FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14659
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TECHDYNE, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-1709103
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2230 West 77th Street, Hialeah, Florida 33016
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(Address of principal executive offices) (Zip Code)
(305) 556-9210
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [x] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value - 5,135,167 shares as of April 30,
1998.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
-------------------------------
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Income (Unaudited) for the
three months ended March 31, 1998 and March 31, 1997 include the accounts
of the Registrant and its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Income for the three
months ended March 31, 1998 and March 31, 1997.
2) Consolidated Condensed Balance Sheets as of March 31, 1998
and December 31, 1997.
3) Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 1998 and March 31, 1997.
4) Notes to Consolidated Condensed Financial Statements as of
March 31, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations
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PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
---------------------------------
Item 1. Financial Statements
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TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
---------------------------
1998 1997
---- ----
Revenues:
Sales $11,872,021 $ 6,342,775
Interest and other income 30,717 40,332
----------- -----------
11,902,738 6,383,107
Cost and expenses:
Cost of goods sold 10,161,399 5,354,842
Selling, general and
administrative expenses 1,026,269 670,477
Interest expense 165,511 69,980
----------- -----------
11,353,179 6,095,299
=========== ===========
Income before income taxes 549,559 287,808
Income tax provision (benefit) 39,592 (47,514)
----------- -----------
Net income $ 509,967 $ 335,322
=========== ===========
Earnings per share:
Basic $.10 $.08
==== ====
Diluted $.08 $.06
==== ====
See notes to consolidated condensed financial statements.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1998 1997(A)
---- -------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,880,693 $ 1,451,564
Accounts receivable, less allowances of
$53,000 at March 31, 1998
and $54,000 at December 31, 1997 6,649,620 5,707,471
Inventories, less allowances for
obsolescence of $272,000 at March 31,
1998 and $223,000 at December 31, 1997 7,821,678 8,325,309
Prepaid expenses and other current assets 524,723 574,250
Deferred tax asset 1,010,558 1,010,558
----------- -----------
Total current assets 17,887,272 17,069,152
Property and Equipment:
Land and improvements 200,400 198,000
Buildings and building improvements 773,838 764,571
Machinery and equipment 6,283,987 6,176,733
Tools and dies 844,844 844,132
Leasehold improvements 242,759 241,934
----------- -----------
8,345,828 8,225,370
Less accumulated depreciation 3,235,954 2,984,825
----------- -----------
5,109,874 5,240,545
Deferred expenses and other assets 74,669 79,707
Costs in excess of net tangible assets
acquired, less accumulated amortization
of $109,000 at March 31, 1998 and
$85,000 at December 31, 1997 2,366,167 2,235,743
----------- -----------
$25,437,982 $24,625,147
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank borrowings $ 555,273 $ 548,698
Accounts payable 4,355,832 4,214,639
Accrued expenses 1,897,548 1,745,926
Current portion of long-term debt 908,793 909,080
Income taxes payable 112,059 103,559
----------- -----------
Total current liabilities 7,829,505 7,521,902
Deferred gain on sale of real estate 161,047 161,047
Deferred income taxes 508,203 507,003
Long-term debt, less current portion 4,408,895 4,619,066
Advances from parent 2,477,718 2,307,221
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value,
authorized 10,000,000 shares; issued
and outstanding 5,135,167 shares 51,351 51,351
Capital in excess of par value 10,612,691 10,612,691
Deficit (595,681) (1,105,648)
Accumulated other comprehensive income-
foreign currency translation adjustments (15,747) (49,486)
----------- -----------
Total stockholders' equity 10,052,614 9,508,908
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$25,437,982 $24,625,147
=========== ===========
(A) Reference is made to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 filed with the Securities and
Exchange Commission in March 1998.
See notes to consolidated condensed financial statements.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
------------------------
1998 1997
---- ----
Operating activities:
Net income $ 509,967 $ 335,322
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 241,483 92,128
Amortization 26,257 4,058
Provision for inventory obsolescence 79,271 20,881
Bad debt expense 552
Deferred income taxes 978
Increase (decrease) relating to
operating activities from:
Accounts receivable (931,878) (954,302)
Inventories 438,442 (659,414)
Prepaid expenses and other
current assets 53,062 77,828
Accounts payable 136,025 276,028
Accrued expenses (7,348) (107,153)
Income taxes payable 8,500 (48,258)
----------- -----------
Net cash provided by (used in)
operating activities 554,333 (961,904)
Investing activities:
Additions to property and equipment,
net of minor disposals (93,262) (149,880)
Deferred expenses and other assets 2,261 57,036
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Net cash used in investing
Activities (91,001) (92,844)
Financing activities:
Short-term line of credit borrowings 6,575
Payments on long-term debt (217,278) (30,709)
Exercise of stock options and warrants 130,925
Increase (decrease) in advances
from parent 170,497 200,544
Deferred financing costs 169 (13,502)
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Net cash (used in) provided by
financing activities (40,037) 287,258
Effect of exchange rate fluctuations
on cash 5,834 (101,747)
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Increase (decrease) in cash and cash
Equivalents 429,129 (869,237)
Cash and cash equivalents at beginning
of year 1,451,564 3,954,047
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Cash and cash equivalents at end of
Period $ 1,880,693 $ 3,084,810
=========== ===========
See notes to consolidated condensed financial statements.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of
Techdyne, Inc. ("Techdyne") and its subsidiaries, including Lytton
Incorporated ("Lytton"), Techdyne (Scotland) Limited ("Techdyne
(Scotland)"), and Techdyne (Livingston) Limited which is a subsidiary
of Techdyne (Scotland), collectively referred to as the "Company." All
material intercompany accounts and transactions have been eliminated in
consolidation. The Company is a 62.9% owned subsidiary of Medicore,
Inc. (the "Parent"). See Note 5.
Major Customers
A majority of the Company's sales are to certain major customers.
The loss of or substantially reduced sales to any of these customers
would have an adverse effect on the Company's operations if such sales
were not replaced.
Inventories
Inventories, which consist primarily of raw materials used in the
production of electronic components, are valued at the lower of cost
(first-in, first-out method) or market value. The cost of finished
goods and work in process consists of direct materials, direct labor and
an appropriate portion of fixed and variable manufacturing overhead.
Inventories are comprised of following:
March 31, December 31,
1998 1997
----------- -----------
Finished goods $ 706,719 $ 554,903
Work in process 1,534,819 1,772,724
Raw materials and supplies 5,580,140 5,997,682
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$ 7,821,678 $ 8,325,309
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Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets is comprised as follows:
March 31, December 31,
1998 1997
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United Kingdom VAT tax receivable $ 146,911 $ 283,106
Other 377,812 291,144
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$ 524,723 $ 574,250
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Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities is comprised as follows:
March 31, December 31,
1998 1997
----------- -----------
United Kingdom VAT tax payable $ 302,612 $ 342,112
Accrued compensation 629,173 563,728
Other 965,763 840,086
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$ 1,897,548 $ 1,745,926
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<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued
FAS 128, "Earnings Per Share," which was adopted on December 31, 1997
requiring a change in the method previously used to compute earnings
per share and restatement of all prior periods. The new requirements
for calculating basic earnings per share exclude the dilutive effect of
stock options and warrants. Earnings per share under the diluted compu-
tation required under FAS 128 includes the dilutive effect of stock
options and warrants using the treasury stock method and average market
price, shares assumed to be converted on the conversion of the con-
vertible promissory note to the Company's Parent with earnings adjusted
for interest expense related to the convertible promissory note which
is assumed to be converted, and contingent shares for the stock price
guarantee for the acquisition of Lytton.
Following is a reconciliation of amounts used in the basic and diluted
computations:
Three Months Ended
March 31,
-------------------------
1998 1997
---- ----
Net income - numerator basic computation $ 509,967 $ 335,322
Effect of dilutive securities:
Interest adjustment on convertible note 32,897 43,019
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Net income, as adjusted for
assumed conversion-
numerator diluted computation $ 542,864 $ 378,341
=========== ===========
Weighted average shares - denominator
basic computation 5,135,167 4,298,315
Effect of dilutive securities:
Warrants 255,859
Stock options 328,908 258,862
Contingent stock - acquisition 256,845
Convertible note 1,319,177 1,725,067
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Weighted average shares, as
adjusted - denominator 7,040,097 6,538,103
=========== ===========
Earnings per share:
Basic $.10 $.08
==== ====
Diluted $.08 $.06
==== ====
In addition to the dilutive stock options and warrants included
in the reconciliation above, neither the 1995 publicly offered warrants
exercisable at $5.00 per share nor underwriter warrants to purchase
100,000 shares of common stock and/or 100,000 warrants exercisable at
$6.60 per share and $.25 per warrant with each warrant exercisable into
common stock at $8.25 per share have been included since they were anti-
dilutive.
Comprehensive Income
The Company has adopted the provisions of Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income"
(FAS 130) in 1998 which is required by FAS 130 for fiscal years
beginning after December 15, 1997. FAS 130 requires the presentation
of comprehensive income and its components in the financial statements
and the accumulated balance of other comprehensive income separately
from retained earnings and additional paid in capital in the equity
section of the balance sheet. The adoption of FAS 130 has no impact
on the Company's net income or stockholders' equity. The only component
of other comprehensive income in the Company's balance sheet is foreign
currency translation adjustments which even prior to adoption of FAS 130
would have been separately reported in stockholders' equity.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Below is a detail of comprehensive income for the three months
ended March 31, 1998 and March 31, 1997:
Three Months Ended
March 31,
------------------------
1998 1997
---- ----
Net income $ 509,967 $ 335,322
Other comprehensive income (loss):
Foreign currency translation 33,739 (153,193)
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Comprehensive income $ 543,706 $ 182,129
========== ==========
Segment Reporting
The Company has adopted the provisions of Financial Accounting
Standards Board Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (FAS 131) in 1998 which is required
by FAS 131 for fiscal years beginning after December 15, 1997. FAS 131
establishes standards for reporting information about operating segments
in annual financial statements with operating segments representing
components of an enterprise evaluated by the enterprise's chief operating
decision maker for purposes of making decisions regarding resource allo-
cation and performance evaluation. FAS 131 also requires that certain
segment information be presented in interim financial statements.
Interim information is not required in the first year of implementation;
however, in subsequent years in which the first year of implementation
is a comparative year, any required interim information for the initial
year of implementation must be presented. The Company does not believe
that adoption of FAS 131 will significantly change its segment reporting
disclosures.
Reclassifications
Certain reclassifications have been made to the 1997 financial state-
ments to conform to the 1998 presentation.
NOTE 2--Interim Adjustments
The financial summaries for the three months ended March 31, 1998
and March 31, 1997 are unaudited and include, in the opinion of manage-
ment of the Company, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the earnings for such periods.
Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the
entire year ending December 31, 1998.
While the Company believes that the disclosures presented are ade-
quate to make the information not misleading, it is suggested that
these Consolidated Condensed Financial Statements be read in conjunc-
tion with the financial statements and notes included in the Company's
latest annual report for the year ended December 31, 1997.
NOTE 3--Long-term Debt
The Company's $1,600,000 line of credit effective December 29, 1997
had an outstanding balance of $1,000,000 at March 31, 1998 and at De-
cember 31, 1997. This line matures May 1, 2000 and has monthly pay-
ments of interest at prime. The new commercial term loan effective
December 29, 1997 with an initial principal balance of $1,500,000 had
an outstanding balance of $1,425,000 at March 31, 1998 and $1,500,000
at December 31, 1997, matures December 15, 2002 with monthly principal
payments of $25,000 plus interest. In connection with the term loan,
the Company entered into an interest rate swap agreement with the bank
to manage the Company's exposure to interest rates by effectively
converting a variable rate obligation with an interest rate of LIBOR
plus 2.25% to a fixed rate of 8.60%.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 3--Long-term Debt--(Continued)
The bank also extended two commercial term loans to the Company
in February 1996, one for $712,500 for five years expiring on February
7, 2001 at an annual rate of interest equal to 8.28% with a monthly
payment of principal and interest of $6,925 based on a 15-year amor-
tization schedule with the unpaid principal and accrued interest due
on the expiration date. This term loan had an outstanding balance of
approximately $655,000 at March 31, 1998 and $663,000 at December 31,
1997 and is secured by a mortgage on properties in Hialeah, Florida
owned by the Company's Parent. The second commercial term loan was
for the principal amount of $200,000 for a period of five years
bearing interest at a per annum rate of 1.25% over the bank's prime
rate and requiring monthly principal payments with accrued interest
of $3,333 through expiration on February 7, 2001. This $200,000 term
loan which had a balance of approximately $117,000 at March 31, 1998
and $127,000 at December 31, 1997 is secured by all of Techdyne's
tangible personal property, goods and equipment, and all cash or
noncash proceeds of such collateral.
The Parent has unconditionally guaranteed the payment and per-
formance by the Company of the revolving loan and the three commercial
term loans and has subordinated the Company's intercompany indebtedness
to the Parent to the bank's position.
Lytton has a $1,500,000 revolving bank line of credit requiring
monthly interest payments at prime plus 1/2% which matures August 1,
1998. The interest rate on this loan was 9% at March 31, 1998 and De-
cember 31, 1997. The balance outstanding on this loan was approxi-
mately $555,000 at March 31, 1998 and $549,000 at December 31, 1997.
Lytton has a $1,000,000 installment loan with the same bank maturing
August 1, 2002, at an annual rate of 9% until July 1999, with monthly
payments of $16,667 plus interest, at which time Lytton will have an
option to convert the note to a variable rate. The balance outstanding
on this loan was approximately $833,000 at March 31, 1998 and $933,000
as of December 31, 1997. Lytton also has a $500,000 equipment loan
agreement with the same bank payable over four years through August 1,
2002 with the same interest rate as the installment loan. There was no
outstanding balance on this loan as of March 31, 1998 or December 31,
1997. All of these bank loans are secured by the business assets of
Lytton.
The prime rate was 8.5% as of March 31, 1998 and December 31, 1997.
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extend through July 1999 with
interest rates ranging from 8.55% to 10.09%. The remaining principal
balance under these financing obligations amounted to $334,000 at March
31, 1998 and $390,000 at December 31, 1997. Lytton has an equipment
loan at an annual interest rate of 5.5% maturing in April 2001 with
monthly payments of principal and interest of $4,298. This loan has a
balance of approximately $188,000 at March 31, 1998 and $198,000 at
December 31, 1997 and is secured by equipment.
Techdyne (Scotland) has a line of credit with a Scottish bank with
a U.S. dollar equivalency of approximately $330,000 at March 31, 1998
and December 31, 1997. This line of credit operates as an overdraft
facility, is secured by assets of Techdyne (Scotland) and is guaranteed
by Techdyne. No amounts were outstanding under this line of credit as
of March 31, 1998 or December 31, 1997. Techdyne (Scotland) has a mort-
gage on its facility which had a principal balance with a U.S. dollar
equivalency of $569,000 at March 31, 1998 and December 31, 1997.
Interest payments on long-term debt amounted to approximately
$143,000 for the three months ended March 31, 1998 and $36,000 for the
same period of the preceding year.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 4--Income Taxes
Subsequent to the completion of the Company's public offering on
October 2, 1995, the Company files separate federal and state income
tax returns from its Parent, with its income tax liability reflected
on a separate return basis.
Deferred income taxes reflect the net tax effect of temporary dif-
ferences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax pur-
poses. For financial reporting purposes a valuation allowance of
approximately $850,000 has been recognized to offset the deferred tax
assets.
The Company had domestic income tax expense of approximately
$45,000 for the three months ended March 31, 1998 and $9,000 for the
same period of the preceding year.
Techdyne (Scotland) had an income tax benefit of approximately
$5,000 for the three months ended March 31, 1998 and $57,000 for the
same period of the preceding year.
Income tax payments for the three months ended March 31, 1998
amounted to $38,000. There were no such payments for the same period
of the preceding year.
NOTE 5--Transactions with Parent
The Parent provides certain administrative services to the Company
including providing office space and general accounting assistance.
Effective October 1, 1996, the services provided to the Company by the
Parent were formalized under a two year service agreement for $408,000
per year. The amount of expenses covered under the service agreement
totaled $102,000 for the three months ended March 31, 1998 and for the
same period of the preceding year.
The Company's demand convertible promissory note payable to the
Parent which bears interest at 5.7% had a balance including accrued
interest of approximately $2,325,000 at March 31, 1998 and $2,292,000
at December 31, 1997, and may be converted into common stock of the
Company at the option of the Parent at a conversion price of $1.75 per
share. Advances from the Parent on the balance sheet includes the
convertible note balance and an advance payable to the Parent of approx-
imately $153,000 at March 31, 1998 and $15,000 at December 31, 1997 with
interest at 5.7%. Interest on the advances amounted to $34,000 for the
three months ended March 31, 1998 and $36,000 for the same period of the
preceding year and is included in the net balance due the Parent. The
Parent has agreed not to require repayment of the intercompany advances
prior to April 1, 1999 and, therefore, the advances have been classified
as long-term at March 31, 1998.
The Company manufactures certain products for the Parent. Sales of
the products were $51,000 for the three months ended March 31, 1998 and
$52,000 for the same period of the preceding year.
NOTE 6--Commitments and Contingencies
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially
all of its employees. The discretionary profit sharing and matching
expense for the three months ended March 31, 1998 amounted to approxi-
mately $10,000.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 6--Commitments and Contingencies--(Continued)
Lytton has a deferred compensation agreement with its President.
The agreement calls for monthly payments of $8,339 provided that
Lytton's cash flow is adequate to cover these payments with interest to
be calculated on any unpaid balance as of August 1, 1999. During the
three months ended March 31, 1998, a total of $33,357 was paid under
this agreement, leaving a balance of approximately $133,000.
Lytton leases its operating facilities from an entity owned by the
President of Lytton and his wife, the former owner. The lease expires
July 31, 2002 and requires monthly lease payments of approximately $17,900
the first year, adjusted each year thereafter based upon the Consumer
Price Index.
NOTE 7--Stock Options
In May 1994, the Company adopted a stock option plan for up to
250,000 options. Pursuant to this plan, in May 1994, the board of
directors granted 227,500 options of which there are 171,600 out-
standing as of March 31, 1998, to certain of its officers, directors
and employees. These options are exercisable at $1 per share through
May 24, 1999.
On February 27, 1995 the Company granted stock options, not part
of the 1994 Plan, to directors of Techdyne and its subsidiaries for
142,500 shares exercisable at $1.75 per share through February 26, 2000.
In April 1996, the Company granted a stock option for 10,000 shares, not
part of the 1994 Plan, to its general counsel at the same price and
terms as the directors' options.
In June 1997, the Company adopted a Stock Option Plan for up to
500,000 options, and pursuant to the plan the board granted 375,000
options exercisable for five years through June 22, 2002 at $3.25 per
share.
NOTE 8--Common Stock
The Company completed a public offering of common stock and
warrants on October 2, 1995 providing it with net proceeds of approxi-
mately $3,321,000. Pursuant to the offering, 1,000,000 shares of
common stock and 1,000,000 redeemable common stock purchase warrants
were issued. The warrants provide for the purchase of one common share,
each with an exercise price of $5.00 exercisable from September 13,
1995 through September 12, 1998. During 1997, approximately 41,000
warrants were exercised resulting in proceeds of approximately $194,000,
net of commissions. The underwriter received warrants to purchase
100,000 shares of common stock and/or 100,000 warrants exercisable
from September 13, 1996 through September 12, 2000 at $6.60 per share
of common stock and $.25 per warrant with each warrant exercisable into
common stock at $8.25 per share.
NOTE 9--ACQUISITION
On July 31, 1997, the Company acquired Lytton, which manufactures
and assembles printed circuit boards and other electronic products, for
$2,500,000 cash, paid at closing, and issuance of 300,000 shares of the
Company's common stock which have been registered for the seller. The
Company has guaranteed that the seller will realize a minimum of
$2,000,000 from the sale of these shares of common stock. The total
purchase price in excess of the fair value of net assets acquired which
originally amounted to approximately $2,230,000 will be amortized over
25 years. In addition, additional contingent consideration may be due
if Lytton achieves pre-defined earning and sales levels. Additional
consideration of approximately $154,000 based on sales levels was paid
in April 1998 with the Stock Purchase Agreement providing for possible
additional sales level incentives over a two year period. As the con-
tingencies are resolved, if additional consideration is due, the then
current fair value of the consideration will be recorded as goodwill,
which will be amortized over the remainder of the initial 25 year life.
The acquisition was accounted for under the purchase method of
accounting and, accordingly, the results of operation of Lytton have
been included in the Company's statement of income since August 1, 1997.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1998
(Unaudited)
NOTE 9--ACQUISITION--(Continued)
The following pro forma consolidated condensed financial infor-
mation reflects the Lytton acquisition as if it had occurred on
January 1, 1997. The pro forma financial information does not
purport to represent what the Company's actual results of operations
would have been had the acquisition occurred as of January 1, 1997 and
may not be indicative of operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
Three Months Ended
March 31, 1997
------------------
Total revenues $10,991,000
===========
Net income $ 468,000
===========
Earnings per share:
Basic $.11
====
Diluted $.08
====
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations
-------------------------
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that
are not historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of the 1934. The Private Securities Litigation
Reform Act of 1995 (the "Reform Act") contains certain safe harbors
regarding forward-looking statements. Certain of the forward-looking
statements include management's expectations, intentions and beliefs
with respect to the growth of the Company, the nature of the elec-
tronics industry in which it is engaged as a manufacturer, the
Company's business strategies and plans for future operations, its
needs for capital expenditures, capital resources, liquidity and
operating results, and similar expressions concerning matters that
are not historical facts. Such forward-looking statements are subject
to risks and uncertainties that could cause actual results to materi-
ally differ from those expressed in the statements.
The Company has continued to depend upon a relatively small number
of customers for a significant percentage of its net revenue. Signifi-
cant reductions in sales to any of the Company's large customers would
have a material adverse effect on the Company's results of operations.
The industry segments served by the Company and the electronics
industry as a whole, are subject to rapid technological change and
product obsolescence. Discontinuance or modification of products
containing components manufactured by the Company could adversely
affect the Company's results of operations. The electronics industry
is also subject to economic cycles and has in the past experienced,
and is likely in the future to experience, recessionary periods. A
general recession in the electronics industry could have a material
adverse effect on Techdyne's business, financial condition and results
of operations.
In 1997 the Company commenced upgrading its operations software
program by acquiring a new Visual Manufacturing software package. It
has been and will be integrating this new software system into all of
its facilities. Lytton and Techdyne (Scotland) anticipate installing
the Visual Manufacturing software system into their operations sometime
in early 1999, most likely with more sophisticated modifications based
upon the Company's experience with and internal technological advances
to the system.
It is anticipated that the Visual Manufacturing software will be
fully integrated by 1999. This system is anticipated to also resolve
the "year 2000" issue which relates to computer information processing
challenges associated with the upcoming millennium change facing public
and private corporations, businesses, and all levels of government to
ensure continued proper operations, management and reporting
With respect to the year 2000 issue, the Company is communicating
with its key vendors, customers and other third parties with whom its
operations are essential to inquire of them their assessment of their
year 2000 issue and actions being taken to resolve it. To the extent
such third parties are potentially adversely affected by the "year 2000"
issue, and such is not timely and properly resolved by such persons,
this could disrupt the Company's operations to the extent that the
Company will have to find alternative vendors or customers that have
resolved their year 2000 issue. No assurance can be given that the
Company's new Visual Manufacturing software program will be successful
in its anticipated operational benefits as assessed above or that the
Company's key vendors and customers will have successful conversion
programs, and that any such failures, whether relating to the manufac-
turing operational efficiencies or the year 2000 issue, will not have a
material adverse effect on the Company's business, results of operations
or financial condition.
Although management believes that the Company's operations utilize
the assembly and testing technologies and equipment currently required
by the Company's customers, there can be no assurance that the Company's
process development efforts will be successful or that the emergence of
new technologies, industry standards or customer requirements will not
render the Company's technology, equipment or processes obsolete or
uncompetitive. In addition, to the extent that the Company determines
that new assembly and testing technologies and equipment are required
to remain competitive, the acquisition and implementation of such tech-
nologies and equipment are likely to require significant capital invest-
ment.
<PAGE>
Techdyne has been expanding its geographic and customer base by
establishing more extensive facilities in the Northeast and Southwest,
and through its July, 1997 acquisition of Lytton, an Ohio electronics
manufacturer, primarily PCBs, in the Midwest. Management intends
to continue to expand within the United States by continuing to estab-
lish new manufacturing facilities and operations in areas to better
serve existing customers and to attract new OEMs, as well as direct
acquisition of contract manufacturing businesses complimentary to the
Company's operations. The Company will be competing with much larger
electronic manufacturing entities for such expansion opportunities.
Further, any such transactions may result in potentially dilutive
issuance of equity securities, the incurrence of debt and amortization
expenses related to goodwill and other intangible assets, and other
costs and expenses, all of which could materially adversely affect the
Company's financial results. Such transactions also involve numerous
business risks, including difficulties in successfully integrating
acquired operations, technologies and products or formalizing antici-
pated synergies, and the diversion of management's attention from
other business concerns. In the event that any such transaction does
occur, there can be no assurance as to the beneficial effect on the
Company's business and financial results.
Quality control is also essential to the Company's operations,
since customers demand strict compliance with design and product spe-
cifications. Any adverse change in the Company's excellent quality
and process controls could adversely affect its relationship with
customers and ultimately its revenues and profitability.
All forward-looking statements included in this document are based
on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking state-
ment. The following cautionary statements are being made pursuant to
the provisions of the Reform Act with the intention of the Company
obtaining the benefits of the safe harbor provisions of the Reform Act.
Among the factors that could cause actual results to differ materially
are the factors detailed in the risks discussed in the "Risk Factors"
section included in the Company's Registration Statements, as filed
with the Securities and Exchange Commission ("Commission") Form SB-2
(effective September 13, 1995), and Forms S-3, effective November 11,
1996 and November 4, 1997, respectively.
Results of Operations
Consolidated revenues increased approximately $5,520,000 (86%) for
the three months ended March 31, 1998 compared to the preceding year.
The increase was largely attributable to the inclusion of sales of
Lytton of $4,527,000. There was an overall increase in domestic sales
of $5,149,000 (104%), including Lytton, and an increase in European
sales of $380,000 (27%) compared to the same period of the preceding
year. Interest and other income decreased by approximately $10,000
compared to the preceding year, due to lower interest income as a result
of a decrease in funds invested.
Revenues of Techdyne (Scotland) continue to be highly dependent on
sales to Compaq, which accounted for approximately 27% of sales for the
three months ended March 31, 1998 compared to 55% for the same period of
the preceding year. The bidding for Compaq orders has become more com-
petitive which has resulted in substantially reduced Compaq sales and
lower profit margins on remaining Compaq sales. Techdyne (Scotland) is
pursuing new business development, has offset some of the lost Compaq
business with sales to other customers and is continuing cost reduction
efforts to remain competitive on Compaq business. There can be no
assurance as to the success of such efforts.
Approximately 43% of the Company's consolidated sales for the three
months ended March 31, 1998 were made to four customers. Customers
generating at least 10% of sales included Motorola (13%) and PMI Food
Equipment Group (12%). PMI Food Equipment Group is Lytton's major
customer and represented 32% of Lytton's sales for the three months
ended March 31, 1998. The loss of, or substantially reduced sales to
any major customer, would have an adverse effect on the Company's
operations if such sales are not replaced.
Cost of goods sold as a percentage of sales amounted to 86% for
the three months ended March 31, 1998 compared to 84% for the same
period of the preceding year reflecting changes in product mix and a
diversification of the Company's customer base, including changes due
to Lytton.
Selling, general and administrative expenses increased $356,000 for
the three months ended March 31, 1998 compared to the same period of the
preceding year. The increase resulted principally from inclusion of the
selling, general and administrative expenses of Lytton. Selling general
and administrative expenses as a percent of sales were 9% for the three
months ended March 31, 1998 compared to 11% for the same period of the
preceding year.
<PAGE>
Interest expense increased $96,000 for the three months ended March
31, 1998 compared to the preceding year. The increase reflects interest
of approximately $53,000 associated with financing the Lytton acquisition
and interest on Lytton's debt and financing agreements of approximately
$43,000. The prime rate was 8.5% at March 31, 1998 and December 31, 1997.
Liquidity and Capital Resources
The Company had working capital of $10,058,000 at March 31, 1998,
an increase of $511,000 (5%) during the first quarter of 1998. This
increase reflects changes in components of working capital resulting
from overall increased sales levels.
Included in the changes in components of working capital was an
increase of $429,000 in cash and cash equivalents, which included net
cash used in operating activities of $554,000, net cash used in
investing activities of $91,000 (including $93,000 from additions to
property and equipment) and net cash used in financing activities of
$40,000 (including payments on long-term debt of $217,000 and a net
increase in advances from the Parent of $170,000).
The Company has a five-year $1,500,000 ("notional amount under
interest rate swap agreement") commercial term loan with monthly
principal payments of $25,000 plus interest at 8.60%, which had an
outstanding balance of $1,425,000 at March 31, 1998 and $1,500,000
at December 31, 1997 and a $1,600,000 commercial revolving line of
credit with interest at prime of which $1,000,000 was outstanding as
of March 31, 1998 and December 31, 1997. The commercial term loan
matures December 15, 2002 and the commercial line of credit, no longer
a demand line, matures May 1, 2000. See Note 3 to "Notes to Con-
solidated Condensed Financial Statements."
The Company had obtained in 1996 two other term loans from its
Florida bank. One is a $712,500 term loan, which had a remaining
principal balance of $655,000 at March 31, 1998 and $663,000 at
December 31, 1997, and is secured by two buildings and land owned by
the Parent. The second term loan for $200,000, which had a remaining
principal balance of $117,000 at March 31, 1998 and $127,000 at
December 31, 1997, is secured by the Company's tangible personal
property, goods and equipment. The Parent has guaranteed the
revolving line and the three term loans and subordinated the inter-
company indebtedness due it from the Company, provided that the Company
may make payments to the Parent on this subordinated debt from addi-
tional equity that is injected into the Company and from earnings, so
long as the Company is otherwise in compliance with the loan agreements.
See Note 3 to "Notes to Consolidated Condensed Financial Statements".
The Company has outstanding borrowings of $145,000 from a local
bank with interest payable monthly with the note, which was renewed
during 1997, maturing April 2000.
Techdyne (Scotland) has a line of credit with a Scottish bank, with
an U.S. dollar equivalency of approximately $330,000 at March 31, 1998
and December 31, 1997 that is secured by assets of Techdyne (Scotland)
and guaranteed by the Company. This line of credit operates as an over-
draft facility. No amounts were outstanding under this line of credit
as of March 31, 1998 or December 31, 1997. In July, 1994 Techdyne
(Scotland) purchased the facility housing its operations for approxi-
mately $730,000, obtaining a 15-year mortgage which had a U.S. dollar
equivalency of approximately $569,000 at March 31, 1998 and December
31, 1997, based on exchange rates in effect at each of these dates. See
Note 3 to "Notes to Consolidated Condensed Financial Statements."
On July 31, 1997, the Company acquired Lytton Incorporated, which
is engaged in the manufacture and assembly of PCBs and other electronic
products for commercial customers. This acquisition required $2,500,000
cash at closing, funded by the modified bank line of credit, as well as
300,000 shares of the Company's common stock which had a fair value of
approximately $1,031,000 based on the closing price of the Company's
common stock on the date of acquisition. The Company has guaranteed
$2,000,000 minimum proceeds ($2,400,000 if certain earnings objectives
are met over a specified twelve month period) to the seller with respect
to these shares. The Stock Purchase Agreement also provides for in-
centive consideration to be paid in cash based on specific sales levels
of Lytton for each of three successive specified years. Additional
consideration of approximately $154,000 based on sales levels was paid
in April 1998, with the Stock Purchase Agreement providing for possible
additional sales level incentives over a two year period. Based upon
the closing price of the Company's common stock on March 31, 1998, the
shares issued in the Lytton acquisition had a fair value of $1,293,000
which could result in additional consideration of approximately $707,000
payable in either cash or in approximately 164,000 shares of the
Company's stock. If the earnings objective is met, an additional
$400,000 would be payable in cash or approximately 93,000 shares of
common stock based upon the March 31, 1998 closing stock price. The
Lytton
<PAGE>
acquisition has expanded the Company's customer base, broadened its
product line, enhanced its manufacturing capabilities and provided a
new geographic area to better serve the Company's existing customer
base with opportunities to attract new customers. See Notes 3 and 9 to
"Notes to Consolidated Condensed Financial Statements."
The Company anticipates that current levels of working capital and
working capital from operations, including those of Lytton, will be
adequate to successfully meet liquidity demands for at least the next
twelve months, including the financing obligations incurred in the
acquisition of Lytton.
Inflation
Inflationary factors have not had a significant effect on the
Company's operations. The Company attempts to pass on increased costs
and expenses by increasing selling prices when and where possible and
by developing different and improved products for its customers that
can be sold at targeted profit margins.
<PAGE>
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
Part II Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter
ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
TTECHDYNE, Inc.
/s/ Daniel R. Ouzts
By:--------------------------------
DANIEL R. OUZTS, Vice President/
Finance, Controller and Chief
Financial Officer
Dated: May 12, 1998
<PAGE>
EXHIBIT INDEX
Exhibit
No.
- -------
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,880,693
<SECURITIES> 0
<RECEIVABLES> 6,649,620
<ALLOWANCES> 0
<INVENTORY> 7,821,678
<CURRENT-ASSETS> 17,887,272
<PP&E> 8,345,828
<DEPRECIATION> 3,235,954
<TOTAL-ASSETS> 25,437,982
<CURRENT-LIABILITIES> 7,829,505
<BONDS> 4,408,895
0
0
<COMMON> 51,351
<OTHER-SE> 10,001,263
<TOTAL-LIABILITY-AND-EQUITY> 25,437,982
<SALES> 11,872,021
<TOTAL-REVENUES> 11,902,738
<CGS> 10,161,399
<TOTAL-COSTS> 10,161,399
<OTHER-EXPENSES> 1,026,269
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165,511
<INCOME-PRETAX> 549,559
<INCOME-TAX> 39,592
<INCOME-CONTINUING> 509,967
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 509,967
<EPS-PRIMARY> .10
<EPS-DILUTED> .08
<FN>
<F1>Accounts receivable are net of allowance of $53,000 at March
31, 1998.
<F2>Inventories are net of reserve of $272,000 at March 31, 1998.
</FN>
</TABLE>
