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, 1999
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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
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(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 - 5,250,167 shares as of April 30,
1999.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
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INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Operations (Unaudited) for the
three months ended March 31, 1999 and March 31, 1998 include the accounts
of the Registrant and its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Operations for the three months
ended March 31, 1999 and March 31, 1998.
2) Consolidated Condensed Balance Sheets as of March 31, 1999 and De-
cember 31, 1998.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 1999 and March 31, 1998.
4) Notes to Consolidated Condensed Financial Statements as of March 31,
1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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PART II -- OTHER INFORMATION
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Item 2. Changes in Securities and Use of Proceeds
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Item 5. Other Information
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
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TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
1999 1998
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Revenues:
Sales $ 9,834,994 $11,872,021
Interest and other income 22,121 30,717
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9,857,115 11,902,738
Cost and expenses:
Cost of goods sold 8,818,948 10,161,399
Selling, general and administrative expenses 995,059 1,026,269
Interest expense 165,323 165,511
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9,979,330 11,353,179
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(Loss) income before income taxes (122,215) 549,559
Income tax provision 26,913 39,592
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Net (loss) income $ (149,128) $ 509,967
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(Loss) earnings per share:
Basic $(.03) $.10
===== ====
Diluted $(.03) $.08
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See notes to consolidated condensed financial statements.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1999 1998(A)
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(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,171,843 $ 1,659,737
Accounts receivable, less allowances
of $47,000 at March 31, 1999 and
December 31, 1998 5,875,603 5,769,868
Inventories, less allowances for obsolescence
of $559,000 at March 31, 1999 and $544,000
at December 31, 1998 7,627,703 7,874,500
Prepaid expenses and other current assets 197,303 165,925
Deferred tax asset 466,259 466,259
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Total current assets 15,338,711 15,936,289
Property and equipment:
Land and improvements 193,200 199,200
Buildings and building improvements 746,036 769,204
Machinery and equipment 7,117,579 6,846,863
Tools and dies 843,209 844,988
Leasehold improvements 338,636 308,074
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9,238,660 8,968,329
Less accumulated depreciation
and amortization (4,085,151) 3,892,293
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5,153,509 5,076,036
Deferred expenses and other assets 123,120 122,578
Costs in excess of net tangible assets
acquired, less accumulated amortization
of $220,000 at March 31, 1999 and $192,000
at December 31, 1998 2,655,195 2,682,938
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$23,270,535 $23,817,841
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Liabilities and Stockholders' Equity
Current liabilities:
Short-term bank borrowings $ 635,658 $ 962,407
Accounts payable 3,292,865 3,233,202
Accrued expenses 1,562,988 1,534,785
Current portion of long-term debt 743,573 764,550
Income taxes payable 144,940 120,027
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Total current liabilities 6,380,024 6,614,971
Deferred gain on sale of real estate 161,047 161,047
Long-term debt, less current portion 4,272,788 4,450,578
Advances from parent 3,214,532 3,130,588
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized
10,000,000 shares; issued and outstanding
5,250,167 shares 52,501 52,501
Capital in excess of par value 11,139,291 11,139,291
Accumulated deficit (457,064) (307,936)
Accumulated other comprehensive loss (101,023) (31,638)
Notes receivable from options exercised (113,850) (113,850)
Advance on subsidiary acquisition price
guarantee (1,277,711) (1,277,711)
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Total stockholders' equity 9,242,144 9,460,657
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$23,270,535 $23,817,841
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(A) Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 filed with the Securities and Exchange
Commission in March 1999.
See notes to consolidated condensed financial statements.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
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1999 1998
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Operating activities:
Net (loss) income $ (149,128) $ 509,967
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 273,750 241,483
Amortization 30,597 26,257
Provision for inventory obsolescence 77,051 79,271
Bad debt expense --- 552
Increase (decrease) relating to operating
activities from:
Accounts receivable (123,557) (931,878)
Inventories 157,739 438,442
Prepaid expenses and other current assets (34,870) 53,062
Accounts payable 65,587 136,025
Accrued expenses 36,136 (7,348)
Income taxes payable 24,913 8,500
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Net cash provided by operating
activities 358,218 554,333
Investing activities:
Additions to property and equipment, net
of minor disposals (392,646) (93,262)
Deferred expenses and other assets (3,614) 2,261
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Net cash used in investing activities (396,260) (91,001)
Financing activities:
Short-term line of credit net (payments)
borrowings (326,749) 6,575
Payments on long-term debt (182,454) (217,278)
Increase (decrease) in advances from parent 83,944 170,497
Deferred financing costs (303) 169
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Net cash used in financing activities (425,562) (40,037)
Effect of exchange rate fluctuations on cash (24,290) 5,834
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(Decrease) increase in cash and cash equivalents (487,894) 429,129
Cash and cash equivalents at beginning of year 1,659,737 1,451,564
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Cash and cash equivalents at end of period $1,171,843 $1,880,693
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See notes to consolidated condensed financial statements.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(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 (Europe) Limited ("Techdyne (Europe)"), and Techdyne
(Livingston) Limited which is a subsidiary of Techdyne (Europe), collec-
tively referred to as the "Company." All material intercompany accounts
and transactions have been eliminated in consolidation. The Company is a
61.5% 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.
A significant customer of the Company, which accounted for 4% of sales
for the three months ended March 31, 1999 and 9% of sales for the same period
of the preceding year has been slow in paying amounts due to the Company.
The Company has substantial receivables and inventory relating to a sales
contract with the customer. The Company anticipates an ongoing business re-
lationship with the customer and believes that the receivables and inventory
relating to the customer are recoverable. If any significant amount of
receivables and inventory were not recoverable, this could have a material
adverse effect on the Company's financial position and result of operations.
Inventories
Inventories, which consist primarily of raw materials used in the pro-
duction 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,
1999 1998
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Finished goods $ 655,518 $ 794,297
Work in process 1,686,389 1,845,954
Raw materials and supplies 5,285,796 5,234,249
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$7,627,703 $7,874,500
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Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities is comprised as follows:
March 31, December 31,
1999 1998
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Accrued compensation $ 492,969 $ 400,680
Other 1,070,019 1,134,105
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$1,562,988 $1,534,785
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<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Earnings per Share
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants using the treasury stock method and average market price, shares
assumed to be converted relating to the convertible 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. No
potentially dilutive securities were included in the diluted earnings per
share computation for the three months ended March 31, 1999, as a result of
exercise prices and the net loss, and to include them would be anti-dilutive.
Following is a reconciliation of amounts used in the basic and diluted
computations:
Three Months Ended
March 31,
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1999 1998
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Net (loss) income - numerator basic computation $ (149,128) $ 509,967
Effect of dilutive securities:
Interest adjustment on convertible note --- 32,897
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Net (loss) income, as adjusted for assumed
conversion - numerator diluted computation $ (149,128) $ 542,864
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Weighted average shares - denominator basic
computation 5,135,167 5,135,167
Effect of dilutive securities:
Stock options --- 328,908
Contingent stock - acquisition --- 256,845
Convertible note --- 1,319,177
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Weighted average shares, as adjusted -
denominator 5,135,167 7,040,097
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(Loss) earnings per share:
Basic $(.03) $.10
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Diluted $(.03) $.08
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The Company has various potentially dilutive securities, including stock
options and warrants, contingent shares and shares from assumed conversion of
convertible debt. See Notes 5,7,8, and 9.
Comprehensive Income
In 1998 the Company adopted Financial Accounting Standards Board State-
ment No. 130, "Reporting Comprehensive Income" (FAS 130). This statement
establishes rules for the reporting of comprehensive income (loss) and its
components. Comprehensive income (loss) consists of net income (loss) and
foreign currency translation adjustments.
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TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Below is a detail of comprehensive (loss) income for the three months
ended March 31, 1999 and March 31, 1998:
Three Months Ended
March 31,
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1999 1998
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Net (loss) income $(149,128) $ 509,967
Other comprehensive (loss) income:
Foreign currency translation (69,385) 33,739
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Comprehensive (loss) income $(218,513) $ 543,706
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New Pronouncements
In June, 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effec-
tive for fiscal quarters of fiscal years beginning after June 15, 1999.
FAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities and requires, among other things,
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and that those instruments be measured at
fair value. The Company is in the process of determining the impact that
the adoption of FAS 133 will have on its consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 1998 financial state-
ments to conform to the 1999 presentation.
NOTE 2--Interim Adjustments
The financial summaries for the three months ended March 31, 1999 and
March 31, 1998 are unaudited and include, in the opinion of management 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, 1999 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1999.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these Consoli-
dated Condensed Financial Statements be read in conjunction with the
financial statements and notes included in the Company's latest annual
report for the year ended December 31, 1998.
NOTE 3--Long-term Debt
The Company's $1,600,000 line of credit effective December 29, 1997 was
fully drawn down with an outstanding balance of $1,600,000 at March 31, 1999
and December 31, 1998. This line matures May 1, 2000 and has monthly payments
of interest at prime. The commercial term loan effective December 29, 1997
with an initial principal balance of $1,500,000 had an outstanding balance of
$1,125,000 at March 31, 1999 and $1,200,000 at December 31, 1998, 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
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 3--Long-term Debt--(Continued)
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%.
The bank also extended two commercial term loans to the Company in Feb-
ruary 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 amortization schedule with the
unpaid principal and accrued interest due on the expiration date. This term
loan had an outstanding balance of approximately $629,000 at March 31, 1999
and $636,000 at December 31, 1998 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 $77,000 at March 31, 1999 and $87,000 at December
31, 1998 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 performance 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 matured August 1, 1998 and was
renewed under the same terms and conditions through June 30, 1999. The
interest rate on this loan was 8.25% at March 31, 1999 and December 31,
1998. There was an outstanding balance on this loan of $636,000 as of March
31, 1999 with $962,000 outstanding at December 31, 1998. 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
$667,000 at March 31, 1999 and $733,000 as of December 31, 1998. Lytton
also has a $500,000 equipment loan agreement with the same bank payable
through August 1, 2003 with the interest rate at prime plus 1%. There was
no outstanding balance on this loan as of March 31, 1999 or December 31,
1998. All of these bank loans are secured by the business assets of Lytton.
The prime rate was 7.75% as of March 31, 1999 and December 31, 1998.
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 $91,000 at March 31,
1999 and $112,000 at December 31, 1998. 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 had a balance
of approximately $146,000 at March 31, 1999 and $157,000 at December 31,
1998 and is secured by equipment.
Techdyne (Europe) has a mortgage on its facility which had a principal
balance with a U.S. dollar equivalency of $521,000 at March 31, 1999 and
$545,000 at December 31, 1998.
Interest payments on long-term debt amounted to approximately $126,000
for the three months ended March 31, 1999 and $143,000 for the same period of
the preceding year.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 4--Income Taxes
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 purposes. For
financial reporting purposes a valuation allowance has been recognized to
offset a portion of the deferred tax assets.
The Company had domestic income tax expense of approximately $27,000 for
the three months ended March 31, 1999 and $45,000 for the same period of the
preceding year.
Techdyne (Europe) had an income tax benefit of approximately $5,000 for
the three months ended March 31, 1998 with no such benefit or provision for
the three months ended March 31, 1999.
Income tax payments amounted to $2,000 for the three months ended March
31, 1999 and $38,000 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 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, 1999 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 $2,461,000 at March 31, 1999 and $2,427,000 at December 31,
1998, 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 approximately $754,000 at March 31, 1999
and $704,000 at December 31, 1998 with interest at 5.7%. Interest on the
advances amounted to $45,000 for the three months ended March 31, 1999 and
$34,000 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, 2000 and, therefore, the
advances have been classified as long-term at March 31, 1999.
The Company has manufactured certain products for the Parent. Sales of
the products were $23,000 for the three months ended March 31, 1999 and
$51,000 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 Company adopted this plan as a participating employer
effective July 1, 1998. The discretionary profit sharing and matching
expense, including that of the Company and Lytton for the three months ended
March 31, 1999 amounted to approximately $19,000, with such expense amounting
to approximately $10,000 and including only Lytton for the three months ended
March 31, 1998.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 6--Commitments and Contingencies--(Continued)
Lytton has a deferred compensation agreement with its former 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,
1999, a total of $25,000 was paid under this agreement, leaving an unpaid
balance of approximately $33,000 as of March 31, 1999.
Lytton leases its operating facilities from an entity owned by the former
President of Lytton and his wife, the former owner. The lease expires July 31,
2002 and requires annual lease payments of approximately $218,000, adjusted
each year based upon the Consumer Price Index. During the three months ended
March 31, 1999, $54,579 was paid under the lease compared to $53,676 paid for
the same period last year.
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 to certain of its officers, directors and employees. These
options are exercisable at $1 per share through May 24, 1999. On June 30,
1998, 115,000 of these options were exercised with a remaining balance of
56,300 outstanding as of March 31, 1999. The Company received cash payment
of the par value and the balance in three year promissory notes, presented
in the Stockholders' Equity Section of the balance sheet with interest at
5.16%.
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 1995, 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.
As part of the consideration pursuant to an agreement for investor
relations and corporate communications services, the Company granted options
for 25,000 shares of its common stock exercisable for three years through May
14, 2001 at $4.25 per share with the options to vest quarterly on the basis of
25% at the end of each quarter commencing June 30, 1998. 6,250 options vested
during the quarter ended June 30, 1998 with no additional options to vest due
to cancellation of this agreement in August 1998. Pursuant to FAS 123, the
Company recorded $13,000 expense for options vesting under this agreement.
NOTE 8--Common Stock
Pursuant to a 1995 public 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. In February
1999, the Company reduced the exercise price to $4.00 and extended the
exercise period of the remaining approximately 959,000 outstanding warrants
to May 17, 1999. The underwriter received warrants to purchase 100,000
shares of common stock and/or 100,000 warrants exercisable 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.
<PAGE>
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
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, and issuance of 300,000 shares of the Company's common
stock which have been registered for the seller. The Company has guar-
anteed that the seller will realize a minimum of $2,400,000 from the sale
of these shares of common stock based on Lytton having achieved certain
earnings objectives resulting in an increase of $400,000 in the valuation
of $2,000,000 originally recorded for these securities. The total purchase
price in excess of the fair value of net assets acquired which originally
amounted to approximately $2,230,000 is being amortized over 25 years.
Additional contingent consideration is due if Lytton achieves pre-defined
sales levels. Additional consideration of approximately $290,000 and
$154,000 was paid in April 1999 and April 1998, respectively, based on
sales levels with the Stock Purchase Agreement providing for a possible
additional sales level incentive for a specified one year period. As the
contingencies 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 terms of the Guaranty in the Stock Purchase Agreement were modified
in June, 1998 by the Company and the seller ("Modified Guaranty"). The
modified terms provide that the seller will sell an amount of common stock
which will provide $1,300,000 gross proceeds, and the Company will guarantee
that, to the extent that the seller has less than 150,000 shares of the
Company's common stock remaining, the Company will issue additional shares
to the seller. In July 1998, the Company advanced the seller approximately
$1,278,000 ("Advance") toward the $1,300,000 from the sale of the Company's
common in addition to the seller having sold 5,000 shares of common stock
in July, 1998. Proceeds from the sale of the Company's common stock by the
seller, up to 195,000 shares, would repay the Advance and to the extent
proceeds from the sale of these shares were insufficient to pay the advance,
the balance of the Advance would be forgiven. The Advance has been presented
in the Stockholder's Equity section of the balance sheet. The Company has
also guaranteed the seller aggregate proceeds of no less than $1,100,000 from
the sale of the remaining common stock if sold on or prior to July 31, 1999.
<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 state-
ments. 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 electronics 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 materially differ from
those expressed in the statements. 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 statement. 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 Securi-
ties and Exchange Commission ("Commission") Form SB-2 (effective September
13, 1995), and Forms S-3, effective November 11, 1996 and November 4, 1997,
respectively, and as amended or supplemented.
The Company has continued to depend upon a relatively small number of
customers for a significant percentage of its net revenue. Significant
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 level
and timing of orders placed by a customer vary due to, among other
variables, attempts to balance inventory, design changes, demand for
products, competition and general economic conditions. Termination of
manufacturing relationships or changes, reductions or delays in orders as
had occurred in the past, could have an adverse effect on the Company's
results of operations or financial condition.
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.
Due to the Company's utilization of just-in-time inventory techniques,
the timely availability of many components is dependent on the Company's
ability to continuously develop accurate forecasts of customer volume re-
quirements. Component shortages could result in manufacturing and shipping
delays or increased component prices which could have a material adverse
effect on the Company's results of operations. It is important for the
Company, and there are significant risks involved, to efficiently manage
inventory, proper timing of expenditures and allocations of physical and
personnel resources in anticipation of future sales, the evaluation of
economic conditions in the electronics industry and the mix of products,
whether PCBs, wire harnesses, cables or turnkey products, for manufacture.
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 tech-
nologies, industry standards or customer requirements will not render the
Company's technology, equipment or processes obsolete or noncompetitive.
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 technologies and equipment are
likely to require significant capital investment.
The Company's results of operations are also affected by other factors,
including price competition, the level and timing of customer orders,
fluctuations in material costs, the overhead efficiencies achieved by the
Company in managing the costs of its operations, the Company's experience
in manufacturing a particular product, the timing of expenditures in
anticipation of increased orders, and selling, general and administrative
expenses. Accordingly, gross margins and operating income margins have
generally improved during periods of high volume and high capacity utiliza-
tion. The Company generally has idle capacity and reduced operating margins
during periods of lower-volume production.
<PAGE>
Year 2000 Readiness
The Year 2000 computer information processing challenge associated with
the upcoming millennium change concerns the ability of computerized informa-
tion systems to properly recognize date sensitive information, with which
many companies, public and private, are faced to ensure continued proper
operations and reporting of financial condition. Failure to correct and
comply with the Year 2000 change may cause systems that cannot recognize the
new date and millenium information to generate erroneous data or to fail to
operate. Management is fully aware of the Year 2000 issues, has made its
assessments and has evaluated its computerized systems and equipment, and
communicated with its major vendors, and has substantially made the opera-
tions of the Company Year 2000 compliant.
In 1997 the Company commenced upgrading its operations software program
by acquiring a new Visual Manufacturing software package. To a lesser extent
its Parent also acquired certain hardware and software of the Visual Manu-
facturing system. It has been and will be integrating this new software
system into all of its facilities. The Company is in the process of
installing the Visual Manufacturing software system into Lytton's and
Techdyne (Europe)'s operations. This new system has greatly enhanced the
Company's ERP system, essential to bids for new business, production
scheduling, inventory and information technology and overall operations.
Management believes this new system is providing it with leverage in material
pricing, production, timely-delivery and thereby enabling the Company to be
more competitive in bidding for manufacturing business. This Visual
Manufacturing system also enables the Company to better track actual costs
against its quotes, thereby allowing the Company to more effectively control
costs and manage operating margins. The Visual Manufacturing system has
been pre-tested and guaranteed by the manufacturer to be Year 2000 compliant.
The Visual Manufacturing system also provides the bookkeeping, accounting
and financial recording and information functions for the Company, its Parent
and Dialysis Corporation of America, a 68% owned public subsidiary of the
Parent.
With respect to non-information technology systems which typically
include embedded technology such as microcontrollers, the major equipment
used in the Company's manufacturing operations is not date sensitive and
should not pose any threat of system breakdown. Personal computer hardware
and software systems have been checked and have been determined to be Year
2000 compliant.
The Company has communicated with its key vendors, customers and other
third parties with whom its operations are essential to inquire of their
assessment of their Year 2000 issues and actions being taken to resolve those
issues. The Company has received a significant response rate for which
approximately half of the respondents have given written assurance that they
are Year 2000 compliant, with the balance assuring the Company they will be
Year 2000 compliant before the millenium change. To the extent such third
parties are potentially adversely affected by the Year 2000 issues, 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 issues.
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
manufacturing 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.
Results of Operations
Consolidated revenues decreased approximately $2,046,000 (17%) for the
three months ended March 31, 1999 compared to the preceding year. There was
a decrease in domestic sales of $1,185,000(12%) and a decrease in European
sales of $852,000 (48%), for the three months ended March 31, 1999 compared
to the same period of the preceding year. Interest and other income
decreased by approximately $9,000 for the three months ended March 31,
1999 compared to the same period of the preceding year, which includes a
decrease in interest as a result of a reduction in invested cash balances
and reduced interest rates.
<PAGE>
Results of Operations (continued)
The decrease in European based sales included a decrease of approximate-
ly $417,000 (86%) in sales to Compaq (Europe) by Techdyne (Europe), as well
as decrease in sales to other customers. Sales of Techdyne (Europe) to
Compaq, accounted for approximately 7% of sales for the three months ended
March 31, 1999 compared to 27% for the same period of the preceding year.
The bidding for Compaq orders has become more competitive which has con-
tinued to result in substantial reductions in Compaq sales and lower profit
margins on remaining Compaq sales. Techdyne (Europe) is pursuing new
business development; however there can be no assurance as to the success
of such efforts.
Approximately 45% of the Company's consolidated sales for the three
months ended March 31, 1999 were made to five customers. Customers
generating at least 10% of sales included IBM (10%) and PMI Food Equipment
Group (17%). PMI Food Equipment Group is Lytton's major customer and
represented 31% of Lytton's sales for the three months ended March 31,
1999. 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 increased to 90% for the
three months ended March 31, 1999 compared to 86% for the same period of the
preceding year reflecting changes in product mix and a diversification of the
Company's customer base.
Selling, general and administrative expenses remained relatively stable
amounting to $995,000 for the three months ended March 31, 1999 compared to
$1,026,000 for the same period of the preceding year.
Interest expense was basically the same overall for the three months
ended March 31, 1999 compared to the same period of the preceding year.
Interest on advances from the Parent increased approximately $11,000 as a
result of higher outstanding balances which was offset by a decrease of
approximately the same amount in interest on other debt due to lower
interest rates and reduced average borrowings. The prime rate was 7.75%
at March 31, 1999 and December 31, 1998.
Liquidity and Capital Resources
The Company had working capital of approximately $8,959,000 at March 31,
1999, a decrease of $363,000 (4%) during the first three months of 1999.
Included in the changes in components of working capital was a decrease of
$488,000 in cash and cash equivalents, which included net cash provided by
operating activities of $358,000, net cash used in investing activities of
$396,000 (including $393,000 from additions to property and equipment) and
net cash used in financing activities of $425,000 (including Lytton's net
payments on its, line of credit of $327,000, payments on long-term debt of
$182,000 and a net increase in advances from the Parent of $84,000).
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
$1,125,000 at March 31, 1999 and $1,200,000 at December 31, 1998 and a
$1,600,000 commercial revolving line of credit with interest at prime which
was fully drawn down as of March 31, 1999 and December 31, 1998. The com-
mercial term loan matures December 15, 2002 and the commercial line of
credit matures May 1, 2000. See Note 3 to "Notes to Consolidated 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 $629,000 at March 31, 1999 and $636,000 at December 31, 1998, 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 $77,000 at March 31,
1999 and $87,000 at December 31, 1998, 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 intercompany
indebtedness due it from the Company to the bank's position. 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.
<PAGE>
Liquidity and Capital Resources (continued)
In July, 1994 Techdyne (Scotland) purchased the facility housing its
operations for approximately $730,000, obtaining a 15-year mortgage which had
a U.S. dollar equivalency of approximately $521,000 at March 31, 1999 and
$545,000 at December 31, 1998, 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 which is engaged in the
manufacture and assembly of PCBs and other electronic products for commercial
customers. This acquisition required $2,500,000 cash, 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
guaranteed $2,400,000 minimum proceeds from the sale of these securities based
on Lytton having achieved certain earnings objectives. The Stock Purchase
Agreement also provides for incentive consideration to be paid in cash based
on specific sales levels of Lytton for each of three successive specified
years, resulting in additional consideration of approximately $290,000 and
$154,000 for the first two years of sales levels paid in April 1999 and April
1998, respectively. The Lytton 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. The
Guaranty in the Stock Purchase Agreement was modified by the Company and
the seller. See Note 9 to "Notes to Consolidated Condensed Financial
Statements."
With one bank, Lytton has (i) a $1,500,000 revolving bank line of credit
requiring monthly interest payments at prime plus 1/2%; (ii) a $1,000,000
installment loan 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; and (iii) a
$500,000 equipment loan agreement payable through August 1, 2003 with
interest at prime plus 1%. All of these bank loans are secured by the
business assets of Lytton. See Note 3 to "Notes to Consolidated Condensed
Financial Statements."
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%, and has an equipment loan at an annual
interest rate of 5.5% maturing in April 2001 with monthly payments of princi-
pal and interest of $4,298 secured by equipment. See Note 3 to "Notes to
Consolidated Condensed Financial Statements."
A significant customer of the Company, which accounted for 4% of sales
for the three months ended March 31, 1999 and 9% of sales for the same period
of the preceding year has been slow in paying amounts due to the Company.
The Company has substantial receivables and inventory relating to a sales
contract with the customer. See "Major Customers" under Note 1 to "Notes to
Consolidated Condensed Financial Statements."
The Company anticipates that current levels of working capital and
working capital from operations, will be adequate to successfully meet
liquidity demands for at least the next twelve months.
New Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. FAS 133
establishes accounting and reporting standards for derivative instruments
and for hedging activities and requires, among other things, that all
derivatives be recognized as either assets or liabilities in the statement
of financial position and that those instruments be measured at fair value.
The Company is in the process of determining the impact that the adoption
of FAS 133 will have on its consolidated financial statements.
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 2. Changes in Securities and Use of Proceeds
- ------ -----------------------------------------
The Company's redeemable common stock purchase warrants ("Warrants") of
which there are approximately 959,000 outstanding originally exercisable at
$5.00 were reduced to an exercise price of $4.00 per share and extended from
March 12, 1999 to May 17, 1999, at which date they expire. See Item 6(b)
below.
Item 5. Other Information
- ------ -----------------
On April 1, 1999 the Company entered into a financial advisory services
agreement with Consulting for Strategic Growth, Ltd. ("CSG") for one year,
provided either party may terminate the agreement on 15 days' notice. CSG
is to assist the Company in greater exposure to the investment and securities
community, providing research reports concerning the Company, and furnish
advice with respect to corporate organization, business plans and prospec-
tive acquisitions and mergers.
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
Form 8-K, Current Report, Item 5, "Other Events" relating to the
reduction of the exercise price and extension of the exercise period of the
Warrants, expiring May 17, 1999 filed on February 10, 1999. No financial
statements were filed.
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.
TECHDYNE, Inc.
/s/ Daniel R. Ouzts
By---------------------------------
DANIEL R. OUZTS, Vice President/
Finance, Controller and Chief
Financial Officer
Dated: May 14, 1999
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,171,843
<SECURITIES> 0
<RECEIVABLES> 5,875,603
<ALLOWANCES> 0
<INVENTORY> 7,627,703
<CURRENT-ASSETS> 15,338,711
<PP&E> 9,238,660
<DEPRECIATION> 4,085,151
<TOTAL-ASSETS> 23,270,535
<CURRENT-LIABILITIES> 6,380,024
<BONDS> 4,272,788
0
0
<COMMON> 52,501
<OTHER-SE> 9,189,643
<TOTAL-LIABILITY-AND-EQUITY> 23,270,535
<SALES> 9,834,994
<TOTAL-REVENUES> 9,857,115
<CGS> 8,818,948
<TOTAL-COSTS> 8,818,948
<OTHER-EXPENSES> 995,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165,323
<INCOME-PRETAX> (122,215)
<INCOME-TAX> 26,913
<INCOME-CONTINUING> (149,128)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (149,128)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
<FN>
<F1>Accounts receivable are net of allowance of $47,000 at March 31,
1999.
<F2>Inventories are net of reserve of $559,000 at March 31, 1999.
<FN>
</TABLE>
