UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Year Ended December 31, 2001
Commission File Number: 0-14659
TECHDYNE, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-1709103
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2230 W. 77TH STREET
HIALEAH, FLORIDA 33016
(Address of principal executive offices,
including zip code)
(305) 556-9210
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
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 the
filing requirements for at least the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the closing price per share on March
28, 2002, was approximately $1,653,402.
As of March 28, 2002, the Company had issued and outstanding 6,556,990
shares of its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Information Statement for the 2002 Annual Meeting of
Stockholders are incorporated by reference in Part III.
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 18
Item 3. Legal Proceedings..................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................................... 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 21
Item 6. Selected Financial Data............................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Oerations.......................................................................... 22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk............................. 30
Item 8. Financial Statements and Supplementary Data........................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 31
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 32
Item 11. Executive Compensation................................................................ 32
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 32
Item 13. Certain Relationships and Related Transactions........................................ 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 33
Signatures ...................................................................................... 36
PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a contract manufacturer of electronic and electro-mechanical
products. Our products are manufactured to customer specifications and designed
for original equipment manufacturers (OEMs) and distributors in the data
processing, telecommunications, instrumentation and food preparation equipment
industries. Our principal custom-designed products include complex printed
circuit boards (PCBs), conventional and molded cables-wire harnesses and
electro-mechanical assemblies. In addition, we provide OEMs with value-added,
turnkey contract manufacturing services and total systems assembly and
integration. We also deliver manufacturing and test engineering services and
materials management, with flexible and service-oriented manufacturing and
assembly services for our customers' high-tech and rapidly changing products.
We were incorporated in Florida in 1976, acquired by Medicore, Inc.,
our former parent, in 1982, and became a public company in 1985. Effective June
27, 2001, control of our company was acquired by Simclar International Limited
(Simclar International), which then transferred its 71.3% ownership of our
company to its parent, Simclar International Holdings Limited (Simclar), both of
which are private United Kingdom companies. See "Recent Developments." Simclar
International is engaged in the same electronic and electro-mechanical
subcontract manufacturing industry as is our company. Simclar International is a
larger company than ours, with sales for fiscal 2001 of approximately $62
million.
Our executive offices are located at 2230 West 77th Street, Hialeah,
Florida 33016. Our telephone number is (305) 556-9210. Our common stock is
traded on the Nasdaq Small Cap Market (Ticker:TCDN).
ELECTRONIC MANUFACTURING INDUSTRY
Until 2001, our industry exhibited significant year to year growth, due
both to the growth in the overall electronics industry, and to the steadily
increasing number of OEMs deciding to outsource all or a significant portion of
the manufacturing of their products. As a result of the general global recession
during 2001, and its magnified effect in the computer and telecommunications
equipment segments, this recent pattern of growth in our industry was
interrupted, and both the Company and the industry as a whole experienced a
decline in sales during 2001. While we are aggressively seeking new business
opportunities with existing and new customers, there can be no assurance we will
be successful in reversing this trend, particularly if the current recession
continues.
Nonetheless, with recovery in the economy generally anticipated in
2002, we believe that the fundamental factors contributing to the growth of our
industry in past years will lead to a resumption of the pattern of growth late
in this year. These factors include increased capital requirements for OEMs to
acquire modern, highly automated manufacturing equipment, their continuing
effort to reduce inventory costs and the relative cost advantages of contract
manufacturers. Using outsourcing for their manufacturing of electronic
assemblies also enables OEMs to focus on product development, reduce working
capital requirements, improve inventory management and marketability. We believe
OEMs will continue to rely on contract manufacturers not only for partial
component assemblies but complete turnkey manufacturing of entire finished
products. We also believe that OEMs
will look more to contract manufacturers to provide a broader scope of
value-added services, including manufacturing, engineering and test services.
We assist our customers from initial design and engineering through
materials procurement, to manufacturing of the complete product and testing.
Involving contract manufacturers earlier in the manufacturing process through
"concurrent engineering" allows OEMs to realize greater efficiencies and gives
contract manufacturers greater impact in product design, component selection,
production methods and the preparation of assembly drawings and test schematics.
This process also gives the customer the ability to draw upon our manufacturing
expertise at the outset and minimize manufacturing bottlenecks.
Another factor which will continue to lead OEMs to utilize contract
manufacturers is reduced time-to-market. Due to the intense competition in the
electronics industry, OEMs are faced with increasingly shorter product
life-cycles which pressures them to reduce time constraints in bringing a
product to market. This reduction can be accomplished by using a contract
manufacturer's established manufacturing expertise with its sophisticated,
technically advanced and automated manufacturing processes. We believe that
this, coupled with the elements discussed above, such as reduced production
costs through economies of scale in materials procurement, improved inventory
management, access to our manufacturing technology, engineering, testing and
related expertise, will motivate OEMs to work with electronic contract
manufacturers such as us.
BUSINESS STRATEGY
Notwithstanding the setbacks we suffered in 2001, our objective is to
become a stronger competitive force in the electronics manufacturing services
industry, and we believe that the cost reductions and restructuring of our
operations that we made in response to the economic downturn will put us in a
better position to compete once the economy and our industry recovers. We also
believe that our recent alliance with Simclar will allow us to expand our
customer base, broaden our product lines and provide greater efficiencies in
equipment, supplies, labor and manufacturing processes, both domestically and
internationally.
In response to industry trends, particularly in view of constantly
changing and improving technology and, therefore, shorter product life cycles,
we focus on product development and marketing, in order to become a competitive
provider of electronic contract manufacturing services for OEM customers. We
continue to seek to develop strong, long-term alliances with major-growth OEMs
of complex, market leading products. We believe that creating and maintaining
long-term relationships with customers requires providing high quality,
cost-effective manufacturing services marked by a high degree of customer
responsiveness and flexibility. Therefore, our strategy is to focus on leading
manufacturers of advanced electronic products that generally require
custom-designed, more complex interconnect products and short lead-time
manufacturing services. In 2002, we will also continue to target large contract
manufacturers as potential customers.
We strive to build on our integrated manufacturing capabilities, final
system assemblies and testing. In addition to PCBs, our custom cable assembly
capabilities provide us with further opportunities to leverage our vertical
integration and to provide greater value added services and be more competitive.
In addition, vertical integration provides us with greater control over quality,
delivery and cost.
To further satisfy customer needs, we develop long-term customer
relationships by using our state-of-the-art technology to provide timely and
quick-turnaround manufacturing and comprehensive
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support for materials purchases and inventory control. Through our use of
electronic data interchange (EDI) technology, the customer is able to convey its
inventory and product needs on a weekly basis based on a rolling quantity
forecast. More emphasis is placed on value-added turnkey business for the
manufacture of complete finished assemblies. This is accomplished with extended
technology, continuous improvement of our processes, and our early involvement
in the design process using our computer-aided design system.
We believe that we can develop closer and more economically beneficial
relationships with our customers through our geographically diverse
manufacturing and assembly operations, presently located in Florida, Texas,
Massachusetts, and Ohio. Our diverse locations have multiple advantages by
helping satisfy costs, timely deliveries and local market requirements of our
customers. We will continue to pursue expansion in different markets to better
serve existing customers and to obtain additional new customers. In alliance
with Simclar, we anticipate experiencing growth and the ability to increase our
global presence and competitive position.
PRODUCTS AND SERVICES
We manufacture approximately 850 products, including complete turnkey
finished products, sub-assemblies, molded and non-molded cable assemblies, wire
harnesses, PCBs, injection molded and electronic assembly products, for over 100
OEM customers.
Printed Circuit Boards
PCB assemblies are electronic assemblies consisting of a basic printed
circuit laminate with electronic components including diodes, resistors,
capacitors and transistors, inserted and wave soldered. PCBs may be used either
internally within the customer's products or in peripheral devices. The PCBs
produced by the company include pin-through-hole assemblies, low and medium
volume surface mount technology assemblies, and mixed technology PCBs, which
include multilayer PCBs.
In pin-through-hole assembly production, electronic components with
pins or leads are inserted through pre-drilled holes in a PCB and the pins are
soldered to the electrical surface of a PCB. In surface mount technology
production, electronic components are attached and soldered directly onto the
surface of a circuit board rather than inserted through holes. Surface mount
technology components are smaller so they can be spaced more closely together
and, unlike pin-through-hole components, surface mount technology components can
be placed on both sides of a PCB. This allows for product miniaturization, while
enhancing the electronic properties of the circuit. Surface mount technology
manufacturing requires substantial capital investment in expensive, automated
production equipment, which requires high usage. We are utilizing computerized
testing system in order to verify that all components have been installed
properly and meet certain functional standards, that the electrical circuits
have been properly completed, and that the PCB assembly will perform its
intended functions.
In 1997, we acquired Lytton Incorporated (Lytton), whose Ohio
operations, with six automated lines, are more focused on PCB manufacturing,
primarily for the food preparation equipment industry. We also established a
5,500 square foot manufacturing facility in Massachusetts in 1997. These
expansions resulted in PCB manufacturing yielding approximately 60% and 56% of
our sales revenues in 2001 and 2000 respectively.
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Cable and Harness Assemblies
A cable is an assembly of electrical conductors insulated from each
other, twisted around a central core and jacketed. Cables may be molded or
non-molded.
Techdyne offers a wide range of custom manufactured cable and harness
assemblies for molded and mechanical applications. These assemblies include
multiconductor, ribbon, co-axial cable, and discrete wire harness assemblies. We
use advanced manufacturing processes, in-line inspection and computerized
automated test equipment.
We maintain a large assortment of standard tooling for D-Subminiature,
DIN connectors and phono connectors. D-Subminiatures are connectors which are
over-molded with the imprint of the customer's name and part number. DIN
connectors are circular connectors consisting of two to four pairs of wires used
for computer keyboards.
Flat ribbon cable or ribbon cable assemblies are cables with wires
(conductors) on the same plane with connectors at each end. Flat ribbon cables
are used in computer assemblies and instrumentation.
Discrete cable assemblies are wires with contacts and connectors.
Harnesses are prefabricated wiring with insulation and terminals ready to be
attached to connectors. Our cable sales comprised approximately 34% and 34% of
total sales revenue for 2001 and 2000, respectively.
Contract Manufacturing
Contract manufacturing involves the manufacture of complete finished
assemblies with all sheet metal, power supplies, fans, PCBs as well as complete
sub-assemblies for integration into an OEM's finished products, such as speaker
and lock-key assemblies and diode assemblies that consist of wire, connectors
and diodes that are over-molded, packaged and bar coded for distribution. These
products can be totally designed and manufactured by the company through our
computer-aided design system, engineering and supply procurement. We develop
manufacturing processes and tooling, and test sequences for new products of our
customers. We provide design and engineering services in the early stages of
product development, thereby assuring mechanical and electrical considerations
are integrated with a total system. Alternatively, the customer may provide
specifications and we will assist in the design and engineering or manufacture
to the customer's specifications.
Reworking and Refurbishing
Customers provide the company with materials and sub-assemblies
acquired from other sources, which the customer has determined require modified
design or engineering changes. We redesign, rework, refurbish and repair these
materials and sub-assemblies.
Contract manufacturing, reworking and refurbishing together amounted to
approximately 10% of sales for each of 2001 and 2000. We believe that PCB sales
and contract manufacturing will provide us with substantial increases in
revenues over the next few years. Our affiliation with Simclar International
gives us access to a larger customer base and the ability to handle large
customers both in the USA and Europe.
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MANUFACTURING
We manufacture components and products that are custom designed and
developed to fit specific customer requirements and specifications. Such service
includes computer integrated manufacturing and engineering services,
quick-turnaround manufacturing and prototype development, materials procurement,
inventory management, developing customer oriented manufacturing processes,
tooling and test sequences for new products from product designs received from
our customers or developed by Techdyne from customer requirements. Our
industrial, electrical and mechanical engineers work closely with our customers'
engineering departments from inception through design, prototypes, production
and packaging. We evaluate customer designs and if appropriate, recommend design
changes to improve the quality of the finished product, reduce manufacturing
costs or other necessary design modifications. Upon completion of engineering,
we produce prototype or preproduction samples. Materials procurement includes
planning, purchasing and warehousing electronic components and materials used in
the assemblies and finished products. Our engineering staff reviews and
structures the bill of materials for purchase, coordinates manufacturing
instructions and operations, and reviews inspection criteria with the quality
assurance department. The engineering staff also determines any special capital
equipment requirements, tooling and dies, which must be acquired.
We attempt to develop a "partnership" relationship with many of our
customers by providing a responsive, flexible, total manufacturing service. We
have "supplier partnerships" with certain customers pursuant to which we must
satisfy in-house manufacturing requirements of the customer, projected on a
weekly basis, based on a rolling quarterly forecast.
Our PCB assembly operations are geared toward advanced surface mount
technology. Our Lytton subsidiary provides the PCB production through
state-of-the-art manufacturing equipment and processes and a highly trained and
experienced engineering and manufacturing workforce. We also offer a wide range
of custom manufactured cables and harnesses for molded and mechanical
applications. We use advanced manufacturing processes, in-line inspection and
testing to focus on process efficiencies and quality. The cable and harness
assembly process is accomplished with automated and semi-automated preparation
and insertion equipment and manual assembly techniques.
Finished turnkey assemblies include the entire manufacturing process
from design and engineering to purchasing raw materials, manufacturing and
assembly of the component parts, testing, packaging and delivery of the finished
product to the customer. By contracting assembly production, OEMs are able to
keep pace with continuous and complex technological changes and improvements by
making rapid modifications to their products without costly retooling and
without any extensive capital investments for new or altered equipment.
At all of our facilities we maintain modern state-of-the-art equipment
for crimping, stripping, terminating, soldering, sonic welding and sonic
cleaning which permits us to produce conventional and complex molded cables. We
also maintain a large assortment of standard tooling. New manufacturing jobs may
require new tooling and dies, but most presses and related equipment are
standard.
Our European manufacturing facility, located in Dunfermline, Scotland,
focused on producing primarily wire harnesses, electro-mechanical assemblies,
and molded cables. Significant reductions in sales of our Techdyne (Europe)
Limited (Techdyne (Europe)) subsidiary resulted in net losses for this
subsidiary amounting to $909,000 for 2001, and $328,000 for 2000. As a result of
continuing operating losses, in April 2001 the company decided to discontinue
its European manufacturing operations, and in May 2001, Techdyne (Europe)
entered into a management agreement with Simclar International whereby it
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undertook to manufacture products for Techdyne (Europe) and assist in management
coordination. Subsequently, effective February 28, 2002, the company cancelled
the management agreement, and entered into an agreement to transfer to Simclar
International, at net book value, all operating assets and all liabilities of
Techdyne (Europe) with the exception of the land and building, which are being
offered for sale. The company plans to liquidate its European subsidiary when
the land and building are sold.
SUPPLIES AND MATERIALS MANAGEMENT
Materials used in our operations consist of metals, electronic
components such as cable, wire, resistors, capacitors, diodes, PCBs and plastic
resins. For over six months in 2000, a worldwide shortage of key electronic
components adversely impacted our sales and earnings. The shortages diminished
during 2001.
The company procures components from a select group of vendors which
meet our standards for timely delivery, high quality and cost effectiveness. In
order to control inventory investment and avoid material obsolescence,
components are generally ordered when we have a purchase order or commitment
from our customer for the completed assembly. We use ERP management technologies
and manage our material pipelines and vendor base to allow our customers to
increase or decrease volume requirements within established frameworks. We have
a Visual Manufacturing computerized software system providing us with material
requirements planning, purchasing, and sales and marketing functions. See
"Business Strategy" above and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We have improved our overall efficiency of manufacturing, particularly
in the area of inventory management, including purchasing, which is geared more
closely to current needs resulting in reduced obsolescence problems. Except for
a worldwide shortage of key electronic components in 2000 that adversely
impacted our sales and earnings, we have not otherwise experienced any
significant disruptions from shortages of materials or delivery delays from
suppliers and we believe that our present sources and the availability of our
required materials are adequate. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
QUALITY AND PROCESS CONTROL
Our Florida, Texas, and Massachusetts facilities received from
Underwriter's Laboratories, an independent quality assurance organization, the
ISO 9002 quality assurance designation, which is the international standard of
quality with respect to all systems of operations, including, among others,
purchasing, engineering, manufacturing, sales, inventory control and quality.
Lytton holds its ISO 9002 quality designation from Eagle Registrations, Inc.
These quality assurance designations are only provided to those manufacturers
which exhibit stringent quality and process control assurances after extensive
evaluation and auditing by these independent quality assurance organizations.
Quality control is essential to the company's operations since customers demand
strict compliance with design and product specifications, and high quality
production is a primary competitive standard vital to our services.
Product components, assemblies and sub-assemblies manufactured by the
company are thoroughly inspected visually and electronically to assure all
components are made to strict specifications and are functional and safe. Strict
process controls relating to the entire manufacturing process are part of our
standard operating procedure.
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Over the years our product and manufacturing quality have received
excellent ratings. Total quality, timely delivery and customer satisfaction is
our philosophy. High levels of quality in every area of our operations are
essential. Quality standards are established for each operation, performance
tracked against those standards, and identifying workflow and implementing
necessary changes to deliver higher quality levels. We maintain regular contact
with our customers to assure adequate information exchange and other activities
necessary to assure customer satisfaction and to support our high level of
quality and on-time delivery. Any adverse change in our quality and process
controls could adversely affect our relationships with customers and ultimately
our revenues and profitability.
CUSTOMERS
We serve a wide range of businesses, from emerging growth companies to
multinational OEMs, involved in a variety of markets including computer
networking systems, computer workstations, telecommunications, mass data storage
systems, instrumentation and food preparation equipment industries. A
significant portion of our revenues are distributed over the following industry
segments:
Year Ended December 31,
----------------------------
2001 2000 1999
---- ---- ----
Data processing 13% 15% 22%
Telecommunications 9% 22% 22%
Instrumentation 19% 19% 23%
Food preparation equipment 23% 22% 17%
We seek to serve a sufficiently large number of customers to avoid
dependence on any one customer or industry. Nevertheless, historically a
substantial percentage of our net sales have been to multiple locations of a
small number of customers. Significant reductions or delays in sales to any of
those major customers would have a material adverse effect on our results of
operations. In the past, certain of our customers have terminated their
manufacturing relationship with us, or otherwise significantly reduced their
product orders. We cannot assure you that any major customer may not terminate
or otherwise significantly reduce or delay manufacturing orders, any of which
such terminations or changes in manufacturing orders could have a material
adverse effect on our results of operations.
We depend upon the continued growth, viability and financial stability
of our customers, who in turn substantially depend on the growth of the personal
computer, computer peripherals, communications, instrumentation, data processing
and food preparation equipment industries. Most of these industries have been
characterized by rapid technological change, short product life cycles, pricing
and margin pressures. In addition, many of our customers in these industries are
affected by general economic conditions. The factors affecting these industries
in general, and/or our customers in particular, could have a material adverse
effect on our results of operations. In addition, we generate significant
accounts receivable in connection with providing manufacturing services to our
customers. If one or more of our customers were to become insolvent or otherwise
were unable to pay us for provided manufacturing services, our operating results
and financial condition would be adversely affected. In 2001, 43% of our sales
were made to numerous locations of three major customers. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The table below sets forth the respective portion of sales for the
applicable period attributable to customers and related suppliers who accounted
for more than 10% of the company's sales in any respective period.
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Percentage of Sales
-------------------
2001 2000 1999
---- ---- ----
Illinois Tool Works 26% 19% 15%
Trilithic * 12% *
Alcatel * 12% *
Motorola, Inc. * * 13%
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* less than 10% for that year
MARKETING AND SALES
We are pursuing expansion and diversification of our customer base. We
are seeking to develop long term relationships by working closely with
customers, starting with the initial product design and development stage, and
continuing throughout the manufacturing and distribution process. Our principal
sources of new business are the expansion in the volume and scope of services
provided to existing customers, referrals from customers and suppliers, direct
sales through our sales managers and executive staff, and through independent
sales representatives. Domestic operations generate sales through five regional
sales managers covering the Northeast, Southeast, West and Southwest regions of
the United States. There are 15 in-house sales/marketing personnel in the United
States and one internationally. In addition to sales through sales
representatives and in-house sales personnel, sales are also generated through
our website at http://www.tcdn.com and through catalogues, brochures and trade
shows.
The independent manufacturer sales representatives, primarily marketing
electronic and similar high-technology products, are retained under exclusive
sales representative agreements for specific territories and are paid on a
commission basis. Unless otherwise approved by Techdyne, the sales
representatives cannot represent any other person engaged in the business of
manufacturing services similar to those of the company, nor represent any person
who may be in competition with us. The agreements further prohibit the sales
representative from disclosing trade secrets or calling on our customers for a
period of six months to one year from termination of their agreement.
Techdyne (Europe) had one in-house salesperson who marketed our
products, primarily ribbon, harness and cable assemblies, electro-mechanical
products, and molded cable assemblies, as well as our reworked and refurbished
products to customers in Scotland, England, Ireland, Germany and the Middle
East. Following the transfer of the assets of Techdyne (Europe) to Simclar
International, this salesperson transferred to Simclar International employment
as of March 2002.
Substantially all of our sales and reorders are effected through
competitive bidding. Most sales are accomplished through purchase orders with
specific quantity, price and delivery terms. Some productions, such as our
supplier partnerships, are accomplished under open purchase orders with
components released against customer request.
BACKLOG
At December 31, 2001 and 2000, our backlog of orders amounted to
approximately $8,314,000 and $18,676,000, respectively. Based on past experience
and relationships with our customers and knowledge of our manufacturing
capabilities, we believe that most of our backlog orders are firm and should be
filled
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within six months. Most of the purchase orders within which the company performs
do not provide for cancellation. Over the last several years cancellations have
been minimal and management does not believe that any significant amount of the
backlog orders will be canceled. However, based upon relationships with our
customers, we occasionally allow cancellations and frequently the rescheduling
of deliveries. The variations in the size and delivery schedules of purchase
orders received by the company may result in substantial fluctuations in backlog
from period to period. Since orders and commitments may be rescheduled or
cancelled, and customers' lead times may vary, backlog does not necessarily
reflect the timing or amount of future sales.
PATENTS AND TRADEMARKS
We do not have nor do we rely on patents or trademarks to establish or
protect our market position. Rather, we depend on design, engineering and
manufacturing, cost containment, quality, and marketing skills to establish or
maintain market position.
COMPETITION
Techdyne is a part of highly competitive electronic manufacturing
services industry. We face competition from divisions of large electronics and
high-technology firms, as well as numerous smaller specialized companies.
Certain competitors have broader geographic coverage and competitive price
advantage based on their less expensive offshore operations, particularly in the
Far East. Many of our competitors are larger and more geographically diverse and
have greater financial, manufacturing and marketing resources than we have. Our
main competitors in the PCB area include ACT Manufacturing, Inc., Vickers
Electronics Systems, Diversified Systems, Inc., Epic Technologies, Inc, and
others. We have numerous competitors in the cable and harness assembly market,
including Volex Interconnect Systems, Inc., Foxconn, ACT Manufacturing, Inc. (in
bankruptcy) and Escod Industries.
We believe that we are favorably positioned with regard to primary
competitive factors - price, quality of production, manufacturing capability,
prompt customer service, timely delivery, engineering expertise, and technical
support. We also believe that our affiliation with Simclar enhances our
competitive position internationally. However, recent consolidation trends in
the electronic manufacturing services industry are resulting in changes in the
competitive landscape. Increased competition could result in lower priced
components and lower profit margins, or loss of customers, which could have a
material adverse effect on our business, financial condition and result of
operations. Compared to manufacturers who have greater direct buying power with
component suppliers or who have lower cost structure, we may be operating at a
cost disadvantage.
Due to the number and variety of competitors, reliable data reflective
to our competitive position in the electronic components and assembly industry
is difficult to develop and is not known.
GOVERNMENTAL REGULATION
Our operations are subject to certain federal, state and local
regulatory requirements relating to environmental waste management and health
and safety matters. We believe that we comply with applicable regulations
pertaining to health, safety and the use, storage and disposal of materials that
are considered hazardous waste under applicable law. To date our costs for
compliance and governmental permits and authorizations have not been material.
However, additional or modified requirements that may require substantial
additional expenditures may be imposed in future.
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EMPLOYEES
We presently have 256 employees, ten of our whom are employed as part
time or temporary help. Of our employees, approximately 191 are engaged in
manufacturing, quality assurance, related operations and support activities, 22
are in material handling and procurement, 14 are in sales and marketing, seven
are in engineering, and 12 are in administrative, accounting and support
activities.
We have no unions and we believe that our relationship with our
employees is good.
RECENT DEVELOPMENTS
On June 27, 2001, our shareholders approved an agreement under which
Simclar International, acquired 4,674,620 shares of our common stock (71.3% of
our shares) from our former parent, Medicore, Inc. Simclar International
immediately transferred its controlling interest in our company to its parent,
Simclar, which is owned by Samuel Russell and his wife, Christina Margaret Janet
Russell, each of whom is also a director of Simclar International and our
company. Mr. Russell is also Chief Executive Officer of our company.
Simclar acquired the controlling interest in our company from Medicore,
Inc. for $10,000,000 plus earn-out payments of 3% of our net sales for the next
three years, with a minimum aggregate earn-out of $2,500,000 and a maximum
aggregate earn-out of $5,000,000. It was also agreed that Simclar use its best
efforts to refinance our long-term debt, which Simclar did, enabling us to repay
our outstanding indebtedness of approximately $193,000 to Medicore on October
29, 2001. Simclar and Medicore made a variety of customary representations and
covenants under the Agreement for Sale and Purchase of Shares, one noteworthy
one being Simclar's covenant not to finance the purchase of control with any
pre-arranged sale of our assets, provided Simclar would be permitted to close or
dispose of our facilities or assets for valid corporate purposes. Simclar also
agreed to register the shares of common stock underlying certain options held by
management See "Risk Factors."
In April 2001, as a result of continuing operating losses, we
determined to discontinue our manufacturing operations in Scotland through our
subsidiary, Techdyne (Europe) Limited. We incurred a cost of approximately
$225,000 for closing our Scottish manufacturing operations, primarily from
post-employment benefits. In May 2001, Techdyne (Europe) entered into a
management agreement with Simclar International, under which Simclar
International manufactured products for that subsidiary, and assisted it in
management coordination. Simclar International received a service charge for the
cost of such personnel and the cost of providing any administrative services
based on the actual costs incurred by Simclar. To date, we have paid Simclar
$1,250,000 under that management agreement. The management agreement has been
terminated following the transfer of the assets of Techdyne (Europe) to Simclar
International.
Upon Simclar's acquisition of control of our company, management also
changed. Of the original executive officers, only Barry Pardon, President and
Director, and Lytton Crossley, Director, continue in their original positions.
Joseph Verga, formerly Senior Vice President and director, no longer holds those
positions, but he continues as a member of our management. Mr. Thomas K.
Langbein, Chairman of the Board and Chief Executive Officer of our company and
Medicore, of which former parent he is also President, and Directors Peter D.
Fischbein, Anthony C. D'Amore and Edward Diamond resigned upon completion of the
sale of control. Messrs. Fischbein and D'Amore are directors of Medicore.
Additions to our management upon the change in control are: (1) Samuel Russell,
managing director of Simclar International and 90% owner of Simclar, who is
Chairman of the Board
-10-
and Chief Executive Officer of our company; (2) Christina Margaret Janet
Russell, the wife of Samuel Russell and a Director of Simclar International and
10% owner of Simclar, who is a Director of our company, and (3) three new
Directors, Thomas Foggo, senior partner of Skene Edwards, W.S., counsel to
Simclar, John Ian Durie, Finance Director of Simclar and formerly a partner of
Deloitte & Touche, and Kenneth Greenhalgh, a management consultant to Simclar.
Our by-laws were amended to increase the board of directors to nine members
effective upon completion of the sale of control. There remain two vacancies on
the board.
RISK FACTORS
This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
prospects discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those listed
below.
The loss of a major customer would adversely affect us
A substantial percentage, approximately 57% of our sales for the year
ended December 31, 2001, have been to five customers, the loss of any of which
would adversely affect us. A substantial portion of our sales (26%) is with one
major customer, Illinois Tool Works ("ITW"). There are no long-term contracts
with any customer. Substantially all of our sales and reorders are subject to
competitive bids. Sales are dependent on the success of our customers, some of
which operate in businesses associated with rapid technological change, vigorous
competition, short product life cycles, and pricing and margin pressures.
Additionally, certain of the industries served by us are subject to economic
cycles and have in the past experienced, and are likely in the future to
experience, recessionary periods. Developments adverse to our major customers or
their products could have an adverse effect on us. A variety of conditions, both
specific to each individual customer and generally affecting each customer's
industry, may cause customers to cancel, reduce or delay purchase orders and
commitments without penalty, except for payment for services rendered, materials
purchased and, in certain circumstances, charges associated with such
cancellation, reduction or delay.
In addition, we generate large accounts receivable in connection with
our providing of electronic contract manufacturing. If one or more of our
customers experiences financial difficulty and is unable to pay for the services
provided by us, our operating results and financial condition would be adversely
affected. Recent examples are two customers who filed under Chapter 11 of the
Bankruptcy Act since August 2001. Both customers owed us a total of $159,000 at
the time of their filings, which may be uncollectable. We expect to continue to
depend on the sales of a limited number of major customers.
Secured loans - existence of liens on all of our assets
All of our assets, except for those of Techdyne (Europe), have been
pledged as collateral for two bank loans. On October 24, 2001, we refinanced our
existing bank loans of $10,400,000, of which approximately $7,256,000 was
outstanding at the time of refinancing, with a one-year $3,000,000 line of
credit and a $7,000,000 seven-year term loan. The refinancing was completed with
the Bank of Scotland. The refinancing is at an interest rate at the LIBOR rate
plus 1.5% for a one, three or six month period, at our option. We elected the
three month interest period at 3.83% until January 24, 2002, and continued the
three month election until April 24, 2002, at an interest rate of 3.31%. The
term loan specifies quarterly payments of $250,000 starting January 24, 2002.
-11-
Our new credit facilities impose operational and financial restrictions on us
Our new credit facilities with the Bank of Scotland, which include a
Facility Letter, a Working Capital Facility Letter, a Security Agreement, a
Pledge Agreement, and a Guaranty, in addition to subjecting all our assets as
security for the bank financing, includes substantial covenants that impose
significant restrictions on us, including, among others, requirements that:
o the facilities take priority over all our other obligations;
o we must maintain sufficient and appropriate insurance for our
business and assets;
o we must maintain all necessary licenses and authorizations for the
conduct of our business;
o we indemnify the bank against all costs and expenses incurred by it
which arise as a result of any actual or threatened (i) breach of
environmental laws; (ii) release or exposure to a dangerous
substance at or from our premises; or (iii) claim for an alleged
breach of environmental law or remedial action or liability under
such environmental law which could have an adverse material effect;
o if environmental harm has occurred to our property securing the
credit facility, we have to ensure we were not responsible for the
harm, and we have to be aware of the person responsible and its
financial condition; and
o relate to various pension and benefit plans and ERISA issues,
including, among others, requiring us to notify the bank of (i)
material adverse changes in the financial condition of any such
plan; (ii) increase in benefits; (iii) establishment of any new
plan; (iv) grounds for termination of any plan; and (v) our
affiliation with or acquisition of any new ERISA affiliate that has
an obligation to contribute to a plan that has an accumulated
funding deficiency.
In addition, our credit facilities require us to maintain:
o consolidated adjusted net worth greater than $9,000,000 for fiscal
2002 and $11,000,000 thereafter;
o a ratio of consolidated net trade receivables and net inventories
to consolidated net borrowings not less than 1.5 to 1 to June 30,
2002, and 1.75 to 1 thereafter;
o a ratio of consolidated trade receivables to consolidated net
borrowing of not less than .5 to 1 to June 30, 2002, and .75 to 1
thereafter; and
o a ratio of consolidated net income before interest, income taxes
and management fees to total consolidated interest costs of not
less than 2 to 1.
Finally, without the prior written consent of the Bank of Scotland, our
credit facilities prohibit us from:
o granting or permitting a security agreement against our
consolidated assets (except for permitted security agreements);
o declaring or paying any dividends or making any other payments on
our capital stock;
o consolidating or merging with any other entity or acquiring or
purchasing any equity interest in any other entity, or assuming any
obligations of any other entity, except for notes and receivables
acquired in the ordinary course of business;
o incurring, assuming, guaranteeing, or remaining liable with respect
to any indebtedness, except for certain existing indebtedness
disclosed in our financial statements;
o undertaking any capital expenditures in excess of $1,000,000 in any
one fiscal year;
-12-
o effecting any changes in ownership of our company or Lytton, our
100%-owned subsidiary; and
o making any material change in any of our business objectives,
purposes, operation or taxes.
Our ability to comply with these provisions may be affected by changes
in our business condition or results of our operations, or other events beyond
our control. The breach of any of these covenants would result in a default
under our debt. At December 31, 2001, we were in violation of the interest
coverage covenant. Although the Bank of Scotland has waived this default, there
can be no assurance that defaults in these or other covenants will not occur in
the future, nor can there be any assurance that our lender will waive future
defaults. A default in the covenants would permit our lender to accelerate the
maturity of our credit facilities and sell the assets securing them, which would
cause the company to cease operations and seek bankruptcy protection.
Our indebtedness requires us to dedicate a substantial portion of our
cash flow from operations to payments on our debt, which could reduce amounts
for working capital and other general corporate purposes. The restrictions in
our credit facility could also limit our flexibility in reacting to changes in
our business and increases our vulnerability to general adverse economic and
industry conditions.
We operate in a highly competitive industry and our business may be
harmed by competitive pressures
Manufacture and assembly of electro-mechanical and electronic
components is a highly competitive industry characterized by a diversity and
sophistication of products and components. We compete with major electronics
firms that have substantially greater financial and technical resources and
personnel than we do. We also face competition from many smaller, more
specialized companies. We believe the primary competitive factors are pricing,
quality of production, prompt customer service, timely delivery, engineering
expertise, and technical assistance to customers. Among this mix of competitive
standards, we believe we are competitive with respect to delivery time, quality,
price and customer service. Price sensitivity becomes a paramount competitive
issue in recessionary periods, as we are now experiencing, and we may be at a
competitive disadvantage with manufacturers with a lower cost structure,
particularly off-shore manufacturers with lower labor and related production
costs. To compete effectively, we must also provide technologically advanced
manufacturing services, and respond flexibly and rapidly to customers' design
and schedule changes. Our inability to do so could have adverse affects on us.
Customers in our industry are price-sensitive and, particularly in the current
downturn, there is substantial pressure from customers to reduce our prices. Our
ability to remain competitive depends on our ability to meet these customer and
competitive price pressures while protecting our profit margins. We have been
engaged in and will have to continue cost reductions in overhead, manufacturing
processes, and equipment retooling, while maintaining product flow, inventory
control, and just-in-time shipping to our customers. If we are unable to
accomplish these factors, we will not be competitive, and our business and
operating results will be adversely impacted.
Our revenues are contingent on the health of the industries we serve
We rely on the continued growth and financial stability of our
customers who operate in the following industries:
o data processing
o telecommunications
o instrumentation, and
o food preparation equipment
-13-
These industry segments, to a varying extent, are subject to dynamic
changes in technology, competition, short product life cycles, and economic
recessionary periods. When our customers are adversely affected by these
factors, we may be similarly affected.
Manufacture of electronic and electro-mechanical products, particularly designed
for OEMs and manufactured to custom specifications, is cyclical, and demand for
our products may decline.
Our business depends substantially on both the volume of electronic and
electro-mechanical production by OEMs in the data processing,
telecommunications, instrumentation and food preparation industries, and new
specifications and designs for these OEMs. These industries have been cyclical
over the years, and have experienced oversupply as well as significantly reduced
demand, as we are currently experiencing. Declining demand for our products and
services may continue into the immediate future. The result of the economic
downturn has resulted in lower capacity utilization of our manufacturing
operations and a shift in product mix toward lower margin assemblies. OEMs may
not increase production or may shift to new customer specifications and designs,
in which case demand for our products and services may continue to slow. These
changes in economic conditions and demand have resulted and may continue to
result in customer rescheduling of orders and shipments, which affects our
results of operations. The continued recession and downturn in OEM products is
anticipated to have an adverse effect on our business, financial condition, and
operating results. Moreover, our need to invest in engineering, marketing, and
customer services and support capabilities will limit our ability to reduce
expenses, as we have been attempting to do, in response to such downturns.
We do not have long-term contracts with customers, and cancellations, reductions
or delays in orders affect our profitability
We do not typically obtain firm long-term contracts from our customers.
Instead, we work closely with our customers to develop forecasts for upcoming
orders, which are not binding, in order to properly schedule inventory and
manufacturing. Our customers may alter or cancel their orders or demand delays
in production for a number of reasons beyond our control, which may include:
o market demand for products;
o change in inventory control and procedures;
o acquisitions of or consolidations among competing customers;
o electronic design and technological advancements; and
o recessionary economic environment.
Any one of these factors may significantly change the total volume of
sales and affect our operating results, as has been the case with the
recessionary environment and reduced demand for our customers' products and in
turn, our products and services. In addition, since much of our costs and
operating expenses are relatively fixed, a reduction in customer demand would
adversely affect our gross margins and operating income. Although we are always
seeking new business and customers, we cannot assure you that we will be able to
replace deferred, reduced or cancelled orders.
Shortages of components specified by our customers would delay shipments and
adversely affect our profitability
Substantially all of our sales are derived from electro-mechanical and
subcontract electronic manufacturing in which we purchase components specified
by our customers. In 2000, supply shortages
-14-
curtailed production of certain assemblies using a particular component.
Industry-wide shortages of electronic components, particularly components for
PCB assemblies, have occurred. If shortages of components occur, we may be
forced to delay shipments, which could have an adverse effect on our profit
margins and customer relations. Because of the continued increase in demand for
surface mount components, we anticipate component shortages and longer lead
times for certain components to occur from time to time. Also, we typically bear
the risk of component price increases that occur, which accordingly could
adversely affect our gross profit margins. At times, we are forced to purchase
components beyond customer demand on items which are in short supply. To the
extent there is less customer demand or cancellations, we will have increased
obsolescence. Due to the current difficult economic environment, there may be
cut-backs and/or shut-downs of semi-conductor foundries, which could reinitiate
component shortages.
Technological developments, satisfying customer designs and production
requirements, quality and process controls are factors impacting our operations
Our existing and future operations are and will be influenced by
several factors, including technological developments, our ability to
efficiently meet the design and production requirements of our customers,
increases in expenses associated with continued sales growth, our ability to
control costs, our ability to evaluate new orders to target satisfactory profit
margins, and our capacity to develop and manage the introduction of new
products. We also may not be able to adequately identify new product trends or
opportunities, or respond effectively to new technological changes. Quality
control is also essential to our operations, since customers demand strict
compliance with design and product specifications. Any deviation from our
quality and process controls would adversely affect our relationship with
customers, and ultimately our revenues and profitability.
Our operating results are subject to annual and quarterly fluctuation which
could negatively impact our stock prices
There are a number of factors, beyond our control, that may affect our
annual and quarterly results. These factors include:
o the volume and timing of customer orders;
o changes in labor and operating prices;
o fluctuations in material cost and availability;
o changes in domestic and international economies;
o timing of our expenditures in anticipation of future orders;
o increase in price competition, and competitive pressures on
delivery time and product reliability;
o changes in demand for customer products;
o the efficiency and effectiveness of our automated manufacturing
processes;
o market acceptance of new products introduced by our customers; and
o uneven seasonal demands by our customers.
Any one or combination of these factors can cause an adverse effect on our
future annual and quarterly financial results. Fluctuations in our operating
results could materially and adversely affect the market price of our common
stock, which has been declining over the last several years, and over the nine
months ended September 30, 2001.
-15-
Environmental laws may expose us to financial liability and restrictions on
operations
We are subject to a variety of federal, state and local laws and
regulations relating to environmental, waste management, and health and safety
concerns, including the handling, storage, discharge and disposal of hazardous
materials used in or derived from our manufacturing processes. Proper waste
disposal is a major consideration for PCB manufacturers, which is a substantial
part of our business, since metals and chemicals are used in our manufacturing
process. Environmental controls are also essential in our other areas of
electronic assembly. If we fail to comply with such environmental laws and
regulations, then we could incur liabilities and fines and our operations could
be suspended.
This could also trigger indemnification of our lender under our new credit
facilities, as well as being deemed a default under such credit facilities. See
"Our new credit facilities impose operational and financial restrictions on us"
above. Such laws and regulations could also restrict our ability to modify or
expand our facilities, could require us to acquire costly equipment, or could
impose other significant capital expenditures. In addition, our operations may
give rise to claims of property contamination or human exposure to hazardous
chemicals or conditions. Although we have not incurred any environmental
problems in our operations, there can be no assurance that violations of
environmental laws will not occur in the future due to failure to obtain
permits, human error, equipment failure, or other causes. Furthermore,
environmental laws may become more stringent and impose greater compliance costs
and increase risks and penalties for violations.
Simclar controls over 72% of our common stock and the affairs of our company.
Simclar acquired 71.3% of our common stock in June 2001, and controls
the affairs of our company. In September 2001 Simclar announced its intention to
acquire an additional 200,000 shares of our common stock. To date, Simclar has
purchased 54,900 shares of our common stock in the open market, giving Simclar a
72.1% ownership of our company. Our common stock does not provide for cumulative
voting, and therefore, the remaining shareholders other than Simclar will be
unable to elect any directors or have any significant impact in controlling the
business or affairs of the company. The concentration of ownership with Simclar
may also have the effect of delaying, deterring or preventing a change in
control of our company, and would make transactions relating to our operations
more difficult or impossible without the support of Simclar.
The price of our shares is volatile
The market price of our common stock has substantially fluctuated in
the past, which resulted in its delisting from the Nasdaq National Market in
1992. In 1995, we completed a public offering of our common stock, which then
was listed with the Nasdaq SmallCap Market and Boston Stock Exchange. On
November 6, 1996, the common stock was relisted for trading on the Nasdaq
National Market and delisted from the Boston Stock Exchange. On February 18,
2000, our common stock transferred to the Nasdaq SmallCap Market, since the
market value of the public float was not equal to or greater than the minimum
required for listing. The market price of our common stock has been as high as
$8.13 in the first quarter of 1997 to as low as $.77 in the third quarter of
2001. Our common stock has limited trading volume, and it closed at $.99 on
March 28, 2002.
There are a variety of factors which contribute to the volatility of
our common stock. These factors include domestic and international economic
conditions, stock market volatility, our reported financial results,
fluctuations in annual and quarterly operating results, and general conditions
in the contract manufacturing and technology sectors. Announcements concerning
our company and competitors, our operating results, and any significant amount
of shares eligible for future sale may also
-16-
have an impact on the market price of our common stock. As a result of these
factors, the volatility of our common stock prices may continue in the future.
Substantial market overhang from outstanding options and shares held by the
certain shareholders and our parent may adversely affect the market price of our
common stock.
Certain persons, including former officers and directors of our company
and officers of our former parent, Medicore, Inc., own options to purchase
shares of our common stock that are exercisable at prices ranging from $2.00 to
$4.00 per share for an aggregate of 266,000 shares, and they own 230,000 shares
of common stock directly. The company has filed a registration statement,
expected to become effective following the filing of this report, that will
permit these 496,000 shares, representing approximately 7.3% of our total
outstanding shares (assuming all the options are exercised), to be sold by these
persons. In addition, our parent, Simclar, owns 4,729,520 shares of our common
stock, or 72.1% of our outstanding shares (69.3% assuming exercise of the
selling shareholders' options). Under the agreement in which it purchased the
controlling interest in our company, Simclar agreed to acquire the shares as
"restricted securities" under the Securities Act of 1933 (the "Securities Act"),
and not with a view to their distribution. However, restricted shares may be
sold under Rule 144 of the Securities Act one year from their acquisition, which
would be June 26, 2002, and Simclar, at any time, could register as many of its
4,729,520 shares of common stock as it desires, which could be well in excess of
any limited amounts it could sell under Rule 144 without registration. Rule 144
entitles each person having owned restricted securities for a period of one
year, to sell without registering the securities, every three months, an amount
of shares which does not exceed the greater of 1% of the outstanding common
stock or, since the common stock is trading on Nasdaq, the average weekly volume
of trading as reported by Nasdaq during the four calendar weeks prior to the
sale. Accordingly, the sale of the 496,000 shares by former officers and
directors of our company and Medicore and the potential sale of shares by
Simclar, whether under Rule 144 or through a registration statement, may have an
adverse affect on the market price of our common stock, and may hamper our
ability to manage subsequent equity or debt financing, or otherwise affect the
terms and timing of such financing.
We have not declared dividends, and our credit facilities prohibit us from
paying dividends
Under Florida corporate law, holders of our common stock are entitled
to receive dividends from legally available funds, when and if declared by our
board of directors. We have not paid any cash dividends, and our board of
directors does not intend to declare dividends in the foreseeable future. Our
future earnings, if any, will be used to finance our capital requirements and
fund our operations. We have experienced substantial losses for the year ended
December 31, 2001. Even if we had available funds, our credit facilities
prohibit us from paying any dividends or making any other payments on our
capital stock without the written consent of the lender. There can be no
assurance that the lender will provide such consent.
Possible delisting of our stock
Our common stock trades on the Nasdaq SmallCap Market. There are
certain criteria for continued listing on the Nasdaq SmallCap Market, known as
maintenance listing requirements. Failure to satisfy any one of these
maintenance listing requirements could result in our securities being delisted
from the Nasdaq SmallCap Market. These criteria include two active market
makers, maintenance of $2,500,000 of stockholders' equity (or alternatively,
$35,000,000 in market capitalization or $500,000 in net income from operations
in the latest fiscal year or 2 of the last 3 fiscal years), a minimum bid price
for our common stock of $1.00, and at least 500,000 publicly held shares with a
market value of at least
-17-
$1,000,000, among others. Usually, if a deficiency occurs for a period of 30
consecutive business days (10 consecutive business days for failure to satisfy
the minimum market capitalization requirement), the particular company is
notified by Nasdaq and has 90 days (30 days in the case of market
capitalization) to achieve compliance. If the company is unable to demonstrate
compliance, the security is subject to delisting. The security might be able to
trade on the Nasdaq OTC Bulletin Board, a less transparent trading market which
may not provide the same visibility for the company or liquidity for its
securities, as does the Nasdaq SmallCap Market. As a consequence, an investor
may find it more difficult to dispose of or obtain prompt quotations as to the
price of our securities, and may be exposed to a risk of decline in the market
price of our common stock.
In October 1999, we received notification from the Nasdaq Listing
Qualification Department of the Nasdaq Stock Market that our common stock failed
to maintain a market value of public float greater than $5,000,000, the minimum
maintenance requirement for continued listing on the Nasdaq National Market.
Since we were unable to satisfy that maintenance requirement, we transferred our
common stock for trading to the Nasdaq SmallCap Market in February 2000. The
Nasdaq SmallCap Market requirement for market value float is $1,000,000. The
publicly trading shares, exclusive of any affiliate ownership, which is the
float for our common stock, is approximately 1,615,000 shares, and as the
closing price of our shares on March 28, 2002 was $.99, we satisfy that
maintenance requirement.
However, our common stock has traded as low as $.77 in the third
quarter of 2001, and has limited trading volume. There is the risk of being
delisted from the Nasdaq SmallCap Market should our common stock fail to
maintain a minimum bid price of $1.00 per share for 30 consecutive days. Such
occurrence would generate a notice from Nasdaq that we have a 90-day period to
reflect that our common stock traded at $1.00 or more for at least 10
consecutive trading days. Continued satisfaction of certain of the Nasdaq
SmallCap listing maintenance requirements is beyond our control. There is no
assurance that the company will continue to satisfy the minimum listing
maintenance criteria, which without a timely cure, could cause our securities to
be delisted from the Nasdaq SmallCap Market.
ITEM 2. PROPERTIES
The following chart summarizes the properties leased by the company.
SPACE PROPERTY TERM
- ----- -------- ----
16,000 sq. ft. 2230 W 77th St. 10 yrs. to August 31, 2010
(exec. offs., mfg.) Hialeah, FL(1)
12,000 sq. ft. 2200 W 77th St. 10 yrs. to August 31, 2010
(warehouse) Hialeah, FL(1)
15,000 sq. ft. 7110 Brittmore 5 yrs. to August 31, 2002
(mfg., offs. & Houston, TX(2)
warehouse)
5,500 sq. ft. 171 Commonwealth Ave 3 yrs. to March 31, 2005
(mfg. & offs.) Attleboro, MA
18,225 sq. ft. 800 Paloma Dr. 5 yrs. to May 31, 2002,
(mfg., offs. & Round Rock (Austin), one year renewal to
warehouse) TX May 31, 2003
-18-
77,800 sq. ft. 1784 Stanley Ave. 5 yrs. to July 31, 2002,
(mfg., offs. & Dayton, Ohio(3) exercised first five year
warehouse) renewal July 31, 2007
one five year renewal
- -------------
(1) The landlord is our former parent, Medicore. The lease is as favorable as
may be obtained from unaffiliated third parties.
(2) This facility has been closed and the property subleased for the remainder
of the term to an unaffiliated party for substantially similar rent.
(3) The landlord is owned by the former President and Director of Lytton and
Director of the company. See Item 13, "Certain Relationships and Related
Transactions." The company has a right of first refusal and an option to
purchase these premises. This lease is guaranteed by the company.
Techdyne (Europe) owns an approximately 31,000 square foot facility in
Livingston, Scotland that is listed as assets for sale. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The company maintains state-of-the-art manufacturing, quality control,
testing and packaging equipment at all of its facilities in Florida, Ohio,
Massachusetts, and Texas.
We believe that our equipment and facilities are adequate for our
current operations.
We are subject to a variety of environmental regulations relating to
our manufacturing processes and facilities. See "Government Regulation" and
"Risk Factors" under Item 1, "Business."
ITEM 3. LEGAL PROCEEDINGS
The company is a party in a pending proceeding entitled Lemelson
Medical Education & Research Foundation, Limited Partnership v. Esco Electronics
Corporation, et al., initiated in August 2000, pending in the United States
District Court for the District of Arizona. Lemelson brought a suit against 91
named defendants, including our company, for infringement of a variety of
patents owned by Lemelson, primarily relating to Lemelson's machine vision and
bar code scanning patents. Each of the defendants is involved, as is the
company, in the manufacture of electronic or semiconductor products. Lemelson
simultaneously filed similar lawsuits in the same court against approximately
another 350 defendants in different categories of electronic manufacturing. The
matter has been referred to patent counsel, who filed jointly with the majority
of the other named defendants, a motion to stay any further proceedings pending
the resolution of a motion for summary judgment addressing the issue of the
equitable defense of "prosecution laches" in an unrelated action entitled
Lemelson v. Symbol Technologies, Inc. The equitable defense of prosecution
laches is based on the assertion that Lemelson filed initial patent applications
with USPTO in the 1950s and continued the patent prosecution through the 1990s
continually amending his applications to include products and methods that have
become prevalent in the market. In February 2002, the Federal Court of Appeals
in the Symbol Technologies case found that prosecution laches is a viable
defense to patent infringement claims. This determination is very favorable and
could minimize or totally negate Lemelson's claim.
-19-
We assemble custom products to the specifications of our customers, and
we rely on our customers' patents, designs, know-how and other intellectual
property. At this early stage in the litigation, we are evaluating the Lemelson
litigation and our potential exposure, but are unable to project the merits of
Lemelson's claims, whether the litigation might result in material damages, or
whether, if necessary, we could obtain a license from Lemelson. Should we be
required to obtain such a license from Lemelson, there can be no assurance that
a license could be obtained on acceptable terms. Any litigation of this type may
result in substantial costs and diversion of our resources.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of our fiscal year to
a vote of security holders through the solicitation of proxies or otherwise.
-20-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The table below reflects the high and low closing sales prices for our
common stock, which trades under the symbol "TCDN" as reported by the Nasdaq
SmallCap Market. Prior to February 18, 2000, our common stock was traded on the
Nasdaq National Market. The prices shown represent quotations between dealers,
without adjustment for retail markups, markdowns or commissions and may not
represent actual transactions.
2000
----
High Low
---- ---
1st Quarter $ 3.63 $ 2.25
2nd Quarter $ 3.19 $ 2.00
3rd Quarter $ 2.75 $ 1.35
4th Quarter $ 1.88 $ 0.75
2001
----
High Low
---- ---
1st Quarter $ 1.50 $ 0.88
2nd Quarter $ 1.50 $ 0.81
3rd Quarter $ 1.34 $ 0.77
4th Quarter $ 1.10 $ 0.81
At March 28, 2002, the closing sales price of our common stock was
$0.99.
At March 20, 2002, we had 67 shareholders of record and based upon data
obtained from our transfer agent, and we have approximately 552 beneficial
owners of our common stock.
We have not paid, nor do we have any present plans to pay cash
dividends on our common stock in the immediate future. In addition, our credit
facilities with the Bank of Scotland prohibit us from declaring or paying
dividends on our common stock without the Bank of Scotland's written consent.
See Item 7, "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information included herein.
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997(1)
---- ---- ---- ---- ----
Revenues $37,042 $52,767 $48,383 $44,927 $ 33,169
Net (loss) income (2,806) 565 303 798 1,426
(Loss) earnings per share:
Basic $ (.43) $ .09 $ .05 $ .15 $ .32
Diluted $ (.43) $ .09 $ .05 $ .13 $ .24
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS)
Years Ended December 31,
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997(1)
---- ---- ---- ---- ----
Working capital $ 8,859 $12,443 $10,986 $ 9,321 $ 9,547
Total assets 21,209 27,876 26,796 23,818 24,625
Long-term debt (2) 6,371 8,582 7,962 7,581 6,926
Total liabilities 12,230 16,295 15,631 14,357 15,116
Stockholders' equity 8,979 11,581 11,165 9,461 9,509
- --------------------
(1) Reflects operations of Lytton commencing August 1, 1997. Lytton was acquired
on July 31, 1997.
(2) Includes advances from parent for years prior to 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Our operations have continued to depend upon a relatively small number
of customers for a significant percentage of our net revenue. Significant
reductions in sales to any of our large customers would have a material adverse
effect on our results of operations. The level and timing of orders placed by a
customer vary due to the customer's attempts to balance its inventory, design
modifications, changes in a customer's manufacturing strategy, acquisitions of
or consolidations among customers, and variation in demand for a customer's
products due to, among other things, product life cycles, competitive conditions
and general economic conditions. Termination of manufacturing relationships or
changes, reductions or delays in orders could have an adverse effect on our
results of operations and financial condition, as has occurred in the past. Our
results also depend to a substantial extent on the success of our OEM customers
in marketing their products. We continue to seek to diversify our customer base
to reduce our reliance on our few major customers. See "Business Strategy" and
"Customers" under Item 1, "Business."
The industry segments we serve, and the electronics industry as a
whole, are subject to rapid technological change and product obsolescence.
Discontinuance or modification of products containing components
-22-
manufactured by the company could adversely affect our 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 prolonged worldwide recession in the
electronics industry, as we have experienced 2001, could have a material adverse
effect on our business, financial condition and results of operations. Our 2001
operating results were adversely impacted by the severe instabilities
experienced during the last 18 months in the telecommunications industry as well
as a general downturn in the U.S. economy over the preceding year. We typically
do not obtain long-term volume purchase contracts from our customers, but rather
we work with our customers to anticipate future volumes of orders. Based upon
such anticipated future orders, we will make commitments regarding the level of
business we want and can accomplish the timing of production schedules and the
levels of and utilization of facilities and personnel. Occasionally, we purchase
raw materials without a customer order or commitment. Customers may cancel,
delay or reduce orders, usually without penalty, for a variety of reasons,
whether relating to the customer or the industry in general, which orders are
already made or anticipated. Any significant cancellations, reductions or order
delays could adversely affect our results of operations.
We use Electronic Data Interchange (EDI) with both our customers and
our suppliers in our efforts to continuously develop accurate forecasts of
customer volume requirements, as well as sharing our future requirements with
our suppliers. We depend on the timely availability of many components.
Component shortages could result in manufacturing and shipping delays or
increased component prices, which could have a material adverse effect on our
results of operations. It is important for us 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. See "Electronic
Manufacturing Industry" and "Supplies and Materials Management" under Item 1,
"Business" and "Results of Operations" below.
We must continuously develop improved manufacturing procedures to
accommodate our customers' needs for increasingly complex products. To continue
to grow and be a successful competitor, we must be able to maintain and enhance
our technological capabilities, develop and market manufacturing services which
meet changing customer needs and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely
basis. Although we believe that our operations utilize the assembly and testing
technologies and equipment currently required by our customers, there can be no
assurance that our process development efforts will be successful or that the
emergence of new technologies, industry standards or customer requirements will
not render our technology, equipment or processes obsolete or noncompetitive. In
addition, to the extent that we determine 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.
During periods of recession in the electronics industry, as we have
experienced in 2001, our competitive advantages in the areas of quick-turnaround
manufacturing and responsive customer service may be of reduced importance to
electronic OEMs, who may become more price sensitive.
Our results of operations are also affected by other factors, including
price competition, the level and timing of customer orders, fluctuations in
material costs (due to availability), the overhead efficiencies achieved by
management in managing the costs of our operations, our experience in
manufacturing a particular product, the timing of expenditures in anticipation
of increased orders, selling, and general and administrative expenses.
Accordingly, gross margins and operating income margins have generally improved
during periods of high volume and high capacity utilization. We generally have
idle capacity and reduced operating margins during periods of lower-volume
production.
-23-
We compete with much larger electronic manufacturing entities for
expansion opportunities. Any acquisitions may result in potentially dilutive
issuance of equity securities, the incidence of debt and amortization expenses
related to goodwill and other intangible assets, and other costs and expenses,
all of which could materially adversely affect our financial results.
Acquisition transactions also involve numerous business risks, including
difficulties in successfully integrating the acquired operations, technologies
and products or formalizing anticipated synergies, and the diversion of
management's attention from other business concerns.
RESULTS OF OPERATIONS
The following is a discussion of the key factors that have affected our
business over the last three years. This discussion should be read in
conjunction with our consolidated financial statements and the related footnotes
included herein.
2001 COMPARED TO 2000
Consolidated revenues decreased approximately $15,724,000 (30%) for the
year ended December 31, 2001, compared to the preceding year. There was a
decrease in domestic sales of $13,303,000 (28%), and a decrease in European
sales of $2,584,000 (53%) compared to the preceding year. The sale decrease was
due primarily to a 61% decrease in our shipments to our customers in the
telecommunications industry and to a lesser degree the general overall business
decline in 2001 compared to 2000. Interest and other income increased by
approximately $163,000 compared to the preceding year. This increase reflects
the recognition of a $161,000 deferred gain on sale of a buildings to Medicore.
See Note 4 to our consolidated financial statements in Part IV of this report.
Significant reductions in sales of Techdyne (Europe) during recent
years have resulted in continuing losses. Net losses for this subsidiary
amounted to $909,000 for the year ended December 31, 2001, and $328,000 for the
preceding year. As a result of continuing operating losses, in April 2001 we
decided to discontinue the manufacturing operations of Techdyne (Europe). We
incurred a cost of approximately $225,000 for closing our Scottish manufacturing
operations, primarily for severance benefits associated with 79 employees. In
May 2001, Techdyne (Europe) entered into a management agreement with Simclar
whereby Simclar undertook to manufacture products for Techdyne (Europe) and
assist in management coordination. Subsequently on February 28, 2002, the
company entered into an agreement with Simclar to transfer, at net book value,
all operating assets and all liabilities of Techdyne (Europe), with the
exception the land and building. The company plans to liquidate its European
subsidiary when the land and building are sold. The company believes that the
liquidation of this subsidiary will not require any additional write-down
losses.
Approximately 57% of our consolidated sales for 2001 were made to five
customers. Illinois Tool Works ("ITW") (26%) is the only customer that accounts
for more than 10% of our total sales. The loss of or substantially reduced sales
to any major customer would have an adverse effect on our operations if such
sales were not replaced. See Item 1, "Business-Customers."
Cost of goods sold as a percentage of sales amounted to 94% for the
year ended December 31, 2001, and 88% for the preceding year. We experienced
decreases in utilization of our manufacturing facilities during 2001, which had
a negative effect on our profit margins. Higher component costs during the first
quarter of 2001 also had a negative effect on our profit margins. As the
economic business cycle deteriorated in 2001, our product mix negatively
affected our profit margin in the last half of the year.
-24-
Selling, general and administrative expenses, although decreasing by
approximately $821,000 (17%) for the year ended December 31, 2001, compared to
the preceding year, amounted to approximately 11% of sales for 2001 and 9% of
sales for 2000. The decrease in 2001 was due primarily to the reduction in the
costs of support personnel and marketing personnel, which amounted to
approximately $501,000. The Company also recorded a charge of $304,000 in 2001
related to the forgiveness of stock option notes and related accrued interest as
well as bonuses for certain officers and directors, all as a result of the sale
of the Company to Simclar in June 2001.
Interest expense decreased approximately $248,000 for the year ended
December 31, 2001, compared to the preceding year reflecting the decreased
borrowings due to the reduction in trade receivables and inventories, along with
declining interest rates during the year. The prime rate was 4.75% and 9.5% at
December 31, 2001 and 2000, respectively.
2000 COMPARED TO 1999
Consolidated revenues increased approximately $4,384,000 (9%) for the
year ended December 31, 2000, compared to the preceding year. There was an
increase in domestic sales of $3,341,000 (8%), and an increase in European sales
of $1,051,000 (28%) compared to the preceding year. Interest and other income
decreased by approximately $9,000 compared to the preceding year. The decrease
reflects a decrease in interest income as a result of a reduction in invested
funds.
Significant reductions in sales of Techdyne (Europe) during recent
years have resulted in continuing losses. Net losses for this subsidiary
amounted to $328,000 for the year ended December 31, 2000, and $577,000 for the
preceding year. Techdyne (Europe) has continued its efforts at new business
development; however, continuing losses have resulted in management's ongoing
evaluation of the prospects for this facility.
Approximately 43% of our consolidated sales for 2000 were made to five
customers. Customers generating at least 10% of sales included ITW (19%),
Alcatel (12%) and Trilithic (12%). The loss of, or substantially reduced sales
to, any major customer would have an adverse effect on our operations if such
sales were not replaced. See Item 1, "Business-Customers."
Cost of goods sold as a percentage of sales amounted to 88% for the
year ended December 31, 2000, and for the preceding year. We experienced
increases in component costs during 2000 which had a negative effect on our
profit margins; however, changes in product mix and a diversification of our
customer base have offset this negative impact.
Selling, general and administrative expenses, although increasing by
approximately $349,000 (8%) for the year ended December 31, 2000, compared to
the preceding year, amounted to approximately 9% of sales for both periods. The
increase in 2000 included increases in the cost of support personnel and
increased marketing costs associated with efforts to increase sales.
Interest expense increased approximately $101,000 for the year ended
December 31, 2000 compared to the preceding year reflecting the increased
borrowings of Lytton, a portion of which were utilized to fund the remaining
$1,100,000 payment in July 1999, on the Lytton acquisition purchase price
guarantee and increases relating to increased borrowings under our new credit
facilities. These increases were partially offset by a reduction of $112,000 for
the year ended December 31, 2000, in interest on loans from Medicore due to its'
conversion on September 30, 1999, of approximately $2,532,000 of a convertible
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note receivable from the company. The prime rate was 9.5% and 8.5% at December
31, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance at December 31, 2001, was
approximately $1,021,000 compared to approximately $507,000 at December 31,
2000. Net cash provided by operating activities was approximately $2,167,000 in
2001 compared to approximately $519,000 in 2000. The increase in cash provided
from operating activities was due primarily to the reduction in accounts
receivable and inventories resulting from the sales volume decrease from the
year 2000 to 2001 partially offset by decreases in accounts payable and accrued
expenses.
At December 31, 2001, our average days sales outstanding was 44 days as
compared to 54 days at December 31, 2000. The decrease of our average days sales
outstanding is primarily the result of increased collection efforts and changes
in customer base from 2000. Average inventory turnover was 4.2 and 4.6 times for
the years ended December 31, 2000 and 2001, respectively. The decrease in
inventory turnover is primarily due to the increased frequency in customer order
cancellations and for rescheduling to a later delivery date during 2001 compared
to 2000.
Cash flows used in investing activities decreased approximately
$1,072,000 in 2001 compared to approximately $1,346,000 used for investing
activities in 2000. Due primarily to the business downturn experienced in 2001
compared to 2000, the company decreased its net acquisition of property and
equipment in 2001 compared to 2000. The company has a capital expenditure budget
of $500,000 for 2002. Cash flow used in financing activities was approximately
$1,375,000 compared to cash flow provided in 2000 of approximately $1,122,000.
The cash flow was used to reduce the company's line of credit in 2001 (see
paragraph below regarding the company's new credit facility) while the cash
provided in 2000 was due primarily from an increase in line of credit.
On October 24, 2001, the company entered into two credit facilities
with Bank of Scotland in Edinburgh, Scotland for an aggregate borrowing of
$10,000,000. This new financing replaced the lines of credit and three
commercial loans with The Provident Bank of Ohio, for Techdyne and Lytton. The
new financing includes a line of credit, expiring May 31, 2002, with an interest
rate at LIBOR rate plus 1.5% for a one, three or six month period, at the
Company's election. The company elected the three-month interest period at 3.83%
until January 24, 2002, and 3.31% from this date until April 24, 2002. This line
of credit had an outstanding balance of approximately $881,000 at December 31,
2001. The financing also includes a seven-year term loan of $7,000,000 at the
same interest rate as the line of credit. The term loan requires quarterly
payments of $250,000 starting on January 24, 2002. The term loan had an
outstanding balance of approximately $7,000,000 at December 31, 2001. The
company is of the opinion that the Bank of Scotland will renew the $3,000,000
line of credit until May 31, 2003.
All of the assets of Techdyne and Lytton collateralize the credit
facilities. The credit facilities require affirmative and negative covenants.
Certain of the affirmative covenants require maintenance of a consolidated
adjusted net worth greater than $9,000,000 after December 31, 2001; a ratio of
consolidated net trade receivables and net inventories to consolidated net
borrowings not less than 1.5 to 1; a ratio of consolidated trade receivable to
consolidated net borrowings not less than .5 to 1; and a ratio of consolidated
net income before interest and income taxes to total consolidated interest costs
not less than 2 to 1. Some of the negative covenants, among others, include (1)
granting or permitting a security agreement against the consolidated assets of
the companies other than permitted security agreements, (2) declaring or paying
any dividends or making any other payments on our capital stock, (3)
consolidating or merging with
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any other entity or acquiring or purchasing any equity interest in any other
entity, or assuming any obligations of any other entity, except for notes and
receivables acquired in the ordinary course of business, (4) incurring,
assuming, guarantying, or remaining liable with respect to any indebtedness,
except for certain existing indebtedness disclosed in our financial statements,
or (5) undertaking any capital expenditure in excess of $1,000,000 in any one
fiscal year. The agreements also preclude changes in ownership in the companies,
or any material change in any of our business objectives, purposes, operations
and tax residence.
Our ability to comply with these provisions may be affected by changes
in our business condition or results of our operations, or other events beyond
our control. The breach of any of these covenants would result in a default
under our debt. At December 31, 2001, we were in violation of the interest
coverage covenant. Although the Bank of Scotland has waived this default, there
can be no assurance that defaults in these or other covenants will not occur in
the future, nor can there be any assurance that our lender will waive such
future defaults. A default in the covenants would permit our lender to
accelerate the maturity of our credit facilities and sell the assets securing
them, which would cause the company to cease operations and seek bankruptcy
protection.
Our indebtedness requires us to dedicate a substantial portion of our
cash flow from operations to payments on our debt, which could reduce amounts
for working capital and other general corporate purposes. The restrictions in
our credit facility could also limit our flexibility in reacting to changes in
our business and increases our vulnerability to general adverse economic and
industry conditions.
On October 11, 2001, Techdyne (Europe) entered into a credit facility
with Bank of Scotland for an amount of (pound)275,000 ($399,025). This facility
comprises an eight-year term loan repayable in quarterly payments of
(pound)8,594 $(12,470) starting on January 11, 2002, with an interest rate of
Bank of Scotland base rate plus 1.5% (effectively 3.81% at December 31, 2001).
This line of credit had an outstanding balance of $399,025 at December 31, 2001.
The proceeds from the credit facility were used to repay the 15-year mortgage
loan of $371,000 as of September 30, 2001.
We have no off balance sheet financing arrangements with related or
unrelated parties and no unconsolidated subsidiaries. In the normal course of
business, we enter into various contractual and other commercial commitments
that impact or can impact the liquidity of our operations. The following table
outlines our commitments at December 31, 2001:
Total Less than 1-3 4-5 Over 5
In millions Amounts 1 Year Years Years Years
--------------------------------------------------------------
Long-term debt $ 7,450 $ 1,429 $ 2,021 $ 2,000 $ 2,000
Operating leases
(non-cancelable) 3,164 571 895 860 838
Bank line of credit 881 881 -- -- --
--------------------------------------------------------------
Total contractual $11,495 $ 2,881 $ 2,916 $ 2,860 $ 2,838
==============================================================
Unused bank line of credit $ 2,119 $ 2,119 $ -- $ -- $ --
--------------------------------------------------------------
Total commerical $ 2,119 $ 2,119 $ -- $ -- $ --
--------------------------------------------------------------
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Due to the operating loss experienced by the company in the fourth quarter of
2001, the company experienced an event of default as of December 31, 2001,
relating to the interest coverage covenant. The company received a wavier from
the Bank of Scotland stating that it has no intention of placing the credit
facility in default.
Following its acquisition of a controlling interest in our company in
June 2001, Simclar carried out a comprehensive review of various aspects of our
business. That review highlighted a number of areas where change was considered
necessary to bring the company's operations and cost base more into line with
the current order backlog and business climate. The changes arising as a result
of that review have now been implemented and the financial benefits of these are
expected to have a positive effect on the company's financial performance in the
forthcoming year. Such changes included the elimination of approximately 125
employees and a reduction in associated annual costs of $3,805,000.
Additionally, the company on February 28, 2002 transferred all operating assets
of Techdyne (Europe) to Simclar. Techdyne (Europe) incurred an operating loss of
approximately $909,000 in 2001. The company's operating plans for the year 2002
reflect that the company will be in compliance with all the bank's financial
covenants when tested in 2002. The company believes that the current levels of
working capital and working capital generated from operations will be adequate
to successfully meet its liquidity demands for next year.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS No. 141), Business
Combinations, and issued Statement of Financial Accounting Standards No. 142
(SFAS No. 142), Goodwill and Other Intangible Assets. SFAS (SFAS No. 141), No.
141 eliminates the pooling-of-interest method of accounting for business
combinations and requires that all business combinations be accounted for as
purchases. In addition, SFAS No. 141 establishes new rules concerning
recognition of intangible assets arising in a purchase business combination and
requires enhanced disclosure of information in the period in which a business
combination is completed. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. SFAS No. 142 establishes new rules
on accounting for goodwill whereby goodwill will no longer be amortized to
expense, but rather will be subject to impairment review and will be effective
for fiscal years beginning after December 15, 2001. Net income will increase
when the amortization of goodwill to expense is stopped. Amortization expense
related to goodwill was approximately $147,000, $142,000 and $124,000,
respectively, for the years ended December 31, 2001, 2000 and 1999. In addition,
upon adoption, we will perform the first of the required impairment tests of
goodwill and have not yet determined what the effect of this test will be on the
Company's financial position or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations,
" and in August 2001 issued Statement of Financial Accounting Standards No. 144
(SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 143 establishes standards of accounting for asset retirement
obligations (i.e., legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of long-lived asset, except for certain obligations
of lessees) and the associated asset retirement costs. SFAS No. 144 replaces
existing accounting pronouncements related to impairment of disposal of
long-lived assets. Both SFAS No. 143 and No. 144 are effective beginning with
the Company's calendar 2002 year. The Company is currently evaluating the impact
of these two statements, but does not expect that they will have a material
impact on its financial condition or results of operations when they are
implemented.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
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USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgements and estimates. On an on-going basis, we
evaluate our estimates, the most significant of which include establishing
allowances for doubtful accounts, allowances for inventory obsolescence, a
valuation allowance for our deferred tax assets and determining the
recoverability of our long-lived assets. The basis for our estimates are
historical experience and various assumptions that are believed to be reasonable
under the circumstances, given the available information at the time of the
estimate, the results of which form the basis for making judgements about the
carrying values of assets and liabilities that are not readily available from
other sources. As described in Note 1 to the consolidated financial statements,
actual results may differ from the amounts estimated and recorded in such
financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Based on historical information, we believe that our
allowance is adequate. However, changes in general economic, business and market
conditions could affect the ability of our customers to make their required
payments; therefore, the allowance for doubtful accounts is reviewed monthly and
changes to the allowance are updated as new information is received.
ALLOWANCE FOR INVENTORY OBSOLESCENCE. We maintain an allowance for
inventory obsolescence for losses resulting from inventory items becoming
unusable in our manufacturing operations due to loss of a specific customers or
a customers' product changes or discontinuations. Based on historical and
projected sales information and our concentration of customers, we believe that
our allowance is adequate. However, changes in general economic, business and
market conditions could cause our customers to cancel, reduce or reschedule
orders. These changes could affect our inventory turn over; therefore, the
allowance for inventory obsolescence is reviewed monthly and changes to the
allowance are updated as new information is received.
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS. We had $587,000 deferred
tax assets, including a $368,000 net operating loss carryforward benefit, in
excess of deferred tax liabilities as of December 31, 2001. For financial
reporting purposes we have recorded a valuation allowance of $587,000 due to the
uncertainty of realizing these deferred tax assets.
LONG-LIVED ASSETS. We state our property and equipment at acquisition
cost and compute depreciation by the straight-line method over estimated useful
lives of the assets. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of the asset may
not be recoverable. A $105,000 write-down on the carrying costs of the building
and equipment of our discontinued Scotland manufacturing facility was recorded
in 2001 as further discussed under Item 7, "Results of Operations." No other
write downs are currently anticipated. See also the related discussion under
"Effect of Recently Issued Accounting Pronouncements" above.
REVENUE RECOGNITION. Revenue is recognized upon delivery of a product
based upon a customer's order where the selling price is fixed and
collectability is reasonably assured.
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RELATED PARTY TRANSACTIONS. Related party transactions as described in
Notes 4 and 5 in the consolidated financial statements appearing in Part IV of
this report, and are at terms no less favorable than would be received from
third parties.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Form 10-K includes certain forward-looking statements with respect
to our company and its business that involve risks and uncertainties. These
statements are influenced by our financial position, business strategy, budgets,
projected costs and the plans and objectives of management for future
operations. They use words such as anticipate, believe, plan, estimate, expect,
intend, project and other similar expressions. Although we believe our
expectations reflected in these forward-looking statements are based on
reasonable assumptions, we cannot assure you that our expectations will prove
correct. Actual results and developments may differ materially from those
conveyed in the forward-looking statements. For these statements, we claim the
protections for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
Important factors include changes in general economic, business and
market conditions, as well as changes in such conditions that may affect
industries or the markets in which we operate, including, in particular, the
impact of our nation's current war on terrorism could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements made in this Form 10-K. Further, information on other factors that
could affect the financial results of Techdyne, Inc. is included in Techdyne's
other filings with the Securities and Exchange Commission. These documents are
available free of charge at the Commissions website at http://www.sec.gov and/or
fromTechdyne, Inc. The forward-looking statements speak only as of the date on
which they are made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date of
this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risks from changes in interest rates
and foreign currency exchange rates.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities and interest-bearing accounts at financial institutions in
which we had approximately $520,000 invested at December 31, 2001.
Interest rate risks on debt are managed by negotiation of appropriate
rates on new financing obligations based on current market rates. There is an
interest rate risk associated with our variable rate debt agreements which
totaled approximately $8,280,000 at December 31, 2001.
We have exposure to both rising and falling interest rates. A 1/2%
decrease in rates on our year-end investments would result in a negative impact
of approximately $2,000 on our results of operations. A 1% increase in rates on
our year-end variable rate debt would result in a negative impact of
approximately $51,000 on our operations.
Our exposure to market risks from foreign currency exchange rates
relates to our European subsidiary whose results of operations when translated
into U.S. dollars are impacted by changes in foreign exchange rates. A 10%
strengthening of the U.S. dollar against the United Kingdom currency, the pound,
would have negatively impacted 2001 earnings by approximately $91,000. We have
not incurred any significant realized losses on exchange transactions and have
not utilized foreign exchange contracts to
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hedge foreign currency fluctuations. If realized losses on foreign transactions
were to become significant, we would evaluate appropriate strategies, including
the possible use of foreign exchange contracts, to reduce such losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the company, and the related notes,
together with the reports of PricewaterhouseCoopers LLP, dated April 4, 2002,
and Wiss & Company, LLP, dated March 9, 2001, are set forth at pages F-1 through
F-21 attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective September 19, 2001, the board of directors of the company,
upon the recommendation of the audit committee, dismissed Wiss & Company, LLP as
our independent accountants, and engaged new independent accountants,
PricewaterhouseCoopers, LLP, for the company's annual audit for our 2001 fiscal
year. This matter was previously reported by the company on the Current Report
on Form 8-K dated September 19, 2001, filed with the Securities and Exchange
Commission on September 25, 2001.
The report of Wiss & Company, LLP on the Company's financial statements
for the last two fiscal years ended December 31, 2000, contained no adverse
opinion or a disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. During the two most recent
fiscal years ended December 31, 2000, and subsequent interim period to the date
of September 19, 2001, there were no disagreements with Wiss on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope of procedure, nor any "reportable events" as defined in Item 304(a)(1)(v)
of Regulation S-K of the Securities and Exchange Commission.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the caption,
"INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS" in our Information
Statement relating to our 2002 annual meeting of shareholders to be held on June
5, 2002, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption,
"EXECUTIVE COMPENSATION" in our Information Statement relating to our 2002
annual meeting of shareholders to be held on June 5, 2002, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is included under the caption,
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in our
Information Statement relating to our 2002 annual meeting of shareholders to be
held on June 5, 2002, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in our Information Statement
relating to our 2002 annual meeting of shareholders to be held on June 5, 2002,
and is incorporated herein by reference.
-32-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT.
(1) The following financial statements are filed as part of
this Annual Report on Form 10-K:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999.
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.
Notes to the Consolidated Financial Statements.
(2) The following financial statement schedule is
included in this Annual Report on Form 10-K and should be read in conjunction
with the Consolidated Financial Statements contained in this Report:
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above are omitted because of the absence of conditions
under which they are required or because the required information is included in
the financial statements or notes thereto.
(3) Exhibits:
EXHIBIT EXHIBIT DESCRIPTION
NUMBER -------------------
- ------
3(i) Articles of Incorporation (incorporated by reference to the Company's
Registration Statement on Form SB-2 dated July 26, 1995, as amended August
21, 1995 and September 1, 1995, Registration No. 33-94998-A ("Form SB-2"),
Part II, Item 27, 3(a)).
3(ii) By-Laws (incorporated by reference to the Company's Form SB-2, Part II, Item
27, 3(b)), as amended June 27, 2001 (incorporated by reference to the
Company's Form S-3 Registration dated January 23, 2002, Registration No.
333-81270, Part II, Item 16, 99(i)).
4(i) Form of Common Stock Certificate (incorporated by reference to the Company's
Form SB-2, Part II, Item 27, 4(a)).
-33-
4(ii) Form of 1997 Stock Option Plan (incorporated by reference to the Company's
Current Report on Form 8-K dated June 11, 1997 ("June 11, 1997 Form 8-K"),
Item 7(c)(4)(i)).
4(iii) Form of 1997 Incentive Stock Option (incorporated by reference to the
Company's June 11, 1997 Form 8-K, Item 7(c)(4)(ii)).
4(iv) Form of 1997 Non-Qualified Stock Option (incorporated by reference to the
Company's June 11, 1997 Form 8-K, Item 7(c)(4)(iii)).
10(i) Lease Agreement between the Company and Medicore, Inc. dated August 29, 2000
(incorporated by reference to Medicore Inc.'s Current Report on Form 8-K
dated September 1, 2000).
10(ii) Form of Exclusive Sales Representative Agreement (incorporated by reference
to Medicore, Inc.'s Annual Report on Form 10-K for the year ended December
31, 1994, Part IV, Item 14 (a) 3 (10)(lxiv)).
10(iii) Employment Agreement between the Company and Barry Pardon dated September 27,
2000 (incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, Part IV, Item 14(a), 10(iii)).
10(iv) Promissory Note to Medicore, Inc. dated April 10, 1995 (incorporated by
reference to the Company's Form SB-2, Part II, Item 27, 10 (a)(a)).
10(v) Lease Agreement between the Company and Route 495 Commerce Park Limited
Partnership dated March 25, 1997 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the first quarter of 1997, Item 6(a), Part
II(10)).
10(vi) Lease Agreement between the Company and PruCrow Industrial Properties, L.P.
dated April 30, 1997 (incorporated by reference to the Company's Current
Report on Form 8-K dated June 4, 1997 ("June 1997 Form 8-K"), Item
7(c)(10)(i)).
10(vii) Lease Agreement between the Company and EGP Houston Partners Ltd. dated April
29, 1997 (incorporated by reference to the Company's June 1997 Form 8-K, Item
7(c)(10)(ii)).
10(viii) Form of Stock Option to The Investor Relations Group, Inc. (incorporated by
reference to the Company's Current Report on Form 8-K dated May 28, 1998,
Item 7(c)(10)(i)).
10(ix) Sublease between the Company and United Consulting Group dated August 23,
1999 (incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999; Part IV, Item 14(a)(10)(xiv).
-34-
10(x) Amended Consent to Sublease between the Company, United Consulting Group,
Inc., and United Computing Group, Inc. (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 2000,
Part IV, Item 14(a), 10(xxv)).
10(xi) Management Agreement between Techdyne (Europe) Limited and Simclar
International Limited dated May 3, 2001 (incorporated by reference to the
Company's Amended Quarterly Report on Form 10-Q for the first quarter of
2001, Item 6(a)(99)(i)).
10(xii) Facility Letter, dated October 2, 2001, for the Company's financing with the
Bank of Scotland (incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the third quarter of 2001, Item 6(a)10(a)).
10(xiii) Working Capital Facility Letter, dated October 21, 2001, for the Company's
Financing with the Bank of Scotland (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the third quarter of 2001, Item
6(a)10(b)).
10(xiv) Service Agreement between the Company and Simclar International Holdings
Limited, effective July 11, 2001 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the third quarter of 2001, Item 6(a)10(c)).
10(xv) * Minute of Agreement between Techdyne (Europe) Limited and Simclar
International Limited, effective February 28, 2002.
16(i) Letter from Wiss & Company, LLP, dated September 28, 2001, addressed to the
Securities and Exchange Commission (incorporated by reference to the
Company's Current Report on Form 8-K/A dated September 19, 2001, Item 7,
16(a)).
21 * Subsidiaries of the registrant.
23.1 * Consent of PricewaterhouseCoopers LLP.
23.2 * Consent of Wiss & Company.
24 * Powers of Attorney
- -----------------
* Filed with this Report.
(B) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K, pursuant to Item 5
thereof, dated October 26, 2001, regarding the Company's entering into two
credit facilities with the Bank of Scotland for an aggregate amount of $10
million.
(C) EXHIBITS.
The exhibits to this report follow the Signature Page.
(D) FINANCIAL STATEMENT SCHEDULES.
The financial statement schedule follows the exhibits to this
report.
-35-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: April 16, 2002 By: /s/ Barry J. Pardon
---------------------------------------
Barry J. Pardon, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
Samuel Russell* Chairman of the Board of Directors April 16, 2002
- -------------------------------- and Chief Executive Officer
Samuel Russell
/s/ Barry J. Pardon President and Director April 16, 2002
- -------------------------------- (principal executive officer)
Barry J. Pardon
John Ian Durie* Vice-President (Finance) and April 16, 2002
- -------------------------------- Director
John Ian Durie
David L. Watts* Chief Financial Officer and April 16, 2002
- -------------------------------- Secretary
David L. Watts (principal financial and principal
accounting officer)
Lytton Crossley* Director April 16, 2002
- --------------------------------
Lytton Crossley
Christina M.J.Russell* Director April 16, 2002
- --------------------------------
Christina Margaret Janet Russell
Thomas Foggo* Director April 16, 2002
- --------------------------------
Thomas Foggo
Kenneth Greenhalgh* Director April 16, 2002
- --------------------------------
Kenneth Greenhalgh
*By: /s/ Barry J. Pardon
---------------------------------
Barry J. Pardon, Attorney-in-Fact
-36-
TECHDYNE, INC. AND SUBSIDIARIES
The following consolidated financial statements of Techdyne, Inc. and
subsidiaries are included in Item 8:
Page
----
Report of PricewaterhouseCoopers LLP, independent certified
public accountants F-2
Report of Wiss & Company, independent certified public accountants F-3
Consolidated Balance Sheets - December 31, 2001 and 2000. F-4
Consolidated Statements of Operations - Years ended December 31,
2001, 2000, and 1999. F-5
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2001, 2000 and 1999. F-6
Consolidated Statements of Cash Flows - Years ended December 31,
2001, 2000, and 1999. F-7
Notes to Consolidated Financial Statements F-8
The following financial statement schedule of Techdyne, Inc. and subsidiaries is
included in Item 14(d):
Schedule II - Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
TECHDYNE, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Techdyne, Inc. and Subsidiaries
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page F-1 present fairly, in all material
respects, the financial position of Techdyne, Inc. and its subsidiaries at
December 31, 2001, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(1) on page F-1
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
April 4, 2002
Dayton, Ohio
F-2
TECHDYNE, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Techdyne, Inc.
We have audited the accompanying consolidated balance sheet of Techdyne, Inc.
and subsidiaries as of December 31, 2000, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 2000. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Techdyne, Inc. and subsidiaries at December 31, 2000, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2000 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ WISS & COMPANY LLP
March 9, 2001
Livingston, New Jersey
F-3
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,021,112 $ 506,824
Accounts receivable, less allowances of $220,000 and $120,000
at December 31, 2001 and 2000, respectively 4,464,553 7,851,926
Inventories, less allowances for obsolescence of $959,000 and
$783,000 at December 31, 2001 and 2000, respectively 8,241,680 10,183,134
Prepaid expenses and other current assets 184,475 701,507
Deferred income taxes 403,000 498,097
------------ ------------
Total current assets 14,314,820 19,741,488
------------ ------------
Property and equipment:
Land and improvements 174,120 178,800
Buildings and building improvements 672,359 690,431
Machinery, computer and office equipment 7,370,178 7,654,995
Tools and dies 402,796 450,583
Leasehold improvements 545,162 621,788
------------ ------------
9,164,615 9,596,597
Less accumulated depreciation and amortization 5,247,725 4,605,128
------------ ------------
3,916,890 4,991,469
Deferred expenses and other assets, net 21,909 41,193
Costs in excess of net tangible assets acquired, less accumulated
amortization of $605,000 and $459,000 at
December 31, 2001 and 2000, respectively 2,954,995 3,101,635
------------ ------------
$ 21,208,614 $ 27,875,785
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 881,184 $ -
Accounts payable 2,080,102 4,248,750
Accounts payable to major stockholder - net 563,455 -
Accrued expenses 851,558 1,826,546
Current portion of long-term debt 1,079,578 625,048
Income taxes payable - 99,433
Advances from parent - 498,900
------------ ------------
Total current liabilities 5,455,877 7,298,677
------------ ------------
Deferred gain on sale of real estate - 161,047
------------ ------------
Long-term debt 6,370,844 8,582,289
------------ ------------
Deferred income taxes 403,000 252,600
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 10,000,000 shares; issued and
outstanding 6,556,990 shares at December 31, 2001 and 2000 65,570 65,570
Capital in excess of par value 11,592,995 11,592,995
Retained (deficit) earnings (2,244,972) 560,582
Accumulated other comprehensive loss (226,875) (222,325)
Notes receivable from options exercised (207,825) (415,650)
------------ ------------
Total stockholders' equity 8,978,893 11,581,172
------------ ------------
$ 21,208,614 $ 27,875,785
============ ============
See notes to consolidated financial statements
F-4
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2001 2000 1999
---- ---- ----
Revenues:
Sales $ 36,825,274 $ 52,712,819 $ 48,320,096
Interest and other income 217,000 53,693 62,664
------------ ------------ ------------
37,042,274 52,766,512 48,382,760
------------ ------------ ------------
Cost and expenses:
Cost of goods sold 34,436,950 46,510,042 42,579,142
Selling, general and administrative expenses 3,940,055 4,761,240 4,411,685
Stock option note writeoff and bonus compensation 304,000 - -
Shutdown of Scotland manufacturing operations
including impairment loss 330,000 - -
Interest expense 591,326 839,660 738,794
------------ ------------ ------------
39,602,331 52,110,942 47,729,621
------------ ------------ ------------
(Loss) income before income taxes (2,560,057) 655,570 653,139
Income tax provision 245,497 90,543 349,648
------------ ------------ ------------
Net (loss) income $ (2,805,554) $ 565,027 $ 303,491
============ ============ ============
(Loss) earnings per share:
Basic $ (0.43) $ 0.09 $ 0.05
============ ============ ============
Diluted $ (0.43) $ 0.09 $ 0.05
============ ============ ============
See notes to consolidated financial statements
F-5
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital in Retained
Common Excess of Comprehensive Earnings
Stock Par Value Income (Deficit)
--------------------------------------------------------------
Balance at January 1, 1999 $ 52,501 $ 11,139,291 $ (307,936)
Comprehensive income:
Net income $ 303,491 303,491
Other comprehensive income:
Foreign currency translation adjustments (71,128)
------------
Comprehensive income $ 232,363
============
Note conversion by Medicore (1,446,823 shares) 14,469 2,517,473
Exercise of stock options and warrants 500 49,500
Consultant stock options 40,000
Settlement subsidiary acquisition price
guarantee (2,950) (2,374,761)
-------- ------------ ------------
Balance at December 31, 1999 64,520 11,371,503 (4,445)
Comprehensive income:
Net income 565,027 565,027
Other comprehensive loss:
Foreign currency translation adjustments (119,559)
------------
Comprehensive income $ 445,468
============
Exercise of stock options 1,450 252,300
Repurchase of 40,000 shares (400) (30,808)
-------- ------------ ------------
Balance at December 31, 2000 65,570 11,592,995 560,582
Comprehensive income:
Net income (2,805,554) (2,805,554)
Other comprehensive loss:
Foreign currency translation adjustments (4,550)
------------
Comprehensive income $ (2,810,104) -
============
Forgiveness of stock option notes
-------- ------------ ------------
Balance at December 31, 2001 $ 65,570 $ 11,592,995 $ (2,244,972)
======== ============ ============
Accumulated Notes Advance
Other Receivable Subsidiary
Comprehensive Stock Price
Income (Loss) Options Guarantee Total
--------------------------------------------------------
Balance at January 1, 1999 $ (31,638) $ (113,850) $ (1,277,711) $ 9,460,657
Comprehensive income:
Net income
Other comprehensive income:
Foreign currency translation adjustments (71,128)
Comprehensive income 232,363
Note conversion by Medicore (1,446,823 shares) 2,531,942
Exercise of stock options and warrants (49,500) 500
Consultant stock options 40,000
Settlement subsidiary acquisition price
guarantee 1,277,711 (1,100,000)
---------- ---------- ------------ -----------
Balance at December 31, 1999 (102,766) (163,350) - 11,165,462
Comprehensive income:
Net income
Other comprehensive loss:
Foreign currency translation adjustments (119,559)
Comprehensive income 445,468
Exercise of stock options (252,300) 1,450
Repurchase of 40,000 shares (31,208)
---------- ---------- ------------ -----------
Balance at December 31, 2000 (222,325) (415,650) - 11,581,172
Comprehensive income:
Net income
Other comprehensive loss:
Foreign currency translation adjustments (4,550)
Comprehensive income (2,810,104)
Forgiveness of stock option notes 207,825 207,825
---------- ---------- ------------ -----------
Balance at December 31, 2001 $ (226,875) $ (207,825) $ - $ 8,978,893
========== ========== ============ ===========
See notes to consolidated financial statements
F-6
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
---- ---- ----
Operating activities:
Net (loss) income $(2,805,554) $ 565,027 $ 303,491
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,234,035 1,261,455 1,192,204
Amortization 260,913 178,019 138,817
Deferred expenses and other assets 19,284 16,296 (1,329)
Bad debt expense 104,000 25,000 1,714
Provision for inventory obsolescence 698,581 421,888 404,762
Deferred income taxes 245,497 14,400 40,100
Recognition of deferred gain on sale of property (161,047) - -
Forgiveness of notes reveivable from stock options 207,825 - -
Consultant stock option expense - 23,448 16,552
Increase (decrease) relating
to operating activities from:
Accounts receivable 3,283,373 131,756 (2,324,576)
Inventories 1,242,873 (1,155,456) (2,036,063)
Prepaid expenses and other current assets 517,032 (334,999) (110,005)
Accounts payable (2,168,648) (782,886) 1,820,943
Accounts payable to major shareholder, net 563,455 - -
Accrued expenses (974,988) 183,452 152,294
Income taxes payable (99,433) (28,239) 83,016
----------- ----------- -----------
Net cash provided by (used in) operating activities 2,167,198 519,161 (318,080)
----------- ----------- -----------
Investing activities:
Subsidiary acquisition payments - (395,806) (1,389,531)
Additions to property and equipment, net of minor disposals (273,729) (950,213) (1,565,048)
----------- ----------- -----------
Net cash used in investing activities (273,729) (1,346,019) (2,954,579)
----------- ----------- -----------
Financing activities:
Line of credit payments (7,486,249) - -
Line of credit borrowings 1,697,934 1,562,445 1,867,590
Other short-term bank borrowings - - 375,000
Payments on short-term bank borrowings - - (375,000)
Exercise of stock options - 1,450 500
Proceeds from long-term borrowings 7,399,025 150,000 783,333
Payments on long-term borrowings (2,486,441) (561,534) (724,942)
(Decrease) increase in advances from parent (498,900) 585 (100,331)
Repurchase of stock - (31,208) -
----------- ----------- -----------
Net cash (used in) provided by financing activities (1,374,631) 1,121,738 1,826,150
Effect of exchange rate fluctuations on cash (4,550) 21,601 (22,885)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 514,288 316,481 (1,469,394)
Cash and cash equivalents at beginning of year 506,824 190,343 1,659,737
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,021,112 $ 506,824 $ 190,343
=========== =========== ===========
See notes to consolidated financial statements.
F-7
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company operates in one business segment, the manufacture of
electronic and electro-mechanical products primarily manufactured to customer
specifications in the data processing, telecommunication, instrumentation and
food preparation equipment industries.
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), collectively
referred to as the "Company." All material intercompany accounts and
transactions have been eliminated in consolidation. The Company is a 72.1% owned
subsidiary of Simclar International Holdings Limited ("Simclar"), which
purchased the 71.3% interest of the Company's former parent, Medicore, Inc.
("Medicore'), on June 27, 2001. See Notes 4, 5 and 13.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. The
carrying amounts reported in the balance sheet for cash and cash equivalents
approximate their fair values. The credit risk associated with cash and cash
equivalents is considered low due to the high quality of the financial
institutions in which the assets are invested.
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 and/or weighted average cost 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 the following:
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Finished goods $ 584,397 $ 658,966
Work in process 1,216,328 2,586,900
Raw materials and supplies 6,440,955 6,937,268
----------- -----------
$ 8,241,680 $10,183,134
=========== ===========
Property and Equipment
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which are generally 25 years for buildings and improvements; 3 to 10
years for machinery, computer and office equipment; 3 to 10 years for tools and
dies; and 5 to 15 years for leasehold improvements based on the shorter of the
lease term or estimated useful life of the property. Replacements and
betterments that extend the lives of assets are capitalized. Maintenance and
repairs are expensed as incurred. Upon the sale or retirement of assets the
related cost and accumulated depreciation are removed and any gain or loss is
recognized.
F-8
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Long-Lived Asset Impairment
Pursuant to Financial Accounting Standards Board (FASB) Statement No.
121 "Accounting for the Impairment of Long-Lived Assets to be Disposed of,"
impairment of long-lived assets, including intangibles related to such assets,
is recognized whenever events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be fully
recoverable from estimated future cash flows and the fair value of the related
assets is less than their carrying value. The Company based on current
circumstances, does not believe any indicators of impairment are present, other
than relative to the building located in Scotland, see Note 14. See also "New
Pronouncements" below.
Deferred Expenses
Deferred expenses, except for deferred loan costs, are amortized on the
straight-line method, over their estimated benefit period ranging to 60 months.
Deferred loan costs are amortized over the lives of the respective loans.
Accumulated amortization amounted to $9,699 and $15,529 at December 31, 2001 and
2000, respectively.
Cost in Excess of Net Tangible Assets Acquired
Cost in excess of net tangible assets acquired is being amortized on a
straight-line basis over 25 years. If, in the opinion of management, an
impairment of value occurs, based on the undiscounted cash flow method, any
writedowns will be charged to expense. See also "New Pronouncements" below.
Income Taxes
Deferred income taxes at the end of each period are determined by
applying enacted tax rates applicable to future periods in which the taxes are
expected to be paid or recovered to differences between the financial accounting
and tax basis of assets and liabilities.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), permits a company to elect
to follow the accounting provisions of APB 25 rather than the alternative fair
value accounting provided under SFAS 123 but requires pro forma net income and
earnings per share disclosures as well as various other disclosures not required
under APB 25 for companies following APB 25.
Earnings per Share
Diluted earnings (losses) 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,
and contingent shares for the stock price guarantee for the acquisition of
Lytton. The Company has various stock options; however, only those options which
were anti-dilutive during the periods being reported on have been included in
the earnings per share computations. For the year ended December 31, 2001, no
potentially dilutive securities were included in the diluted earnings per share
computation as the Company incurred a net loss for the period and to include
them would be anti-dilutive.
F-9
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Following is a reconciliation of amounts used in the basic and diluted
computations:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
------------ ---------- ----------
Net (loss) income - numerator basic computation $ (2,805,554) $ 565,027 $ 303,491
============ ========== ==========
Weighted average shares - denominator basic computation 6,556,990 6,575,200 5,647,174
Effect of dilutive securities:
Stock options - 24,256 68,039
Contingent stock - acquisition - - 164,131
Weighted average shares, as adjusted - denominator 6,556,990 6,599,456 5,879,344
============ ========== ==========
(Loss) earnings per share:
Basic $ (0.43) $ .09 $ .05
============ ========== ==========
Diluted $ (0.43) $ .09 $ .05
============ ========== ==========
Accrued Expenses
Accrued expenses is comprised as follows:
DECEMBER 31, DECEMBER 31,
2001 2000
------------ -----------
Accrued compensation $ 319,682 $ 518,436
Other 531,876 1,308,110
---------- ----------
$ 851,558 $1,826,546
========== ==========
Estimated Fair Value of Financial Instruments
The carrying value of cash, accounts receivable and debt in the
accompanying financial statements approximate their fair value because of the
short-term maturity of these instruments, or in the case of debt, becau
se such
instruments bear variable interest rates which approximate market.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
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.
Revenue Recognition
Revenue is recognized upon delivery of a product based upon a
customer's order where the selling price is fixed and collectability is
reasonably assured.
F-10
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Foreign Operations
The financial statements of the foreign subsidiary have been translated
into U.S. dollars in accordance with FASB Statement No. 52. All balance sheet
accounts have been translated using the current exchange rates at the balance
sheet date. Income statement accounts have been translated using the average
exchange rate for the period. The translation adjustments resulting from the
change in exchange rates from period to period have been reported separately as
a component of accumulated other comprehensive income included in stockholders'
equity. Foreign currency transaction gains and losses, which are not material,
are included in the results of operations. These gains and losses result from
exchange rate changes between the time transactions are recorded and settled,
and for unsettled transactions, exchange rate changes between the time the
transactions are recorded and the balance sheet date.
Comprehensive Income
The Company follows FASB Statement No. 130, "Reporting Comprehensive
Income" which contains rules for the reporting of comprehensive income and its
components. Comprehensive income consists of net income and foreign currency
translation adjustments and is presented in the Consolidated Statement of
Stockholders' Equity.
New Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 (SFAS No. 141), "Business Combinations", and issued Statement
of Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other
Intangible Assets". SFAS No. 141 eliminates the pooling-of-interest method of
accounting for business combinations and requires that all business combinations
be accounted for as purchases. In addition, SFAS No. 141 establishes new rules
concerning recognition of intangible assets arising in a purchase business
combination and requires enhanced disclosure of information in the period in
which a business combination is completed. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001. SFAS No. 142 establishes
new rules on accounting for goodwill whereby goodwill will no longer be
amortized to expense, but rather will be subject to impairment review and will
be effective for fiscal year beginning after December 15, 2001. Net income will
increase when the amortization of goodwill to expense is stopped. Amortization
expense related to goodwill was approximately $147,000, $142,000 and $124,000,
respectively, for the years ended December 31, 2001, 2000 and 1999. In addition,
upon adoption, we will perform the first of the required impairment tests of
goodwill and have not yet determined what the effect of this test will be on the
Company's financial position or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations,"
and in August 2001 issued Statement of Financial Accounting Standards No. 144
(SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 143 establishes standards of accounting for asset retirement
obligations (i.e., legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of long-lived asset, except for certain obligations
of lessees) and the associated asset retirement costs. SFAS No. 144 replaces
existing accounting pronouncements related to impairment of disposal of
long-lived assets. Both SFAS No. 143 and No. 144 are effective beginning with
the Company's calendar 2002 year. The Company is currently evaluating the impact
of these two statements, but does not expect that they will have a material
impact on its financial condition or results of operations when they are
implemented.
F-11
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--LONG-TERM DEBT
On October 24, 2001, the Company entered into two credit facilities
with Bank of Scotland in Edinburgh, Scotland for an aggregate borrowing of
$10,000,000. This new financing replaced the lines of credit and three
commercial loans with The Provident Bank of Ohio for Techdyne and Lytton. The
new financing includes a $3,000,000 line of credit, expiring May 31, 2002, with
an interest rate at LIBOR rate plus 1.5% for a one, three or six month period,
at the Company's election. The Company elected the three-month interest period
at 3.83% until January 24, 2002, after this date the rate is 3.31% until April
24, 2002. This line of credit had an outstanding balance of approximately
$881,184 at December 31, 2001. The financing also included a seven-year term
loan of $7,000,000 at the same interest rate as the line of credit. The term
loan specifies quarterly payments of $250,000 starting on January 24, 2002 plus
interest. The term loan had an outstanding balance of $7,000,000 at December 31,
2001.
The credit facilities are collateralized by all the assets of the
Company and requires affirmative and negative covenants be maintained by the
Company. Certain of the affirmative covenants require maintenance of a
consolidated adjusted net worth greater than $9,000,000 after December 31, 2001;
a ratio of consolidated net trade receivables and net inventories to
consolidated net borrowings not less than 1.5 to 1; a ratio of consolidated
trade receivable to consolidated net borrowings not less than .5 to 1; and a
ratio of consolidated net income before interest and income taxes to total
consolidated interest costs not less than 2 to 1. Some of the negative
covenants, among others, (1) include granting or permitting a security agreement
against the consolidated assets of the companies other than permitted security
agreements, (2) declaring or paying any dividends or making any other payments
on the Company's capital stock, (3) consolidating or merging with any other
entity or acquiring or purchasing any equity interest in any other entity, or
assuming any obligations of any other entity, except for notes and receivables
acquired in the ordinary course of business, (4) incurring, assuming,
guarantying, or remaining liable with respect to any indebtedness, except for
certain existing indebtedness disclosed in these financial statements, or (5)
undertaking any capital expenditure in excess of $1,000,000 in any one fiscal
year. The agreements also preclude changes in ownership in the companies, or any
material change in any of our business objectives, purposes, operations and tax
residence. At December 31, 2001, the Company was not in compliance with respect
to the terms of the credit facilities as a result of not meeting certain
financial covenant requirements. In April 2002, the Company obtained a wavier of
the non-compliance.
On October 11, 2001, Techdyne (Europe) entered into a credit facility
with Bank of Scotland for an amount of (pound)275,000 ($399,025). This facility
comprises an eight-year term loan repayable in quarterly payments of
(pound)8,594 ($12,470) starting on January 11, 2002 with an interest rate of
Bank of Scotland base rate plus 1.5%. This line of credit had an outstanding
balance of $399,025 at December 31, 2001 (effectively 3.1% at December 31,
2001). The proceeds from the credit facility were used to repay the 15-year
mortgage loan of $371,000 as of September 30, 2001.
The Company had a three-year $4,500,000 commercial revolving line of
credit with the Provident Bank of Ohio which became effective February 9, 2000
and maturing February 2003 with interest at prime minus 1/4% and an option to
fix the rate for up to 180 days at LIBOR plus 2.5%. This line of credit had an
outstanding balance of approximately $3,883,000 at December 31, 2000. The bank
also extended a $1,000,000 five-year term loan maturing February 2005 with
monthly payments of $16,667 plus interest at the same interest rate as for the
line of credit. This loan had an outstanding balance of approximately $833,000
at December 31, 2000. The interest rate on both loans was 9.25% as of December
31, 2000. The loans were collateralized by the business assets of the Company
and were cross collateralized with the debt of Lytton.
Lytton had a $3,000,000 revolving bank line of credit requiring monthly
interest payments at prime minus 1/4% with an option to fix the rate for up to
180 days at LIBOR plus 2.5% maturing
F-12
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--LONG-TERM DEBT--CONTINUED
February 2003. There was an outstanding balance on this loan of approximately
$2,786,000 at December 31, 2000. Lytton had a $1,400,000 60-month installment
loan with the same bank maturing February 2004, at an annual rate of prime minus
1/4%, with monthly payments of $23,333 plus interest. The balance outstanding on
this loan was approximately $1,028,000 at December 31, 2000. Lytton also has a
$500,000 equipment loan agreement with the same bank maturing February 2003 with
monthly interest payments until January 2001 and monthly principal payments of
$6,000 plus interest commencing January 2001 with interest at prime minus 1/4%
and an option to fix the rate for 180 days at LIBOR plus 2.5%. This loan had an
outstanding balance of $150,000 at December 31, 2000. The interest rate on all
of the Lytton bank loans was 9.25% as of December 31, 2000. The business assets
of Lytton collateralize all of these bank loans.
Long-term debt is as follows:
December 31,
------------
2001 2000
---------- ----------
Term loan $7,000,000 $ -
Term loan 399,025 -
Three year line of credit agreement - 3,883,058
Term loan - 833,330
Mortgage note collateralized by land and building with a net book value
of $699,000 at December 31, 2000 - 413,608
Line of credit - 2,786,442
Installment loan - 1,028,337
Equipment loan - 150,000
Equipment loan requiring monthly payments of $4,298 including
interest at 5.5% and maturing in April 2002 16,996 66,157
Other 34,401 46,405
---------- ----------
$7,450,422 $9,207,337
Less current portion 1,079,578 625,048
---------- ----------
$6,370,844 $8,582,289
========== ==========
The prime rate was 4.75% and 9.50% as of December 31, 2001 and 2000,
respectively.
Scheduled maturities of long-term debt outstanding at December 31, 2001
are approximately: 2002---$1,080,000; 2003---$1,064,000; 2004---$1,058,000;
2005---$1,050,000; 2006---$1,050,000; thereafter---$2,150,000. Interest payments
on all of the above debt amounted to approximately $600,000, $784,000 and
$581,000 in 2001, 2000 and 1999, respectively.
F-13
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--INCOME TAXES
The Company files separate federal and state income tax returns from
its former Parent, with its income tax liability reflected on a separate return
basis. The Company has net operating loss carryforwards which amounted to
approximately $944,000 at December 31, 2001, expiring through 2021.
Deferred income taxes reflect the net tax effect of temporary
differences 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 of $587, 000 at December 31, 2001 was
recognized to offset the deferred tax assets. Significant components of the
Company's deferred tax liabilities and assets are as follows:
DECEMBER 31,
------------------------
2001 2000
--------- ----------
Deferred tax liabilities:
Depreciation and amortization $ 403,000 $ 252,600
--------- ----------
Total deferred tax liability 403,000 252,600
--------- ----------
Deferred tax assets:
Inventory obsolescence 374,000 275,501
Cost capitalized in ending inventory 120,000 70,328
Accrued expenses 50,000 49,017
Other 78,000 36,979
Net operating loss carryforwards 368,000 66,272
--------- ----------
Total deferred tax assets 990,000 498,097
Valuation allowance for deferred tax assets (587,000) -
--------- ----------
Net deferred tax assets 403,000 498,097
--------- ----------
Net deferred tax asset (liability) $ - $ 245,497
========= ==========
A valuation allowance was provided to offset the deferred tax asset
recorded at December 31, 2001 as management believed that it was more likely
than not, based on the weight of the available evidence, this portion of the
deferred tax asset would not be realized.
Deferred taxes in the accompanying balance sheets consist of the following
components:
DECEMBER 31,
-----------------------
2001 2000
---------- ---------
Current deferred tax asset $ 403,000 $ 498,097
Current deferred tax liability - -
---------- ---------
Net current deferred tax asset 403,000 498,097
Long-term deferred tax asset - -
Long-term deferred tax liability (403,000) (252,600)
---------- ---------
Net long-term deferred tax asset (liability) (403,000) (252,600)
---------- ---------
Net deferred tax asset (liability) $ - $ 245,497
========== =========
For financial reporting purposes, (loss) income before income taxes includes the
following components:
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
----------- ----------- -----------
United States (loss) income $(1,651,423) $ 983,848 $ 1,229,773
Foreign loss (908,634) (328,278) (576,634)
----------- ----------- -----------
$(2,560,057) $ 655,570 $ 653,139
=========== =========== ===========
F-14
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--INCOME TAXES--CONTINUED
Significant components of the provision (benefit) for income taxes are as
follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
--------- --------- ---------
Current:
Federal $ - $ 20,000 $ 247,619
State - 60,600 69,369
--------- --------- ---------
- 80,600 316,988
--------- --------- ---------
Deferred:
Federal 214,023 (18,489) 32,660
State 31,474 28,432 -
--------- --------- ---------
245,497 9,943 32,660
--------- --------- ---------
$ 245,497 $ 90,543 $ 349,648
========= ========= =========
Techdyne (Europe) files separate income tax returns in the United Kingdom.
The reconciliation of income tax attributable to income before income
taxes computed at the U.S. federal statutory rates to income tax expense
(benefit) is:
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
---------- ---------- ----------
Statutory tax rate (34%) applied to income before
income taxes $ (870,419) $ 222,894 $ 222,067
(Reduction) increases in taxes resulting from:
State income taxes benefits-net of federal income
tax effect (75,256) 53,196 44,021
Tax rate differential relating to tax benefit of
foreign operating loss 308,936 111,615 196,056
Reversal of deferred income taxes 245,497 - -
Non deductible items 57,966 9,592 23,657
Change in deferred tax valuation allowance 587,000 (303,000) (145,000)
Other (8,227) (3,574) 8,847
---------- ---------- ----------
$ 245,497 $ 90,543 $ 349,648
========== ========== ==========
Undistributed earnings of the Company's foreign subsidiary amounted to
approximately $481,000 and $1,390,000 at December 31, 2001 and 2000,
respectively. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable because of the complexities
associated with its hypothetical calculation; however, foreign tax credits may
be available to reduce some portion of the U.S. liability. Withholding taxes of
approximately $24,000 and $69,000 would be payable upon remittance of all
previously unremitted earnings at December 31, 2001 and 2000, respectively.
Income tax payments were approximately $130,000, $368,000 and $227,000
in 2001, 2000 and 1999, respectively.
F-15
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--TRANSACTIONS WITH SIMCLAR AND MEDICORE
The Company's parent, Simclar, provides certain financial and
administrative services to the Company under a service agreement. The amount of
expenses covered under the service agreement totaled $154,000 in 2001.
Subsequent to Medicore's sale of its majority ownership interest to Simclar on
June 27, 2001, Medicore continued to provide certain financial and
administrative services to the Company under a service agreement through July
15, 2001, the effective date of cancellation of the agreement. The amount of
expenses allocated by former parent Medicore under the service agreement totaled
$195,000, $360,000, and $408,000 in 2001, 2000 and 1999, respectively.
Advances payable to Medicore on the balance sheet were approximately
$499,000 at December 31, 2000 with interest at 5.7%. Interest on the net
advances amounted to approximately $11,000, $31,000 and $143,000, in 2001, 2000
and 1999, respectively, and is included in the net balance due the former
parent. The advances were repaid in full on October 26, 2001.
On March 27, 1990, the Company sold real property to Medicore. The gain
on the sale of approximately $161,000, which was deferred due to the
relationship of the parties, has been recognized in 2001, in accordance with the
provisions of SFAS No. 66, "Accounting for Sales of Real Estate," as a result of
Medicore's sale of its interest in the Company to Simclar. The premises are
leased from Medicore under a 10-year net operating lease expiring August 31,
2010 at an annual rental of $120,000 plus applicable taxes.
In May 2001, Techdyne (Europe) entered into a management agreement with
Simclar pursuant to which Simclar will manufacture products for Techdyne
(Europe) and assist in management coordination. These expenses were
approximately $1,103,000 in 2001. The Company has a net payable due to its
parent, Simclar, of approximately $563,000 at December 31, 2001. The Company
manufactured certain products for the parent, Simclar during 2001. Sales of the
products were $190,000 in 2001.
NOTE 5--RELATED PARTY TRANSACTIONS
For the years ended December 31, 2001, 2000 and 1999, respectively, the
Company paid premiums of approximately $434,000, $588,000 and $467,000, for
insurance through a former director and stockholder, and the relative of a
former director and stockholder.
For the years ended December 31, 2001, 2000 and 1999, respectively,
legal fees of $44,000, $52,000 and $45,000 were paid to an officer of the former
parent, Medicore, who acts as general counsel for the Company and the former
parent.
Subcontract manufacturing is performed for the Company by a company
whose President and shareholder is a former director of the Company. Subcontract
manufacturing purchases from this company amounted to approximately $1,503,000,
$2,302,000 and $1,728,000 in 2001, 2000 and 1999, respectively.
NOTE 6--COMMITMENTS AND CONTINGENCIES
Commitments
Lytton leases its operating facilities from an entity which is owned by
Lytton's former owner and former President. The operating lease, which expires
July 31, 2002, requires annual lease payments of approximately $234,000,
adjusted each year based on the Consumer Price Index, and contains renewal
options for a period of five to ten years at the then fair market rental value.
The Company leases several
F-16
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--COMMITMENTS AND CONTINGENCIES--Continued
facilities including that of Lytton and those under lease from its former Parent
which expire at various dates through 2010 with renewal options for a period of
five years at the then fair market rental value. the Company's aggregate lease
commitments at December 31, 2001, are approximately: 2002--$571,000,
2003---$455,000, 2004---$439,000, 2005---$428,000 and 2006---$432,000. Total
rent expense was approximately $669, 000, $818, 000 and $806, 000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
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, amounted to approximately $64,000,
$80,000 and $86,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
The Company is involved in various legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
liability, if any, resulting from these matters will not have a material effect
on the Company's financial position.
NOTE 7--STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as is
discussed below, Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense was recognized.
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 were exercisable for a period of five years at $1 per share. On June 30,
1998, 115,000 of these options were exercised and on May 10, 1999, 50,000 of the
remaining options were exercised. 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% for the
June 1998 exercises and 4.49% for the May 1999 exercises.
On February 27, 1995 the Company granted non-qualified stock options,
not part of the 1994 Plan, to directors of Techdyne and its subsidiary for
142,500 shares exercisable at $1.75 per share for five years. In April 1995, the
Company granted a non-qualified stock option for 10,000 shares which vested
immediately, not part of the 1994 Plan, to its general counsel at the same price
and terms as the directors' options. On February 25, 2000, 145,000 of these
options were exercised. The Company received cash payment of the par value and
the balance in three-year promissory notes present in the stockholders' equity
section of the balance sheet, with interest at 6.19%.
In June 1997, the Company adopted a stock option plan for up to 500,000
options, and pursuant to this plan the board granted 375,000 options exercisable
for five years through June 22, 2002 at $3.25 per share, with 325,000 of these
options outstanding at December 31, 2000. On June 30, 1999, the Company granted
52,000 options exercisable for three years through September 29, 2002 at $4.00
per share with 10,000 options outstanding at December 31, 2000. On August 25,
1999, the Company granted 16,000 options exercisable for three years through
August 24, 2002 at $4.00 per share with 13,000 options outstanding at December
31, 2000. On December 15, 1999 the Company granted 19,000 options
F-17
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--STOCK OPTIONS--CONTINUED
exercisable for three years through December 14, 2002 at $4.00 per share with
13,000 options outstanding at December 31, 2000. On May 24, 2000, the Company
granted 3,000 options exercisable for three years through May 23, 2003 at $4.00
per share, which remain outstanding at December 31, 2000. On October16, 2000,
the Company granted 90,000 three year stock options exercisable at $2.00 per
share through October 15, 2002, with one-third of the options vesting
immediately, one-third vesting on October 16, 2001 and one-third vesting on
October 16, 2002, but based on the change in control of the Company (see Notes
4, 5 and 13), all options vested on June 27, 2001, and 30,000 options were
redeemed for $4,200.
The Company entered into a consulting agreement on July 1, 1999 for
financial advisory services which ended on September 15, 2000. As compensation,
the consultant received non-qualified stock options to purchase 100,000 shares
of the Company's common stock exercisable at $3.50 per share that expire on
September 15, 2000. These options were valued at $40,000 resulting in
approximately $23,000 expense during 2000 and $17,000 expense during 1999.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the options issued during 2000 and 1999, respectively: risk-free
interest rate of 5.88% and 5.20%, respectively; no dividend yield; volatility
factor of the expected market price of the Company's common stock of .85 and
.67, respectively; and an expected life of the options of 3 years and 1.8 years,
respectively.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective input assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different than those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee's stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The Company's
pro forma information for options issued is as follows:
2001 2000 1999
---- ---- ----
Pro forma net (loss) income $(2,805,554) $ 557,000 $ 233,000
=========== ========= =========
Pro forma earnings per share:
Basic $ (0.43) $ .09 $ .04
=========== ========= =========
Diluted $ (0.43) $ .09 $ .04
=========== ========= =========
F-18
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--STOCK OPTIONS--CONTINUED
A summary of the Company's stock option activity, for the years ended
December 31, follows:
2001 2000 1999
---- ---- ----
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding-beginning of year 460,250 $2.02 688,250 $2.06 590,350
Granted 0 93,000 1.75 187,000 $3.73
Exercised 0 (145,000) 3.57 (50,000) 1.00
Expired (49,250) (176,000) (39,100) 2.77
------- -------- -------
Outstanding-end of year 411,000 460,250 688,250
======= ======== =======
Outstanding and exercisable
at end of year:
May 1994 options - - -
February and April 1995 options - - 150,000 $1.75
June 1997 options 320,000 $3.25 325,000 $3.25 345,000 3.25
May 1998 options 0 4.25 6,250 4.25 6,250 4.25
June, August and December 1999
Options, and May 2000 options 31,000 4.00 39,000 4.00 87,000 4.00
July 1999 options - - 100,000 3.50
October 2000 options 60,000 2.00 90,000 2.00 -
------- -------- -------
411,000 460,250 688,250
======= ======== =======
Weighted-average fair value of
Options granted during the year - $ .44 $ .59
======= ======== =======
The remaining average contractual life at December 31, 2001 is 1. 8
years for the October 2000 options, 2. 6 years for the June 1999, August 1999,
December 1999 and May 2000 options, and . 5 years for the June 1997 options.
In June 2001, in connection with the sale to Simclar, the Company
forgave stock option notes and related accrued interest totaling $207,825 from
certain current and former officers and directors of the Company.
NOTE 8--COMMON STOCK
The Company has 411,000 shares reserved for future issuance at December
31, 2001, including: 320,000 shares for 1997 options; 31,000 shares for 1999
options; and 60,000 shares for 2000 options.
NOTE 9--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes certain quarterly operating data:
YEAR ENDED DECEMBER 31, 2001 YEAR ENDED DECEMBER 31, 2000
--------------------------------------------- --------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- -------
(In thousands except per share data)
Net Sales $13,244 $ 9,312 $ 7,128 $ 7,138 $12,638 $12,280 $13,616 $14,178
Gross profit 1,468 322 413 125 1,162 1,420 1,700 1,920
Net income (loss) 1 (1,168) (664) (974) (201) (36) 224 578
Earnings (loss) per share:
Basic $ - $ (.18) $ (.10) $ (.11) $ (.03) $ (.01) $ .03 $ .09
Diluted $ - $ (.18) $ (.10) $ (.11) $ (.03) $ (.01) $ .03 $ .09
F-19
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since the computation of earnings per share is made independently for
each quarter using the treasury stock method, the total of four quarters
earnings do not necessarily equal earnings per share for the year.
The Company recorded an adjustment to the valuation allowance relating
to its deferred tax asset of approximately $521,000 during the fourth quarter of
2001; $66,000 during the third quarter of 2001; $303,000 during the fourth
quarter of 2000 and $145,000 during the fourth quarter of 1999. In the third
quarter of 2001, the Company recorded an adjustment of $77,000 related to a
write down on buildings and equipment in Scotland (See Note 14).
NOTE 10--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. The Company guaranteed that the seller would realize a minimum of
$2,400,000 from the sale of these shares of common stock based on Lytton having
achieved certain earnings objectives. The total purchase price in excess of the
fair value of net assets acquired is being amortized over 25 years. Additional
contingent consideration was due if Lytton achieved pre-defined sales levels.
Additional consideration of approximately $396,000 and $290,000 was paid in
April 2000 and April 1999, respectively, based on sales levels. As the
contingencies have been resolved, additional consideration due, has been
recorded as goodwill, and is being amortized over the remainder of the initial
25-year life of the goodwill.
NOTE 11--GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS
Summarized financial information for the Company's one reportable
segment is shown in the following table.
GEOGRAPHIC AREA SALES 2001 2000 1999
--------------------- ---- ---- ----
United States $34,539,558 $47,843,141 $44,501,810
Europe(1) 2,285,716 4,869,678 3,818,286
----------- ----------- -----------
$36,825,274 $52,712,819 $48,320,096
=========== =========== ===========
(1)
Techdyne (Europe) sales are primarily to customers in the United Kingdom.
GEOGRAPHIC AREA PROPERTY, PLANT AND EQUIPMENT (NET) 2001 2000 1999
- --------------------------------------------------- ---- ---- ----
United States $2,999,125 $3,918,081 $4,074,801
Europe 917,765 1,073,388 1,284,854
---------- ---------- ----------
$3,916,890 $4,991,469 $5,359,655
========== ========== ==========
Sales to major customers are as follows:
YEAR ENDED DECEMBER 31,
MAJOR CUSTOMERS 2001 2000 1999
- --------------- ---------- ----------- ----------
Illinois Tool Works $9,705,000 $10,196,000 $7,195,000
Motorola - - 6,338,000
Alcatel(2) - 6,179,000 -
Trilithic(2) - 6,177,000 -
- ----------
(1) Less than 10% of sales for 2001 and 2000.
(2) Less than 10% of sales for 2001 and 1999.
F-20
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS--CONTINUED
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 affect on the Company's operations if such sales were not replaced.
NOTE 12--REPURCHASE OF COMMON STOCK
In October, 2000, the Company repurchased and cancelled 40,000 shares
of its common stock with a repurchase cost of approximately $31,000. The Company
currently has no formal plan to repurchase additional shares.
NOTE 13--SALE OF INTEREST
On April 6, 2001, the Company's former parent, Medicore, Inc., entered
into an Agreement for Sale and Purchase of Shares with Simclar International
Holdings Limited ("Simclar"), a private United Kingdom company, and the Company,
pursuant to which Medicore agreed to sell its 71.3% interest in the Company's
common stock to Simclar. The sale was subject to Medicore shareholder approval,
which was obtained on June 27, 2001, on which date the sale closed.
NOTE 14 - CESSATION OF SCOTLAND MANUFACTURING OPERATIONS
As a result of continuing operating losses, in April 2001 the Company
decided to discontinue the manufacturing operations of its European subsidiary,
Techdyne (Europe). In May 2001, Techdyne (Europe) entered into a management
agreement with Simclar pursuant to which Simclar would temporarily manufacture
products for Techdyne (Europe) and assist in management coordination. The
Company initially incurred a cost of approximately $225,000, primarily for
severance benefits associated with 79 employees who were terminated during the
second quarter of 2001 as a result of this decision. During the remainder of
2001, Techdyne (Europe) continued operations with approximately 2 employees (one
as of December 31, 2001).
With the cessation of the manufacturing operations, the Company made
the land, building and equipment available for sale during the third quarter of
2001. In connection with this process, the company recorded an adjustment of
$77,000 based upon market information obtained from an unrelated third party
during the third quarter of 2001 to adjust the land, building and equipment to
its estimated fair value. During the fourth quarter, the Company recorded an
additional $28,000 charge to further adjust to estimated fair value. Included in
property and equipment at December 31, 2001 are assets held for sale, net of
accumulated depreciation, in Scotland totalling approximately $918,000.
As of February 28, 2002 all remaining net assets and the remaining
employee, except the building and land, were transferred to Simclar at net book
value on that date. These net assets consisted principally of cash, receivables,
payables and equipment. The management agreement with Simclar was also
cancelled. Accordingly, the Company will no longer have European operations in
2002.
F-21
Schedule II - Valuation and Qualifying Accounts
Techdyne, Inc. and Subsidiaries
December 31, 2001
- ------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C
- ------------------------------------------------------------------------------------------------------
Additions
Balance at Additions (Deductions) Charged to
Beginning Charged (Credited)to Other Accounts
Classification of Period Cost and Expenses Describe
- ------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001:
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectable accounts $ 120,000 $ 104,000
Reserve for inventory obsolescence 783,000 699,000
Valuation allowance for deferred tax asset ---- 587,000
---------- -----------
$ 903,000 $ 1,390,000
========== ===========
YEAR ENDED DECEMBER 31, 2000:
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectable accounts $ 67,000 $ 25,000
Reserve for inventory obsolescence 709,000 422,000
Valuation allowance for deferred tax asset 303,000 (303,000)
---------- ----------- -----------
$1,079,000 $ 144,000 $ 0
========== =========== ===========
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectable accounts $ 47,000 $ 2,000
Reserve for inventory obsolescence 544,000 405,000
Valuation allowance for deferred tax asset 448,000 (145,000)
---------- ------------ -----------
$1,039,000 $ 262,000 $ 0
========== =========== ===========
- ------------------------------------------------------------------------------------
COL. A COL. D COL. E
- ------------------------------------------------------------------------------------
Other Changes Balance
Add (Deduct) at End of
Classification Describe Period
- ------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001:
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectable accounts $ (4,000)(1) $ 220,000
Reserve for inventory obsolescence (523,000)(2) 959,000
Valuation allowance for deferred tax asset (587,000) ----
------------ ----------
$ (1,114,000) $1,179,000
============ ==========
YEAR ENDED DECEMBER 31, 2000:
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectable accounts $ 28,000 (1) $ 120,000
Reserve for inventory obsolescence (348,000)(2) 783,000
Valuation allowance for deferred tax asset --- ----
------------ ----------
$ (320,000) $ 903,000
============ ==========
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
From asset accounts:
Allowance for uncollectable accounts $ 18,000 (1) $ 67,000
Reserve for inventory obsolescence (240,000)(2) 709,000
Valuation allowance for deferred tax asset --- 303,000
------------ ----------
$ (222,000) $1,079,000
============ ==========
(1) Uncollectable accounts written off, net of recoveries.
(2) Net write-offs against inventory reserves.