FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14659
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TECHDYNE, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-1709103
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2230 West 77th Street, Hialeah, Florida 33016
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(Address of principal executive offices) (Zip Code)
(305) 556-9210
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value - 6,556,990 shares as of August 9, 2002
TECHDYNE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Operations (Unaudited) for the
three and six months ended June 30, 2002 and June 30, 2001 include the accounts
of the Registrant and its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Balance Sheets as of June 30, 2002 and
December 31, 2001. (Unaudited)
2) Consolidated Condensed Statements of Operations for the three and
six months ended June 30, 2002 and June 30, 2001. (Unaudited)
3) Consolidated Condensed Statements of Cash Flows for the six months
ended June 30 2002 and June 30, 2001. (Unaudited)
4) Notes to Consolidated Condensed Financial Statements as of June 30,
2002. (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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PART II -- OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders
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Item 6. Exhibits and Reports on Form 8-K
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2
PART I -- FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001(A)
-------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 134,376 $ 1,021,112
Accounts receivable, less allowances of $220,000 at June 30 and December 31 4,478,073 4,464,553
Accounts receivable from major stockholder 698,472 --
Inventories, less allowances for obsolescence of $1,061,000 at June 30
and $959,000 at December 31 8,344,832 8,241,680
Prepaid expenses and other current assets 99,731 184,475
Deferred income taxes 403,000 403,000
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Total current assets 14,158,484 14,314,820
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Property and equipment:
Land and improvements 174,120 174,120
Buildings and building improvements 672,359 672,359
Machinery, computer and office equipment 6,357,041 7,370,178
Tools and dies 254,453 402,796
Leasehold improvements 587,188 545,162
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8,045,161 9,164,615
Less accumulated depreciation and amortization 4,736,500 5,247,725
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3,308,661 3,916,890
Deferred expenses and other assets, net 34,669 21,909
Goodwill, net 2,954,995 2,954,995
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$20,456,809 $21,208,614
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(A) Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission
in April 2002.
CONTINUED ON FOLLOWING PAGE
3
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
June 30, December 31,
2002 2001(A)
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current liabilities:
Line of credit $ 881,184 $ 881,184
Accounts payable 1,979,551 2,080,102
Accounts payable to major stockholder - net -- 563,455
Accrued expenses 812,857 851,558
Current portion of long-term debt 1,012,702 1,079,578
----------------------------
Total current liabilities 4,686,294 5,455,877
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Long-term debt 5,923,052 6,370,844
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Deferred income taxes 403,000 403,000
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Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 10,000,000 shares; issued and
outstanding 6,556,990 shares at June 30, 2002 and December 31, 2001 65,570 65,570
Capital in excess of par value 11,592,995 11,592,995
Accumulated deficit (1,781,928) (2,244,972)
Accumulated other comprehensive loss (224,349) (226,875)
Notes receivable from options exercised (207,825) (207,825)
----------------------------
Total stockholders' equity 9,444,463 8,978,893
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$ 20,456,809 $ 21,208,614
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(A) Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001 filed with the Securities and Exchange
Commission in April 2002.
See notes to consolidated condensed financial statements.
4
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
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2002 2001 2002 2001
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Revenues:
Sales $ 8,085,290 $ 9,311,956 $ 15,515,202 $ 22,556,083
Interest and other income 3,848 172,946 26,756 182,135
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8,089,138 9,484,902 15,541,958 22,738,218
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Cost and expenses:
Cost of goods sold 7,063,920 8,990,433 13,491,096 20,766,708
Selling, general and administrative expenses 731,152 1,079,806 1,444,723 2,223,761
Stock option note writeoff and bonus compensation -- 304,000 -- 304,000
Shutdown of Scotland manufacturing operations -- 225,000 -- 225,000
Interest expense 72,416 168,356 143,095 361,592
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7,867,488 10,767,595 15,078,914 23,881,061
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Income (loss) before income taxes 221,650 (1,282,693) 463,044 (1,142,843)
Income tax (benefit) provision -- (114,323) -- 24,743
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Net income (loss) $ 221,650 $ (1,168,370) $ 463,044 $ (1,167,586)
==========================================================
Earnings (loss) per share:
Basic $ 0.03 $ (0.18) $ 0.07 $ (0.18)
==========================================================
Diluted $ 0.03 $ (0.18) $ 0.07 $ (0.18)
==========================================================
See notes to consolidated condensed financial statements
5
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
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2002 2001
--------------------------
Operating activities:
Net income (loss) $ 463,044 $(1,167,586)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 437,578 659,500
Amortization 42,897 74,483
Deferred expenses and other assets (14,944) (733)
Provision for inventory obsolescence 129,216 189,805
Recognition of deferred gain on sale of property -- (161,047)
Forgiveness of notes receivable from stock options -- 207,825
Changes relating to operating activities from:
Accounts receivable (294,129) 966,711
Inventories (232,368) 778,727
Prepaid expenses and other current assets 83,300 (21,443)
Accounts payable (396,918) (1,193,699)
Accounts payable to major shareholder, net (410,690) --
Accrued expenses (47,274) (411,718)
Income taxes payable -- (20,257)
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Net cash used in operating activities (240,288) (99,432)
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Investing activities:
Additions to property and equipment, net of minor disposals (134,307) (235,238)
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Net cash used in investing activities (134,307) (235,238)
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Financing activities:
Line of credit borrowings -- 524,692
Payments on long-termbank borrowings (514,668) (271,868)
Decrease in advances from parent -- (309,570)
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Net cash used in financing activities (514,668) (56,746)
Effect of exchange rate fluctuations on cash 2,527 32,478
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Decrease in cash and cash equivalents (886,736) (358,938)
Cash and cash equivalents at beginning of period 1,021,112 506,824
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Cash and cash equivalents at end of period $ 134,376 $ 147,886
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See notes to consolidated condensed financial statements
6
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
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 72.4% owned
subsidiary of Simclar International Holdings Limited ("Simclar"), which
initially purchased a 71.3% interest of the company's former parent, Medicore,
Inc. ("Medicore") on June 27, 2001.
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:
JUNE 30, DECEMBER 31,
2002 2001
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Finished goods $ 716,452 $ 584,397
Work in process 1,387,271 1,216,328
Raw materials and supplies 6,241,109 6,440,955
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$ 8,344,832 $ 8,241,680
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LONG-LIVED ASSET IMPAIRMENT
Effective January 1, 2002 the company adopted Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 requires a company to recognize an
impairment loss on a long-lived asset when the carrying amount of a long-lived
asset is not recoverable from its undiscounted cash flows. It also provides
guidance for long-lived assets to be disposed of by sale. The adoption of this
statement in the first quarter of 2002 did not have any impact on the
consolidated financial statements. See Note 4.
GOODWILL AND OTHER INTANGIBLE ASSETS
The company adopted SFAS No.142, "Goodwill and Other Intangible
Assets," effective January 1, 2002. Under SFAS No. 142, goodwill and certain
other intangible assets are no longer amortized but are tested annually for
impairment using a two-step process. The first step is to identify a potential
impairment and, in transition, this step must be measured as of the beginning of
the fiscal year. However, a company has six months from the date of adoption to
complete the first step. The company completed
7
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
the first step of the goodwill impairment test during the second quarter of
2002, which did not result in any impairment loss. The second step of the
goodwill impairment test measures the amount of impairment loss, if any, and
must be completed by the end of 2002. Income before income taxes for the six
months ended June 30, 2001 included goodwill amortization of $73,000. Loss
before income taxes on a pro forma basis, assuming SFAS 142 had been adopted for
the three months and six months ended June 30, 2001 would have been $(1,246,000)
and $(1,070,000), respectively.
EARNINGS PER SHARE
Diluted earnings (loss) 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.
No potentially dilutive securities were included in the diluted earnings per
share computation for the three months and six months ended June 30, 2002 or for
the same periods of the preceding year, as a result of exercise prices.
Following is a reconciliation of amounts used in the basic and diluted
computations:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2002 2001 2002 2001
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Net income (loss) $ 221,650 $(1,168,370) $ 463,044 $ (1,167,586)
=========== =========== =========== ============
Weighted average shares 6,556,990 6,556,990 6,556,990 6,556,990
=========== =========== =========== ============
Earnings (loss) per share:
Basic $ .03 $ (.18) $ .07 $ (.18)
=========== =========== =========== ============
Diluted $ .03 $ (.18) $ .07 $ (.18)
=========== =========== =========== ============
Comprehensive Income
The company follows SFAS 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.
Below is a detail of comprehensive income (loss) for the three and six
months ended June 30, 2002 and 2001:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2002 2001 2002 2001
--------- ------------ --------- ------------
Net income(loss) $ 221,650 $ (1,168,370) $ 463,044 $ (1,167,586)
Other comprehensive loss:
Foreign currency translation -- (54) 2,527 (55,261)
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Comprehensive income (loss) $ 221,650 $ (1,168,424) $ 465,571 $ (1,222,847)
=========================================================
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued FASB
Statement No. 146 (FAS 146), Accounting for Exit or Disposal Activities. FAS 146
addresses the recognition, measurement, and
8
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
reporting of costs that are associated with exit and disposal activities,
including costs related to terminating a contract that is not a capital lease
and termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. FAS 146 supersedes
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring) and requires liabilities associated
with exit and disposal activities to be expensed as incurred. FAS 146 will be
effective for exit or disposal activities of the company that are initiated
after December 31, 2002.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three and six months ended June 30,
2002 and 2001, respectively, are unaudited and include, in the opinion of
management of the company, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the earnings for such periods. Operating
results for the three and six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2002.
While the company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these Consolidated
Condensed Financial Statements be read in conjunction with the financial
statements and notes included in the company's latest annual report for the year
ended December 31, 2001.
NOTE 3--INCOME TAXES
The company files separate federal and state income tax returns from
Simclar, with its income tax liability reflected on a separate return basis.
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. Through June
30, 2002, the company has utilized approximately $500,000 of net operating loss
carry forwards. For financial reporting purposes a valuation allowance of
approximately $587,000 has been recognized at December 31, 2001 to offset the
portion of the deferred tax assets related to U.S. net operating loss carry
forwards of approximately $944,000.
The company had no domestic income tax expense for the three and six
months ended June 30, 2002 due to utilization of its available tax loss
carryforwards. The company had domestic income tax (benefit) expense of
approximately $(114,000) and $25,000 for the three and six months ended June 30,
2001, respectively.
Techdyne (Europe) had no income tax expense or benefit for the three
and six months ended June 30, 2002 or the same period of the preceding year due
to utilizing available tax loss carryforwards and its loss in the same period of
the preceding year.
Income tax payments amounted to $ 0 for the three and six months ended
June 30, 2002 and $128,000 and $130,000, respectively, for the same period of
the preceding year.
9
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 4--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 as a result of this
decision, primarily for severance benefits associated with 79 employees who were
terminated during the second quarter of 2001. 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. On February 28, 2002, the company agreed to transfer to Simclar at net
book value the operating assets of Techdyne (Europe) except for the land and
building. Included in property and equipment at June 30, 2002 is the Scottish
land and building, which are considered assets held for sale, at an estimated
fair value of $653,000 based upon market information obtained from an unrelated
third party.
10
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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FORWARD-LOOKING INFORMATION
This report 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 such as 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
continuation of the worldwide recession in the telecommunications and
electronics sectors could cause actual results to differ materially from the
expectations reflected in the forward-looking statements made in this Form 10-Q.
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 from Techdyne, 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 report.
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.
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 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 since
the third quarter of 2000, has had a material adverse effect on our business and
financial condition and has required us to restructure and downsize our
organization and operations beginning the second half of 2001 and continuing
through the first half of 2002. Our 2002 operating results to date show signs
that these changes have had a positive impact on our financial condition. 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.
11
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.
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.
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.
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 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
Consolidated revenues decreased approximately $1,396,000 (15%) and
$7,196,000 (32%) for the three and six months ended June 30, 2002 compared to
the same period of the preceding year. There was a decrease in domestic sales of
$819,000 (9%) and $5,925,,000 (28%) and a decrease in European sales of $408,000
and $ 1,116,000, respectively, for the three and six months ended June 30, 2002
compared to the same period of the preceding year. Sales have been affected
substantially by the general economic slowdown and by transfer of European sales
and marketing operations to Simclar as of February 28, 2002. The company has not
lost a major customer, and has added customers to its listing. However, the
worldwide slowdown has affected all customers, and caused them to push-out
requirements.
Interest and other income decreased by approximately $169,000 and
$155,000, respectively, for the three and six months ended June 30, 2002
compared to the same period of the preceding year. This decrease is largely
attributable to the recognition of a deferred gain on the sale of property to
Medicore in the second quarter of 2001.
12
Approximately 34% and 37% of our consolidated sales for the three and
six months ended June 31, 2002, respectively, were made to one customer,
Illinois Tool Works.
Cost of goods sold as a percentage of sales amounted to 87% for the
three and six months ended June 30, 2002 and 97% and 92% for the same period of
the preceding year. The resulting improvement in the gross margin is primarily
due to management's restructuring of operations made during the second half of
2001.
Selling, general and administrative expenses, decreased by
approximately $349,000 and $779,000, respectively, for the three and six months
ended June 30, 2002 compared to the same periods of the preceding year,
reflecting the overall result of management cost reductions implemented in the
second half of 2001.
Interest expense decreased approximately $96,000 and $218,000,
respectively, for the three and six months ended June 30, 2002 compared to the
same period of the preceding year reflecting lower interest rates during the
2002 period. The LIBOR rate was 1.823% and 3.677% at June 30, 2002 and 2001,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance at June 30, 2002, was
approximately $134,000 compared to approximately $1,021,000 at December 31,
2001. Net cash used in operating activities was approximately $240,000 in the
six months ended June 30, 2002 compared to approximately $99,000 used in the
same period of the preceding year. The increase in cash used in operating
activities was due primarily to the transfer of Techdyne Europe's operating
assets at net book value to Simclar at February 28, 2002.
At June 30, 2002, our average days sales outstanding was 52 days as
compared to 54 days at June 30, 2001. The decrease of our average days sales
outstanding is primarily the result of decreased sales to two customers during
the six month period from the same period in 2001. Average inventory turnover
was 3.2 and 5.0 times for the six months ended June 30, 2002 and 2001,
respectively. The decrease in inventory turnover is primarily due to the
increased frequency of customer's orders rescheduled to a later delivery date
during the 2002 period compared to the 2001 period.
Cash used in investing activities was approximately $134,000 in the six
months ended June 30, 2002 compared to approximately $235,000 used for investing
activities in the same period of the preceding year. Due primarily to the slow
business activities experienced in the six months ended June 30, 2002 compared
to the same period in the preceding year, the company decreased its net
acquisition of property and equipment. The company has a capital expenditure
budget of $500,000 for 2002. Cash used in financing activities was approximately
$515,000 in the six months ended June 30, 2002 compared to approximately $57,000
in the same period of the preceding year. The cash was used to make scheduled
repayments on the company's 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 included a $3,000,000 line of credit, expiring July 19, 2003, 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 3.38% until October 24, 2002. This line of credit had an outstanding balance
of approximately $881,000 at June 30, 2002 and 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 plus
interest. The term loan had an outstanding balance of $6,500,000 at June 30,
2002 and $7,000,000 at December 31, 2001.
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The credit facilities are collateralized by all the assets of the
company and impose affirmative and negative covenants on 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
current assets to consolidated net borrowing not less than 1.75 to 1; a ratio of
consolidated trade receivable to consolidated net borrowings not less than .75
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.
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) with an interest rate of Bank of Scotland base rate plus
1.5%. This line of credit had an outstanding balance of $386,706 at June 30,
2002 (effectively 3.8% at June 30, 2002). The proceeds from the credit facility
were used to repay the 15-year mortgage loan of $371,000 as of September 30,
2001.
Our ability to comply with our bank covenants 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 default
under our debt. At June 30, 2002, we were in compliance with all the bank
covenants.
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 have no off balance sheet financing arrangements with related or
unrelated parties and no unconsolidated subsidiaries.
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 been implemented since the second half of 2001 and the
financial benefits of these change have had a positive effect on the company's
financial performance in the six months ended June 30, 2002.
NEW PRONOUNCEMENTS
Effective January 1, 2002 the company adopted Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 requires a company to recognize an
impairment loss on a long-lived asset when the carrying amount of a long-lived
asset is not recoverable from its undiscounted cash flows. It also provides
guidance for long-lived assets to be disposed of by sale. The adoption of this
statement in the first quarter of 2002 did not have any impact on the
consolidated financial statements. See Note 4.
14
The company adopted SFAS No.142, "Goodwill and Other Intangible
Assets," effective January 1, 2002. Under SFAS No. 142, goodwill and certain
other intangible assets are no longer amortized but are tested annually for
impairment using a two-step process. The first step is to identify a potential
impairment and, in transition, this step must be measured as of the beginning of
the fiscal year. However, a company has six months from the date of adoption to
complete the first step. The company completed the first step of the goodwill
impairment test during the third quarter of 2002, which did not result in any
impairment loss. The second step of the goodwill impairment test measures the
amount of impairment loss, if any, and must be completed by the end of 2002.
Income before income taxes for the six months ended June 30, 2001 included
goodwill amortization of $73,000. Loss before income taxes on a pro forma basis,
assuming SFAS 142 had been adopted for the six months ended June 30, 2001 would
have been $(1,070,000).
The Financial Accounting Standards Board (FASB) has issued FASB
Statement No. 146 (FAS 146), Accounting for Exit or Disposal Activities. FAS 146
addresses the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including costs related to
terminating a contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. FAS 146 supersedes Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) and requires liabilities associated with exit and disposal
activities to be expensed as incurred. FAS 146 will be effective for exit or
disposal activities of the company that are initiated after December 31, 2002.
INFLATION
Inflationary factors have not had a significant effect on our
operations. The company attempts to pass on increased costs and expenses by
increasing selling prices when and where possible and by developing different
and improved products for our customers that can be sold at targeted profit
margins.
ITEM 3. 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
governments securities and interest-bearing accounts at financial institutions
in which we had approximately $39,000 invested at June 30, 2002.
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 debt agreements, which totaled
approximately $7,768,000 at June 30, 2002.
The company has exposure to both rising and falling interest rates. A
1/2% decrease in rates on our six months ending investments would be
insignificant. A 1% increase in rates on our six months ending variable rate
debt would result in a negative impact of approximately $37,000 on our results
of operations.
Our exposure to market risks from foreign currency exchange rates
relates to our European subsidiary whose results of liquidation, when translated
into U.S. dollars, are impacted by changes in foreign exchange rate. A 10%
strengthening of the U.S. dollars against the local Scottish currency, the
pound, would have negatively impacted six months earnings by approximately $
21,000. We have not incurred any significant realized losses on exchange
transactions and do not utilize foreign exchange contracts to 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.
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PART II -- OTHER INFORMATION
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
Techdyne, Inc. held its Annual Meeting of Stockholders on June 5,
2002, for the purpose of electing seven directors. The nominees were: Samuel J.
Russell, Barry J. Pardon, John Ian Durie, Christina M.J. Russell, Lytton
Crossley, Thomas C. Foggo and Kenneth Greenhalgh. Each nominee was elected by
total of 4,833,053 shares voted for and no votes withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits
99. ADDITIONAL EXHIBITS
Exhibit 99.1 Certification Under Section 906 of Sarbanes-Oxley Act
of 2002
Exhibit 99.2 Certification Under Section 906 of Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHDYNE, INC.
By /s/ Barry Pardon
------------------------------------
BARRY PARDON, President
By /s/ David Watts
------------------------------------
DAVID WATTS, Chief Financial Officer
Dated: August 14, 2002
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