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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 September 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 __________________
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 (I.R.S. Employer
incorporation or organization) Identification No.)
2230 West 77th Street, Hialeah, Florida 33016
- --------------------------------------- -----------------
(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 November 12, 2002
TECHDYNE, INC. AND SUBSIDIARIES
-------------------------------
INDEX
PART I -- FINANCIAL INFORMATION
- ------ ---------------------
The Consolidated Condensed Statements of Operations (Unaudited) for the
three and nine months ended September 30, 2002 and September 30, 2001 include
the accounts of the Registrant and its subsidiaries.
Item 1. Financial Statements
- ------- --------------------
1) Consolidated Condensed Balance Sheets as of September 30, 2002
(Unaudited) and December 31, 2001.
2) Consolidated Condensed Statements of Operations for the three and
nine months ended September 30, 2002 and September 30, 2001.
(Unaudited)
3) Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 2002 and September 30, 2001.
(Unaudited)
4) Notes to Consolidated Condensed Financial Statements as of
September 30, 2002. (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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Item 4. Controls and Procedures
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PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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Signatures
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Certifications of Principal Executive Officer and Principal Financial
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Officer
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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
September 30, December 31,
2002 2001(A)
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,086,308 $ 1,021,112
Accounts receivable, less allowances of $220,000 at September 30 and December 31 4,794,791 4,464,553
Amounts receivable from major stockholder, net 2,057,387 --
Inventories, less allowances for obsolescence of $1,057,000 at September 30
and $959,000 at December 31 7,777,986 8,241,680
Prepaid expenses and other current assets 131,607 184,475
Deferred income taxes 403,000 403,000
----------- -----------
Total current assets 16,251,079 14,314,820
----------- -----------
Property and equipment:
Land and improvements 174,120 174,120
Buildings and building improvements 672,359 672,359
Machinery, computer and office equipment 6,383,827 7,370,178
Tools and dies 258,853 402,796
Leasehold improvements 592,404 545,162
----------- -----------
8,081,563 9,164,615
Less accumulated depreciation and amortization 4,973,349 5,247,725
----------- -----------
3,108,214 3,916,890
Deferred expenses and other assets, net 16,924 21,909
Goodwill, net 2,954,995 2,954,995
----------- -----------
$22,331,212 $21,208,614
=========== ===========
(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)
September 30, December 31,
2002 2001(A)
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current liabilities:
Line of credit $ 1,881,184 $ 881,184
Accounts payable 2,467,787 2,080,102
Amounts payable to major stockholder, net -- 563,455
Accrued expenses 939,294 851,558
Current portion of long-term debt 1,012,702 1,079,578
------------ ------------
Total current liabilities 6,300,967 5,455,877
------------ ------------
Long-term debt 5,642,935 6,370,844
------------ ------------
Deferred income taxes 403,000 403,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 10,000,000 shares; issued and
outstanding 6,556,990 shares at September 30, 2002 and December 31, 2001 65,570 65,570
Capital in excess of par value 11,592,995 11,592,995
Accumulated deficit (1,242,081) (2,244,972)
Accumulated other comprehensive loss (224,349) (226,875)
Notes receivable from options exercised (207,825) (207,825)
------------ ------------
Total stockholders' equity 9,984,310 8,978,893
------------ ------------
$ 22,331,212 $ 21,208,614
============ ============
(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 Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
Revenues:
Sales $ 9,310,735 $ 7,128,222 $ 24,863,568 $ 29,687,433
Interest and other income 7,870 29,570 34,625 209,992
------------ ------------ ------------ ------------
9,318,605 7,157,792 24,898,193 29,897,425
------------ ------------ ------------ ------------
Cost and expenses:
Cost of goods sold 7,982,369 6,714,809 21,511,095 27,424,144
Selling, general and administrative expenses 725,305 844,872 2,170,028 3,127,422
Stock option note writeoff and bonus compensation -- -- -- 304,000
Shutdown of Scotland manufacturing operations -- 77,000 -- 302,000
Interest expense 71,084 140,686 214,179 502,278
------------ ------------ ------------ ------------
8,778,758 7,777,367 23,895,302 31,659,844
------------ ------------ ------------ ------------
Income (loss) before income taxes 539,847 (619,575) 1,002,891 (1,762,419)
Income tax provision -- 44,000 -- 68,743
------------ ------------ ------------ ------------
Net income (loss) $ 539,847 $ (663,575) $ 1,002,891 $ (1,831,162)
============ ============ ============ ============
Earnings (loss) per share:
Basic $ 0.08 $ (0.10) $ 0.15 $ (0.28)
============ ============ ============ ============
Diluted $ 0.08 $ (0.10) $ 0.15 $ (0.28)
============ ============ ============ ============
See notes to consolidated condensed financial statements
5
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------
2002 2001
-------------- -------------
Operating activities:
Net income (loss) $ 1,002,891 $ (1,831,162)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 655,957 948,079
Amortization 63,872 170,622
Deferred expenses and other assets 2,801 12,479
Provision for inventory obsolescence 206,732 212,981
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 (610,847) 2,736,872
Inventories 256,962 1,063,147
Prepaid expenses and other current assets 51,424 460,097
Accounts payable 91,318 (1,226,319)
Amounts payable to major shareholder, net (1,769,605) (212,000)
Accrued expenses 79,163 (762,449)
Income taxes payable -- (42,257)
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Net cash provided by operating activities 30,668 1,576,868
----------- ------------
Investing activities:
Additions to property and equipment, net of minor disposals (173,214) (186,559)
----------- ------------
Net cash used in investing activities (173,214) (186,559)
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Financing activities:
Line of credit net borrowings (payments) 1,000,000 (665,299)
Payments on long-term bank borrowings (794,785) (425,783)
Decrease in advances from parent -- (309,570)
----------- ------------
Net cash provided by (used in) financing activities 205,215 (1,400,652)
Effect of exchange rate fluctuations on cash 2,527 (55,825)
----------- ------------
Increase (decrease) in cash and cash equivalents 65,196 (66,168)
Cash and cash equivalents at beginning of period 1,021,112 506,824
----------- ------------
Cash and cash equivalents at end of period $1,086,308 $ $440,656
=========== ============
See notes to consolidated condensed financial statements
6
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
Finished goods $ 607,730 $ 584,397
Work in process 1,417,757 1,216,328
Raw materials and supplies 5,752,499 6,440,955
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$7,777,986 $8,241,680
========== ==========
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 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 nine months ended September 30, 2001 included
goodwill amortization of $110,000. Loss before income taxes on a pro forma
basis, assuming SFAS 142 had been adopted for the three months and nine months
ended September 30, 2001 would have been $(583,000) and $(1,652,000),
respectively.
7
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
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 nine months ended September 30, 2002,
or for the same periods of the preceding year, as a result of exercise prices.
The following is a reconciliation of amounts used in the basic and
diluted computations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Net income (loss) $ 539,847 $ (663,575) $1,002,891 $(1,831,162)
========== ========== ========== ===========
Weighted average shares 6,556,990 6,556,990 6,556,990 6,556,990
=--------- ---------- ---------- -----------
Earnings (loss) per share:
Basic $ .08 $ (.10) $ .15 $ (.28)
========== ========== ========== ===========
Diluted $ .08 $ (.10) $ .15 $ (.28)
========== ========== ========== ===========
COMPREHENSIVE INCOME (LOSS)
The company follows SFAS No. 130, "Reporting Comprehensive Income,"
which contains rules for the reporting of comprehensive income and its
components. Comprehensive income (loss) consists of net income and foreign
currency translation adjustments.
Below is a detail of comprehensive income (loss) for the three and nine
months ended September 30, 2002 and 2001:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income (loss) $ 539,847 $ (663,575) $ 1,002,891 $(1,831,162)
Other comprehensive loss:
Foreign currency translation -- (563) 2,527 (55,825)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 539,847 $ (664,138) $ 1,005,418 $(1,886,987)
=========== =========== =========== ===========
8
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED
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 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 nine months ended September
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 nine months ended September 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 on Form 10-K
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
September 30, 2002, the company has utilized approximately $944,000 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 nine
months ended September 30, 2002, due to utilization of its available tax loss
carryforwards. The company had domestic income tax expense of approximately
$44,000 and $69,000 for the three and nine months ended September 30, 2001,
respectively.
Techdyne (Europe) had no income tax expense or benefit for the three
and nine months ended September 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 nine months
ended September 30, 2002, and $ -0- and $130,000, respectively, for the same
period of the preceding year.
9
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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.
NOTE 5--AMOUNTS RECEIVABLE FROM MAJOR STOCKHOLDER
On September 3, 2002, the company received a demand note from Simclar
in the amount of $1,500,000. The note bears interest at LIBOR plus 2%.
Management expects repayment of the note by no later than December 31, 2002.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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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 is included in the company's other filings with the Securities and
Exchange Commission (the "Commission"). These documents are available free of
charge at the Commission's website at http://www.sec.gov and/or from Techdyne.
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 original
equipment manufacturer ("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 third quarter 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 these anticipated future orders and considering the timing of our
production schedules and the levels of utilization of facilities and personnel,
we will make commitments regarding the level of business we will accept.
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. In anticipation of future sales, it is important for us
to efficiently manage inventory by assuring proper timing of expenditures and
allocations of physical and personnel resources used in manufacturing.
11
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 to 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 increased approximately $2,161,000 (30%) for the
three months and decreased approximately $4,999,000 (17%) for the nine months
ended September 30, 2002, compared to the same period of the preceding year.
There was an increase in domestic sales of $2,577,000 (38%) and a decrease in
European sales of $394,000 for the three months ended September 30, 2002,
compared to the same period of the preceding year. Domestic sales decreased
$3,314,000 (12%) and European sales decreased $1,510,000 (87%) for the nine
months ended September 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, but domestic sales show a strong rebound in the quarter ended
September 30, 2002. The company has not lost a major customer, and has added
customers to its listing during the quarter ended September 30, 2002.
Interest and other income decreased by approximately $22,000 and
$175,000, respectively, for the three and nine months ended September 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.
Approximately 37% and 33% of our consolidated sales for the three and
nine months ended September 30, 2002, respectively, were made to one customer,
Illinois Tool Works.
Cost of goods sold as a percentage of sales amounted to 86% and 87% for
the three and nine months ended September 30, 2002, and 94% 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 which started during
the second half of 2001; however the major benefits of these changes were not
reflected in our operating results until the fourth quarter of 2001.
Selling, general and administrative expenses decreased by approximately
$120,000 and $957,000, respectively, for the three and nine months ended
September 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.
12
Interest expense decreased approximately $70,000 and $288,000,
respectively, for the three and nine months ended September 30, 2002, compared
to the same period of the preceding year reflecting lower interest rates during
the 2002 period. The LIBOR rate was 1.81% and 2.60% at September 30, 2002 and
2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance at September 30, 2002, was
approximately $1,086,000 compared to approximately $1,021,000 at December 31,
2001. Net cash provided by operating activities was approximately $31,000 in the
nine months ended September 30, 2002, compared to approximately $1,577,000
provided in the same period of the preceding year. The increase in cash provided
by operating activities was due to the increase in profitable operating
activities for the period less the transfer of Techdyne Europe's operating
assets at net book value to Simclar at February 28, 2002, and the loan of
$1,500,000 to Simclar as of September 3, 2002. The Board of Directors approved
the loan, realizing the acquisition of Fullarton Computer Industries Ltd by
Simclar will allow Techdyne to benefit from product and market synergies. The
loan to Simclar is a 2% over LIBOR demand note. Simclar used these funds as
bridge capital financing for their recent acquisition of Fullarton Computer
Industries Ltd until permanent long term financing is arranged. Management
expects repayment of this demand note before the end of this calendar year.
At September 30, 2002, our average days sales outstanding for the
quarter was 47 days as compared to 68 days at September 30, 2001. The decrease
of our average days sales outstanding is primarily the result of centralizing
all cash application and collection functions in one location which results in
more timely collection actions on past due accounts. Average inventory turnover
was 3.7 and 4.1 times for the nine months ended September 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 last half of 2001 and the first half of 2002. The inventory turnover
for the quarter ended September 30, 2002, was 4.1 compared to 3.0 for the same
period for the previous year.
Cash used in investing activities was approximately $173,000 in the
nine months ended September 30, 2002, compared to approximately $187,000 used
for investing activities in the same period of the preceding year. Due to the
under utilized capacity within our operating facilities, the company net
acquisition of property and equipment was $14,000 less in the nine months ended
September 30, 2002, compared to the same period in the preceding year. Cash
provided by financing activities was approximately $205,000 in the nine months
ended September 30, 2002, compared to approximately $1,401,000 used in the same
period of the preceding year. The cash provided was a net draw down of
$1,000,000 on the $3,000,000 line of credit with the Bank of Scotland. The
company made all scheduled repayments on the company's long term debt during the
period.
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 3.36% until January 24, 2004. This line of credit had an outstanding balance
of approximately $1,881,000 at September 30, 2002, and $881,000 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 plus interest. The term loan had an outstanding balance of
$6,250,000 at September 30, 2002, and $7,000,000 at December 31, 2001.
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 of not less than 1.75 to 1; a ratio
of consolidated trade receivable to consolidated net borrowings of not less than
..75 to 1; and a ratio of consolidated net income before interest and income
taxes to total of consolidated interest costs of 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 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.
13
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 $360,825 at September
30, 2002 (effectively 5.5% at September 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 September 30, 2002, we were in violation of the ratio of
consolidated trade receivable to consolidated net borrowings as a result of the
line of credit draw which funded the demand note from the major stockholder.
Although the Bank of Scotland has waived this default, there can be no assurance
that defaults in this or other covenants will not occur in the future, nor can
there be any assurance that our lender will waive violations in the future. 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 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 nine months ended September 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.
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 nine months ended September 30, 2001,
included goodwill amortization of $110,000. Loss before income taxes on a pro
forma basis, assuming SFAS 142 had been adopted for the nine months ended
September 30, 2001, would have been $(1,652,000).
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.
14
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 $38,000 invested at September 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 $8,131,184 at September 30, 2002.
The company has exposure to both rising and falling interest rates. A
1/2% decrease in rates on our nine months ending investments would be
insignificant. A 1% increase in rates on our nine months ending variable rate
debt would result in a negative impact of approximately $61,000 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. dollar against the local Scottish currency, the pound,
would have negatively impacted nine months earnings by approximately $ 41,000.
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.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the company
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, our principal executive officer and principal financial
officer concluded that the company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
company (including its consolidated subsidiaries) required to be included in the
company's periodic SEC filings.
CHANGES IN INTERNAL CONTROLS
Since the date of the company's evaluation to the filing date of this
Quarterly Report, there have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
15
PART II -- OTHER INFORMATION
------- -----------------
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 J. Pardon
-----------------------------------------
BARRY J. PARDON, President
(Principal Executive Officer)
By /s/David L. Watts
-----------------------------------------
DAVID L. WATTS, Chief Financial Officer
(Principal Financial Officer)
Dated: November 14, 2002
16
CERTIFICATION
I, Barry J. Pardon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Techdyne, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Barry J. Pardon
------------------------------------------
Barry J. Pardon
President and Principal Executive Officer
17
CERTIFICATION
I, David L. Watts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Techdyne, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ David L. Watts
------------------------------------------
David L. Watts
Chief Financial Officer
18