FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
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
-------
TECHDYNE, INC.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-1709103
- -------------------------------------------- --------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2230 West 77th Street, Hialeah, Florida 33016
- --------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
(305) 556-9210
-------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
-------------------------------------------------------------------
(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 [_]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Common Stock Outstanding
Common Stock, $.01 par value -- 6,435,345 shares as of May 14, 2003
TECHDYNE, INC. AND SUBSIDIARIES
-------------------------------
INDEX
PAGE
----
PART I -- FINANCIAL INFORMATION
- ------ ---------------------
The Consolidated Statements of Operations (Unaudited) for
the three months ended March 31, 2003 and March 31, 2002 include
the accounts of the Registrant and its subsidiaries. .................... 3
Item 1. Financial Statements
- ------- --------------------
1) Consolidated Balance Sheets as of March 31, 2003 (Unaudited)
and December 31, 2002. ..................................... 3-4
2) Consolidated Statements of Operations for the three months
ended March 31, 2003 and March 31, 2002. (Unaudited)........ 5
3) Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and March 31, 2002. (Unaudited)........ 6
4) Notes to Consolidated Financial Statements as of
March 31, 2003. (Unaudited)................................. 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations....................................... 12
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 16
- ------- ----------------------------------------------------------
Item 4. Controls and Procedures......................................... 17
- ------- -----------------------
PART II -- OTHER INFORMATION............................................. 18
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K................................ 18
- ------- --------------------------------
Signatures...................................................... 18
----------
Certifications of Chief Executive Officer and
----------------------------------------------
Chief Financial Officer......................................... 19-20
-----------------------
2
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002(a)
---------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,889,124 $ 1,536,965
Accounts receivable, less allowances of $244,000 at March 31 and December 31 4,169,333 4,473,938
Amounts receivable from major stockholder, net 1,849,591 1,944,669
Inventories, less allowances for obsolescence of $1,023,000 at March 31
and $1,115,000 at December 31 7,331,111 7,431,382
Prepaid expenses and other current assets 801,880 802,037
--------------------------------
Total current assets 16,041,039 16,188,991
--------------------------------
Property and equipment (Note 6):
Land and improvements 174,120 174,120
Buildings and building improvements 672,359 672,359
Machinery, computer and office equipment 6,448,640 6,417,050
Tools and dies 260,203 259,453
Leasehold improvements 683,684 679,183
--------------------------------
8,239,006 8,202,165
Less accumulated depreciation and amortization 5,375,932 5,186,660
--------------------------------
2,863,074 3,015,505
--------------------------------
Deferred expenses and other assets, net 7,600 8,692
--------------------------------
Goodwill 2,954,995 2,954,995
--------------------------------
$21,866,708 $22,168,183
================================
(a) Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002 filed with the Securities and Exchange
Commission in March 31, 2003.
CONTINUED ON FOLLOWING PAGE
3
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
March 31, December 31,
2003 2002(a)
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
Current liabilities:
Line of credit $ 1,500,000 $ 1,500,000
Accounts payable 2,026,150 2,188,700
Accrued expenses 886,069 889,356
Accrued income taxes 485,990 519,617
Current portion of long-term debt 1,061,020 1,073,429
------------------------------
Total current liabilities 5,959,229 6,171,102
Long-term debt 5,028,756 5,314,753
Deferred income taxes 310,800 310,800
------------------------------
Commitments and contingencies
Total liabilities 11,298,785 11,796,655
------------------------------
Stockholders' equity:
Common stock, $.01 par value, authorized 10,000,000 shares; issued and
outstanding 6,435,345 and 6,556,990 shares at March 31 and December 31;
respectively 64,354 65,570
Capital in excess of par value 11,386,386 11,592,995
Accumulated deficit (658,468) (854,863)
Accumulated other comprehensive loss (224,349) (224,349)
Notes receivable from options exercised -- (207,825)
------------------------------
Total stockholders' equity 10,567,923 10,371,528
------------------------------
$ 21,866,708 $ 22,168,183
==============================
(a) Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002 filed with the Securities and Exchange Commission
in March 31, 2003.
See notes to consolidated condensed financial statements.
4
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
------------------------
2003 2002
------------------------
Revenues:
Sales $7,376,492 $7,429,912
Interest and other income 16,683 22,907
------------------------
7,393,175 7,452,819
------------------------
Cost and expenses:
Cost of goods sold 6,317,432 6,427,176
Selling, general and administrative expenses 685,339 713,570
Interest expense 60,010 70,679
------------------------
7,062,781 7,211,425
------------------------
Income before income taxes 330,394 241,394
Income tax provision 134,000 --
------------------------
Net income $ 196,394 $ 241,394
========================
Earnings per share:
Basic $ 0.03 $ 0.04
========================
Diluted $ 0.03 $ 0.04
========================
See notes to consolidated condensed financial statements
5
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-----------------------------
2003 2002
-----------------------------
Operating activities:
Net income $ 196,394 $ 241,394
Adjustments to reconcile net income to net cash
privided by operating activities:
Depreciation 175,213 212,385
Amortization 26,780 26,018
Deferred expenses and other assets 1,092 (25,048)
Provision for inventory obsolescence 53,109 59,086
Changes relating to operating activities from:
Accounts receivable 304,605 239,821
Inventories 47,162 (97,963)
Prepaid expenses and other current assets 157 841
Accounts payable (162,550) (369,658)
Accrued expenses (3,287) 27,061
Income taxes payable (33,627) --
---------------------------
Net cash provided by operating activities 605,048 313,937
---------------------------
Investing activities:
Additions to property and equipment, net of minor disposals (49,561) (56,853)
---------------------------
Net cash used in investing activities (49,561) (56,853)
---------------------------
Financing activities:
Payments on long-term bank borrowings (298,406) (278,110)
Receivable due from major shareholder, net borrowings (payments) 95,078 (410,690)
---------------------------
Net cash (used in) provided by financing activities (203,328) (688,800)
Effect of exchange rate fluctuations on cash -- 2,526
---------------------------
Increase (decrease) in cash and cash equivalents 352,159 (429,190)
Cash and cash equivalents at beginning of period 1,536,965 1,021,113
---------------------------
Cash and cash equivalents at end of period $ 1,889,124 $ 591,923
===========================
Supplemental disclosure of cash flow information:
Interest paid in cash $ 62,827 $ 77,821
===========================
See notes to consolidated condensed financial statements
6
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Techdyne,
Inc. ("Techdyne") and its subsidiaries, including Lytton Incorporated
("Lytton"), Techdyne (Europe) Limited ("Techdyne (Europe)"), and Techdyne
(Livingston) Limited which is a subsidiary of Techdyne (Europe), 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 Group Limited ("Simclar"), which initially purchased a
71.3% interest of the company's former parent, Medicore, Inc. ("Medicore") on
June 27, 2001. See Note 6.
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.
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:
March 31, December 31,
2003 2002
--------------------------
Finished goods $ 905,647 $ 703,754
Work in process 1,279,014 1,359,595
Raw materials and supplies 5,146,450 5,368,033
------------------------
$7,331,111 $7,431,382
========================
LONG-LIVED ASSET IMPAIRMENT
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
long-lived assets to be held and used are reviewed for impairment whenever
events or circumstances indicate that the carrying amount may not be
recoverable. When required, impairment losses on assets to be held and used are
recognized based on the fair value of the asset. The fair value of these assets
is determined based upon estimates of future cash flows, market value of similar
assets, if available, or independent appraisals, if required. In analyzing the
fair value and recoverability using future cash flows, we make projections based
on a number of assumptions and estimates of growth rates, future economic
conditions, assignment of discount rates and estimates of terminal values. An
impairment loss is recognized if the carrying amount of the long-lived
7
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
asset is not recoverable from its undiscounted cash flows. The measurement of
impairment loss is the difference between the carrying amount and fair value of
the asset. Long-lived assets to be disposed of and/or held for sale are reported
at the lower of carrying amount or fair value less cost to sell. We determine
the fair value of these assets in the same manner as described for assets held
and used. See Note 4.
REVENUE RECOGNITION
Revenue is recognized upon delivery of a product based upon a
customer's order where the selling price is fixed and the ability to collect is
reasonably assured.
EARNINGS PER SHARE
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants using the treasury stock method and average market price. No
potentially dilutive securities were included in the diluted earnings per share
computation for the three months ended March 31, 2003 or for the same period 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
March 31,
2003 2002
------------------------------
Net income - numerator basic computation $ 196,395 $ 241,934
Weighted average shares - denominator basic computation 6,509,684 6,556,990
==============================
Earnings per share:
Basic $ 0.03 $ 0.04
==============================
Diluted $ 0.03 $ 0.04
==============================
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.
8
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Below is a detail of comprehensive income for the three months ended
March 31, 2003 and 2002:
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
Net income $196,395 $241,394
Foreign currency translation -- 2,526
--------------------
Comprehensive income $196,395 $243,920
====================
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the company adopted the provisions of
Statement of Financial Accounting Standards No. 145, ("SFAS No. 145") which
updates and clarifies existing accounting pronouncements related to reporting
gains and losses from the extinguishment of debt and certain lease modifications
that have economic effects similar to sale-leaseback transactions. The adoption
of SFAS No. 145 did not have any material impact on the company's financial
position or results of operations.
Effective January 1, 2003, the company adopted the provisions of SFAS,
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF
Issue 94-3 was recognized at the date of an entity's commitment to an exit
plan..
Effective January 1, 2003, the company adopted the provisions of the
FASB issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 requires that a guarantor must recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
that it has undertaken in issuing a guarantee. FIN No. 45 also addresses the
disclosure requirements that a guarantor must include in its financial
statements for guarantees issued. The adoption of FIN No. 45 did not have any
material impact on the company's financial position or results of operations.
In December 2002, the FASB issued SFAS, No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS
Statement No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the prior disclosure guidance and requires prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The provisions of SFAS No. 148 are generally effective for
fiscal years ending after December 15, 2002. At this time, the company does not
plan to adopt the accounting provisions of SFAS No. 123 and will continue to
account for stock options in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees".
9
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities" (an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements"), which becomes effective for the company in
June 2003. FIN No. 46 provides consolidation guidance for certain variable
interest entities ("VIE") in which equity investors of the VIE do not have the
characteristics of a controlling interest or do not have sufficient equity at
risk for the VIE to finance its activities independently. FIN No. 46 requires
each enterprise involved with a special purpose entity to determine whether it
provides financial support to the special purpose entity through a variable
interest. Variable interests may arise from financial instruments, service
contracts, minority ownership interests or other arrangements. If an entity
holds a majority of the variable interests, or a significant variable interest
that is considerably more than any other party's variable interest, that entity
would be the primary beneficiary and would be required to include the assets,
liabilities and results of operations of the special purpose entity in its
consolidated financial statements. The company does not expect the adoption of
FIN 46 to have a material impact on its financial position or results of
operations.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months ended March 31, 2003 and
2002, 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
months ended March 31, 2003 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 2003.
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, 2002.
NOTE 3--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 during 2003.
NOTE 4--NOTES RECEIVABLE FROM OPTIONS EXERCISED
On February 27, 1995 the company granted non-qualified stock options,
to directors of Techdyne and its subsidiary for 142,500 shares exercisable at
$1.75 per share for five years. In April 1995, the company granted a
non-qualified stock option for 10,000 shares, which vested immediately, to its
general counsel at the same price and terms as the directors' options. On
February 25, 2000, 145,000 of these options were exercised. The company received
cash payment of the par value and the balance in three-year promissory notes
totaling $207,825 presented in the stockholders' equity section of the balance
sheet, with interest at 6.19%. The notes, which were due in February 2003, were
not repaid and, as a result, the notes as well as the related balance sheet
entries for common stock and capital in excess of par value were written off in
the first quarter of 2003. The common shares issued upon the exercise of these
options will be cancelled.
10
TECHDYNE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 5--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.
The company had $134,000 domestic income tax expense for the three
months ended March 31, 2003, and no domestic income tax expense for the three
months ended March 31, 2002 due to the reversal of a tax allowance reserve
established in 2001 on its available tax loss carryforwards.
Income tax payments amounted to $ 254,000 for the three months ended
March 31, 2003, and $ 0 for the same period of the preceding year.
NOTE 6--CESSATION OF SCOTLAND MANUFACTURING OPERATIONS AND RELATED SUBSEQUENT
EVENT
As a result of continuing operating losses, in 2001 the company decided
to discontinue the manufacturing operations of its European subsidiary, Techdyne
(Europe).
With the cessation of the sales and manufacturing activities, 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 March 31, 2003, is
the Scottish land and building, which are considered assets held for sale, at an
estimated fair value of $654,000 based upon market information obtained from an
unrelated third party.
On April 2, 2003 the Techdyne (Europe) building located in Livingston,
Scotland was destroyed by a fire started by vandalism. Management is working
with the property insurance carrier to settle this claim as soon as possible.
Management's opinion is that the claim will be settled with the insurance
carrier without any financial loss resulting from this event.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
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 first quarter of 2003. Our 2003 operating results to date show signs
that these on going changes continue to have 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 level of our production schedules and our facilities utilization, we will
make commitments regarding the level of new 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.
12
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.
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 decreased approximately $60,000 for the three
months ended March 31, 2003, compared to the same period of the preceding year.
Domestic sales increased by $180,000 (2%) while European sales decreased by
$233,000 for the three months ended March 31, 2003 as a result of the decision
to exit the market in 2002, compared to the same period of the preceding year.
Sales have been affected by the general economic war-related hesitation during
the quarter ended March 31, 2003.
Interest and other income decreased by approximately $6,000 for the
three months ended March 31, 2003, compared to the same period of the preceding
year. This decrease is largely attributable to continual decline in the LIBOR
interest rate.
Approximately 20% of our consolidated sales for the three months ended
March 31, 2003, were made to one customer, Illinois Tool Works.
13
Cost of goods sold as a percentage of sales amounted to 86% for the
three months ended March 31, 2003, and 87% for the same period of the preceding
year. The improvement in the gross margin is primarily due to increased
utilization of our domestic facilities.
Selling, general and administrative expenses decreased by approximately
$28,000 for the three months ended March 31, 2003, compared to the same period
of the preceding year, reflecting the overall result of management's various
cost reduction programs.
Interest expense decreased approximately $10,000 for the three months
ended March 31, 2003, compared to the same period of the preceding year
reflecting lower interest rates during the 2003 period. The LIBOR was 1.33% and
1.88% at March 31, 2003 and 2002, respectively.
Income taxes increased by $134,000 for the three months ended March 31,
2003 compared to the same period of 2002. This increase resulted from the
company utilizing the benefits of tax loss carryforwards benefits from prior
years in the 2002 period.
SUBSEQUENT EVENT
On April 2, 2003, the Techdyne (Europe) building, with a fair value of
$654,000, located in Livingston, Scotland was destroyed by a fire started by
vandalism. Management is working with the property insurance carrier to settle
this claim as soon as possible. Management's opinion is that the claim will be
settled with the insurance carrier without any financial loss resulting from
this event.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance at March 31, 2003, was
approximately $1,889,000 compared to approximately $1,537,000 at December 31,
2002. Net cash provided by operating activities was approximately $605,000 in
the three months ended March 31, 2003, compared to approximately $314,000
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 and the reduction in trade accounts receivables
outstanding.
At March 31, 2003, our average day's sales outstanding for the quarter
was 51 days as compared to 47 days at March 31, 2002. The increase of our
average day's sales outstanding is primarily the result of an increase in cable
and harness sales activities during the quarter. Average inventory turnover was
3.5 and 3.1 times for the three months ended March 31, 2003 and 2002,
respectively. The increase in inventory turnover is due to management's
inventory reduction programs and the increase in the domestic sales activities
during the period.
Cash used in investing activities was approximately $50,000 in the
three months ended March 31, 2003, compared to approximately $57,000 used for
investing activities in the same period of the preceding year. Cash used in
investing activities was primarily for capital expenditures. Cash used in
financing activities was approximately $203,000 in the three months ended March
31, 2003, compared to approximately $689,000 used in the same period of the
preceding year. Cash used in financing activities was primarily for debt
reduction. The company made all scheduled repayments on its 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. The financing included a $3,000,000 line of credit, expiring July
19, 2003, with an interest rate at LIBOR 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 2.85% until April 24, 2003, after this date the rate is 2.83% until
July 24, 2003. This line of credit had an outstanding balance of $1,500,000 at
March 31, 2003. 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 due in January, April, July and October of each
year, plus interest. The term loan had an outstanding balance of $5,750,000 at
March 31, 2003.
14
The credit facilities are collateralized by all the assets of the
company, excluding Techdyne (Europe), and require affirmative and negative
covenants be maintained by the company. Certain of the affirmative covenants
require maintenance of a consolidated adjusted net worth greater than
$10,000,000 after December 31, 2002, $10,500,000 after June 30, 2003 and
$11,000,000 after September 30, 2003; a ratio of consolidated current assets to
consolidated net borrowing not less than 1.75 to 1; a ratio of consolidated
trade receivables 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, 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,
guaranteeing, 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, any
material change in any of our business objectives, purposes, operations and tax
residence or any other circumstances or events which will have a material
adverse effect as defined by the agreements.
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 ($13,788) due in January, April, July and October of each year,
with an interest rate of Bank of Scotland base rate plus 1.5% (effectively 5.4%
at December 31, 2002). This term loan had an outstanding balance of $333,909 at
March 31, 2003.
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 March 31, 2003, 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.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet financing arrangements with related or
unrelated parties and no unconsolidated subsidiaries.
NEW PRONOUNCEMENTS
Effective January 1, 2003, the company adopted the provisions of
Statement of Financial Accounting Standards No. 145, ("SFAS No. 145") which
updates and clarifies existing accounting pronouncements related to reporting
gains and losses from the extinguishment of debt and certain lease modifications
that have economic effects similar to sale-leaseback transactions. The adoption
of SFAS No. 145 did not have any material impact on the company's financial
position or results of operations.
15
Effective January 1, 2003, the company adopted the provisions of SFAS,
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
Effective January 1, 2003, the company adopted the provisions of the
FASB issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 requires that a guarantor must recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
that it has undertaken in issuing a guarantee. FIN No. 45 also addresses the
disclosure requirements that a guarantor must include in its financial
statements for guarantees issued. The adoption of FIN No. 45 did not have any
material impact on the company's financial position or results of operations.
In December 2002, the FASB issued SFAS, No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS
Statement No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the prior disclosure guidance and requires prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The provisions of SFAS No. 148 are generally effective for
fiscal years ending after December 15, 2002. At this time, the company does not
plan to adopt the accounting provisions of SFAS No. 123 and will continue to
account for stock options in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees".
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities" (an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements"), which becomes effective for the company in
June 2003. FIN No. 46 provides consolidation guidance for certain variable
interest entities ("VIE") in which equity investors of the VIE do not have the
characteristics of a controlling interest or do not have sufficient equity at
risk for the VIE to finance its activities independently. FIN No. 46 requires
each enterprise involved with a special purpose entity to determine whether it
provides financial support to the special purpose entity through a variable
interest. Variable interests may arise from financial instruments, service
contracts, minority ownership interests or other arrangements. If an entity
holds a majority of the variable interests, or a significant variable interest
that is considerably more than any other party's variable interest, that entity
would be the primary beneficiary and would be required to include the assets,
liabilities and results of operations of the special purpose entity in its
consolidated financial statements. The company does not expect the adoption of
FIN 46 to have a material impact on its financial position or results of
operations.
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.
16
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 March 31, 2003.
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 $7,250,000 at March 31, 2003.
The company has exposure to both rising and falling interest rates. A
1/2% decrease in rates on our three months ending investments would be
insignificant. A 1% increase in rates on our three months ending variable rate
debt would result in a negative impact of approximately $18,000 on our results
of operations.
Our exposures to market risks are impacted by changes in the 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 an insignificant impact on our three
months earnings. 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 Chief Executive Officer and Chief 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, the company's Chief Executive Officer and
Chief Financial Officer concluded that our 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.
17
PART II -- OTHER INFORMATION
----------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
Description
Exhibit 99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350.
Exhibit 99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350.
(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
By /s/David L. Watts
------------------------------------
DAVID L. WATTS, Chief Financial Officer
Dated: May 15, 2003
18
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: May 15, 2003
/s/ Barry J. Pardon
-------------------------------------
Barry J. Pardon
President and Chief Executive Officer
19
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: May 15, 2003
/s/ David L. Watts
-------------------------------------
David L. Watts
Chief Financial Officer
20