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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
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 W. 77TH STREET, HIALEAH, FLORIDA 33016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (305) 556-9210
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Securities registered under Section12(b) of the Act:
None
Securities registered under Section12(g) of the Act:
Title of each class
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Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the closing price at which the stock
was sold on March 20, 2000 was approximately $5,703,000.
As of March 20, 2000 the Company had 6,596,990 outstanding shares of
its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Information
Statement in connection with the Registrant's Annual Meeting of Shareholders
anticipated to be held on May 24, 2000.
Registrant's Registration Statement on Form SB-2 dated July 26, 1995,
as amended August 21, 1995 and September 1, 1995, Registration No. 33-94998-A
Part II, Item 27, Exhibits.
Registrant's Registration Statement on Form S-3 dated December 11,
1996, Registration No. 333-15371, Part II, Item 16, Exhibits.
Annual Report, Form 10-K, for the years ended December 31, 1995 and
1997, Part IV, Exhibits.
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for
the years ended December 31, 1994 and 1998, Part IV, Exhibits.
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TECHDYNE, INC.
Index to Annual Report on Form 10-K
Year Ended December 31, 1999
Page
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PART I
Item 1. Business...........................................................1
Item 2. Properties........................................................12
Item 3. Legal Proceedings.................................................13
Item 4. Submission of Matters to a Vote of Security Holders...............13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters......................................14
Item 6. Selected Financial Data...........................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.........23
Item 8. Financial Statements and Supplementary Data.......................23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................23
PART III
Item 10. Directors and Executive Officers of the Registrant................24
Item 11. Executive Compensation............................................25
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................................25
Item 13. Certain Relationships and Related Transactions....................25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...26
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
the 1934. The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors regarding forward-looking statements. Certain of the
forward-looking statements include management's expectations, intentions and
beliefs with respect to the growth of Techdyne, Inc., the nature of the
electronics industry in which it is engaged as a manufacturer, Techdyne, Inc.'s
business strategies and plans for future operations, needs for capital
expenditures, capital resources, liquidity and operating results, and similar
expressions concerning matters that are not historical facts. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such forward-looking statements are subject to risks and
uncertainties that could cause actual results to materially differ from those
expressed in the statements, including general economic, market and business
conditions, opportunities taken or abandoned, competition and other factors
discussed periodically in Techdyne, Inc.'s reports and filings. Many of the
foregoing factors are beyond the control of Techdyne, Inc.
All forward-looking statements included in this document are based on
information available to Techdyne, Inc. on the date hereof, and it assumes no
obligation to update any such forward-looking statement. The following
cautionary statements are being made pursuant to the provisions of the Reform
Act with the intention of Techdyne, Inc. obtaining the benefits of the safe
harbor provisions of the Reform Act. Among the factors that could cause actual
results to differ materially are the factors detailed in the risks discussed in
the "Risk Factors" section included in Techdyne, Inc.'s Registration Statements,
as filed with the Securities and Exchange Commission, Form SB-2 (effective
September 13, 1995) and Form S-3, effective December 11, 1996. Accordingly,
readers are cautioned not to place too much reliance on such forward-looking
statements.
ITEM 1. BUSINESS
Techdyne, Inc. is an international contract manufacturer of electronic
and electro-mechanical products, primarily manufactured to customer
specifications and designed for original equipment manufacturers ("OEMs") and
distributors in the data processing, telecommunications, instrumentation and
food preparation equipment industries. Custom-designed products primarily
include complex printed circuit boards ("PCBs"), conventional and molded cables
and wire harnesses, and electro-mechanical assemblies. In addition, the Company
provides OEMs with value-added, turnkey contract manufacturing services and
total systems assembly and integration. The Company also delivers manufacturing
and test engineering services and materials management, with flexible and
service-oriented manufacturing and assembly services for its customers'
high-tech and rapidly changing products.
Approximately 92% of sales are domestic, a substantial amount generated
by our domestic wholly-owned subsidiary, Lytton Incorporated, and 8% are
effected by our wholly owned subsidiary, Techdyne (Europe) Limited in the
European markets and to a limited extent in the Middle East. There have been
significant reductions in sales for that facility. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company has another European subsidiary, Techdyne Livingston Limited. Unless
otherwise noted, Techdyne and our subsidiaries shall be referred to collectively
as "Techdyne" or the "Company."
Included among our customers are several Fortune 500 companies.
Services and products are marketed through an in-house sales/marketing staff of
19 persons, in conjunction with approximately 3 independent manufacturer's sales
representative firms with approximately 10 sales representatives.
The Company was incorporated in Florida in 1976, acquired by Medicore,
Inc. ("Medicore" or our "parent") in 1982, and became a public company in 1985.
Medicore, a Nasdaq SmallCap Market company, owns approximately 71% of our common
stock. See "Security Ownership of Certain Beneficial Owners and Management" and
"Certain Relations and Related Transactions" of our Information Statement
relating to the Annual Meeting of Shareholders anticipated to be held on
Wednesday, May 24, 2000, which is incorporated herein by reference.
The Company's executive offices are located at 2230 West 77th Street,
Hialeah, Florida 33016. The Company's telephone number is (305) 556-9210 and its
Internet address is www.tcdn.com.
ELECTRONIC MANUFACTURING INDUSTRY
In recent years, the electronic contract manufacturing industry has
exhibited significant growth. We believe this growth has resulted from a vastly
increased number of OEMs adopting an external manufacturing philosophy coupled
with the growth of the electronics industry. This philosophy is motivated by the
increased capital necessary to acquire modern, highly automated manufacturing
equipment for the OEMs to access leading manufacturing technologies and
capabilities, to reduce inventory, and to realize the cost benefits of the
improved purchasing power, labor efficiency and overall cost benefits of
contract manufacturers. We believe that many OEMs view contract manufacturers as
an integral part of their manufacturing strategy. Using outsourcing for their
manufacturing of electronic assemblies also enables OEMs to focus on product
development, reduce working capital requirements, improve inventory management
and marketability. OEMs are looking more to contract manufacturers, like
Techdyne, to provide a broader scope of value-added services, including
manufacturing, engineering and test services. OEMs rely on contract
manufacturers not only for partial component assemblies but complete turnkey
manufacturing of entire finished products. We assist our customers from initial
design and engineering through materials procurement, to manufacturing of the
complete product and testing. Greater efficiencies are obtained by OEMs through
"concurrent engineering" which gives contract manufacturers greater impact in
product design, component selection, production methods and the preparation of
assembly drawings and test schematics. This also gives the customer the ability
to draw upon our manufacturing expertise at the outset and minimize
manufacturing bottlenecks.
Another factor which leads OEMs to utilize contract manufacturers is
reduced time-to-market. Due to the intense competition in the electronics
industry, OEMs are faced with increasingly shorter product life-cycles which
pressures OEMs to reduce time constraints in bringing a product to market. This
can be accomplished by using a contract manufacturer's established manufacturing
expertise with its sophisticated, technically advanced and automated
manufacturing processes. This, coupled with the elements discussed above, such
as reduced production costs through economies of scale in materials procurement,
improved inventory management, access to our manufacturing technology,
engineering, testing and related expertise, motivates OEMs to work with
electronic contract manufacturers.
BUSINESS STRATEGY
In response to industry trends for OEMs to rely more on contract
manufacturers in order to reduce capital investment, and focus on product
development and marketing, our objective is to become a stronger competitive
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force and provider of electronic contract manufacturing services for OEM
customers, particularly in view of constantly changing and improving technology
and therefore, shorter product life cycles. We continue to seek to develop
strong, long-term alliances with major-growth OEMs of complex, market leading
products. We believe that creating and maintaining long-term relationships with
customers requires providing high quality, cost-effective manufacturing services
marked by a high degree of customer responsiveness and flexibility.
We try to concentrate on high value-added products and services for
leading OEMs. We focus on leading manufacturers of advanced electronic products
that generally require custom-designed, more complex interconnect products and
short lead-time manufacturing services.
We continue to build on our integrated manufacturing capabilities,
final system assemblies and testing. In addition to PCBs, our custom cable
assembly capabilities provide us with further opportunities to leverage our
vertical integration and to provide greater value added services and be more
competitive. In addition, vertical integration provides us with greater control
over quality, delivery and cost.
We believe we develop closer and more economically beneficial
relationships with our customers through our geographically diverse
manufacturing and assembly operations, presently located in Florida, Texas,
Massachusetts, Ohio and Scotland. Our diverse locations also help satisfy costs,
timely deliveries and local market requirements of our customers. We continue to
pursue expansion in different markets to better serve existing customers and to
obtain additional new customers. In 1997, we acquired Lytton, a private Ohio
company engaged in the manufacture, assembly and sale of complex PCBs and other
electronic products. The Lytton acquisition complemented our operations and
continued our business strategy by expanding our customer base, broadening our
product line, entering a new geographic area, enhancing our manufacturing
capabilities, and enabling us to better serve the combined existing customer
base with enhanced product choices with opportunities to further attract new
customers. We continue to seek acquisitions of contract manufacturing businesses
complimentary to our operations.
We compete with much larger electronic manufacturing entities for such
expansion opportunities. Further, any such transactions may result in
potentially dilutive issuance of equity securities, the incurrence of debt and
amortization expenses related to goodwill and other intangible assets, and other
costs and expenses, all of which could materially adversely affect our financial
results. Such transactions also involve numerous business risks, including
difficulties in successfully integrating acquired operations, technologies and
products or formalizing anticipated synergies, and the diversion of management's
attention from other business concerns. In the event that any such transaction
does occur, there can be no assurance as to the beneficial effect on our
business and financial results.
To further satisfy customer needs, we develop long-term customer
relationships by using our state-of-the-art technology to provide timely and
quick-turnaround manufacturing and comprehensive support for materials purchases
and inventory control. Through our EDI (electronic data interchange), the
customer is able to convey its inventory and product needs on a weekly basis
based on a rolling quantity forecast.
More emphasis is placed on value-added turnkey business for the
manufacture of complete finished assemblies. This is accomplished with extended
technology, continuous improvement of our processes, and our early involvement
in the design process using our computer-aided design ("CAD") system.
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We are improving our material acquisition process in an attempt to
better our purchasing power by identifying materials used across customer lines.
In 1998, we started utilizing our Visual Manufacturing software and updated our
enterprise resource planning ("ERP") system. The Visual Manufacturing software
solved the "Year 2000" issues for us. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." We believe these
efforts have provided us with better leverage in material pricing and permit us
to be more competitive when bidding for manufacturing work and turnkey business.
We are also better able to track actual costs against customer quotes, which
allows us to control costs and more accurately manage our operating margins.
PRODUCTS AND SERVICES
Approximately 850 products, including complete turnkey finished
products, sub-assemblies, molded and non-molded cable assemblies, wire
harnesses, PCBs, injection molded and electronic assembly products, are
manufactured by the Company for over 100 OEM customers.
PRINTED CIRCUIT BOARDS
PCB assemblies are electronic assemblies consisting of a basic printed
circuit laminate with electronic components including diodes, resistors,
capacitors and transistors, inserted and wave soldered. PCBs may be used either
internally within the customer's products or in peripheral devices. The variety
of PCBs produced by the Company include pin-through-hole ("PTH") assemblies, low
and medium volume surface mount technology ("SMT") assemblies, and mixed
technology PCBs, which include multilayer PCBs.
PTH assembly involves inserting electronic components with pins or
leads through pre-drilled holes in a PCB and soldering the pins to the
electrical circuit.
In SMT production, electronic components are attached and soldered
directly onto the surface of a circuit board rather than inserted through holes.
SMT components are smaller, can be spaced more closely together and, unlike PTH
components, can be placed on both sides of a PCB. This allows for product
miniaturization, while enhancing the electronic properties of the circuit. SMT
manufacturing requires substantial capital investment in expensive, automated
production equipment which requires high usage. We have computerized testing for
substantially all of our PCBs to verify that components have been installed
properly and meet certain functional standards, that the electrical circuits
have been properly completed, and that the PCB assembly will perform its
intended functions.
In 1997, we acquired Lytton, whose Ohio operations, with six automated
lines, are more focused on PCB manufacturing, primarily for the food preparation
equipment industry. We also established a 5,500 square foot manufacturing
facility in Massachusetts in 1997. These expansions resulted in PCB
manufacturing to have yielded approximately 55% and 48% of our sales revenues in
1999 and 1998, respectively.
CABLE AND HARNESS ASSEMBLIES
A cable is an assembly of electrical conductors insulated from each
other and twisted around a central core and jacketed. Cables may be molded or
non-molded.
Techdyne offers a wide range of custom manufactured cable and harness
assemblies for molded and mechanical applications. These assemblies include
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multiconductor, ribbon, co-axial cable assemblies, and discrete wire harness
assemblies. We use advanced manufacturing processes, in-line inspection and
computer testing. We test all of our cable and harness assemblies with
computerized automated test equipment.
We maintain a large assortment of standard tooling for D-Subminiature
("D-Subs"), DIN connectors and phono connectors. D-Subs are connectors which are
over-molded with the imprint of the customer's name and part number. DIN
connectors are circular connectors with from two to four pairs of wires used for
computer keyboards. Today's computers are multi-media, providing audio as well
as video, such as the CD-ROM.
Flat ribbon cable or ribbon cable assemblies are cables with wires
(conductors) on the same plane with connectors at each end. Flat ribbon cables
are used in computer assemblies and instrumentation.
Discrete cable assemblies are wires with contacts and connectors.
Harnesses are prefabricated wiring with insulation and terminals ready to be
attached to connectors. Our cable sales comprised approximately 35% and 42% of
total sales revenue for 1999 and 1998, respectively.
CONTRACT MANUFACTURING
Contract manufacturing involves the manufacture of complete finished
assemblies with all sheet metal, power supplies, fans, PCBs as well as complete
sub-assemblies for integration into an OEM's finished products, such as speaker
and lock-key assemblies and diode assemblies that consist of wire, connectors
and diodes that are over-molded, packaged and bar coded for distribution. These
products can be totally designed and manufactured by the Company through our CAD
system, engineering and supply procurement. Techdyne develops manufacturing
processes and tooling and test sequences for new products of our customers. We
provide design and engineering services in the early stages of product
development thereby assuring mechanical and electrical considerations are
integrated with a total system. Alternatively, the customer may provide
specifications and we will assist in the design and engineering or manufacture
to the customer's specifications. Contract manufacturing products include rack
assemblies for data processing and video editing and custom disk drive
enclosures for OEMs.
REWORKING AND REFURBISHING
Customers provide the Company with materials and sub-assemblies
acquired from other sources which the customer has determined requires modified
design or engineering changes. We redesign, rework, refurbish and repair these
materials and sub-assemblies.
Contract manufacturing, medical product sales, reworking and
refurbishing together amounted to approximately 10% of sales for each of 1999
and 1998. We believe that PCB sales and contract manufacturing will provide us
with substantial increases in revenues over the next few years.
MANUFACTURING
Components and products are custom designed and developed to fit
specific customer requirements and specifications. Techdyne attempts to develop
a "partnership" relationship with many of our customers by providing a
responsive, flexible, total manufacturing service. Such service includes
computer integrated manufacturing and engineering services, quick-turnaround
manufacturing and prototype development, materials procurement, inventory
management, developing manufacturing processes for that particular customer and
its needs, tooling and test sequences for new products from product designs
5
received from its customers or developed by Techdyne from customer requirements.
Our industrial, electrical and mechanical engineers work in close liaison with
its customers' engineering departments from inception through design,
prototypes, production and packaging. We evaluate customer designs and if
appropriate, recommend design changes to improve quality of the finished
product, reduce manufacturing costs or other necessary design modifications.
Upon completion of engineering, Techdyne produces prototype or preproduction
samples. Materials procurement includes planning, purchasing and warehousing
electronic components and materials used in the assemblies and finished
products.
Our engineering staff reviews and structures the bill of materials for
purchasing, coordinates manufacturing instructions and operations, and reviews
inspection criteria with the quality assurance department. The engineering staff
also determines any special capital equipment requirements, tooling and dies,
which must be acquired.
The Company's PCB assembly operations are geared toward advanced SMT.
Our Lytton subsidiary provides us with increased PCB production through
state-of-the-art manufacturing equipment and processes and a highly trained and
experienced engineering and manufacturing workforce. The manufacturing of PCBs
involves several steps including the attachment of various electronic
components, such as integrated circuits, capacitors, microprocessors and
resistors.
We offer a wide range of custom manufactured cables and harnesses for
molded and mechanical applications. We use advanced manufacturing processes,
in-line inspection and testing to focus on process efficiencies and quality. The
cable and harness assembly process is accomplished with automated and
semi-automated preparation and insertion equipment and manual assembly
techniques.
We maintain a large assortment of standard tooling. New manufacturing
jobs may require new tooling and dies, but most presses and related equipment
are standard.
We maintain modern state-of-the-art equipment at all of our facilities
for crimping, stripping, terminating, soldering, sonic welding and sonic
cleaning which permits us to produce conventional and complex molded cables.
Finished turnkey assemblies include the entire manufacturing process
from design and engineering to purchasing raw materials, manufacturing and
assembly of the component parts, testing, packaging and delivery of the finished
product to the customer. By contracting assembly production, OEMs are able to
keep pace with continuous and complex technological changes and improvements by
making rapid modifications to their products without costly retooling and
without any extensive capital investments for new or altered equipment.
The European manufacturing facility, located in Livingston, Scotland,
focuses mainly on the electronics industry producing primarily wire harnesses,
electro-mechanical assemblies, and molded cables, incorporating multifaceted
design and production capabilities. Significant reductions in sales of Techdyne
(Europe) have resulted in net losses for this subsidiary amounting to $577,000
for 1999 and $442,000 for 1998, and we are evaluating the future prospects for
that facility. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We also have "supplier partnerships" to meet customers' needs. This
involves the Company accomplishing the in-house manufacturing requirements of
the customer. Through EDI, the customer conveys its needs on a weekly basis
based on a rolling quarterly forecast.
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SUPPLIES AND MATERIALS MANAGEMENT
Materials used in our operations consist of metals, electronic
components such as cable, wire, resistors, capacitors, diodes, PCBs and plastic
resins. These materials are readily available from a large number of suppliers
and manufacturers. We have not experienced any significant disruptions from
shortages of materials or delivery delays from suppliers and we believe that our
present sources and the availability of our required materials are adequate. We
have a computerized system of material requirements planning, purchasing, sales
and marketing functions. We have made our materials acquisition processes more
efficient through our Visual Manufacturing software system. This new software
also satisfied our Year 2000 challenges. See "Business Strategy" above and Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company procures components from a select group of vendors which
meet our standards for timely delivery, high quality and cost effectiveness. In
order to control inventory investment and avoid material obsolescence,
components are generally ordered when we have a purchase order or commitment
from our customer for the completed assembly. Techdyne uses ERP management
technologies and manages our material pipelines and vendor base to allow our
customers to increase or decrease volume requirements within established
frameworks.
We have improved our overall efficiency of manufacturing, particularly
in the area of inventory management, including purchasing which is geared more
closely to current needs resulting in reduced obsolescence problems. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
QUALITY AND PROCESS CONTROL
Our Florida and Texas facilities received from Underwriter's
Laboratories, an independent quality assurance organization, the ISO 9002
quality assurance designation, which is the international standard of quality
with respect to all systems of operations, including, among others, purchasing,
engineering, manufacturing, sales, inventory control and quality. Techdyne
(Europe) has a BS 5750 quality assurance designation from British Standards
Institute. Lytton holds its ISO 9002 quality designation from Eagle
Registrations, Inc. These quality assurance designations are only provided to
those manufacturers which exhibit stringent quality and process control
assurances after extensive evaluation and auditing by these independent quality
assurance organizations.
Quality control is essential to the Company's operations since
customers demand strict compliance with design and product specifications,
low-cost and high quality production are primary competitive standards and are
vital to our services. See "Competition" below. Product components, assemblies
and sub-assemblies manufactured by the Company are thoroughly inspected visually
and electronically to assure all components are made to strict specifications
and are functional and safe. We believe we are one of the manufacturers of
choice for the major Fortune 500 companies, certain of which are our customers,
based upon our excellent record of quality production.
Strict process controls are also standard operating procedure. Process
controls deal with the controls relating to the entire manufacturing process. We
strive for a CPK of two, i.e., twice as critical as customer tolerances.
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During the course of initial qualification and production cycles, new
and existing customers inspect the Company and our operations. Over the years
our product and manufacturing quality have received excellent ratings.
Total quality, timely delivery and customer satisfaction is our
philosophy. High levels of quality in every area of Techdyne's operations are
essential. Quality standards are established for each operation, performance
tracked against those standards, and identifying work flow and implementing
necessary changes to deliver higher quality levels. We maintain regular contact
with our customers to assure adequate information exchange and other activities
necessary to assure customer satisfaction and to support our high level of
quality and on-time delivery. Any adverse change in our excellent quality and
process controls could adversely affect our relationships with customers and
ultimately our revenues and profitability.
CUSTOMERS
Techdyne serves a wide range of businesses from emerging growth
companies to multinational OEMs involved in a variety of markets including
computer networking systems, computer workstations, telecommunications, mass
data storage systems, instrumentation and food preparation equipment industries.
Our revenue is distributed over the following industry segments:
Year Ended December 31,
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1999 1998 1997
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Data processing 22% 29% 40%
Telecommunications 22% 20% 7%
Instrumentation 23% 17% 16%
Food preparation equipment (1) 17% 18% 19%
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(1) Accomplished through Lytton, acquired in July, 1997.
We seek to serve a sufficiently large number of customers to avoid
dependence on any one customer or industry. Nevertheless, historically a
substantial percentage of our net sales have been to multiple locations of a
small number of customers. Significant reductions or delays in sales to any of
those major customers would have a material adverse effect on our results of
operations. In the past, certain customers have terminated their manufacturing
relationship with us, or otherwise significantly reduced their product orders.
There can be no insurance that any major customer may not terminate or otherwise
significantly reduce or delay manufacturing orders, any of which such
terminations or changes in manufacturing orders could have a material adverse
effect on our results of operations. We are dependent upon the continued growth,
viability and financial stability of our customers, which are in turn
substantially dependent on the growth of the personal computer, computer
peripherals, the communications, instrumentation, data processing and food
preparation equipment industries. Most of these industries have been
characterized by rapid technological change, short product life cycles, pricing
and margin pressures. In addition, many of our customers in these industries are
affected by general economic conditions. The factors affecting these industries
in general, and/or our customers in particular, could have a material adverse
effect on our results of operations. In addition, we generate significant
accounts receivable in connection with providing manufacturing services to our
customers. If one or more of our customers were to become insolvent or otherwise
were unable to pay for the manufacturing services provided by us, our operating
results and financial condition would be adversely affected. In 1999, 28% of our
sales were made to numerous locations of two major customers. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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The table below sets forth the respective portion of sales for the
applicable period attributable to customers and related suppliers who accounted
for more than 10% of sales in any respective period.
Percentage of Sales
1999 1998 1997
---- ---- ----
PMI Food Equipment Group(1) 15% 18% *
International Business Machines * * 19%
EMC * * 10%
Motorola, Inc. 13% 10% *
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* less than 10% for that year
(1) PMI is a customer of Lytton acquired July 31, 1997.
Techdyne sells to approximately 100 additional other companies, which
comprise the remaining 72% of sales for 1999. Lytton focuses primarily in PCB
production, and had approximately 32% of its sales for fiscal 1999 to PMI.
MARKETING AND SALES
We continue to pursue expansion and diversification of our customer
base and we are targeting emerging OEMs in high growth industry segments. Our
principal sources of new business are the expansion in the volume and scope of
services provided to existing customers, referrals from customers and suppliers,
direct sales through our sales managers and executive staff, and through our
independent sales representatives. Sales managers, directed and supported by the
executive staff, identify and attempt to develop relationships with potential
customers who exemplify financial stability, a need for electronic and
electro-mechanical component assembly and manufacturing, anticipated unit
volume, and a history of establishing long-term relationships.
Domestic sales are generated by four regional sales managers covering
the Northeast, Southeast, West and Southwest regions of the United States. There
are also 12 in-house sales/marketing personnel, including Barry Pardon, the
President of our Company. The regional sales managers have three independent
manufacturer representative agencies who employ approximately 10 sales
representatives. Sales are also generated through catalogues, brochures and
trade shows.
The manufacturer sales representatives, primarily marketing electronic
and similar high-technology products, are retained under exclusive sales
representative agreements for specific territories and are paid on a commission
basis. The sales representatives cannot represent any other person engaged in
the business of manufacturing services similar to those of the Company, nor
represent any person who may be in competition with us. The agreements further
prohibit the sales representative from disclosing trade secrets or calling on
our customers for a period of six months to one year from termination of their
agreement.
Techdyne (Europe) has three in-house sales personnel who market its
products, primarily ribbon, harness and cable assemblies, electro-mechanical
products, and molded cable assemblies, as well as its reworked and refurbished
9
products (see "Business - Products - Reworking and Refurbishing" above) to
customers in Scotland, England, Ireland, Germany and the Middle East.
Substantially all of our sales and reorders are effected through
competitive bidding. Most sales are accomplished through purchase orders with
specific quantity, price and delivery terms. Some production, such as its
supplier partnerships, are accomplished under open purchase orders with
components released against customer requests.
BACKLOG
At December 31, 1999, our backlog of orders amounted to approximately
$14,643,000, of which approximately $8,179,000 (approximately 56%) was
represented by the orders from its Lytton operations and approximately $959,000
(approximately 7%) was represented by orders for Techdyne (Europe) operations.
Last year the backlog was approximately $11,817,000 of which approximately
$8,354,000 was derived from Lytton operations and approximately $673,000 was
represented by orders of Techdyne (Europe) operations. We believe, based on past
experience and relationships with our customers and knowledge of our
manufacturing capabilities, that most of our backlog orders are firm and should
be filled within six months. Most of the purchase orders within which the
Company performs do not provide for cancellation. Over the last several years
cancellations have been minimal and management does not believe that any
significant amount of the backlog orders will be canceled. However, based upon
relationships with its customers, we occasionally allow cancellations and
frequently rescheduling of deliveries. The variations in the size and delivery
schedules of purchase orders received by the Company may result in substantial
fluctuations in backlog from period to period. Since orders and commitments may
be rescheduled or cancelled, and customers' lead times may vary, backlog does
not necessarily reflect the timing or amount of future sales.
PATENTS AND TRADEMARKS
We do not have nor do we rely on patents or trademarks to establish or
protect our market position. Dependency is placed more on design, engineering,
manufacturing cost containment, quality and marketing skills to establish or
maintain market position.
COMPETITION
Techdyne experiences substantial competition from many areas including
divisions of large electronic and high-technology firms, as well as from
numerous smaller, specialized companies. Competitive price advantages may also
be available to competitors with less expensive off-shore operations,
particularly from the Far East. We also compete with in-house manufacturing
operations of current and potential customers. Although we have been expanding
in the Northeast, Midwest, Southeast and Southwest areas of the United States,
certain of our competitors have broader geographic coverage to serve their
customers and attract additional business. Many of such competitors are more
established in the industry and have substantially greater financial,
manufacturing and marketability resources than the Company. Increased
competition could result in lower priced components and lower profit margins,
loss of customers, any of which occurrences could have a material adverse effect
on our business, financial condition and results of operations. We may be
operating at a cost disadvantage compared to manufacturers who have greater
direct buying power with component suppliers or who have lower cost structures.
During downtimes in the electronics industry, OEMs become more price sensitive.
In the PCB area major competitors include ACT Manufacturing, Inc., Vickers
10
Electronic Systems, Diversified Systems, Inc., Epic Technologies, Inc. and
others. Major competitors in the cable and harness assembly market include Volex
Interconnect Systems, Inc., Foxconn, ACT Manufacturing, Inc., Escod Industries
and others. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We believe the primary competitive factors to be price, quality of
production, manufacturing capability, prompt customer service, timely delivery,
engineering expertise, and technical assistance to customers. We believe we
compete favorably in these areas. We also believe our competitive position is
internationally enhanced through our European manufacturing and marketing
operations through Techdyne (Europe). See "Manufacturing" and "Foreign
Operations" under "Business" above.
Due to the number and variety of competitors, reliable data relative to
our competitive position in the electronic components and assembly industry is
difficult to develop and is not known.
GOVERNMENTAL REGULATION
Our operations are subject to certain federal, state and local
regulatory requirements relating to environmental waste management and health
and safety matters. We believe that we comply with applicable regulations
pertaining to health and safety in the workplace and the use, storage, discharge
and disposal of chemicals used in its manufacturing processes. The Company
periodically generates and temporarily handles limited amounts of materials that
are considered hazardous waste under applicable law. The current costs of
compliance are not material to us. Nevertheless, no assurances can be given that
additional or modified requirements will not be imposed in the future, and if so
imposed, will not subject us to difficulties in compliance, the failure of which
could subject us to future liabilities, restriction on expansion or existing
production, or otherwise involve substantial additional expenditures. These
regulations provide for civil and criminal fines, injunctions and other
sanctions and, in certain instances, allow third parties to sue to enforce
compliance.
EMPLOYEES
We currently employ 403 full-time people domestically. Of these
approximately 300 are engaged in manufacturing, quality assurance and related
operations, 20 in material handling and procurement, 15 are employed in
marketing, including our President, 12 in engineering, and 56 are engaged in
administrative, accounting, warehousing and support activities. Our European
subsidiary employs approximately 67 people of which 54 are in production and
engineering and the balance in administrative, sales, accounting and support
activities.
In addition to our full-time employees, domestically we regularly
utilize the services of temporary workers retained through local agencies.
Presently there are approximately 32 such workers. Many of these temporary
workers, upon fulfilling in excess of 320 hours of service, may be employed on a
full time basis as needed.
We have no unions and we believe our relationships with our employees
is good.
11
ITEM 2. PROPERTIES
The following chart summarizes the properties leased by the Company.
SPACE PROPERTY TERM
- ----- -------- ----
16,000 sq. ft. 2230 W 77th St. 5 yrs. to March 31, 2001
(exec. offs., mfg.) Hialeah, FL(1)
12,000 sq. ft. 2200 W 77th St. 5 yrs. to March 31, 2001
(warehouse) Hialeah, FL(1)
15,000 sq. ft. 7110 Brittmore 5 yrs. to August 31, 2002,
(mfg., offs. & Houston, TX(2) one five year renewal
warehouse)
5,500 sq. ft. Rte. 495 Commerce Park 5 yrs. to March 31, 2002,
(mfg. & offs.) Milford, MA one five year renewal
18,225 sq. ft. 800 Paloma Dr. 5 yrs. to May 31, 2002,
(mfg., offs. & Round Rock (Austin), one five year renewal
warehouse) TX
2,000 sq. ft. 1311 West 2nd Street 1 yr. to August 15,2000
(warehouse) Taylor, TX
77,800 sq. ft. 1784 Stanley Ave. 5 yrs. to July 31, 2002,
(mfg., offs. & Dayton, Ohio(3) two five year renewals
warehouse)
We also have two month-to-month leases, one for warehouse space (1,000
square feet in Milford, Massachusetts), and another for a sales office
(approximately 700 square feet in Houston, Texas).
- ----------
(1) THE LANDLORD IS OUR PARENT. THE LEASE IS AS FAVORABLE AS MAY BE
OBTAINED FROM UNAFFILIATED THIRD PARTIES, WITH WHOM ALL OTHER LEASES
ARE MADE, EXCEPT FOR THE LYTTON LEASE.
(2) THIS FACILITY HAS BEEN CLOSED AND THE PROPERTY SUBLEASED FOR THE
REMAINDER OF THE TERM TO AN UNAFFILIATED PARTY FOR SUBSTANTIALLY
SIMILAR RENT.
(3) THE LANDLORD IS OWNED BY THE FORMER PRESIDENT, NOW ASSISTANT TO THE
PRESIDENT AND DIRECTOR OF LYTTON AND DIRECTOR OF THE COMPANY. SEE
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" OF OUR INFORMATION
STATEMENT RELATING TO THE ANNUAL MEETING OF SHAREHOLDERS ANTICIPATED TO
BE HELD ON MAY 24, 2000, INCORPORATED HEREIN BY REFERENCE. THE COMPANY
HAS A RIGHT OF FIRST REFUSAL AND AN OPTION TO PURCHASE THESE PREMISES.
THIS LEASE IS GUARANTEED BY THE COMPANY.
Techdyne (Europe) owns an approximately 31,000 square foot facility in
Livingston, Scotland. The property is subject to a 15-year mortgage due July,
2009 which had a U.S. dollar equivalency of approximately $489,000 at December
31, 1999. See Item 1, "Business - Foreign Operations" and Item 7, "Management's
12
Discussion and Analysis of Financial Condition and Results of Operations."
The Company maintains state-of-the-art manufacturing, quality control,
testing and packaging equipment at all of its facilities in Florida, Ohio,
Massachusetts, Texas and Europe.
We believe that our equipment and facilities are adequate for our
current operations.
We are subject to a variety of environmental regulations relating to
our manufacturing processes and facilities. See Item 1, "Business - Government
Regulations."
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of our fiscal year to
a vote of security holders through the solicitation of proxies or otherwise.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The table below reflects for the periods indicated, the high and
low closing sales prices for the common stock as reported by the Nasdaq National
Market. On February 18, 2000, our common stock transferred to the Nasdaq
SmallCap Market, since the market value of the public float was not equal to or
greater than $5,000,000 for a 90-day period in 1999, as required under the
Nasdaq Marketplace rule 4450(a)(2), Maintenance Standard 1.
1998
----
High Low
---- ---
1st Quarter...................... $4.81 $4.13
2nd Quarter...................... 5.00 3.88
3rd Quarter...................... 4.75 3.50
4th Quarter...................... 3.50 1.88
1999
----
High Low
---- ---
1st Quarter...................... $4.25 $2.13
2nd Quarter...................... 4.00 2.38
3rd Quarter...................... 4.63 2.13
4th Quarter...................... 4.00 1.75
At March 20, 2000, the closing sales price of the common stock was
$3.50.
At March 20, 2000, we had 63 shareholders of record and based upon data
obtained from its transfer agent we have approximately 594 beneficial owners of
our common stock.
We have not paid, nor do we have any present plans to pay cash
dividends on our common stock in the immediate future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information included herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
----------------------------------------------------
1999 1998 1997(1) 1996 1995
---- ---- ---- ---- ----
Revenues $48,383 $44,927 $33,169 $24,434 $30,424
Net income 303 798 1,426 743 1,315
Earnings per share:
Basic $.05 $.15 $.32 $.18 $.40
Diluted $.05 $.13 $.24 $.14 $.27
14
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS)
December 31,
----------------------------------------------
1999 1998 1997(1) 1996 1995
------- ------- ------- ------- -------
Working capital $10,986 $ 9,321 $ 9,547 $ 6,597 $ 4,921
Total assets 26,796 23,818 24,625 13,224 12,879
Long-term debt (2) 7,962 7,581 6,926 3,842 3,415
Total liabilities 15,631 14,357 15,116 8,056 9,216
Shareholders' equity 11,165 9,461 9,509 5,168 3,663
- --------------------
(1) Reflects operations of Lytton for five months, as well as assets,
liabilities and shareholders' equity at December 31, 1997. Lytton was
acquired on July 31, 1997. See Item 1, "Business - Business Strategy"
and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) Includes advances from parent.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Our operations have continued to depend upon a relatively small number
of customers for a significant percentage of our net revenue. Significant
reductions in sales to any of our large customers would have a material adverse
effect on our results of operations. The level and timing of orders placed by a
customer vary due to the customer's attempts to balance its inventory, design
modifications, changes in a customer's manufacturing strategy, acquisitions of
or consolidations among customers, and variation in demand for a customer's
products due to, among other things, product life cycles, competitive conditions
and general economic conditions. Termination of manufacturing relationships or
changes, reductions or delays in orders, as has occurred in the past, could have
an adverse effect on our results of operations and financial condition. Our
results also depend to a substantial extent on the success of our OEM customers
in marketing their products. We continue to seek to diversify our customer base
to reduce our reliance on our few major customers. See "Business Strategy" and
"Customers" under Item 1, "Business."
The industry segments we serve, and the electronics industry as a
whole, are subject to rapid technological change and product obsolescence.
Discontinuance or modification of products containing components 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 general recession
in the electronics industry could have a material adverse effect on our
business, financial condition and results of operations. We typically do not
obtain long-term volume purchase contracts from our customers, but rather we
work with our customers to anticipate future volumes of orders. Based upon such
anticipated future orders, we will make commitments regarding the level of
business we want and can accomplish, the timing of production schedules and the
levels of and utilization of facilities and personnel. Occasionally, we purchase
raw materials without a customer order or commitment. Customers may cancel,
15
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 ERP techniques through our Visual Manufacturing system (see Item
1, "Business - Business Strategy" and "Year 2000 Readiness" below) in our
efforts to continuously develop accurate forecasts of customer volume
requirements. We are dependent on the timely availability of many components.
Component shortages could result in manufacturing and shipping delays or
increased component prices which could have a material adverse effect on our
results of operations. It is important for us, and there are significant risks
involved, to efficiently manage inventory, proper timing of expenditures and
allocations of physical and personnel resources in anticipation of future sales,
the evaluation of economic conditions in the electronics industry and the mix of
products, whether PCBs, wire harnesses, cables, or turnkey products, for
manufacture. See "Electronic Manufacturing Industry" and "Supplies and Materials
Management" under Item 1, "Business."
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 uncompetitive. In
addition, to the extent that we determine that new assembly and testing
technologies and equipment are required to remain competitive, the acquisition
and implementation of such technologies and equipment are likely to require
significant capital investment.
During periods of recession in the electronics industry, our
competitive advantages in the areas of quick-turnaround manufacturing and
responsive customer service may be of reduced importance to electronic OEMs, who
may become more price sensitive.
Our results of operations are also affected by other factors, including
price competition, the level and timing of customer orders, fluctuations in
material costs, 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, and selling,
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 incurrence of debt and amortization expenses
related to goodwill and other intangible assets, and other costs and expenses,
all of which could materially adversely affect our financial results.
Acquisition transactions also involve numerous business risks, including
difficulties in successfully integrating the acquired operations, technologies
and products or formalizing anticipated synergies, and the diversion of
management's attention from other business concerns.
16
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Consolidated revenues increased approximately $3,456,000 (8%) for the
year December 31, 1999 compared to the preceding year. There was an increase in
domestic sales of $4,482,000 (11%), and a decrease in European sales of $828,000
(18%) compared to the preceding year. Interest and other income decreased by
approximately $198,000 compared to the preceding year.
The decline in European-based sales was attributable to a decrease of
approximately $982,000 (82%) in sales to Compaq (Europe) by Techdyne (Europe)
which was partially offset by increased sales to other customers. Significant
reductions in sales of Techdyne (Europe) have resulted in net losses for this
subsidiary amounting to $577,000 for the year ended December 31, 1999 and
$442,000 for the preceding year. Techdyne (Europe) has continued its efforts at
new business development; however, continuing losses have resulted in
management's ongoing evaluation of the future prospects for this facility.
Approximately 41% of our consolidated sales for 1999 were made to four
customers. Customers generating at least 10% of sales included Motorola (13%)
and PMI Food Equipment Group (15%). Approximately $7,195,000 (32%) of Lytton's
sales for 1999 were to its major customer, PMI Food Equipment Group. The loss
of, or substantially reduced sales to any major customer would have an adverse
effect on our operations if such sales are not replaced. See Item 1, "Business -
Customers."
Cost of goods sold as a percentage of sales remained relatively stable
amounting to 88% for the year ended December 31, 1999 and for the preceding
year.
Selling, general and administrative expenses, although increasing by
approximately $350,000 (9%) for the year ended December 31, 1999 compared to the
preceding year, amounted to approximately 9% of sales for both periods. The
increase in 1999 included increases in the cost of support personnel and
increased marketing costs associated with efforts to increase sales.
Interest expense increased $76,000 for the year ended December 31, 1999
compared to the preceding year. The primary contributor to the increase in
interest expense was the increased borrowings of Lytton, which were utilized to
fund the remaining $1,100,000 payment in July, 1999, on the Lytton acquisition
purchase price guarantee. The prime rate was 8.50% at December 31, 1999 and
7.75% at December 31, 1998.
During the year ended December 31, 1999, we recorded an adjustment to
the valuation allowance relating to our deferred tax assets of approximately
$300,000, which was recorded in the fourth quarter of 1999, resulting in a 1999
tax provision of approximately $350,000. During the year ended December 31, 1998
we recorded an adjustment to the valuation allowance relating to our deferred
tax assets of approximately $400,000 related to domestic operations in the
fourth quarter of 1998 resulting in a 1998 tax provision of approximately
$130,000.
1998 COMPARED TO 1997
Consolidated revenues increased approximately $11,758,000 (35%) for the
year December 31, 1998 compared to the preceding year. The increase was
attributable principally to the inclusion of sales of Lytton for which sales of
$20,062,000 were included during the current year compared to $7,170,000 for the
preceding year commencing with our acquisition of Lytton on July 31, 1997. There
was an overall increase in domestic sales of $13,771,000 (52%), including
17
Lytton, and a decrease in European sales of $2,125,000 (31%) compared to the
preceding year. Interest and other income increased by approximately $111,000
compared to the preceding year.
The decline in European-based sales was mainly attributable to a
decrease of approximately $1,656,000 (58%) in sales to Compaq (Europe) by
Techdyne (Europe) which was partially offset by sales to new customers and
increased sales to existing customers. Revenues of Techdyne (Europe) continue to
be highly dependent on sales to Compaq, which accounted for approximately 26% of
sales for the current year compared to 42% in the preceding year. The bidding
for Compaq orders has become more competitive which has continued to result in
substantial reductions in Compaq sales and lower profit margins on remaining
Compaq sales. Techdyne (Europe) is pursuing new business development and has
offset some of the lost Compaq business with sales to other customers; however
there can be no assurance as to the success of such efforts.
Approximately 50% of our consolidated sales for 1998 were made to five
customers. Customers generating at least 10% of sales included Motorola (10%)
and PMI Food Equipment Group (18%). Approximately $8,183,000 (41%) of Lytton's
sales for 1998 were to its major customer, PMI Food Equipment Group. The loss
of, or substantially reduced sales to any major customer, as occurred with Avid
domestically in 1996 and Compaq in Europe commencing in 1996, would have an
adverse effect on our operations if such sales are not replaced. See Item 1,
"Business - Customers."
Cost of goods sold as a percentage of sales remained relatively stable
amounting to 88% for the year ended December 31, 1998 compared to 87% for the
preceding year.
Selling, general and administrative expenses increased by approximately
$927,000 for the year ended December 31, 1998 compared to the preceding year.
The increase resulted principally from inclusion of the selling, general and
administrative expenses of Lytton commencing August 1, 1997.
Interest expense increased $206,000 for the year ended December 31,
1998 compared to the preceding year. The increase reflects increases in interest
of approximately $122,000 associated with the financing the Lytton acquisition
and increases in interest on Lytton's debt and financing agreements of
approximately $81,000. The prime rate was 7.75% at December 31, 1998 and 8.5% at
December 31, 1997.
During the year ended December 31, 1998, we recorded an adjustment to
the valuation allowance relating to our deferred tax assets of approximately
$400,000, which was recorded in the fourth quarter of 1998, resulting in a 1998
tax provision of approximately $130,000. During the year ended December 31, 1997
we recorded an adjustment to the valuation allowance relating to our deferred
tax assets of approximately $900,000 related to domestic operations in the
fourth quarter of 1997 resulting in a 1997 tax credit of approximately $560,000
including approximately $100,000 of tax credits on foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $10,986,000 at December 31, 1999,
an increase of $1,665,000 (18%) during 1999. This decrease includes changes in
components of working capital resulting from overall increased sales levels,
including increased accounts receivable of $2,305,000, increased inventories of
$1,618,000, increased accounts payable of $1,816,000, and also reflects the
amendment of Lytton's line of credit term in February, 2000, resulting in a
reclassification of its line of credit balance to long-term debt.
Included in the changes in components of working capital was a decrease
of $1,469,000 in cash and cash equivalents, which included net cash used in
18
operating activities of $317,000, net cash used in investing activities of
$2,956,000 (including $1,565,000 from additions to property and equipment and
payments of $1,390,000 regarding the Lytton acquisition, including a payment of
$1,100,000 as the final payment toward the Lytton acquisition purchase price
guarantee and a $290,000 sales incentive payment under the Lytton stock
purchase agreement) and net cash provided by financing activities of $1,826,000
(including Lytton's net borrowings on its line of credit of $1,868,000,
increased borrowings under Lytton's term loan of $783,000, borrowings and
repayments on Lytton's equipment loan facility of $375,000, payments on
long-term debt of $725,000 and a net decrease in advances from the parent of
$100,000).
We had a five-year $1,500,000 ("notional amount under interest rate
swap agreement") commercial term loan with monthly principal payments of $25,000
plus interest at 8.60%, which had an outstanding balance of $900,000 at December
31, 1999 and $1,200,000 at December 31, 1998; and a $1,600,000 commercial
revolving line of credit with interest at prime which was fully drawn down as of
December 31, 1999 and 1998. The commercial term loan had a maturity of December
15, 2002 and the commercial line of credit, no longer a demand line, had a
maturity of May 1, 2000. In 1996 we obtained two other term loans from our
Florida bank. One a $712,500 term loan secured by two buildings and land owned
by the parent. The second term loan for $200,000, was secured by our tangible
personal property, goods and equipment. The parent guaranteed the revolving line
and the three term loans and subordinated the intercompany indebtedness due it
from the Company, provided that we could make payments to our parent on this
subordinated debt from additional equity injected into the Company and from
earnings, so long as we were otherwise in compliance with the loan agreements.
The Company was in default of certain covenants relating to capital funds ratio
requirements regarding these loans as of December 31, 1999 for which the bank
granted a waiver. We also had outstanding borrowings of $145,000 from a local
bank with interest payable monthly with the note having a maturity of April
2000. See Note 2 to "Notes to Consolidated Financial Statements."
On February 9, 2000, we entered into two credit facilities with The
Provident Bank in Ohio for an aggregate borrowing of $5,500,000. This new
financing replaced the line of credit and the three commercial loans with
NationsBank of Florida which had a principal balance of $3,115,500 at February
9, 2000, the repayment date, and a smaller borrowing from another Florida bank
in the amount of approximately $145,000. Medicore is not guaranteeing our
financing with the Provident Bank, but one of the negative covenants precludes
loans to or the payment of loans from affiliates, other than the pre-existing
balance on the advances from parent, which includes Medicore.
The new financing includes a three-year revolving line of credit,
renewable annually at the discretion of the bank, which credit line carries an
interest rate of prime minus .25%, or at a fixed rate equal to the relevant
quoted LIBOR rate plus 2.5%, at our election. Also part of the financing is a
five-year term loan of $1,000,000 at the same interest rate as the revolving
line of credit. The financing is guaranteed by Lytton, which subsidiary has
provided the bank with a Security Agreement securing its guaranty of our
financing. The Security Agreement includes all of Lytton's property, including
accounts receivable, equipment, inventory, general intangibles, and the proceeds
of such collateral. Lytton has also provided the bank with a Conditional
Assignment of Lease, assigning all of its right, title and interest as tenant
under the lease to the bank as further security for its guaranty of our
financing. The Conditional Assignment of Lease takes effect only if Lytton
defaults in any of its obligations under the lease or any of its obligations
under its guaranty. That lease is with Stanley Avenue Properties, Ltd., a
limited liability company whose membership includes Lytton and Patricia
Crossley, the wife of Lytton Crossley, former President of Lytton and a director
19
of the Company, who is also Assistant to the President of Lytton under an
employment agreement requiring 40 hours per month at an annual salary of
$30,000.
The financing, evidenced by an Asset Based Loan and Security Agreement,
provides for all the assets of the Company to collateralize the financing, as
well as affirmative and negative covenants. Certain of the affirmative covenants
require maintenance of a consolidated tangible net worth at all times greater
than $7,500,000, a ratio of consolidated liabilities to consolidated tangible
net worth of not more than 2.6 to 1.0, a debt coverage ratio of at least 1.5 to
1.0. Some of the negative covenants, among others, include prohibiting sale of
any of its assets or properties except inventory in the ordinary course of
business, declaring or paying any dividends or making any other payments on our
capital stock, consolidating or merging with any other corporation or acquiring
or purchasing any equity interest in any other entity, or assuming any
obligations of any other entity the value of which exceeds $100,000, except for
notes and receivables acquired in the ordinary course of business, incur,
assume, guaranty or remain liable with respect to any indebtedness, except for
certain existing indebtedness disclosed in our financial statements, or
undertake any capital expenditures in excess of $1,000,000 in any one fiscal
year. The credit line also provides for restrictions on transactions with
related persons, precludes changes in ownership in the Company, or changes in
our management or any material change in any of our business objectives,
purposes and operations which might adversely affect repayment of the financing.
On July 31, 1997, we acquired Lytton, which is engaged in the
manufacture and assembly of PCBs and other electronic products for commercial
customers. This acquisition required $2,500,000 cash, funded by the Company's
modified bank line of credit, as well as 300,000 shares of our common stock
which had a fair value of approximately $1,031,000 based on the closing price of
our common stock on the date of acquisition. We guaranteed $2,400,000 minimum
proceeds from the sale of these securities based on Lytton having achieved
certain earnings objectives. The Stock Purchase Agreement also provided for
incentive consideration to be paid in cash based on specific sales levels of
Lytton for each of three successive specified years, resulting in additional
consideration of approximately $290,000 and $154,000 for the first two years of
sales levels paid in April, 1999, and April, 1998, respectively. The Lytton
acquisition expanded our customer base, broadened our product line, enhanced our
manufacturing capabilities and provided a new geographic area to better serve
our existing customer base with opportunities to attract new customers. The
Guaranty in the Stock Purchase Agreement was modified by the Company and the
seller. In July, 1999 we issued a payment of $1,100,000 and forgave an advance
of $1,278,000 made in July, 1998, to satisfy our remaining obligation under the
$2,400,000 guarantee. See Note 10 to "Notes to Consolidated Financial
Statements."
Lytton also entered into amendments to its financing agreements with
the Provident Bank. Lytton had an Asset Based Loan and Security Agreement with
that bank dated April 14, 1995, amended over the last several years, evidenced
by a $3,000,000 Revolving Credit Promissory Note, together with a Term Loan
Promissory Note in the amount of $1,400,000, and an Equipment Acquisition
Promissory Note in the amount of $500,000 (collectively the "Notes"). The line
of credit was amended to a three-year term coinciding with the term of the
Company's line of credit. The Provident Bank also agreed to reduce the interest
rates charged under the Notes, and Lytton and the Provident Bank entered into
modification and amendments of the aggregate $4,900,000 loan agreements and
Notes, restated at the same interest rates, at the election of Lytton, as has
been provided to the Company in its credit facilities. We are guaranteeing
Lytton's financing, which guaranty is unconditional and is secured by a Security
Agreement between the Company and the Provident Bank which provides the bank
with a continuing first priority security interest on all of our property. See
Note 2 to "Notes to Consolidated Financial Statements."
20
In July, 1994 Techdyne (Europe) purchased the facility in Scotland
housing its operations for approximately $730,000, obtaining a 15-year mortgage
which had a U.S. dollar equivalency of approximately $489,000 at December 31,
1999 and approximately $545,000 at December 31, 1998, based on exchange rates in
effect at each of these dates. See Note 2 to "Notes to Consolidated Financial
Statements."
On September 30, 1999, the Company's parent, Medicore, converted the
balance of approximately $2,532,000 under its convertible promissory note
receivable from the Company into approximately 1,447,000 shares of the
Company's common stock, increasing Medicore's ownership interest to 72.5%.
See Note 4 to "Notes to Consolidated Financial Statements."
We continue to attempt to expand our operations through acquisitions of
companies in similar businesses, as with the Lytton acquisition. There can be no
assurance that we would be able to finance such acquisitions from our own
capital or be able to obtain sufficient external financing.
We believe that current levels of working capital and working capital
from operations will be adequate to successfully meet liquidity demands for at
least the next twelve months.
YEAR 2000 READINESS
The Year 2000 computer information processing challenge associated with
the recent millennium change concerned the ability of computerized information
systems to properly recognize date sensitive information, with which many
companies, public and private, were faced to ensure continued proper operations
and reporting of financial condition. Management was fully aware of the Year
2000 issues, made its assessments, evaluated its computerized systems and
equipment, and communicated with its major vendors, and made our operations Year
2000 compliant.
In 1997, we commenced upgrading our operations software program through
the acquisition of a new Visual Manufacturing software package. To a lesser
extent our parent also acquired certain hardware and software of the Visual
Manufacturing system. We integrated this new software system into all of our
facilities. This new system greatly enhanced our ERP system, essential to bids
for new business, production scheduling, inventory and information technology
and overall operations. This new system is providing us with leverage in
material pricing, production, timely-delivery and thereby enabling the Company
to be more competitive in bidding for manufacturing business. This Visual
Manufacturing system also enables us to better track actual costs against our
quotes, thereby allowing us to more effectively control costs and manage
operating margins. The cost of this new software program for all our domestic
and European operations was approximately $586,000. Our parent's cost for the
hardware and software was approximately $58,000. The Company and our parent have
an ongoing consulting, training and servicing arrangement with the system's
manufacturer for $25,000 per annum. The Visual Manufacturing system also
provides the bookkeeping, accounting and financial recording and information
functions for the Company, our parent and Dialysis Corporation of America
("DCA"), a 65% owned public subsidiary of our parent. DCA relies less on our
system since it recently installed its own accounting and financial information
software program.
21
With respect to non-information technology systems which typically
include embedded technology such as microcontrollers, the major equipment used
in our manufacturing operations is not date sensitive and did not pose any
threat of system breakdown. Our quality control "Cirrus testers" and personal
computer hardware and software systems had been checked and determined to be
Year 2000 compliant.
We also communicated with our key vendors, customers and other third
parties with whom our operations are essential and inquired of their assessment
of their Year 2000 issues and actions taken to insure they would be Year 2000
compliant. We received written assurances that they were Year 2000 compliant,
and in fact, we have not experienced any material adverse effects in entering
the Year 2000.
One of the more significant Year 2000 issues related to the readiness
of our suppliers. Most of our products are manufactured to customer
specifications, requiring specialized tooling as well as customer directed
supplies and suppliers. Any Year 2000 problems with such suppliers could have
adversely affected our production of these specific products. However, this
would only impact a limited range of products, since we manufacture
approximately 850 products for over 100 customers. For any significant worse
case scenario, such supplier failure would have to have been widespread which
would also impact many of our competitors. This was remote based upon responses
we have had from our suppliers. We assumed a worse case scenario that our
critical suppliers could have a millenium problem and limit, delay or be unable
to deliver supplies. We identified other sources of supplies and, if necessary,
would have sought customer approval to purchase from these alternate sources. We
were ready to request our major suppliers to carry more inventory earmarked for
us, and we maintained specific contacts with those suppliers.
Another area that could have significantly impacted our operations that
related to third-party providers were the utility companies providing necessary
power for our manufacturing operations. These providers and services are beyond
our control, and we do not have a separate generator for electricity. Should any
of these utilities have failed to provide services, that contingency would have
seriously adversely impact our operations in such affected areas. Our continuing
plan to reduce the impact of such utility shortages or outages includes
notification to our utility companies of our manufacturing locations and
schedules, and notification to each of our landlords to assure access to the
facility for our staff and key service providers.
We have not experienced any material unanticipated negative
consequences from the Year 2000 issues. We believe our assessment and
implementation of our Year 2000 issues were satisfactorily completed, as
evidenced by our continued and uninterrupted manufacturing operations. However,
we have only recently entered the new millenium, and there remains the
possibility that Year 2000 issues that we are not aware of may yet arise. These
unknowns do not allow us the ability to predict with any significant accuracy or
to quantify these potential unforeseen Year 2000 issues' impact upon us, since
they would involve uncertainty of costs that might be incurred in spite of our
current successful implementation of our program.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effective
for fiscal years beginning after June 15, 2000. FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities
and requires, among other things, that all derivatives be recognized as either
assets or liabilities in the statement of financial position and that these
instruments be measured at fair value. We are in the process of determining the
impact that the adoption of FAS 133 will have on its consolidated financial
statements.
22
INFLATION
Inflationary factors have not had a significant effect on our
operations. We attempt 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks from changes in interest rates
and foreign currency exchange rates.
Our principal exposure on interest rates is on debt agreements with
variable interest rates of which we had approximately $3,564,000 of such debt at
December 31, 1999. W have exposure to both rising and falling interest rates. A
1% increase in rates on its year-end variable rate debt would result in a
negative impact of approximately $22,000 on our results of operations.
We utilize interest rate swap agreements on some of our debt
obligations to manage sensitivity of results of operations to interest rate risk
by converting variable rate obligations to fixed rate obligations. These
agreements, which totaled approximately $900,000 as of December 31, 1999,
contain provisions which can either result in a gain or a cost to the Company
for early settlement of the related debt depending on whether rates have
increased or decreased since the agreements were negotiated. At December 31,
1999, early settlement of these debt obligations would have had a negative
impact of approximately $6,000 on our results of operations.
Our exposure to market risks from foreign currency exchange rates
relates to our European subsidiary whose results of operations when translated
into U.S. dollars are impacted by changes in foreign exchange rates. A 10%
strengthening of the U.S. dollar against the local Scottish currency, the pound,
would have negatively impacted 1999 earnings by approximately $58,000. We have
not incurred any significant realized losses on exchange transactions and does
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective August 6, 1999, the board of directors, upon the
recommendation of the audit committee, terminated Ernst & Young LLP as our
independent accountants, and engaged new independent accountants, Wiss &
Company, LLP, for the Company's annual audit for our 1999 fiscal year.
This matter was previously reported on our Current Report on Form 8-K
dated August 27, 1999. For more details you are referred to the caption
"Proposals, 2. Ratification of Wiss & Young, LLP as Independent Auditors" of our
Information Statement, relating to the Annual Meeting of Shareholders
anticipated to be held on May 24, 2000, which is incorporated herein by
reference.
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors is included under the caption
"Election of Directors" of our Information Statement relating to the Annual
Meeting of Shareholders anticipated to be held on Wednesday, May 24, 2000, which
is incorporated herein by reference.
Our executive officers are elected by the board of directors at its
first meeting following the annual meeting of shareholders to serve during the
ensuing year and until their respective successors are elected and qualified.
There are no family relationships between any of our executive officers. The
following information indicates the position and age of each executive officer
at March 15, 2000, and their business experience during the prior five years.
Name Age Position with the Company Position Held Since
---- --- ------------------------- -------------------
Thomas K. Langbein 54 Chairman of the Board and 1982
Chief Executive Officer 1990
Barry Pardon 48 President 1991
and Director 1990
Joseph Verga 48 Senior Vice President, 1988
Treasurer 1985
Director 1984
Daniel R. Ouzts 53 Vice President - Finance Controller 1986
THOMAS K. LANGBEIN was financial consultant to Medicore until 1980,
when he became Chairman of the Board of Directors, Chief Executive Officer and
President. Mr. Langbein is also an officer and director of most of Medicore's
subsidiaries. He is Chairman of the Board and Chief Executive Officer of DCA, a
65% owned public subsidiary of Medicore. Mr. Langbein is also a director of
Lytton and Techdyne (Europe). In 1971, Mr. Langbein organized and currently is
the President, sole director and owner of Todd & Company, Inc., a broker-dealer
registered with the Commission and a member of the NASD. Todd has an agreement
with MainStreet IPO.com with which company DCA has a proposed merger pending.
Mr. Langbein was recently appointed as a director of Linux Global Partners, a
private holding company in which Medicore, in January, 2000, invested and to
which it loaned money. Mr. Langbein devotes most of his time to the affairs of
the Company, Medicore and DCA. See "Certain Relationships and Related
Transactions" of our Information Statement relating to the Annual Meeting of
Shareholders anticipated to be held on Wednesday, May 24, 2000, incorporated
herein by reference.
BARRY PARDON joined the Company in November, 1980 as national sales
manager and initiated the independent manufacturer representatives sales force.
Mr. Pardon became Vice President of Marketing in 1981, and was appointed
Executive Vice President (Marketing) in 1988, and was appointed President in
November, 1991. Mr. Pardon is Chairman of the Board of Lytton and a director of
Techdyne (Europe). He is also a member of the South Florida Manufacturing Center
Advisory Board.
JOSEPH VERGA joined the Company in 1979 as purchasing agent. In 1980,
he became production control manager and Vice President, in 1981 the operations
manager, and in 1984 was elected a director and appointed Secretary of the
24
Company. In 1985 he was appointed Treasurer and in 1988 was made Senior Vice
President of Operations.
DANIEL R. OUZTS joined Medicore in 1980 as Controller of its plasma
division, and in 1983 became Controller of Medicore and DCA. He became Vice
President of Finance of the Company and Medicore in 1986. He was appointed as
Vice-President and Treasurer of DCA in June, 1996. Mr. Ouzts is a certified
public accountant. See "Certain Relationships and Related Transactions" of our
Information Statement relating to the Annual Meeting of Shareholders anticipated
to be held on Wednesday, May 24, 2000, incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation is included under the caption
"Executive Compensation" of our Information Statement relating to the Annual
Meeting of Shareholders anticipated to be held on Wednesday, May 24, 2000, which
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of our voting securities by each
director and all officers and directors as a group, and for each of the named
executive officers disclosed in the Summary Compensation Table (see "Executive
Compensation" of the Company's Information Statement relating to the Annual
Meeting of Shareholders anticipated to be held on Wednesday, May 24, 2000, which
is incorporated herein by reference), and by any person known to us to
beneficially own more than 5% of any class of our voting security, is included
under the caption "Security Ownership of Certain Beneficial Owners and
Management" of our Information Statement relating to the Annual Meeting of
Shareholders anticipated to be held on Wednesday, May 24, 2000, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions is
included under the caption "Certain Relationships and Related Transactions" of
our Information Statement relating to the Annual Meeting of Shareholders
anticipated to be held on Wednesday, May 24, 2000, which is incorporated herein
by reference.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements - See Index to Consolidated Financial
Statements.
2. Financial statement schedules - See Index to Consolidated
Financial Statements.
(b) Current Reports on Form 8-K filed during the fourth quarter.
(i) Item 5, "Other Events" re: parent's conversion of promissory
note, October 12, 1999.
(ii) Item 5, "Other Events" re: grant of options under 1997 Stock
Option Plan, December 23, 1999.
(c) Exhibits
(3)(i) Articles of Incorporation (incorporated by reference to the
Company's Registration Statement on Form SB-2 dated July 26,
1995, as amended August 21, 1995 and September 1, 1995,
Registration No. 33-94998-A ("Form SB-2"), Part II, Item 27,
3(a)). *
(ii) By-Laws (incorporated by reference to the Company's Form SB-2,
Part II, Item 27, 3(b)). *
(4)(i) Form of Common Stock Certificate (incorporated by reference to
the Company's Form SB-2, Part II, Item 27, 4(a)). *
(ii) Form of Underwriter's Warrant (incorporated by reference to
the Company's Form SB-2, Part II, Item 27, 4(c)). *
(iii) Form of 1997 Stock Option Plan (incorporated by reference to
the Company's Current Report on Form 8-K dated June 24, 1997
("June 24, 1997 Form 8-K"), Item 7(c)(4)(i)). *
(iv) Form of 1997 Incentive Stock Option (incorporated by reference
to the Company's June 24, 1997 Form 8-K, Item 7(c)(4)(ii)). *
(v) Form of 1997 Non-Qualified Stock Option (incorporated by
reference to the Company's June 24, 1997 Form 8-K, Item
7(c)(4)(iii)). *
(10)(i) Lease Agreement between the Company and Medicore, Inc.(1)
dated July 17, 1990 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997 ("1997 Form 10-K"), Part IV, Item
14(c)(10)(i)).*
(ii) Lease Renewal Letter from the Company to Medicore, Inc.(1)
dated December 19, 1994 (incorporated by reference to the
Company's Form SB-2, Part II, Item 27, 10(b)).*
26
(iii) Lease Extension Letter between the Company and Medicore,
Inc.(1) dated January 25, 2000.
(iv) Form of Exclusive Sales Representative Agreement (incorporated
by reference to Medicore, Inc.'s(1) Annual Report on Form
10-K for the year ended December 31, 1994 ("1994 Form 10-K"),
Part IV, Item 14 (a) 3 (10)(lxiv)). *
(v) Employment Agreement between the Company and Barry Pardon
dated March 13, 1996 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995; Part IV, Item 14(a)(10)(viii).*
(vi) Mortgage by Techdyne (Europe) Ltd.(3) to the Royal Bank of
Scotland dated August 8, 1994 (incorporated by reference to
Medicore, Inc.'s(1) Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994 ("Medicore June, 1994 Form 10-Q"),
Part II, Item 6(a)(28)(vi)). *
(vii) Promissory Note to Medicore, Inc.(1) dated April 10, 1995
(incorporated by reference to the Company's Form SB-2, Part
II, Item 27, 10 (a)(a)). *
(viii) Service Agreement between the Company and Medicore, Inc.(1)
dated October 25, 1996 (incorporated by reference to the
Company's Registration Statement on Form S-3, Registration No.
333-15371, Part II, Item 16, Exhibit 10(a)).*
(ix) Service Agreement renewal letter from Medicore, Inc.(1) to
the Company dated September 30, 1998 (incorporated by
reference to Medicore, Inc.'s(1)Annual Report on Form 10-K
for the year ended December 31, 1998, Part IV, Item
14(c)(10)(liii)).
(x) Lease Agreement between the Company and Route 495 Commerce
Park Limited Partnership dated March 25, 1997 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the first quarter of 1997, Item 6(a), Part II(10)).*
(xi) Lease Agreement between the Company and PruCrow Industrial
Properties, L.P. dated April 30, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K dated
June 4, 1997 ("June, 1997 Form 8-K"), Item 7(c)(10)(i)).*
(xii) Lease Agreement between the Company and EGP Houston Partners
Ltd. dated April 29, 1997 (incorporated by reference to the
Company's June, 1997 Form 8-K, Item 7(c)(10)(ii)).*
(xiii) Form of Stock Option to The Investor Relations Group, Inc.
(incorporated by reference to the Company's Current Report on
Form 8-K dated May 28, 1998, Item 7(c)(10)(i)).*
(xiv) Sublease between the Company and United Consulting Group dated
August 23, 1999.
(xv) Asset Based Loan and Security Agreement between the Company
and The Provident Bank dated February 9, 2000 (incorporated by
reference to the Company's Current Report on Form 8-K dated
March 1, 2000 ("March, 2000 Form 8-K"), Item 7(c)(10)(i)).*
(xvi) Line of Credit Promissory Note for $4,500,000 from the Company
to The Provident Bank dated February 9, 2000 (incorporated by
reference to the Company's March, 2000 Form 8-K, Item
7(c)(10)(ii)).*
27
(xvii) Term Loan Promissory Note for $1,000,000 from the Company to
The Provident Bank dated February 9, 2000 (incorporated by
reference to the Company's March, 2000 Form 8-K, Item
7(c)(10)(iii)).*
(xviii) Guaranty of the Company for the Lytton Incorporated(2)
financing with The Provident Bank dated February 9, 2000
(incorporated by reference to the Company's March, 2000 Form
8-K, Item 7(c)(10)(iv)).*
(xvix) Security Agreement of the Company for its Guaranty of the
Lytton Incorporated(2) financing with The Provident Bank dated
February 9, 2000 (incorporated by reference to the Company's
March, 2000 Form 8-K, Item 7(c)(10)(v)).*
(xx) Amendment to Asset Based Loan and Security Agreement between
Lytton Incorporated(2) and The Provident Bank dated February
9, 2000 (incorporated by reference to the Company's March,
2000 Form 8-K, Item 7(c)(10)(vi)).*
(xxi) Amended and Restated Revolving Credit Promissory Note for
$3,000,000 from Lytton Incorporated(2) to The Provident Bank
dated February 9, 2000 (incorporated by reference to the
Company's March, 2000 Form 8-K, Item 7(c)(10)(vii)).*
(xxii) Amended and Restated Term Loan Promissory Note for $1,400,000
from Lytton Incorporated(2) to The Provident Bank dated
February 9, 2000 (incorporated by reference to the Company's
March, 2000 Form 8-K, Item 7(c)(10)(viii)).*
(xxiii) Amended and Restated Equipment Acquisition Loan Promissory
Note for $500,000 from Lytton Incorporated(2) to The Provident
Bank dated February 9, 2000 (incorporated by reference to the
Company's March, 2000 Form 8-K, Item 7(c)(10)(ix)).*
(xxiv) Guaranty of Lytton Incorporated(2) for the Company's financing
with The Provident Bank dated February 9, 2000 (incorporated
by reference to the Company's March, 2000 Form 8-K, Item
7(c)(10)(x)).*
(xxv) Security Agreement for Lytton Incorporated(2) with respect to
its Guaranty of the Company's financing with The Provident
Bank dated February 9, 2000 (incorporated by reference to the
Company's March, 2000 Form 8-K, Item 7(c)(10)(xi)).*
(xxvi) Conditional Assignment of Lease by Lytton Incorporated(2) to
The Provident Bank dated February 9, 2000 (incorporated by
reference to the Company's March, 2000 Form 8-K, Item
7(c)(10)(xii)).*(4)
(21) Subsidiaries of the registrant.
(23) Consents of experts and counsel.
(i) Consent of Ernst & Young LLP, Independent Certified
Public Accountants.
(ii) Consent of Wiss & Company, LLP, Independent Certified
Public Accountants.
(27) Financial Data Schedule (for SEC use only).
28
- -----------------
* Documents incorporated by reference not included in Exhibit Volume.
(1) PARENT OF THE COMPANY OWNING 65% OF THE COMPANY'S OUTSTANDING SHARES.
(2) WHOLLY-OWNED SUBSIDIARY.
(3) EACH OF THE $1,600,000 REVOLVING LOAN AND THE $1,500,000 TERM LOAN HAS
BEEN UNCONDITIONALLY GUARANTEED BY MEDICORE, INC.(1), AND EACH SUCH
UNCONDITIONAL GUARANTY AGREEMENT IS SUBSTANTIALLY SIMILAR TO THE
EXHIBIT FILED FOR THE REVOLVING LOAN.
(4) LYTTON EXECUTED TWO IDENTICAL DOCUMENTS, EACH CONFORMING TO THIS
EXHIBIT, ONE FOR THE GUARANTY AND ONE FOR THE INDEBTEDNESS.
29
Schedule II - Valuation and Qualifying Accounts
Techdyne, Inc. and Subsidiaries
December 31, 1998
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Additions (Deductions) Charged to Other Changes Balance
Beginning Charged (Credited)to Other Accounts Add (Deduct) at End of
Classification of Period Cost and Expenses Describe Describe Period
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 47,000 $ 2,000 $ 18,000(1) $ 67,000
Reserve for inventory obsolescence 544,000 405,000 (240,000)(2) 709,000
Valuation allowance for deferred tax asset 448,000 (145,000) --- 303,000
---------- ---------- ------------- ----------- ----------
$1,039,000 $ 262,000 $ 0 $ (222,000) $1,079,000
========== ========== ============= =========== ==========
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 54,000 $ 2,000 $ (9,000)(1) $ 47,000
Reserve for inventory obsolescence 223,000 437,000 (116,000)(2) 544,000
Valuation allowance for deferred tax asset 850,465 (402,465) --- 448,000
---------- ---------- ------------- ----------- ----------
$1,127,465 $ 36,535 $ 0 $ (125,000) $1,039,000
========== ========== ============= =========== ==========
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 83,000 $ 1,000 $ (30,000)(1) $ 54,000
Reserve for inventory obsolescence 134,000 153,000 (64,000)(2) 223,000
Valuation allowance for deferred tax asset 1,798,000 (947,535) --- 850,465
---------- ---------- ------------- ----------- ----------
$2,015,000 $ (793,535) $ 0 $ (94,000) $1,127,465
========== ========== ============= =========== ==========
(1) Uncollectable accounts written off, net of recoveries.
(2) Net write-offs against inventory reserves.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TECHDYNE, INC.
By /s/ THOMAS K. LANGBEIN
------------------------------------------------
THOMAS K. LANGBEIN, Chairman of the
Board of Directors and Chief Executive Officer
March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
Chairman of the Board
of Directors, Chief
/s/ THOMAS K. LANGBEIN Executive Officer March 28, 2000
- -------------------------
Thomas K. Langbein
/s/ BARRY PARDON President and Director March 28, 2000
- -------------------------
Barry Pardon
/s/ JOSEPH VERGA Senior Vice President,
- -------------------------
Joseph Verga Treasurer and Director March 28, 2000
/s/ DANIEL R. OUZTS Vice President and Controller
- -------------------------
Daniel R. Ouzts March 28, 2000
/s/ DAVID WATTS Chief Financial Officer March 28, 2000
- -------------------------
David Watts
/s/ PETER D. FISCHBEIN Director March 28, 2000
- -------------------------
Peter D. Fischbein
/s/ ANTHONY C. D'AMORE Director March 28, 2000
- -------------------------
Anthony C. D'Amore
/s/ LYTTON CROSSLEY Director March 28, 2000
- -------------------------
Lytton Crossley
/s/ EDWARD DIAMOND Director March 28, 2000
- -------------------------
Edward Diamond
31
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14 (a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENTS SCHEDULES
YEAR ENDED DECEMBER 31, 1999
TECHDYNE, INC.
HIALEAH, FLORIDA
FORM 10-K--ITEM 14(a)(1) AND (2)
TECHDYNE, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Techdyne, Inc. and
subsidiaries are included in Item 8:
PAGE
----
Consolidated Balance Sheets - December 31, 1999 and 1998. F-4
Consolidated Statements of Income - Years ended December 31,
1999, 1998, and 1997. F-5
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1999, 1998 and 1997. F-6
Consolidated Statements of Cash Flows - Years ended December 31,
1999, 1998, and 1997. F-7
Notes to Consolidated Financial Statements - December 31, 1999. F-8
The following financial statement schedule of Techdyne, Inc. and subsidiaries is
included in Item 14(d):
Schedule II - Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Techdyne, Inc.
We have audited the accompanying consolidated balance sheet of Techdyne, Inc.
and subsidiaries as of December 31, 1999, and the related consolidated
statement of income, stockholders' equity and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the respon-
sibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Techdyne, Inc. and subsidiaries at December 31, 1999, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ WISS & COMPANY LLP
March 10, 2000
Livingston, New Jersey
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Techdyne, Inc.
We have audited the accompanying consolidated balance sheet of Techdyne,
Inc. and subsidiaries as of December 31, 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1998. Our audits also included
the information related to each of the two years in the period ended December
31, 1998 on the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Techdyne, Inc. and subsidiaries at December 31, 1998, and the
consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States. Also, in
our opinion, the related financial statement schedule for the two years in
the period ended December 31, 1998, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
March 22, 1999
Miami, Florida
F-3
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1999 1998
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 190,343 $ 1,659,737
Accounts receivable, less allowances of $67,000 at December 31, 1999
and $47,000 at December 31, 1998 8,074,567 5,769,868
Inventories, less allowances for obsolescence of $709,000 at
December 31, 1999 and $544,000 at December 31, 1998 9,492,309 7,874,500
Prepaid expenses and other current assets 296,193 165,925
Deferred tax asset 440,759 466,259
--------------- ---------------
Total current assets 18,494,171 15,936,289
Property and equipment:
Land and improvements 193,200 199,200
Buildings and building improvements 746,036 769,204
Machinery and equipment 7,853,621 6,846,863
Tools and dies 843,202 844,988
Leasehold improvements 559,961 308,074
--------------- ---------------
10,196,020 8,968,329
Less accumulated depreciation and amortization 4,836,365 3,892,293
--------------- ---------------
5,359,655 5,076,036
Deferred expenses and other assets 94,435 122,578
Costs in excess of net tangible assets acquired, less accumulated
amortization of $317,000 at December 31, 1999
and $192,000 at December 31, 1998 2,848,038 2,682,938
--------------- ---------------
$ 26,796,299 $ 23,817,841
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ -- $ 962,407
Accounts payable 5,049,456 3,233,202
Accrued expenses 1,679,513 1,534,785
Current portion of long-term debt 576,239 764,550
Income taxes payable 203,043 120,027
--------------- ---------------
Total current liabilities 7,508,251 6,614,971
Deferred gain on sale of real estate 161,047 161,047
Long-term debt, less current portion 7,463,224 4,450,578
Advances from parent 498,315 3,130,588
Common stock, $.01 par value, authorized 10,000,000 shares; issued and
outstanding 6,451,990 shares in 1999 and 5,250,167 shares in 1998 64,520 52,501
Capital in excess of par value 11,371,503 11,139,291
Accumulated deficit (4,445) (307,936)
Accumulated other comprehensive loss (102,766) (31,638)
Notes receivable from options exercised (163,350) (113,850)
Advance on subsidiary acquisition price guarantee -- (1,277,711)
--------------- ---------------
Total stockholders' equity 11,165,462 9,460,657
--------------- ---------------
$ 26,796,299 $ 23,817,841
=============== ===============
See notes to consolidated financial statements.
F-4
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------ ------------- ------------
Revenues:
Sales $ 48,320,096 $ 44,665,925 $ 33,019,331
Interest and other income 62,664 260,806 149,449
------------ ------------ ------------
48,382,760 44,926,731 33,168,780
Cost and expenses:
Cost of goods sold 42,579,142 39,277,746 28,716,910
Selling, general and administrative expenses 4,411,685 4,061,205 3,134,001
Interest expense 738,794 662,856 456,621
------------ ------------ ------------
47,729,621 44,001,807 32,307,532
------------ ------------ ------------
Income before income taxes 653,139 924,924 861,248
Income tax provision (benefit) 349,648 127,212 (564,271)
------------ ------------ ------------
Net income $ 303,491 $ 797,712 $ 1,425,519
============ ============ ============
Earnings per share:
Basic $ .05 $ .15 $ .32
============ ============ ============
Diluted $ .05 $ .13 $ .24
============ ============ ============
See notes to consolidated financialstatements.
F-5
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED NOTES ADVANCE
CAPITAL IN RETAINED OTHER RECEIVABLE SUBSIDIARY
COMMON EXCESS OF COMPREHENSIVE EARNINGS COMPREHENSIVE STOCK PRICE
STOCK PAR VALUE INCOME (DEFICIT) INCOME (LOSS) OPTIONS GUARANTEE TOTAL
--------- ----------- ------------- ------------ ------------- --------- ------------ ----------
Balance at January 1, 1997 $42,940 $7,551,774 $ (2,531,167) $104,764 $5,168,311
Comprehensive income:
Net income --- --- $1,425,519 1,425,519 ---
Other comprehensive income:
Foreign currency translation (154,250) (154,250)
----------
Comprehensive income $1,271,269 1,271,269
==========
Note conversion by Medicore
(500,000 shares) 5,000 870,000 875,000
Shares issued in subsidiary
acquisition (300,000 shares) 3,000 1,997,000 2,000,000
Exercise of stock options
and warrants 411 193,917 194,328
--------- ----------- ------------ ---------- ----------
Balance at December 31, 1997 51,351 10,612,691 (1,105,648) (49,486) 9,508,908
Comprehensive income:
Net income $ 797,712 797,712
Other comprehensive income:
Foreign currency translation 17,848 17,848
----------
Comprehensive income $ 815,560 815,560
==========
Exercise of stock options
and warrants 1,150 113,850 (113,850) 1,150
Consultant stock options 12,750 12,750
Subsidiary acquisition
price adjustment 400,000 400,000
Advance on subsidiary
acquisition price (1,277,711) (1,277,711)
--------- ----------- ------------ ---------- --------- ------------ ----------
Balance at December 31, 1998 52,501 11,139,291 (307,936) (31,638) (113,850) (1,277,711) 9,460,657
Comprehensive income:
Net income $ 303,491 303,491
Other comprehensive income:
Foreign currency translation (71,128) (71,128)
----------
Comprehensive income $ 232,363 232,363
==========
Note conversion by Medicore
(1,446,823 shares) 14,469 2,517,473 2,531,942
Exercise of stock options 500 49,500 (49,500) 500
Consultant stock options 40,000 40,000
Settlement subsidiary
acquisition price (2,950) (2,374,761) 1,277,711 (1,100,000)
--------- ----------- ------------ ---------- --------- ------------ ----------
Balance at December 31, 1999 $ 64,520 $11,371,503 $ (4,445) $ (102,766) $(163,350) $ --- $11,165,462
========= =========== ============ ========== ========= ============ ==========
F-6
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Operating activities:
Net income $ 303,491 $ 797,712 $ 1,425,519
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 1,192,204 996,919 616,663
Amortization 138,817 118,104 52,576
Bad debt expense 1,714 2,179 1,282
Provision for inventory obsolescence 404,762 437,095 153,011
Deferred income taxes (benefit) 40,100 (10,295) (503,555)
Consultant stock option expense 16,552 12,750 --
Increase (decrease) relating
To operating activities from:
Accounts receivable (2,324,576) (55,293) (1,420,709)
Inventories (2,036,063) 22,274 (2,797,742)
Prepaid expenses and other
current assets (110,005) 410,884 (137,786)
Accounts payable 1,820,943 (987,521) 474,334
Accrued expenses 152,294 (213,984) (91,805)
Income taxes payable 83,016 13,362 (276,463)
----------- ----------- -----------
Net cash (used in) provided by operating activities (316,751) 1,544,186 (2,504,675)
Investing activities:
Subsidiary acquisition payments (1,389,531) (153,818) (2,166,010)
Advance on subsidiary acquisition price guarantee -- (1,277,711) --
Additions to property and equipment,
net of minor disposals (1,565,048) (823,419) (1,449,077)
Deferred expenses and other assets (1,329) (3,520) 44,386
----------- ----------- -----------
Net cash used in investing activities (2,955,908) (2,258,468) (3,570,701)
Financing activities:
Borrowings to finance subsidiary acquisition -- 600,000 2,500,000
Line of credit borrowings 1,867,590 413,709 548,698
Other short-term bank borrowings 375,000 -- --
Payments on short-term bank borrowings (375,000) -- --
Exercise of stock options and warrants 500 1,150 194,328
Proceeds from long-term borrowings 783,333 -- --
Payments on long-term borrowings (724,942) (916,470) (273,437)
Increase (decrease) in advances from parent (100,331) 823,367 724,651
Deferred financing costs -- -- (2,657)
----------- ----------- -----------
Net cash provided by financing activities 1,826,150 921,756 3,691,583
Effect of exchange rate fluctuations on cash (22,885) 699 (118,690)
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (1,469,394) 208,173 (2,502,483)
Cash and cash equivalents at beginning of year 1,659,737 1,451,564 3,954,047
----------- ----------- -----------
Cash and cash equivalents at end of year $ 190,343 $ 1,659,737 $ 1,451,564
=========== =========== ===========
See notes to consolidated financialstatements.
F-7
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company is 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 72.5% owned
subsidiary of Medicore, Inc. (the "Parent").
MAJOR CUSTOMERS
A majority of the Company's sales are to certain major customers. The
loss of or substantially reduced sales to any of these customers would have an
adverse effect on the Company's operations if such sales were not replaced.
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 following:
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- --------------
Finished goods $ 1,018,131 $ 794,297
Work in process 2,463,191 1,845,954
Raw materials and supplies 6,010,987 5,234,249
-------------- --------------
$ 9,492,309 $ 7,874,500
============== ==============
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which are generally 25 years for buildings and improvements; 3 to 10
years for machinery, computer and office equipment; 3 to 10 years for tools and
dies; and 5 to 15 years for leasehold improvements, based on the shorter of the
lease term or estimated useful life of the property. Replacements and better-
ments that extend the lives of assets are capitalized. Maintenance and repairs
are expensed as incurred. Upon the sale or retirement of assets the related
cost and accumulated depreciation are removed and any gain or loss is
recognized.
LONG-LIVED ASSET IMPAIRMENT
Pursuant to Financial Accounting Standards Board Statement No. 121
"Accounting for the Impairment of Long-Lived Assets to be Disposed of,"
impairment of long-lived assets, including intangibles related to such assets,
is recognized whenever events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be fully
recoverable from estimated future cash flows and the fair value of the related
assets is less than their carrying value. The Company, based on current
circumstances, does not believe any indicators of impairment are present.
F-8
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
DEFERRED EXPENSES
Deferred expenses, except for deferred loan costs, are amortized on the
straight-line method, over their estimated benefit period ranging to 60 months.
Deferred loan costs are amortized over the lives of the respective loans.
COST IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED
Cost in excess of net tangible assets acquired is being amortized on a
straight-line basis over 25 years. If, in the opinion of management, an
impairment of value occurs, based on the undiscounted cash flow method, any
writedowns will be charged to expense.
FOREIGN OPERATIONS
The financial statements of the foreign subsidiary have been translated
into U.S. dollars in accordance with FASB Statement No. 52. All balance sheet
accounts have been translated using the current exchange rates at the balance
sheet date. Income statement accounts have been translated using the average
exchange rate for the period. The translation adjustments resulting from the
change in exchange rates from period to period have been reported separately as
a component of accumulated other comprehensive income included in stockholders'
equity. Foreign currency transaction gains and losses, which are not material,
are included in the results of operations. These gains and losses result from
exchange rate changes between the time transactions are recorded and settled,
and for unsettled transactions, exchange rate changes between the time the
transactions are recorded and the balance sheet date.
CUSTOMER PAYMENT TERMS
The majority of the Company's sales are made at payment terms of net
amount due in 30-45 days, and do not require collateral.
INCOME TAXES
Deferred income taxes at the end of each period are determined by
applying enacted tax rates applicable to future periods in which the taxes are
expected to be paid or recovered to differences between the financial accounting
and tax basis of assets and liabilities.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123),
permits a company to elect to follow the accounting provisions of APB 25 rather
than the alternative fair value accounting provided under FAS 123 but requires
pro forma net income and earnings per share disclosures as well as various other
disclosures not required under APB 25 for companies following APB 25.
EARNINGS PER SHARE
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants using the treasury stock method and average market price, shares
assumed to be converted relating to the convertible promissory note to the
Company's Parent (with earnings adjusted for interest expense related to the
convertible promissory note which is assumed to be converted) and contingent
shares for the stock price guarantee for the acquisition of Lytton.
F-9
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Following is a reconciliation of amounts used in the basic and diluted
computations:
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Net income - numerator basic computation $ 303,491 $ 797,712 $1,425,519
Effect of dilutive securities:
Interest adjustment on convertible note -- 134,436 169,525
---------- ---------- ----------
Net income, as adjusted for assumed conversion-
Numerator diluted computation $ 303,491 $ 932,148 $1,595,044
========== ========== ==========
Weighted average shares - denominator basic computation 5,647,174 5,193,140 4,510,375
Effect of dilutive securities:
Warrants -- -- 85,987
Stock options 68,039 238,033 247,886
Contingent stock - acquisition 164,131 373,285 65,652
Convertible note -- 1,347,729 1,699,494
---------- ---------- ----------
Weighted average shares, as adjusted - denominator 5,879,344 7,152,187 6,609,394
========== ========== ==========
Earnings per share:
Basic $ .05 $ .15 $ .32
========== ========== ==========
Diluted $ .05 $ .13 $ .24
========== ========== ==========
Neither the 1995 publicly offered warrants exercisable at $4.00 per
share which expired May 17, 1999 nor underwriter warrants to purchase 100,000
shares of common stock and/or 100,000 warrants exercisable at $6.60 per share
and $.25 per warrant with each warrant exercisable into common stock at $8.25
per share have been included since they were anti-dilutive.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate their
fair values. The credit risk associated with cash and cash equivalents is
considered low due to the high quality of the financial institutions in which
the assets are invested.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities is comprised as follows:
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
Accrued compensation $ 446,481 400,680
Other 1,213,032 1,134,105
------------ ------------
$ 1,679,513 $ 1,534,785
============ ============
F-10
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable and debt in the
accompanying financial statements approximate their fair value because of the
short-term maturity of these instruments, or in the case of debt because such
instruments bear variable interest rates which approximate market.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentation.
COMPREHENSIVE INCOME
In 1998 the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income" (FAS 130). This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the Consolidated Statement of Shareholders'
Equity. Prior year financial statements have been reclassified to conform with
these requirements.
NEW PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effective
for fiscal quarters of fiscal years beginning after June 15, 2000. FAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires, among other things, that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that those instruments be measured at fair value. The Company is in
the process of determining the impact that the adoption of FAS 133 will have on
its consolidated financial statements.
NOTE 2--LONG-TERM DEBT
On February 8, 1996, the Company refinanced its term loan by
entering into three loan agreements with a Florida bank. One credit facility
was a $2,000,000 line of credit due on demand secured by the Company's
accounts receivable, inventory, furniture, fixtures and intangible assets and
bore interest at the bank's prime rate plus 1.25%. In
F-11
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 2--LONG-TERM DEBT--CONTINUED
conjunction with the Company's acquisition of Lytton on July 31, 1997, this line
of credit was modified and increased to $2,500,000 with the interest rate
reduced to prime plus .75% and various other modifications. The line was fully
drawn down in connection with this acquisition with $2,500,000 remaining
outstanding, with interest due at 9.25%, until the line was refinanced in
December 1997.
The $2,500,000 line of credit agreement was refinanced and replaced
effective December 29, 1997 with a five-year $1,500,000 commercial term loan and
a $1,600,000 commercial revolving line of credit. The $1,600,000 line of credit
had an outstanding balance of $1,600,000 at December 31, 1999 and December 31,
1998. This line matures May 1, 2000 and has monthly payments of interest at
prime. Both credit facilities are collateralized by the corporate assets of
Techdyne. The commercial term loan, with an outstanding balance of $900,000 at
December 31, 1999 and $1,200,000 at December 31, 1998, matures December 15, 2002
with monthly principal payments of $25,000 plus interest. In connection with the
term loan, the Company entered into an interest rate swap agreement with the
bank to manage the Company's exposure to interest rates by effectively
converting a variable rate obligation with an interest rate of LIBOR plus 2.25%
to a fixed rate of 8.60%. Early termination of the swap agreement, either
through prepayment or default on the term loan, may result in a cost or a
benefit to the Company. The December 29, 1997 refinancing represents a noncash
financing activity which is a supplemental disclosure required by Financial
Accounting Standards Board Statement No. 95, "Statement of Cash Flows" (FAS 95).
The bank also extended two commercial term loans to the Company in
February 1996, one for $712,500 for five years expiring on February 7, 2001 at
an annual rate of interest equal to 8.28% with a monthly payment of principal
and interest of $6,925 based on a 15-year amortization schedule with the unpaid
principal and accrued interest due on the expiration date. This term loan had an
outstanding balance of approximately $606,000 at December 31, 1999 and $636,000
at December 31, 1998 and is secured by a mortgage on properties in Hialeah,
Florida owned by the Company's Parent, two of which properties are leased to the
Company and one parcel being vacant land used as a parking lot. Under this term
loan the Company was obligated to adhere to a variety of affirmative and
negative covenants.
The second commercial term loan was for the principal amount of
$200,000 for a period of five years bearing interest at a per annum rate of
1.25% over the bank's prime rate and requiring monthly principal payments with
accrued interest of $3,333 through expiration on February 7, 2001. This $200,000
term loan which had a balance of approximately $47,000 at December 31, 1999 and
$87,000 at December 31, 1998 is secured by all of Techdyne's tangible personal
property, goods and equipment, and all cash or noncash proceeds of such
collateral.
The Parent has unconditionally guaranteed the payment and performance
by the Company of the revolving loan and the three commercial term loans and has
subordinated the Company's intercompany indebtedness to the Parent to the bank's
position. There are cross defaults between the revolving line and term loans
exclusive of the $200,000 term loan.
Lytton had a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus 1/2% maturing June 30, 1999 which was increased
to $3,000,000 and extended to June 30, 2000. There was an outstanding balance on
this loan of approximately $2,830,000 December 31, 1999 and $962,000 at December
31, 1998. The interest rate on this loan was 9% at December 31, 1999 and 8.25%
at December 31, 1998. Lytton had a $1,000,000 installment loan with the same
bank maturing August 1, 2002, at an annual rate of 9% until July 1999, with
F-12
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 2--LONG-TERM DEBT--CONTINUED
monthly payments of $16,667 plus interest, at which time Lytton was to have an
option to convert the note to a variable rate. This loan was subject to a
prepayment penalty during the fixed rate period. Lytton replaced this loan at
June 30, 1999 with a $1,400,000 installment loan with interest at prime plus
1/2% and monthly payments of $23,333 plus interest payable in 60 monthly
installments commencing August 1, 1999 with the final installment due June 30,
2004. The balance outstanding on this loan was approximately $1,283,000 as of
December 31, 1999 and $733,000 as December 31, 1998. Lytton also has a $500,000
equipment loan agreement with the same bank payable through June 30, 2004 with
interest at prime plus 1/2%. There was no outstanding balance on this loan as of
December 31, 1999 or December 31, 1998. All of these bank loans are secured by
the business assets of Lytton.
Long-term debt is as follows: DECEMBER 31,
-----------------------------
1999 1998
---------- ----------
Term loan secured by real property of Parent with
a carrying value of $946,000 at December 31, 1999.
Monthly payments of principal and interest as
described above. $ 605,584 $ 636,438
Term loan secured by tangible personal property,
goods and equipment with a carrying value of
$5,726,000 at December 31, 1999. Monthly payments
of principal and interest as described above. 46,764 86,763
Commercial term loan secured by corporate assets
of the Company with a carrying value of
approximately $15,366,000 at December 31, 1999.
Monthly payments of principal and interest as
described above. 900,000 1,200,000
Three year revolving line of credit agreement
maturing May 1, 2000. Secured by corporate assets
of the Company with a carrying value of
approximately $15,366,000 at December 31, 1999.
Monthly payments of interest as described above. 1,600,000 1,600,000
Mortgage note secured by land and building with a
net book value of $785,000 at December 31, 1999.
Quarterly payments of approximately $20,000 based
on exchange rates at December 31, 1999 for 15
years commencing October 1994 including interest
at 2% above bank base rate. 489,308 544,528
Line of credit agreement, originally one year with
June 30, 2000 maturity, refinanced in February
2000 as described below. Secured by business
assets of Lytton with a carrying value of
$12,533,000 at December 31, 1999. Monthly payments
of interest as described above. 2,829,997 --
Installment loan requiring monthly payments of
$23,333 plus interest at prime plus 1/2% at
December 31, 1999 and $16,667 plus interest at 9%
at December 31, 1998. Secured by business assets
of Lytton with a carrying value of approximately
$12,533,000 at December 31, 1999 Monthly payments
of principal and interest as described above. 1,283,333 733,333
Equipment loan requiring monthly payments of
$4,298 including interest at 5.5% and maturing in
April 2002. The loan is secured by equipment of
Lytton with a carrying value of approximately
$392,000 at December 31, 1999. 112,693 156,746
Equipment financing obligations requiring combined
monthly payments of $19,467 as of December 31,
1998 as described below, including interest at
rates ranging from 8.55% to 10.09% and secured by
the related assets of Lytton.
-- 112,320
Other 171,784 145,000
---------- ----------
$8,039,463 $5,215,128
Less current portion 576,239 764,550
---------- ----------
$7,463,224 $4,450,578
========== ==========
The prime rate was 8.50% as of December 31, 1999 and 7.75% as of
December 31, 1998.
F-13
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 2--LONG-TERM DEBT--CONTINUED
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extended through July 1999. The
present value of annual future minimum payments required under these financing
obligations is included in the schedule of long-term debt above. Financing under
these agreements is a noncash financing activity which is a supplemental
disclosure required by FAS 95.
In July 1994, Techdyne (Europe) purchased the facility housing its
operations obtaining a 15 year mortgage which had a U.S. dollar equivalency of
approximately $489,000 at December 31, 1999 and $545,000 at December 31, 19998,
based on exchange rates in effect at each of these dates.
The Company refinanced its bank debt and amended Lytton's bank loan
agreements in February 2000. The new financing arrangements have been considered
in the presentation of debt maturities. Scheduled maturities of long-term debt
outstanding at December 31, 1999 are approximately: 2000---$576,239;
2001---$586,974; 2002---$550,395; 2003---$5,628,139; 2004---$426,397;
thereafter---$271,319. Interest payments on all of the above debt amounted to
approximately $581,000, $513,000 and $270,000 in 1999, 1998 and 1997,
respectively.
The Company's line of credit and term loan contain certain restrictive
covenants that, among other things, restrict the payment of dividends, restrict
additional indebtedness, and require maintenance of certain financial ratios.
NOTE 3--INCOME TAXES
The Company files separate federal and state income tax returns from
its Parent, with its income tax liability reflected on a separate return basis.
The Company has a net operating loss carryforward of approximately
$1,000,000 at December 31, 1999 and $2,400,000 at December 31, 1998, expiring
between 2003 and 2010. The Company's new subsidiary Lytton, is included in the
Company's consolidated federal tax return effective August 1, 1997 with the
Company's net operating loss carryforwards able to be utilized to offset any
income taxable for federal tax return purposes generated by this subsidiary.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. For financial
reporting purposes a valuation allowance of $303,000 at December 31, 1999 and
$448,000 at December 31, 1998 has been recognized to offset the deferred tax
assets. Significant components of the Company's deferred tax liabilities and
assets are as follows:
DECEMBER 31,
-------------------------------------
1999 1998
--------------- -------------
Deferred tax liabilities:
Depreciation $ 377,525 $ 422,577
Other -- 14,952
--------------- -------------
Total deferred tax liability 377,525 437,529
Deferred tax assets:
Inventory obsolescence 327,733 321,982
Cost capitalized in ending inventory 69,074 59,292
Accrued expenses 21,966
Tax credits 303,000 48,000
Other 40,174 66,453
--------------- -------------
Sub-total 739,981 517,693
Net operating loss carryforward 417,400 884,792
--------------- -------------
Total deferred tax assets 1,157,381 1,402,485
Valuation allowance for deferred tax assets (303,000) (448,000)
--------------- -------------
Net deferred tax assets 854,381 954,485
--------------- -------------
Net deferred tax asset $ 476,856 $ 516,956
=============== =============
F-14
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 3--INCOME TAXES--CONTINUED
A valuation allowance has been provided that offsets a portion of the
deferred tax asset recorded at December 31, 1999 as management believes that it
is more likely than not, based on the weight of the available evidence, this
portion of the deferred tax asset will not be realized.
Deferred taxes in the accompanying balance sheets consist of the following
components:
DECEMBER 31,
-------------------------------------
1999 1998
--------------- -------------
Current deferred tax asset $ 473,975 $ 481,211
Current deferred tax liability (33,216) (14,952)
--------------- -------------
Net current deferred tax asset 440,759 466,259
Long-term deferred tax asset 413,622 473,274
Long-term deferred tax liability (377,525) (422,577)
--------------- -------------
Net long-term deferred tax asset (liability) 36,097 50,697
--------------- -------------
Net deferred tax asset $ 476,856 $ 516,956
=============== =============
For financial reporting purposes, income before income taxes includes the
following components:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
----------- ----------- -----------
United States income $ 1,229,773 $ 1,462,390 $ 1,150,804
Foreign loss (576,634) (537,466) (289,556)
----------- ----------- -----------
$ 653,139 $ 924,924 $ 861,248
=========== =========== ===========
Significant components of the provision (benefit) for income taxes are as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ 247,619 $ 53,992 $ 34,148
Foreign -- -- (95,864)
State 69,369 83,515 1,000
----------- ----------- -----------
316,988 137,507 (60,716)
Deferred:
Federal 32,660 85,602 (503,555)
Foreign -- (95,897) --
----------- ----------- -----------
32,660 (10,295) (503,555)
----------- ----------- -----------
$ 349,648 $ 127,212 $ (564,271)
=========== =========== ===========
Techdyne (Europe) files separate income tax returns in the United Kingdom.
The reconciliation of income tax attributable to income before income
taxes computed at the U.S. federal statutory rates to income tax expense
(benefit) is:
F-15
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 3--INCOME TAXES--CONTINUED
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ---------- ---------
Statutory tax rate (34%) applied to income before
income taxes $ 222,067 $ 314,474 $ 292,824
Increases (reduction)in taxes resulting from:
State income taxes-net of federal income tax effect 44,021 74,628 31,263
Benefit of net operating losses -- -- (893,000)
Tax rate differential relating to tax benefit of
foreign operatin loss 196,056 $ 86,841 --
Non deductible items 23,657 40,780 20,593
Change in deferred tax valuation allowance (145,000) (402,465) --
Other 8,847 12,954 (15,951)
--------- ---------- ---------
$ 349,648 $ 127,212 $(564,271)
========= ========== =========
Undistributed earnings of the Company's foreign subsidiary amounted to
approximately $1,718,000 at December 31, 1999 and $2,294,000 December 31, 1998.
Those earnings are considered to be indefinitely reinvested and, accordingly, no
provision for U.S. federal and state income taxes has been provided thereon.
Upon distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to the various foreign
countries. Determination of the amount of unrecognized deferred U.S. income tax
liability is not practicable because of the complexities associated with its
hypothetical calculation; however, foreign tax credits may be available to
reduce some portion of the U.S. liability. Withholding taxes of approximately
$86,000 and $115,000 would be payable upon remittance of all previously
unremitted earnings at December 31, 1999 and December 31, 1998, respectively.
Income tax payments were approximately $227,000, $32,000 and $269,000
in 1999, 1998 and 1997, respectively.
NOTE 4--TRANSACTIONS WITH PARENT
The Parent provides certain financial and administrative services to
the Company. Effective October 1, 1996, the services provided to the Company by
the Parent were formalized under a service agreement for $408,000 per year. The
amount of expenses allocated by the Parent and those covered under the service
agreement effective October 1, 1996 totaled $408,000 in 1999, 1998 and 1997.
The advances from Parent were made under a demand convertible
promissory note with interest at 5.7%. The balance of the note including accrued
interest, which amounted to $2,427,000 at December 31, 1998, was convertible
into common stock of the Company at the option of the Parent at a conversion
price of $1.75 per share. On September 30, 1999, the Parent converted the note
balance which amounted to $2,531,942, including accrued interest into 1,446,823
shares of the Company's common stock resulting in an increase in the Parent'
ownership interest to 72.5%. The Parent had previously converted $350,000 of
this note into 200,000 common shares in June 1996 and $875,000 into 500,000
common shares in November 1997. Advances from the Parent on the balance sheet
represent the advance payable to the Parent of approximately $498,000 at
December 31, 1999 and included an advance payable of approximately $704,000 in
addition to the convertible note balance at December 31, 1998 with interest at
5.7%. Interest on the net advances amounted to $143,000, $156,000 and $152,000,
in 1999, 1998 and 1997, respectively, and is included in the net balance due the
Parent.
F-16
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 4--TRANSACTIONS WITH PARENT--CONTINUED
The Company has deferred the gain on the sale of real property to its
Parent of approximately $161,000. The premises are leased from the Parent under
a 5-year net lease expiring March 31, 2000 at an annual rental of $94,000 plus
applicable taxes. The lease was extended for one year at an annual rental of
$150,000 plus applicable taxes.
The Parent has agreed not to require repayment of the intercompany
advances prior to January 1, 2001 and, therefore, the advances have been
classified as long-term at December 31, 1999.
The Company manufactured certain products for the Parent through
February 1999. Sales of the products were $23,000, $172,000 and $214,000 in
1999, 1998 and 1997, respectively.
NOTE 5--RELATED PARTY TRANSACTIONS
For the years ended December 31, 1999, 1998 and 1997, respectively, the
Company paid premiums of approximately $467,000, $348,000 and $325,000, for
insurance through a director and stockholder, and the relative of a director and
stockholder.
For the years ended December 31, 1999, 1998 and 1997, respectively,
legal fees of $45,000, $47,000 and $53,000, were paid to an officer of the
Parent who acts as general counsel for the Company and the Parent.
Subcontract manufacturing is performed for the Company by a company of
which a director of the Company is President and one of the owners. Subcontract
manufacturing purchases from this company amounted to approximately $1,728,000,
$2,245,000 and $2,837,000 in 1999, 1998 and 1997, respectively.
Lytton had a deferred compensation agreement with its former President.
The agreement called for monthly payments of $8,339 provided that Lytton's cash
flow was adequate to cover these payments with interest to be calculated on any
unpaid balance as of August 1, 1999. During the period ending December 31, 1999,
a total of $58,000 was paid under this agreement which fully paid the agreement.
NOTE 6--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Lytton leases its operating facilities from an entity, which is owned
by Lytton's former owner and former President. The operating lease, which
expires July 31, 2002, requires annual lease payments of approximately $218,000,
adjusted each year based on the Consumer Price Index, and contains renewal
options for a period of five to ten years at the then fair market rental value.
The Company leases several facilities including that of Lytton and those under
lease from its Parent which expire at various dates through 2002 with renewal
options for a period of five years at the then fair market rental value. The
Company's aggregate lease commitments at December 31, 1999, are approximately:
2000---$578,000, 2001---$548,000, 2002---$380,000, 2003---$240,000 and
thereafter---$245,000. Total rent expense was approximately $806,000, $817,000
and $656,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially all
of its employees. The Company adopted this plan as a participating employer
effective July 1, 1998. The discretionary profit sharing and matching expense,
including that of the Company and Lytton amounted to approximately $86,000 for
the year ended December 31, 1999 and $ 48,000 for the year ended December 31,
1998.
F-17
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 7--STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as is
discussed below, Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock Based Compensation" (FAS 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense was recognized.
In May 1994, the Company adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in May 1994, the board of directors granted
227,500 options to certain of its officers, directors and employees. These
options were exercisable for a period of five years at $1 per share. On June 30,
1998, 115,000 of these options were exercised and on May 10, 1999, 50,000 of the
remaining options were exercised. The Company received cash payment of the par
value and the balance in three year promissory notes, presented in the
stockholders' equity section of the balance sheet with interest at 5.16% for the
June 1998 exercises and 4.49% for the May 1999 exercises.
On February 27, 1995 the Company granted non-qualified stock options,
not part of the 1994 Plan, to directors of Techdyne and its subsidiary for
142,500 shares exercisable at $1.75 per share for five years. In April 1995, the
Company granted a non-qualified stock option for 10,000 shares which vested
immediately, not part of the 1994 Plan, to its general counsel at the same price
and terms as the directors' options. Including the April 1995 grant, 150,000
of these options are outstanding at December 31, 1999.
In June 1997, the Company adopted a Stock Option Plan for up to 500,000
options, and pursuant to the plan the board granted 375,000 options exercisable
for five years through June 22, 2002 at $3.25 per share, the closing price of
the common stock on the grant date, with 345,000 of these options outstanding
at December 31, 1999. On June 30, 1999, the Company granted 52,000 options
exercisable for three years through June 29, 2002 at $4.00 per share. On
August 25, 1999, the Company granted 16,000 options exercisable for three years
through August 24, 2002 at $4.00 per shares. On December 15, 1999 the Company
granted 19,000 options exercisable for three years through December 14, 2002 at
$4.00 per share.
In May, 1998, as part of the consideration pursuant to an agreement for
investor relations and corporate communications services, the Company granted
options for 25,000 shares of its common stock exercisable for three years
through May 14, 2001 at $4.25 per share. Options for 6,250 shares of the
Company's common stock vested during 1998 with no additional options to vest due
to cancellation of this agreement in August, 1998. Pursuant to FAS 123, the
Company recorded $13,000 expense for options vesting under this agreement.
The Company entered into a consulting agreement on July 1, 1999 for
financial advisory services with the agreement to end on September 15, 2000. As
compensation, the consultant received non-qualified stock options to purchase
100,000 shares of the Company's common stock exercisable at $3.50 per share that
will expire on September 15, 2000. These options were valued at $40,000
resulting in approximately $17,000 expense during 1999.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing
F-18
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 7--STOCK OPTIONS--CONTINUED
model with the following weighted-average assumptions for the options issued
during 1999, 1998 and 1997, respectively: risk-free interest rate of 5.20%,
5.55% and 5.59%; no dividend yield; volatility factor of the expected market
price of the Company's common stock of .67, .58 and .60; and an expected life
of the options of 1.8 years for the options issued during 1999, 3 years for
the options issued during 1998 and 2.5 years for the options issued during
1997.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective input assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different than those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employees stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. Since the
options vested immediately, the Company's pro forma disclosure recognizes
expense upon issuance of the options. The Company's pro forma information for
options issued is as follows:
1999 1998 1997
-------- -------- --------
Pro forma net income $233,101 $790,000 $927,000
======== ======== ========
Pro forma earnings per share:
Basic $ .04 $ .15 $ .21
======== ======== ========
Diluted $ .04 $ .13 $ .17
======== ======== ========
A summary of the Company's stock option activity, for the years ended
December 31, follows:
1999 1998 1997
---- ---- ----
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- ---------------- --------- ---------------- --------- --------------
Outstanding-beginning of year 590,350 699,100 326,500
Granted 187,000 $3.73 6,250 $4.25 375,000 $3.25
Exercised (50,000) 1.00 (115,000) $1.00 (300) 1.00
Expired (39,100) 2.77 (2,100) 1.00
------- --------- ---------
Outstanding-end of year 688,250 590,350 699,100
======= ========= =========
Outstanding and exercisable
May 1994 options --- 56,600 1.00 171,600 1.00
February and April 1995 options 150,000 $1.75 152,500 1.75 152,500 1.75
June 1997 options 345,000 3.25 375,000 3.25 375,000 3.25
May 1998 options 6,250 4.25 6,250 4.25 ---
June, August and December
1999 options 87,000 4.00 --- ---
July 1999 options 100,000 3.50 --- ---
------- --------- --------
688,250 590,350 699,100
======= ========= =========
Weighted-average fair value of
options granted during the year $ .59 $ 2.04 $ 1.33
======= ========= =========
The remaining average contractual life at December 31, 1999 is .7 years
for the July 1999 options, and 4.6 years for the June 1999, August 1999 and
December 1999 options, and 1.4 years, 2.5 years and .2 years for the 1998, 1997
and 1995 options, respectively.
F-19
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 8--COMMON STOCK
The Company completed a public offering of common stock and warrants on
October 2, 1995 providing it with net proceeds of approximately $3,321,000.
Pursuant to the offering, 1,000,000 shares of common stock and 1,000,000
redeemable common stock purchase warrants were issued. The warrants provided for
the purchase of one common share each and had an initial exercise price of $5.00
which was reduced to $4.00 in February 1999 with the expiration date extended to
May 17, 1999 at which time the warrants expired. During 1997, approximately
41,000 warrants were exercised resulting in proceeds of approximately $194,000,
net of commissions. The underwriter received warrants to purchase 100,000 shares
of common stock and/or 100,000 warrants exercisable from September 13, 1996
through September 12, 2000 at $6.60 per share of common stock and $.25 per
warrant with each warrant exercisable into common stock at $8.25 per share.
The Company has 888,250 shares reserved for future issuance at December
31, 1999, including: 150,000 shares for 1995 options; 345,000 shares for 1997
options; 87,000 shares for 1999 options; 200,000 shares for underwriter's
options; and 106,250 shares for consultants' stock options.
NOTE 9--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes certain quarterly operating data:
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
--------------------------------------------- --------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- -------
(In thousands except per share data)
Net Sales $9,835 $10,457 $14,129 $13,899 $11,872 $11,614 $10,973 $10,207
Gross profit 1,016 1,257 2,079 1,389 1,711 1,507 1,412 758
Net income (loss) (149) 2 626 (176) 510 545 179 (436)
Earnings (loss) per share:
Basic $(.03) $ -- $ .12 $ (.03) $ .10 $ .11 $.03 $ (.08)
Diluted $(.03) $ -- $ .10 $ (.03) $ .08 $ .08 $.03 $ (.08)
Since the computation of earnings per share is made independently for
each quarter using the treasury stock method, the total of four quarters
earnings do not necessarily equal earnings per share for the year.
The Company recorded an adjustment to the valuation allowance relating
to its deferred tax asset of approximately $145,000 during the fourth quarter
of 1999, $400,000 during the fourth quarter of 1998 and $900,000 during the
fourth quarter of 1997.
NOTE 10--ACQUISITION
On July 31, 1997, the Company acquired Lytton, which manufactures and assembles
printed circuit boards and other electronic products, for $2,500,000 cash, paid
at closing, and issuance of 300,000 shares of the Company's common stock. The
Company guaranteed that the seller would realize a minimum of $2,400,000 from
the sale of these shares of common stock based on Lytton having achieved
certain earnings objectives. These earning objectives were achieved in 1998
resulting in an increase of $400,000 to the valuation of $2,000,000 originally
recorded for these securities. The difference (of $968,750) between the fair
value of
F-20
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 10--ACQUISITION--CONTINUED
the common stock at the date of acquisition and the guaranteed value was
considered part of the cost of the acquisition and is reflected as paid-in
capital. The acquisition was accounted for under the purchase method of
accounting and, accordingly, the results of operation of Lytton have been
included in the Company's consolidated statement of income since August 1, 1997.
The total purchase price in excess of the fair value of net assets acquired is
being amortized over 25 years. Additional contingent consideration is due if
Lytton reaches pre-defined sales levels. Additional consideration of
approximately $290,000 and $154,000 was paid in April 1999 and April 1998,
respectively, based on sales levels with the Stock Purchase Agreement providing
for a possible additional sales level incentive, for a specified one year
period. As the contingencies are resolved, if additional consideration is due,
the then current fair value of the consideration will be recorded as goodwill,
which will be amortized over the remainder of the initial 25 year life of the
goodwill.
The terms of the Guaranty in the Stock Purchase Agreement were modified
in June, 1998 by the Company and the seller ("Modified Guaranty"). The modified
terms provided that the seller would sell an amount of common stock which would
provide $1,300,000 gross proceeds, and the Company guaranteed that, to the
extent that the seller had less than 150,000 shares of the Company's common
stock remaining, the Company would issue additional shares to the seller. In
July 1998, the Company advanced the seller approximately $1,278,000 ("Advance")
toward the $1,300,000 from the sale of the Company's common stock in addition to
the seller having sold 5,000 shares of common stock in July, 1998. Proceeds from
the sale of the Company's common stock by the seller, up to 195,000 shares, were
to repay the Advance and to the extent proceeds from the sale of these shares
were insufficient to pay the advance, the balance of the Advance would be
forgiven. The Advance was presented in the Stockholder's Equity section of the
balance sheet. The Company guaranteed the seller aggregate proceeds of no less
than $1,100,000 from the sale of the remaining common stock if sold on or prior
to July 31, 1999 ("Extended Guaranty"). In July 1999, The Company forgave the
Advance to the seller and issued payment of $1,100,000 to the seller, which
together with the proceeds realized by the seller from the sale of stock in July
1998 satisfied the Company's remaining obligation under the $2,400,000
guarantee. The remaining 295,000 shares of common stock held by the seller as
security for the remaining $2,378,000 guarantee were returned to the company and
have been cancelled.
The following summary pro forma financial information reflects the
Lytton acquisition as if it had occurred on January 1, 1997, accordingly,
revenues and expenses of Lytton and related income tax effects for the period
prior to the acquisition are included. The pro forma financial information
does not purport to represent what the Company's actual results of operations
would have been had the acquisition occurred as of January 1, 1997.
SUMMARY PRO FORMA INFORMATION
Year ended December 31, 1997
----------------------------
Total revenues $43,867,000
===========
Net income $ 1,840,000
===========
Earnings per share:
Basic $.39
====
Diluted $.30
====
F-21
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 11--CAPITAL EXPENDITURES, GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS
Summarized financial information in accordance with FAS 131 for the
Company's one reportable segment is shown in the following table.
CAPITAL EXPENDITURES 1999 1998 1997
- -------------------- ----------- ----------- -----------
$ 1,475,823 $ 832,410 $ 1,396,260
=========== =========== ===========
GEOGRAPHIC AREA SALES 1999 1998 1997
- --------------------- ----------- ----------- -----------
United States $44,501,810 $40,019,478 $26,248,002
Europe(1) 3,818,286 4,646,447 6,771,329
----------- ----------- -----------
$48,320,096 $44,665,925 $33,019,331
=========== =========== ===========
(1) Techdyne (Europe) sales are primarily to customers in the United
Kingdom.
GEOGRAPHIC AREA PROPERTY, PLANT AND EQUIPMENT (NET) 1999 1998 1997
- --------------------------------------------------- ----------- ----------- -----------
United States $ 4,074,801 $ 3,689,894 $ 3,757,065
Europe 1,284,854 1,386,142 1,483,480
----------- ----------- -----------
$ 5,359,655 $ 5,076,036 $ 5,240,545
=========== =========== ===========
Sales to major customers are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
MAJOR CUSTOMERS 1999 1998 1997
- --------------- ----------- ----------- -----------
Motorola(2) $ 6,338,000 $ 4,488,000 $ ---
PMI Food Equipment Group (2) 7,195,000 8,183,000 ---
IBM(1) --- --- 6,438,000
EMC and its related suppliers(1) --- --- 3,201,000
(1) Less than 10% of sales for 1998.
(2) Less than 10% of sales for 1997.
(3) Less than 10% of Sales for 1996.
A majority of the Company's sales are to certain major customers. The
loss of or substantially reduced sales to any of these customers would have an
adverse affect on the Company's operations if such sales were not replaced.
Sales to PMI Food Equipment Group by Lytton, which was acquired by the
Company on July 31, 1997, represented approximately 32% and 41% of Lytton's
sales and 15% and 18% of consolidated sales for the years ended December 31,
1999 and 1998, respectively.
Sales to Compaq Computer Corp., which at one time was a major customer
of Techdyne (Europe) amounted to $209,000 in 1999, $1,192,000 in 1998 and
$2,847,000 in 1997 representing 5%, 26% and 42% of the sales of Techdyne
(Europe) for 1999, 1998 and 1997, respectively.
F-22
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 12--BANK LOAN REFINANCING
In February 2000, the Company refinanced its line of credit and term
loans through the same bank which handles Lytton's financing. One credit
facility is a $4,500,000 three year committed line of credit facility maturing
February, 2003 with interest at prime minus 1/4% and an option to fix the rate
for up to 180 days at Libor plus 2.50%. The bank also extended a $1,000,000 five
year term loan maturing February 2005 with the same interest rate as for the
line of credit. If the Company achieves certain financial criteria for its year
ended December 31, 2000, it would receive a rate reduction under both the prime
and Libor alternatives. The loans are secured by the business assets of the
Company and are cross collateralized with the debt of Lytton.
In conjunction with the Company's refinancing, the bank amended the
terms of the Lytton line of credit and term loan and equipment loan agreement to
make Lytton's line of credit a three year committed facility and to amend the
interest rates on Lytton's line of credit, term loan and equipment loan
agreements to coincide with those of the Company's loan agreements.
The bank also extended an acquisition credit facility for the Company's
use in funding acquisitions of other companies with the facility to be split
between a line of credit and term loan and cross collateralized with the
Company's other loans.
F-23