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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, 1998
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
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Commission file number 0-14659
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TECHDYNE, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 59-1709103
(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 Section
12(b) of the Act:
None
Securities registered under Section
12(g) of the Act:
Title of each class
Common Stock, $.01 par value
Common Stock Purchase Warrants
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. [X]
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 11, 1999 was approximately $5,600,000.
As of March 11, 1999 the Company had 5,250,167 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 to
be held on June 9, 1999.
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 year ended December 31, 1994, Part IV, Exhibits.
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TECHDYNE, INC.
Index to Annual Report on Form 10-K
Year Ended December 31, 1998
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............... 25
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 (the "Reform
Act") 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 ("Commission") Form SB-2
(effective September 13, 1995), and Forms S-3, effective November 11, 1996 and
November 4, 1997, respectively. Accordingly, readers are cautioned not to place
undue 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
also 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 90% of sales are domestic and 10% are effected by the
Company's wholly owned subsidiary, Techdyne (Scotland) Limited ("Techdyne
(Scotland)") in the European markets and to a limited extent in the Middle East.
The Company has another Scottish subsidiary, Techdyne Livingston Limited. Unless
otherwise noted, Techdyne and its subsidiaries shall be referred to collectively
as "Techdyne" or the "Company."
Included among its customers are several Fortune 500 companies.
Services and products are marketed through an in-house sales/marketing staff of
21 persons, in conjunction with approximately four independent manufacturer's
sales representative firms with approximately 13 sales representatives.
The Company was incorporated in Florida in 1976, acquired by Medicore,
Inc. ("Medicore" or the "Parent") in 1982, and became a public company in 1985.
Medicore, a Nasdaq National Market company, owns approximately 62% of the
Company's common stock (approximately 70% with its convertible promissory note).
See "Security Ownership of Certain Beneficial Owners and Management" and
"Certain Relations and Related Transactions" of the Company's Information
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
1999, 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 substantial growth. The Company believes 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. The Company believes 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. Techdyne assists its
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 Techdyne's 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 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 the Company's 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, the Company's objective is to become a stronger
competitive 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. The Company will continue
to seek to develop strong, long-term alliances with major-growth OEMs of
complex, market leading products. The Company believes that creating and
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maintaining long-term relationships with customers requires providing high
quality, cost-effective manufacturing services marked by a high degree of
customer responsiveness and flexibility.
Management is seeking to concentrate on high value-added products and
services for leading OEMs. The Company focuses on leading manufacturers of
advanced electronic products that generally require custom-designed, more
complex interconnect products and short lead-time manufacturing services.
The Company plans to build on its integrated manufacturing
capabilities, final system assemblies and testing. In addition to PCBs, the
Company's custom cable assembly capabilities provide it with further
opportunities to leverage its vertical integration and to provide greater value
added services and be more competitive. In addition, vertical integration pro-
vides it with greater control over quality, delivery and cost.
Management believes it develops closer and more economically beneficial
relationships with its customers through its geographically diverse
manufacturing and assembly operations, presently located in Florida, Texas,
Massachusetts, Ohio and Scotland. The Company's diverse locations also help
satisfy costs, timely deliveries and local market requirements of its customers.
Management continues to pursue expansion in different markets to better serve
existing customers and to obtain additional new customers. In 1997, Techdyne
acquired Lytton Incorporated ("Lytton"), a private Ohio company engaged in the
manufacture, assembly and sale of complex PCBs and other electronic products.
The Lytton acquisition complemented the Company's operations and continued the
business strategy of the Company by expanding its customer base, broadening its
product line, entering a new geographic area, enhancing its manufacturing
capabilities, and enabling the Company to better serve the combined existing
customer base with enhanced product choices with opportunities to further
attract new customers. Management continues to seek acquisitions of contract
manufacturing businesses complimentary to the Company's operations.
The Company will be competing 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 the
Company's 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 the Company's business and financial results.
To further satisfy customer needs, the Company seeks to develop
long-term customer relationships by using its state-of-the-art technology to
provide timely and quick-turnaround manufacturing and comprehensive support for
materials purchases and inventory control. Through its 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 its processes, and the Company's early
involvement in the design process using its computer-aided design ("CAD")
system.
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The Company is improving its material acquisition process in an attempt
to better its purchasing power by identifying materials used across customer
lines. In 1998, the Company began updating its enterprise resource planning
("ERP") system utilizing Visual Manufacturing software. The Visual Manufacturing
software should also solve the "Year 2000" issues for the Company. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Management is also attempting to consolidate vendors to achieve
better purchasing power. The Company believes these efforts will provide it with
better leverage in material pricing and permit the Company to be more
competitive when bidding for manufacturing work and turnkey business. The
Company is also attempting to better track actual costs against customer quotes
which will better allow it to control costs and more accurately manage its
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. Techdyne has computerized
testing for substantially all of its 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.
Techdyne also produces multilayer PCBs. These PCBs consist of three or
more layers of a PCB laminated together and interconnected by plated-through
holes. Multilayer PCBs consist of metallic interconnecting paths on a
non-conductive material, typically laminated epoxy glass. Holes drilled in the
laminate and plated through with conductive material from one surface to
another, called plated-through holes, are used to receive component leads and to
interconnect the circuit layers. Multilayer boards increase packaging density,
improve power and ground distribution, and permit the use of higher speed
circuitry. The development of electronic components with increased speed, higher
performance and smaller size has stimulated a demand for multilayer PCBs, as
they provide increased reliability, density and complexity. Since even the most
sophisticated two-sided PCB cannot meet the requirements of today's circuit
designers for packaging density, an increasing number of designs use multilayer
technology.
4
Fiscal 1996 reflected sales revenues of approximately 8% derived from
PCBs. In 1997, the Company acquired Lytton, whose operations, with six automated
lines, are more focused on PCB manufacturing, primarily for the food preparation
equipment industry. Techdyne also established a 5,500 square foot manufacturing
facility in Massachusetts in 1997, in addition to Lytton's Ohio operations.
These 1997 expansions resulted in PCB manufacturing to have yielded
approximately 48% of the Company's sales revenues in 1998.
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
multiconductor, ribbon, co-axial cable assemblies, and discrete wire harness
assemblies. The Company uses advanced manufacturing processes, in-line
inspection and computer testing. Techdyne tests all of its cable and harness
assemblies with computerized automated test equipment.
The Company maintains 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. In 1997, the Company also
tooled the now popular SCSI III and .8mm SCSI over-molds.
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. The cable sales of the Company comprised approximately
42% of the total sales revenue for 1998.
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 its CAD
system, engineering and supply procurement. Techdyne develops manufacturing
processes and tooling and test sequences for new products of its customers. It
also provides 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 the Company 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.
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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. The Company redesigns, reworks, refurbishes and
repairs these materials and sub-assemblies.
Contract manufacturing, medical product sales, reworking and
refurbishing together amounted to approximately 10% of sales for 1998.
Management believes that PCB sales and contract manufacturing will provide the
Company with substantial increases in revenues in 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 its 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
received from its customers or developed by Techdyne from customer requirements.
The Company's industrial, electrical and mechanical engineers work in close
liaison with its customers' engineering departments from inception through
design, prototypes, production and packaging. Techdyne evaluates customer
designs and if appropriate, recommends 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.
The Company's 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.
Its Lytton subsidiary provides Techdyne 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.
The Company offers a wide range of custom manufactured cables and
harnesses for molded and mechanical applications. The Company uses 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.
The Company maintains a large assortment of standard tooling. New
manufacturing jobs may require new tooling and dies, but most presses and
related equipment are standard.
The Company maintains modern state-of-the-art equipment at all of its
facilities for crimping, stripping, terminating, soldering, sonic welding and
sonic cleaning which permits the Company to produce conventional and complex
molded cables.
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Over the last five years the Company became more involved in contract
manufacturing of moderate to high volume turnkey assemblies and sub-assemblies,
including injection molded and electronic assembly products. See "Business -
Products" above. 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 Scottish 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.
The Company also has "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.
SUPPLIES AND MATERIALS MANAGEMENT
Materials used in the Company's 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. The Company has not experienced any significant
disruptions from shortages of materials or delivery delays of its suppliers and
believes that its present sources and the availability of its required materials
are adequate. The Company has a computerized system of material requirements
planning, purchasing, sales and marketing functions. The Company will continue
to make its materials acquisition processes more efficient through the
installation and upgrading of the Visual Manufacturing software which it
completed in three of its facilities in 1998 with the balance of the Company's
facilities to be upgraded in 1999. This new software not only has improved its
material acquisition process but also satisfies the Company's 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 its standards for timely delivery, high quality and cost effectiveness. In
order to control inventory investment and avoid material obsolescence,
components are generally ordered when the Company has a purchase order or
commitment from its customer for the completed assembly. Techdyne uses ERP
management technologies and manages its material pipelines and vendor base to
allow its customers to increase or decrease volume requirements within
established frameworks.
Operational improvements implemented several years ago have improved
the 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
In March, 1995 for its Hialeah, Florida facility, the Company 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 (Scotland) received its BS 5750 quality assurance designation in 1991
from British Standards Institute. Lytton
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received its ISO 9002 quality designation in 1995 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 the services of the Company. 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. Management believes
it is one of the manufacturers of choice for the major Fortune 500 companies,
certain of which are its customers, based upon its 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.
The Company strives for a CPK of two, i.e., twice as critical as customer
tolerances.
During the course of initial qualification and production cycles, new
and existing customers inspect the Company and its operations. Over the years
the Company's product and manufacturing quality have received excellent ratings.
Total quality, timely delivery and customer satisfaction is
management's 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. The Company
maintains regular contact with its customers to assure adequate information
exchange and other activities necessary to assure customer satisfaction and to
support its high level of quality and on-time delivery. Any adverse change in
the Company's excellent quality and process controls could adversely affect its
relationships with customers and ultimately its 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.
The Company's revenue was distributed over the following industry segments:
Year Ended December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
Data processing 29% 40% 74%
Telecommunications 20% 7% 9%
Instrumentation 17% 16% 8%
Food preparation equipment (1) 18% 19% --%
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(1) Accomplished through Lytton, acquired in July, 1997.
The Company seeks to serve a sufficiently large number of customers to
avoid dependence on any one customer or industry. Nevertheless, historically a
substantial percentage of the Company's net sales have been to multiple
locations of a small number of customers. Significant reductions or delays in
sales to
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any of those major customers would have a material adverse effect on the
Company's results of operations. In the past, certain customers have terminated
their manufacturing relationship with the Company, 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 the Company's results of operations. The
Company is dependent upon the continued growth, viability and financial
stability of its 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 the
Company's customers in these industries are affected by general economic
conditions. The factors affecting these industries in general, and/or the
Company's customers in particular, could have a material adverse effect on the
Company's results of operations. In addition, the Company generates significant
accounts receivable in connection with providing manufacturing services to its
customers. If one or more of the Company's customers were to become insolvent or
otherwise were unable to pay for the manufacturing services provided by the
Company, the Company's operating results and financial condition would be
adversely affected. In 1998, 50% of the Company's sales were made to numerous
locations of five major customers. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The table below sets forth the respective portion of net sales for the
applicable period attributable to customers and related suppliers who accounted
for more than 10% of net sales in any respective period.
Percentage of Net Revenue
1998 1997 1996
---- ---- ----
PMI Food Equipment Group ("PMI") (1) 18% * *
Compaq Computer Corporation ("Compaq") * * 35%
International Business Machines ("IBM") * 19% 18%
EMC * 10% 12%
Motorola, Inc ("Motorola") 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 50% of sales for 1998. Lytton, acquired in 1997,
focuses primarily in PCB production, had approximately 41% of its sales for
fiscal 1998 to PMI. Techdyne (Scotland) had a substantial portion of its 1998
sales, approximately 26%, to Compaq. During the last three years, bidding for
Compaq orders became more competitive due to Far Eastern competitors which
resulted in substantially reduced sales to that customer with lower profit
margins on remaining sales. During the fourth quarter of 1998, sales of Techdyne
(Scotland) to Compaq decreased to 13% of its sales. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MARKETING AND SALES
Techdyne continues to pursue expansion and diversification of its
customer base and it is targeting emerging OEMs in high growth industry
segments. The Company's principal sources of new business are
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the expansion in the volume and scope of services provided to existing
customers, referrals from customers and suppliers, direct sales through its
sales managers and executive staff, and through its 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 six regional sales managers covering
the Northeast, Southeast, West and Southwest regions of the United States. There
are also 11 in-house sales/marketing personnel, including Barry Pardon, the
President of the Company. The regional sales managers have four independent
manufacturer representative agencies who employ approximately 13 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 the Company. The agreements
further prohibit the sales representative from disclosing trade secrets or
calling on customers of the Company for a period of six months to one year from
termination of their agreement.
Techdyne (Scotland) has four 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
products (see "Business - Products - Reworking and Refurbishing" above) to
customers in Scotland, England, Ireland, Germany and the Middle East.
Substantially all of the Company's 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, 1998, the Company's backlog of orders amounted to
approximately $11,817,000, of which approximately $8,354,000 (approximately 71%)
was represented by the orders from its Lytton operations and approximately
$673,000 (approximately 6%) was represented by orders for Techdyne (Scotland)
operations. Last year the backlog was approximately $14,029,000 of which
approximately $7,300,000 was derived from Lytton operations and approximately
$2,054,000 was represented by orders of Techdyne (Scotland) operations.
Management believes, based on past experience and relationships with its
customers and knowledge of its manufacturing capabilities, that substantially
all of its 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,
the Company occasionally allows 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.
10
PATENTS AND TRADEMARKS
The Company does not have nor does it rely on patents or trademarks to
establish or protect its 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. The Company also competes with in-house
manufacturing operations of current and potential customers. Although the
Company has been expanding in the Northeast, Midwest, Southeast and Southwest
areas of the United States, certain of the Company's 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. Techdyne 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 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."
Management believes the primary competitive factors to be price,
quality of production, manufacturing capability, prompt customer service, timely
delivery, engineering expertise, and technical assistance to customers. The
Company believes it competes favorably in these areas. Management also believes
its competitive position is internationally enhanced through its European
manufacturing and marketing operations through Techdyne (Scotland). See
"Manufacturing" and "Foreign Operations" under "Business" above.
Due to the number and variety of competitors, reliable data relative to
the Company's competitive position in the electronic components and assembly
industry is difficult to develop and is not known.
GOVERNMENTAL REGULATION
The Company's operations are subject to certain federal, state and
local regulatory requirements relating to environmental waste management and
health and safety matters. Management believes that the Company complies 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 the Company. 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 the Company to
difficulties in compliance, the failure of which could subject the Company to
future liabilities, restriction on expansion or existing production, or
otherwise involve substantial additional expenditures by the Company. These
regulations provide for civil and criminal fines, injunctions and other
sanctions and, in certain instances, allow third parties to sue to enforce
compliance.
11
EMPLOYEES
The Company currently employs approximately 415 full-time people
domestically. Of these approximately 326 are engaged in manufacturing, quality
assurance and related operations, 20 in material handling and procurement, 17
are employed in marketing, including its President, 22 in engineering, and 30
are engaged in administrative, accounting, warehousing and support activities.
Its Scottish subsidiary employs approximately 88 people of which 52 are in
production and engineering and the balance in administrative, sales, accounting
and support activities.
In addition, to its full-time employees, the Company domestically
regularly utilizes the services of temporary workers retained through local
agencies. Presently there are approximately 70 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.
The Company has no unions and believes its relationship with its
employees is good.
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, 2000
(exec. offs., mfg.) Hialeah, FL(1)
12,000 sq. ft. 2200 W 77th St. 5 yrs. to March 31, 2000
(warehouse) Hialeah, FL(1)
15,000 sq. ft. 7110 Brittmore 5 yrs. to August 31, 2002,
(mfg., offs. & Houston, TX 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)
77,800 sq. ft. 1784 Stanley Ave. 5 yrs. to July 31, 2002,
(mfg., offs. & Dayton, Ohio(3) two five year renewals
warehouse)
- ----------
(1) THE LANDLORD IS THE COMPANY'S 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. SEE NOTE (3) HEREIN.
(2) THE COMPANY HAS SUBLET 860 SQUARE FEET OF SPACE ON A MONTH TO MONTH
BASIS TO AN UNAFFILIATED PARTY.
(3) THE LANDLORD IS OWNED BY THE FORMER PRESIDENT, NOW ASSISTANT TO THE
PRESIDENT, OF LYTTON, ACQUIRED BY THE COMPANY IN JULY, 1997. HE IS ALSO
A NOMINEE FOR DIRECTOR OF THE COMPANY. SEE "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" OF THE COMPANY'S INFORMATION STATEMENT RELATING
TO THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JUNE 9, 1999,
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.
12
Techdyne (Scotland) 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 $545,000 at December
31, 1998. See Item 1, "Business - Foreign Operations" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company maintains state-of-the-art manufacturing, quality control,
testing and packaging equipment at all of its facilities in Florida, Ohio,
Massachusetts, Texas and Scotland.
The Company believes that its equipment and facilities are adequate for
its current operations.
The Company is subject to a variety of environmental regulations
relating to its 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.
In the first quarter of 1996 a temporary worker was injured at the
Company. The extent of his injuries or related costs are not known. The injured
party is insured through the temporary agency. The Company believes its
insurance is adequate to cover any potential claims. See Note 6 to "Notes to
Consolidated Financial Statements."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the Company's
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
On November 6, 1996, the Company's common stock and Warrants were
listed and traded on the Nasdaq National Market under the symbols TCDN and
TCDNW, respectively, and ceased trading on the Boston Stock Exchange. 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.
1997
----
High Low
---- ---
1st Quarter..................... $8.13 $5.50
2nd Quarter..................... 7.88 3.25
3rd Quarter...................... 4.13 2.50
4th Quarter...................... 4.75 3.00
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
At March 11, 1999, the closing sales price of the common stock was
$3.00.
At March 11, 1999, the Company had 72 shareholders of record and based
upon data obtained from its transfer agent it has approximately 820 beneficial
owners of its common stock.
The Company has not paid, nor does it have any present plans to pay
cash dividends on its 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,
-----------------------------------------------------------------
1998 1997(1) 1996 1995 1994
------- -------- -------- -------- --------
Revenues $44,927 $ 33,169 $ 24,434 $ 30,424 $ 20,536
Net income 798 1,426 743 1,315 719
Earnings per share:
Basic $ .15 $ .32 $ .18 $ .40 $ .24
Diluted $ .13 $ .24 $ .14 $ .27 $ .24
14
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS)
December 31,
-----------------------------------------------
1998 1997(1) 1996 1995 1994
------- ------- ------- ------- -------
Working capital $ 9,321 $ 9,547 $ 6,597 $ 4,921 $ 2,988
Total assets 23,818 24,625 13,224 12,879 8,741
Long-term debt (2) 7,581 6,926 3,842 3,415 5,823
Total liabilities 14,357 15,116 8,056 9,216 9,685
Shareholders'
equity 9,461 9,509 5,168 3,663 944
- --------------------
(1) Reflects the five month operations of Lytton, 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
The Company has continued to depend upon a relatively small number of
customers for a significant percentage of its net revenue. Significant
reductions in sales to any of the Company's large customers would have a
material adverse effect on the Company's 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. Any
terminations of manufacturing relationships or changes, reductions or delays in
orders could have an adverse effect on the Company's results of operations or
financial condition. The Company's results also depend to a substantial extent
on the success of its OEM customers in marketing their products. The Company is
always seeking to diversify its customer base to reduce its reliance on its few
major customers. See "Business Strategy" and "Customers" under Item 1,
"Business."
The industry segments served by the Company 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 the Company's 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 Techdyne's business, financial condition and results of
operations. The Company typically does not obtain long-term volume purchase
contracts from its customers but rather attempts to work with its customers to
anticipate future volumes of orders. Based upon such anticipated future orders,
the Company will make commitments regarding the level of business it wants and
can accomplish, the timing of production schedules and the levels of and
utilization of facilities and personnel. Occasionally, the Company will purchase
raw materials without a customer order or commitment.
15
Customers may cancel, delay or reduce orders, usually without penalty, for a
variety of reasons, whether relating to the customer or the industry in general,
which orders were already made or anticipated by the Company. Any significant
cancellations, reductions or order delays could adversely affect the results of
operations.
The Company uses ERP techniques through its Visual Manufacturing system
(see Item 1, "Business - Business Strategy" and "Year 2000 Readiness" below) in
its efforts to continuously develop accurate forecasts of customer volume
requirements. The Company is 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 the Company's results of operations. It is important for the Company, 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."
Techdyne must continuously develop improved manufacturing procedures to
accommodate its customers' needs for increasingly complex products. To continue
to grow and be a successful competitor, the Company must be able to maintain and
enhance its 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 management believes that the Company's operations
utilize the assembly and testing technologies and equipment currently required
by the Company's customers, there can be no assurance that the Company's process
development efforts will be successful or that the emergence of new
technologies, industry standards or customer requirements will not render the
Company's technology, equipment or processes obsolete or uncompetitive. In
addition, to the extent that the Company determines 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, the Company's
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.
The Company's 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 the
Company in managing the costs of its operations, the Company's 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. Techdyne generally
has idle capacity and reduced operating margins during periods of lower-volume
production.
RESULTS OF OPERATIONS
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 the Company's acquisition of Lytton on July
31, 1997. There was an overall increase in domestic sales of $13,771,000 (52%),
including Lytton, and a decrease in
16
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 (Scotland) which was partially offset by sales to new customers and
increased sales to existing customers. Revenues of Techdyne (Scotland) 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 (Scotland) 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 the Company's 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 the Company's 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, the Company recorded an ad-
justment to the valuation allowance relating to its 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 the Company recorded an adjustment to the valuation
allowance relating to its 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.
1997 COMPARED TO 1996
Consolidated revenues increased approximately $8,734,000 (36%) for the
year ended December 31, 1997 compared to the preceding year. The increase was
attributable principally to the inclusion of sales of Lytton totaling $7,170,000
since August 1, 1997. There was an increase in domestic sales of $12,184,000
(87%) that was offset by a decrease in European sales of $3,281,000 (33%)
compared to the same period of the preceding year. Interest and other income
decreased by approximately $169,000 in 1997 compared to the preceding year,
which included a $140,000 litigation settlement and 1997 having lower interest
income than 1996 as a result of a decrease in funds invested.
17
The decline in European-based sales was mainly attributable to a
decrease of approximately $5,580,000 (66%) in sales to Compaq (Europe) by
Techdyne (Scotland) which was partially offset by sales to new customers and
increased sales to existing customers. Revenues of Techdyne (Scotland) continue
to be highly dependent on sales to Compaq, which accounted for approximately 42%
of sales for the current year compared to 84% in the preceding year. The bidding
for Compaq orders has become more competitive which has resulted in substantial-
ly reduced Compaq sales and lower profit margins on remaining Compaq sales.
Techdyne (Scotland) is pursuing new business development, has offset some of the
lost Compaq business with sales to other customers and is continuing cost reduc-
tion efforts to remain competitive for Compaq business. There can be no assur-
ance as to the success of such efforts.
Approximately 63% of the Company's consolidated sales for the year
December 31, 1997 were made to six customers. Customers generating at least 10%
of sales included IBM (19%) and EMC and its related suppliers (10%).
Approximately $2,727,000 (38%) of Lytton's sales since its acquisition by the
Company on July 31, 1997 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 the Company's operations if such sales are not
replaced.
Cost of goods sold as a percentage of sales remained relatively stable
increasing to 87% for the year ended December 31, 1997 compared to 86% for the
preceding year.
Selling, general and administrative expenses increased $730,000 for the
year ended December 31, 1997 compared to the preceding year. The increase
reflects the selling, general and administrative expenses of Lytton commencing
August 1, 1997, as well as the increased costs involved in substantially
increased operations of the Company's Round Rock, Texas facility and the
Company's new Massachusetts facility.
Interest expense increased $185,000 for the year ended December 31,
1997 compared to the preceding year. The increase reflects interest of
approximately $100,000 associated with financing the Lytton acquisition and
interest on Lytton's debt and financing agreements of approximately $71,000. The
prime rate was 8.5% at December 31, 1997 and 8.25% at December 31, 1996.
The Company recorded an adjustment to the valuation allowance relating
to its deferred tax assets of approximately $900,000 related to domestic opera-
tions in the fourth quarter of 1997 resulting in a 1997 tax credit of approxi-
mately $560,000 including approximately $100,000 of tax credits on foreign
operations with the prior year tax expense of approximately $270,000 consisting
mostly of taxes on foreign operations.
For fiscal 1998, the Company will adopt the provisions of Financial
Accounting Standards Board Statements No. 130, "Reporting Comprehensive Income"
and No. 131, "Disclosure About Segments of an Enterprise and Related
Information," which it is anticipated will not have a material effect on its
consolidated financial statements or significantly change its segment reporting
disclosures. See Note 1 to "Notes to Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $9,321,000 at December 31, 1998, a
decrease of $226,000 (2%) during 1998. This decrease includes changes in
components of working capital resulting from overall increased sales levels.
18
Included in the changes in components of working capital was an
increase of $208,000 in cash and cash equivalents, which included net cash
provided by operating activities of $1,544,000, net cash used in investing
activities of $2,258,000 (including $823,000 from additions to property and
equipment, 154,000 from additional consideration regarding the Lytton acquisi-
tion and $1,278,000 advanced against the Lytton acquisition stock price guaran-
tee) and net cash provided by financing activities of $922,000 including
Lytton's net borrowings on its line of credit of $414,000, a drawdown of
$600,000 on Techdyne's line of credit, payments on long-term debt of $916,000
and a net increase in advances from the parent of $823,000, with both the
Techdyne line of credit borrowing and advances from Parent used principally to
fund the advance on the Lytton acquisition stock price guarantee).
The Company has 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 $1,200,000
at December 31, 1998 and $1,500,000 at December 31, 1997; and a $1,600,000
commercial revolving line of credit with interest at prime which was fully drawn
down as of December 31, 1998 with an outstanding balance of $1,000,000 as of
December 31, 1997. The commercial term loan matures December 15, 2002 and the
commercial line of credit, no longer a demand line, matures May 1, 2000. See
Note 2 to "Notes to Consolidated Financial Statements."
The Company had obtained in 1996 two other term loans from its Florida
bank. One is a $712,500 term loan, which had a remaining principal balance of
$636,000 at December 31, 1998 and $663,000 at December 31, 1997, and is secured
by two buildings and land owned by the Parent. The second term loan for
$200,000, which had a remaining principal balance of $87,000 at December 31,
1998 and $127,000 at December 31, 1997, is secured by the Company's tangible
personal property, goods and equipment. The financing under the 1996 term loans
provided cash proceeds to the Company of $215,000 which was reflected as a
reduction in the intercompany advances due to the Parent which represent noncash
financing activities which is a supplemental disclosure required by FAS 95. The
Parent has guaranteed the revolving line and the three term loans and
subordinated the intercompany indebtedness due it from the Company, provided
that the Company may make payments to the Parent on this subordinated debt from
additional equity that is injected into the Company and from earnings, so long
as the Company is otherwise in compliance with the loan agreements. The Company
was in default of certain financial reporting requirements regarding these loans
as of December 31, 1996 for which the bank granted waivers as of December 31.
1996 and extended through December 31, 1997. See Note 2 to "Notes to
Consolidated Financial Statements."
The Company has outstanding borrowings of $145,000 from a local bank
with interest payable monthly with the note, which was renewed during 1997,
maturing April 2000. Techdyne (Scotland) had a line of credit with a Scottish
bank, with a U.S. dollar equivalency of approximately $330,000 at December 31,
1997 that was secured by assets of Techdyne (Scotland) and guaranteed by the
Company. This line of credit was not renewed. No amounts were drawn on this
line of credit. In July, 1994 Techdyne (Scotland) purchased the facility
housing its operations for approximately $730,000, obtaining a 15-year mortgage
which had a U.S. dollar equivalency of approximately $545,000 at December 31,
1998 and $569,000 at December 31, 1997, based on exchange rates in effect at
each of these dates. See Note 2 to "Notes to Consolidated Financial Statements."
The Company has established a new manufacturing facility in Milford,
Massachusetts with the facility having an initial five-year lease term with the
Company's occupancy commencing in April 1997. This facility is intended to
assist in meeting increased customer demand in the Northeastern United States,
as well as to increase service levels to customers in the Northeast and to
penetrate new markets. The Company has increased its manufacturing capacity at
its Texas facilities to meet increased customer
19
demand in the Southwestern United States. Most of the expenditures related to
its new facilities, including leasehold improvements, equipment and furniture
and fixtures, and the costs of expansion of existing facilities were provided
from the proceeds from the Company's 1995 security offering.
On July 31, 1997, the Company 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 modified
bank line of credit, as well as 300,000 shares of the Company's common stock
which had a fair value of approximately $1,031,000 based on the closing price of
the Company's common stock on the date of acquisition. The Company 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
provides 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 $154,000 for the first year of sales
levels paid in April 1998. The Lytton acquisition has expanded the Company's
customer base, broadened its product line, enhanced its manufacturing
capabilities and provided a new geographic area to better serve the Company's
existing customer base with opportunities to attract new customers. See Note 10
to "Notes to Consolidated Financial Statements."
The Guaranty in the Stock Purchase Agreement was modified by the
Company and the seller. The Company advanced approximately $1,278,000 to the
seller. In addition to the seller having sold 5,000 shares of the Company's
common stock in July 1998, the seller is to sell sufficient shares to yield
aggregate proceeds of no more than $1,300,000 toward the Modified Guaranty. Upon
the sale of seller's remaining shares up to 195,000 shares, seller will repay
the advance. The Company funded the advance to the seller largely through a
drawdown of the previously unused $600,000 of its line of credit and advances
from its Parent. To the extent that seller does not have 150,000 shares re-
maining the Company would make up the difference. If the sale of shares is in-
sufficient to repay the advance, the balance would be forgiven. Pursuant to the
Extended Guaranty, sale of the remaining shares is guaranteed to yield no less
than $1,100,000 if sold on or prior to July 1, 1999 or else the Company will
make up the difference in either cash or additional common stock or a combina-
tion of both. See Note 10 to "Notes to Consolidated Financial Statements."
Lytton has a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus 1/2% which matured August 1, 1998 and was
renewed on the same terms and conditions. There was an outstanding balance on
this loan of $962,000 as of December 31, 1998 with $549,000 outstanding December
31, 1997. Lytton has a $1,000,000 installment loan with the same bank maturing
August 1, 2002, at an annual rate of 9% until July 1999, with monthly payments
of $16,667 plus interest, at which time Lytton will have an option to convert
the note to a variable rate. The balance outstanding on this loan was
approximately $733,000 at December 31, 1998 and $933,000 as of December 31,
1997. Lytton also has a $500,000 equipment loan agreement with the same bank
payable through August 1, 2003 with interest at prime rate plus 1%. There was no
outstanding balance on this loan as of December 31, 1998 or December 31, 1997.
All these bank loans are secured by the business assets of Lytton. See Note 2 to
"Notes to Consolidated Financial Statements."
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extend through July 1999 with
interest rates ranging from 8.55% to 10.09%. The remaining principal balance
under these financing obligations amounted to $112,000 at December 31, 1998 and
$390,000 at December 31, 1997. Lytton has an equipment loan at an annual
interest rate of 5.5% maturing in April 2002 with monthly payments of principal
and interest of $4,298. This loan has a balance of approximately $157,000 at
December 31, 1998 and $198,000 at December 31, 1997 and is secured by equipment.
See Note 2 to"Notes to Consolidated Financial Statements."
20
A significant customer of the Company, which accounted for 9% of sales
for 1998 and 8% for the previous year, has been slow in paying amounts due to
the Company. The Company had a receivable of approximately $879,000 from this
customer, and held inventory of approximately $1,160,000 to fulfill a sales
contract relating to this customer, which represents 15% and 14% of the
Company's accounts receivable and inventory balances, respectively, as of Decem-
ber 31, 1998. The Company anticipates an ongoing business relationship with this
customer and believes that the receivables and inventory relating to the
customer are recoverable. If any significant amount of receivables or inventory
were not recoverable, this could have a material adverse effect on the Company's
results of operations and financial position. See Note 11 to "Notes to Consoli-
dated Financial Statements."
The Company is seeking to further expand its operations possibly
through acquisitions of companies in similar businesses, as with the Lytton
acquisition. There can be no assurance that the Company would be able to finance
such acquisitions from its own capital or be able to obtain sufficient external
financing.
The Company anticipates that current levels of working capital and
working capital from operations, including those of Lytton, will be adequate to
successfully meet liquidity demands for at least the next twelve months,
including the financing obligations incurred in the acquisition of Lytton.
YEAR 2000 READINESS
The Year 2000 computer information processing challenge associated with
the upcoming millennium change concerns the ability of computerized information
systems to properly recognize date sensitive information, with which many
companies, public and private, are faced to ensure continued proper operations
and reporting of financial condition. Failure to correct and comply with the
Year 2000 change may cause systems that cannot recognize the new date and
millenium information to generate erroneous data or to fail to operate.
Management is fully aware of the Year 2000 issues, has made its assessments and
has evaluated its computerized systems and equipment, and communicated with its
major vendors, and has substantially made the operations of the Company year
2000 compliant.
In 1997 the Company commenced upgrading its operations software program
by acquiring a new Visual Manufacturing software package. To a lesser extent its
Parent also acquired certain hardware and software of the Visual Manufacturing
system. It has been and will be integrating this new software system into all of
its facilities. The Company is in the process of installing the Visual
Manufacturing software system into Lytton's and Techdyne (Scotland)'s operations
which should be completed sometime prior to June 30, 1999. This new system has
greatly enhanced the Company's ERP system, essential to bids for new business,
production scheduling, inventory and information technology and overall
operations. Management believes this new system is providing it 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 the Company to better track actual costs
against its quotes, thereby allowing the Company to more effectively control
costs and manage operating margins. The cost of this new software program
for the Florida, Texas and Massachusetts operations was approximately $366,000;
and for Ohio and Scotland the cost is estimated to be approximately $220,000.
Its Parent's cost for the hardware and software was approximately $58,000.
The Visual Manufacturing system has been pre-tested and guaranteed by the manu-
facturer to be Year 2000 compliant. The Company and its 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, its Parent and Dialysis Corporation of America, a 68% owned public
subsidiary of the Parent.
21
With respect to non-information technology systems which typically
include embedded technology such as microcontrollers, the major equipment used
in the Company's manufacturing operations is not date sensitive and should not
pose any threat of system breakdown. The quality control "Cirrus testers" have
recently been tested and are Year 2000 compliant. The personal computer hardware
and software systems have been checked and have been determined to be Year 2000
compliant. One computer was replaced with a newer Year 2000 compliant system at
no cost. Any upgrading and replacements would cost approximately $1,500 per
unit.
The Company has communicated with its key vendors, customers and other
third parties with whom its operations are essential to inquire of their
assessment of their Year 2000 issues and actions being taken to resolve those
issues. The Company has received approximately 90% responses of which half have
given written assurance that they are Year 2000 compliant, with the balance
assuring the Company they will be Year 2000 compliant before the millenium
change. To the extent such third parties are potentially adversely affected by
the Year 2000 issues, and such is not timely and properly resolved by such
persons, this could disrupt the Company's operations to the extent that the
Company will have to find alternative vendors or customers that have resolved
their Year 2000 issues. No assurance can be given that the Company's new
Visual Manufacturing software program will be successful in its anticipated
operational benefits as assessed above or that the Company's key vendors and
customers will have successful conversion programs, and that any such failures,
whether relating to the manufacturing operational efficiencies or the Year 2000
issue, will not have a material adverse effect on the Company's business,
results of operations or financial condition.
Other Matters
The Company is exposed to market risks from changes in interest rate
and foreign currency exchange rates.
The Company's principal exposure on interest rates is on debt agree-
ments with variable interest rates of which the Company had approximately
$2,400,000 of such debt at December 31, 1998. The Company has 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 $15,000 on
the Company's results of operations.
The Company utilizes interest rate swap and other agreements on some of
its 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 $1,933,000 as of December 31,
1998, 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,
1998, early settlement of these debt obligations would have had a negative
impact of approximately $28,000 on the Company's results of operations.
The Company's exposure to market risks from foreign currency exchange
rates relates to its Scottish subsidiary whose results of operations when trans-
lated 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 1998 earnings by approximately $14,000. The
Company has not incurred any significant realized losses on exchange transac-
tions and does not utilize foreign exchange contracts to hedge foreign currency
fluctuations. If realized losses on foreign transactions were to become signif-
icant, the Company would evaluate appropriate strategies, including the possible
use of foreign exchange contracts, to reduce such losses.
22
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Finan-
cial 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, 1999. 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. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its consoli-
dated financial statements.
INFLATION
Inflationary factors have not had a significant effect on the Company's
operations. The Company attempts to pass on increased costs and expenses by
increasing selling prices when and where possible and by developing different
improved products for its customers that can be sold at targeted profit margins.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion is presented under the heading, "Other Matters" with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and incorporated herein by reference.
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
None
23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on directors of the Company is included under the caption
"Election of Directors" of the Company's Information Statement relating to the
Annual Meeting of Shareholders to be held on June 9, 1999, which is incorporated
herein by reference.
The executive officers of the Company 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 the executive
officers of the Company. The following information indicates the position and
age of each executive officer at March 15, 1999, and their business experience
during the prior five years.
Name Age Position with the Company Position Held Since
---- --- ------------------------- -------------------
Thomas K. Langbein 53 Chairman of the Board and 1982
Chief Executive Officer 1990
Barry Pardon 47 President 1991
and Director 1990
Joseph Verga 47 Senior Vice President, 1988
Treasurer 1985
Director 1984
Daniel R. Ouzts 52 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
Dialysis Corporation of America ("DCA"), another public subsidiary of Medicore.
Mr. Langbein is also a director of Lytton and Techdyne (Scotland). In 1971, Mr.
Langbein organized and currently is the President, sole director and owner of
Todd & Company, Inc. ("Todd"), a broker-dealer registered with the Commission
and the NASD. Mr. Langbein devotes most of his time to the affairs of the
Company, Medicore and DCA. See "Certain Relationships and Related Transactions"
of the Company's Information Statement relating to the Annual Meeting of
Shareholders to be held on June 9, 1999, 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 (Scotland).
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
Company. In 1985 he was appointed Treasurer and in 1988 was made Senior Vice
President of Operations.
24
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 the
Company's Information Statement relating to the Annual Meeting of Shareholders
to be held on June 9, 1999, incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation is included under the caption
"Executive Compensation" of the Company's Information Statement relating to the
Annual Meeting of Shareholders to be held on June 9, 1999, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of the Company's 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 to be held on June 9, 1999, which is incorporated
herein by reference), and by any person known to the Company to beneficially own
more than 5% of any class of voting security of the Company, is included under
the caption "Security Ownership of Certain Beneficial Owners and Management" of
the Company's Information Statement relating to the Annual Meeting of
Shareholders to be held on June 9, 1999, 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
the Company's Information Statement relating to the Annual Meeting of
Shareholders to be held on June 9, 1999, which is incorporated herein by
reference.
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.
None
25
(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 Redeemable Common Stock Purchase Warrant
(incorporated by reference to the Company's Form
SB-2, Part II, Item 27, 4(b)). *
(iii) Form of Underwriter's Warrant (incorporated by
reference to the Company's Form SB-2, Part II, Item
27, 4(c)). *
(iv) Form of Warrant Agreement between the Company,
Continental Stock Transfer & Trust Co., and Joseph
Dillon & Co., Inc. (incorporated by reference to
the Company's Form SB-2, Part II, Item 27, 4(d)). *
(v) 1994 Stock Option Plan of the Company (incorporated
by reference to Medicore, Inc.'s(1) Annual Report
on Form 10-K for the year ended December 31, 1994
("Medicore's 1994 Form 10-K"), Part IV, Item 14 (a)
3 (10)(lxv)). *
(vi) Form of Stock Option Certificate under 1994 Stock
Option Plan (incorporated by reference to
Medicore's(1)1994 Form 10-K, Part IV, Item 14 (a) 3
(10)(lxvi)). *
(vii) Form of 1995 Non-Qualified Stock Option
(incorporated by reference to Medicore's(1) 1994
Form 10-K, Part IV, Item 14 (a) 3 (10)(lxvii)). *
(viii) 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)). *
(ix) Form of 1997 Incentive Stock Option (incorporated
by reference to the Company's June 24, 1997 Form
8-K, Item 7(c)(4)(ii)). *
(x) 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)).*
26
(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)). *
(iii) Form of Exclusive Sales Representative Agreement
(incorporated by reference to Medicore, Inc.'s(1)
1994 Form 10-K, Part IV, Item 14 (a) 3 (10)(lxiv)).
*
(iv) 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).*
(v) Employment Agreement between Techdyne (Scotland)
Ltd.(3) and John Clark Grieve dated March 11, 1988
(incorporated by reference to the Company's 1997
Form 10-K, Part IV, Item 14(c)(10)(v)).*
(vi) Guarantee of Techdyne (Scotland) Ltd.(3) Line of
Credit with Royal Bank of Scotland Plc dated March
3, 1989 (incorporated by reference to the Company's
1997 Form 10-K, Part IV, Item 14(c)(10)(vi)).
(vii) Mortgage by Techdyne (Scotland) 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)). *
(viii) 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)).
*
(ix) Loan and Security Agreement between the Company and
Barnett Bank of South Florida, N.A. ("Barnett
Bank") for $2,000,000 dated February 8, 1996
(incorporated by reference to the Company's Current
Report on Form 8-K, dated February 23, 1996
("February 1996 Form 8-K"), Item 7(c)(99)(i)). *
(x) Loan Agreement for $712,500 between the Company and
Barnett Bank dated February 8, 1996 (incorporated
by reference to February 1996 Form 8-K, Item
7(c)(99)(v)). *
(xi) Promissory Note for $712,500 from the Company to
Barnett Bank, dated February 8, 1996 (incorporated
by reference to February 1996 Form 8-K, Item
7(c)(99)(vi)).*
(xii) Mortgage and Security Agreement between Medicore,
Inc.(1) and Barnett Bank dated February 8, 1996
(incorporated by reference to February 1996 Form
8-K, Item 7(c)(99)(vii)). *
(xiii) Assignment of Leases, Rents and Profits by
Medicore, Inc.(1) in favor of Barnett Bank dated
February 8, 1996 (incorporated by reference to
February 1996 Form 8-K, Item 7(c)(99)(viii)). *
27
(xiv) Promissory Note for $200,000 from the Company to
Barnett Bank dated February 8, 1996 (incorporated
by reference to February 1996 Form 8-K, Item
7(c)(99)(ix)).*
(xv) Security Agreement between the Company and Barnett
Bank dated February 8, 1996 (incorporated by
reference to February 1996 Form 8-K, Item
7(c)(99)(x)).*
(xvi) 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)).*
(xvii) First Amendment to Loan and Security Agreement,
Loan Agreement and Security Agreement between the
Company and Barnett Bank, N.A. dated July 31, 1997
(incorporated by reference to the Company's Current
Report on Form 8-K dated August 12, 1997 ("August
12, 1997 Form 8-K"), Item 7(c)(99)(i)).*
(xviii) Revolving Demand Promissory Note from the Company
to Barnett Bank, N.A. dated July 31, 1997
(incorporated by reference to the Company's August
12, 1997 Form 8-K, Item 7(c)(99)(ii)).*
(xix) Unconditional and Continuing Guaranty of Payments
and Performance by Medicore, Inc.(1) in favor of
Barnett Bank, N.A. dated July 31, 1997
(incorporated by reference to the Company's August
12, 1997 Form 8-K, Item 7(c)(99)(iii)).*
(xx) Subordination Agreement among the Company, Barnett
Bank, N.A. and Medicore, Inc.(1) dated July 31,
1997 (incorporated by reference to the Company's
August 12, 1997 Form 8-K, Item 7(c)(99)(iv)).*
(xxi) Second Amendment to Loan and Security Agreement
between the Company and Barnett Bank, N.A. dated as
of December 29, 1997 (incorporated by reference to
the Company's Form 8-K dated January 20, 1998
("January, 1998 Form 8-K"), Item 7(c)(99)(i)).*
(xxii) Revolving Promissory Note form the Company to
Barnett Bank, N.A. for $1,600,000 dated as of
December 29, 1997 (incorporated by reference to the
Company's January, 1998 Form 8-K, Item
7(c)(99)(ii)).*
(xxiii) Unconditional and Continuing Guaranty of Payment
and Performance(3) by Medicore, Inc.(1) in favor of
Barnett Bank, N.A. dated as of December 29, 1997
(incorporated by reference to the Company's
January, 1998 Form 8-K, Item 7(c)(99)(iii)).*
(xxiv) Subordination Agreements(4) among the Company,
Barnett Bank, N.A. and Medicore, Inc.(1)
(incorporated by reference to the Company's
January, 1998 Form 8-K, Item 7(c)(99)(iv)).*
(xxv) Loan Agreement for $1,500,000 between the Company
and Barnett Bank, N.A. dated as of December 29,
1997 (incorporated by reference to the Company's
January, 1998 Form 8-K, Item 7(c)(99)(v)).*
28
(xxvi) Promissory Note from the Company to Barnett Bank,
N.A. for $1,500,000 dated as of December 29, 1997
(incorporated by reference to the Company's
January, 1998 Form 8-K, Item 7(c)(99)(vi)).*
(xxvii) Commercial Security Agreement between the Company
and Barnett Bank, N.A. dated as of December 29,
1997 (incorporated by reference to the Company's
January, 1998 Form 8-K, Item 7(c)(99)(vii)).*
(xxviii) International Swap Dealers Association, Inc. Master
Agreement between the Company and Barnett Bank,
N.A. dated as of December 22, 1997 (incorporated by
reference to the Company's January, 1998 Form 8-K,
Item 7(c)(99)(viii)).*
(xxix) 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)).*
(xxx) 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)).*
(xxxi) 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)).*
(xxxii) Stock Purchase Agreement between Patricia A.
Crossley, Lytton Incorporated(2) and the Company
dated July 31, 1997 (incorporated by reference to
the Company's August 12, 1997 Form 8-K, Item
7(c)(2)(i)).*
(xxxiii) 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)).*
(xxxiv) Amendment to Stock Purchase Agreement between the
Company and Patricia Crossley dated June 29, 1998
(incorporated by reference to the Company's Current
Report on Form 8-K dated July 6, 1998, Item
7(c)(99)(i)).*
(xxxv) Supplement to Prospectus dated July 13, 1998
(incorporated by reference to the Company's Current
Report on Form 8-K dated July 13, 1998, Item
7(c)(99)(i)).*
(21) Subsidiaries of the registrant.
(23) Consents of experts and counsel.
(i) Consent of Independent Certified Public Accoun-
tants.
(27) Financial Data Schedule (for SEC use only).
29
- -----------------
* Documents incorporated by reference not included in Exhibit Volume.
(1) PARENT OF THE COMPANY OWNING 62% OF THE COMPANY'S OUTSTANDING SHARES
(70% IF INCLUDE CONVERTIBLE PROMISSORY NOTE).
(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) MEDICORE, INC.(1) HAS SUBORDINATED INDEBTEDNESS DUE TO IT FROM THE
COMPANY TO THE REVOLVING AND TERM LOANS, EACH SUCH SUBORDINATION
AGREEMENT IS SUBSTANTIALLY SIMILAR TO THE EXHIBIT FILED FOR THE
REVOLVING LOAN.
30
(d) Schedule II - Valuation and Qualifying Accounts
Techdyne, Inc. and Subsidiaries
December 31, 1998
- ------------------------------------------ --------- ----------------------- ------------ -----------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------ --------- ----------------------- ------------ -----------
Additions
(Deductions) Additions Other
Charged Charged Changes
Balance at (Credited) to Other Add Balance
Beginning to Cost and Accounts (Deduct) at End of
Classification of Period Expenses Describe Describe Period
- ------------------------------------------ ---------- ----------------------- ------------ -----------
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
========== ========= ========= ========= ==========
YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 103,000 $ 9,380 $ (29,380)(1) $ 83,000
Reserve for inventory obsolescence 309,000 56,913 (231,913)(2) 134,000
Valuation allowance for deferred tax asset 1,857,000 (59,000) --- 1,798,000
---------- --------- --------- --------- ----------
$2,269,000 $ 7,293 $ 0 $(261,293) $2,015,000
========== ========= ========= ========= ==========
(1) Uncollectable accounts written off, net of recoveries.
(2) Net write-offs against inventory reserves.
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 29, 1999
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
- ---- ----- ----
/s/ THOMAS K. LANGBEIN Chairman of the Board
- ----------------------- of Directors, Chief
Thomas K. Langbein Executive Officer March 29, 1999
/s/ BARRY PARDON President and Director March 26, 1999
- -----------------------
Barry Pardon
/s/ JOSEPH VERGA Senior Vice President,
- ----------------------- Treasurer and Director March 26, 1999
Joseph Verga
/s/ DANIEL R. OUZTS Vice President and Controller March 26, 1999
- -----------------------
Daniel R. Ouzts
/s/ PETER D. FISCHBEIN Director March 29, 1999
- -----------------------
Peter D. Fischbein
/s/ ANTHONY C. D'AMORE Director March 29, 1999
- -----------------------
Anthony C. D'Amore
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, 1998
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, 1998 and 1997. F-3
Consolidated Statements of Income - Years ended December 31, 1998,
1997, and 1996. F-4
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1998, 1997 and 1996. F-5
Consolidated Statements of Cash Flows - Years ended December 31, 1998,
1997, and 1996. F-6
Notes to Consolidated Financial Statements - December 31, 1998. F-7
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 sheets of Techdyne, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits 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 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 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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/ ERNST & YOUNG LLP
March 22, 1999
Miami, Florida
F-2
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,659,737 $ 1,451,564
Accounts receivable, less allowances of $47,000 at December 31, 1998
and $54,000 at December 31, 1997 5,769,868 5,707,471
Inventories, less allowances for obsolescence of $544,000 at
December 31, 1998 and $223,000 at December 31, 1997 7,874,500 8,325,309
Prepaid expenses and other current assets 165,925 574,250
Deferred tax asset 466,259 1,010,558
------------ ------------
Total current assets 15,936,289 17,069,152
Property and equipment:
Land and improvements 199,200 198,000
Buildings and building improvements 769,204 764,571
Machinery and equipment 6,846,863 6,176,733
Tools and dies 844,988 844,132
Leasehold improvements 308,074 241,934
------------ ------------
8,968,329 8,225,370
Less accumulated depreciation and amortization 3,892,293 2,984,825
------------ ------------
5,076,036 5,240,545
Deferred expenses and other assets 122,578 79,707
Costs in excess of net tangible assets acquired, less accumulated
amortization of $192,000 at December 31, 1998
and $85,000 at December 31, 1997 2,682,938 2,235,743
------------ ------------
$ 23,817,841 $ 24,625,147
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 962,407 $ 548,698
Accounts payable 3,233,202 4,214,639
Accrued expenses 1,534,785 1,745,926
Current portion of long-term debt 764,550 909,080
Income taxes payable 120,027 103,559
------------ ------------
Total current liabilities 6,614,971 7,521,902
Deferred gain on sale of real estate 161,047 161,047
Deferred income taxes -- 507,003
Long-term debt, less current portion 4,450,578 4,619,066
Advances from parent 3,130,588 2,307,221
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 10,000,000 shares; issued and
outstanding 5,250,167 shares in 1998 and 5,135,167 shares in 1997 52,501 51,351
Capital in excess of par value 11,139,291 10,612,691
Accumulated deficit (307,936) (1,105,648)
Accumulated other comprehensive loss (31,638) (49,486)
Notes receivable from options exercised (113,850) --
Advance on subsidiary acquisition price guarantee (1,277,711) --
------------ ------------
Total stockholders' equity 9,460,657 9,508,908
------------ ------------
$ 23,817,841 $ 24,625,147
============ ============
See notes to consolidated financial statements.
F-3
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenues:
Sales $ 44,665,925 $ 33,019,331 $ 24,116,018
Interest and other income 260,806 149,449 318,162
------------ ------------ ------------
44,926,731 33,168,780 24,434,180
Cost and expenses:
Cost of goods sold 39,277,746 28,716,910 20,747,534
Selling, general and administrative expenses 4,061,205 3,134,001 2,404,456
Interest expense 662,856 456,621 271,736
------------ ------------ ------------
44,001,807 32,307,532 23,423,726
------------ ------------ ------------
Income before income taxes 924,924 861,248 1,010,454
Income tax provision (benefit) 127,212 (564,271) 267,746
------------ ------------ ------------
Net income $ 797,712 $ 1,425,519 $ 742,708
============ ============ ============
Earnings per share:
Basic $ .15 $ .32 $ .18
============ ============ ============
Diluted $ .13 $ .24 $ .14
============ ============ ============
See notes to consolidated financial statements.
F-4
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED NOTES ADVANCE
CAPITAL IN ACCUMU- OTHER RECEIVABLE SUBSIDIARY
COMMON EXCESS OF COMPREHENSIVE LATED COMPREHENSIVE STOCK PRICE
STOCK PAR VALUE INCOME DEFICIT INCOME (LOSS) OPTIONS GUARANTEE TOTAL
--------- ---------- ------------- ----------- ------------- ---------- ---------- -----------
Balance at January 1, 1996 $ 40,433 $7,153,581 $(3,273,875) $ (257,262) $ 3,662,877
Comprehensive income:
Net income -- -- $ 742,708 742,708 --
Other comprehensive income:
Foreign currency
translations adjustments 362,026 362,026
----------
Comprehensive income $1,104,734 1,104,734
==========
Note conversion by Medicore
(200,000 shares) 2,000 348,000 -- -- 350,000
Exercise of stock options 507 50,193 -- -- 50,700
--------- ---------- -- ---------- -----------
Balance at December 31, 1996 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
adjustments (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
adjustments 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 guarantee (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
========= =========== ========== ========== =========== ============ ===========
F-5
TECHDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Operating activities:
Net income $ 797,712 $ 1,425,519 $ 742,708
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 996,919 616,663 368,618
Amortization 118,104 52,576 15,430
Bad debt expense 2,179 1,282 9,380
Provision for inventory obsolescence 437,095 153,011 56,913
Deferred income taxes (benefit) (10,295) (503,555) 3,266
Consultant stock option expense 12,750
Increase (decrease) relating To operating activities from:
Accounts receivable (55,293) (1,420,709) 110,804
Inventories 22,274 (2,797,742) 584,248
Prepaid expenses and other
current assets 410,884 (137,786) 228,554
Accounts payable (987,521) 474,334 (698,395)
Accrued expenses (213,984) (91,805) (480,917)
Income taxes payable 13,362 (276,463) (215,143)
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,544,186 (2,504,675) 725,466
Investing activities:
Subsidiary acquisition payments (153,818) (2,166,010) --
Advance on subsidiary acquisition price guarantee (1,277,711) -- --
Additions to property and equipment,
net of minor disposals (823,419) (1,449,077) (479,815)
Deferred expenses and other assets (3,520) 44,386 (6,808)
----------- ----------- -----------
Net cash used in investing activities (2,258,468) (3,570,701) (486,623)
Financing activities:
Borrowings to finance subsidiary acquisition 600,000 2,500,000 --
Short-term line of credit borrowings 413,709 548,698 --
Exercise of stock options and warrants 1,150 194,328 50,700
Proceeds from long-term borrowings -- -- 181,476
Payments on long-term borrowings (916,470) (273,437) (140,443)
Increase (decrease)in advances from parent 823,367 724,651 336,483
Deferred financing costs -- (2,657) (14,438)
----------- ----------- -----------
Net cash provided by financing activities 921,756 3,691,583 413,778
Effect of exchange rate fluctuations on cash 699 (118,690) 142,085
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 208,173 (2,502,483) 794,706
Cash and cash equivalents at beginning of year 1,451,564 3,954,047 3,159,341
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,659,737 $ 1,451,564 $ 3,954,047
=========== =========== ===========
See notes to consolidated financial statements.
F-6
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 (Scotland) Limited ("Techdyne (Scotland)"), and Techdyne
(Livingston) Limited which is a subsidiary of Techdyne (Scotland), collectively
referred to as the "Company." All material intercompany accounts and
transactions have been eliminated in consolidation. The Company is a 61.5% 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 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,
1998 1997
------------ ------------
Finished goods $ 794,297 $ 554,903
Work in process 1,845,954 1,772,724
Raw materials and supplies 5,234,249 5,997,682
---------- ----------
$7,874,500 $8,325,309
========== ==========
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. Replacements and betterments
that extend the lives of assets are capitalized. Maintenance and repairs are
expensed as incurred. Upon the sale or retirement of assets the related cost and
accumulated depreciation are removed and any gain or loss is recognized.
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-7
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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-8
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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,
------------------------------------
1998 1997 1996
---------- ---------- ----------
Net income - numerator basic computation $ 797,712 $1,425,519 $ 742,708
Effect of dilutive securities:
Interest adjustment on convertible note 134,436 169,525 175,766
---------- ---------- ----------
Net income, as adjusted for assumed conversion-
numerator diluted computation $ 932,148 $1,595,044 $ 918,474
========== ========== ==========
Weighted average shares - denominator basic computation 5,193,140 4,510,375 4,165,042
Effect of dilutive securities:
Warrants -- 85,987 337,698
Stock options 238,033 247,886 296,019
Contingent stock - acquisition 373,285 65,652 --
Convertible note 1,347,729 1,699,494 1,762,066
---------- ---------- ----------
Weighted average shares, as adjusted - denominator 7,152,187 6,609,394 6,560,825
========== ========== ==========
Earnings per share:
Basic $ .15 $ .32 $ .18
========== ========== ==========
Diluted $ .13 $ .24 $ .14
========== ========== ==========
Neither the 1995 publicly offered warrants exercisable at $4.00 per
share 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.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets is comprised as follows:
DECEMBER 31, DECEMBER 31,
1998 1997
----------- ------------
United Kingdom VAT tax receivable $ 64,083 $283,106
Other 101,842 291,144
-------- --------
$165,925 $574,250
======== ========
F-9
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities is comprised as follows:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
United Kingdom VAT tax payable $ 142,310 $ 342,112
Accrued compensation 400,680 493,660
Other 991,795 910,154
---------- ----------
$1,534,785 $1,745,926
========== ==========
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 1997 and 1996 financial
statements to conform to the 1998 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 Shareholder's
Equity. Prior year financial statements have been reclassified to conform with
these requirements.
NEW PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Finan-
cial 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, 1999. 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. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its consoli-
dated 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-10
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 re-
duced to prime plus .75% and various other modifications. The line was fully
drawn down in connection with this acquisition with $2,500,000 remaining out-
standing, 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, 1998 and $1,000,000 at
December 31, 1997. 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 new commercial term loan, with an outstanding balance of
$1,200,000 at December 31, 1998 and $1,500,000 at December 31, 1997, 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 $636,000 at December 31, 1998 and $663,000
at December 31, 1997 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 $87,000 at December 31, 1998 and
$127,000 at December 31, 1997 is secured by all of Techdyne's tangible personal
property, goods and equipment, and all cash or noncash proceeds of such
collateral.
The February 1996 financing under the term loans provided cash proceeds
to the Company of approximately $181,000 and included payment of the balance due
under the Company's previous term loan of $517,000 and payment of a mortgage of
the Parent, including accrued interest, on a building leased to the Company of
$215,000 which was reflected as a reduction in the intercompany advances due the
Parent, representing noncash financing activities which is a supplemental
disclosure required by FAS 95.
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 has a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus 1/2% which matured August 1, 1998 and was
renewed on the same terms and conditions through June 30, 1999. There was an
outstanding balance on this loan of approximately $962,000 at December 31, 1998
and $549,000 at December 31, 1997. The interest rate on this loan was 8.25% at
December 31, 1998 and 9% at December 31, 1997. Lytton has 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-11
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 2--LONG-TERM DEBT--CONTINUED
monthly payments of $16,667 plus interest, at which time Lytton will have an
option to convert the note to a variable rate. This loan is subject to a pre-
payment penalty during the fixed rate period. The balance outstanding on
this loan was approximately $733,000 as of December 31, 1998 and $933,000 as
December 31, 1997. Lytton also has a $500,000 equipment loan agreement with
the same bank payable through August 1, 2003 with interest at prime plus 1%.
There was no outstanding balance on this loan as of December 31, 1998 or Decem-
ber 31, 1997. All of these bank loans are secured by the business assets of
Lytton.
Long-term debt is as follows: DECEMBER 31,
-------------------------
1998 1997
---------- ----------
Term loan secured by real property of Parent with a carrying value of $976,000
at December 31, 1998. Monthly payments of principal and interest as described
above $ 636,438 $ 662,533
Term loan secured by tangible personal property, goods and equipment with a
carrying value of $6,190,000 at December 31, 1998. Monthly payments of
principal and interest as described
above. 86,763 126,764
Commercial term loan secured by corporate assets of the Company with a carrying
value of approximately $14,762,000 at December 31, 1998. Monthly payments of
principal and interest as
described above. 1,200,000 1,500,000
Three year revolving line of credit agreement maturing May 1, 2000. Secured by
corporate assets of the Company with a carrying value of approximately
$14,762,000 at December 31, 1998. Monthly payments of interest as described
above. 1,600,000 1,000,000
Mortgage note secured by land and building with a net book value of $840,000 at
December 31, 1998. Quarterly payments of approximately $20,000 based on
exchange rates at December 31, 1998 for 15 years commencing October 1994
including interest at 2% above bank base rate. 544,528 569,431
Installment loan requiring monthly payments of $16,667 plus interest at 9%. The
loan is secured by all business assets of Lytton with a carrying value of
approximately $9,111,000 at December 31, 1998. Monthly payments of principal
and interest as described above. 733,333 933,333
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 $503,000 at December 31, 1998. 156,746 198,445
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 with
a carrying value of approximately $341,000 at December 31, 1998. 112,320 390,033
Other 145,000 147,607
---------- ----------
$5,215,128 $5,528,146
Less current portion 764,550 909,080
---------- ----------
$4,450,578 $4,619,066
========== ==========
The prime rate was 7.75% as of December 31, 1998 and 8.50% as of
December 31, 1997.
F-12
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 2-LONG-TERM DEBT--CONTINUED
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extend 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.
Techdyne (Scotland) had a line of credit with a Scottish bank with a
U.S. dollar equivalency of approximately $330,000 at December 31, 1997 which was
not renewed. No amounts were drawn on this line of credit during 1998 and no
amounts were outstanding as of December 31, 1997.
Scheduled maturities of long-term debt outstanding at December 31, 1998
are approximately : 1999---$765,000; 2000---$2,403,000; 2001---$1,181,000;
2002---$500,000; 2003---$54,000; thereafter---$312,000. Interest payments on all
of the above debt amounted to approximately $513,000, $270,000 and $136,000 in
1998, 1997 and 1996, 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
$2,400,000 at December 31, 1998 and $3,805,000 at December 31, 1997, 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 $448,000 at December 31, 1998 and
$850,465 at December 31, 1997, 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,
--------------------------
1998 1997
---------- ----------
Deferred tax liabilities:
Depreciation $422,577 $399,000
Accelerated capital allowances (Scotland) -- 99,003
Other 14,952 9,000
---------- ----------
Total deferred tax liability 437,529 507,003
Deferred tax assets:
Inventory obsolescence 321,982 212,023
Cost capitalized in ending inventory 59,292 63,000
Accrued expenses 21,966 85,000
Tax credits 48,000 ---
Other 66,453 69,000
---------- ----------
Sub-total 517,693 429,023
Net operating loss carryforward 884,792 1,432,000
---------- ----------
Total deferred tax assets 1,402,485 1,861,023
Valuation allowance for deferred tax assets (448,000) (850,465)
---------- ----------
Net deferred tax assets 954,485 1,010,558
---------- ----------
Net deferred tax asset $ 516,956 $ 503,555
========== ==========
F-13
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 3--INCOME TAXES--CONTINUED
A valuation allowance has been provided that offsets a portion of the
deferred tax asset recorded at December 31, 1998 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,
--------------------------
1998 1997
---------- ----------
Current deferred tax asset $ 481,211 $1,010,558
Current deferred tax liability (14,952) --
---------- ----------
Net current deferred tax asset 466,259 1,010,558
Long-term deferred tax asset 473,274 --
Long-term deferred tax liability (422,577) (507,003)
---------- ----------
Net long-term deferred tax asset (liability) 50,697 (507,003)
---------- ----------
Net deferred tax asset $ 516,956 $ 503,555
========== ==========
For financial reporting purposes, income before income taxes includes the
following components:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------ ------------ -----------
United States income $ 1,462,390 $ 1,150,804 $ 227,813
Foreign (loss) income (537,466) (289,556) 782,641
----------- ------------ -----------
$ 924,924 $ 861,248 $ 1,010,454
=========== ============ ===========
Significant components of the provision (benefit) for income taxes are as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Current:
Federal $ 53,992 $ 34,148 $ 5,000
Foreign -- (95,864) 259,270
State 83,515 1,000 --
--------- --------- ---------
137,507 (60,716) 264,270
Deferred:
Federal 85,602 (503,555) --
Foreign (95,897) -- 3,476
--------- --------- ---------
(10,295) (503,555) 3,476
--------- --------- ---------
$ 127,212 $(564,271) $ 267,746
========= ========= =========
Techdyne (Scotland) 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-14
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 3-INCOME TAXES--CONTINUED
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Statutory tax rate (34%) applied to income before
income taxes $ 314,474 $ 292,824 $ 343,554
Increases (reduction) in taxes resulting from:
State income taxes-net of federal income
tax effect 74,628 31,263 --
Benefit of net operating losses -- (893,000) (73,000)
Tax rate differential relating to tax benefit of
foreign operating loss 86,841 -- --
Non deductible items 40,780 20,593 --
Change in deferred tax valuation allowance (402,465) -- --
Other 12,954 (15,951) (2,808)
--------- --------- ---------
$ 127,212 $(564,271) $ 267,746
========= ========= =========
Undistributed earnings of the Company's foreign subsidiary amounted to
approximately $2,294,000 at December 31, 1998 and $2,736,000 December 31, 1997.
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
$115,000 and $137,000 would be payable upon remittance of all previously
unremitted earnings at December 31, 1998 and December 31, 1997, respectively.
Income tax payments were approximately $32,000, $269,000 and $487,000
in 1998, 1997 and 1996, respectively.
NOTE 4--TRANSACTIONS WITH PARENT
The Parent provides certain administrative services to the Company
including office space and general accounting assistance. These expenses and all
other central operating costs have been charged on the basis of direct usage,
when identifiable, or on the basis of time spent. In the opinion of management,
this method of allocation is reasonable. 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 1998, 1997 and 1996.
The advances from Parent were made under a demand convertible
promissory note and bear interest at 5.7%. The balance of the note including
accrued interest, which amounted to $2,427,000 at December 31, 1998 and
$2,292,000 at December 31, 1997, may be converted into common stock of the
Company at the option of the Parent at a conversion price of $1.75 per share.
The Parent converted $350,000 of this note into 200,000 shares of the Company's
common stock in June 1996, increasing its ownership interest in the Company at
that time from 62.5% to 64.3%. As a result of the Lytton Acquisition, the
Parent's ownership was diluted to 58.9%. In November 1997, the Parent converted
$875,000 of this note into 500,000 shares of the Company's common stock
increasing its ownership interest to 62.9%. Advances from the Parent on the
balance sheet includes the convertible note balance and an advance payable to
the Parent of approximately $704,000 at December 31, 1998 and $15,000 at
December 31, 1997 with interest at 5.7%. Interest on the net advances amounted
to $156,000, $152,000 and $140,000, in 1998, 1997 and 1996, respectively, and is
included in the net balance due the Parent.
F-15
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 Parent has agreed not to require repayment of the intercompany
advances prior to January 1, 2000 and, therefore, the advances have been
classified as long-term at December 31, 1998.
The Company manufactures certain products for the Parent. Sales of the
products were $172,000, $214,000 and $278,000 in 1998, 1997 and 1996,
respectively.
NOTE 5--RELATED PARTY TRANSACTIONS
For the years ended December 31, 1998, 1997 and 1996, respectively, the
Company paid premiums of approximately $348,000, $325,000 and $312,000, for
insurance through a director and stockholder, and the relative of a director and
stockholder.
For the years ended December 31, 1998, 1997 and 1996, respectively,
legal fees of $47,000, $53,000 and $32,000, were paid to an officer of the
Parent who acts as general counsel for the Company and the Parent.
Lytton has a deferred compensation agreement with its former President.
The agreement calls for monthly payments of $8,339 provided that Lytton's cash
flow is 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, 1998,
a total of $59,000 was paid under this agreement. The balance outstanding under
this agreement amounted to approximately $108,000 at December 31, 1998 and
$167,000 at December 31, 1997.
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 monthly lease payments of approximately $17,900
for the first year, adjusted in subsequent years for 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,
1998, are approximately: 1999---$645,000, 2000---$545,000, 2001---$519,000,
2002---$350,000 and 2003---$238,000. Total rent expense was approximately
$817,000, $656,000 and $491,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially all
of its employees. The Company has 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 for the year ended December 31, 1998
and December 31, 1997 amounted to approximately $48,000 and $50,000.
F-16
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 6-COMMITMENTS AND CONTINGENCIES--CONTINUED
CONTINGENCIES
In the first quarter of 1996, a temporary worker provided by a
temporary personnel agency was injured while working at the Company. The worker
was insured through the temporary personnel agency. While the full extent of the
temporary worker's injuries and the ultimate costs associated with those
injuries are not presently known, the Company anticipates that its insurance is
adequate to cover any potential claims which might arise.
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 are exercisable for a period of five years at $1 per share. On June 30,
1998, 115,000 of these options were exercised, with a balance of 56,600
outstanding as of December 31, 1998. 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%.
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. These options
vested immediately and may be exercised for cash or subject to board approval,
in part by cash, (minimum par value for the shares purchased) and the balance by
a three-year recourse promissory note. Such notes would be secured by the shares
purchased (to be held in escrow with no transfer rights pending full payment)
with interest based on the coupon rate yield of a 52-week U.S. Treasury bill
immediately preceding the execution and issuance of the promissory note, with
voting rights for the underlying shares remaining with the shareholder until
default, if any, on the note. 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.
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.
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.
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-17
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 7--STOCK OPTIONS--CONTINUED
model with the following weighted-average assumptions for the options issued
during 1998 and 1997: risk-free interest rate of 5.55% and 5.59%; no dividend
yield; volatility factor of the expected market price of the Company's common
stock of .58 and .60; and an expected life of the options of 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 which would have no effect on 1996 net
income. The Company's pro forma information for options issued is as follows:
1998 1997
-------- --------
Pro forma net income $790,000 $927,000
======== ========
Pro forma earnings per share:
Basic $ .15 $ .21
======== ========
Diluted $ .13 $ .17
======== ========
A summary of the Company's stock option activity, for the years ended
December 31, follows:
1998 1997 1996
---- ---- ----
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding-beginning of year 699,100 326,500 378,400
Granted 6,250 $4.25 375,000 $3.25 --
Exercised (115,000) $1.00 (300) 1.00 (50,700) $1.00
Expired -- (2,100) 1.00 (1,200) 1.00
------- ------- -------
Outstanding-end of year: 590,350 699,100 326,500
======= ======= =======
Outstanding and exercisable
at end of year:
May 1994 options 56,600 1.00 171,600 1.00 174,000 1.00
February and April 1995 options 152,500 1.75 152,500 1.75 152,500 1.75
June 1997 options 375,000 3.25 375,000 3.25 --
May 1998 options 6,250 4.25 -- --
------- ------- -------
590,350 699,100 326,500
======= ======= =======
Weighted-average fair value of
options granted during the year $ 2.04 $ 1.33
======= =======
The remaining contractual life at December 31, 1998 is 2.4 years, 3.5
years, 1.2 years and .4 years for the options issued in 1998, 1997, 1995 and
1994, respectively.
F-18
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 provide 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. 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 Parent may convert the balance of the convertible promissory note
from the Company at December 31, 1998 of approximately $2,427,000, including
accrued interest, at $1.75 per common share, which would increase the Parent's
ownership to 69.5%.
The Company has 3,136,079 shares reserved for future issuance at
December 31, 1998, including: 959,152 shares for warrants; 56,600 shares for
1994 options; 152,500 shares for 1995 options; 375,000 shares for 1997 options;
200,000 shares for underwriter's option; 1,386,577 shares for convertible note
payable to Parent; and 6,250 shares for consultant stock option.
NOTE 9--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes certain quarterly operating data:
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
----------------------------------------- -----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------- -------- -------- -------- --------
(In thousands except per share data)
Net Sales $ 11,872 $ 11,614 $ 10,973 $ 10,207 $ 6,343 $ 6,642 $ 8,978 $ 11,056
Gross profit 1,711 1,507 1,412 758 988 990 1,080 1,244
Net income 510 545 179 (436) 335 270 175 646
Earnings (loss) per share:
Basic $ .10 $ .11 $ .03 $ (.08) $ .08 $ .06 $ .04 $ .13
Diluted $ .08 $ .08 $ .03 $ (.08) $ .06 $ .05 $ .03 $ .10
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 $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 which have been registered for the seller. The Company has guaranteed that
the seller will 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-19
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 10--ACQUISITION--CONTINUED
the common stock at the date of acquisition and the guaranteed value was con-
sidered part of the cost of the acquisition and is reflected as paid-in
capital. Additional contingent consideration may be due if Lytton reaches pre-
defined sales levels. Additional consideration of approximately $154,000 based
on sales levels was paid in April 1998 with the Stock Purchase Agreement pro-
viding for possible additional sales level incentives, over a two 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 acquisition was accounted for under the purchase method of
accounting and, accordingly, the results of operation of Lytton have been
included in the accompanying consolidated statement of income since August 1,
1997. The total purchase price in excess of the fair value of net assets
acquired will be amortized over 25 years. The net purchase price, including the
original $2,000,000 paid and the additional 1998 consideration, was allocated as
follows:
ORIGINAL 1997 ADDITIONAL 1998 TOTAL
------------- --------------- -----------
Working capital, other than cash $ 1,398,588 $ -- $ 1,398,588
Property, plant and equipment 1,959,751 -- 1,959,751
Other assets 3,000 -- 3,000
Goodwill 2,230,103 553,818 2,783,921
Other liabilities (1,335,432) -- (1,335,432)
----------- ----------- -----------
$ 4,256,010 $ 553,818 $ 4,809,828
=========== =========== ===========
Net cash portion of purchase price $ 2,166,010 $ 153,818 $ 2,319,828
Estimated costs of acquisition 90,000 -- 90,000
Common stock issued 2,000,000 400,000 2,400,000
----------- ----------- -----------
$ 4,256,010 $ 553,818 $ 4,809,828
=========== =========== ===========
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 provide that the seller will sell an amount of common stock which will
provide $1,300,000 gross proceeds, and the Company will guarantee that, to the
extent that the seller has less than 150,000 shares of the Company's common
stock remaining, the Company will 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,
would 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 for-
given. The Advance has been presented in the Stockholder's Equity section of the
balance sheet. The Company has also 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").
The following summary pro forma financial information reflects the
Lytton acquisition as if it had occurred on January 1, 1996. 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, 1996 and may not be indicative of operating results for any future periods.
F-20
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 10-ACQUISITION--CONTINUED
SUMMARY PRO FORMA INFORMATION
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
----------- ------------
Total revenues $43,867,000 $ 40,533,000
=========== ============
Net income $ 1,840,000 $ 1,110,000
=========== ============
Earnings per share:
Basic $ .39 $ .25
=========== ============
Diluted $ .30 $ .19
=========== ============
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 1998 1997 1996
- --------------------- ------------ ------------ ------------
$ 832,410 $ 1,396,260 $ 704,304
============ ============ ============
GEOGRAPHIC AREA SALES 1998 1997 1996
- --------------------- ------------ ------------ ------------
United States $ 40,019,478 $ 26,248,002 $ 14,063,727
Europe(1) 4,646,447 6,771,329 10,052,291
------------ ------------ ------------
$ 44,665,925 $ 33,019,331 $ 24,116,018
============ ============ ============
(1) Techdyne (Scotland) sales are primarily to customers in the United Kingdom.
GEOGRAPHIC AREA PROPERTY, PLANT AND EQUIPMENT (NET) 1998 1997 1996
- --------------------------------------------------- ------------ ------------ ------------
United States $ 3,689,894 $ 3,757,065 $ 877,795
Europe 1,386,142 1,483,480 1,628,248
------------ ------------ ------------
$ 5,076,036 $ 5,240,545 $ 2,506,043
============ ============ ============
Sales to major customers are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------
MAJOR CUSTOMERS 1998 1997 1996
- --------------- ------------ ----------- -----------
Motorola(2)(3) $ 4,488,000 $ -- $ --
PMI Food Equipment Group (2) 8,183,000 -- --
Compaq Computer Corp. (1)(2) -- 8,497,000
IBM(1) 6,438,000 4,275,000
EMC and its related suppliers(1) 3,201,000 2,807,000
- -------------------
(1) Less than 10% of sales for 1998.
(2) Less than 10% of sales for 1997.
(3) Less than 10% of sales for 1996.
F-21
TECHDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 11--CAPITAL EXPENDITURES, GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS--
CONTINUED
A majority of the Company's sales are to certain major customers. The
loss of or substantially reduced sales to any of these customers would have an
adverse affect on the Company's operations if such sales were not replaced.
Sales to PMI Food Equipment Group by Lytton, which was acquired by the
Company on July 31, 1997, represented approximately 41% of Lytton's sales and
18% of consolidated sales for the year ended December 31, 1998.
Sales to Compaq Computer Corp., which has been a major customer of
Techdyne (Scotland) amounted to $1,192,000 in 1998, $2,847,000 in 1997 and
$8,427,000 in 1996 representing 26%, 42% and 84% of the sales of Techdyne
(Scotland) for 1998, 1997 and 1996, respectively. Sales to this customer have
shown substantial declines as a result of increased competition in bidding for
Compaq business which has also resulted in reduced profit margins on remaining
Compaq sales. Sales by Techdyne (Scotland) to Compaq amounted to 13% of its
sales for the fourth quarter of 1998 compared to 35% for the same period of
1997.
A significant customer of Techdyne (which sales to this customer
represented 9% of Techdyne's 1998 sales) has been slow in paying amounts owed to
the company at December 31, 1998, the company had a receivable of approximately
$879,000 from this customer, and held inventory of approximately $1,160,000 to
fulfill a sales contract relating to this customer, which represents 15% and 14%
the Company's accounts receivable and inventory balances, respectively, at that
date. The Company anticipates an ongoing business relationship with this
customer and believes the receivables and inventories relating to the customer
are recoverable. However, future events may occur which could have a material
adverse effect on Techdyne's results of operations and financial position.
F-22