February 9, 2006
United States Securities and Exchange Commission
Division of Corporation Finance
Washington. D.C. 20549-0510
Re: Dynamic Materials
Form 10-K for the year ended December 31, 2004
File No. 1-14775
Dear Mr. Cash:
We acknowledge receipt of your letter dated November 10, 2005, which included
additional comments that resulted from your review of our September 9, 2005
response letter relating to your review of the above-referenced filing. We have
carefully considered your additional comments and provide you with the following
revised response.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
- -----------------------------------------------------
Financial Statements for the Year Ended December 31, 2004
- ---------------------------------------------------------
Consolidated Statements of Cash Flows, page 35
- ----------------------------------------------
1. We note that your reconciliation of cash flows from operating
activities begins with income from continuing operations. Please note
that paragraph 28 of SFAS 95 indicates that companies that use the
indirect method of reporting operating cash flows should adjust net
income to reconcile it to net cash flow from operating activities.
Please confirm to us that you will revise your statements of cash
flows accordingly in future periodic filings.
2. We note that you present one net number for cash flows used in
discontinued operations at the bottom on your statement of cash flows.
We do not object to your presentation of cash flows from discontinued
operations separately from your presentation of cash flows from
continuing operations. However, we do not believe that netting
together cash flows from operating, investing and financing activities
is consistent with basic principles of SFAS 95. Please quantify for
us, and separately disclose in future periodic filings, the cash flows
used in
1
discontinued operations for each of the operating activities,
investing activities, and financing activities.
Response
--------
1. In future periodic filings, beginning with our Form 10-K for the
annual period ending December 31 2005, we will reconcile reported net
income to net cash flows from operating activities as indicated by
paragraph 28 of SFAS 95 for companies that use the indirect method of
reporting operating cash flows. We will also make the appropriate
reclassifications to prior year statements to conform to the 2005
presentation.
2. For the years ended December 31, 2004, 2003 and 2002, cash flows used
in discontinued operations included amounts used in (provided by)
operating activities, investing activities and financing activities as
summarized below. In future filings, we will separately disclose the
breakdown of cash flows used in and provided by our discontinued
operations.
2004 2003 2002
---- ---- ----
Operating activities $ 1,434,122 $ 1,213,374 $ 1,399,751
Investing activities 45,344 233,735 71,803
Financing activities - 97,435 (39,174)
----------- ----------- -----------
$ 1,479,466 $ 1,534,544 $ 1,432,380
=========== =========== ===========
Note 8 - Discontinued Operations, page 53
- -----------------------------------------
3. We note your response to comment 1 from our letter dated July 27,
2005, and the additional information shared with us in a conference
call on October 31, 2005. We appreciate the information you have been
providing us, and we request your continued patience as we find out
more about your transaction with Aerojet. We continue to be concerned
that this transaction may not qualify for treatment as a discontinued
operation, and therefore we have the following additional comments:
o We note that you believe that the guidance in EITF 03-13 is
applicable to this transaction despite the fact that the only
asset sold to Aerojet was the Spin Forge inventory. We continue
to struggle with the fact that the remaining assets of your Spin
Forge business, which includes the land and building under an
operating sublease to Aerojet and the specialized manufacturing
equipment under an operating lease to Aerojet, do not appear to
have been disposed of or to qualify as held for sale as of
December 31, 2004. We are particularly concerned because our
2
understanding from the information provided thus far is that the
Spin Forge business uses specialized manufacturing equipment;
therefore, the disposition of this specialized manufacturing
equipment would appear to be a critical factor in any
determination of whether this component of an entity had been
"disposed of'. Please provide us with a detailed analysis of why
you believe it is appropriate to analyze this transaction under
EITF 03-13. Your response should specifically address the fact
that paragraph 18 of EITF 03-13 states that this consensus should
be applied to a component of an enterprise that is either
disposed of or classified as held for sale. Please provide two
separate analyses, one assuming the treatment of your real estate
lease with Spin Forge LLC is a capital lease, and the other
assuming your real estate lease with Spin Forge LLC is an
operating lease.
o Assuming the guidance in EITF 03-13 applies to this transaction,
please provide us with a robust analysis of this transaction
under EITF 03-13. Please provide two separate analyses, one
assuming the treatment of your real estate lease with Spin Forge
LLC is a capital lease, and the other assuming your real estate
lease with Spin Forge LLC is an operating lease. If you consider
the significance of any cash flows, please provide us with your
calculations. We note your response to this issue in your letter
dated September 9, 2005; however, we are requesting a
significantly more detailed analysis.
Response
--------
While we acknowledge that the guidance for discontinued operations
accounting in SFAS 144 is more commonly applied to the disposition of
long-lived assets, we believe that we have met the criteria for
discontinued operations accounting because we believe the operating
business is the disposal group. In addition, we believe the
presentation of the Spin Forge divesture transaction as discontinued
operations to be more informative disclosure to the user of the
financial statements. Upon release of SFAS 144, the FASB stated that:
In particular, the Board determined that:
Broadening the presentation of discontinued operations to
include more disposal transactions provides investors, creditors, and
others with decision-useful information that is relevant in assessing
the effects of disposal transactions on the ongoing operations of an
entity.
SFAS 144 requires classification of a disposal group as discontinued
operations if:
1. The disposal group represents a component of an entity;
2. The asset group is held for sale or disposed of; and
3. The cash flows and operations are eliminated in the
disposal transaction and no significant forms of continuing
involvement exist.
3
1. Component of an entity - Spin Forge qualifies as a component of an
entity as it has always comprised operations and cash flows that can be
clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity. This is further supported by the
fact that it was historically disclosed in a separate segment from the
Company's core cladding operations;
2. Held for sale or disposed of - In June 2004, we determined that we
met the criteria to classify the disposal group as held for sale, and
we therefore reported the operations of the disposal group as
discontinued operations. During the 2nd quarter of 2004, we had
received board approval to divest of the disposal group and we were
actively seeking potential buyers. We believed the sale would be
completed within one year, and that we would meet the additional
criteria under SFAS 144 to classify the disposal group as discontinued
operations. In September 2004, we ceased operating the Spin Forge
business, when Aerojet took over all operating activities, all
employees and all contracts. As a result, while we believe we qualified
as held for sale in June 2004, we soon thereafter ceased operations;
3. The cash flows and operations are eliminated in the disposal
transaction and no significant forms of continuing involvement exist -
As a result of the disposal transaction, we believe we have met the
criteria of paragraph 42a in that the disposal transaction eliminated
cash flows and operations and did not contain any significant forms of
continuing involvement as further clarified in EITF 03-13:
1. The operations and cash flows of the component have been
(or will be) eliminated from the ongoing operations of the
entity in the disposal transaction, and;
2. The entity will not have any significant continuing
involvement in the operations of the component after the
disposal transaction.
We disposed of the Spin Forge operations and have no intent to get back
into this business. As the business was not particularly attractive to
buyers, we structured the best deal we could to minimize losses to our
shareholders and in order for the acquiring party to continue to serve
the customers of Spin Forge. The result was a transaction where the
long-lived assets were leased. However, we did not consider it
appropriate in this specific situation to be precluded from
discontinued operations presentation because we retained the long-lived
assets. SFAS 144 does not preclude discontinued operations solely
because some long-lived assets were retained. Instead, we believe the
retained long lived assets and corresponding lease should be evaluated
under EITF 03-13.
We believe that the following information further evidences the fact
that we have completely exited the Spin Forge operating business:
4
o We sold all inventory, books and records, intangible personal
property (copyrights, trademarks, trade names, etc.), business
information and technology, customer contracts, and licenses and
permits relating to the Spin Forge business. The sales price for
these assets was approximately $1.7 million;
o Aerojet assumed all workplace safety liabilities after the
closing date and offered employment to all but one of the DMC
employees that worked at the Spin Forge location;
o We entered into a non-compete agreement with Aerojet under which
we agreed not to engage in the business of manufacturing and
selling Spin Forge products for as long as Aerojet is utilizing
the leased equipment to produce rocket motor cases or pressure
tanks. Even if Aerojet does not purchase all or a major portion
of the leased assets at the end of the initial lease term, we
have no intent to operate any of the leased assets and will
immediately liquidate any of the leased assets that are not
purchased by Aerojet. Lastly, even if the equipment were
returned, our ability to restart the business is severely
restricted as we have sold the contracts and therefore, have no
customers nor employees to operate the business.
These facts demonstrate that Aerojet assumed full responsibility
for operating the Spin Forge business effective on the closing
date.
The majority of the equipment at Spin Forge is actually comprised of
older, standard machining centers, lathes, welding equipment and
testing equipment to which specialized tooling, which represents less
than 15% of the net book value of the equipment (book value of
approximately $850,000) and tooling (book value of approximately
$150,000) that is being leased to Aerojet, has been adapted to allow
this generally older equipment to be used in the production of either
rocket motor cases or titanium pressurant tanks under three highly
specific programs. The manufacturing equipment has minimal salvage
value if it is not being used in connection with one or all of these
three programs. Additionally, the specialized tooling would be
worthless if it is not being used in servicing the customer contracts
related to these programs, which contracts were sold in the disposal
transaction. For this reason, we did not view the equipment as a
significant asset of the Spin Forge business in reaching our decision
to account for the Spin Forge divestiture transaction as a discontinued
operation. It is our view that the most critical assets of the Spin
Forge business are the three customer programs and the technical
knowledge and experience of the Spin Forge employees with respect to
production requirements under these three programs. As previously
mentioned, we agreed to a non-compete agreement with Aerojet and all of
our actions subsequent to the disposal support our intention of never
again operating this business at any future date (see response to
comment #5).
The following discusses our analysis under EITF 03-13:
5
o (a) the operations and cash flows of the component have been (or
will be) eliminated from the ongoing operations of the entity as
a result of the disposal transaction.
We assessed this by determining if the continuing cash flows
result from migration or a continuation of activities. We
determined that they do not, based on the following:
o The continuing cash inflows do not meet the criteria as
they result from lease payments.
o Furthermore, they are not significant in relation to
the 3-previous years annualized average cash inflow of
approximately $4 million per year, nor to the year of
disposal in which operating cash inflow of $1.8 million
was generated during the nine months of 2004 prior to
disposal.
|X| Net lease payments are approximately $23,000 per
month or $276,000 per year, representing
approximately 7% of average prior year cash
inflows and 4% of 2004 operating cash flow.
|X| While EITF 03-13 does not provide any quantitative
bright lines to assess the significance of cash
flows,it is noteworthy that in example 2, the
EITF concluded that continuing cash flows of 20
percent were significant while in examples 3 and
11 it concluded that 5 percent was not significant.
o (b) the entity will not have any significant continuing
involvement in the operations of the component after
disposal transaction.
We assessed this by determining if we have the ability
to influence the operations and (or) financial policies
of the disposed component. As long as Aerojet makes the
monthly lease payments, we have no ability to influence
either the operations or financial policies of the
disposed component.
4. As requested during the conference call on October
31, 2005, please provide us with a copy of your
analysis supporting the conclusion that your real
estate lease with Spin Forge LLC should have been
accounted for as a capital lease beginning in 2003.
Response
--------
During 2004, it came to our attention that we had been incorrectly
accounting for the lease of the Spin Forge land and building as an
operating lease. When we entered into the original lease agreement in
March of 1998, we obtained a purchase option on the land and building
that approximated fair market value. In September of 2001, the lease
was extended for 10 years through January 1, 2012. The purchase price
of the option remained the same. Due to the appreciation in the value
of the underlying real estate, the purchase option had become a
bargain.
6
Accordingly, the accounting treatment for the lease should have been
re-evaluated for this material amendment to the lease agreement. Based
upon the re-evaluation that we completed in 2004, we concluded that
capital lease accounting should have been applied beginning in
September 2001. A copy of our analysis is attached as Exhibit A.
FORM 8-K FILED NOVEMBER 8, 2005
- -------------------------------
Exhibit 99.1
- ------------
5. We read that you recently reached an agreement to sell your
purchase option on the Spin Forge property to the property owner
for $2.3 million, and you expect this transaction to result in a
pre-tax gain of $2.2 million. We have the following comments:
o Please provide us with more information on why you decided
to enter into this agreement. Specifically address why
management believes that this agreement is a better decision
for your company than exercising the purchase option on the
land and then selling the land to a third party at fair
market value. Also tell us how you and Spin Forge LLC
determined the $2.3 million purchase price that Spin Forge
LLC will pay to reacquire this option from you. In this
regard, we note that the $2.3 million price is significantly
less than your bargain purchase option exercise price of
$2.88 million.
o Please tell us, and quantify, if you paid any amounts to
acquire your purchase option on the Spin Forge property
beyond the $10,000 option fee mentioned in your March 18,
1998 Option Agreement with Spin Forge LLC.
o Please tell us how Spin Forge LLC will fund this option
purchase (i.e. cash, note, or a combination of these).
o Please tell us how you calculated your estimated pre-tax
gain and the accounting guidance that you relied upon.
o Please provide us with a copy of this agreement.
Response
--------
We hold an option to purchase the Spin Forge real estate at a price of
$2,880,000. The Spin Forge real estate is recorded on our books at the
$2,880,000 option price, with a corresponding offsetting liability of
the same amount. Spin Forge, LLC, the owner of the property, has
entered into an agreement with us to buy the real estate option back
from the Company for $2.3 million in cash. In order to
7
realize the same net amount on the exercise of its option and
subsequent sale of the land to a third party, we would be required to
sell the real estate for a minimum price of $5,180,000, a price which
we believe to be representative of the current fair market value of
the property.
We have not paid any amounts for the Spin Forge real estate option
beyond the $10,000 option fee that we paid on March 18, 1998 when we
first entered into the Option Agreement, which was considered as part
of the minimum lease payments in the accounting analysis that follows.
We will receive a $2.3 million cash payment from Spin Forge, LLC and
not be required to make the option payment as consideration for the
option purchase price.
The estimated pre-tax gain of $2.2 million equals the $2.3 million
purchase price, less estimated selling expenses of $100,000 for
brokerage commissions, legal fees and other closing costs. Based on our
previous classification of the Spin Forge business as a discontinued
operation, we propose to present the gain, net of tax, as discontinued
operations. We believe this classification to be most appropriate so as
to not mislead shareholders with non-operating gains included in
on-going operations coupled with the fact that post the disposal
transaction the leased assets qualify as a component. This transaction
was closed and we received the cash on January 10, 2006. At that time,
we terminated our real property lease relationship with the landlord
and Aerojet. Aerojet is now leasing the real property from the landlord
directly and we have no continuing involvement in the real property.
A copy of the Option Purchase Agreement was filed as an exhibit to the
Quarterly Report on Form 10-Q for the period ended September 30, 2005
with respect to this agreement.
* * *
We hope that our responses adequately address the additional comments
and concerns that you raised in your November 10, 2005 letter. Please
let us know if you require additional clarification with respect to our
responses or have any additional questions.
Sincerely,
/s/ Richard A. Santa
Richard A. Santa
Vice President and Chief Financial Officer
8
EXHIBIT A
EVALUATION OF SPIN FORGE LEASE - OPERATING VERSUS CAPITAL
LEASE TREATMENT
BACKGROUND INFORMATION
The following table shows the dates of significant events related to the lease:
- ------------------------ --------------------------- --------------------------
Date Land & Building Land & Building Purchase
Lease Option
- ------------------------ --------------------------- --------------------------
March 1998 4 year operating lease Option to acquire the land
through January 1, 2002 and building anytime
between July 1998 and
January 1, 2002 for $2.88M
(property was appraised at
$3.0M in March 1998). Paid
$10,000 for this option.
- -------------------------------------------------------------------------------
Initial Assessment - operating lease per criteria of FAS 13
- -------------------------------------------------------------------------------
November 1999 Property appraised for
$3.5M
- -------------------------------------------------------------------------------
February2000 Monthly lease payment
changed from $17,000
to $30,244.
- -------------------------------------------------------------------------------
Re-Assessment - operating lease per criteria of FAS 13, paragraph 9
The only change in a lease provision was that the monthly lease payment
increased. Therefore, the lease was re-evaluated using $30,244 as the new
payment and all other provisions as of the original lease date, and the result
is continued classification as an operating lease.
- -------------------------------------------------------------------------------
Note -The reason for the increase in lease payments is because we were under
severe cash flow shortages at that time, and our lender was pressuring us to use
any alternatives possible to reduce our loan balance. We had a receivable from
the lessor (who was also our then current CEO - this individual resigned in Q3
2000) that was not due until January 2002. He agreed to repay the receivable
early, so that this cash could be used to reduce our outstanding loan balance.
However, in exchange for the early repayment of the receivable, we agreed to an
increase in the monthly lease payment to the current fair market value. As part
of this negotiation, we obtained an appraisal of the property in November 1999
that valued the lease payments at $30,244 per month. Accordingly, our board
agreed to the increase in monthly rent when the receivable was paid in full in
February 2000. The net impact of this transaction was to receive cash up-front
in exchange for increased rent payments over the next two years. By January 2002
(the original lease termination date) the loss on settlement had been fully
recognized through
- -------------------------------------------------------------------------------
9
increased lease payments over 24 months since February 2000.
We have considered the impact of the loss on settlement of note receivable on
our 2000, 2001 and 2002 financial statements as follows:
- -------------------------------------------------------------------------------
Analysis: 30,000 increased payment
17,000 original payment
---------
13,000 difference x 24 months = 312,000 Discounted at 12%= 275,000
========= =========
This amount should have been recorded as a loss on settlement of note receivable
in 2000.
Calculation of loss: 275,000
(126,042) recorded add'l expense - represents $275k/24
months x 11 months recorded in 2000
---------------
148,958 Net understatement of expense
===============
During 2001, the Company continued to record in accordance with the terms of
the lease agreement, resulting in:
(137,500) overstated of expense-represnets $275k/24
months x 12 months recorded in 2001
===============
During 2002, the Company continued to record in accordance with the terms of
the lease agreement, resulting in:
(11,458) overstatement of expense-represents
$275k / 24 months x 1 month recorded in2002
===============
3-Year
2002 2001 2000 Cumulative
Pre-tax income/(loss) by year** 5,268,219 3,739,139 (1,458,080) 7,549,278
Adjustments based on above: 11,458 137,500 (148,958) -
---------- ---------- ----------- -------------
Adjusted pre-tax
5,279,677 3,876,639 (1,607,038) 7,549,278
========== ========== =========== ============
% of error 0.2% 4% 10% 0.0%
** Note - these numbers agree to the 2003 10-K, which is
pre-presentation of Spin Forge operations as ** discontinued.
Net worth as reported 15,564,740 14,645,994 17,739,294 15,564,740
Adjustments based on above: 137,500 (148,958) -
---------- ----------- ---------- -------------
Adjusted net worth
15,564,740 14,783,494 17,590,336 15,564,740
========== =========== ========== =============
0.0% 1% -1%
Our financial statements for 2000 and 2001 were audited by Arthur Andersen.
Ernst & Young became our auditors in 2002. In 2003, in connection with the
classification of PMP as a discontinued operation, Ernst & Young opined on the
2001 income statement.
Since this transaction has now been fully reflected in our financial statements,
we have concluded that the impact of this transaction on our 2002 and 2001
financial statements, which will appear in selected financial data in our 2005
Form 10-K filing, is immaterial. As 2000 no longer appears in our Form 10-K
filing, and does not change the trend of earnings in that year, we would not
propose to restate to 2000.
- -------------------------------------------------------------------------------
June 2001 Extended option on building and the
underlying land.
- -------------------------------------------------------------------------------
10
- -------------------------------------------------------------------------------
Could only purchase for $2.88M
between January 2002 and January 2003
- -------------------------------------------------------------------------------
Re-Assessment -change to lease agreement, and therefore re-evaluation required.
No change from operating lease to capital lease.
- -------------------------------------------------------------------------------
September 2001 Extended operating lease for 10 years
through January 1, 2012.
- -------------------------------------------------------------------------------
Re- Assessment - change to capital lease.
As required by paragraph 9 of SFAS 13, because this amendment extended the lease
term, the lease must be re-evaluated for classification between operating and
capital. Because we held a bargain purchase option ("BPO") under which we could
purchase the land and building for $2.88 million when it was most recently
appraised at $3.5 million, the lease met the criteria to be classified as a
capital lease. See accounting section below for further comments.
- -------------------------------------------------------------------------------
May 2002 Extended option on the building and
underlying land. Can only purchase
for $2.88M between January 2003 and
January 2004. If purchased
thereafter through January 2012,
then price is at fair market value.
- -------------------------------------------------------------------------------
Re-Assessment - continues as capital lease and applies accounting in Paragraph
14a and b. As required by paragraph 14, because this option amendment extended
the accounting lease term (for capital lease purposes, the accounting lease term
in September 2001, when the lease was re-evaluated as a capital lease, was only
four months until January 2002 when the BPO became exercisable), the lease must
be re-evaluated for classification between operating and capital. Since we still
hold a BPO, the lease continues to meet the criteria to be classified as a
capital lease. Therefore, the new accounting lease term is from May 2002 to
January 2003 when the BPO again becomes exercisable. See accounting section
below.
- -------------------------------------------------------------------------------
March 2003 Extended option on the building and
underlying land. Can only purchase
for $2.88M between January 2004 and
January 2005. If purchased
thereafter through January 2012,
then price is at fair
- -------------------------------------------------------------------------------
11
- -------------------------------------------------------------------------------
market value.
- -------------------------------------------------------------------------------
Re-Assessment - continues as capital lease and applies accounting in Paragraph
14a and b. Similar to May 2002, since we still hold a BPO, the lease continues
to meet the criteria to be classified as a capital lease. Therefore, the new
accounting lease term is from March 2003 to January 2004 when the BPO again
becomes exercisable.
See accounting section below.
- -------------------------------------------------------------------------------
February 2004 Property appraised for $5.5M.
- -------------------------------------------------------------------------------
April 2004 Extended option on the building and
underlying land. Can only purchase
for $2.88M between January 2005 and
January 2006. If purchased
thereafter through January 2012,
then price is at fair market value.
- -------------------------------------------------------------------------------
Re-Assessment - continues as capital lease and applies accounting in Paragraph
14a and b. Similar to March 2003, since we still hold a BPO, the lease continues
to meet the criteria to be classified as a capital lease. Therefore, the new
accounting lease term is from April 2004 to January 2005 when the BPO again
becomes exercisable. See accounting section below.
- -------------------------------------------------------------------------------
ACCOUNTING
The following analysis shows the accounting, which would occur at each date
subsequent to September 2001 when the lease was re-evaluated and classified as a
capital lease:
Fiscal 2001
- -----------
Present value of minimum lease payments at September 20, 2001:
Payments over lease term - 3 monthly payments of $30,244 each (from October to
December). Bargain purchase option - $2.88 million (property appraised at $3.5
million in November 1999).
Interest rate:
We considered the monthly lease payment to approximate interest expense based
upon an implied interest rate of 12.5%. In Q3 2001, a rate of 12.5% was
considered reasonable. We had net losses in 1999 and 2000 and were in violation
of debt covenants in those years. Our ability to borrow additional amounts from
our primary commercial lender had been greatly reduced, and our lender closely
monitored all existing third-party debt.
12
Lastly, our 1999 Form 10-K, included a going concern paragraph from our
independent auditors, further evidencing our economic troubles at the time, and
our greatly limited access to additional financing. From a sensitivity
standpoint, if one were to use approximately a 6% rate that non-troubled
companies may have received at that time, but which we believe is too low, the
impact would be to increase the present value of minimum lease payments to $2.92
million, which is not significantly different than the $2.88 million.
Based on the above factors, the present value of minimum lease payments was
determined to be $2.88 million as of September 20, 2001.
Allocation between land and building:
We had an independent appraisal of the property performed in November 1999. At
that time, the appraiser determined that the value of the improvements was
insignificant. Based upon this appraisal, we allocated only 5% of the property's
value to the building.
Therefore, the asset was set-up as follows:
- -------------------------------------------
Land - 95% of $2.88 million equals $2.74 million Building - 5% of $2.88 million
equals $0.14 million
At time of classification as a capital lease, our intent was to hold and use the
property. Therefore, the building's useful life was estimated at 20 years since
the building was more than adequate for the type of manufacturing the Company
was performing. Based upon a 20-year useful life, annual depreciation of $7,000
was determined to be immaterial and not recorded.
Balances at December 31, 2001:
In our December 31, 2004 Form 10-K, when we restated our prior financial
statements, 2001 was not presented. However, if presented, based upon our
restatement approach, we would have presented the following:
Capital lease asset - $2.88 million (consisting of land at $2.74 million and
building at $0.14 million)
Capital lease obligation - $2.88 million (in 12/31/04 10-K classified as
long-term), as substantially all of the lease payments over the term went to
interest.
The income statement impact was not significant as the depreciation was
determined to be immaterial.
Fiscal 2002
- -----------
Present value of minimum lease payments at May 20, 2002:
Payments over lease term - 7 monthly payments of $30,244 each (from June to
December). Bargain purchase option - $2.88 million.
13
Interest rate:
FAS 13, paragraph 14a states:
The present value of the future minimum lease payments under the revised or
new agreement shall be computed using the rate of interest used to record
the lease initially.
Therefore, the interest rate continues to be 12.5%.
Based on the above factors, the present value of minimum lease payments equals
$2.88 million as of May 20, 2002.
Allocation between land and building:
No change to September 2001 assessment and resultant allocation.
Balances at December 31, 2002:
In our December 31, 2004 Form 10-K, when we restated our prior financial
statements, the 2002 balance sheet was not presented and the 2002 income
statement was re-classified to present Spin Forge operations as discontinued.
However, if the balance sheet was presented, based upon our restatement
approach, we would have presented the following:
Capital lease asset - $2.88 million (consisting of land at $2.74 million and
building at $0.14 million)
Capital lease obligation - $2.88 million (in 12/31/04 10-K classified as
long-term), as substantially all of the lease payments over the term went to
interest.
Income statement impact is the same as Fiscal 2001 above.
Fiscal 2003
- -----------
Present value of minimum lease payments at March 14, 2003:
Payments over lease term - 9 monthly payments of $30,244 each (from March to
December). Bargain purchase option - $2.88 million.
Interest rate:
As noted above, the 12.5% interest rate remains the same.
Based on the above factors, the present value of minimum lease payments equals
$2.88 million as of March 14, 2003.
Allocation between land and building:
No change to September 2001 assessment and resultant allocation.
14
Balances at December 31, 2003:
In the December 31, 2004 10-K, when we restated our prior financial statements,
our 2003 balance sheet was labeled restated and the 2003 income statement was
re-classified to present Spin Forge operations as discontinued.
Capital lease asset, classified as "Assets of Discontinued Operations" - $2.88
million (consisting of land at $2.74 million and bldg at $0.14 million)
Capital lease obligation, classified as "Liability of Discontinued Operations" -
$2.88 million (in 12/31/04 10-K classified as long-term). Although this
liability was not assumed in the original disposal with Aerojet, it was
ultimately disposed of when we completed the transaction in January 2006 to sell
the BPO back to the original property owner.
Income statement impact is the same as Fiscal 2001 above.
Fiscal 2004
Present value of minimum lease payments at April 22, 2004:
Payments over lease term - 8 monthly payments of $30,244 each (from May to
December). Bargain purchase option - $2.88 million.
Interest rate:
As noted above, the 12.5% interest rate remains the same.
Based on the above factors, the present value of minimum lease payments equals
$2.88 million as of April 22, 2004.
Allocation between land and building:
No change to September 2001 assessment and resultant allocation.
Balances at December 31, 2004:
In our December 31, 2004 Form 10-K, when we restated our prior financial
statements, the 2003 balance sheet was labeled restated and the 2003 income
statement was re-classified to present Spin Forge operations as discontinued.
The 2004 balance sheet continued to reflect the same amounts as the 2003
restated balance sheet.
Capital lease asset, classified as "Assets of Discontinued Operations" - $2.88
million (consisting of land at $2.74 million and building at $0.14
million)
Capital lease obligation, classified as "Liability of Discontinued Operations" -
$2.88 million (in 12/31/04 10-K classified as long-term)
Income statement impact was recorded the same as Fiscal 2001 above.
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