EDAC TECHNOLOGIES CORPORATION
GROS-ITE INDUSTRIES 1994
GROS-ITE SPINDLE ANNUAL
AMERICAN RESEARCH REPORT
NATURAL COOL, LTD.
To Our Stockholders:
We experienced another difficult year in 1994. Net sales decreased to
$22,239,000 in 1994 from $29,331,000 in 1993. $5,660,000 of this decrease
occurred in the medical instruments area due principally to the loss of our
largest medical customer. We also incurred some sales declines in aerospace
($766,000) and specialty machines ($668,000), but these were minimal.
The negatives in the medical instruments area were offset by positives in
other areas. Our spindle business was strong in 1994 and is off to a very strong
start in 1995. Most importantly, we became a "preferred" supplier to our largest
aerospace customer. Airframe manufacturers are demanding larger jet engines. In
order to aggressively pursue this market, we acquired several machines during
the past year that allow us to produce much larger aerospace parts than we were
previously capable of producing. To facilitate this larger machinery, we are
adding a new 20,000 square foot building adjacent to our existing facilities.
We also undertook major innovations in our design capabilities. We are in
the process of adding several new graphics and computer-aided design systems in
order to service a more diverse customer base. System upgrades are a part of the
ongoing process of maintaining a leadership position.
The problems we faced in 1994 are not over. Continued pressure on our
prices and decreased revenues had a significant negative impact on our earnings.
We are working harder than ever to rebuild sales and profitability and on this
front there is reason for optimism. Our backlog is up to $24.5 million as
compared with $21 million last year. We are also being surveyed by several
aerospace companies as a potential supplier. Our balance sheet continues to be
very strong. Our commitment to quality and customer service remains the core
value of our company.
We appreciate the exceptional efforts of each of our employees and are
confident that we will repay your continued confidence by building solid,
long-term stockholder value.
Thank you for your support.
/s/ Robert P. Luzzi /s/ Robert T. Whitty
Robert P. Luzzi Robert T. Whitty
Chairman of the Board Chief Executive Officer
Edac Technologies Corporation, also known as Gros-Ite Industries, is a
diversified company. It primarily offers design and manufacturing services for
the aerospace industry in areas such as jet engine parts, special tooling,
equipment and gauges, and components used in the manufacture, assembly and
inspection of jet engines. Edac also offers design and manufacturing services
for the medical instruments industry in such areas as components used in the
manufacture of surgical instruments and special tooling. Edac also designs and
manufactures specialized machines for a variety of other applications.
Gros-Ite Spindle specializes in the design, manufacture and repair of
precision spindles. Spindles are an integral part of numerous machine tools
which are found in virtually any type of manufacturing environment. For 13 years
Gros-Ite Spindle has been servicing the industry with high quality standard and
custom spindles.
American Research, a 40 year old company acquired by Edac in 1986, offers
custom designed environmental test chambers which duplicate hostile conditions
such as high altitude, wind and dust, compression, humidity, decompression,
temperature and explosions. This equipment is sold to customers in the
aerospace, automotive and electronics industries, among others.
Edac maintains manufacturing and design facilities with computerized
numerically controlled machining centers, and grinding, welding, and sheet metal
fabrication, painting and assembly capabilities. Items manufactured by Edac
include precision rings, and other components for jet engines, components for
medical instruments, as well as industrial spindles, environmental test chambers
and specialized machinery designed by Edac or others and other assemblies
requiring close tolerances.
Marketing and Competition
- -------------------------
Edac has numerous competitors both in design and manufacturing. Many of the
independent firms with which it competes are smaller than Edac and do not
provide the variety of high quality services that Edac provides. Edac also
competes with its customers' in-house manufacturing and technical services
capabilities. Edac believes that it is able to compete effectively with
independent firms and customers' in-house capabilities because of Edac's
emphasis on customer service, its experience and its competitive pricing of its
services.
For its fiscal year ended December 31, 1994, approximately 69% of Edac's net
sales were derived from sales to United Technologies Corporation.
2
MARKET INFORMATION
The Company's Common Stock is traded on the over-the-counter
market (NASDAQ).
High and low stock bid prices for the last two years were as
follows:
1994 1993
---------------- ----------------
High Low High Low
---- ---- ---- ----
First Quarter 1 6/16 1 2/16 3 14/16 2 2/16
Second Quarter 1 6/16 1 2 4/16 1
Third Quarter 1 2/16 15/16 1 14/16 1
Fourth Quarter 1 13/16 1 12/16 15/16
The approximate number of record holders of the Company's Common
Stock at March 27, 1995 was 329.
The Company has never paid cash dividends. The Company is prohibited
from paying cash dividends by certain loan agreements with its
bank (see Note C to the Company's consolidated financial
statements included elsewhere in this report).
SELECTED FINANCIAL INFORMATION
Years Ended December 31,
1994 1993 1992 1991 1990
----------------------------------------------
(In thousands of dollars, except per share data)
SELECTED OPERATING DATA
Sales $22,239 $29,331 $38,252 $26,830 $27,958
Income before
extraordinary item 72 741 1,476 183 528
Net income 72 741 1,476 320 975
Net income per share .02 .20 .40 .09 .28
SELECTED BALANCE SHEET DATA
Current assets $12,170 $12,179 $14,970 $14,171 $11,597
Total assets 16,326 16,634 19,785 19,163 17,237
Current liabilities 5,323 5,669 9,799 10,538 8,067
Working capital 6,847 6,510 5,171 3,633 3,530
Long-term obligations 4,831 4,959 4,724 4,940 5,883
Shareholders' equity 6,172 6,006 5,262 3,685 3,287
______________________
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues from the Company's principal markets are as follows:
In Thousands of Dollars 1994 1993 1992
- -------------------------- -------- -------- --------
Aerospace customers....... $15,810 $16,576 $18,772
Medical customers......... 1,161 6,819 15,085
Other..................... 5,268 5,936 4,395
Net sales decreased $7,092,000 or 24% in 1994 from 1993. Aerospace sales
decreased $766,000 or 5% from 1993 while sales to medical customers declined by
$5,658,000 or 83%. During 1994, the Company's principal aerospace customer
continued to implement cost savings initiatives including personnel reductions,
vendor consolidations and facility closings to respond to the decline in
military and commercial aviation markets. While this negatively impacted the
Company's revenues, the Company remains an approved supplier of this customer.
The Company's principal medical customer consolidated its vendor base resulting
in the Company receiving few orders in 1994, which level of activity is not
expected to increase in 1995. Sales to other customers decreased $668,000 or 11%
reflecting a decrease in specialized machine sales offset slightly by increased
spindle sales.
Net sales decreased $8,921,000 or 23% in 1993 from 1992. Decreased sales
were due primarily to the Company's medical instruments customers. Sales to
medical instruments customers decreased by $8,266,000 or 55% from 1992. Sales to
aerospace customers decreased by $2,196,000 or 12% from 1992. Sales to customers
in other markets increased by $1,541,000 or 35% from 1992.
In late 1992, pricing concessions were granted to the Company's principal
aerospace customer for ongoing production orders. The Company negotiated price
concessions with its suppliers and implemented cost control programs to mitigate
that concession.
Cost of sales as a percentage of sales increased in 1994 to 86.0% from 85.0%
in 1993 due primarily to the effect of spreading fixed overhead over lower
production levels. Additionally, the Company incurred expense in moving certain
machines and departments within the Company to better utilize its existing
facilities. The American Research department was moved to newly leased
facilities.
Cost of sales as a percentage of sales increased in 1993 to 85.0% from 83.4%
in 1992 due to the above mentioned reduced prices from aerospace customers and
the effect of spreading fixed overhead over lower production levels. In
addition, the Company had lower sales and reduced prices to its principal
medical customer.
Selling, general and administrative costs increased $14,000 in 1994 from
1993 due to additional sales personnel and increased travel and telephone
expense, offset by reduced compensation expense.
4
In 1993 selling, general and administrative costs decreased by $624,000 or
18.9% from 1992. This decrease is the result of the Company's cost reduction
programs implemented early in the year in response to the contracting aerospace
and medical markets. The Company amended its defined benefit plan as of April 1,
1993 to cease benefit accruals. This resulted in a reduction of pension expense
of $282,000. In addition, commission expense decreased by $69,000, amortization
expense decreased by $68,000 and compensation and other expenses decreased by
$205,000.
INTEREST AND OTHER
Interest expense in 1994 was $433,000, a decrease of $90,000 from 1993. This
decrease reflects a reduction in overall borrowing levels throughout the year
offset slightly by an increasing interest rate on the Company's revolving line
of credit.
Interest expense in 1993 was $523,000, a decrease of $222,000 from 1992.
This decrease reflects a reduction in overall borrowing levels throughout the
year. Additionally, the Company refinanced term debt with a fixed interest rate
of 10.15% in March 1993 with $4,000,000 of new term debt with a fixed interest
rate of 7.65%.
Other income for 1994 was $72,000 consisting primarily of insurance proceeds
received.
Other expense for 1993 was $11,000 reflecting a loss on an investment. Other
income of $36,000 for 1992 reflects insurance proceeds received.
INCOME TAXES
The Company adopted Statement of Financial Accounting Standard (SFAS) No.
109 "Accounting for Income Taxes" in 1992. There was no cumulative effect of
adopting this change as of January 1, 1992 because of the Company's net
operating loss position at time of adoption. Under SFAS No. 109, deferred tax
expenses or credits are based on the changes in deferred tax assets and
liabilities from period to period.
The effective rates of 0% for 1994, 37.5% for 1993 and 36.7% for 1992
reflects the utilization of the Company's net operating loss carryforward,
limited to $181,000 per year. (See note F). The Company expects to recognize the
benefit from its remaining net operating loss carryover only to the extent such
amounts are realized for tax purposes and are not required to offset required
deferred tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company assesses its liquidity in terms of its ability to generate cash
to fund its operating and investing activities. Of particular importance to the
Company's liquidity are cash flows
5
generated from operating activities, capital expenditure levels and available
bank lines of credit.
The following is selected cash flow data from the Statements of Cash Flows:
In Thousands of Dollars 1994 1993 1992
----------------------- -------- -------- --------
Net cash flow from
operating activities.... $1,104 $ 3,326 $ 1,986
Net cash flow from
investing activities.... (621) (494) (759)
Net cash flow from
financing activities.... (509) (2,918) (1,153)
Net cash flow from operating activities in 1994 primarily reflect net income
and non-cash charges against income. Net cash flow from operating activities in
1993 improved over 1992 due to reduced inventory levels. Net cash flows from
investing activities for all years primarily reflect purchases of fixed assets
consisting mainly of machinery and equipment. Expenditures have been necessary
to add capacity and to increase productivity.
The following is selected capitalization data from the Balance Sheets:
In Thousands of Dollars 12/31/94 12/31/93 12/31/92
----------------------- --------- --------- ---------
Revolving line of credit.......... $ 1,595 $ 1,875 $ 4,635
Current portion long term debt.... 245 247 825
Long term debt.................... 3,824 4,069 3,706
Shareholders' equity.............. 6,172 6,006 5,262
Debt to total capitalization...... 48% 51% 64%
Unused revolving line of credit... 4,731 4,915 2,248
The Company believes that there are sales opportunities in providing larger
machining capabilities to the aerospace engine industry, as airframe
manufacturers are demanding larger engines. In 1994, the Company purchased
several used large machines capable of producing parts for the larger engines.
The Company anticipates constructing in 1995, a 20,000 square foot building
adjacent to its existing buildings. The large machine that the Company has
committed to purchase in 1995 (See note G) along with the other large machines
purchased in 1994 will be placed in service in the new building. Including the
building, the Company anticipates spending approximately $2.2 million in 1995 on
capital expenditures. The Company has secured a mortgage commitment from its
bank for the new building. In addition, it has an equipment line of credit with
its bank which provides up to
6
$500,000 in 1995 for equipment purchases, and it has secured an extended payment
agreement for the purchase of $690,000 of equipment. (See note G)
In March 1993, the Company completed a refinancing of $4,000,000 of term
debt with its bank reducing its fixed interest rate and its annual payments.
Principal payments were reduced by $500,000 for 1994, $1,701,000 for 1995 and by
$353,000 for 1996. By refinancing its term debt under favorable conditions and
thereby favorably impacting cash flow for 1995 and 1996, management believes the
Company is well positioned to respond to a healthier aerospace market. The
Company has a revolving line of credit with its bank which provides up to
$7,000,000 ($1,386,530 outstanding at December 31, 1994) limited by a formula
based on percentages of the Company's receivables and inventory.
Management believes that the funds generated from operations, as well funds
available from existing financing agreements, will be sufficient to meet the
Company's cash flow needs throughout 1995.
7
LETTERHEAD OF ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Shareholders and Board of Directors of
Edac Technologies Corporation:
We have audited the accompanying consolidated balance sheets of Edac
Technologies Corporation (a Wisconsin corporation) and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of Edac Technologies Corporation
and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 3, 1995
8
CONSOLIDATED STATEMENTS OF OPERATIONS
EDAC TECHNOLOGIES CORPORATION
YEARS ENDED DECEMBER 31,
1994 1993 1992
--------------- -------------- --------------
Sales:
Services $ 2,185,968 $ 3,231,581 $ 3,731,210
Products 20,052,882 26,099,157 34,521,088
-------------- -------------- -------------
22,238,850 29,330,738 38,252,298
Cost of Sales 19,114,373 24,934,728 31,908,439
-------------- -------------- -------------
Gross Profit 3,124,477 4,396,010 6,343,859
Selling, general and administrative expenses 2,691,447 2,677,647 3,302,123
-------------- -------------- -------------
INCOME FROM OPERATIONS 433,030 1,718,363 3,041,736
Non-operating income (expense):
Interest expense (433,173) (522,599) (744,569)
Other 71,658 (10,527) 35,659
-------------- -------------- -------------
INCOME BEFORE INCOME TAXES 71,515 1,185,237 2,332,826
Provision for income taxes - 444,000 856,503
-------------- -------------- -------------
NET INCOME $ 71,515 $ 741,237 $ 1,476,323
============== ============== =============
Weighted average number of shares of
common stock outstanding 3,724,018 3,691,665 3,713,788
============== ============== =============
Earnings Per Share $.02 $.20 $.40
============== ============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
9
CONSOLIDATED BALANCE SHEETS
EDAC TECHNOLOGIES CORPORATION
December 31,
1994 1993
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash $ 86,260 $ 111,754
Trade accounts receivable (net of
allowance for doubtful accounts of
$40,000 in 1994 and 1993) 1,487,150 1,831,063
Inventories:
Finished goods 1,114,575 1,042,034
Work in process and raw materials 8,709,074 8,630,650
Deferred income taxes 671,000 472,000
Prepaid expenses and other current
assets 102,317 91,659
-------------- --------------
TOTAL CURRENT ASSETS 12,170,376 12,179,160
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 314,091 314,091
Buildings 2,512,217 2,499,269
Machinery and equipment 7,250,472 6,949,355
-------------- --------------
10,076,780 9,762,715
Less-accumulated depreciation 6,306,302 5,620,615
-------------- --------------
3,770,478 4,142,100
-------------- --------------
OTHER ASSETS 384,946 312,337
-------------- --------------
$ 16,325,800 $ 16,633,597
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
10
CONSOLIDATED BALANCE SHEETS (CONTINUED)
EDAC TECHNOLOGIES CORPORATION
December 31,
1994 1993
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 1,595,367 $ 1,874,565
Current portion of long-term debt 245,383 246,550
Trade accounts payable 2,083,701 2,134,363
Employee compensation and amounts
withheld 638,068 594,235
Accrued expenses 760,533 819,131
-------------- --------------
TOTAL CURRENT LIABILITIES 5,323,052 5,668,844
-------------- --------------
LONG-TERM DEBT, less current portion 3,824,061 4,069,444
-------------- --------------
OTHER LIABILITIES 296,840 264,254
-------------- --------------
DEFERRED INCOME TAXES 710,000 625,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE G)
SHAREHOLDERS' EQUITY:
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued and outstanding--3,595,539
in 1994 and 3,566,205 in 1993 8,989 8,916
Additional paid-in capital 8,560,672 8,544,246
Accumulated deficit (1,915,216) (1,986,731)
-------------- --------------
6,654,445 6,566,431
Less guaranty of Employee Stock
Ownership Plan debt (350,000) (427,778)
Less Unfunded accrued pension costs (132,598) (132,598)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 6,171,847 6,006,055
-------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 16,325,800 $ 16,633,597
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
11
CONSOLIDATED STATEMENTS OF CASH FLOWS
EDAC TECHNOLOGIES CORPORATION
Years Ended December 31,
1994 1993 1992
------------- ------------- ------------
Operating Activities:
Net income $ 71,515 $ 741,237 $ 1,476,323
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision (benefit) for deferred
income taxes (114,000) (82,000) 235,000
Depreciation and amortization 985,588 931,269 1,025,299
Loss (gain) on sale of property
and equipment 11,915 1,039 (11,420)
Changes in operating assets and
liabilities:
Trade accounts receivable 343,913 (511,392) 814,764
Inventories (150,965) 3,097,671 (869,226)
Prepaid expenses and other
current assets (10,658) 27,624 (107,102)
Trade accounts payable (50,662) (781,504) (301,996)
Other current liabilities (14,765) (141,882) (310,748)
Other liabilities 32,586 44,411 35,537
------------- ------------- ------------
Net cash provided by
operating activities 1,104,467 3,326,473 1,986,431
------------- ------------- ------------
Investing Activities:
Additions to property, plant and
equipment (696,359) (394,709) (762,557)
Proceeds from sales of property,
plant and equipment 231,532 37,746 21,450
Increase in other assets (155,885) (136,930) (18,113)
------------- ------------- ------------
Net cash used in
investing activities $ (620,712) $ (493,893) $ (759,220)
------------- ------------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
12
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
EDAC TECHNOLOGIES CORPORATION
Years Ended December 31,
1994 1993 1992
------------- ------------- ------------
Financing Activities:
Decrease in revolving
line of credit, net $ (279,198) $ (2,760,281) $ (7,341)
Payments of long-term debt (246,550) (4,215,509) (1,168,881)
Issuance of long-term debt --- 4,000,000 ---
Proceeds from exercise of options
for common stock, including
related income tax benefit 16,499 57,438 22,874
------------- ------------- ------------
Net cash used in
financing activities (509,249) (2,918,352) (1,153,348)
------------- ------------- ------------
Increase (decrease) in cash (25,494) (85,772) 73,863
Cash at beginning of year 111,754 197,526 123,663
------------- ------------- ------------
Cash at end of year $ 86,260 $ 111,754 $ 197,526
============ ============ ============
Supplemental Disclosure of
Cash Flow Information:
Interest Paid $ 427,763 $ 578,014 $ 780,400
Income taxes paid 130,000 285,000 476,277
The accompanying notes are an integral part of these consolidated financial
statements.
13
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
EDAC TECHNOLOGIES CORPORATION
Additional
Common Stock Paid In Accumulated
Shares Amount Capital Deficit
---------- --------- ------------ -----------
Balances at January 1, 1992 3,478,543 $ 8,696 $ 8,464,154 $(4,204,291)
Exercise of stock options 40,664 102 22,772 --
Net income -- -- -- 1,476,323
Balances at December 31, 1992 3,519,207 8,798 8,486,926 (2,727,968)
Exercise of stock options,
including related income
tax benefit 46,998 118 57,320 --
Net income -- -- -- 741,237
Balances at December 31, 1993 3,566,205 8,916 8,544,246 (1,986,731)
Exercise of stock options,
including related income
tax benefit 29,334 73 16,426
Net income -- -- -- 71,515
Balances at December 31, 1994 3,595,539 $ 8,989 $ 8,560,672 $(1,915,216)
The accompanying notes are an integral part of these consolidated financial
statements.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EDAC TECHNOLOGIES CORPORATION
DECEMBER 31, 1994
NOTE A -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Until May 12, 1989, Edac Technologies Corporation (the Company) was a subsidiary
of Cade Industries, Inc. (Cade) which owned approximately 57% of the Company's
outstanding Common Stock. Effective May 12, 1989, Cade sold its investment in
the Company's Common Stock to a partnership comprised of certain members of the
Company's management and the Edac Technologies Corporation Employee Stock
Ownership Plan (ESOP). The Partnership owns 27.4% and the ESOP owns 27.1% of
the Company's outstanding Common Stock as of December 31, 1994.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries, Gros-Ite Industries, Inc. and
Natural Cool, Ltd. Intercompany transactions have been eliminated from the
consolidated financial statements.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Provisions for depreciation and amortization are computed using the
straight-line method over 3 to 12 years for machinery and equipment and 25 years
for buildings for financial reporting purposes. For income tax reporting
purposes, straight-line and accelerated methods are used.
Earnings Per Share: Earnings per share is based on the weighted average number
of shares of common stock outstanding during the year, plus the dilutive effect,
if any, of outstanding stock options.
NOTE B -- COMMON STOCK AND STOCK OPTIONS
On December 5, 1991, the Board of Directors adopted the 1991 Stock Option Plan
(the Plan). The Plan is non-qualified and provides for the granting of up to
325,000 options to purchase shares of the Company's Common Stock. The option
price is the fair market value of the shares on the date of the grant. Options
may be exercised at the rate of 33 1/3% six months after the grant date, another
33 1/3% one year after the grant date and the remaining 33 1/3% two years after
the grant date. Options may be granted under the Plan through December 5, 2001.
During 1991, options to purchase 282,000 shares of the Company's Common Stock at
$.5625 per share were granted under the Plan.
On January 1, 1994, options to purchase 100,000 restricted shares were granted
to an officer at an exercise price of $.5625 per share. On October 1, 1994,
25,000 of these options became exercisable. An additional 25,000 become
exercisable each January 1 thereafter through January 1, 1997.
During 1994, 1993, and 1992, options for 29,334, 46,998 and 40,664 shares,
respectively, were exercised at $.5625 per share. At December 31, 1994, there
were options outstanding for the purchase of 265,004 shares at $.5625 per share
of which 190,004 were exercisable.
15
NOTE C -- NOTES PAYABLE AND LONG TERM DEBT
Long-term debt consisted of the following:
December 31
-----------------------
1994 1993
---------- ----------
Note payable to bank in 60 monthly installments of $37,516,
including interest at 7.65% per annum commencing
April 1, 1993, with a balloon payment of $3,089,220
due on April 30, 1998. $3,719,444 $3,874,580
Note payable to bank by Edac Technologies
Corporation Employee Stock Ownership Plan
(guaranteed by the Company). Principal is
due in 108 monthly installments of $6,481
commencing July 1, 1990. Interest at 95%
of the bank's base rate is due monthly. 350,000 427,778
Installment notes payable in monthly and
annual installments, plus interest. -- 13,636
---------- ----------
4,069,444 4,315,994
Less amounts due within one year 245,383 246,550
---------- ----------
$3,824,061 $4,069,444
========== ==========
The Company also has a Revolving Loan and Security Agreement (the Agreement)
which provides for a revolving line of credit with a borrowing base limited to
an amount which is the lesser of $10,000,000 or an amount determined by a
formula based on percentages of the Company's receivables and inventory. The
revolving line of credit bears interest at the bank's base rate of interest
(8.5% at December 31, 1994) on borrowings up to $3,000,000, base rate plus 1/4
on borrowings from $3,000,001 to $6,000,000 and base rate plus 1/2 on borrowings
from $6,000,001 to $10,000,000. Effective February 28, 1995, the Agreement was
amended to revise the borrowing base to the lesser of $7,000,000 or an amount
determined by a formula based on percentages of the Company's receivables and
inventory and extend the maturity of the Agreement from January 31, 1995 to
January 31, 1996. The interest rate was amended to the bank's base rate of
interest. The Agreement also provides for an equipment line of credit which
provides loan advances of 75% of equipment purchases up to an aggregate amount
of $500,000, with interest payable monthly at the bank's base rate plus 0.5%.
The principal amount outstanding as of February 1, 1995 will be paid in 60 equal
payments commencing February 1, 1995. Interest will be charged monthly after
February 1, 1995 at the bank's base rate plus 0.5% or, upon election of the
Company, at a fixed rate equal to 3% above the bank's five-year average cost of
funds. At December 31, 1994, the Company had borrowed $208,837 on the equipment
line. The Agreement, as amended on February 28, 1995, provides as of February
1, 1995 a second equipment line of credit which provides loan advances of 75% of
equipment purchases up to an aggregate amount of $500,000 through January 31,
1996 with interest payable monthly at the bank's base rate plus 0.5%. The
principal amount outstanding as of February 1, 1996 will be paid in 60 equal
payments commencing February 1, 1996. Interest will be charged monthly after
February 1, 1996 at the bank's base rate plus 0.5% or, upon election of the
Company, at a fixed rate equal to 3% above the bank's cost of funds. The
Agreement also provides for a five-year term loan in the original amount of
$4,000,000 ($3,719,444 outstanding at December 31, 1994).
At December 31, 1994 and 1993, borrowings outstanding under the revolving line
of credit and the equipment line amounted to $1,595,367 and $1,874,565,
respectively. The unused portion of the line of credit was approximately
$4,730,965 as of December 31, 1994 (based on a borrowing base determined by the
formula).
To secure all obligations of the Company under the Agreement, the bank has a
first priority security interest in the Company's accounts receivable,
inventories, equipment, real estate and other assets. The Agreement requires,
among other things, minimum levels of net income, no material adverse changes in
the financial condition of the company and the maintenance of certain financial
ratios including debt to net worth, interest coverage, current and debt service
ratios. The Agreement also prohibits payment of dividends, issuance, redemption
or sale of common stock, and creation of certain other encumbrances and
contingent liabilities without the consent of the bank and limits the amount of
annual capital expenditures. The Company was in compliance with all loan
covenants, as amended, at December 31, 1994.
16
Aggregate annual maturities of long-term debt for the five year period
subsequent to December 31, 1994 are as follows: 1995--$245,383; 1996--$258,062;
1997--$273,347; 1998--$3,253,763; and 1999--$38,889.
NOTE D -- PENSION PLAN
The Company maintains a noncontributory defined benefit pension plan covering
substantially all employees meeting certain minimum age and service
requirements. The benefits are generally based on years of service and
employees' compensation during the last five years of employment. The Company's
policy is to contribute annually the amount necessary to satisfy the
requirements of the Employee Retirement Income Security Act of 1974.
In March 1993, the Board of Directors approved a curtailment to the plan which
resulted in the freezing of all future benefits under the plan as of April 1,
1993. As a result, the Company recognized a gain of $361,929 in 1993.
The following table sets forth the plan's funded status and amounts recognized
in the Company's financial statements:
December 31
------------------------
1994 1993
--------- ----------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$4,042,220 and $4,100,858
in 1994 and 1993, respectively... $4,210,450 $4,307,881
---------- ----------
Projected benefit obligation....... 4,210,450 4,307,881
Plan assets at fair value.......... 4,153,134 4,177,428
---------- ----------
Projected benefit obligation in
excess of plan assets............. (57,316) (130,453)
---------- ----------
Accrued pension cost included
in accrued employee compensation.. $ (57,316) $ (130,453)
========== ==========
Years Ended December 31
-------------------------------------
1994 1993 1992
---------- --------- ---------
Net pension cost included the
following components:
Service cost-benefits earned
during the period.................. $ -- $ 103,606 $ 188,216
Interest cost on projected
benefit obligation................. 317,914 352,159 360,956
Actual return on plan assets..... 8,683 (367,950) (287,246)
Net amortization and deferral.... (300,633) 331,764 78,141
---------- ---------- ---------
Curtailment gain................. -- (361,929) --
---------- ---------- ---------
$ 25,954 $ 57,650 $ 340,067
========== ========== =========
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The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5%. The expected long-term rate
of return on plan assets was 7%.
In accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 87, "Employers' Accounting for Pensions," the Company recorded an
additional liability with a corresponding reduction in stockholders' equity of
$132,598 relating to the change in the discount rate from 8.0% to 7.5%
subsequent to the curtailment of the plan.
In July 1991, the Company established a 401(k) defined contribution plan. The
Company matches 10% of employee contributions up to 4% of compensation.
Employer contributions and expense related to this plan were $10,508, $17,891,
and $17,309 in 1994, 1993 and 1992, respectively.
NOTE E -- EMPLOYEE STOCK OWNERSHIP PLAN
Effective May 4, 1989, the Company established the Edac Technologies Corporation
Employee Stock Ownership Plan (the ESOP). Employees of the Company are eligible
to participate in the ESOP beginning six months following their hire date. The
Company's contributions to the ESOP are determined annually by the Board of
Directors. The Company records the expense in the amount of contributions made
to the ESOP. The Company contributed $104,500, $105,000, and $111,000, to the
ESOP for the years ended December 31, 1994, 1993 and 1992, respectively.
At December 31, 1994, the ESOP owned 973,802 shares of the Company's Common
Stock. These shares were purchased using the proceeds of a $700,000 note payable
to a bank for which repayment has been guaranteed by the Company. Interest
expense incurred on the debt was $26,357, $26,772. and $32,679, for the years
ended December 31, 1994, 1993 and 1992, respectively.
In the accompanying financial statements, the outstanding debt of the ESOP has
been included in the Company's long-term debt, and shareholders' equity has been
decreased by a corresponding amount. As the principal amount of the loan is
repaid, the liability and the amount offset against shareholders' equity will be
reduced in equal amounts.
NOTE F -- INCOME TAXES
Effective January 1, 1992, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109 "Accounting for Income Taxes." Under SFAS No. 109,
deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using
the enacted marginal tax rate. Deferred income tax expenses or benefits are
based on the changes in the deferred tax assets and liabilities from period to
period. Because of the Company's net operating loss carryforward position, there
was no cumulative effect of adopting this change as of January 1, 1992.
Income tax expense (benefit) are included in the financial statements as follows
(in 000's):
1994 1993 1992
----- ----- -----
Current $ 114 $ 526 $ 622
Deferred (114) ( 82) 235
----- ----- -----
$ - $ 444 $ 857
===== ===== =====
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The effective tax rate on income before income taxes is different from the
prevailing Federal and state income tax rate as follows (in 000's):
Years Ended December 31,
---------------------------
1994 1993 1992
------ ------ ------
Income before income taxes $ 72 $1,185 $2,333
----- ------ ------
Income tax at Federal statutory rate $ 24 $ 403 $ 793
State income taxes-net of Federal benefit 5 90 208
Meals, Entertainment and Other 41 21 72
Change in valuation allowance on
deferred income tax assets due to
realization of net operating loss
carryforwards subject to limitations (70) (70) (216)
----- ------ ------
$ - $ 444 $ 857
===== ====== ======
The tax effect of temporary differences giving rise to the Company's deferred
tax asset and liability at December 31, 1994 and 1993 are as follows (in 000's):
1994 1993
------- --------
Deferred tax liabilities:
Property, plant and equipment $ 959 $1,113
Capital leases 58 58
Other 90 25
------ ------
1,107 1,196
====== ======
Deferred tax assets:
Allowance for uncollectible
accounts receivable 17 17
Employee compensation and amounts withheld 125 208
Accrued expenses 55 125
Unicap and inventory reserves 466 272
Tax effect of net operating loss carryforwards 464 517
Alternative minimum tax credit carryforwards 268 283
Capital loss carryforwards -- 541
Other 5 14
Valuation allowance (332) (934)
------ ------
1,068 1,043
------ ------
Net deferred tax liability $ 39 $ 153
====== ======
Reflected in balance sheet as:
Net current deferred tax asset $ 671 $ 472
Net long term deferred tax liability 710 625
------ ------
$ 39 $ 153
====== ======
Due to the change in ownership during 1989 (see Note A), provisions of the
Internal Revenue Code restrict the utilization of net operating loss
carryforwards (NOLs) attributed to the period prior to the change in ownership.
As of December 31, 1994, the Company has pre-change NOLs of approximately
$1,521,000 available to offset future federal taxable income of which the
company is limited to annual utilization of approximately $181,000. These NOLs
expire in the year 2003. The Company has alternative minimum tax credits of
approximately $268,000 which carry forward indefinitely for Federal income tax
purposes. These credits can be used in the future to the extent that the
Company's regular tax liability exceeds amounts calculated under the alternative
minimum tax method.
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NOTE G -- COMMITMENTS AND CONTINGENCIES
Lease expense under operating leases was $16,710, $7,917 and $30,250, for the
years ended December 31, 1994, 1993 and 1992, respectively. Minimum rental
commitments as of December 31, 1994 for noncancelable operating leases with
initial or remaining terms of one year or more are as follows: 1995--$38,000;
1996--$38,000; 1997--$1,750.
The Company is committed to expend $690,000 on equipment in 1995. After a down
payment of $103,000, minimum quarterly payments of $12,500 will be made
commencing four months after delivery of the machine. Any unpaid balance will
be due on March 24, 1998.
NOTE H -- BUSINESS SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company and its subsidiaries design and manufacture tools, fixtures, special
machines, jet engine components, medical instrument components and spindles.
Although the Company and its subsidiaries offer both design and manufacturing
services to the aerospace and medical instruments industries, the design and
manufacturing are interrelated and have essentially the same capabilities and,
in the opinion of management, the Company operates in one business segment.
For the year ended December 31, 1994, sales to United Technologies Corporation
amounted to 69% of consolidated sales. For the year ended December 31, 1993,
sales to United Technologies Corporation and United States Surgical Corporation
amounted to 55% and 21%, respectively, of consolidated sales. For the year
ended December 31, 1992, sales to United Technologies Corporation and United
States Surgical Corporation amounted to 48% and 35%, respectively, of
consolidated sales. These customers operate in the aerospace and medical
instruments fields, respectively.
At December 31, 1994, the Company had $676,185 of trade receivables due from
United Technologies Corporation.
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OFFICERS
Robert T. Whitty Chief Executive Officer
Francis W. Moskey President and Chief Operating Officer
Gerald C. Smith Executive Vice President
Glenn L. Purple Vice President-Finance and Secretary
BOARD OF DIRECTORS
John Di Francesco Retired General Motors Plant Manager
William J. Gallagher President, William J. Gallagher Company
Robert P. Luzzi Chairman, Consultant
Francis W. Moskey President, Chief Operating Officer
Gerald C. Smith Executive Vice President
Stephen G.W. Walk Business Consultant
CORPORATE OFFICES
1790 New Britain Avenue
Farmington, CT 06032
GENERAL COUNSEL
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.
1000 North Water Street
Milwaukee, WI 53202
CORPORATE AUDITORS
Arthur Andersen LLP
One Financial Plaza
Hartford, CT 06103
TRANSFER AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, WI 53202
10-K INFORMATION
Shareowners may obtain a copy of the 1994 Edac Technologies 10-K report filed
with the Securities and Exchange Commission by writing to: Glenn Purple,
Secretary, Edac Technologies Corporation, 1790 New Britain Avenue, Farmington,
CT 06032.
21