EXHIBIT 13
EDAC TECHNOLOGIES CORPORATION
GROS-ITE INDUSTRIES 1995
GROS-ITE SPINDLE ANNUAL
AMERICAN RESEARCH REPORT
NATURAL COOL, LTD.
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 14
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, 1995, approximately 69% and 10% of
Edac's net sales were derived from sales to United Technologies Corporation and
Zapata Technologies Inc., respectively.
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:
1995 1994
---- ----
High Low High Low
---- --- ---- ---
First Quarter 1 2/16 12/16 1 6/16 1 2/16
Second Quarter 1 12/16 1 1 6/16 1
Third Quarter 1 10/16 14/16 1 2/16 15/16
Fourth Quarter 1 10/16 15/16 1 13/16
The approximate number of record holders of the Company's Common Stock at
April 11, 1996 was 311.
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,
1995 1994 1993 1992 1991
--------------------------------------------
(In thousands of dollars, except per share data)
SELECTED OPERATING DATA
Sales $24,564 $22,239 $29,331 $38,252 $26,830
Income (loss) before
extraordinary item (1,083) 72 741 1,476 183
Net income (loss) (1,083) 72 741 1,476 320
Net income (loss)
per share (.29) .02 .20 .40 .09
SELECTED BALANCE SHEET DATA
Current assets $14,215 $12,170 $12,179 $14,970 $14,171
Total assets 20,352 16,326 16,634 19,785 19,163
Current liabilities 9,166 5,323 5,669 9,799 10,538
Working capital 5,049 6,847 6,510 5,171 3,633
Long-term obligations 5,854 4,831 4,959 4,724 4,940
Shareholders' equity 5,332 6,172 6,006 5,262 3,685
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Indications are present that the aerospace industry is getting healthier.
Airframe manufacturers have booked significant orders in the past year. 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. The Company believes that it is
well positioned to respond to a healthier aerospace market. In 1995, the
Company constructed a 20,000 square foot manufacturing facility adjacent to its
existing buildings and purchased several large used machines capable of
producing parts for the larger engines. With an additional plant and large
machines acquired over the past two years, the Company has pursued the larger
aerospace machining work. Sales in the large machining area should increase in
1996, better utilizing the capacity that was added in 1995.
RESULTS OF OPERATIONS
Revenues from the Company's principal markets are as follows:
In Thousands of Dollars 1995 1994 1993
----------------------- ---- ---- ----
Aerospace customers.......... $ 17,376 $ 15,810 $ 16,576
Medical customers............ --- 1,161 6,819
Other........................ 7,188 5,268 5,936
Net sales increased 10% in 1995 from 1994. Aerospace sales increased
$1,566,000 or 10% from 1994 representing stronger sales to the Company's
principal aerospace customer and increasing sales in the larger machining area.
During 1995, the Company's principal aerospace customer continued to reduce its
vendor base as it has in prior years. The Company remains an approved supplier
and has been selected as a "going forward supplier" of this customer. Sales to
other markets increased $1,920,000 or 36% representing very strong growth of
spindle sales. The Company's medical customer ceased doing business with the
Company in 1994.
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 remained an approved supplier of this customer.
The Company's principal medical customer consolidated its vendor base resulting
in the Company receiving a few orders in 1994. Sales to other customers
decreased $668,000 or 11% reflecting a decrease in specialized machine sales
offset slightly by increased spindle sales.
Cost of sales as a percentage of sales increased in 1995 to 92% from 86% in
1994. This is due to additional costs incurred in 1995 associated with the
occupation and utilization of the Company's new manufacturing facility. Large
machines were moved from the existing facilities to the new facility to
consolidate all large turning operations. Also, the Company incurred
substantial costs in training the design department employees to enable them to
work on the new graphic and computer-aided design systems. These systems
replace traditional designing on drawing boards. Although there will be some
recurring costs in training new design employees and staying current with system
updates, the above projects were completed in 1995 and should not incur any
substantial costs in 1996. Additionally, the Company accrued for projected
losses on several large customer orders.
Cost of sales as a percentage of sales increased in 1994 to 86% from 85% 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.
Selling, general and administrative costs decreased $274,000 in 1995 from
1994 primarily due to reduced bonus and travel costs offset slightly by costs
associated with additional sales personnel.
In 1994, selling, general and administrative costs increased $14,000 from
1993 due to additional sales personnel and increased travel and telephone
expense, offset by reduced compensation expense.
INTEREST AND OTHER
Interest expense for 1995 was $618,000, an increase of $185,000 from 1994.
This increase reflects borrowings of $4,300,000 primarily to construct a new
20,000 square foot building and borrowings to purchase machinery. The effect of
increased borrowings was partially offset by generally lower interest rates
throughout 1995 compared to 1994.
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.
Other income for 1995 was $45,000 consisting primarily of interest income
on a trade receivable. 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.
INCOME TAXES
The Company adopted Statement of Financial Accounting Standards (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 rate of 0% for 1995 reflects providing a valuation allowance
equal to the deferred tax benefit which might be received by the Company. A
valuation allowance was provided as it is possible that these benefits will not
be realized through future profitable operations. The effective rates of 0% for
1994 and 37.5% for 1993 reflect 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 generated from operating activities, capital
expenditures levels and available bank lines of credit.
The following is selected cash flow data from the Statements of Cash Flows:
In Thousands of Dollars 1995 1994 1993
----------------------- ---- ---- ----
Net cash flow from
operating activities........ $ (1,336) $ 1,104 $ 3,326
Net cash flow from
investing activities........ (2,918) (621) (494)
Net cash flow from
financing activities........ 4,236 (509) (2,918)
Net cash flow from operating activities in 1995 and 1994 primarily reflect
net income (loss) and non-cash charges against income. Net cash flow from
operating activities in 1993 results primarily from reductions in inventories.
Net cash flow from investing activities for 1995 reflects the Company's
investment in new building construction and the purchase of machinery and
equipment and other working capital needs. Net cash flow from investing
activities for 1994 and 1993 primarily reflects purchases of fixed assets
consisting mainly of machinery and equipment. Expenditures have been necessary
to add capacity and to increase productivity. Capital expenditures for 1996 are
projected to be $500,000.
The following is selected capitalization data from the Balance Sheets:
In Thousands of Dollars 12/31/95 12/31/94 12/31/93
----------------------- -------- -------- --------
Revolving line of credit..... $ 4,651 $ 1,595 $ 1,875
Current portion
long-term debt............. 387 245 247
Long-term debt............... 4,919 3,824 4,069
Shareholders' equity......... 5,332 6,172 6,006
Debt to total
capitalization............. 65% 48% 51%
Unused revolving line
of credit.................. 1,275 4,731 4,915
The Company has a revolving line of credit with its bank which provides for
borrowings of up to $7,000,000 ($4,003,597 outstanding at December 31, 1995)
limited by a formula based on percentages of the Company's receivable and
inventory. Availability under that line of credit was $1,274,829 on December
31, 1995. The credit agreement, as amended on April 10, 1996, matures on March
31, 1997. Included in the amended agreement is an increase in interest rates
(see Note C). The amended agreement, includes additional covenants including a
subjective covenant clause which requires that the Company make improvements in
its inventory management.
Management believes that the funds generated from operations, as well as
funds available from existing financing agreements, will be sufficient to meet
the Company's cash flow needs throughout 1996.
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 1, 1996 (except with
respect to the matter discussed in
Note C, as to which the date is
April 10, 1996)
CONSOLIDATED STATEMENTS OF OPERATIONS
EDAC TECHNOLOGIES CORPORATION
---------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993
------------- ------------- -------------
Sales:
Services $ 1,197,656 $ 2,185,968 $ 3,231,581
Products 23,366,278 20,052,882 26,099,157
------------- ------------- -------------
24,563,934 22,238,850 29,330,738
Cost of Sales 22,656,651 19,114,373 24,934,728
------------- ------------- -------------
Gross Profit 1,907,283 3,124,477 4,396,010
Selling, general and administrative expenses 2,417,136 2,691,447 2,677,647
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS (509,853) 433,030 1,718,363
Non-operating income (expense):
Interest expense (618,156) (433,173) (522,599)
Other 44,790 71,658 (10,527)
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (1,083,219) 71,515 1,185,237
Provision for income taxes - - 444,000
------------- ------------- -------------
NET INCOME (LOSS) $ (1,083,219) $ 71,515 $ 741,237
============= ============= =============
Weighted average number of shares of
common stock outstanding 3,760,789 3,724,018 3,701,911
============= ============= =============
Earnings (Loss) Per Share $(.29) $.02 $.20
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
EDAC TECHNOLOGIES CORPORATION
----------------------------
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
ASSETS
- ------
CURRENT ASSETS:
Cash $ 158,077 $ 86,260
Trade accounts receivable (net of
allowance for doubtful accounts of
$40,000 in 1995 and 1994) 1,650,840 1,487,150
Refundable income taxes 106,000 ---
Inventories:
Finished goods 935,825 1,114,575
Work in process and raw materials 10,344,212 8,709,074
Prepaid expenses and other current
assets 103,197 102,317
Deferred income taxes 917,000 671,000
------------- -------------
TOTAL CURRENT ASSETS 14,215,151 12,170,376
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 394,821 314,091
Buildings 3,656,191 2,512,217
Machinery and equipment 8,682,242 7,250,472
------------- -------------
12,733,254 10,076,780
Less-accumulated depreciation 6,850,794 6,306,302
------------- -------------
5,882,460 3,770,478
------------- -------------
OTHER ASSETS 254,519 384,946
------------- -------------
$ 20,352,130 $ 16,325,800
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
EDAC TECHNOLOGIES CORPORATION
------------------------------
DECEMBER 31,
------------------------------
1995 1994
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 4,651,484 $ 1,595,367
Current portion of long-term debt 387,366 245,383
Trade accounts payable 2,730,256 2,083,701
Employee compensation and amounts
withheld 613,815 638,068
Accrued expenses 783,561 760,533
------------- -------------
TOTAL CURRENT LIABILITIES 9,166,482 5,323,052
------------- -------------
LONG-TERM DEBT, less current portion 4,919,019 3,824,061
------------- -------------
OTHER LIABILITIES 18,000 296,840
------------- -------------
DEFERRED INCOME TAXES 917,000 710,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE G)
SHAREHOLDERS' EQUITY:
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued and outstanding--3,653,540
in 1995 and 3,595,539 in 1994 9,134 8,989
Additional paid-in capital 8,593,152 8,560,672
Accumulated deficit (2,998,435) (1,915,216)
------------- -------------
5,603,851 6,654,445
Less guaranty of Employee Stock
Ownership Plan debt (272,222) (350,000)
Less Unfunded accrued pension costs --- (132,598)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 5,331,629 6,171,847
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 20,352,130 $ 16,325,800
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
EDAC TECHNOLOGIES CORPORATION
---------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993
------------- ------------ ------------
Operating Activities:
Net income (loss) $ (1,083,219) $ 71,515 $ 741,237
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Deferred income taxes (39,000) (114,000) (82,000)
Depreciation and amortization 1,047,000 985,588 931,269
(Gain) loss on sale of property
and equipment (32,780) 11,915 1,039
Changes in operating assets and
liabilities:
Trade accounts receivable (163,690) 343,913 (511,392)
Refundable income taxes (106,000) --- ---
Inventories (1,456,388) (150,965) 3,097,671
Prepaid expenses and other
current assets (880) (10,658) 27,624
Trade accounts payable 646,555 (50,662) (781,504)
Other current liabilities 131,373 (14,765) (141,882)
Other liabilities (278,840) 32,586 44,411
------------- ------------ ------------
Net cash (used in) provided by
operating activities (1,335,869) 1,104,467 3,326,473
------------- ------------ ------------
Investing Activities:
Additions to property, plant and
equipment (3,241,937) (696,359) (394,709)
Proceeds from sales of property,
plant and equipment 196,655 231,532 37,746
Decrease (increase) in other assets 127,285 (155,885) (136,930)
------------- ------------ ------------
Net cash used in
investing activities $ (2,917,997) $ (620,712) $ (493,893)
------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
EDAC TECHNOLOGIES CORPORATION
------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
------------ ------------ -------------
Financing Activities:
Increase (decrease) in revolving
line of credit, net $ 3,056,117 $ (279,198) $ (2,760,281)
Payments of long-term debt (247,499) (246,550) (4,215,509)
Issuance of long-term debt 1,484,440 --- 4,000,000
------------ ------------ -------------
Proceeds from exercise of options
for common stock, including
related income tax benefit 32,625 16,499 57,438
------------ ------------ -------------
Net cash provided by (used in)
financing activities 4,325,683 (509,249) (2,918,352)
------------ ------------ -------------
Increase (decrease) in cash 71,817 (25,494) (85,772)
Cash at beginning of year 86,260 111,754 197,526
------------ ------------ -------------
Cash at end of year $ 158,077 $ 86,260 $ 111,754
============ ============ =============
Supplemental Disclosure of
Cash Flow Information:
Interest Paid $ 594,488 $ 427,763 $ 578,014
Income taxes paid 139,000 130,000 285,000
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
EDAC TECHNOLOGIES CORPORATION
------------------------------- -------------- --------------
Common Stock Additional Accumulated
------------------------------- Pain-In Deficit
Shares Amount Capital
-------------- -------------- -------------- --------------
Balances at January 1, 1993 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)
Exercise of stock options,
including related income
tax benefit 58,001 145 32,480 ---
Net loss -- -- -- (1,083,219)
-------------- -------------- -------------- --------------
Balances at December 31, 1995 3,653,540 $ 9,134 $8,593,152 $(2,998,435)
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EDAC TECHNOLOGIES CORPORATION
DECEMBER 31, 1995
NOTE A -- ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
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 27.0% and the ESOP owns 26.6% of
the Company's outstanding Common Stock as of December 31, 1995.
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.
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.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain of the amounts reflected in the financial
statements. Actual results could differ from those estimates.
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 and 1995, options to purchase 282,000 shares at $.5625 per share and
30,000 shares at $1.25 per share, respectively, of the Company's Common Stock
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. At December 31, 1995,
50,000 of these options were exercisable. An additional 25,000 become
exercisable each January 1 thereafter through January 1, 1997.
During 1995, 1994, and 1993, options for 58,001, 29,334, and 46,998 shares,
respectively, were exercised at $.5625 per share. At December 31, 1995, there
were options outstanding for the purchase of 237,003 shares, which consisted of
207,003 at $.5625 per share of which 157,003 were exercisable, and 30,000 at
$1.25 per share, of which 10,000 were exercisable.
NOTE C -- NOTES PAYABLE AND LONG TERM DEBT
Long-term debt consisted of the following:
December 31
---------------------------------
1995 1994
--------------- ---------------
Note payable to bank in 60 monthly installments of $37,516,
including interest at 7.65% (8.65% as of April 10, 1996)
per annum commencing April 1, 1993, with a balloon
payment of $3,089,220 due on April 30, 1998. $3,551,838 $3,719,444
Note payable to bank in 56 monthly principal installments of $5,556 1,000,000 ---
commencing December 1, 1995 with a balloon payment of
$688,864 due on August 1, 2000. Interest at 7.83% (8.83%
as of April 10, 1996).
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. 272,222 350,000
Installment equipment note payable in quarterly
installments of $12,500 and monthly installments
based on 50% of the Company's profit, as defined,
on jobs performed by the equipment, commencing
November 28, 1995 and due March 31, 1998.
Interest imputed at 9%. Note collateralized by
the equipment. 482,325 ---
--------------- ---------------
5,306,385 4,069,444
Less amounts due within one year 387,366 245,383
--------------- ---------------
$4,919,019 $3,824,061
=============== ===============
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 $7,000,000 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, 1995). Effective April 10, 1996, the Agreement was amended to
extend the maturity of the Agreement from April 30, 1996 to March 31, 1997 and
to increase the interest rates on all loans and lines of credit provided by the
Agreement. The interest rate on the revolving line of credit increased to the
bank's base rate plus 1%. At December 31, 1995, the Company had $4,003,597
outstanding under the revolving line of credit.
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. The principal outstanding on the equipment line
of credit 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% (base rate plus 1.5% as of April 10, 1996). At
December 31, 1995, the Company had borrowed $367,587 on the equipment line. The
Agreement also provides for an equipment line in the original amount of $433,837
($280,300 outstanding at
December 31, 1995). Principal payments are $7,231 per month with interest
charged at the bank's base rate plus 0.5% (base rate plus 1.5% as of April 10,
1996).
At December 31, 1995 and 1994, borrowings outstanding under the revolving line
of credit and the equipment lines amounted to $4,651,484 and $1,595,367,
respectively. The unused portion of the line of credit was approximately
$1,274,829 as of December 31, 1995 (based on a borrowing base determined by the
formula).
The Agreement also provides for a five-year term note in the original amount of
$1,000,000. Effective April 10, 1996, the interest rate on the term note
increased from 7.83% to 8.83%. In addition, the Agreement provides for a five-
year term note in the amount of $4,000,000 ($3,551,838 outstanding at December
31, 1995). Effective April 10, 1996, the interest rate on the term note
increased from 7.65% to 8.65%.
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 worth, 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 or received
waivers for all loan covenants, as amended, at December 31, 1995.
Aggregate annual maturities of long-term debt for the five year period
subsequent to December 31, 1995 are as follows: 1996--$387,366; 1997--$402,267;
1998--$3,683,418; 1999--$105,556; and 2000--$727,778.
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
-----------------------------------
1995 1994
---------------- ---------------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$3,970,402 and $4,042,220
in 1995 and 1994, respectively..................... $4,106,298 $4,210,450
=============== ===============
Projected benefit obligation......................... $4,106,298 $4,210,450
Plan assets at fair value............................ 4,468,558 4,153,134
----------- -----------
Plan assets in excess of (less than) projected
benefit obligation.................................. 362,260 (57,316)
Unrecognized net gain................................ (156,460) ---
----------- -----------
Prepaid (accrued) pension cost included
in accrued employee compensation.................... $ 205,800 $ (57,316)
=========== ===========
Years Ended December 31
------------------------------------------------
1995 1994 1993
------------------------------------------------
Net pension cost included the
following components:
Service cost-benefits earned
during the period...................... $ -- $ -- $ 103,606
Interest cost on projected
benefit obligation..................... 319,122 317,914 352,159
Actual return on plan assets............ (512,481) 8,683 (367,950)
Net amortization and deferral........... 228,315 (300,633) 331,764
Curtailment gain........................ -- -- (361,929)
----------- ---------- ---------
$ 34,956 $ 25,964 $ 57,650
=========== ========== =========
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5% for 1995, 8.0% for 1994, and
7.5% for 1993. 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," during 1994 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 1995, this additional liability
was no longer required.
In July 1991, the Company established a 401(k) defined contribution plan. The
Company matches 10% (20% commencing November 1, 1995) of employee contributions
up to 4% of compensation. Employer contributions and expense related to this
plan were $24,596, $10,508, and $17,891 in 1995, 1994 and 1993, 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 $105,000, $104,500, and $105,000, to the
ESOP for the years ended December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995, the ESOP owned 970,520 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 $26,174, $26,357, and $26,772, for the years
ended December 31, 1995, 1994 and 1993, 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
The Company accounts for income taxes under 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.
Income tax expense (benefit) are included in the financial statements as follows
(in 000's):
1995 1994 1993
------ ---- ------
Current $ 39 $ 114 $ 526
Deferred (39) (114) (82)
---- --- -----
$ -- $ -- $ 444
===== ===== =====
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,
-----------------------------------------------
1995 1994 1993
---- ---- ----
Income (loss) before income taxes $ (1,083) $ 72 $ 1,185
---------- -------- ---------
Income tax at Federal statutory rate $ (368) $ 24 $ 403
State income taxes-net of Federal benefit (80) 5 90
Meals, Entertainment and Other 68 41 21
Change in valuation allowance on
deferred income tax assets 380 (70) (70)
------- -------- ---------
$ -- $ -- $ 444
======= ======== =========
For the year ended December 31, 1995, the Company increased its recorded
valuation allowance to reserve against assets for which it is considered
possible that a benefit will not be realized. For the years ended December 31,
1994 and 1993, the change in the valuation allowance is due to realization of
net operating loss carryforwards, subject to limitations.
The tax effect of temporary differences giving rise to the Company's deferred
tax asset and liability at December 31, 1995 and 1994 are as follows (in 000's):
1995 1994
---- ----
Deferred tax liabilities:
Property, plant and equipment $ 856 $ 959
Capital leases 58 58
Other 57 90
------ ------
971 1,107
------ ------
Deferred tax assets:
Allowance for uncollectible
accounts receivable 17 17
Employee compensation and amounts withheld 58 125
Accrued expenses 66 55
Unicap and inventory reserves 776 466
Tax effect of net operating loss carryforwards 464 464
Alternative minimum tax credit carryforwards 285 268
Other 17 5
Valuation allowance (712) (332)
------ ------
971 1,068
------ ------
Net deferred tax liability $ -- $ 39
------ ------
Reflected in balance sheet as:
Net current deferred tax asset $ 917 $ 671
Net long term deferred tax liability 917 710
------ ------
$ -- $ 39
====== ======
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, 1995, the Company has pre-change NOLs of approximately
$1,200,000 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 $285,000 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.
NOTE G -- COMMITMENTS AND CONTINGENCIES
Lease expense under operating leases was $60,074, $16,710 and $7,917, for the
years ended December 31, 1995, 1994 and 1993, respectively. Minimum rental
commitments as of December 31, 1995 for noncancelable operating leases with
initial or remaining terms of one year or more are as follows: 1996--$45,716;
1997--$10,841; 1998--$5,872; 1999--$3,300; 2000--$3,300; 2001 and thereafter--
$42,725.
NOTE H -- BUSINESS SEGMENT INFORMATION AND MAJOR CUSTOMERS
For the year ended December 31, 1995, sales to United Technologies Corporation
and Zapata Technologies, Inc. amounted to 69% and 10%, respectively, of
consolidated sales. These customers operate in the aerospace and packaging
fields, respectively. 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. United States Surgical Corporation is in the medical
instruments field.
At December 31, 1995, the Company had $484,861 of trade receivables due from
United Technologies Corporation, and $473,299 due from Zapata Technologies,
Inc.
NOTE I -- RECENT ACCOUNTING PRONOUNCEMENT
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of," was issued. This statement requires a company to review long
lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company is
required to adopt the new standard on or before January 1, 1996. Management
does not believe the adoption of the new standard will have a significant impact
on the Company's results of operations or financial position.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The statement defines a fair value based method of accounting
for an employee stock option or similar equity instrument. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with
the accounting in Opinion 25 must make pro forma disclosures of net income, as
if the fair value based method of accounting defined in the statement had been
applied. The Company has not yet determined which method of accounting it will
elect. The Company is required to adopt the new standard on January 1, 1996.
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 Chairman
William J. Gallagher President, William J. Gallagher Company
Francis W. Moskey President, Chief Operating Officer
Gerald C. Smith Executive Vice President
Stephen G.W. Walk Business Consultant
Robert T. Whitty Chief Executive Officer
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 1995 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.