1
EXHIBIT 13
EDAC TECHNOLOGIES CORPORATION
ANNUAL REPORT
1999
2
TO OUR SHAREHOLDERS:
This past year was very difficult and disappointing for all employees and
shareholders of Edac. After two very successful years of earnings and sales
growth, 1999 illustrated the harsh realities of global competition in the
aerospace industry.
Incoming orders for precision components, large turning as well as Apex products
declined in 1999, reflecting the overall downturn in the industry we serve. By
early 1999 this slow-down began to affect production and shipments. The
resultant impact on profit was magnified by the highly leveraged position of the
Company and charges for inventories, severance charges for the CEO and the write
down of underutilized equipment awaiting disposal or sale.
It became apparent as the year progressed that the emphasis of the management
team had to be refocused from internal operations to marketing and sales. In
addition to a change in emphasis, the need to restructure the organization
culminated in a mutual agreement between the board and Mr. McNerney that he
resign as CEO. Mr. McNerney must be recognized for his contributions to the
Company that included such items as an introduction to lean manufacturing
concepts, improved utilization of floor space and renovation of the Gros-Ite
facilities.
The focus as year 2000 starts is to work with our bank to restructure the debt
and exploring any opportunity for capital infusion and business opportunities to
strengthen the balance sheet. Efforts to diversify the customer base are slowly
beginning to show results in several business units, and this effort will be
intensified in the near future.
We appreciate the support, understanding and unfailing efforts of our employees
and the patience of you, the shareholder. The Board is committed to protecting
and enhancing shareholder value.
Sincerely yours,
/s/John J. DiFrancesco
John J. DiFrancesco
Chairman of the Board
3
Marketing and Competition
Edac has numerous competitors both in design and manufacturing.
Many of the independent firms with which Edac 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 its emphasis
on customer service, its experience and its competitive pricing of its services.
For the fiscal year ended January 1, 2000, approximately 52% of Edac's
net sales were to United Technologies Corporation, 10% were to a consumer
products company and 38% were to other industrial based customers.
MARKET INFORMATION
The Company's Common Stock trades on The OTC Bulletin Board under the symbol:
"EDAC".
Prior to September 9, 1999, the Company's Common Stock was listed on the Nasdaq
National Market. The following table lists the high and low stock prices of a
share of Common Stock on the Nasdaq National Market for periods prior to
September 9, 1999, and on the OTC Bulletin Board for periods on or after
September 9, 1999.
1999 1998
---------------------- -----------------------
High Low High Low
---- --- ---- ---
First Quarter $ 6.625 $ 4.625 $ 9.205 $ 5.909
Second Quarter 5.688 3.375 16.500 8.409
Third Quarter 4.625 1.500 13.250 5.750
Fourth Quarter 2.000 1.344 7.000 3.688
The sales price quotations above reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions.
The approximate number of shareholders of record plus beneficial shareholders of
the Company's Common Stock at March 20, 2000 was 1,505.
The Company has never paid cash dividends and does not anticipate making any
cash dividends in the foreseeable future. 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).
4
SELECTED FINANCIAL INFORMATION
The following selected financial information for each of the years in the
five-year period ended January 1, 2000 have been derived from the financial
statements of the Company as audited by Arthur Andersen LLP, independent
auditors, whose report with respect to fiscal 1999, 1998 and 1997 appears
elsewhere herein. The following data are qualified by reference to and should be
read in conjunction with the Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
1999 1998 1997 1996 1995
-------------------------------------------------------------------
(In thousands, except per share data)
SELECTED INCOME STATEMENT DATA
Sales $ 52,395 $ 53,162 $ 38,229 $ 30,249 $ 24,564
Net income (loss) (4,058) 2,276 1,696 7 (1,083)
Diluted earnings (loss)
per common share (0.95) 0.50 0.39 0.00 (0.27)
SELECTED BALANCE SHEET DATA
Current assets $ 15,460 $ 20,881 $ 15,196 $ 14,058 $ 14,215
Total assets 44,755 52,608 23,850 19,917 20,352
Current liabilities 35,053 20,245 10,695 9,402 9,166
Working capital (deficit) (19,593) 636 4,501 4,656 5,049
Long-term liabilities 3,614 22,780 6,269 5,043 5,854
Shareholders' equity 6,088 9,583 6,886 5,473 5,332
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In 1999 the Company experienced a significant reduction in revenues in
its Engineered Precision Components and Precision Large Machining groups. This
revenue loss of $7,697,000, or 25.6%, from $30,106,000 in 1998 to $22,409,000 in
1999 was primarily due to decreased production for engine components from the
divisions' major customers. The combination of lower revenues in a key product
line, combined with certain charges, led to the Company's disappointing results
in 1999. Edac reported a loss of $4.1 million, which included $3.2 million of
charges associated with inventory reserves, accounts receivable reserves,
impairment charges for equipment to be disposed of or sold, the write off of
deferred loan costs and severance charges. The Company's management team is
taking several actions to improve the Company's financial performance in 2000.
These actions include, but are not limited to, reducing overhead costs and
indirect staffing levels, expanding marketing activities to diversify the
Company's customers and markets, disposing of underutilized assets (including
property, plant and equipment), re-negotiating unfavorable contracts and
combining operating units to improve resource utilization. Management believes,
but has no assurances, that these initiatives will improve the Company's
operating performance in 2000.
On June 29, 1998, Edac Technologies Corporation completed its
acquisition of Apex. Apex was a strategic acquisition for Edac, complementing
Gros-Ite Industries with its design and tooling businesses. Apex also helped
Edac diversify both within and outside of the aerospace industry. In addition,
Apex produces complex composite and injection molds. Apex is well known in the
industry for its high levels of precision manufacturing, its highly skilled
workforce and its reputation for quality and on-time delivery. We are proud to
call Apex Machine Tool Company, Inc. part of the Edac Technologies Corporation
family.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto.
Sales to the Company's principal markets are as follows(in thousands):
1999 1998 1997
---- ---- ----
Aerospace customers... $36,236 $36,348 $28,758
Other ................ 16,159 16,814 9,471
------- ------- -------
52,395 53,162 38,229
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Sales decreased $767,000, or 1.4%, from $53,162,000 in 1998 to
$52,395,000 in 1999. Aerospace sales decreased $112,000, or 0.3%, from 1998 to
1999 representing weaker sales to the Company's primary aerospace customer.
Sales to non-aerospace customers decreased $655,000, or 3.9%, representing an
overall decline in the Company's non-aerospace customers. Sales to the consumer
products industry represented 10% of the Company's total sales for 1999. Sales
included an entire year for the Apex Machine Tool division in 1999 compared to
six months in 1998. As a result, Apex's sales increased $8,419,000, from
$9,901,00 in 1998 to $18,320,000 in 1999. During 1999, the Company's principal
aerospace customer continued to reduce its vendor base as it has in prior years.
During this vendor base realignment, the Company has improved its performance
and the Company believes it is currently viewed as a leader by this customer. As
of January 1, 2000, sales backlog was approximately $29,800,000, compared to
approximately $36,000,000 at January 2, 1999.
Sales for the Precision Engineered Technologies group decreased
$1,489,000, or 11.3%, to $11,666,000 in 1999 compared to $13,155,000 in 1998.
During 1999, as part of the Company's restructuring efforts, the tooling area at
Gros-Ite Industries was combined with Apex Machine Tool. The design area of Apex
Machine Tool was combined with Gros-Ite Industries. This change enabled the
Company to reduce overhead costs and enhance customer service. The decrease in
sales for Precision Engineered Technologies is due to the overall decrease in
business from the Company's major customers.
Sales for the Precision Large Machining group decreased 40.6%, or
$4,687,000, to $6,865,000 in 1999 compared to $11,552,000 in 1998. This decrease
is a direct result of lower demand for new aircraft engine builds. The Company
initiated a new marketing effort to expand the number of customers and increase
the number of products it can manufacture for those customers. In addition to
aerospace, the Company is considering manufacturing parts for land based
turbines for diversification and revenue enhancement.
Sales for the Engineered Precision Components group decreased
$3,010,000, or 16.2%, to $15,544,000 in 1999 compared to $18,554,000 1998. The
primary reason for this decrease has been the overall downturn in the aerospace
industry which has affected the Company's major aerospace customer.
Sales increased $14,933,000, or 39.1%, to $53,162,000 in 1998 from
$38,229,000 in 1997. Aerospace sales increased $7,590,000, or 26.4%, from 1997
representing stronger sales to the Company's principal aerospace customer and
substantial increases in sales to other aerospace customers. Due to Edac's
diversification efforts, sales to non-aerospace customers increased $7,343,000,
or 77.5%, from 1997 to 1998. Sales attributable to Apex represented $9,901,000
of the Company's sales for 1998 compared to $0 in 1997.
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Sales for the Precision Engineered Technologies group increased
$1,643,000, or 14%, to $13,155,000 in 1998 from $11,512,000 in 1997 due
primarily to the increase in sales to markets other than the aerospace market.
The Company's corporate diversification program, designed to diversify the
Company's sales into other markets and reduce the Company's dependence on the
aerospace industry resulted in sales to the consumer products industry reaching
10% of the Company's total sales for 1998. Sales to other non-aerospace
industries also contributed to the increase in sales for this group.
Sales for the Precision Large Machining group increased $5,054,000, or
78%, to $11,552,000 in 1998 from $6,498,000 in 1997. Expenditures for capital
equipment in 1997 and early 1998 for machinery and equipment provided additional
capacity resulting in the increase in sales.
Sales for Engineered Precision Components decreased $1,665,000, or 8%,
to $18,554,000 in 1998 from $20,219,000 in 1997 due primarily to the
postponement in the third quarter of orders scheduled for delivery in the third
and fourth quarters to a major aerospace customer.
Cost of sales as a percentage of sales increased in 1999 to 91.7% from
81.5% in 1998. This increase was caused by lower sales levels to cover fixed
manufacturing costs. In addition, rapid and dramatic decline in both the
commercial and military jet engine marketplace has caused severe schedule
shifting, delays of orders, cancellations of orders and smaller production
quantities all of which negatively impacted productivity and gross margins in
the Engineered Precision Components and Large Machining areas. Due to this
decline in sales and the downward trend in the aerospace industry, the Company
has increased its reserves on inventory and other reserves by $1,875,000. The
Company also recorded impairment charges associated with equipment sold or to be
sold of $600,000.
Cost of sales as a percentage of sales decreased in 1998 to 81.5% from
84.5% in 1997. This decrease is a result of the efficiencies obtained through
lean manufacturing techniques. The Company also experienced higher sales levels
to cover fixed manufacturing costs.
Selling, general and administrative expenses were $6,047,000 in 1999,
representing an increase of $1,071,000, or 21.5%, from the 1998 level of
$4,976,000. Increases in 1999 were due to severance charges related to the
former CEO of $750,000 and a full year of expenses for Apex Machine Tool Company
in 1999 compared to six months in 1998 resulting in an increase of $1,037,000.
As a percentage of sales, selling, general and administrative costs were 11.5%
of sales in 1999 and 9.5% in 1998.
Selling, general and administrative expenses were $4,976,000 in 1998,
representing an increase of $1,446,000, or 41.0%, from the 1997 level of
$3,531,000. The increase in these expenses was primarily the result of an
additional $962,000 of expenses attributable to Apex and additional costs for
selling and promotional expenses. As a percentage
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of sales, selling, general and administrative costs were 9.4% of sales in 1998
and 9.2% of sales in 1997.
Interest expense for 1999 increased to $3,279,000 from $1,962,000 in
1998. This increase was due in part to debt incurred in connection with the
acquisition of Apex Machine Tool Company in June 1998. In addition, in October
1999 the Company entered into a forbearance agreement with its principal bank.
This agreement requires interest to be charged at 1 1/4% above the rate prior to
the forbearance agreement. Additionally, in 1999 the Company wrote-off deferred
financing costs of $425,179 as a result of the forbearance agreement. Such costs
are included in interest expense.
Interest expense for 1998 increased $1,187,000 from $775,000 in 1997 to
$1,962,000. This increase was due to additional debt incurred for the
acquisition of Apex.
Other income of $44,000 for 1999 consisted primarily of interest
income.
Other income for 1998 and 1997 was $91,000 and $81,000, respectively.
These amounts consisted primarily of gains on sales of assets and a gain on an
investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its working capital needs through funds generated
from operations and bank financing. 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 expenditure levels and available bank lines
of credit.
The following is selected cash flow data from the Consolidated
Statements of Cash Flows (in thousands):
1999 1998 1997
---- ---- ----
Net cash provided by
operating activities ....... $ 3,844 $ 3,199 $ 1,677
Net cash used in
investing activities ....... (1,138) (26,756) (3,642)
Net cash (used in) provided by
financing activities ....... (2,790) 23,649 1,908
Net cash provided by operating activities in 1999 results primarily
from reductions in inventory and accounts receivable amounts (partially due to
higher reserve levels) offset partially by lower accounts payable, accrued
employee compensation and other accrued expenses.
9
Net cash provided by operating activities in 1998 results primarily
from net income prior to non-cash charges.
Net cash provided by operating activities in 1997 results primarily
from net income and reductions in prepaid expenses, offset partially by higher
levels of accounts receivable and inventories.
Net cash used in investing activities for 1999 consists primarily of
expenditures for machinery and computer equipment.
Net cash used in investing activities for 1998 included $20,585,000 for
the acquisition of Apex and $6,682,000 for capital expenditures to add capacity
and increase productivity. Net cash used in investing activities for 1997
consists of capital expenditures to add capacity and increase productivity.
Net cash (used in) provided by financing activities resulted primarily
from net bank borrowings/repayments.
Estimated capital expenditures for 2000 are approximately $600,000.
The following is selected capitalization data from the Consolidated Balance
Sheets (in thousands):
1/1/00 1/2/99
------ ------
Revolving and equipment
lines of credit.................................... $ 6,152 $ 7,512
Current portion of
long-term debt..................................... 22,431 4,760
Long-term debt,
less current portion................................... 2,495 21,606
Shareholders' equity................................. 6,088 9,583
Debt to total
capitalization..................................... 84% 78%
Unused revolving line
of credit.......................................... 2,187 4,373
During 1999, the Company was in violation of certain of its financial
covenants contained in its primary financing arrangement with a bank which
includes revolving credit and term financing (the Agreement). As of January 1,
2000, the Company had aggregate borrowings under the Agreement and other
borrowings with the bank of $27,524,000. The Agreement provides the bank a first
priority security interest in substantially all of the Company's assets and is
generally cross collateralized and cross defaulting with other borrowings with
the bank. Accordingly, as of January 1, 2000, all amounts outstanding to the
bank are classified as current in the consolidated balance sheet. The Company
has entered into a series of short-term forbearance agreements
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with the bank which prevents the acceleration and collection of the indebtedness
until April 30, 2000, the expiration date of the most recent agreement. In
accordance with the forbearance agreements, starting September 1, 1999, the Bank
began charging a default rate of interest representing an additional 1 1/4% per
annum and will charge a $77,500 success fee payable on the earlier of June 30,
2000 or demand by the bank. The forbearance agreements decreased the amount the
Company can borrow on its revolving line of credit 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. As of January 1, 2000, $2,187,000
was available for additional borrowings under the terms of the most recent
forbearance agreement. As a result of the forbearance agreements, the Company
expensed the remaining unamortized deferred financing fees of $425,179 in 1999.
These costs are included as a component of interest expense in the consolidated
statement of operations. As of April 11, 2000, the Company is negotiating an
extension to its latest forbearance agreement and expects to receive an
extension within the next 30 days. There is no assurance that the Company will
be able to extend the maturity of the forbearance agreement and the bank would
then have the right to demand repayment of the $27,524,000 outstanding on April
30, 2000. If the bank ultimately requires repayment of the indebtedness, the
Company will need to find alternative financing and there can be no assurance
that alternative financing would be available on terms acceptable to the
Company, if at all. Any inability to obtain such alternative financing, if
necessary, would seriously harm the Company's ability to continue as a going
concern.
As of January 1, 2000, the Company's current liabilities exceeded
current assets by $19,593,000. This is due primarily to the reclassification of
$18,860,000 to current liabilities from long-term liabilities as a result of the
current forbearance agreement. The Company's working capital deficit of
$19,593,000 on January 1, 2000 represents a decrease of $20,230,000 from the
$636,000 of working capital the Company had on January 2, 1999.
All statements other than historical statements contained in this
report on Form 10-K constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Without limitation,
these forward looking statements include statements regarding the Company's
business strategy and plans, statements about the adequacy of the Company's
working capital and other financial resources and other statements herein that
are not of a historical nature. These forward-looking statements rely on a
number of assumptions concerning future events and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, that could cause actual results to differ materially from such
statements. These include, but are not limited to, factors which could affect
demand for the Company's products and services such as general economic
conditions and economic conditions in the aerospace industry and the other
industries in which the Company competes;
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competition from the Company's competitors; the Company's ability to complete a
new forbearance agreement with its bank and the Company's ability to continue as
a going concern if it is unable to do so; the Company's ability to dispose of
underutilized assets; and other factors discussed in the Company's annual report
on Form 10-K for the year ended January 1, 2000. The Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
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EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
January 1, January 2,
2000 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Cash $ 145,386 $ 229,480
Accounts receivable (net of allowance
for doubtful trade accounts of
$207,000 in 1999 and $160,000 in 1998) 4,811,993 6,745,433
Inventories, net 8,804,497 12,418,181
Prepaid expenses and other current
assets 442,133 321,730
Refundable income taxes 556,159 --
Deferred income taxes 699,649 1,166,469
----------- -----------
Total current assets 15,459,817 20,881,293
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 865,182 865,182
Buildings 7,065,794 6,837,584
Machinery and equipment 20,640,896 20,119,609
----------- -----------
28,571,872 27,822,375
Less - accumulated depreciation 10,628,387 8,630,371
----------- -----------
17,943,485 19,192,004
----------- -----------
OTHER ASSETS:
Goodwill (net of accumulated amortization
of $427,932 in 1999 and $143,484 in 1998) 10,949,972 11,234,420
Other 401,562 1,300,146
----------- -----------
TOTAL ASSETS $44,754,836 $52,607,863
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
January 1, January 2,
2000 1999
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving and equipment lines of credit $ 6,151,925 $ 7,512,407
Current portion of long-term debt 22,430,798 4,759,750
Trade accounts payable 3,348,140 3,623,598
Employee compensation and amounts
withheld 1,137,120 2,134,176
Accrued expenses 1,985,264 2,215,100
------------ ------------
Total current liabilities 35,053,247 20,245,031
------------ ------------
LONG-TERM DEBT, less current portion 2,494,686 21,606,043
------------ ------------
OTHER LIABILITIES 419,346 6,000
------------ ------------
DEFERRED INCOME TAXES 700,000 1,168,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE G)
SHAREHOLDERS' EQUITY:
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued and outstanding--4,269,080
in 1999 and 4,261,580 in 1998 10,673 10,654
Additional paid-in capital 9,153,941 9,033,162
(Accumulated deficit) retained earnings (3,077,057) 981,062
------------ ------------
6,087,557 10,024,878
Less - deferred ESOP compensation
expense -- (38,889)
Less - accumulated other comprehensive loss -- (403,200)
------------ ------------
Total Shareholders' Equity 6,087,557 9,582,789
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 44,754,836 $ 52,607,863
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
------------------------------------------------------
January 1, January 2, December 31,
2000 1999 1997
------------ ------------ ------------
Sales $ 52,394,843 $ 53,162,275 $ 38,229,389
Cost of Sales 48,035,346 43,334,125 32,287,962
------------ ------------ ------------
GROSS PROFIT 4,359,497 9,828,150 5,941,427
Selling, General and Administrative Expenses 6,046,730 4,976,044 3,530,614
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (1,687,233) 4,852,106 2,410,813
Non-Operating (Expense) Income:
Interest expense (3,278,532) (1,961,974) (774,864)
Other 43,775 90,942 81,199
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (4,921,990) 2,981,074 1,717,148
(Benefit from) provision for Income Taxes (863,871) 704,802 21,000
------------ ------------ ------------
NET (LOSS) INCOME $ (4,058,119) $ 2,276,272 $ 1,696,148
============ ============ ============
Basic (Loss) Earnings Per Common Share (Note A) $ (0.95) $ 0.54 $ 0.41
Diluted (Loss) Earnings Per Common Share (Note A) $ (0.95) $ 0.50 $ 0.39
The accompanying notes are an integral part of these consolidated financial
statements.
15
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
------------------------------------------------------
January 1, January 2, December 31,
2000 1999 1997
------------ ------------ ------------
Operating Activities:
Net (loss)income ($ 4,058,119) $ 2,276,272 $ 1,696,148
Adjustments to reconcile net (loss) income
to net cash provided by
operating activities:
Deferred income taxes (271,180) 35,000 (13,592)
Amortization of deferred ESOP
compensation expense 38,889 77,778 77,778
Depreciation and amortization 2,957,582 1,574,441 835,963
Loss (gain) on sale of property
and equipment 12,075 (25,874) 12,145
Writedown of equipment 600,000 -- --
Stock option grants and modifications 110,460 -- --
Inventory reserve 620,651 108,806 200,000
Changes in operating assets and liabilities:
Accounts receivable 1,933,440 (172,467) (495,405)
Refundable income taxes (556,159) -- --
Inventories 2,993,033 (815,310) (823,253)
Prepaid expenses and other
current assets (120,403) (250,239) 306,971
Trade accounts payable (275,458) (359,093) (273,878)
Other current liabilities (553,692) 752,680 156,991
Other liabilities 413,346 (3,000) (3,000)
------------ ------------ ------------
Net cash provided by
operating activities 3,844,465 3,198,994 1,676,868
------------ ------------ ------------
Investing Activities:
Additions to property, plant and
equipment (1,439,542) (6,681,595) (3,057,652)
Proceeds from sales of property,
plant and equipment 34,825 65,757 108,016
Acquisition of Apex
Machine Tool Company, Inc. -- (20,585,392) --
Decrease (increase) in other assets 266,611 445,462 (692,822)
------------ ------------ ------------
Net cash used in
investing activities (1,138,106) (26,755,768) (3,642,458)
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
16
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED
------------------------------------------------------
January 1, January 2, December 31,
2000 1999 1997
------------ ------------ ------------
Financing Activities:
(Decrease) increase in revolving
line of credit, net (1,360,482) 3,404,925 312,911
Payments of long-term debt (1,897,592) (1,381,285) (548,342)
Borrowings of long-term debt 457,283 21,359,268 2,023,894
Proceeds from exercise of options
for common stock 10,338 265,726 119,365
------------ ------------ ------------
Net cash (used in) provided by
financing activities (2,790,453) 23,648,634 1,907,828
------------ ------------ ------------
(Decrease) increase in cash (84,094) 91,860 (57,762)
Cash at beginning of year 229,480 137,620 195,382
------------ ------------ ------------
Cash at end of year $ 145,386 $ 229,480 $ 137,620
============ ============ ============
Supplemental Disclosure of
Cash Flow Information:
Interest paid $ 2,623,883 $ 1,716,435 $ 759,907
Income taxes paid 598,721 5,700 33,659
The accompanying notes are an integral part of these consolidated financial
statements.
17
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Additional Accumulated Deferred ESOP Accumulated Other
Common Paid-In Deficit) Comprehension Comprehensive
Stock Capital Retained Earnings Expense (Loss) Income Total
----------- ----------- ----------------- -------------- ----------------- -----------
Balances at January 1, 1997 $ 10,352 $ 8,648,373 $(2,991,358) $ (194,445) $ 5,472,922
Comprehensive income:
Net income 1,696,148 1,696,148
Minimum pension liability adjustment,
net of income taxes (480,450) (480,450)
-----------
Total comprehensive income 1,215,698
-----------
ESOP deferred compensation expense 77,778 77,778
Exercise of stock options, net
of income tax benefit 201 119,164 119,365
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 10,553 8,767,537 (1,295,210) (116,667) (480,450) 6,885,763
Comprehensive income:
Net income 2,276,272 2,276,272
Minimum pension liability adjustment 77,250 77,250
-----------
Total comprehensive income 2,353,522
-----------
ESOP deferred compensation expense 77,778 77,778
Exercise of stock options, net
of income tax benefit 101 265,625 265,726
----------- ----------- ----------- ----------- ----------- -----------
Balances at January 2, 1999 10,654 9,033,162 981,062 (38,889) (403,200) 9,582,789
Comprehensive income (loss):
Net loss (4,058,119) (4,058,119)
Minimum pension liability adjustment,
net of income taxes 403,200 403,200
-----------
Total comprehensive loss (3,654,919)
-----------
ESOP deferred compensation expense 38,889 38,889
Stock options expense, net
of income tax benefit 19 120,779 120,798
----------- ----------- ----------- ----------- ----------- -----------
Balances at January 1, 2000 $ 10,673 $ 9,153,941 ($3,077,057) -- -- $ 6,087,557
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
18
EDAC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000 AND JANUARY 2, 1999
NOTE A - ORGANIZATION AND BUSINESS, ACQUISITION 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). In January 1997, the Company's Common Stock held by the
partnership was distributed to the individual partners and the partnership was
liquidated. The ESOP owns 15.5% of the Company's outstanding Common Stock as of
January 1, 2000.
The accompanying consolidated financial statements include Edac Technologies
Corporation and its wholly owned subsidiaries, Gros-Ite Industries Inc. and Apex
Machine Tool Company, Inc. Results of operations of Apex Machine Tool Company,
Inc. are included in the Company's Consolidated Statements of Operations since
June 29, 1998, the effective date of the business combination described below.
The Company incurred a loss from operations of $1.7 million for 1999 and is
operating under a forbearance agreement with respect to its principal financing
arrangements, including revolving credit and term financing, of $27.5 million.
As of April 11, 2000, the Company is working with it lender to extend the
forbearance agreement or obtain a long-term financing arrangement. The Company
expects to receive an extension prior to April 30, 2000; however, there is no
assurance that the Company will be able to obtain an extension of the
forbearance agreement and the bank would then have the right to demand repayment
of the $27.5 million outstanding on April 30, 2000. If the bank ultimately
requires repayment of the indebtedness, the Company will need to find
alternative financing and there can be no assurance that alternative financing
would be available on terms acceptable to the Company, if at all. The Company's
management team is taking several actions to improve the Company's financial
performance in 2000. These actions include, but are not limited to, reducing
overhead costs and indirect staffing levels, expanding marketing activities to
diversify the Company's customers and markets, disposing of underutilized assets
(including property , plant and equipment), re-negotiating unfavorable contracts
and combining operating units to improve resource utilization. Management
believes, but has no assurance, that these initiatives will improve the
Company's operating performance in 2000.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ACQUISITION
On June 29, 1998, the Company consummated its acquisition of certain assets and
liabilities of Apex Machine Tool Company, Inc. (Apex). In connection with this
acquisition, the Company purchased two buildings from certain shareholders of
Apex. The transaction was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of the acquisition.
19
The following table summarizes the allocation of the cost of Apex to the net
assets acquired (in thousands):
Accounts receivable.................................................... $2,670
Inventories ........................................................... 1,525
Prepaid expenses and other assets ..................................... 27
Property, plant and equipment ......................................... 6,316
Goodwill .............................................................. 11,378
Covenant not to compete ............................................... 100
Deferred loan costs ................................................... 657
Accounts payable and accrued expenses ................................. (2,088)
-------
$20,585
=======
The acquisition was principally funded through borrowings under the Company's
revolving credit facility and borrowings under a $14,000,000 note payable with
the Company's principal lender. The seller also provided financing of $2,710,688
relating to the purchase of the two buildings used in the operation of Apex (See
Note C). The Company had a contingent purchase option for the purchase of 55
Spring Lane in Farmington, CT. During 1999, the Company reached a settlement
agreement which in effect terminated the purchase option.
The unaudited pro forma consolidated financial information for the years ended
January 2, 1999 and December 31, 1997 as though the acquisition of Apex had been
consummated at the beginning of the respective periods are as follows (in
thousands, except share data):
January 2, December 31,
1999 1997
---- ----
Sales $64,261 $58,323
Net income 2,820 3,174
Average shares (basic) 4,244,980 4,186,617
Basic income per share $0.66 $0.76
Average shares (diluted) 4,533,449 4,378,146
Diluted income per share $0.62 $0.72
The unaudited information above includes proforma adjustments related to the
amortization of intangible assets, interest expense, certain operating expenses
and income taxes necessary to present the information had the acquisition been
consumated as of January 1, 1997.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: All significant intercompany transactions have been
eliminated from the consolidated financial statements.
Revenue Recognition: Sales are recorded when goods are shipped to the Company's
customers.
Fiscal Year: Effective January 1, 1998, the Company changed its fiscal year to a
52 week fiscal period. The Company's fiscal year now ends on the Saturday
closest to December 31. This change did not result in a material difference for
the years ended January 1, 2000 and January 2, 1999.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. As of January 1, 2000 and January 2, 1999, inventories
consisted of the following:
January 1, January 2,
2000 1999
---- ----
Raw materials $1,926,177 $ 2,519,411
Work-in-progress 6,685,644 7,090,353
Finished goods 1,222,133 3,217,223
--------- ---------
Gross inventories 9,833,954 12,826,987
(1,029,457) (408,806)
---------- -----------
Inventories, net $8,804,497 $12,418,181
========== ===========
20
Long-Lived Assets: 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.
The Company accounts for its investments in long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" (SFAS
No. 121). SFAS No. 121 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 recognizes an
impairment when the carrying value of the property exceeds its estimated fair
value less cost to sell or its costs are not estimated to be earned by its
activities. During 1999, the Company determined certain equipment would no
longer be utilized. The Company is holding the equipment for sale and has
written the equipment down to the estimated net realizable value resulting in a
charge to cost of sales of $600,000 for the year ended January 1, 2000. No
impairments were recorded for the years ended January 2, 1999 or December 31,
1997.
Goodwill represents the excess of the purchase price over the fair values of net
assets acquired in connection with the Apex acquisition. Goodwill is amortized
over 40 years. The Company monitors the overall profitability and future
expectations of profitability of Apex in order to assess whether any impairment
of recorded goodwill has occurred.
Derivative Instruments: The Company uses interest rate swap agreements to reduce
interest rate risks and to manage interest expense. Each interest rate swap
agreement is designated with all or a portion of the principal balance and the
repayment term of a specific debt. These agreements effectively convert
floating-rate debt into fixed-rate debt over the life of the swap agreement,
without an exchange of the notional amount upon which the payments are based.
The differential to be paid or received as interest rates change is accrued and
recognized as an adjustment of interest expense related to the debt. The fair
value of the swap agreements are not recognized in the financial statements.
(Loss) Earnings Per Share: Basic (loss) earnings per common share are based on
the average number of common shares outstanding during the year. Diluted (loss)
earnings per common share assumes, in addition to the above, a dilutive effect
of common share equivalents during the year. Common share equivalents represent
dilutive stock options using the treasury method. The number of shares used in
the earnings per common share computation for 1999, 1998 and 1997, are as
follows:
January 1, January 2, December 31,
2000 1999 1997
---- ---- ----
Basic:
Average common shares outstanding 4,268,445 4,244,980 4,186,617
Diluted:
Dilutive effect of stock options - 288,469 191,529
--------- --------- ---------
Average shares diluted 4,268,445 4,533,449 4,378,146
========= ========= =========
Options to purchase 523,157 shares of common stock were not included in the
computation of earnings (loss) per share for the year ended January 1, 2000
since their effect was antidilutive.
Stock options: The Company accounts for stock-based compensation for employees
in accordance with Accounting Principles Board Opinion No. 25. Stock-based
compensation for non-employees is accounted for in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation".
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.
Reclassifications: Certain prior period balances have been reclassified to
conform to the current year presentation.
21
New Accounting Standards: In June 1999, the Financial Accounting Standard Board
(FASB) issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of SFAS No. 133 - an Amendment of SFAS
No. 133" for the sole purpose of updating the effective date of adoption of SFAS
No. 133 to January 1, 2001. SFAS No. 133 establishes accounting and reporting
standards requiring that each derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations and requires that a
company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 cannot be applied
retroactively. Management has not yet quantified the impact of adopting SFAS No.
133 on the Company's financial statements and has not determined the timing or
method of the Company's adoption of SFAS No. 133.
In December 1999, the Securities and Exchange Commission's Staff Accounting
Bulletin No. 101 (SAB 101) Revenue Recognition, was issued. SAB 101 will require
a company to defer revenue recognition on product shipments until contractual
terms of customer acceptance, including inspection and installation
requirements, are met. The Company will be required to adopt this new accounting
principle through a cumulative charge to retained earnings in accordance with
the provisions of APB Opinion No. 20 no later than the second quarter of fiscal
2000. The Company does not believe that the adoption of this standard will have
a material impact on its future operating results.
NOTE B -- COMMON STOCK AND STOCK OPTIONS
On July 1, 1998, the Company paid a ten percent stock dividend to all
shareholders of record as of June 16, 1998. Prior period common share
information has been retroactively restated to reflect the effect of the stock
dividend.
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. The maximum term of options granted is five years.
Options may be granted under the Plan through December 5, 2001.
On January 1, 1994, the Board of Directors adopted a stock option plan for the
purpose of granting 100,000 shares to an officer. The options were granted on
January 1, 1994 at an exercise price of $0.5625 per share. Options to purchase
25,000 shares became exercisable on October 1, 1994, January 1, 1995, January 1,
1996 and January 1, 1997.
On November 19, 1996, the Board of Directors adopted the 1996 Stock Option Plan
(the 1996 Plan). The 1996 Plan is nonqualified and provides for granting of up
to 300,967 options to purchase shares of Common Stock of the Company. The term
of the options and vesting requirements shall be for such period as the Stock
Option Committee designates. The option price is not less than the fair market
value of the shares on the date of the grant.
On February 17, 1998, the Board of Directors adopted the 1998 Employee Stock
Option Plan (the 1998 Plan). The 1998 Plan is non-qualified and provides for
granting up to 330,000 options to purchase shares of Common Stock of the
Company. The terms of the options and vesting requirements shall be for such
period as the Stock Option Committee designates. The option price is not less
than the fair market value of the shares on the date of the grant.
The Company has computed the pro forma disclosures required under SFAS No. 123
for options granted in fiscal 1999, 1998 and 1997 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The weighted average assumptions used
are as follows:
1999 1998 1997
---- ---- ----
Risk free interest rate 6.00% 4.39% to 5.38% 5.16% to 5.65%
Expected dividend yield None None None
Expected lives 3 years 3 years 3 years
Expected volatility 84% 80% 86%
22
Had compensation cost for the Company's employee stock options plan been
determined based on the fair value at the grant dates of awards under these
plans consistent with the method of SFAS No. 123, the Company's net (loss)
income applicable to common shareholders would have been adjusted to reflect the
following pro forma amounts:
1999 1998 1996
---- ---- ----
(Loss) income applicable to common shareholders:
As reported $(4,058,119) $2,276,272 $1,696,148
Pro forma (4,254,294) 2,153,232 1,557,680
Pro forma net (loss) income per common share:
Basic (loss) earnings per share
As reported $(0.95) $0.54 $0.41
Pro forma (1.00) 0.51 0.37
Diluted (loss) earnings per share:
As reported $(0.95) $0.50 $0.39
Pro forma (1.00) 0.47 0.36
23
A summary of the status of the Company's stock option plans as of January 1,
2000, January 2, 1999 and December 31, 1997, and changes during the years then
ended is presented below:
1999 1998 1997
-------------------------------- ------------------------------ ---------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
PRICE PRICE PRICE
---------------- --------------- ------------- ---------------- ----------------- ---------------
Outstanding at beginning of 486,657 $3.74 373,257 $2.64 267,300 $0.79
year
Granted 65,000 2.11 157,000 0.58 194,700 4.15
Exercised (7,500) 1.38 (43,600) 1.52 (88,743) 0.56
Expired (21,000) 5.72 - - - -
---------------- ------------- ------------------
Outstanding at end of year 523,157 3.49 486,657 3.74 373,257 2.64
================ ============= ==================
Options exercisable at
year-end 473,157 3.69 318,657 3.29 200,558 1.40
======= ======= =======
Weighted-average fair
value of options granted
during the year $1.45 $3.17 $0.98
====== ====== =====
The following table summarizes information about stock options outstanding
at January 1, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ---------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AT CONTRACTUAL EXERCISE AT EXERCISE
1/1/00 LIFE (IN YEARS) PRICE 1/1/00 PRICE
- ------------------------- -------------- ----------------- ------------------- ------------- --------------------
$0.91 110,000 1.9 $0.91 110,000 $0.91
1.14 22,000 0.5 1.14 22,000 1.14
1.25 6,957 1.5 1.25 6,957 1.25
1.65 1,500 2.2 1.65 1,500 1.65
1.69 50,000 9.8 1.69 - 1.69
2.05 80,500 7.4 2.05 80,500 2.05
3.50 15,000 9.5 3.50 15,000 3.5
5.50 125,000 8.9 5.50 125,000 5.50
5.91 90,200 7.9 5.91 90,200 5.91
7.73 22,000 8.2 7.73 22,000 7.73
============== ================= ============= ====================
$0.91 to 7.73 523,157 6.6 3.49 473,157 3.69
============== ================= ============= ====================
During 1999, the expiration date for exercising stock options previously granted
to the Company's former President and Chief Executive Officer (Note G) was
extended. Additionally, the Company granted a non-employee options to purchase
15,000 shares of common stock at an exercise price of $3.50 per share.
Accordingly, the Company recorded an aggregate charge to earnings of $110,460
related to the modification and grant.
24
NOTE C -- NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following:
January 1, January 2,
2000 1999
------------ ------------
Note payable to bank due in monthly installments of $83,333 commencing July 1,
1999, increasing to $250,000 on July 1, 2002 and increasing again to $333,333
on July 1, 2003 with the final payment due June 1, 2005. Interest is due
monthly at the rate of 8.775% on $8,500,000 through July 1, 2003 and 8.645% on
$5,000,000 through January 4, 2000, and 8.57% through January 4, 2001.
Interest then reverts to bank's base rate. (1) $13,500,000 $14,000,000
Note payable to bank due in 60 monthly installments of $37,516, including
interest at 8.90% with the remaining balance due on March 31, 2002. (1) 2,736,497 2,964,719
Note payable to bank due in 56 monthly principal installments of $5,556
commencing December 1, 1995 with a balloon payment of $688,864 due on August
1, 2000. Interest is due monthly at 8.90% to May 1, 2001, then reverts to the
bank's base rate. (1) 733,333 800,000
Equipment note payable to bank due in 60 monthly principal installments of
$50,000 commencing April 1, 1998. Interest is due monthly at 9.98% through
March 3, 2003. (1) 1,950,000 2,550,000
Equipment note payable to bank due in 60 monthly principal installments of
$41,667 commencing June 1, 1999. Interest is due monthly at 8.50%. (1) 2,208,333 2,042,717
Equipment note payable to bank due in 60 monthly principal installments of
$9,020 commencing May 1, 1997. Interest is due monthly at 8.51% to March 1,
2002, then reverts to bank's base rate. (1) 252,513 360,753
Note payable to former shareholders of Apex Machine Tool Company, Inc. Principal
was originally due in full on January 1, 2000. Prior to expiration, the note
was amended to provide for monthly principal installments of $18,000
commencing January 1, 2000 and increasing to $25,000 commencing January 1,
2001 with the remaining balance due January 1, 2002. Interest at 10.12% is due
monthly until January 3, 2000 when interest will be paid quarterly in advance. 2,710,688 2,710,688
Equipment note payable due in quarterly installments of $28,750 and additional
monthly installments based on equipment utilization and results, as defined,
commencing December 28, 1997 and due July 31, 2000 with interest imputed at
8.5%. 834,121 898,027
Note payable to bank by Edac Technologies Corporation Employee Stock Ownership
Plan (guaranteed by the Company). - 38,889
----------- -----------
24,925,484 26,365,793
Less - current portion of long-term debt 22,430,798 4,759,750
----------- -----------
$ 2,494,686 $21,606,043
=========== ===========
(1) Amount included in current portion due to forbearance agreement discussed
below.
25
As of January 1, 2000, the revolving line of credit had a balance of $6,151,925
and requires interest at the rate of 8.42% to April 1, 2000 on $5,000,000 with
the remainder at the bank's base rate of interest plus 1.25% (9.75% at January
1, 2000). The unused availability on the line at January 1, 2000 was $2,186,861.
To secure all obligations of the Company under the Revolving Loan and Security
Agreement (the Agreement), the bank has a first priority security interest in
substantially all of the Company's assets. The Agreement is generally cross
collateralized and cross defaulting. The Agreement requires, among other things,
no material adverse changes in the financial condition of the Company and the
maintenance of certain financial ratios including debt to net worth 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.
During 1999, the Company was in violation of certain of its financial covenants
contained in its primary financing arrangement with a bank which includes
revolving credit and term financing (the Agreement). As of January 1, 2000, the
Company had aggregate borrowings under the Agreement and other borrowings with
the bank of $27,524,000. As the Agreement provides the bank a first priority
security interest in substantially all of the Company's assets and is generally
cross collateralized and cross defaulting with other borrowings with the bank,
all amounts outstanding to the bank as of January 1, 2000, are classified as
current in the consolidated balance sheet. The Company has entered into a series
of short-term forbearance agreements with the bank which prevents the
acceleration and collection of the indebtedness until April 30, 2000, the
expiration date of the most recent agreement. In accordance with the forbearance
agreements, starting September 1, 1999, the Bank began charging a default rate
of interest representing an additional 1 1/4% per annum and will charge a
$77,500 success fee payable on the earlier of June 30, 2000 or demand by the
bank. The forbearance agreements decreased the amount the Company can borrow on
its revolving line of credit 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. As of January 1, 2000, $2,187,000 was available for
additional borrowings under the terms of the most recent forbearance agreement.
As a result of the forbearance agreements, the Company expensed the remaining
unamortized deferred financing fees of $425,179 in 1999. These costs are
included as a component of interest expense in the consolidated statement of
operations. As of April 11, 2000, the Company is negotiating an extension to its
latest forbearance agreement and expects to receive an extension within the next
30 days. There is no assurance that the Company will be able to extend the
maturity of the forbearance agreement and the bank would then have the right to
demand repayment of the $27,524,000 outstanding on April 30, 2000. If the bank
ultimately requires repayment of the indebtedness, the Company will need to find
alternative financing and there can be no assurance that alternative financing
would be available on terms acceptable to the Company, if at all.
Aggregate annual maturities of long-term non bank debt for the five year period
subsequent to January 1, 2000 are as follows: 2000--$22,430,798; 2001--$300,000;
2002--$2,194,686; 2003--$0; 2004--$0; 2005 and thereafter-$0.
As of January 1, 2000, the Company was party to six separate interest rate swap
agreements with an aggregate notional principal amount of $ 18,644,183 related
to existing unpaid term debt. The interest rate swap agreements effectively fix
the interest rates on the related debt at 7.395% to 8.73% prior to the default
interest rate.
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
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.
26
The following table sets forth the changes in benefit obligations and plan
assets, and reconciles amounts recognized in the Company's consolidated balance
sheets (in thousands):
January 1, January 2,
2000 1999
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,128 $ 4,973
Interest cost 341 339
Actuarial (gain) loss (513) 148
Benefits paid (336) (332)
------- -------
Benefit obligation at end of year $ 4,620 $ 5,128
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,756 $ 4,827
Actual return on plan assets 212 261
Employer contribution 108 --
Benefits paid (336) (332)
------- -------
Fair value of plan assets at end of year $ 4,740 $ 4,756
======= =======
Funded status $ 119 $ (372)
Unrecognized net actuarial loss 231 673
------- -------
Net amount recognized $ 350 $ 301
======= =======
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit obligation $ 350 $ 301
Minimum pension liability -- (673)
------- -------
Net asset(liability) recognized in balance sheet $ 350 $ (372)
======= =======
Weighted-average assumptions:
Discount rate 8.00% 6.75%
Expected return on plan assets 7.00% 7.00%
Components of net periodic benefit cost:
Interest cost $ 341 $ 339
Expected return on plan assets (282) (305)
------- -------
Net periodic pension expense $ 59 $ 34
======= =======
In July 1991, the Company established a 401(k) defined contribution plan. The
Company matches 35% of employee contributions up to 15% of compensation limited
annually to $1,750 for 1999 and 1998 and 20% of employee contributions up to 10%
of compensation for 1997. Employer contributions and expenses related to this
plan were $178,151, $155,500 and $72,991, in 1999, 1998 and 1997, respectively.
The Apex Machine Tool Company, Inc. Profit-Sharing and Retirement Plan (the
Plan), covers substantially all Apex employees who have completed more than one
year of service . Profit sharing contributions are made to the Plan at the
discretion of the Company's Board of Directors. The Plan also allows employees
to contribute tax deferred salary deductions into the Plan under Section 401(k)
of the Internal Revenue Code subject to certain limitations as defined in the
Plan. Matching contributions are made by the Company at a rate of 20% of
employees' contributions. The Company declared and made discretionary profit
sharing contributions and matching contributions of $108,719 and $28,000 for
1999 and the period subsequent to the Apex acquisition from June 30, 1998 to
January 2, 1999, respectively.
27
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 makes annual contributions to the ESOP equal to the ESOP's debt service.
The ESOP shares initially were pledged as collateral for its debt. As the debt
is repaid, shares are released from collateral based on the proportion of debt
service paid in the year, and allocated to active employees. The debt of the
ESOP is recorded as debt of the Company and the shares pledged as collateral are
reported as unearned ESOP compensation expense in the consolidated balance
sheets. As shares are released from collateral, the Company reports compensation
expense. ESOP compensation expense was $38,889, $77,778 and $77,778 for the
years ended January 1, 2000, January 2, 1999 and December 31, 1997,
respectively. Interest expense incurred on the debt was $598, $6,026 and
$12,356, for the years ended January 1, 2000, January 2, 1999 and December 31,
1997, respectively. The ESOP shares as of January 1, 2000 and January 2, 1999
were as follows:
January 1, January 2,
2000 1999
---- ----
Allocated shares 600,555 567,095
Shares released
for allocation 60,269 120,545
Unreleased shares -- 60,269
------- -------
Total ESOP shares 660,824 747,909
======= =======
NOTE F -- INCOME TAXES
The Company accounts for income taxes under 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.
The (benefit from) provision for income taxes is as follows (in thousands):
January 1, January 2, December 31,
2000 1999 1997
---- ---- ----
Current (benefit) provision $(593) $ 670 $ 34
Deferred (benefit) provision (271) 35 (13)
----- ----- -----
$(864) $ 705 $ 21
===== ===== =====
The effective tax rate on income before income taxes is different from the
prevailing Federal and state income tax rates as follows (in thousands):
January 1, January 2, December 31,
2000 1999 1997
---- ---- ----
(Loss) income before income taxes $(4,922) $ 2,981 $ 1,717
======= ======= =======
Income tax at Federal statutory rate $(1,673) $ 1,014 $ 584
State income taxes-net of Federal benefit (388) --
119
Meals, entertainment and other (254) (195) (76)
Change in valuation allowance 1,451 (114) (606)
------- ------- -------
$ (864) $ 705 $ 21
======= ======= =======
28
During 1999 the Company provided a valuation allowance to reserve against
deferred tax assets for which it was considered possible that a benefit would
not be realized. During 1998 and 1997, the valuation allowance was reversed to
the extent assets were considered realizable.
The tax effect of temporary differences giving rise to the Company's deferred
tax assets and liabilities are as follows (in thousands):
January 1, January 2,
2000 1999
---- ----
Deferred tax assets:
Allowance for uncollectible
accounts receivable 82 63
Employee compensation and amounts withheld 466 291
Accrued expenses 114 142
Unicap and inventory reserves 475 267
Tax effect of net operating loss carryforwards (state and federal) 1,555 209
Alternative minimum tax credit carryforwards 227 312
Other 483 48
Valuation allowance (1,366) --
------- -------
2,036 1,332
------- -------
Deferred tax liabilities:
Property, plant and equipment $ 1,349 $ 1,036
Pension 130 --
Goodwill 281 93
Other 276 205
------- -------
2,036 1,334
------- -------
Net deferred tax liability $ -- $ (2)
======= =======
Reflected in consolidated balance sheet as:
Net current deferred tax asset $ 700 $ 1,166
Net long-term deferred tax liability (700) (1,168)
------- -------
$ -- $ (2)
======= =======
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 (NOL's) attributed to the period prior to the change in ownership.
As of January 1, 2000 and January 2, 1999, the Company has pre-change NOL's of
approximately $614,000 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. During 1999, the Company generated
additional federal and state NOL's of approximately $3.0 million and $3.9
million, respectively, which are available to offset future taxable income.
These NOL's expire through 2019 and 2004, respectively. In addition, the Company
has alternative minimum tax credits of approximately $227,000 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 $124,866, $84,449 and $169,567, for the
years ended January 1, 2000, January 2, 1999 and December 31, 1997,
respectively. Minimum rental commitments as of January 1, 2000 for noncancelable
operating leases with initial or remaining terms of one year or more are as
follows: 2000--$130,853; 2001--$109,582; 2002--$95,769; 2003--$26,686; 2004
$3,600; 2004 and thereafter-- $28,800.
Under the terms of an agreement executed May 3, 1995 with the State of
Connecticut, Apex obtained a tax free grant in the amount of $200,000, which is
secured by a first lien on various equipment and a second lien on the remainder
of the Apex assets. The direct financial assistance package requires Apex to
maintain its operations in Connecticut through May 3, 2005 and maintain certain
employment levels. In the event of a default of the conditions, Apex is required
to immediately repay the $200,000 grant plus interest at the rate of 7.5% per
annum from the date of the first grant payment.
On August 17, 1999, the Company's President and Chief Executive Officer since
January 1, 1997, resigned. The Company will pay the former President and CEO a
severance of $710,000. This amount will be payable over three
29
years, $225,000 each year for the first two years and $260,000 in the third
year. The Company will also provide the former President and CEO with health
insurance coverage until he obtains other coverage or until July 1, 2000
whichever is earlier and an automobile until the end of the lease term in March
2000. These severance costs resulted in a charge to selling, general and
administrative expenses of $750,000 in 1999.
NOTE H -- MAJOR CUSTOMERS
For the year ended January 1, 2000, sales to United Technologies Corporation and
a consumer products company amounted to 52% and 10% of the Company's sales,
respectively. For the year ended January 2, 1999, sales to United Technologies
Corporation, Nordam Manufacturing and a consumer products company amounted to
51%, 11% and 10% of the Company's sales, respectively. For the year ended
December 31, 1997, sales to United Technologies Corporation amounted to 68% of
sales. United Technologies Corporation and Nordam Manufacturing operate in the
aerospace industry.
At January 1, 2000, the Company had $1,016,361 of trade receivables due from
United Technologies Corporation and $885,776 due from a consumer products
company.
NOTE I -- SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which
financial information is available that is evaluated regularly by the Company's
President in deciding how to allocate resources and in assessing performance.
The operating segments are managed separately because each operating segment
represents a strategic business unit that offers different products and serves
different markets.
The Company has four reportable segments identified as Engineered Precision
Components, Precision Engineered Technologies, Precision Large Machining and
Apex Machine Tool Company (since June 29, 1998). The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates the performance of these segments
based on segment profit or loss after income taxes. The Company allocates
certain administrative expenses to segments. The amounts in this table are the
amounts in reports used by the Company's President for the years ended January
1, 2000, January 2, 1999 and December 31, 1997 (in thousands):
For the Year ended January 1, 2000
-----------------------------------------------------------------------
Engineered Precision Precision Apex
Precision Engineered Large Machine
Components Technologies Machining Tool Co. Total
---------- ------------ --------- -------- -----
Revenues from
external customers $ 15,544 $ 11,666 $ 6,865 $ 18,320 $ 52,395
Intersegment
revenues -- 10 -- 453 463
-------- -------- -------- -------- --------
Total revenues 15,544 11,676 6,865 18,773 52,858
-------- -------- -------- -------- --------
Allocated interest
expense 350 380 300 1,637 2,667
Allocated
Depreciation
and amortization 427 503 513 1,514 2,957
Segment loss (2,414) (795) (124) (725) (4,058)
Income tax
(benefit) expense (801) 22 (24) (61) (864)
30
For the Year ended January 2, 1999
-------------------------------------------------------------------
Engineered Precision Precision Apex
Precision Engineered Large Machine
Components Technologies Machining Tool Co. Total
---------- ------------ --------- -------- -----
Revenues from
external customers $ 18,554 $ 13,155 $ 11,552 $ 9,901 $ 53,162
Intersegment
revenues -- 4 -- 102 106
-------- -------- -------- -------- --------
Total revenues 18,554 13,159 11,552 10,003 53,268
-------- -------- -------- -------- --------
Allocated interest
expense 397 418 294 782 1,891
Allocated
depreciation
and amortization 390 377 440 367 1,574
Segment (loss)
profit (72) 678 1,218 452 2,276
Income tax
(benefit) expense (24) 210 390 129 705
For the Year ended December 31, 1997
----------------------------------------------------
Engineered Precision Precision
Precision Engineered Large
Components Technologies Machining Total
---------- ------------ --------- -----
Revenues from
external
customers $ 20,219 $ 11,512 $ 6,498 $ 38,229
Intersegment
revenues -- -- -- --
Allocated
interest expense 331 275 159 765
Allocated
depreciation and
amortization 322 256 258 836
Segment profit
(loss) 1,185 (667) 1,178 1,696
Income tax expense
11 -- 10 21
Asset information is unavailable by segment.
31
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
January 1, 2000 and January 2, 1999, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended January 1, 2000. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Edac Technologies
Corporation and subsidiaries as of January 1, 2000 and January 2, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2000 in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company incurred a loss from operations
of $1.7 million for 1999 and is operating under a forbearance agreement with
respect to the Company's primary financing arrangements, including revolving
credit and term financing, of $27.5 million. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note A. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
/s/ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 11, 2000
32
OFFICERS
John DiFrancesco Chairman and Chief Executive Officer
Ronald G. Popolizio Executive Vice President, CFO and Secretary
BOARD OF DIRECTORS
John DiFrancesco Chairman
William J. Gallagher President, William J. Gallagher Company
Robert J. Gilchrist Managing Director, Horton International, Inc.
Lee Morris Chairman, Robert E. Morris Company
Arnold J. Sargis President, A. J. Sargis & Associates
Daniel C. Tracy Business Consultant
Stephen G.W. Walk President, Blanche P. Field LLC
CORPORATE OFFICES
1806 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 TRANSFER AGENT
Arthur Andersen LLP Firstar Trust Company
One Financial Plaza 1555 North River Center Drive
Hartford, CT 06103 Milwaukee, WI 53212
ANNUAL MEETING
The 2000 annual meeting of shareholders will be held on May 16, 2000 at 10:00
a.m. Eastern Daylight Time at the Farmington Country Club, 806 Farmington
Avenue, Farmington, CT.
10-K INFORMATION
A copy of the 1999 Edac Technologies Corporation 10-K report filed with the
Securities and Exchange Commission is available without charge by writing to:
Ronald G. Popolizio, Secretary, Edac Technologies Corporation, 1806 New Britain
Avenue, Farmington, CT 06032.