SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2002
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____________ to _______________
Commission file number: 0-14275
Edac Technologies Corporation
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1515599
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
1806 New Britain Avenue, Farmington, CT 06032
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(Address of principal executive offices)
(860) 677-2603
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by section 13 or 15 (d) of the Securities'
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
On April 25, 2002 there were outstanding 4,416,038 shares of
the Registrant's Common Stock, $0.0025 par value per share.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EDAC TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 30 December 29
2002 2001
(Unaudited) (Note)
--------------- -------------
ASSETS
CURRENT ASSETS:
Cash $ 171,893 $ 176,245
Trade accounts receivable 5,017,337 5,080,106
Inventories 6,277,435 6,677,257
Prepaid expenses and other 392,350 89,069
Refundable income taxes 217,603 217,603
Deferred income taxes 909,649 909,649
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TOTAL CURRENT ASSETS 12,986,267 13,149,929
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PROPERTY, PLANT, AND EQUIPMENT 27,209,189 27,164,002
less-accumulated depreciation 13,997,401 13,526,674
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13,211,788 13,637,328
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OTHER ASSETS:
Goodwill 10,381,077 10,381,077
Other 26,884 30,000
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$ 36,606,016 $37,198,334
============ ===========
Note: The balance sheet at December 29, 2001 has been derived from the audited
consolidated financial statements at that date.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EDAC TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 30 December 29
2002 2001
(Unaudited) (Note)
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit $ 2,917,254 $ 1,955,138
Current portion of long-term debt
and capital lease obligation 18,443,325 17,409,544
Trade accounts payable 1,550,403 1,740,910
Employee compensation and
amounts withheld 2,155,495 2,440,420
Accrued expenses 816,406 1,008,798
------------ ------------
TOTAL CURRENT LIABILITIES 25,882,883 24,554,810
------------ ------------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATION, less current portion 252,330 1,761,235
------------ ------------
DEFERRED INCOME TAXES 910,000 910,000
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued and outstanding 4,416,038
on March 30, 2002 and 4,346,038
on December 29, 2001 11,040 10,865
Additional paid-in capital 9,344,496 9,240,295
Retained earnings 1,168,252 1,684,114
------------ ------------
10,523,788 10,935,274
Less: accumulated other
comprehensive loss (962,985) (962,985)
------------ ------------
9,560,803 9,972,289
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$ 36,606,016 $ 37,198,334
============ ============
Note: The balance sheet at December 29, 2001 has been derived from the audited
consolidated financial statements at that date.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EDAC TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the quarter ended
----------------------
March 30, March 31,
2002 2001
------------ ------------
Sales $ 7,731,734 $ 12,327,679
Cost of sales 7,225,755 9,963,944
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Gross profit 505,979 2,363,735
Selling, general and
administrative expenses 982,016 1,177,512
------------ ------------
(Loss) income from operations (476,037) 1,186,223
Non-operating income
(expense):
Interest expense (187,184) (400,711)
Other 18,359 24,286
------------ ------------
(168,825) (376,425)
(Loss) income before income taxes
and extraordinary item (644,862) 809,798
Benefit from (provision for)
income taxes 129,000 (160,380)
------------ ------------
(Loss) income before extraordinary gain (515,862) 649,418
Extraordinary gain, net of tax - 2,822,234
------------ ------------
Net (loss) income $ (515,862) $ 3,471,652
============ ============
Basic per common share data (Note A):
(Loss) income before extraordinary gain ($0.12) $0.15
Extraordinary gain - 0.66
------------ ------------
Net (loss) income ($0.12) $0.81
============ ============
Diluted per common share data (Note A):
(Loss) income before extraordinary gain ($0.12) $0.14
Extraordinary gain - 0.63
------------ ------------
Net (loss) income ($0.12) $0.77
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EDAC TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the quarter ended
--------------------------
March 30, March 31,
2002 2001
----------- -----------
Operating Activities:
Net (loss) income $ (515,862) $ 3,471,652
Depreciation and amortization 502,167 589,960
Forgiveness of debt - (2,822,234)
Changes in working capital items (510,398) 22,853
Other - (69,669)
----------- -----------
Net cash (used in) provided by
operating activities (524,093) 1,192,562
----------- -----------
Investing Activities:
Additions to property, plant
and equipment (71,627) (123,437)
Proceeds from sales of property,
plant and equipment - 32,775
Other - (232,357)
Net cash used in ----------- -----------
investing activities (71,627) (323,019)
----------- -----------
Financing Activities:
Increase (decrease) in revolving
line of credit 962,116 (87,789)
Payments of long-term debt (499,402) (2,357,665)
Borrowings of long-term debt 24,278 2,000,000
Proceeds from exercise of common
stock options 104,376 65,000
----------- -----------
Net cash provided by (used in)
financing activities 591,368 (380,454)
----------- -----------
(Decrease) increase in cash (4,352) 489,089
Cash at beginning of period 176,245 246,711
----------- -----------
Cash at end of period $ 171,893 $ 735,800
=========== ===========
Supplemental Disclosure of
Cash Flow Information:
Interest paid $ 187,325 $ 401,317
Non-Cash Transaction:
Capital lease obligation $ - $ 255,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EDAC TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 30, 2002
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments to previously established loss
provisions) considered necessary for a fair presentation have been included.
Operating results for the quarter ending March 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 28,
2002. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 29, 2001.
In 2002, certain shareholders proposed changes to the composition of the
Company's board of directors. The letters and other communications from these
shareholders contained certain statements which, if true, appear to have
indicated that a change of control, as defined, may have occurred under certain
change of control agreements with two officers of the Company. Under the change
of control agreement provisions, the officers could have been entitled to
maximum payments of $1,400,000 if they were to leave the Company following the
change of control. In May 2002, the officers waived their rights to change of
control payments related to any prior events that may have been deemed to
constitute a change of control. The officers did not waive their rights to
change of control payments related to any future change in control events.
The Company's sales for the first quarter of 2002 decreased 37.3% compared to
the first quarter of 2001 and the Company incurred a net loss of $516,000 for
the quarter ended March 30, 2002. As a result, if results of operations do not
improve in subsequent periods in 2002, the Company expects that it may not be
able to comply with the Fixed Charge Coverage Ratio covenant on its revolving
credit and term debt facility through March 31, 2003. As of May 16, 2002, the
Company is not in violation of any covenants on its revolving credit and term
debt facility except for the covenant violation resulting from the issuance of a
going concern opinion on the December 29, 2001 consolidated financial
statements. A violation of the Fixed Charge Coverage Ratio covenant would make
the debt payable on demand. The notes payable to the former lender and the
mortgage loan contain cross default provisions. Accordingly, these amounts are
reflected as current liabilities in the accompanying consolidated balance sheet.
A default would increase the interest rates charged to the Company by 2% on both
its revolving credit and term debt facility and its mortgage loan and by 5% on
the note payable to the former lender. Additionally, the note payable to the
former shareholders of Apex matures on January 2, 2003 and is included in the
current liabilities in the March 30, 2002 consolidated balance sheet.
The Company would be unable to pay the amount classified as current liabilities
if demand was made by any of the lenders which raises substantial doubt about
the Company's ability to continue as a going concern. The Company is working
with its lenders to renegotiate the terms and covenants under its credit
facilities; however, there is no assurance that any changes will be made or that
the changes will be sufficient for the Company to comply with the covenants and
make scheduled payments. The Company is also working to reduce operating
expenses and diversify its customer base to improve its operating results.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. As of March 30, 2002 and December 29, 2001, inventories
consisted of the following:
March 30, December 29,
2002 2001
---- ----
Raw materials $ 832,179 $ 1,313,489
Work-in-progress 3,859,056 4,548,469
Finished goods 1,929,317 1,849,481
----------- ------------
6,620,552 7,711,439
Reserve for excess
and obsolete (343,117) (1,034,182)
----------- ------------
Inventories $ 6,277,435 $ 6,677,257
=========== ============
During the quarter ended March 30, 2002, the Company disposed of $691,000 of
obsolete inventory that had been reserved for in prior periods.
Earnings (Loss) Per Share: The number of shares used in the earnings (loss) per
common share computation for the quarters ended March 30, 2002 and March 31,
2001 are as follows:
For the quarter ended
---------------------
March 30, March 30,
2002 2001
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Basic:
Average common
shares outstanding 4,386,038 4,307,413
Diluted:
Dilutive effect of
stock options - 197,402
--------- ---------
Average common shares diluted 4,386,038 4,504,815
========= =========
For the quarter ended March 30, 2002, there was an additional 796,700 options
outstanding but were not included in the computation of diluted earnings per
share as such inclusion would be anti-dilutive. In addition, for the quarter
ended March 31, 2001, options to purchase 368,200 shares of common stock of the
Company were outstanding but were not included in the computation of diluted
earnings per share as such inclusion would be anti-dilutive.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Upon the adoption of SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Instead, SFAS No. 142 requires that
goodwill be evaluated at least annually for impairment by applying a
fair-value-based test and, if impairment exists, a charge to earnings be
recorded. With adoption of SFAS No. 142 on December 30, 2001, the Company no
longer records amortization of goodwill. Amortization expense was $0 and $71,000
for the quarters ended March 30, 2002 and March 31, 2001, respectively.
Excluding the effect of the goodwill amortization net of tax, net income would
have been $3,528,000 for the quarter ended March 30, 2001. The Company is
required to complete the initial fair value test by June 30, 2002 to the
goodwill balance as of December 29, 2001. The Company believes the initial fair
value test of the goodwill of $10,381,000 reflected in the accompanying
consolidated balance sheet will result in a material impairment charge on
January 1, 2002. The amount of the charge has not yet been quantified.
Comprehensive (Loss) Income: Comprehensive (loss) income is the same as net
(loss) income for the quarters ended March 30, 2002 and March 31, 2001.
NOTE B -- SEGMENT INFORMATION
The following amounts are in thousands:
For the quarter ended March 30, 2002
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Engineered Precision Precision Apex
Precision Engineered Large Machine
Components Technologies Machining Tool Co. Total
---------- ------------ --------- -------- -----
Sales from
external
customers $3,354 $726 $692 $2,960 $7,732
Segment
profit (loss) 92 (281) (66) (261) (516)
For the quarter ended March 31, 2001
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Engineered Precision Precision Apex
Precision Engineered Large Machine Extraordinary
Components Technologies Machining Tool Co. Gain Total
---------- ----------- --------- -------- ---- -----
Sales from
external
customers $4,226 $1,904 $1,134 $5,064 $12,328
Segment
profit 9 81 133 427 2,822 3,472
Asset information is unavailable by segment.
NOTE C -- FINANCING ARRANGEMENTS
Long-term debt consisted of the following:
3/30/02 12/29/01
--------------- ---------------
Notes payable due in 35 monthly principal installments
of $122,734 commencing November 1, 2000
with a balloon payment due on September 29, 2003. (1) $ 5,225,842 $ 5,594,044
Mortgage due to bank in 240 monthly installments
of $18,578 including interest. (1) 1,964,984 1,974,152
Note payable to former lender with principal due in
one payment on September 29, 2004. (1,2) 9,462,347 9,462,347
Note payable to former shareholders of Apex Machine
Tool Company, Inc. Monthly principal installments of $25,000
with a balloon payment due on January 2, 2003. Interest
at 10.12% is paid quarterly in advance. 1,709,638 1,809,638
Equipment notes payable due in 36 monthly principal
payments of $700 and $674. 46,006 24,503
Capitalized lease obligations-equipment 286,838 306,095
--------------- ---------------
18,695,655 19,170,779
Less - current portion of long-term debt 18,443,325 17,409,544
--------------- ---------------
$ 252,330 $ 1,761,235
=============== ===============
(1) Amount is classified as current liability since the Company expects that
it may not be able to comply with financial covenants during 2002 and
other obligations contain cross default provisions.
(2) Amount includes $2,462,347 of estimated interest recorded in accordance
with accounting for troubled debt restructurings
As of March 30, 2002, $2,917,254 was outstanding on the Company's revolving line
of credit and $1,536,687 was available for additional borrowings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Sales. The Company's sales in the first quarter of 2002 decreased $4,596,000 or
37.3% compared to the first quarter of 2001 from $12,327,679 to $7,731,734.
Sales and sales decreases for the three months ended March 30, 2002 compared to
the three month period ended March 31, 2001 by segment were as follows (in
thousands):
Three Months Ended
March 30, March 31,
Segment 2002 2001 Change
------- ---- ---- ------
Engineered Precision Components $3,354 $4,226 ($872)
Precision Engineered Technologies 726 1,904 (1,178)
Precision Large Machining 692 1,134 (442)
Apex Machine Tool Co. 2,960 5,064 (2,104)
A significant downturn in the machine tool industry accompanied by a rapid and
dramatic decline in the commercial jet engine marketplace caused severe customer
schedule shifting delaying shipments and reductions of orders to the Company in
the first quarter of 2002 for all segments. Based on sales and orders through
May 6, 2002, the Company expects to see a further decrease in sales for the
second quarter of 2002 compared to both the 1st quarter of 2002 and the 2nd
quarter of 2001. Our quoting activity is high, however, and we are hopeful that
this signals a potential for improvement in the level of business in the second
half of the year.
As of March 30, 2002, sales backlog was approximately $24,700,000 compared to
$29,000,000 as of December 29, 2001. The decrease of $4,300,000 is due the
downturn in the jet engine and machine tool industries causing a severe
reduction in orders received by the Company. Backlog consists of accepted
purchase orders that are cancelable by the customer without penalty, except for
payment of costs incurred. The Company presently expects to complete
approximately $12,500,000 of its March 29, 2002 backlog during the remainder of
the 2002 fiscal year. The remaining $12,200,000 of backlog is deliverable in the
fiscal year 2003 and beyond.
Cost of Sales. Cost of sales as a percentage of sales increased in the 2002
period to 93.5% from 80.8% in the first quarter of 2001. Cost of sales as a
percentage of sales increased primarily due to decreased sales levels to cover
fixed manufacturing costs. In addition, a rapid and dramatic decline in the
commercial jet engine marketplace caused severe schedule shifting and delays of
orders which negatively impacted productivity and gross margins in the
Engineered Precision Components and Precision Large Machining areas while the
significant downturn in the machine tool industry negatively impacted
productivity and gross margins in the Apex Machine Tool Co. and Precision
Engineered Technologies areas. The Company has acted to continue the drive for
productivity improvements and to reduce manufacturing costs.
Selling, General & Administrative Expenses. Selling, general and administrative
costs decreased by $195,000 or 16.6% compared to the first quarter of 2001. The
decrease in these costs was mainly the result of (i) decreased compensation and
commissions due to lower sales levels and layoffs and (ii) decreased
amortization expenses due to a new accounting standard partially offset by
increased professional
expenses. Operating expenses have been cut significantly in light of the lower
volume.
Interest Expense. Interest expense decreased by $214,000 or 53.3% to $187,000
for the first quarter of 2002 from $401,000 for the first quarter of 2001. This
is due to the significant decrease in variable interest rates charged to the
Company by its lenders accompanied by lower indebtedness from the first quarter
of 2001 to the first quarter of 2002. Also, as part of the troubled debt
restructuring, no interest expense was recorded after February 5, 2001 on the
$7,000,000 obligation to the Company's former lender.
Liquidity and Capital Resources.
In 2002, certain shareholders proposed changes to the composition of the
Company's board of directors. The letters and other communications from these
shareholders contained certain statements which, if true, appear to have
indicated that a change of control, as defined, may have occurred under certain
change of control agreements with two officers of the Company. Under the change
of control agreement provisions, the officers could have been entitled to
maximum payments of $1,400,000 if they were to leave the Company following the
change of control. In May 2002, the officers waived their rights to change of
control payments related to any prior events that may have been deemed to
constitute a change of control. The officers did not waive their rights to
change of control payments related to any future change in control events.
The Company's sales for the first quarter of 2002 decreased 37.3% compared to
the first quarter of 2001 and the Company incurred a net loss of $516,000 for
the quarter ended March 30, 2002. As a result, if results of operations do not
improve in subsequent periods in 2002, the Company expects that it may not be
able to comply with the Fixed Charge Coverage Ratio covenant on its revolving
credit and term debt facility through March 31, 2003. As of May 16, 2002, the
Company is not in violation of any covenants on its revolving credit and term
debt facility except for the covenant violation resulting from the issuance of a
going concern opinion on the December 29, 2001 consolidated financial
statements. A violation of the Fixed Charge Coverage Ratio covenant would make
the debt payable on demand. The notes payable to the former lender and the
mortgage loan contain cross default provisions. Accordingly, these amounts are
reflected as current liabilities in the accompanying consolidated balance sheet.
A default would increase the interest rates charged to the Company by 2% on both
its revolving credit and term debt facility and its mortgage loan and by 5% on
the note payable to the former lender. Additionally, the note payable to the
former shareholders of Apex matures on January 2, 2003 and is included in the
current liabilities in the March 30, 2002 consolidated balance sheet. The
Company would be unable to pay the amount classified as current liabilities if
demand was made by any of the lenders which raises substantial doubt about the
Company's ability to continue as a going concern. The Company is working with
its lenders to renegotiate the terms and covenants under its credit facilities;
however, there is no assurance that any changes will be made or that the changes
will be sufficient for the Company to comply
with the covenants and make scheduled payments. The Company is also working to
reduce operating expenses and diversify its customer base to improve its
operating results.
If results of operations do not improve in subsequent periods in 2002, the
Company will experience cash flow difficulties which would adversely affect the
Company's ability to make payments on the Company's obligations as they become
due.
As of March 30, 2002, the Company's current liabilities exceed its current
assets by $12,896,616 as a result of the debt classified as current liabilities
as discussed above. As of March 30, 2002, $2,917,254 was outstanding on the
Company's revolving line of credit and $1,536,687 was available for additional
borrowings. As discussed above, the Company is working with its lenders to
renegotiate the terms and covenants under its credit facilities.
Net cash used in operating activities of $524,000 for the three months ended
March 30, 2002, resulted primarily from the net loss and lower accounts payable,
employee compensation and accrued expenses offset partially by lower
inventories.
Net cash used in investing activities of $72,000 for the three months ended
March 30, 2002, consisted primarily of expenditures for machinery and computer
equipment.
Net cash provided by financing activities of $591,000 for the three months ended
March 30, 2002, resulted from borrowings on the Company's revolving line of
credit and proceeds from the exercise of common stock options, partially offset
by bank repayments.
All statements other than historical statements contained in this report on Form
10-Q 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; competition from the Company's
competitors; the adequacy of the Company's revolving credit facility and other
sources of capital; the Company's ability to comply with the financial covenants
in its credit facility and its ability to continue as a going concern if it is
unable to comply with such covenants; and other factors discussed in this report
and in the Company's annual report on Form 10-K for the year ended December 29,
2001. 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.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Edac's Amended and Restated Articles of
Incorporation
3.2 Edac's Amended and Restated By-laws
(b) Reports on Form 8-K
Form 8-K dated February 25, 2002, filed with the SEC on March 1, 2002
to report pursuant to item 6 the resignation of Joseph P. Lebel from Edac's
Board of Directors.
Form 8-K dated February 19, 2002, filed with the SEC on February 22,
2002 to report pursuant to Item 5 the adoption of Edac's Amended and Restated
By-laws.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDAC TECHNOLOGIES CORPORATION
May 17, 2002 By /s/ Ronald G. Popolizio
----------------------------------
Ronald G. Popolizio, Chief Financial
Officer and duly authorized officer
EXHIBIT INDEX
Page Number
in Sequential
NUMBER DESCRIPTION Numbering System
- ------ ----------- ----------------
3.1 Edac's Amended and Restated Articles of (1)
Incorporation
3.2 Edac's Amended and Restated By-laws (2)
(1) Exhibit incorporated by reference to the Company's registration
statement on Form S-1 dated August 6, 1985, commission file
No. 2-99491, Amendment No.1.
(2) Exhibit incorporated by reference to the Company's Report
on Form 8-K dated February 19, 2002.