1
EXHIBIT 13
EDAC TECHNOLOGIES CORPORATION
ANNUAL REPORT
2000
2
Change is Underway 2000 Annual Report
To Our Shareholders:
Change is once again underway at EDAC Technologies. With the changes we have a
renewed sense of purpose and genuine excitement about the prospects to execute
and deliver significant improvement in shareholder value. The hard work to
transform EDAC is well underway. The vitality of any company is the ability to
achieve sustainable profitable growth. The first step in the revitalization was
demonstrated in 2000 as we emerged from the serious financial difficulties of
the past two years by restructuring our bank debt and achieving sales growth and
profitability in the fourth quarter. This management team is resolute about
making profitable growth a way of life at EDAC Technologies.
The year 2000 was difficult, requiring a reorganization of the company after the
major reductions in business with some of our largest customers. Tough cuts in
selling, general and administrative expenses and improvements in productivity
were made. Despite the sales drop of 10% for the year, margins were improved
through this effort. Although the net loss was a disappointment, it was a
dramatic improvement over 1999. The results of the fourth quarter were
encouraging that the actions taken and the plans in place will generate
continued profitability.
We have set in motion a transition process that will continue throughout 2001.
Our people have worked tirelessly to survive the difficult times and have
ambitious goals to grow the business and generate consistent profitability. The
primary challenge facing our business is the pricing pressure that has been
generated by the broadening of competitive bidding worldwide, set in motion by
our largest customers. We are confident that by honing our distinct competitive
advantage and improving our internal performance we can respond effectively. We
are embarking on a strategic planning effort that will guide the process of
change.
A significant step in the change to strengthen the company is our recent
announcement of the agreement to sell the Engineered Components Division to Tomz
Corporation. The sale is subject to the approval of our shareholders. The
Engineered Components business manufactures components primarily for use in jet
engines. Tomz is a Connecticut company providing a range of turning, milling and
manufacturing services. The transaction is expected to provide the opportunity
for EDAC to focus on the growth potential of the Gros-Ite Industries' Spindle,
Design and Large Machining divisions and the APEX Machine Tool business.
Our objectives in 2001 are based on the significant growth opportunities
available by expanding the reach of our businesses to new markets and new
customers. The precision machining and manufacturing capabilities in our
divisions have tremendous application to a broad base of industrial companies.
We expect revenue growth to continue throughout 2001. To ensure that this
happens we have mobilized a sales and marketing initiative to drive results in
each division. Our plans include a major e-commerce thrust and a concerted
effort to expand globally to extend our market reach. The efforts of the
operating businesses to continuously improve should provide the necessary
productivity gains to respond to the on-going price pressures.
The EDAC Technologies balance sheet has been improved dramatically with the debt
refinancing completed in February 2001. The financial restructuring has resulted
in approximately $ 4.5 million of debt reductions which amount includes the
elimination of approximately $600,000 of accrued interest and fees. As a result
of the improved financial structure, the company has reduced annual interest
expense by approximately $1,200,000. A focus on process flow should allow the
company to reduce inventory while becoming more responsive to customer
requirements. Cash flow is expected to be stronger than it has been for over two
years.
There have been significant changes to the Board of Directors of the company in
the past year. Stephen Walk and William Gallagher retired from the Board in 2000
after providing 15 years of guidance and direction to the company. We would like
to thank Steve and Bill for their distinguished service to the company. Also, we
would like to thank Lee Morris and Arnold Sargis, who also left the Board of
Directors in 2000 for three years of support and service to EDAC.
3
I am pleased to be joined on the Board of Directors by three new members who are
important additions as we examine the strategic opportunities for the future.
George Fraher, President of Apex Machine Tool was appointed to the Board in May
2000. Two new outside Directors were appointed in 2000. Stephen J. Raffay joined
the Board in November 2000. Steve is an accomplished executive who has extensive
strategic and operational experience to provide guidance to the company. John
Kuharick, CEO of IPC, Inc. was also appointed in November 2000, and brings a
strong knowledge and leadership in manufacturing to the Board.
EDAC Technologies is gaining strength and focus on providing shareholder value.
We believe we are well positioned to grow and deliver improvements to
profitability and cash flow. All of the team at EDAC Technologies is committed
to maximizing the value of our Company for you, our shareholders.
Sincerely yours,
/s/Richard A. Dandurand
Richard A. Dandurand
President and CEO
4
MARKETING AND COMPETITION
EDAC Technologies provides complete design, manufacture and service meeting the
precision requirements of some of the most exacting customers in the world for
tooling, fixtures, molds, jet engine components and machine spindles. The
company developed its high skill level serving the aerospace industry for over
50 years. In addition EDAC has expanded its commitment to serving the
manufacturing needs of a broad base of industrial customers.
For fiscal 2000, approximately 45% of EDAC's net sales were to United
Technologies Corporation. We expect to continue to diversify our customer base.
We expect that our sales to United Technologies Corporation would decrease
significantly if we complete the pending sale of our Engineered Components
Division as described in Management's Discussion and Analysis of Financial
Condition and Results of Operations section of this report.
The competition for design, manufacturing and service in precision machining and
machine tools consists of independent firms, many of which are smaller than
EDAC. This allows us to bring a broader spectrum of support to our customers who
are consistently looking for ways to consolidate their vendor base. The company
also competes against the in-house manufacturing and service capability of our
larger customers. The trend by large manufacturers to outsource activities that
are outside their core competency is a current advantage for EDAC.
The market for our products and precision machining capabilities is also opening
up through the development of more sophisticated use of business-to-business
tools on the internet. We are actively involved in securing new business leads
on the internet and have participated in internet auctions for precision
components. The sales and marketing team at EDAC is evaluating potential
partners to further develop our e-commerce strategy and extend the reach of our
current capabilities.
The target marketing activity, particularly in the APEX and Gros-Ite Spindle
divisions in 2000 has resulted in the opening of over 40 new customers for
continuing business. The business from these new customers offset some of the
reduction from some of our long-standing customers and was critical in
generating the strong performance we achieved in the fourth quarter of 2000.
EDAC Technologies has a distinct competitive advantage in our ability to provide
high quality, high precision, quick turnaround support to customers from design
to delivery. Our experience and reputation in the demanding aerospace business
provides an extra level of experience in meeting our customers' requirements. We
believe our commitment to continuous improvement and the latest technology will
generate productivity improvements required to respond to the increasing price
pressure in the competitive marketplace.
5
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.
2000 1999
---- ----
High Low High Low
---- --- ---- ---
First Quarter $3.125 $1.563 $6.625 $4.625
Second Quarter 1.750 0.625 5.688 3.375
Third Quarter 2.406 0.813 4.625 1.500
Fourth Quarter 2.875 0.813 2.000 1.344
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 2, 2001 was 1,358.
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 (see Note C to the Company's
Consolidated Financial Statements included elsewhere in this report).
6
SELECTED FINANCIAL INFORMATION
The following selected financial information for each of the years in the
five-year period ended December 30, 2000 have been derived from the financial
statements of the Company as audited by Arthur Andersen LLP, independent public
accountants, whose report with respect to fiscal 2000, 1999 and 1998 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."
SELECTED INCOME STATEMENT DATA
2000 1999 1998 1997 1996
----------------------------------------------------------
(In thousands, except per share data)
Sales $47,252 $52,395 $53,162 $38,229 $30,249
(Loss) income before cumulative effect of adoption of
Staff Accounting Bulletin No. 101 (SAB 101)
(428) (4,058) 2,276 1,696 7
Cumulative effect of adoption of SAB 101 (224) - - - -
Net (loss) income (652) (4,058) 2,276 1,696 7
Diluted per common share data:
(Loss) income before cumulative effect of adoption
of SAB 101 (0.10) (0.95) 0.50 0.39 0.00
Cumulative effect of adoption of SAB 101 (0.05) - - - -
Net (loss) income (0.15) (0.95) 0.50 0.39 0.00
Pro forma amounts assuming adoption of
SAB 101 is applied retroactively (unaudited)
Pro forma net (loss) income (428) (3,927) 1,920 (1) (1)
Pro forma basic net (loss) income per common share
(0.10) (0.92) 0.45 (1) (1)
Pro forma diluted net (loss) income per
common share (0.10) (0.92) 0.42 (1) (1)
(1) Information is not available to determine pro forma amounts prior to 1998.
SELECTED BALANCE SHEET DATA
Pro Forma (1)
2000 2000 1999 1998 1997 1996
------------------------------------------------------------------
(Unaudited) (In thousands)
Current assets $15,870 $15,870 $15,460 $20,881 $15,196 $14,058
Total assets 41,663 41,926 44,755 52,608 23,850 19,917
Current Liabilities 12,403 14,335 35,053 20,245 10,695 9,402
Working capital (deficit) 3,467 1,535 (19,593) 636 4,501 4,656
Long-term liabilities 20,997 22,155 3,614 22,780 6,269 5,043
Shareholders' equity 8,263 5,436 6,088 9,583 6,886 5,473
(1) The pro forma amounts reflect the effect of the February 2001 refinancing
which resulted in a reduction in debt for accounting purposes of $3.9
million the elimination of accrued interest and fees of $0.6 million, and
a gain of approximately $4.2 million prior to estimated income taxes
payable of $1.4 million after the usage of available net operating loss
carryforwards.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company operates on a fiscal year basis. The years ended December
30, 2000, January 1, 2000 and January 2, 1999 are referred to herein as fiscal
2000, 1999 and 1998, respectively.
In 1999 and throughout most of 2000 the Company faced many challenges.
The Company is pleased to announce that it has successfully dealt with several
of those challenges and now looks forward to profitably growing the business.
One of the major accomplishments was the refinancing of debt with our prior
lender. On September 29, 2000 the Company refinanced substantially all of its
bank facilities with replacement financing from a new lender. The new credit
facilities include a revolving credit facility in an amount up to $8,000,000 and
a term loan in an amount up to $7,364,000. On February 5, 2001 the Company
completed the last step in its refinancing efforts by obtaining a $2,000,000
real estate loan from a local bank which resulted in a reduction in debt for
accounting purposes of $3,884,000 and the elimination of $600,000 of accrued
interest and fees. The remaining principal amount due the prior lender was
reduced to a single principal amount of $7,000,000 due September 29, 2004. If
Edac prepays an aggregate principal amount of $5,000,000 to its prior lender any
time prior to October 1, 2003, an additional $2,000,000 will be forgiven. Total
notes payable and long term debt, including the lines of credit went from
$31,077,409 on January 1, 2000 to $23,874,010 on December 30, 2000, on a pro
forma basis after giving effect to the debt forgiveness in February 2001.
On December 1, 2000, Richard A. Dandurand joined the Company as
President and Chief Executive Officer after a 20-year career with The Stanley
Works. He has broad-based global experience as President of three different
businesses in Stanley and also was a member of Stanley's Corporate Executive
Council.
During 2000, there were several changes to the Company's Board of
Directors. New additions to the Board include Richard A. Dandurand in December
2000 and Stephen J. Raffay in November 2000. Stephen served as a senior
executive and a Director of Emhart Corporation including Vice Chairman.
Additionally, John Kucharik joined the Board of Directors in November 2000.
John, who is the Chief Executive Officer of IPC, Inc. of Norwalk, OH, has spent
the last 28 years in manufacturing industries and has an extensive background in
metal working, with experience in both industrial and consumer products. In May
2000 George Fraher joined the Board of Directors. George is President of Apex
Machine Tool Company, a subsidiary of EDAC Technologies.
The Company has entered into an Asset Purchase Agreement, dated as of
March 29, 2001, among the Company, Gros-Ite Industries, Inc., Tomz Corporation
("Tomz"), and Gros-Ite Engineered Components Division of Tomz, Inc. (the
"Buyer"), which provides, among other things, that the Company will sell to the
Buyer a significant portion of the assets of the Company's Engineered Precision
Components group for cash of approximately $6.4 million, subject to a
post-closing adjustment. The asset sale is subject to the satisfaction of a
number of conditions, including the approval of the Company's shareholders, the
receipt of necessary third party approvals and other closing conditions. Because
there are significant conditions remaining to be satisfied with respect to the
asset sale, no assurance can be given that the sale will be consummated or, if
consummated, that the terms of the asset sale will be as presently contemplated.
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):
2000 1999 1998
---- ---- ----
Aerospace customers.................................. $27,999 $36,236 $36,348
Other............................................ 19,253 16,159 16,814
------- ------- -------
$47,252 $52,395 $53,162
------- ------- -------
8
2000 VS. 1999
Sales
Consolidated sales decreased $5,143,000, or 9.8%, from $52,395,000 in
1999 to $47,252,000 in 2000. Aerospace sales decreased $8,237,000, or 22.7%,
from 1999 to 2000 representing weaker sales to the Company's primary aerospace
customer. Due to Edac's diversification efforts, sales to non-aerospace
customers increased $3,094,000, or 19.1%, from 1999 to 2000. As of December 30,
2000, sales backlog was approximately $32,000,000, compared to approximately
$29,800,000 at January 1, 2000.
Sales for the Apex Machine Tool division increased $1,266,000, or 6.9%,
to $19,586,000 in 2000 compared to $18,320,000 in 1999. During 2000 Apex added
36 new customers. Backlog in this area was $4,912,000 at December 30, 2000,
which was its highest level since Edac purchased Apex in 1998.
Sales for the Precision Engineered Technologies group decreased
$5,282,000, or 45.3%, to $6,384,000 in 2000 compared to $11,666,000 in 1999. The
decrease in sales for Precision Engineered Technologies was due to the overall
decrease in business from the Company's major customers.
Sales for the Precision Large Machining group decreased $2,203,000, or
32.1% to $4,662,000 in 2000 compared to $6,865,000 in 1999. After decreasing
during the first quarter of 2000, revenue increased from April to the end of
2000. The Company is aggressively pursuing new business opportunities for this
division.
Sales for the Engineered Precision Components group increased
$1,076,000, or 6.9%, to $16,620,000 in 2000 compared to $15,544,000 1999. During
2000, the Company entered into a long term agreement with its major aerospace
customer. While the agreement secured business for the Company until December
31, 2002, the prices were significantly reduced on this business.
Cost of Sales
Cost of sales as a percentage of sales decreased in 2000 to 83.9% from
91.7% in 1999. This decrease was caused in part by reserves on inventory and
other reserves in 1999 of $1,875,000. Without these reserves, cost of sales as a
percentage of sales in 1999 would have been 88.1%. The decrease as a percentage
from 1999 to 2000 of 4.2% represents higher margin work mostly in our Precision
Engineered Technologies and Precision Large Machining divisions. The Company had
a series of layoffs in 2000 to bring our overhead structure more in line with
our reduced revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $4,742,000 in 2000,
representing a decrease of $1,305,000, or 21.6%, from the 1999 level of
$6,047,000. The 1999 amount includes severance charges of $750,000.
Additionally, the 2000 compensation expense was lower than the 1999 amount
offset slightly by increased professional expense. As a percentage of sales,
selling, general and administrative costs were 10.0% of sales in 2000 and 11.5%
in 1999.
Interest Expense
Interest expense for 2000 decreased to $3,224,000 from $3,279,000 in
1999. This slight change was due in part to lower notes payable amounts during
2000 partially offset by the effect of higher interest rates in 2000. The
Company's forbearance agreement resulted in an additional 1 1/4% above the rate
previously charged. The Company will incur significantly lower interest expense
in 2001 as a result of the debt forgiveness in February 2001 previously
discussed.
Other (Expense) Income
Other expense of $44,000 for 2000 consisted primarily of the write-off
of an investment due to an impairment.
9
1999 VS. 1998
Sales
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. 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 and 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 was due to the overall decrease in
business from the Company's major customers.
Sales for the Precision Large Machining group decreased $4,687,000, or
40.6% to $6,865,000 in 1999 compared to $11,552,000 in 1998. This decrease was 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.
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.
Cost of Sales
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, a rapid and dramatic decline in the commercial
and military jet engine marketplace 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 in 1999. Due to this decline in sales and
the downward trend in the aerospace industry, the Company increased its reserves
on inventory and other reserves by $1,875,000 in 1999. The Company also recorded
impairment charges associated with equipment sold or to be sold of $600,000 in
1999.
Selling, General and Administrative Expenses
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. The increase in 1999 was primarily 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. As a percentage of sales,
selling, general and administrative costs were 11.5% of sales in 1999 and 9.5%
in 1998.
Interest Expense
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, the
forbearance agreement required interest to be charged at 1 1/4% above the rate
prior to the forbearance agreement commencing September 1, 1999. 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 in
1999.
10
Other (Expense) Income
Other income of $44,000 for 1999 consisted primarily of interest
income. Other income for 1998 was $91,000 and 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):
Fiscal
---------------------------------------
2000 1999 1998
---- ---- ----
Net cash provided by
operating activities............................... $ 2,575 $ 3,844 $ 3,199
Net cash provided by (used in)
investing activities............................... 845 (1,138) (26,756)
Net cash (used in) provided by
financing activities............................... (3,319) (2,790) 23,649
FISCAL 2000
Net cash provided by operating activities resulted primarily from
reductions in inventory amounts, an increase in current liabilities and the
collection of refundable income taxes offset partially by higher accounts
receivable and lower accounts payable.
Net cash provided by investing activities consisted primarily of
proceeds from sales of excess property, plant and equipment.
Net cash used in financing activities resulted primarily from net bank
borrowings/repayments.
Estimated capital expenditures for 2001 are approximately $600,000.
FISCAL 1999
Net cash provided by operating activities resulted 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.
Net cash used in investing activities consisted primarily of
expenditures for machinery and computer equipment.
Net cash used in financing activities resulted primarily from net bank
borrowings/repayments.
FISCAL 1998
Net cash provided by operating activities resulted primarily from net
income prior to non-cash charges.
Net cash used in investing activities included $20,585,000 for the
acquisition of Apex and $6,682,000 for capital expenditures to add capacity and
increase productivity.
11
Net cash provided by financing activities resulted primarily from net
bank borrowings/repayments. The following is selected capitalization data from
the Consolidated Balance Sheets (in thousands):
Pro Forma (1)
12/30/00 12/30/00 1/1/00
-------- -------- ------
(Unaudited)
Revolving lines of credit............................ $ 3,310 $6,037 $ 6,152
Current portion of long-term debt.................... 1,772 1,772 22,431
Long-term debt, less current portion................. 18,791 19,949 2,495
Shareholders' equity................................. 8,263 5,436 6,088
Debt to total capitalization......................... 74% 84% 84%
Unused revolving line of credit...................... 2,837 2,837 2,187
(1) The pro forma amounts reflect the effect of the February 2001
refinancing including the forgiveness of $4.2 million, including
accrued interest and fees of $0.6 million, and estimated income
taxes payable of $1.4 million as a result of the debt forgiveness,
after the usage of available net operating loss carryforwards.
During 1999 and through September 29, 2000, the Company was in violation
of certain of the financial covenants contained in its primary financing
arrangement with a bank. On September 29, 2000, the Company refinanced its
primary facility with replacement financing from a new lender. The new credit
facilities include a revolving credit facility in an amount up to $8,000,000 and
a term loan in an amount up to $7,364,000. The revolving credit is limited to an
amount determined by a formula based on percentages of the Company's receivables
and inventory. Interest rates are based on the index rate (30 day dealer placed
commercial paper) plus 3.75% (10.4% at December 30, 2000) for the revolving
credit and the index rate plus 4% (10.65% at December 30, 2000) for the term
loans. On February 5, 2001 the Company completed the last step in its
refinancing efforts by obtaining a $2,000,000 real estate loan with a local
bank. This mortgage is due in 240 monthly installments of $18,578 including
interest at 9.45%. The monthly payment will be adjusted by the bank every 5
years commencing on March 1, 2006 to reflect interest at the Five Year Federal
Home Loan Bank "Classic Credit Rate" plus 2.75%. Concurrent with the $2,000,000
real estate financing consummated in February 2001, the remaining principal
amount due to the former lender of $13,347,000 and accrued interest of $593,000,
was reduced to a single principal amount of $7,000,000, with the principal due
in full on September 29, 2004.
The refinancing resulted in the forgiveness of certain indebtedness and
accrued interest payable to the former lender which will be accounted for as a
troubled debt restructuring. Accordingly, the Company will record an
extraordinary gain in the first quarter of 2001 of $4.2 million (less estimated
income taxes of $1.4 million), which amount represents the difference between
the carrying value of the remaining debt to the former lender ($13,677,818,
including accrued interest payable and deferred financing fees) and the total
amount of remaining payments to the former lender, including interest, under the
terms of the refinancing of $9,462,347 (assuming that the entire $7 million
remaining is repaid and no additional amounts are forgiven). In accordance with
the accounting for troubled debt restructurings, no interest expense will be
recorded on the $7 million obligation after February 5, 2001 since such interest
has been considered in determining the amount of the gain to be recorded.
If Edac prepays an aggregate principal amount of $5,000,000 any time
prior to October 1, 2003, an additional $2,000,000 of indebtedness will be
forgiven. Total notes payable and long term debt, including lines of credit went
from $31,077,409 on January 1, 2000 to $23,874,010 on December 30, 2000, on a
pro forma basis after giving effect to the debt forgiveness in February 2001. As
of December 30, 2000, approximately $3,310,000 was outstanding and $2,837,000
was available for additional borrowings under the revolving credit facility with
the new lender and $2,727,165 was outstanding on the revolving credit facility
with the former lender. The Company was in compliance with all of its loan
covenants as of December 30, 2000.
Under the accounting for troubled debt restructurings, the carrying
value of the $7,000,000 note will become $9,462,347 in the first quarter 2001.
This amount includes estimated interest on the $7 million obligation to
maturity. If the Company were to prepay $5 million of the note on March 31,
2001, an additional gain of $4.1 million would be recorded representing $2
million of debt forgiven and $2.1 million of interest accrued which the Company
would not be liable for. The amount of the additional potential gain decreases
by $169,000 each quarter that the $5 million
12
repayment does not occur. There is no assurance that the Company will be able to
make the prepayment in order to obtain such a gain on debt forgiveness.
As of December 30, 2000, the Company's current assets exceeded current
liabilities by $1,535,000. On a pro forma basis after giving effect to the
refinancing discussed above, as of December 30, 2000 current assets exceeded
current liabilities by $ 3,467,000.
All statements other than historical statements contained in this
annual report 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 risk 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 Company's ability to complete its proposed asset sale
transaction with Tomz Corporation and the terms of such transaction if
completed; the Company's ability to effectively use business-to-business tools
on the Internet to improve operating results; the adequacy of the Company's
revolving credit facility and other sources of capital; and other factors
discussed in the Company's annual report on Form 10-K for the year ended
December 30, 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.
13
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
As of December 30, 2000 and January 1, 2000
December 30, December 30, January 1,
2000 2000 2000
------------------- ----------------- -----------------
Pro Forma Actual
(Unaudited)
ASSETS Note A
- ------
CURRENT ASSETS:
Cash $ 246,711 $ 246,711 $ 145,386
Accounts receivable (net of allowance
for doubtful trade accounts of $200,000
as of December 30, 2000 and $207,000
as of January 1, 2000) 5,984,839 5,984,839 4,811,993
Inventories, net 7,007,664 7,007,664 8,804,497
Prepaid expenses and other current
assets 601,668 601,668 442,133
Refundable income taxes - - 556,159
Deferred income taxes 2,028,649 2,028,649 699,649
------------------- ----------------- -----------------
Total current assets 15,869,531 15,869,531 15,459,817
------------------- ----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 730,394 730,394 865,182
Buildings 6,710,282 6,710,282 7,065,794
Machinery and equipment 19,202,699 19,202,699 20,640,896
------------------- ----------------- -----------------
26,643,375 26,643,375 28,571,872
Less - accumulated depreciation 11,565,270 11,565,270 10,628,387
------------------- ----------------- -----------------
15,078,105 15,078,105 17,943,485
------------------- ----------------- -----------------
OTHER ASSETS:
Goodwill (net of accumulated amortization
of $712,379 as of December 30, 2000 and
$427,932 as of January 1, 2000) 10,665,525 10,665,525 10,949,972
Other 50,001 312,345 401,562
------------------- ----------------- -----------------
TOTAL ASSETS $ 41,663,162 $ 41,925,506 $ 44,754,836
=================== ================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
14
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of December 30, 2000 and January 1, 2000
December 30, December 30, January 1,
2000 2000 2000
------------------- ----------------- -----------------
Pro Forma Actual
(Unaudited)
Note A
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit $ 3,310,161 $ 6,037,326 $ 6,151,925
Current portion of long-term debt 1,772,410 1,772,410 22,430,798
Trade accounts payable 2,758,069 2,758,069 3,348,140
Employee compensation and amounts
withheld 1,225,135 1,225,135 1,137,120
Accrued expenses 3,336,836 2,542,033 1,985,264
------------------- ----------------- -----------------
Total current liabilities 12,402,611 14,334,973 35,053,247
------------------- ----------------- -----------------
LONG-TERM DEBT, less current portion 18,791,439 19,948,892 2,494,686
------------------- ----------------- -----------------
OTHER LIABILITIES 176,768 176,768 419,346
------------------- ----------------- -----------------
DEFERRED INCOME TAXES 2,029,000 2,029,000 700,000
------------------- ----------------- -----------------
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 2000 and 1999 10,673 10,673 10,673
Additional paid-in capital 9,153,941 9,153,941 9,153,941
Accumulated deficit (901,270) (3,728,741) (3,077,057)
------------------- ----------------- -----------------
Total shareholders' equity 8,263,344 5,435,873 6,087,557
------------------- ----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,663,162 $ 41,925,506 $ 44,754,836
=================== ================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
15
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ending December 30, 2000,
January 1, 2000 and January 2, 1999
--------------------------------------------------------------------
FISCAL YEAR
--------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- ------------------
Sales $47,252,391 $ 52,394,843 $53,162,275
Cost of Sales 39,638,087 48,035,346 43,334,125
------------------- ------------------- ------------------
Gross Profit 7,614,304 4,359,497 9,828,150
Selling, General and Administrative Expenses 4,741,522 6,046,730 4,976,044
------------------- ------------------- ------------------
Income (Loss) From Operations 2,872,782 (1,687,233) 4,852,106
Non-Operating (Expense) Income:
Interest Expense (3,224,123) (3,278,532) (1,961,974)
Other (43,500) 43,775 90,942
------------------- ------------------- ------------------
(Loss) Income Before Income Taxes (394,841) (4,921,990) 2,981,074
Provision for (Benefit from) Income Taxes 33,000 (863,871) 704,802
------------------- ------------------- ------------------
(Loss) Income before Cumulative Effect of (427,841) (4,058,119) 2,276,272
Adoption of Staff Accounting Bulletin No. 101
(SAB 101) (see Note A)
Cumulative Effect of Adoption of SAB 101 (223,843) - -
------------------- ------------------- ------------------
Net (Loss) Income $ (651,684) $ (4,058,119) $ 2,276,272
=================== =================== ==================
Basic Per Common Share Data (Note A):
(Loss) income before cumulative effect of
adoption of SAB 101 ($0.10) ($0.95) $0.54
Cumulative effect of adoption of SAB 101 (0.05) - -
------- ------- -----
Net (loss) income ($0.15) ($0.95) $0.54
======= ======= =====
Diluted Per Common Share Data (Note A):
(Loss) income before cumulative effect of
adoption of SAB 101 ($0.10) ($0.95) $0.50
Cumulative effect of adoption of SAB 101 (0.05) - -
------- ------- -----
Net (loss) income ($0.15) ($0.95) $0.50
======= ======= =====
Pro Forma amounts assuming adoption of SAB 101
is applied retroactively (see Note A) (unaudited):
Pro forma net (loss) income ($427,841) ($3,926,600) $1,920,910
Pro forma basic net (loss) income per common share ($0.10) ($0.92) $0.45
Pro forma diluted net (loss) income per common share ($0.10) ($0.92) $0.42
The accompanying notes are an integral part of these consolidated financial
statements.
16
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ending December 30, 2000,
January 1, 2000 and January 2, 1999
--------------------------------------------------------------------
FISCAL YEAR
--------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- ------------------
Operating Activities:
Net (loss) income ($651,684) ($4,058,119) $2,276,272
Adjustments to reconcile net (loss) income
to net cash provided by
operating activities:
Deferred income taxes - (271,180) 35,000
Amortization of deferred ESOP
compensation expense - 38,889 77,778
Depreciation and amortization 2,337,631 2,957,582 1,574,441
Loss (gain) on sale of property
and equipment 3,404 12,075 (25,874)
Writedown of equipment - 600,000 -
Stock option grants and modifications - 110,460 -
Inventory reserve 25,488 620,651 108,806
Changes in operating assets and liabilities:
Accounts receivable (1,172,846) 1,933,440 (172,467)
Refundable income taxes 556,159 (556,159) -
Inventories 1,771,345 2,993,033 (815,310)
Prepaid expenses and other
current assets (159,535) (120,403) (250,239)
Trade accounts payable (590,071) (275,458) (359,093)
Other current liabilities 697,658 (553,692) 752,680
Other liabilities (242,578) 413,346 (3,000)
------------------- ------------------- ------------------
Net cash provided by
operating activities 2,574,971 3,844,465 3,198,994
------------------- ------------------- ------------------
Investing Activities:
Additions to property, plant and
equipment (124,256) (1,439,542) (6,681,595)
Proceeds from sales of property,
plant and equipment 927,661 34,825 65,757
Acquisition of Apex
Machine Tool Company, Inc. - - (20,585,392)
Decrease in other assets 41,730 266,611 445,462
------------------- ------------------- ------------------
Net cash provided by (used in)
investing activities 845,135 (1,138,106) (26,755,768)
------------------- ------------------- ------------------
The accompanying notes are an integral part of these consolidated financial
statements.
17
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Fiscal Years Ending December 30, 2000,
January 1, 2000 and January 2, 1999
--------------------------------------------------------------------
FISCAL YEAR
--------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- ------------------
Financing Activities:
(Decrease) increase in revolving
lines of credit (114,599) (1,360,482) 3,404,925
Payments of long-term debt (10,568,182) (1,897,592) (1,381,285)
Borrowings of long-term debt 7,364,000 457,283 21,359,268
Proceeds from exercise of options
for common stock - 10,338 265,726
------------------- ------------------- ------------------
Net cash (used in) provided by
financing activities (3,318,781) (2,790,453) 23,648,634
------------------- ------------------- ------------------
Increase (decrease) in cash 101,325 (84,094) 91,860
Cash at beginning of year 145,386 229,480 137,620
------------------- ------------------- ------------------
Cash at end of year $ 246,711 $ 145,386 $ 229,480
=================== =================== ==================
Supplemental Disclosure of
Cash Flow Information:
Interest paid $ 2,611,845 $ 2,623,883 $ 1,716,435
Income taxes paid - 598,721 5,700
The accompanying notes are an integral part of these consolidated financial
statements.
18
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Years Ending December 30, 2000,
January 1, 2000 and January 2, 1999
Additional Retained Earnings Deferred ESOP Accumulated Other
Common Paid-in (Accumulated Compensation Comprehensive
Stock Capital Deficit) Expense (Loss) Income Total
--------- ---------- ----------------- ------------- ----------------- -------------
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
Exercise of stock options, 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
Net loss and comprehensive loss (651,684) (651,684)
--------- ---------- ---------------- ------------- ----------------- -------------
Balances at December 30, 2000 $10,673 $9,153,941 ($3,728,741) - - $5,435,873
========= ========== ================ ============== ================= =============
The accompanying notes are an integral part of these consolidated financial
statements.
19
EDAC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 30, 2000 and January 1, 2000
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 11.9% of the Company's outstanding Common Stock as of
December 30, 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.
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. 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 note payable with the Company's
principal lender. The seller also provided financing relating to the purchase of
the two buildings used in the operation of Apex (see Note C). During 2000, the
Company sold one of the buildings which was being leased and which generated
rental income of $23,258 during the year ended December 30, 2000. A loss of
$7,877 was recorded upon disposition of the property.
20
The unaudited pro forma consolidated financial information for the year ended
January 2, 1999 as though the acquisition of Apex had been consummated at the
beginning of the period is as follows (in thousands, except share data):
January 2,
1999
------
Sales $64,261
Net income 2,820
Average shares (basic) 4,244,980
Basic income per share $0.66
Average shares (diluted) 4,533,449
Diluted income per share $0.62
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
consummated as of January 1, 1998.
SIGNIFICANT ACCOUNTING POLICIES
Pro Forma Information (Unaudited): The pro forma consolidated balance sheet as
of December 30, 2000 gives effect to the February 2001 refinancing as if such
refinancing had occurred as of December 30, 2000 (see Note C). For accounting
purposes, the refinancing results in a gain of $4,215,000, prior to income taxes
of $1,388,000, a reduction in debt of $3,884,000 and the elimination of deferred
financing costs of $262,000.
Principles of Consolidation: All significant intercompany transactions have been
eliminated from the consolidated financial statements.
Revenue Recognition: Sales are generally recorded when goods are shipped to the
Company's customers. The Company defers revenue recognition on certain product
shipments in accordance with SAB 101 as discussed below.
Fiscal Year: Effective January 1, 1998, the Company changed its fiscal year to a
52 week fiscal period. The Company's fiscal year ends on the Saturday closest to
December 31. Fiscal 2000, 1999 and 1998 ended on December 30, 2000, January 1,
2000 and January 2, 1999, respectively. Fiscal 1998 includes 52 weeks plus 3
days while fiscal 1999 and 2000 each include 52 weeks.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. As of December 30, 2000 and January 1, 2000, inventories
consisted of the following:
2000 1999
---- ----
Raw materials $1,117,616 $1,926,177
Work-in-progress 4,631,698 6,685,644
Finished goods 2,313,295 1,222,133
----------- -----------
8,062,609 9,833,954
Less: reserve for
excess and obsolete (1,054,945) (1,029,457)
----------- -----------
Inventories, net $7,007,664 $8,804,497
=========== ===========
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 reviews 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
21
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 held the equipment for sale and wrote
the equipment down to the estimated net realizable value resulting in a charge
to cost of sales of $600,000 for fiscal 1999. In January 2000 certain of the
equipment was sold for the carrying value, after the effect of the related
write-down. The remaining equipment was returned to service in March 2000. No
impairments were recorded for fiscal 2000 and 1998.
Goodwill represents the excess of the purchase price over the fair value 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. As of December 30, 2000, no impairments have
been recorded.
Derivative Instruments: Until May 2000, the Company used interest rate swap
agreements to reduce interest rate risks and to manage interest expense. Each
interest rate swap agreement was designated with all or a portion of the
principal balance and the repayment term of a specific debt. These agreements
effectively converted 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 were based. The differential to be paid or received was accrued and
recognized as an adjustment of interest expense. On May 2, 2000, the Company
sold the interest rate swap agreements for $177,350. The Company amortized the
deferred gain associated with this sale as a reduction of interest expense over
the period of the associated financing.
(Loss) Earnings Per Share: Basic (loss) earnings per common share is 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 fiscal 2000, 1999 and 1998, are as
follows:
2000 1999 1998
---- ---- ----
Basic:
Average common shares outstanding 4,269,080 4,268,445 4,244,980
Diluted:
Dilutive effect of stock options - - 288,469
--------- --------- ---------
Average shares diluted 4,269,080 4,268,445 4,533,449
========= ========= =========
Options to purchase 869,157 and 523,157 shares of common stock were not included
in the computation of earnings (loss) per share for fiscal 2000 and 1999,
respectively, 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 accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect certain of the amounts reflected in the
consolidated financial statements. Actual results could differ from those
estimates.
New Accounting Standards: In December 1999, the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101 (SAB 101) Revenue Recognition,
was issued. SAB 101 requires a company to defer revenue recognition on product
shipments until customer acceptance, including inspection and installation
requirements, as defined, are achieved. The Company adopted this new accounting
principle as of January 2, 2000, in the fourth quarter of fiscal 2000. The
cumulative effect on earnings as of January 1, 2000 was $223,843, which relates
to sales of $824,430.
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
22
measured at its fair value. Since the Company had no derivative instruments as
of December 30, 2000, the adoption of SFAS No. 133, as amended, had no effect on
the Company upon adoption.
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 November 19, 1996, the Board of Directors adopted the 1996 Stock Option Plan
(the 1996 Plan). The 1996 Plan is non-qualified 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
Compensation 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 Compensation Committee designates. The option price is not less
than the fair market value of the shares on the date of the grant.
On May 15, 2000, the Board of Directors adopted the 2000 Employee Stock Option
Plan (the 2000 Plan). The 2000 Plan is non-qualified and provides for granting
up to 300,000 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
Compensation Committee designates. The option price is not less than the fair
market value of the shares on the date of the grant.
On November 21, 2000, the Board of Directors adopted the 2000-B Employee Stock
Option Plan (the 2000-B Plan). The 2000-B Plan is non-qualified and provides for
granting up to 500,000 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 Compensation 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 2000, 1999 and 1998 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The weighted average assumptions used
are as follows:
2000 1999 1998
---- ---- ----
Risk free interest rate 5.79% to 6.43% 6.00% 4.39% to 5.38%
Expected dividend yield None None None
Expected lives 3 years 3 years 3 years
Expected volatility 153% 84% 80%
Had compensation cost for the Company's employee stock option plans 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 would have been adjusted to reflect the following pro forma amounts:
23
2000 1999 1998
---- ---- ----
(Loss) income:
As reported ($651,684) ($4,058,119) $2,276,272
Pro forma (779,361) (4,254,294) 2,153,232
Pro forma net (loss) income per common share:
Basic (loss) earnings per share
As reported ($0.15) ($0.95) $0.54
Pro forma (0.18) (1.00) 0.51
Diluted (loss) earnings per share:
As reported ($0.15) ($0.95) $0.50
Pro forma (0.18) (1.00) 0.47
24
A summary of the status of the Company's stock option plans as of December 30,
2000, January 1, 2000 and January 2, 1999, and changes during the years then
ended is presented below:
2000 1999 1998
-------------------------------- ------------------------------ ----------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
PRICE PRICE PRICE
---------------- --------------- ------------- ---------------- ------------------ ---------------
Outstanding at beginning of 523,157 $3.49 486,657 $3.74 373,257 $2.64
year
Granted 384,000 0.99 65,000 2.11 157,000 0.58
Exercised - - (7,500) 1.38 (43,600) 1.52
Expired (38,000) 3.09 (21,000) 5.72 - -
---------------- ------------- ------------------
Outstanding at end of year 869,157 2.41 523,157 3.49 486,657 3.74
================ ============= ==================
Options exercisable at
year-end 699,157 2.75 473,157 3.69 318,657 3.29
================ ============= ==================
Weighted-average fair
value of options granted
during the year $0.83 $1.45 $3.17
================ ============= ==================
The following table summarizes information about stock options outstanding
at December 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AT CONTRACTUAL EXERCISE AT EXERCISE
12/30/00 LIFE (IN YEARS) PRICE 12/30/00 PRICE
- ------------------------- -------------- ----------------- ------------------- ------------- --------------------
$0.91 110,000 0.9 $0.91 110,000 $0.91
0.94 150,000 9.9 0.94 - 0.94
0.97 24,000 9.5 0.97 24,000 0.97
1.00 190,000 9.5 1.00 190,000 1.00
1.25 6,957 0.5 1.25 6,957 1.25
1.38 20,000 9.9 1.38 - 1.38
1.65 1,500 1.2 1.65 1,500 1.65
1.69 50,000 8.8 1.69 50,000 1.69
2.05 80,500 6.4 2.05 80,500 2.05
3.50 15,000 8.5 3.50 15,000 3.50
5.50 120,000 7.9 5.50 120,000 5.50
5.91 79,200 6.9 5.91 79,200 5.91
7.73 22,000 7.2 7.73 22,000 7.73
-------------- -------------
$0.91 to 7.73 869,157 7.54 2.41 699,157 2.75
============== =============
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 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
during fiscal 1999, related to the modification and grant.
25
NOTE C -- NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following:
2000 2000 1999
------------- ------------- ------------
Pro Forma (1) Actual
Notes payable due in 35 monthly principal installments
of $122,734 commencing November 1, 2000
with a balloon payment due on September 29, 2003. $ 7,118,532 $ 7,118,532 $ -
Notes payable under forbearance agreement
at December 30, 2000 (see discussion below) 11,395,679 12,553,132 21,380,675
Note payable to former shareholders of Apex Machine
Tool Company, Inc. Note was amended on December 28,
2000 to provide monthly principal installments of $18,000,
increasing to $22,000 on July 1, 2001 and increasing to $25,000
on January 1, 2002. Interest at 10.12% is due monthly until
January 2, 2001 when interest will be paid quarterly
in advance. 2,049,638 2,049,638 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
------------ ----------- ----------
20,563,849 21,721,302 24,925,484
Less - current portion of long-term debt 1,772,410 1,772,410 22,430,798
------------ ----------- ----------
$ 18,791,439 $19,948,892 $2,494,686
============ =========== ==========
(1)The pro forma amounts reflect the effect of the February 2001
refinancing. The refinancing also resulted in a reduction in the revolving
line of credit with the former lender in the amount of $2,727,000
On September 29, 2000, the Company refinanced substantially all of its loan
facilities with its former principal lender ("Former Lender") with financing
from a new lender. The new credit facility includes revolving credit in an
amount up to $8,000,000, and term loans of $7,364,000. The revolving credit is
limited to an amount determined by a formula based on percentages of the
Company's receivables and inventory. As of December 30, 2000, $3,310,161 was
outstanding on the revolver and $2,837,334 was available for additional
borrowings on the revolver with the new lender. $2,727,165 of revolving debt was
outstanding with the Former Lender as of December 30, 2000. The term loans are
payable in 35 monthly principal payments of $122,734 plus accrued interest with
a balloon payment of $3,068,310 due upon expiration of the facility on September
29, 2003. Interest rates are based on the index rate (30 day dealer placed
commercial paper) plus 3.75% (10.4% at December 30, 2000) for the revolving
credit and the index rate plus 4% (10.65% at December 30, 2000) for the term
loans. The credit facility requires maintenance of a certain earnings to fixed
charges ratio commencing with the quarter ending December 30, 2000. The Company
was in compliance with all covenants as of December 30, 2000 and for the quarter
then ended.
On February 5, 2001, the Company refinanced $2,000,000 due to its Former Lender
through a mortgage with a local bank. This mortgage is due in 240 monthly
installments of $18,578 including interest at 9.45%. The payment will be
adjusted by the bank every 5 years commencing on March 1, 2006 to reflect
interest at the Five Year Federal Home Loan Bank "Classic Credit Rate" plus
2.75%. As of December 30, 2000, the Company owed the Former Lender $15,280,297
consisting of $12,553,132 of notes payable and $2,727,165 of revolving debt. The
Company paid to the Former Lender a principal payment of $33,333 on January 11,
2001 in accordance with the forbearance agreement and $1,900,000 from the
proceeds of the $2,000,000 mortgage on February 5, 2001. Concurrent with the
$2,000,000 real estate financing consummated in February 2001, the remaining
principal amount due to the
26
Former Lender of $13,347,000 along with accrued interest of $593,000 was reduced
to a single principal amount of $7,000,000, with the principal due in full on
September 29, 2004.
The refinancing resulted in the forgiveness of certain indebtedness and accrued
interest payable to the former lender which will be accounted for as a troubled
debt restructuring. Accordingly, the Company will record an extraordinary gain
in the first quarter of 2001 of $4.2 million (less estimated income taxes of
$1.4 million), which amount represents the difference between the carrying value
of the remaining debt to the Former Lender ($13,677,818, including accrued
interest payable and deferred financing fees) and the total amount of remaining
payments to the former lender, including interest, under the terms of the
refinancing of $9,462,347 (assuming that the entire $7 million remaining is
repaid and no additional amounts are forgiven). In accordance with the
accounting for troubled debt restructurings, no interest expense will be
recorded on the $7 million obligation after February 5, 2001 since such interest
has been considered in determining the amount of the gain to be recorded.
Interest on the $7,000,000 note is at the bank's prime rate plus 1% and interest
will not be paid until September 29, 2002 and monthly thereafter. If the Company
prepays an aggregate principal amount of $5,000,000 plus accrued interest on the
remaining $7,000,000 anytime prior to October 1, 2003, the remaining principal
will be reduced by $2,000,000.
Under the accounting for troubled debt restructurings, the carrying value of the
$7,000,000 note will become $9,462,347 in the first quarter 2001. This amount
includes estimated interest on the $7 million obligation to maturity. If the
Company were to prepay $5 million of the note on March 31, 2001, an additional
gain of $4.1 million would be recorded representing $2 million of debt forgiven
and $2.1 million of interest accrued which the Company would not be liable for.
The amount of the additional potential gain decreases by $169,000 each quarter
that the $5 million repayment does not occur. There is no assurance that the
Company will be able to make the prepayment in order to obtain such a gain on
debt forgiveness.
During 1999 and for the first nine months of 2000, the Company was in violation
of certain of its financial covenants contained in its financing arrangement
with its Former Lender. As of January 1, 2000, the Company had aggregate
borrowings under the Agreement and other borrowings with its Former Lender of
$27,524,000. As the financing arrangement provided a first priority security
interest in substantially all of the Company's assets and was generally cross
collateralized and cross defaulted with other borrowings with the bank, all
amounts outstanding to the bank as of January 1, 2000, were classified as
current in the consolidated balance sheet. As a result of the forbearance
agreements, the Company expensed remaining unamortized deferred financing fees
of $425,179 in fiscal 1999. These costs are included as a component of interest
expense in the consolidated statement of operations.
Aggregate annual maturities of long-term debt after giving effect to the
February 5, 2001 debt refinancing for the five year period subsequent to
December 30, 2000 are as follows: 2001--$1,772,410; 2002--$ 3,094,665; 2003--$
6,398,583; 2004--$ 7,550,209; 2005--$50,550; 2006 and thereafter--$1,697,432.
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.
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):
2000 1999
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $4,620 $5,128
Interest cost 361 341
Actuarial (gain) loss 304 (513)
Benefits paid (363) (336)
------ ------
Benefit obligation at end of year $4,922 $4,620
====== ======
27
2000 1999
---- ----
Change in plan assets:
Fair value of plan assets at beginning of year $4,740 $4,756
Actual return on plan assets 465 212
Employer contribution 126 108
Expenses (21) -
Benefits paid (363) (336)
------ ------
Fair value of plan assets at end of year $4,947 $4,740
====== ======
Funded status $25 $119
Unrecognized net actuarial loss 389 231
------ ------
Recognized in the consolidated balance
sheets as prepaid benefit obligation $ 414 $ 350
====== ======
Weighted-average assumptions:
Discount rate 7.50% 8.00%
Expected return on plan assets 7.00% 7.00%
Components of net periodic benefit cost:
Interest cost $361 $341
Expected return on plan assets (298) (282)
------ ------
Net periodic pension expense $ 63 $ 59
====== ======
Through March of 2000 the Company maintained the Gros-Ite Industries 401(k)
Retirement Plan (the Gros-Ite Plan) which covered substantially all employees
meeting minimum age and service requirements. The Company matched 35% of
employee contributions up to 15% of compensation limited annually to $1,750.
Employer contributions and expenses related to this plan were $178,151 and
$155,500, in fiscal 1999 and 1998, respectively.
The Apex Machine Tool Company, Inc. Profit-Sharing and Retirement Plan (the Apex
Plan), covered substantially all Apex employees who have completed more than one
year of service. Profit sharing contributions were made to the Plan at the
discretion of the Company's Board of Directors. The Plan also allowed 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 were 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
fiscal 1999 and the period subsequent to the Apex acquisition from June 30, 1998
to January 2, 1999, respectively.
On March 1, 2000, the assets of both of the Gros-Ite Plan and Apex Plan combined
into one plan forming the Edac Technologies Corporation 401(k) Retirement Plan.
All employees who had completed at least three consecutive months of service and
were age eighteen or older were eligible to participate. The Company matches 35%
of employee contributions up to 15% of compensation limited annually to $1,750.
Employer contributions and expenses related to the combined plan for fiscal 2000
were $277,972.
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
28
reports compensation expense. ESOP compensation expense was $0, $38,889 and
$77,778 for fiscal 2000, 1999 and 1998, respectively. Interest expense incurred
on the debt was $0, $598 and $6,026, for fiscal 2000, 1999 and 1998,
respectively. All debt was repaid as of June 1, 1999. The ESOP shares as of 2000
and 1999 were as follows:
2000 1999
---- ----
Allocated shares 508,323 600,555
Shares released
for allocation - 60,269
------- -------
Total ESOP shares 508,323 660,824
======= =======
The reduction in shares of 152,501 from January 1, 2000 to December 30, 2000
reflects distributions to plan participants.
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):
2000 1999 1998
---- ---- ----
Current provision (benefit) $ 33 $ (593) $ 670
Deferred (benefit) provision - (271) 35
---------- ---------- --------
$ 33 $ (864) $ 705
========== ========== ========
The effective tax rate on income before income taxes is different from the
prevailing Federal and state income tax rates as follows (in thousands):
2000 1999 1998
---- ---- ----
(Loss) income before income taxes $ (619) $ (4,922) $ 2,981
========= ========== =========
Income tax at Federal statutory rate $ (210) $ (1,673) $ 1,014
State income taxes-net of Federal benefit (46) (388) -
Meals, entertainment and other (203) (254) (195)
Change in valuation allowance 492 1,451 (114)
--------- ---------- ---------
$ 33 $ (864) $ 705
========= ========== =========
During fiscal 2000 and 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 fiscal 1998, a previous valuation
allowance was reversed to the extent assets were considered realizable.
29
The tax effect of temporary differences giving rise to the Company's deferred
tax assets and liabilities are as follows (in thousands):
2000 1999
---- ----
Deferred tax assets:
Allowance for uncollectible
accounts receivable $ 78 $ 82
Employee compensation and amounts withheld 377 466
Accrued expenses 122 114
Unicap and inventory reserves 475 475
Tax effect of net operating loss carryforwards (state and federal) 2,501 1,555
Alternative minimum tax credit carryforwards 327 227
Other 562 483
Valuation allowance (1,858) (1,366)
------- -------
2,584 2,036
------- -------
Deferred tax liabilities:
Property, plant and equipment 1,855 1,349
Pension 142 130
Goodwill 462 281
Other 125 276
------- -------
2,584 2,036
------- -------
Net deferred tax liability $ - $ -
======= =======
Reflected in consolidated balance sheets as:
Net current deferred tax asset $ 2,029 $ 700
Net long-term deferred tax liability (2,029) (700)
------- -------
$ - $ -
======= =======
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 fiscal 2000 and 1999, the Company has pre-change NOL's of approximately
$252,000 and $433,000, respectively, 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. As of fiscal 2000, the Company has
available aggregate Federal and state NOL's of approximately $5.6 million and
$6.2 million, respectively, which are available to offset future taxable income.
These NOL's expire through 2020 and 2005, respectively. In addition, the Company
has alternative minimum tax credits of approximately $327,000 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 $117,853, $124,866 and $84,449, for
fiscal 2000, 1999 and 1998, respectively. Minimum rental commitments as of
December 30, 2000 for noncancelable operating leases with initial or remaining
terms of one year or more are as follows: 2001--$111,186; 2002--$102,120;
2003--$31,979; 2004--$3,600; 2005--$3,600; 2006 and thereafter-- $25,200.
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 agreed to pay the former President and
CEO severance of $710,000. This amount is payable over three years, $225,000
each year for the first two years and $260,000 in the third year. The Company
also provided the former President and CEO with health insurance coverage until
he obtained other coverage or until July 1, 2000 whichever was 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.
30
NOTE H -- MAJOR CUSTOMERS
For fiscal 2000, sales to United Technologies Corporation amounted to 45% of the
Company's sales. For fiscal 1999, sales to United Technologies Corporation and a
consumer products company amounted to 52% and 10% of the Company's sales,
respectively. For fiscal 1998, sales to United Technologies Corporation, Nordam
Manufacturing and a consumer products company amounted to 51%, 11% and 10% of
the Company's sales, respectively. United Technologies Corporation and Nordam
Manufacturing operate in the aerospace industry.
At December 30, 2000, the Company had $1,731,212 of trade receivables due from
United Technologies Corporation.
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 fiscal 2000, 1999 and
1998 (in thousands):
2000
--------------------------------------------------------------------------
Engineered Precision Precision Apex
Precision Engineered Large Machine
Components Technologies Machining Tool Co. Total
---------- ------------ --------- -------- -----
Revenues from
external
customers $16,620 $6,384 $4,662 $19,586 $47,252
Allocated interest
expense 493 262 303 2,166 3,224
Allocated
depreciation and
amortization 477 380 536 945 2,338
Income tax expense 16 7 10 -- 33
Cumulative effect of
SAB 101 -- -- -- (224) (224)
Segment (loss) (1,252) 340 502 (242) (652)
profit
31
1999
--------------------------------------------------------------------------
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 356 384 305 2,234 3,279
Allocated
depreciation and
amortization 427 503 513 1,514 2,957
Income tax (benefit)
expense (801) 22 (24) (61) (864)
Segment loss (2,414) (795) (124) (725) (4,058)
1998
--------------------------------------------------------------------------
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 401 421 297 843 1,962
Allocated
depreciation and
amortization 390 377 440 367 1,574
Income tax (benefit)
expense (24) 210 390 129 705
Segment (loss)
profit (72) 678 1,218 452 2,276
Asset information is unavailable by segment.
32
NOTE J -- QUARTERLY DATA (Unaudited)
Following is selected quarterly data for fiscal 2000 and 1999. All quarterly
information was obtained from unaudited consolidated financial statements not
otherwise contained herein. The data for fiscal 2000 includes amounts as
restated for the adoption of SAB 101 and the amounts previously reported in the
Company's Form 10-Q's, prior to the adoption of SAB 101. The unaudited results
for any quarter are not necessarily indicative of the results for any future
period.
2000 (1) 1st quarter 2nd quarter 3rd quarter 4th quarter
---------- ----------- ----------- ----------- -----------
(as adjusted for SAB 101 implementation)
Sales $12,157,888 $12,125,672 $11,024,808 $11,944,023
Gross profit 1,839,751 1,911,851 1,614,682 2,248,020
Income from operations 585,582 633,595 381,486 1,272,119
Income (loss) before cumulative effect of
adoption of SAB 101 (102,028) (219,805) (591,733) 485,725
Cumulative effect of adoption of SAB 101 (223,843) - - -
Net income (loss) (325,871) (219,805) (591,733) 485,725
Income (loss) per share:
Basic ($0.08) ($0.05) ($0.14) $0.11
Diluted ($0.08) ($0.05) ($0.14) $0.11
2000 (1)
- ----------
(as previously reported)
Sales $12,249,238 $11,776,242 $10,634,858 $11,944,023
Gross profit 1,841,960 1,971,443 1,340,665 2,248,020
Income from operations 587,791 693,187 107,469 1,272,119
Income (loss) before cumulative effect of
adoption of SAB 101 (99,819) (160,213) (865,750) 485,725
Cumulative effect of adoption of SAB 101 - - - -
Net income (loss) (99,819) (160,213) (865,750) 485,725
Income (loss) per share:
Basic ($0.02) ($0.04) ($0.20) $0.11
Diluted ($0.02) ($0.04) ($0.20) $0.11
1999 (2)
- ----------
Sales $15,170,285 $14,945,132 $12,243,219 $10,036,207
Gross profit 2,393,902 (190,040) 1,770,987 384,648
Income (loss) from operations 1,037,026 (1,538,258) (630,729) (555,272)
Net income (loss) 285,990 (1,669,656) (1,117,471) (1,556,982)
Income (loss) per share:
Basic $0.07 ($0.39) ($0.26) ($0.36)
Diluted $0.06 ($0.39) ($0.26) ($0.36)
(1) The third quarter of 2000 includes a write-down of $338,000 related to an
investment offset by $277,000 related to a reduction in a reserve made in
the fourth quarter of 1999 against a note receivable. The fourth quarter
includes an inventory reserve of $58,989. Selling, general and
administrative (SG&A) costs were cut in the second quarter by staff
reductions of 5 people reducing costs by $60,000 per quarter.
(2) The second quarter of 1999 includes an inventory reserve of $1,200,000.
SG&A costs were impacted by reductions in compensation expense of $150,000
compared to 1998 beginning in the second quarter. The third quarter
includes a write-down of equipment of $400,000, severance charges of
$750,000 and a charge for modification of stock options of $65,000. In the
third quarter sales to the Company's largest customer decreased $2.6
million from the previous quarter. The fourth quarter includes charges for
the write-down of equipment of $200,000, expensing of deferred loan fees of
33
$425,179, the modification of stock options of $45,450 and the reserve of
$675,182 against a note receivable. In the fourth quarter sales to the
Company's largest customer decreased $1.4 million from the previous
quarter. SG&A costs were impacted by reductions in public relations
expenses of $25,000 per quarter beginning in the fourth quarter.
NOTE K -- SUBSEQUENT EVENT
On March 29, 2001, the Company entered into as asset purchase agreement
providing for the sale of substantially all of the assets related to the
Engineered Precision Components division for cash of approximately $6.4 million,
subject to post closing adjustment based upon a valuation as of the closing date
of the inventory to be transferred to the purchaser. Because there are
significant conditions remaining to be satisfied with respect to the asset sale,
no assurance can be given that the sale will be consummated or, if consummated,
that the terms of the asset sale will be as presently contemplated.
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Edac Technologies Corporation:
We have audited the accompanying consolidated balance sheets of Edac
Technologies Corporation (a Wisconsin corporation) and subsidiaries as of
December 30, 2000 and January 1, 2000, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 30, 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 December 30, 2000 and January 1, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 30, 2000 in conformity with accounting principles
generally accepted in the United States.
As explained in Note A to the consolidated financial statements, effective
January 2, 2000, the Company changed its method of accounting for certain
revenue to comply with Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements".
/s/Arthur Andersen LLP
Hartford, Connecticut
February 9, 2001 (except for the matter discussed in Note K
as to which the date is March 29, 2001)
35
OFFICERS
Richard A. Dandurand President and Chief Executive Officer
Ronald G. Popolizio Executive Vice President, CFO and Secretary
BOARD OF DIRECTORS
Richard A. Dandurand President and Chief Executive Officer
John DiFrancesco Chairman
George Fraher President of Apex Machine Tool
Robert J. Gilchrist Managing Director, Horton International, Inc.
John M. Kucharik Chief Executive Officer of IPC, Inc.
Stephen J. Raffay Retired Vice-Chairman Emhart Corporation
Daniel C. Tracy Business Consultant
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 2001 annual meeting of shareholders will be held on the date and at the time
and place indicated in the proxy statement accompanying this report.
10-K INFORMATION
A copy of the 2000 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.