UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 September 27, 2003
----------------------
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
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EDAC Technologies Corporation
-----------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1515599
--------- ----------
(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
--- ---
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
On October 28, 2003 there were outstanding 4,444,203 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
September 27, December 28,
2003 2002
(Unaudited) (Note)
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash $ 196,700 $ 207,501
Trade accounts receivable, net 3,925,753 2,891,449
Inventories, net 4,349,183 5,427,936
Prepaid expenses and other 125,525 74,891
Refundable income taxes - 641,193
Land, building and equipment
held for sale 1,450,000 1,545,000
--------------- ---------------
TOTAL CURRENT ASSETS 10,047,161 10,787,970
--------------- ---------------
PROPERTY, PLANT, AND EQUIPMENT 23,750,887 23,807,540
less-accumulated depreciation 15,204,407 14,132,933
--------------- ---------------
8,546,480 9,674,607
--------------- ---------------
OTHER ASSETS:
Deferred income taxes 112,623 112,623
Other 31,063 10,000
--------------- ---------------
$ 18,737,327 $ 20,585,200
=============== ===============
Note: The balance sheet at December 28, 2002 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
September 27, December 28,
2003 2002
(Unaudited) (Note)
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
- -------------------------------------------------
CURRENT LIABILITIES:
Revolving line of credit $ 2,374,169 $ 668,820
Current portion of long-term debt 4,202,619 2,250,091
Trade accounts payable 2,384,146 2,287,047
Accrued employee compensation
and amounts withheld 892,580 1,151,062
Other accrued expenses 225,049 823,140
Customer advances 319,467 930,536
Deferred income taxes 112,974 112,974
--------------- ---------------
TOTAL CURRENT LIABILITIES 10,511,004 8,223,670
--------------- ---------------
LONG-TERM DEBT,
less current portion 4,316,022 15,151,047
--------------- ---------------
OTHER LONG-TERM LIABILITIES 1,611,875 1,611,875
--------------- ---------------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued -- 4,444,438 on September
27, 2003 and 4,416,038 on
December 28, 2002 11,111 11,040
Additional paid-in capital 9,372,508 9,358,379
Accumulated deficit (5,037,014) (11,722,797)
--------------- ---------------
4,346,605 (2,353,378)
Less: accumulated other
comprehensive loss (2,048,014) (2,048,014)
treasury stock, 235 shares (165) -
--------------- ---------------
2,298,426 (4,401,392)
--------------- ---------------
$ 18,737,327 $ 20,585,200
=============== ===============
Note: The balance sheet at December 28, 2002 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 three months ended For the nine months ended
-------------------------------- --------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales $ 6,437,696 $ 5,797,981 $ 19,684,841 $ 19,803,961
Cost of sales 5,655,411 5,487,903 17,640,983 18,657,562
------------ ------------ ------------ ------------
Gross profit 782,285 310,078 2,043,858 1,146,399
Selling, general and
administrative expenses 663,023 1,004,425 2,136,584 2,910,397
------------ ------------ ------------ ------------
Income (loss)
from operations 119,262 (694,347) (92,726) (1,763,998)
Non-operating income
(expense):
Gain on debt
restructuring - - 7,253,203 -
Interest expense (171,474) (188,437) (518,407) (561,853)
Other 500 962 43,713 33,518
------------ ------------ ------------ ------------
Total non-operating
income (expense) (170,974) (187,475) 6,778,509 (528,335)
(Loss) income before
income taxes and cumulative
effect of adoption
of SFAS No. 142 (51,712) (881,822) 6,685,783 (2,292,333)
Benefit from income taxes - 175,897 - 458,489
------------ ------------ ------------ ------------
(Loss) income before
cumulative effect of change
in accounting principle (51,712) (705,925) 6,685,783 (1,833,844)
Cumulative effect of
adoption of SFAS No. 142 - - - (10,381,077)
------------ ------------ ------------ ------------
Net (loss) income $ (51,712) $ (705,925) $ 6,685,783 $(12,214,921)
============ ============ ============ ============
Basic per common share data (Note A):
(Loss) income before
cumulative effect of change in
accounting principle $ (0.01) $ (0.16) $ 1.51 $ (0.41)
Cumulative effect of change
in accounting principle - - - (2.36)
------------ ------------ ------------ ------------
Net (loss) income $ (0.01) $ (0.16) $ 1.51 $ (2.77)
============ ============ ============ ============
Diluted per common share data (Note A):
(Loss) income before
cumulative effect of change in
accounting principle $ (0.01) $ (0.16) $ 1.49 $ (0.41)
Cumulative effect of change
in accounting principle - - - (2.36)
------------ ------------ ------------ ------------
Net (loss) income $ (0.01) $ (0.16) $ 1.49 $ (2.77)
============ ============ ============ ============
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 nine months ended
---------------------------------------------
September 27, September 28,
2003 2002
--------------- ---------------
Operating Activities:
Net income (loss) $ 6,685,783 $ (12,214,921)
Depreciation and amortization 1,445,142 1,508,543
Gain on sale of equipment (31,441) -
Forgiveness of debt (7,253,203) -
Cumulative effect of adoption of
SFAS No. 142 - 10,381,077
Changes in working capital items (545,187) 2,159,874
Other (59,065) (34,170)
--------------- ---------------
Net cash provided by
operating activities 242,029 1,800,403
--------------- ---------------
Investing Activities:
Additions to property, plant
and equipment (287,194) (104,729)
Proceeds from sales of property,
plant and equipment 134,623 53,400
--------------- ---------------
Net cash used in
investing activities (152,571) (51,329)
--------------- ---------------
Financing Activities:
Increase (decrease) in revolving
line of credit 1,705,349 (577,889)
Payments of long-term debt (1,819,808) (1,398,815)
Borrowings of long-term debt - 24,278
Proceeds from exercise of common
stock options 14,200 104,376
--------------- ---------------
Net cash used in
financing activities (100,259) (1,848,050)
--------------- ---------------
Decrease in cash (10,801) (98,976)
Cash at beginning of period 207,501 176,245
--------------- ---------------
Cash at end of period $ 196,700 $ 77,269
=============== ===============
Supplemental Disclosure of
Cash Flow Information:
Interest paid $ 550,448 $ 563,253
Non-cash transactions:
Fractional shares of common
stock returned to the
Company from ESOP 165 -
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EDAC TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 27, 2003
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with 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 ended September 27, 2003 are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 3, 2004. 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 28, 2002.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. As of September 27, 2003 and December 28, 2002, inventories
consisted of the following:
September 27, December 28,
2003 2002
---- ----
Raw materials $ 627,515 $ 676,107
Work-in-progress 2,441,283 3,675,325
Finished goods 2,063,457 1,842,898
----------- -----------
5,132,255 6,194,330
Reserve for excess
and obsolete (783,072) (766,394)
----------- -----------
Inventories, net $ 4,349,183 $ 5,427,936
=========== ===========
In April 2002, EDAC's largest customer told EDAC to stop work on a significant
portion of EDAC's inventory due to the customer's reduced requirements. During
the quarter ended December 28, 2002, EDAC reached an agreement with the customer
to receive an advance for terminated contracts. A majority of the amount
received prior to December 28, 2002 had not been recognized as revenue since the
terminated contracts at the time were still subject to approval by the customer.
During the six month period ended June 28, 2003, the Company received the
remaining advances due under the agreement. Additionally, during the three and
nine month periods ended September 27, 2003, some of the terminated contracts
were approved by the customer and amounts were recognized as revenue.
Land, building and equipment held for sale: In October 2002, the Company adopted
a consolidation plan. Under the plan, the Company consolidated its four
independent divisions into one entity, allowing the Company to reduce overhead,
improve operating efficiencies and share resources. The consolidation resulted
in the physical relocation of 130 people and the
related equipment without suspending operations. The consolidation commenced in
the fourth quarter of 2002 and was completed in the first quarter of 2003. The
Company incurred costs of $159,000 in the first quarter of 2003 related to the
restructuring, which were included in cost of sales in the consolidated
statement of operations during the nine months ended September 27, 2003.
Additionally, certain land and a building are listed for sale. Excess equipment
as a result of the consolidation was sold at an auction in the second quarter of
2003. Net proceeds from the auction totaled $119,000, resulting in a gain of
approximately $31,000.
Goodwill: Effective December 30, 2001, the Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets". The Company completed the impairment
test as of such date and wrote-off $10,381,077 of goodwill related to the 1998
acquisition of Apex Machine Tool Co. as a cumulative effect of change in
accounting principle in the first fiscal quarter of 2002. The write-off was the
result of the decline in the fair market value of Apex since the acquisition
date due primarily to a reduction in Apex's sales volume. The impairment loss
was computed using the estimated fair market value of Apex as of the write-off
date. No tax benefit was recorded due to the uncertainty of realization of the
related deferred tax asset.
Income (loss) Per Share: The number of shares used in the income (loss) per
common share computations for the three and nine month periods ended September
27, 2003 and September 28, 2002 are as follows:
For the three months ended For the nine months ended
------------------------------------ ------------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Basic:
Average common
shares outstanding 4,425,270 4,416,038 4,419,011 4,406,038
Diluted:
Dilutive effect of
stock options - - 72,908 -
--------------- --------------- --------------- ---------------
Average common
shares diluted 4,425,270 4,416,038 4,491,919 4,406,038
=============== =============== =============== ===============
Options excluded
since anti-dilutive 533,600 817,700 310,500 817,700
=============== =============== =============== ===============
The Company uses the intrinsic value method of accounting for stock options. 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 income (loss)
would have been adjusted to reflect the following pro forma amounts:
For the three months ended For the nine months ended
------------------------------- ----------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Income (loss):
As reported $ (51,712) $ (705,925) $ 6,685,783 $ (12,214,921)
Effect of stock-based employee
compensation expense determined
under fair valuation method for
all awards, net of any
related tax effects (23,271) (17,750) (34,371) (53,250)
------------- ------------- ------------- -------------
Pro forma $ (74,983) $ (723,675) $ 6,651,412 $ (12,268,171)
============= ============= ============= =============
Income (loss) per common share:
Basic:
As reported $ (0.01) $ (0.16) $ 1.51 $ (2.77)
Pro forma $ (0.02) $ (0.16) $ 1.51 $ (2.78)
Diluted:
As reported $ (0.01) $ (0.16) $ 1.49 $ (2.77)
Pro forma $ (0.02) $ (0.16) $ 1.48 $ (2.78)
Comprehensive Income (Loss): Comprehensive income (loss) is the same as net
income (loss) for the three and nine month periods ended September 27, 2003 and
September 28, 2002 since the valuation used in connection with determining the
amount of the change in the minimum pension liability is determined at the end
of the year.
Treasury stock: On October 11, 2002, the Company terminated its Employee Stock
Ownership Plan and distributed the accounts of all participants in the form of
shares of the Company. The fractional share portion of each account was paid in
cash by the Company. Fractional shares aggregating 235 shares were transferred
back to the Company as treasury stock.
New Accounting Standards: The Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) Nos. 146, "Accounting for
Costs Associated with Exit or Disposal Activities", 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities", and 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity". The FASB also issued Interpretations 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" and 46 "Consolidation of Variable Interest Entities".
The Company is not impacted by these Statements and Interpretations and does not
expect their implementation to have a material impact on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-
Fund Requirements". SFAS No. 145 also rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers". SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The adoption
of SFAS No. 145 will result in the reclassification of the extraordinary gain,
net of tax of $2.8 million in 2001, to other income by the Company in the
Company's fiscal 2003 Form 10-K. Additionally, in accordance with SFAS No. 145,
the gain on debt restructuring during the nine months ended September 27, 2003
of $7,253,000 has been classified as non-operating income.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure and Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of that Statement. The Company has not adopted the fair value
recognition principles of SFAS No. 123; therefore this Statement has had no
effect upon the Company's consolidated financial condition or results of
operations. The Company has provided the additional quarterly disclosures
required by SFAS No. 148 in this filing.
NOTE B -- SEGMENT INFORMATION
As a result of the restructuring commencing in the fourth quarter of 2002 and
ending in the first quarter of 2003, the Company now operates as one segment.
NOTE C -- FINANCING ARRANGEMENTS
Long-term debt consisted of the following:
Sept. 27, December 28,
2003 2002
------------- -------------
Notes payable due in 35 monthly aggregate
principal installments of $122,734
plus interest (1) $ 2,836,541 $ 4,068,451
Note payable due in 18 monthly principal
installments of $73,611 plus
interest at 7% (1)(2) 917,399 -
Non-interest bearing note payable
to former lender payable only upon
the occurrence of certain events (1) 1,000,000 -
Note payable to former lender (1) - 9,462,347
Mortgage note due to bank in 240 monthly
installments of $18,578 including
interest at 9.45% subject to
change every 5 years (3) 1,909,636 1,941,572
Note payable to former shareholders of
Apex Machine Tool Company, Inc. Monthly
interest payments at 10.12%. Balloon
principal payment due on
January 5, 2004 1,659,638 1,659,638
Equipment notes payable due in 36 monthly
principal payments of $700 and $674 20,545 33,662
Capitalized lease obligations 174,882 235,468
------------- -------------
8,518,641 17,401,138
Less-current portion of long-term debt 4,202,619 2,250,091
------------- -------------
$ 4,316,022 $ 15,151,047
============= =============
(1) See below for discussion of April 1, 2003 refinancing.
(2) Amount includes $34,065 of interest recorded in accordance with
accounting for troubled debt restructurings.
(3) On October 15, 2003, the mortgage holder reduced the interest rate on the
note from 9.45% to 7.5% effective for the period October 1, 2003 to the next
interest change date, March 1, 2006. Monthly payments were correspondingly
reduced from $18,578 to $16,423.
On April 1, 2003, the Company's former lender (the "Former Lender") canceled the
Note to Former Lender in the amount of $9,728,000 including principal, interest
and late fees in exchange for (i) a new promissory note in the principal amount
of $1,325,000 and (ii) a new promissory note in the amount of $1,000,000
(collectively, the "New Notes"). The transaction resulted in the forgiveness of
indebtedness and accrued interest and fees and has been accounted for as a
troubled debt restructuring in the second quarter of 2003. The Company recorded
a gain in the second quarter of 2003 of $7,253,203 representing the difference
between the carrying value of the Note to Former Lender, including accrued
interest and fees, and the payments due under the New Notes, including interest.
The $1,325,000 note payable bears interest at 7% per annum and is repayable in
18 monthly installments of $73,611. The $1 million note is non-interest bearing
and will be paid only upon the occurrence of certain events on or before March
31, 2005, including a change of control, sale of the Company or liquidation. The
$1 million note will reduce to $750,000 and $0 on April 1, 2004 and April 1,
2005, respectively, if none of such events have occurred or been initiated as of
that date.
Additionally, in April 2003 the Company entered into an amended agreement with
its primary lender regarding the Company's revolving credit facility and term
loans. Under the terms of the amended
agreement, the maturity date of the revolver was changed to January 3, 2005, the
term loans were extended to January 3, 2005, covenant violations for 2002 and
the first quarter of 2003 were waived and financial covenant requirements were
revised commencing in the second quarter of 2003 (collectively, with the
troubled debt restructuring above, the "2003 Refinancing"). The classification
of long-term debt has been determined in the accompanying condensed balance
sheets based on the repayment terms after consideration of the 2003 Refinancing.
As of September 27, 2003, the Company was in compliance with its financial
covenants.
As of September 27, 2003, $2,374,169 was outstanding on the Company's revolving
line of credit and $1,266,000 was available for additional borrowings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Sales. The Company's sales increased $640,000, or 11.0%, and decreased by
$119,000, or 0.6%, for the three and nine months ended September 27, 2003,
respectively, as compared to the three and nine months ended September 28, 2002.
Sales and sales increases (decreases) for the three and nine month periods ended
September 27, 2003 compared to the three and nine month periods ended September
28, 2002 by product line were as follows (in thousands):
For the Three Months Ended
--------------------------
Sept. 27, Sept. 28,
Product Line 2003 2002 Change
------------ ---- ---- ------
Engineered Precision Components $ 1,507 $ 1,638 $ (131)
Precision Engineered Technologies 857 871 (14)
Precision Large Machining 313 352 (39)
Apex Machine Tool Co. 3,761 2,937 824
---------- ---------- ----------
Total $ 6,438 $ 5,798 $ 640
========== ========== ==========
For the Nine Months Ended
-------------------------
Sept. 27, Sept. 28,
Product Line 2003 2002 Change
------------ ---- ---- ------
Engineered Precision Components $ 5,188 $ 7,312 $ (2,124)
Precision Engineered Technologies 2,467 2,035 432
Precision Large Machining 1,029 1,584 (555)
Apex Machine Tool Co. 11,001 8,873 2,128
---------- ---------- ----------
Total $ 19,685 $ 19,804 $ (119)
========== ========== ==========
Apex Machine Tool Co. sales have increased due to a general increase in the
machine tool industry. The continuing decline in the aerospace industry resulted
in lower sales in the Engineered Precision Components and Precision Large
Machining product lines in the three and nine month periods ended September 27,
2003 compared to the comparable periods in 2002.
As of September 27, 2003, sales backlog was approximately $15,700,000 compared
to $18,500,000 as of December 28, 2002. Backlog consists of accepted purchase
orders that are cancelable by the customer without penalty, except for payment
of costs incurred. This decrease in sales backlog is due to declining orders
resulting from the continued decline in the aerospace industry. The Company
presently expects to complete approximately $4,300,000 of its September 27, 2003
backlog during the remainder of the 2003 fiscal year. The remaining $11,400,000
of backlog is deliverable in the fiscal year 2004 and beyond.
Cost of Sales. Cost of sales as a percentage of sales decreased to 87.8% from
94.7% and to 89.6% from 94.2%, for the three and nine month periods ended
September 27, 2003, compared to the three and nine month periods ended September
28, 2002. This decrease was the result of the consolidation of the Company's
four divisions into one entity, resulting in synergies as well as reductions in
overhead, which favorably impacted gross margin. The Company has also made
certain changes within the production cycle to compensate for schedule shifting
and delays in customer orders as a result of the continued downturn in the jet
engine industry.
Selling, General & Administrative Expenses. Selling, general and administrative
costs decreased by $341,000, or 34.0%, and by $774,000, or 26.6%, for the three
and nine month periods ended September 27, 2003, compared to the three and nine
month periods ended September 28, 2002. The decrease in these costs for the nine
month periods was mainly the result of decreased compensation of $505,000 due to
layoffs and severance expense and decreased professional expenses of $278,000.
The decrease for the three month periods was also mainly due to decreased
compensation of $165,000 due to layoffs and severance expense and decreased
professional expenses of $168,000.
Interest Expense. Interest expense decreased by $17,000, or 9.0%, and by
$43,000, or 7.7%, for the three and nine month periods ended September 27, 2003,
compared to the three and nine month periods ended September 28, 2002. This is
primarily due to lower indebtedness and lower interest rates in the 2003 periods
compared to the 2002 periods, although not all of the benefit can be seen in the
condensed consolidated statement of operations due to the accounting for debt
restructuring which affects the accounting for interest expense.
Income taxes. Due to the company's insolvency at the time that certain debts
were forgiven, approximately $6.2 million of income from the debt discharge will
be exempt from taxation with a corresponding reduction in the tax basis of the
Company's assets. Federal income tax loss carryforwards (NOLs) will be used to
offset the balance of the gain. NOLs will also be utilized to offset any
earnings in excess of the gain
on forgiveness of indebtedness during 2003. Accordingly, no tax provision has
been recorded as of September 27, 2003.
Liquidity and Capital Resources.
As of September 27, 2003, $2,374,169 was outstanding on the Company's revolving
line of credit and $1,266,000 was available for additional borrowings.
Net cash provided by operating activities of $242,000 for the nine months ended
September 27, 2003, resulted primarily from net income as adjusted for non-cash
income related to the forgiveness of indebtedness and non-cash charges for
depreciation and amortization, and a decrease in inventories and the collection
of refundable income taxes, offset by increases in accounts receivable and
decreases in customer advances and accrued expenses.
Net cash used in investing activities of $153,000 for the nine months ended
September 27, 2003, consisted primarily of expenditures for machinery and
computer equipment offset by proceeds from the sale of equipment.
Net cash used in financing activities of $100,000 for the nine months ended
September 27, 2003, resulted from repayments of long-term debt partially offset
by borrowings on the Company's revolving line of credit
Net cash provided by operating activities of $1,800,000 for the nine months
ended September 28, 2002, resulted primarily from the net loss as adjusted for
non-cash charges for the adoption of SFAS No. 142 and depreciation and
amortization and lower receivables and inventory amounts partially offset by
lower accrued expenses and employee compensation.
Net cash used in investing activities of $51,000 for the nine months ended
September 28, 2002, consisted primarily of expenditures for machinery and
computer equipment.
Net cash used by financing activities of $1,848,000 for the nine months ended
September 28, 2002, resulted from repayments on the Company's revolving line of
credit and term debt, partially offset by proceeds from the exercise of common
stock options.
In October 2002, the Company adopted a consolidation plan. Under the plan, the
Company consolidated its four independent divisions into one entity, allowing
the Company to reduce overhead, improve operating efficiencies and share
resources. The consolidation resulted in the physical relocation of 130 people
and the related equipment without suspending operations. The consolidation
commenced in the fourth quarter of 2002 and was completed in the first quarter
of 2003. The Company incurred costs of $159,000 in the first quarter of 2003
related to the restructuring, which are included in cost of sales in the
consolidated statement of operations during the nine months ended September 27,
2003. Additionally, certain land and a building are listed for sale and excess
equipment as a result of the consolidation
was sold at an auction held in the second quarter of 2003. Net proceeds from the
auction totaled $119,000 resulting in a gain of $31,000.
On April 1, 2003, the Former Lender canceled the Note to Former Lender in the
amount of $9,728,000 including principal, interest and late fees in exchange for
(i) a new promissory note in the principal amount of $1,325,000 and (ii) a new
promissory note in the amount of $1,000,000 (collectively, the "New Notes"). The
transaction resulted in the forgiveness of indebtedness and accrued interest and
fees and has been accounted for as a troubled debt restructuring. The Company
recorded a gain in the second quarter of 2003 of $7,253,203 representing the
difference between the carrying value of the Note to Former Lender, including
accrued interest and fees, and the payments due under the New Notes, including
interest. The $1,325,000 note payable bears interest at 7% per annum and is
repayable in 18 monthly installments of $73,611. The $1 million note is
non-interest bearing and will be paid only upon the occurrence of certain events
on or before March 31, 2005, including a change of control, sale of the Company
or liquidation. The $1 million note will reduce to $750,000 and $0 on April 1,
2004 and April 1, 2005, respectively, if none of such events have occurred or
been initiated as of that date.
Additionally, in April 2003 the Company entered into an amended agreement with
its primary lender regarding the Company's revolving credit facility and term
loans. Under the terms of the amended agreement, the maturity date of the
revolver was changed to January 3, 2005, the term loans were extended to January
3, 2005, covenant violations for 2002 and the first quarter of 2003 were waived
and financial covenant requirements were revised commencing in the second
quarter of 2003 (collectively, with the troubled debt restructuring above, the
"2003 Refinancing"). The classification of long-term debt has been determined in
the accompanying condensed balance sheets based on the repayment terms after
consideration of the 2003 Refinancing. As of September 27, 2003, the Company was
in compliance with its financial covenants.
Based on the Company's forecasted results for its business, the Company believes
that the funds generated from operations as well as funds available from
existing financing agreements, will provide sufficient liquidity to meet the
operating needs of the Company.
All statements other than historical statements contained in this 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, statements about the Company's bank agreements,
statements about the Company's backlog, statements about the Company's action to
improve operating performance, 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 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 28, 2002. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 27, 2003 there have been no material changes in information
regarding quantitative and qualitative disclosure about market risk from the
information presented as of December 28, 2002 in the Company's Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure and procedures
The Chief Executive Officer and Chief Financial Officer of the Company evaluated
the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14(c) and 15d-14(c)) as of September 27, 2003 and, based on this
evaluation, concluded that the Company's disclosure controls and procedures are
functioning in an effective manner to ensure that the information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms.
Change in internal controls
No changes in the Company's internal control over financial reporting occurred
during the fiscal quarter ended September 27, 2003, that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Incorporated by reference
(b) Reports on Form 8-K
On August 5, 2003, the Company filed a report on Form 8-K to report, under
Items 7 and 12, the Company's financial results for its second quarter
ended June 28, 2003.
On August 5, 2003, the Company filed a report on Form 8-K to report, under
Items 4 and 7, the change in the Company's certifying accountant.
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
November 4, 2003 By /s/ Glenn L. Purple
----------------------------
Glenn L. Purple, Chief Financial
Officer and duly authorized officer
EXHIBIT INDEX
NUMBER DESCRIPTION
3.1 EDAC's Amended and Restated Articles of Incorporation (1)
3.2 EDAC's Amended and Restated By-laws (2)
31.1* Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
31.2* Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended.
32.1* Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(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.
* Filed herewith.