EXHIBIT 13
EDAC TECHNOLOGIES CORPORATION
ANNUAL REPORT
2003
2003 Annual Report
To Our Shareholders:
Paraphrasing the words of W. Edwards Deming,
If survival is not mandatory, then change is not necessary...
For EDAC, survival was mandatory, therefore change was necessary and
2003 was a year of change... and changed we have! We consolidated
operations, restructured our debt, reduced our overheads and improved
our operating efficiencies. The result is that even with slightly lower
sales in 2003 compared to 2002, our operating loss was reduced by
$2,818,907 from a loss of ($2,961,959) in 2002 to a loss of ($143,052)
in 2003, exclusive of the gain on debt restructuring of $7.3 million.
The Company believes that its credit facilities and cash to be provided
by operations will be adequate to meet the Company's needs for 2004.
Order activity in the past several months has been robust, sales
backlog has increased from $15.7 million at September 27, 2003 to $20.4
million at February 28, 2004.
Our primary objective for 2004 is to build on the achievements of the
past year. We will continue to transition EDAC into a balanced business
in delivering products, engineering and manufacturing services. In the
product development area, we have introduced new proprietary products
for the woodworking and automotive markets, and in July 2003, we
entered into an exclusive worldwide licensing agreement to develop,
design, manufacture and market a patented hydrostatic spindle product
line. In the manufacturing area, for the first time in five years we
have invested in capital equipment by adding new machining centers and
creating manufacturing cells.
EDAC has truly risen from the ashes, and we believe is now well
positioned to grow and deliver shareholder value by achieving
profitability and improved cash flow. The entire team at EDAC continues
to be committed to maximizing the value of our Company for you, our
shareholders.
Sincerely yours,
/s/ Dominick A. Pagano
Dominick A. Pagano
President and Chief Executive Officer
EDAC TECHNOLOGIES: ORGANIZATION AND MISSION
EDAC Technologies Corporation, founded in 1946, is a diversified public
corporation. The Company is comprised of four product line groups: Apex Machine
Tool, Gros-Ite Spindles, Gros-Ite Precision Components, and Gros-Ite Precision
Large Machining.
APEX MACHINE TOOL designs and manufactures highly sophisticated fixtures,
precision gauges, close tolerance plastic injection molds, precision component
molds for composite parts and specialized machinery. A unique combination of
highly skilled toolmakers and machinists and leading edge technology has enabled
Apex to provide exacting quality to customers who require tolerances to +/-
..0001 inches.
GROS-ITE SPINDLES designs, manufactures and repairs all types of precision
rolling element bearing spindles including hydrostatic and other precision
rotary devices. Custom spindles are completely assembled in a Class 10,000 Clean
Room and are built to suit any manufacturing application up to 100 horsepower
and speeds in excess of 100,000 revolutions per minute. Gros-Ite Spindles'
repair service can recondition all brands of precision rolling element spindles,
domestic or foreign. This product line serves a variety of customers: machine
tool manufacturers, special machine tool builders and integrators, industrial
end-users, and powertrain machinery manufacturers and end-users. Geographical
markets include the U.S., Canada, Mexico, Europe and Asia, although almost all
of Gros-Ite Spindles' sales come from the United States.
GROS-ITE PRECISION COMPONENTS builds and assembles complex, close tolerance
components for the aircraft jet engine, ground turbine and medical industries.
This product line excels in 4 and 5 axis CNC milling of forgings and castings
made from high temperature alloys. Precision assembly services include assembly
of jet engine sync rings and medical devices, aircraft welding and riveting,
post-assembly machining and sutton barrel finishing. Geographical markets
include the U.S., Canada, Mexico, Europe and Asia, although almost all of this
product line's sales come from the United States.
GROS-ITE PRECISION LARGE MACHINING produces low pressure turbine cases, hubs,
rings and disks for all major aircraft engine and ground turbine manufacturers.
This product line specializes in such difficult-to-machine alloys as waspalloy,
hastalloy, inconnel, titanium, high nickel alloys, aluminum and stainless
steels. Geographical markets include the U.S.
EDAC is ISO 9001 Certified, and BS EN 9001, ANSI 900, and ASQC Q9001-compliant.
Additionally, Apex is ISO 9002 Certified, and is recognized as one of the
leading design and manufacturing providers in the U.S.
RESTRUCTURING
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.
MISSION
The mission of EDAC is to be the company of choice for customers, shareholders,
employees and the community at large. We believe that this can be achieved by
being flexible and easy to work with, providing customers with benchmark
quality, service and value, providing shareholders superior return on their
investment, developing a world class working environment for employee heath,
safety, security and career growth, and acting as a good corporate citizen
through support of the local community and charities.
MARKETING AND COMPETITION
EDAC designs, manufactures and services tooling, fixtures, molds, jet engine
components and machine spindles, satisfying the highest precision requirements
of some of the most exacting customers in the world. This high skill level has
been developed through more than 50 years of involvement with the aerospace
industry. Beyond aerospace, EDAC continues to expand its manufacturing services
to a broad base of industrial customers.
Most of the competition for design, manufacturing and service in precision
machining and machine tools comes from independent firms, many of which are
smaller than EDAC. This point of difference often gives us an advantage in that
we can bring a broader spectrum of support to customers who are constantly
looking for ways to consolidate their vendor base. We also compete against the
in-house manufacturing and service capabilities of larger customers. We believe
that the trend of these large manufacturers is to outsource activities beyond
their core competencies, which presents us with another favorable opportunity.
The market for our products and precision machining capabilities continues to
change with the development of more sophisticated use of business-to-business
tools on the internet. We are actively involved in securing new business leads
through the web and have participated in internet auctions and research for
quoting opportunities. Moreover, the sales and marketing team at EDAC has
developed an updated website (www.edactechnologies.com) with interactive tools
to make it easier for customers to do business with us.
EDAC's competitive advantage is enhanced not only by the extra level of
expertise gained through our experience in the aerospace industry, but also by
our ability to provide customers with high quality, high precision, and quick
turnaround support, from design to delivery. We believe that this comprehensive,
end-to-end service capability sets us apart. It is also indicative of our
commitment to seek continuous improvement and utilization of the latest
technology. Such commitment, we believe, will boost our productivity and make us
ready to respond effectively to the increasing price pressure in a very
competitive marketplace.
MARKET INFORMATION
The Company's Common Stock trades on The OTC Bulletin Board under the symbol:
"EDAC.OB".
High and low sales prices per share during each fiscal quarter of the past two
fiscal years were as follows:
2003 2002
High Low High Low
---- --- ---- ---
First Quarter $ .95 $ .51 $ 2.22 $ 1.53
Second Quarter 1.25 .58 1.95 .62
Third Quarter 1.00 .60 .88 .37
Fourth Quarter 1.30 1.01 .75 .31
The information provided above reflects inter-dealer prices, without retail
mark-ups, markdowns or commissions and may not represent actual transactions.
The approximate number of shareholders of record plus beneficial shareholders of
the Company's Common Stock at February 16, 2004 was 1,245.
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 D to the Company's
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
report).
SELECTED FINANCIAL INFORMATION
The following selected financial information for each of the years in the five -
year period ended January 3, 2004 has been derived from the Company's audited
financial statements. The following data is qualified by reference to and should
be read in conjunction with the Company's audited financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company operates on a fiscal year basis. Its fiscal year and fiscal quarters
end on the Saturday closest to the end of the calendar year and calendar
quarters, respectively. Fiscal 2003 was a 53-week year that ended on January 3,
2004. The years ended January 3, 2004, December 28, 2002 and December 29, 2001
are referred to herein as 2003, 2002 and 2001, respectively.
SELECTED INCOME STATEMENT DATA
2003 2002 2001 2000 1999
----------------------------------------------------------------
(In thousands, except per share data)
Sales $ 25,677 $ 25,850 $ 44,911 $ 47,252 $ 52,395
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of changes in $ 6,579 $ (3,026) $ 5,413 $ (428) $ (4,058)
accounting principles
Cumulative effect of adoption of SFAS No.142 - (10,381) - - -
Cumulative effect of adoption of SAB 101 - - - (224) -
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 6,579 $ (13,407) $ 5,413 $ (652) $ (4,058)
========== ========== ========== ========== ==========
Basic per common share data:
Income (loss) before cumulative effect of changes
in accounting principles $ 1.49 $ (0.69) $ 1.25 $ (0.10) $ (0.95)
Cumulative effect of adoption of SFAS No.142 - (2.35) - - -
Cumulative effect of adoption of SAB 101 - - - (0.05) -
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 1.49 $ (3.04) $ 1.25 $ (0.15) $ (0.95)
========== ========== ========== ========== ==========
Diluted per common share data:
Income (loss) before cumulative effect of changes in
accounting principles $ 1.46 $ (0.69) $ 1.18 $ (0.10) $ (0.95)
Cumulative effect of adoption of SFAS No.142 - (2.35) - - -
Cumulative effect of adoption of SAB 101 - - - (0.05) -
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 1.46 $ (3.04) $ 1.18 $ (0.15) $ (0.95)
========== ========== ========== ========== ==========
SELECTED BALANCE SHEET DATA
2003 2002 2001 2000 1999
-----------------------------------------------------------------
(In thousands)
Current assets $ 7,920 $ 10,788 $ 13,150 $ 15,870 $ 15,460
Total assets 18,166 20,585 37,198 41,926 44,755
Current liabilities 8,624 8,224 24,555 14,335 35,053
Working capital (deficit) (704) 2,564 (11,405) 1,535 (19,593)
Long-term liabilities 6,796 16,763 2,671 22,155 3,614
Shareholders' equity (deficit) 2,745 (4,401) 9,972 5,436 6,088
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In October 2002, the Company adopted a consolidation plan. Under this
plan, the Company consolidated its four independent divisions into one operating
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 recorded a write-down of $692,000 in 2002
(included in cost of sales in the accompanying consolidated statement of
operations) for certain land, building and equipment held for sale as a result
of the Company's restructuring and the subsequent recognition in 2003 of a gain
of $177,000 from the reclassification of the land and building to be held and
used. The Company incurred costs associated with the consolidation of $112,000
in the fourth quarter of 2002 and $159,000 in the first quarter of 2003 which
were included in cost of sales.
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):
2003 2002 2001
---- ---- ----
Aerospace customers $ 17,449 $ 19,436 $ 29,624
Other 8,228 6,414 15,287
---------- ---------- ----------
$ 25,677 $ 25,850 $ 44,911
========== ========== ==========
2003 VS. 2002
SALES
The Company's sales decreased $173,000, or 0.7%, from $25,850,000 in
2002 to $25,677,000 in 2003. Sales to non-aerospace customers increased
$1,814,000, or 28.3% from 2002 to 2003, primarily because of increased sales to
the machine tool industry. Sales to aerospace customers decreased $1,987,000, or
10.2% from 2002 to 2003, primarily due to the continued decline in the
commercial jet engine market. As of January 3, 2004, sales backlog was
approximately $18,000,000, compared to approximately $18,500,000 at December 28,
2002. The decrease is primarily due to the sales backlog decrease in the
Engineered Precision Components group offset by a sales backlog increase in the
Apex Machine Tool group. The Company presently expects to complete approximately
$10,000,000 of the January 3, 2004 backlog during the 2004 fiscal year.
Sales and sales increases (decreases) for 2003 compared to 2002 by product line
were as follows (in thousands):
Product Line 2003 2002 Change
------------ ---- ---- ------
Engineered Precision Components $ 6,108 $ 8,992 $ (2,884)
Precision Engineered Technologies (Spindles) 3,153 2,820 333
Precision Large Machining 1,536 1,838 (302)
Apex Machine Tool Co. 14,880 12,200 2,680
---------- ---------- ----------
Total $ 25,677 $ 25,850 $ (173)
========== ========== ==========
Sales in the Engineered Precision Components group decreased
$2,884,000, or 32.1%, to $6,108,000 in 2003 compared to $8,992,000 in 2002. This
division operated under a long-term purchasing agreement with the Company's
largest customer until December 31, 2002. The Company and the customer agreed
not to renew the long-term purchasing agreement beyond its maturity date of
December 31, 2002. However, the Company and the customer agreed that the Company
would continue to quote on the customer's requirements.
Sales for the Apex Machine Tool division increased $2,680,000, or
22.0%, to $14,880,000 in 2003 compared to $12,200,000 in 2002. This increase is
due to the increased activity in the later part of the year. We believe that we
can generate new customers and increase our market penetration through quick
turnaround of orders, value added to our customers and high quality product
delivered in a timely manner.
Sales in the Precision Engineered Technologies group increased
$333,000, or 11.8%, to $3,153,000 in 2003 compared to $2,820,000 in 2002. This
increase was due to increased sales of repair work to the machine tool industry.
Sales in the Precision Large Machining group decreased $302,000, or
16.4%, to $1,536,000 in 2003 compared to $1,838,000 in 2002. The decrease in
sales was due to the overall decrease in business from the division's major
customers due to a continued decline in the commercial jet engine market.
COST OF SALES
Cost of sales as a percentage of sales decreased in 2003 to 89.4% from
96.1% in 2002. This decrease was due to a write-down of $692,000 incurred in
2002 for certain land, building and equipment held for sale as a result of the
Company's restructuring and the subsequent recognition in 2003 of a gain of
$177,000 from the reclassification of the land and building to be held and used.
Without the write-down, cost of sales as a percentage of sales in 2002 would
have been 93.5%. Further, cost of sales decreased as a percentage of sales in
2003 due to the Company's consolidation of its four independent divisions into
one operating entity, allowing the Company to reduce overhead, improve operating
efficiencies and share resources. The Company incurred costs associated with the
consolidation of $112,000 in the fourth quarter of 2002 and $159,000 in the
first quarter of 2003 which were included in cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2,870,000 in 2003,
representing a decrease of $1,091,000, or 27.5%, from the 2002 level of
$3,961,000. The decrease was mainly the result of a $666,000 decrease in
compensation due to layoffs and severance expense incurred in 2002.
Additionally, $382,000 of the decrease was due to reduced professional expenses.
GAIN ON DEBT RESTRUCTURING
The Company recorded a gain on debt restructuring in 2003 of $7,253,203
which amount represents the difference between the carrying value of the then
existing indebtedness to the Company's Former Lender of $9,727,861 (including
the total amount of interest that would have been payable over the life of the
note) and the total amount of remaining payments to such Former Lender of
$2,474,658, including interest and fees incurred under the terms of the
refinancing, (see Note D to consolidated financial statements).
OTHER INCOME
Other income of $147,000 in 2003 consisted primarily of an inventory
carrying charge of $103,000 and the gain on sale of equipment of $31,000. Other
income of $35,000 in 2002 consisted primarily of a gain on the sale of an asset.
INTEREST EXPENSE
Interest expense for 2003 decreased $64,000 to $678,000 from $742,000
in 2002. This was primarily due to lower interest rates and lower indebtedness
resulting from lower inventory levels throughout the year.
(BENEFIT FROM) PROVISION FOR INCOME TAXES
Under Internal Revenue Code Section 108, income realized from a
discharge of indebtedness or cancellation of debt is excluded from taxable
income when a taxpayer is insolvent to the extent of the insolvency. The
taxpayer is then required to reduce certain tax attributes including net
operating losses, general business credits, minimum tax credits, capital loss
carryforwards and asset bases. The Company applied Section 108 to its gain on
debt restructuring to the extent of insolvency, resulting in a substantial
exclusion from income related to the gain on debt restructuring. Net operating
losses were then applied to that portion of the gain that exceeded the exclusion
from income provided under Section 108.
2002 VS. 2001
SALES
Consolidated sales decreased $19,061,000, or 42.4%, from $44,911,000 in
2001 to $25,850,000 in 2002. Aerospace sales decreased $10,188,000, or 34%, from
2001 to 2002. This was a result of a rapid decline in the ground-based turbine
market and a continued decline in the commercial jet engine market. Sales to
non-aerospace customers decreased $8,873,000, or 58% from 2001 to 2002,
primarily because many of the Company's customers have been faced with major
downturns in their business due to the national recession. As of December 28,
2002, sales backlog was approximately $18,500,000, compared to approximately
$29,000,000 at December 29, 2001. The decrease is primarily due to the sales
backlog decrease in the Engineered Precision Components group.
Sales in the Engineered Precision Components group decreased
$8,851,000, or 49.6%, to $8,992,000 in 2002 compared to $17,843,000 in 2001.
This division operated under a long-term purchasing agreement with the Company's
largest customer until December 31, 2002. The Company and the customer agreed
not to renew the long-term purchasing agreement beyond its maturity date of
December 31, 2002. However, the Company and the customer agreed that the Company
would continue to quote on the customer's requirements.
Sales for the Apex Machine Tool division decreased $3,527,000, or
22.4%, to $12,200,000 in 2002 compared to $15,727,000 in 2001. Major customers
in the high technology area were severely slowed by the national recession. Apex
also faced increased competition from foreign markets.
Sales in the Precision Engineered Technologies group decreased
$4,289,000, or 60.3%, to $2,820,000 in 2002 compared to $7,109,000 in 2001. This
decrease was due to an overall decrease in business from our major customers as
a result of downturns in their business from the national recession.
Sales in the Precision Large Machining group decreased $2,394,000, or
56.6%, to $1,838,000 in 2002 compared to $4,232,000 in 2001. The decrease in
sales was due to the overall decrease in business from the division's major
customers due to a continued decline in the commercial jet engine market.
COST OF SALES
Cost of sales as a percentage of sales increased in 2002 to 96.1% from
81.1% in 2001. This increase was caused by lower sales levels to cover fixed
manufacturing costs. In addition, a rapid and dramatic decline in the
ground-based turbine and jet engine markets caused severe schedule shifting,
delays of orders, cancellation of orders and smaller production quantities, all
of which negatively impacted productivity and gross margins in the Engineered
Precision Components and Precision Large Machining areas in 2002. Additionally,
a write-down of $692,000 was recorded in 2002 for certain land, buildings and
equipment to be held for sale as a result of the Company's restructuring and
$112,000 was recorded for plant consolidation expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $3,961,000 in 2002,
representing a decrease of $823,000, or 17.2%, from the 2001 level of
$4,784,000. The decrease was mainly the result of a $760,000 decrease in
compensation and commissions due to lower sales levels and layoffs and a
$284,000 decrease in goodwill amortization due to the discontinuance of
amortization of goodwill as of January 1, 2002, partially offset by a $432,000
increase in legal and consulting fees and by $330,000 in severance costs. The
decrease was also due to costs of $451,000 incurred in the 2001 fiscal year
associated with the terminated sale of the Company's Engineered Precision
Components division.
GAIN ON DEBT RESTRUCTURING
The Company recorded a gain on debt restructuring in 2001 of $4.2
million, which represents the difference between the carrying value of the then
existing debt to the Company's Former Lender of $13,686,581 (including accrued
interest payable and deferred financing fees) and the total amount of remaining
payments to such Former Lender of $9,462,347, including interest, under the
terms of the refinancing, (see Note D to consolidated financial statements).
OTHER INCOME
Other income of $35,000 in 2002 consisted primarily of a gain on the
sale of an asset. Other income of $98,000 in 2001 consisted primarily of a
recovery of an investment written off in 2000.
INTEREST EXPENSE
Interest expense for 2002 decreased $398,000 to $742,000 from
$1,140,000 in 2001. This was primarily due to lower indebtedness resulting from
lower accounts receivable and inventory levels throughout the year, partially
offset by the Company's primary lender charging default interest rates beginning
in June 2002.
(BENEFIT FROM) PROVISION FOR INCOME TAXES
The benefit for income taxes relating to 2002 primarily represents the
refund of a portion of the alternative minimum taxes paid in 2001. The provision
for 2001 primarily represents alternative minimum taxes paid during 2001 as a
result of the gain on debt restructuring. No benefit has been recorded for net
operating losses in 2002 since the Company provided a valuation allowance to
reserve against deferred tax assets, due to uncertainty of realization.
CUMULATIVE EFFECT OF ADOPTION OF SFAS 142
As of June 30, 2002, the Company determined that it had failed the step
one test under SFAS No. 142. During the quarter ended September 28, 2002, the
Company completed the testing of the goodwill balance as of December 30, 2001.
The test indicated that the goodwill, which related entirely to the Apex Machine
Tool acquisition in 1998, was impaired. The impairment is a result of the
decline in the fair market value of Apex since the acquisition date primarily
due to a reduction in Apex's sales volumes. The impairment loss was computed
using the estimated fair market value of Apex as of such date. The Company
recorded the impairment charge of $10,381,077 as a cumulative effect of a change
in accounting principle, as of December 30, 2001, and restated the Company's
first quarter of 2002 results (see Note J to the consolidated financial
statements). No tax benefit was recorded due to uncertainty of realization of
the related deferred tax asset.
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.
A decrease in product demand would impact the availability of funds. Of
particular importance to the Company's liquidity are cash flows generated from
operating activities, capital expenditure levels and borrowings on the revolving
credit facility.
Revolving Line of Credit and Long-Term Debt
Long-term debt consisted of the following as of January 3, 2004 and December 28,
2002:
2003 2002
------------ ------------
Term loans payable to primary lender $ 2,345,605 $ 4,068,451
Note payable 682,080 -
Notes payable to former lender (1) 1,000,000 9,462,347
Mortgage loan to bank 1,901,043 1,941,572
Note payable to former shareholders of Apex Machine
Tool Company, Inc. 1,659,638 1,659,638
Equipment notes payable 16,467 33,662
Capital lease obligations 320,499 235,468
------------ ------------
7,925,332 17,401,138
Less - current portion of long-term debt (3) 2,254,142 (2) 2,250,091
------------ ------------
$ 5,671,190 $ 15,151,047
============ ============
(1) The 2002 amount was refinanced in April 2003 which resulted in a gain of
$7.3 million as discussed below.
(2) After consideration of the April 2003 refinancing.
(3) After consideration of the March 2004 refinancing.
On September 29, 2000, the Company refinanced certain of its loan
facilities with its Former Lender with financing from a new lender (primary
lender). The new credit facility includes a revolving credit line in an amount
up to $8,000,000, and term loans of $7,364,000. The revolving credit line is
limited to an amount determined by a formula based on percentages of the
Company's receivables and inventory. As of January 3, 2004, $2,550,832 was
outstanding on the revolver and $650,000 was available for additional borrowings
on the revolver with the new lender. The term loans are payable in monthly
principal payments of $122,734 plus accrued interest with a balloon payment due
upon expiration of the facility on September 29, 2003 (amended to January 3,
2005). Interest rates are based on the index rate (30 day dealer placed
commercial paper) plus 3.75% (4.81% at January 3, 2004) for the revolving credit
line and the index rate plus 4% (5.06% at January 3, 2004) for the term loans.
The primary lender has a first security interest in accounts receivable,
inventory, equipment and other assets.
On April 3, 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 of $9,727,861, including accrued interest and fees, and the payments due
under the new notes of $2,474,658, including interest and fees. The $1.325
million note payable bears interest at 7% per annum and is payable 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 "April 2003 Refinancing"). The classification of
long-term debt has been determined in the accompanying December 28, 2002
consolidated balance sheet based on the repayment terms after consideration of
the April 2003 Refinancing.
On January 15, 2004, the Company's primary lender again amended the
Company's revolving credit facility and term loans. Under the terms of the
amended agreement, the lender increased the availability on the Company's
revolving line of credit by $400,000 and the financial covenant requirements
were revised commencing in the first quarter of 2004. The Company was not in
compliance with one of its financial covenants for the fourth quarter of 2003.
The primary lender subsequently waived this event of default.
The Company has a mortgage loan, which is secured by a mortgage on the
Company's real property located on New Britain Avenue in Farmington Connecticut,
and 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%. This loan was amended in October 2003 to provide for payments
of $16,423 including interest at 7.5% through February 28, 2006.
The note payable to the former shareholders of Apex Machine Tool
Company Inc. was amended on January 18, 2003 to provide for monthly payments of
interest only through December of 2003 and to extend the note's maturity date
from January 2, 2003 to January 5, 2004. The note was further amended to extend
the note's maturity date to April 5, 2004.
On March 5, 2004, a local bank refinanced the note payable to the
former shareholders of Apex Machine Tool Company Inc, paying that note in full
(the "March 2004 Refinancing"). The new mortgage loan, which is secured by a
mortgage on the Company's real property located at Spring Lane in Farmington
Connecticut, is due in 120 monthly installments of $12,452 including interest at
6.49% with a balloon payment due on April 1, 2014. The monthly payment will be
adjusted by the bank every 5 years to reflect interest at the FHLBB Amortizing
Advance Rate plus 2.75%. The classification of long-term debt has been
determined in the accompanying January 3, 2004 consolidated balance sheet based
on the repayment terms after consideration of the March 2004 Refinancing.
CASH FLOW
The following is selected cash flow data from the Consolidated
Statements of Cash Flows (in thousands):
2003 2002 2001
---- ---- ----
Net cash provided by
operating activities...... $ 760 $ 3,187 $ 3,211
Net cash used in
investing activities...... (119) (204) (296)
Net cash used in
financing activities...... (755) (2,952) (2,985)
2003
Net cash provided by operating activities resulted primarily from the
receipt of refundable income taxes and the reduction in inventory partially
offset by cash operating losses.
Net cash used in investing activities consisted primarily of
expenditures for machinery partially offset by proceeds for the sale of
machinery and equipment. Estimated capital expenditures for 2004 are
approximately $750,000.
Net cash used in financing activities resulted primarily from the
repayment of bank debt, net of borrowings on the revolving credit line.
As of January 3, 2004, $650,000 was available for additional borrowings
on the revolving credit loan.
2002
Net cash provided by operating activities resulted primarily from
reductions in accounts receivable and inventory and an increase in accounts
payable partially offset by cash operating losses.
Net cash used in investing activities consisted primarily of
expenditures for machinery.
Net cash used in financing activities resulted primarily from the
repayment of bank debt.
As of December 28, 2002, $1,163,460 was available for additional
borrowings on the revolving credit loan.
2001
Net cash provided by operating activities resulted primarily from cash
earnings and a reduction in accounts receivable and inventory offset partially
by lower accounts payable and other current liabilities.
Net cash used in investing activities consisted primarily of
expenditures for machinery.
Net cash used in financing activities resulted primarily from repayment
of bank debt.
PENSION
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.
Pension expense for the plan was $259,976 and $146,476 for the years
ended January 3, 2004 and December 28, 2002, respectively, and is calculated
based upon a number of actuarial assumptions, including an expected long-term
rate of return on our plan assets of 7.0% for each year. In developing our
expected long-term rate of return assumption, we evaluated input from our
actuaries. We anticipate that our investment managers will continue to generate
long-term returns of at least 7.0%. We regularly review our asset allocation and
periodically rebalance our investments when considered appropriate. For the year
ended January 3, 2004, we realized a return of over 7%. We continue to believe
that 7.0% is a reasonable long-term rate of return on our plan assets. We will
continue to evaluate our actuarial assumptions, including our expected rate of
return, at least annually, and will adjust as necessary.
The discount rate that we utilize for determining future pension
obligations is based on a review of long-term bonds that receive one of the two
highest ratings given by a recognized rating agency. The discount rate
determined on this basis was 6.50% at December 28, 2002 and at January 3, 2004.
Based on an expected rate of return on our plan assets of 7.0%, a discount rate
of 6.5% and various other assumptions, we estimate that our pension expense
for the plan will approximate $213,000, $192,000 and $171,000 in 2004, 2005 and
2006, respectively. Future actual pension expense will depend on future
investment performance, changes in future discount rates and various other
factors related to the populations participating in our plan.
Lowering the expected long-term rate of return on our plan assets by
..5% (from 7.0% to 6.5%) would have increased our pension expense for 2003 by
approximately $20,000. Lowering the discount rate and the salary increase
assumptions by 0.5% would have increased our pension expense for 2003 by
approximately $16,000.
The value of our plan assets has increased from $4.0 million at
December 28, 2002 to $4.4 million at January 3, 2004. Further, the investment
performance returns exceeded 7% and the Company realized an actuarial gain of
$117,000 for the year ended January 3, 2004, resulting in a decrease in the
unfunded status of our plan, from $1.8 million at December 28, 2002 to $1.3
million at January 3, 2004. We believe that, based on our actuarial assumptions,
we will be required to continue to make cash contributions to our plan.
During 2003, the Company contributed $0.3 million to the plan, which
was the minimum required for the 2003 plan year. During 2004, the Company
expects to contribute $0.3 million to the plan which is the minimum required for
the 2004 plan year. In the absence of significant changes, it is estimated that
the minimum required contribution for the 2005 plan year will be approximately
$0.3 million.
INVENTORY
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 as of December 28, 2002 had not been recognized
as revenue since the terminated contracts were still subject to approval by the
customer at that time. During the subsequent six month period ended June 28,
2003, the Company received the remaining advances due under the agreement.
Additionally, during the year ended January 3, 2004, the terminated contracts
were approved by the customer and all of the remaining advances were recognized
as revenue.
SUMMARY
The Company believes the successful restructuring of our balance sheet,
together with the consolidation of our four operating divisions, has allowed the
Company to be in a better position to compete and grow our business as the
machine tool and aerospace industries have started to rebound. The Company
believes that its credit facilities and cash to be provided by operations will
be adequate to meet the Company's needs for 2004.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following represents the contractual obligations and commercial
commitments of the Company as of January 3, 2004 (in thousands):
Payments Due by Period
----------------------
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 years
--------------------------------------------------------------
Contractual Obligations
Long-Term Debt, including
current portion $ 7,925 $ 2,254 $ 1,358 $ 314 $ 3,999
Revolving Line of Credit 2,551 2,551
Operating Leases 44 11 11 8 14
--------------------------------------------------------------
Total $ 10,520 $ 4,816 $ 1,369 $ 322 $ 4,013
==============================================================
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The Company's significant accounting
policies are set forth below.
Revenue Recognition - Sales are generally recorded when goods are shipped to the
Company's customers. The Company defers revenue recognition on certain product
shipments until customer acceptance, including inspection and installation
requirements, as defined, are achieved.
Inventories- Inventories are stated at the lower of cost (first-in, first-out
method) or market. Provisions for slow moving and obsolete inventory are
provided based on historical experience and product demand.
Long-Lived Assets - Property, plant and equipment are carried at cost less
accumulated depreciation. The appropriateness and the recoverability of the
carrying value of such assets are periodically reviewed taking into
consideration current and expected business conditions.
The Company's significant accounting policies are more fully described in Note A
to the Company's Consolidated Financial Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described below, interest rate risk is the primary source of financial market
risk to the Company related to its notes payable and long-term debt.
QUALITATIVE:
Interest Rate Risk: Changes in interest rates can potentially impact the
Company's profitability and its ability to realize assets and satisfy
liabilities. Interest rate risk is present primarily in the Company's
borrowings, which have variable interest rates. The following amounts are after
consideration of the Company's 2004 refinancing.
QUANTITATIVE:
Maturing less Maturing greater
than one year than one year
------------- -------------
Revolving line of credit and Long-term debt
Amount $4,804,974 $5,671,190
Weighted average interest rate 5.3% 6.7%
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 consolidated 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 resulted in the reclassification by the Company of the 2001
extraordinary gain, of $2,822,234 (net of tax of $1,402,000) to $4,224,234 of
non-operating income. Additionally, in accordance with SFAS No. 145, the gain on
debt restructuring in 2003 of $7,253,203 has been classified as non-operating
income.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits an
amendment of FASB Statements No. 87, 88, and 106" which requires additional
disclosures about the assets, obligations, cash flows and net periodic pension
cost of defined benefit pension plans and other defined postretirement benefit
plans. The Company adopted the disclosure requirements under SFAS No. 132
(revised 2003) for the fiscal year ended January 3, 2004.
Certain factors that may affect future results of operations
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, 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 January
3, 2004. 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.
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
As of January 3, 2004 and December 28, 2002
January 3, December 28,
2004 2002
----------- ------------
ASSETS
CURRENT ASSETS:
Cash $ 94,151 $ 207,501
Accounts receivable (net of allowance
for doubtful accounts of $234,000
as of January 3, 2004 and $273,000
as of December 28, 2002) 3,154,498 2,891,449
Inventories, net 4,611,253 5,427,936
Prepaid expenses and other current assets 60,424 74,891
Refundable income taxes - 641,193
Land, building and equipment held for sale - 1,545,000
----------- ------------
Total current assets 7,920,326 10,787,970
----------- ------------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 632,821 394,821
Buildings 6,280,988 4,717,306
Machinery and equipment 18,571,819 18,695,413
----------- -----------
25,485,628 23,807,540
Less: accumulated depreciation 15,542,501 14,132,933
----------- ------------
9,943,127 9,674,607
----------- ------------
OTHER ASSETS:
Deferred income taxes 258,608 112,623
Other 43,751 10,000
----------- ------------
TOTAL ASSETS $18,165,812 $ 20,585,200
=========== ============
See notes to consolidated financial statements.
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of January 3, 2004 and December 28, 2002
January 3, December 28,
2004 2002
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving line of credit $ 2,550,832 $ 668,820
Current portion of long-term debt 2,254,142 2,250,091
Trade accounts payable 2,098,415 2,287,047
Employee compensation and amounts withheld 972,630 1,151,062
Accrued expenses 412,201 823,140
Customer advances 77,138 930,536
Deferred income taxes 258,959 112,974
------------ ------------
Total current liabilities 8,624,317 8,223,670
------------ ------------
LONG-TERM DEBT, less current portion 5,671,190 15,151,047
------------ ------------
OTHER LONG-TERM LIABILITIES 1,125,063 1,611,875
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES D and H)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued and outstanding-- 4,444,438 in 2003
and 4,416,038 in 2002 11,111 11,040
Additional paid-in capital 9,377,508 9,358,379
Accumulated deficit (5,144,009) (11,722,797)
------------ ------------
4,244,610 (2,353,378)
Less: accumulated other comprehensive loss 1,499,203 2,048,014
Treasury stock, 235 shares 165 -
------------ ------------
Total shareholders' equity (deficit) 2,745,242 (4,401,392)
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) $ 18,165,812 $ 20,585,200
============ ============
See notes to consolidated financial statements.
EDAC TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended January 3, 2004,
December 28, 2002 and December 29, 2001
FICAL YEAR
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Sales $ 25,677,087 $ 25,850,167 $ 44,910,983
Cost of Sales 22,950,242 24,850,653 36,418,480
------------ ------------ ------------
Gross Profit 2,726,845 999,514 8,492,503
Selling, General and Administrative Expenses 2,869,897 3,961,473 4,783,690
------------ ------------ ------------
(Loss) Income From Operations (143,052) (2,961,959) 3,708,813
Non-Operating Income (Expense):
Gain on Debt Restructuring 7,253,203 - 4,224,234
Other 147,126 35,446 97,971
Interest Expense (678,489) (742,112) (1,139,709)
------------ ------------ ------------
Income (Loss) Before Income Taxes and Cumulative 6,578,788 (3,668,625) 6,891,309
Effect of Change in Accounting Principle
(Benefit from) Provision for Income Taxes - (642,791) 1,478,454
------------ ------------ ------------
Income (Loss) before Cumulative Effect of Change in 6,578,788 (3,025,834) 5,412,855
Accounting Principle
Cumulative Effect of Adoption of SFAS No. 142 - (10,381,077) -
------------ ------------- ------------
Net Income (Loss) $ 6,578,788 $ (13,406,911) $ 5,412,855
============ ============= ============
Basic Per Common Share Data:
Income (loss) before cumulative effect of change in
accounting principle $ 1.49 $ (0.69) $ 1.25
Cumulative effect of adoption of SFAS No. 142 - (2.35) -
------------ ------------- ------------
Net income (loss) $ 1.49 $ (3.04) $ 1.25
============ ============= ============
Diluted Per Common Share Data:
Income (loss) before cumulative effect of change in
accounting principle $ 1.46 $ (0.69) $ 1.18
Cumulative effect of adoption of SFAS No. 142 - (2.35) -
------------ ------------- ------------
Net income (loss) $ 1.46 $ (3.04) $ 1.18
============ ============= ============
See notes to consolidated financial statements.
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
For the Fiscal Years Ended January 3, 2004,
December 28, 2002 and December 29, 2001
Additional Accumulated other
Common Paid-in Accumulated Comprehensive Treasury
Stock Capital Deficit (Loss)income Stock Total
------------ ------------ ------------ ----------------- -------- ------------
Balances at December 30, 2000 $ 10,673 $ 9,153,941 $ (3,728,741) $ - $ - $ 5,435,873
Comprehensive income:
Net income - - 5,412,855 - - 5,412,855
Minimum pension liability,
net of tax benefit of $517,650 - - - (962,985) - (962,985)
------------
Total comprehensive income 4,449,870
------------
Stock options issued to non-employee - 12,900 - - - 12,900
Exercise of stock options including
income tax benefit 192 73,454 - - - 73,646
------------ ------------ ------------ ----------------- -------- ------------
Balances at December 29, 2001 10,865 9,240,295 1,684,114 (962,985) - 9,972,289
Comprehensive loss:
Net loss - - (13,406,911) - - (13,406,911)
Minimum pension liability,
net of $0 tax benefit - - - (1,085,029) - (1,085,029)
------------
Total comprehensive loss (14,491,940)
------------
Stock option modification - 13,884 - - - 13,884
Exercise of stock options 175 104,200 - - - 104,375
------------ ------------ ------------ ----------------- -------- ------------
Balances at December 28, 2002 11,040 9,358,379 (11,722,797) (2,048,014) - (4,401,392)
Comprehensive income:
Net income - - 6,578,788 - - 6,578,788
Minimum pension liability,
net of $0 tax provision - - - 548,811 - 548,811
------------
Total comprehensive income 7,127,599
------------
Stock option modification - 5,000 - - - 5,000
Exercise of stock options 71 14,129 - - - 14,200
Treasury stock - - - - (165) (165)
------------ ------------ ------------ ----------------- -------- ------------
Balances at January 3, 2004 $ 11,111 $ 9,377,508 $ (5,144,009) $ (1,499,203) $ (165) $ 2,745,242
============ ============ ============ ================= ======== ============
See notes to consolidated financial statements.
EDAC TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended January 3, 2004,
December 28, 2002 and December 29, 2001
FISCAL YEAR
2003 2002 2001
----------- ------------ -----------
Operating Activities:
Net income (loss) $ 6,578,788 ($13,406,911) $ 5,412,855
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of adoption of SFAS No. 142 - 10,381,077 -
Gain on debt restructuring (7,253,203) - (4,224,234)
Depreciation and amortization 1,814,513 1,990,913 2,304,725
Write-(up)/down of land, building and equipment (177,000) 692,088 -
Deferred income taxes - - (517,000)
(Gain) on sale of property, plant and equipment (38,008) (41,025) (22,780)
Stock option grants and modifications 5,000 13,884 12,900
Change in inventory reserve (66,705) (267,788) (20,763)
Changes in operating assets and liabilities:
Accounts receivable (263,049) 2,188,657 904,733
Refundable income taxes 641,193 (423,590) (217,603)
Inventories 883,388 1,517,109 351,170
Prepaid expenses and other current assets 14,467 14,178 1,049,599
Trade accounts payable (188,632) 546,137 (1,017,159)
Other current liabilities and other long-term liabilities (1,190,421) (17,633) (805,384)
----------- ------------ -----------
Net cash provided by operating activities 760,331 3,187,096 3,211,059
----------- ------------ -----------
Investing Activities:
Additions to property, plant and equipment (259,927) (257,656) (332,515)
Proceeds from sales of property, plant and equipment 141,189 53,400 36,475
----------- ------------ -----------
Net cash (used in) investing activities (118,738) (204,256) (296,040)
----------- ------------ -----------
Financing Activities:
Increase (decrease) in revolving line of credit 1,882,012 (1,286,318) (3,288,355)
Repayments of long-term debt (2,582,090) (1,793,918) (1,821,028)
Borrowings on long-term debt - 24,277 2,106,290
Deferred loan fees (69,065) - (60,939)
Proceeds from exercise of common stock options 14,200 104,375 78,547
----------- ------------ -----------
Net cash used in financing activities (754,943) (2,951,584) (2,985,485)
----------- ------------ -----------
(Decrease) increase in cash (113,350) 31,256 (70,466)
Cash at beginning of year 207,501 176,245 246,711
----------- ------------ -----------
Cash at end of year $ 94,151 $ 207,501 $ 176,245
=========== ============ ===========
Supplemental Disclosure of
Cash Flow Information:
Interest paid $ 704,800 $ 731,410 $ 1,203,549
Income taxes paid (refunded) (697,068) - 1,200,472
Non-Cash Transaction:
Capital lease obligation 168,973 - 255,000
See notes to consolidated financial statements.
EDAC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended January 3, 2004, December 28, 2002 and December 29, 2001
NOTE A -- ORGANIZATION AND BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
The accompanying consolidated financial statements include EDAC Technologies
Corporation (the "Company") and its wholly owned subsidiaries, Gros-Ite
Industries Inc. and Apex Machine Tool Company, Inc. The Company provides
complete design, manufacture and service meeting the precision requirements of
customers for tooling, fixtures, molds, jet engine components and machine
spindles.
In October 2002, the Company adopted a consolidation (restructuring) plan. Under
the plan, the Company consolidated its four independent divisions into one
operating 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 $112,000
in the fourth quarter of 2002 and $159,000 in the first quarter of 2003
associated with the restructuring. Additionally, as a part of the restructuring,
the Company recorded a write-down of $692,000 in 2002 associated with certain
land, building and equipment that it was determined would be marketed for sale.
All such restructuring costs are included in cost of sales in the accompanying
consolidated statements of operations.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: All significant intercompany transactions and
balances have been eliminated in the consolidated financial statements.
Fiscal Year: The Company's fiscal year is a 52 or 53-week period ending on the
Saturday closest to December 31. Fiscal 2003 was a 53-week year that ended on
January 3, 2004. Fiscal years 2002 and 2001 were 52-week years that ended on
December 28, 2002 and December 29, 2001, respectively.
Estimates: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain of the amounts
and disclosures reflected in the consolidated financial statements. Actual
results could differ from those estimates.
Cash and Cash Equivalents: For the purpose of the statement of cash flows, the
Company defines cash equivalents as highly liquid instruments with an original
maturity of three months or less. The Company had no cash equivalents at January
3, 2004 and December 28, 2002.
Revenue Recognition: Sales are generally recorded when goods are shipped to the
Company's customers. The Company defers revenue recognition on certain product
shipments until customer acceptance, including inspection and installation
requirements, as defined, are achieved.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. As of January 3, 2004 and December 28, 2002, inventories
consist of the following:
2003 2002
----------- -----------
Raw materials $ 673,774 $ 676,107
Work-in-progress 2,494,102 3,675,325
Finished goods 2,143,066 1,842,898
----------- -----------
5,310,942 6,194,330
Less: reserve for
excess and obsolete (699,689) (766,394)
----------- -----------
Inventories, net $ 4,611,253 $ 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 as of December 28,
1
2002 had not been recognized as revenue since the terminated contracts were
still subject to approval by the customer at that time. During the subsequent
six month period ended June 28, 2003, the Company received the remaining
advances due under the agreement. Additionally, during the twelve month period
ended January 3, 2004, the terminated contracts were approved by the customer
and all of the remaining advances were recognized as revenue.
Long-Lived Assets: Property, plant and equipment are stated at cost. Provisions
for depreciation and amortization for financial reporting purposes, are computed
using the straight-line method over 3 to 12 years for machinery and equipment
and 25 years for buildings.
The Company reviews its investments in long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company recognizes impairment when the carrying
amount of the asset exceeds its estimated fair value. During 2002, as a result
of the restructuring, the Company determined that certain land, building and
equipment would no longer be utilized and would be marketed for sale. A
write-down of these assets of $692,000 was recorded in the fourth quarter of
2002 based on estimated net proceeds to be received. During 2003, the Company
engaged a broker to sell the land and building and the equipment was sold via an
auction in the second quarter of 2003. During the last half of 2003, the Company
determined that it would utilize a portion of the building and lease the
remaining portion. Therefore, the land and building have been reclassified as to
be held and used, measured at the lower of the carrying amount before the assets
were held for sale or the fair value at the date of the decision not to sell. As
a result of the decision not to sell, the Company recognized a gain of $177,000
in 2003 based on the amount by which the reversal of the estimated costs to sell
exceed the depreciation expense that would have been recognized had the land and
building been continually classified as held and used.
Goodwill: In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." Upon the adoption of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life. Instead, SFAS No. 142
requires that goodwill be evaluated at least annually for impairment by applying
a fair-value-based test and, if impairment exists, a charge to earnings be
recorded. As of June 30, 2002, the Company determined that it had failed step
one of the impairment analysis and during the quarter ended September 28, 2002,
the Company completed the testing of the goodwill balance as of December 30,
2001. The test indicated that the goodwill, which related entirely to the Apex
Machine Tool ("Apex") acquisition in 1998, was impaired. The loss is a result of
the decline in the fair market value of Apex since the acquisition date due to a
reduction in Apex's sales volume. The impairment loss was computed using the
estimated fair market value of Apex as of such date. The Company recorded the
impairment charge of $10,381,077 as a cumulative effect of a change in
accounting principle, as of December 30, 2001, and restated the Company's first
quarter of 2002 results (see Note J). No tax benefit was recorded due to
uncertainty of realization of the related deferred tax asset.
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.
Earnings (Loss) Per Share: Basic earnings (loss) per common share is based on
the average number of common shares outstanding during the year. Diluted
earnings (loss) 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, which results in the
issuance of common shares in an amount less than the options exercised. The
number of shares used in the earnings per common share computation for fiscal
2003, 2002, and 2001, are as follows:
2003 2002 2001
--------- --------- ---------
Basic:
Weighted average common shares outstanding 4,425,309 4,408,538 4,334,969
Diluted:
Dilutive effect of stock options 76,742 - 243,071
--------- --------- ---------
Weighted average shares diluted 4,502,051 4,408,538 4,578,040
========= ========= =========
Options excluded since anti - dilutive 317,500 644,200 -
========= ========= =========
Comprehensive Income (Loss): Comprehensive income (loss), which is reported on
the accompanying consolidated statement of changes in shareholders' equity
(deficit) and comprehensive income (loss) as a component of accumulated
2
other comprehensive income (loss), consists of net income (loss) and other gains
and losses affecting shareholders' equity that, under accounting principles
generally accepted in the United States of America, are excluded from net income
(loss). For the Company, comprehensive income (loss) consists of gains and
losses related to the Company's minimum pension liability.
Stock options: The Company accounts for stock-based compensation for employees
in accordance with Accounting Principles Board Opinion No. 25 ("APB No. 25") and
the related interpretations. Under APB No. 25, no stock based employee
compensation cost is reflected in net income (loss), as all options granted to
employees have been granted at no less than fair market value on the date of
grant. Stock-based compensation for non-employees is accounted for in accordance
with EITF 96-18.
The Company has computed the pro forma disclosures required under SFAS No. 123
for options granted in fiscal 2003, 2002 and 2001 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The weighted average assumptions used
are as follows:
2003 2002 2001
------------- ------------- -------------
Risk free interest rate 2.10% 2.94 -- 3.29% 4.09%
Expected dividend yield None None None
Expected lives 3 years 3 years 3 years
Expected volatility 119% 159% 100%
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:
2003 2002 2001
-------------- -------------- --------------
Net income (loss):
As reported $ 6,578,778 $ (13,406,911) $ 5,412,855
Effect of stock-based employee
compensation expense determined
under fair valuation method for all
awards, net of any related tax effects (29,794) (71,000) (142,369)
-------------- -------------- --------------
Pro forma $ 6,548,984 $ (13,477,911) $ 5,270,486
============== ============== ==============
Net income (loss) per common share:
Basic earnings (loss) per share:
As reported $ 1.49 $ (3.04) $ 1.25
Pro forma 1.48 (3.06) 1.22
Diluted earnings (loss) per share:
As reported $ 1.46 $ (3.04) $ 1.18
Pro forma 1.45 (3.06) 1.15
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
consolidated financial statements.
3
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 resulted in the reclassification by the
Company of the 2001 extraordinary gain of $2,822,234 (net of tax of $1,402,000),
to $4,224,234 of non-operating income. Additionally, in accordance with SFAS No.
145, the gain on debt restructuring in 2003 of $7,253,203 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 December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits an amendment of
FASB Statements No. 87, 88, and 106" which requires additional disclosures about
the assets, obligations, cash flows and net periodic pension cost of defined
benefit pension plans and other defined postretirement benefit plans. The
Company adopted the disclosure requirements under SFAS No. 132 (revised 2003)
for the fiscal year ended January 3, 2004.
Reclassifications: Certain reclassifications have been made to the prior year
financial statements to conform with the current year presentation.
NOTE B -- FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
The Company's financial instruments that are subject to concentrations of credit
risk consist of cash and accounts receivable.
The Company places its cash deposits with a high credit quality financial
institution. Bank deposits may at times be in excess of the federal depository
insurance limit.
At January 3, 2004, the Company had $820,000, or 27%, of trade receivables due
from an aerospace company and $724,000 or 23% due from a consumer products
company. For 2003, 2002 and 2001, sales to an aerospace company amounted to 45%,
54% and 50%, respectively, of the Company's sales. For 2003, sales to a consumer
products company amounted to 12% of the Company's sales. The Company reviews a
customer's credit history before extending credit and typically does not require
collateral. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information. Such losses have been within management's
expectations.
Fair Value of Financial Instruments
SFAS No. 107, "Fair Value of Financial Instruments", requires disclosure of the
fair value of financial instruments for which the determination of fair value is
practicable. SFAS No. 107 defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current transaction
between willing parties.
The carrying amount of the Company's financial instruments approximates their
fair value as outlined below.
Cash, accounts receivable and accounts payable: The carrying amounts approximate
their fair value because of the short maturity of those instruments.
4
Notes payable and long-term debt: The carrying amounts approximate their fair
value as the interest rates on the debt approximates the Company's current
incremental borrowing rate.
The Company's financial instruments are held for other than trading purposes.
NOTE C -- COMMON STOCK AND STOCK OPTIONS
The Company has issued stock options that are exercisable as of January 3, 2004
from the 1996 Stock Option Plan, the 1998 Employee Stock Option Plan, the 2000
Employee Stock Option Plan and the 2000-B Employee Stock Option Plan. 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.
A summary of the status of the Company's stock option plans as of January 3,
2004, December 28, 2002 and December 29, 2001, and changes during the years then
ended is presented below:
2003 2002 2001
--------------------------- --------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at beginning of year 644,200 $ 1.36 868,200 $ 2.10 869,157 $ 2.41
Granted 10,000 1.10 251,500 0.55 278,500 1.49
Exercised (28,400) 0.50 (70,000) 1.49 (76,957) 1.02
Expired/Forfeited (85,200) 1.74 (405,500) 2.18 (202,500) 3.01
------------ ------------ ------------
Outstanding at end of year 540,600 1.36 644,200 1.36 868,200 2.10
------------ ------------ ------------
Options exercisable at year-end 455,435 1.48 420,700 1.74 579,700 2.48
------------ ------------ ------------
Weighted-average fair
value of options granted
during the year $ 1.04 $ 0.44 $ 0.95
------------ ------------ ------------
The following table summarizes information about stock options outstanding at
January 3, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE AT CONTRACTUAL EXERCISE AT EXERCISE
RANGE 1/3/04 LIFE (IN YEARS) PRICE 1/3/04 PRICE
- -------------- ------------ --------------- --------- ---------- ---------
$0.50 to $1.00 314,100 7.85 0.68 252,099 0.71
$1.01 to $2.00 129,500 7.77 1.31 106,336 1.32
$2.01 to $5.91 97,000 4.18 3.63 97,000 3.63
------- -------
$0.50 to $5.91 540,600 6.60 1.36 455,435 1.48
======= =======
5
During 2003, the expiration date for vested stock options previously granted to
a former director of the Company was changed to May 20, 2006. In accordance with
this modification, the Company recorded a charge of $5,000 in the fourth quarter
of 2003.
During 2002, the expiration date for vested stock options previously granted to
the Company's former President and Chief Executive Officer was extended to March
31, 2003. Additionally, the Company granted options to purchase a total of
39,000 shares to the former Executive Vice President and CFO and to former
Directors at exercise prices from $0.45 to $0.51 per share in exchange for
existing options to purchase 240,000 shares at exercise prices ranging from
$1.00 to $7.73 per share. In accordance with these modifications and grants, the
Company recorded charges of approximately $5,500 and $8,400 in the third and
fourth quarter of 2002, respectively.
NOTE D -- NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
2003 2002
------------ ------------
Term loans payable to primary lender $ 2,345,605 $ 4,068,451
Note payable 682,080 -
Note payable to former lender ("Note to Former Lender") (1) (2) 1,000,000 9,462,347
Mortgage loan to bank 1,901,043 1,941,572
Note payable to former shareholders of Apex Machine
Tool Company, Inc. 1,659,638 1,659,638
Equipment notes payable due in 36 monthly principal
payments of $700 and $674. 16,467 33,662
Capital lease obligations 320,499 235,468
------------ ------------
7,925,332 17,401,138
Less - current portion of long-term debt (4) 2,254,142 (3) 2,250,091
------------ ------------
$ 5,671,190 $ 15,151,047
============ ============
(1) See below for a discussion of the April 1, 2003 Refinancing.
(2) 2002 amount includes $2,462,347 of estimated interest recorded in accordance
with accounting for troubled debt restructurings.
(3) After consideration of the April 2003 Refinancing as discussed below.
(4) After consideration of the March 2004 Refinancing as discussed below.
On September 29, 2000, the Company refinanced certain of its loan facilities
with its Former Lender with financing from a new lender (primary lender). The
new credit facility includes a revolving credit line in an amount up to
$8,000,000, and term loans of $7,364,000. The revolving credit line is limited
to an amount determined by a formula based on percentages of the Company's
receivables and inventory. As of January 3, 2004, $2,550,832 was outstanding on
the revolver and $650,000 was available for additional borrowings on the
revolver with the primary lender. The term loans are payable in monthly
principal payments of $122,734 plus accrued interest with a balloon payment due
upon expiration of the facility on September 29, 2003 (amended to January 3,
2005). Interest rates are based on the index rate (30 day dealer placed
commercial paper) plus 3.75% (4.81% at January 3, 2004) for the revolving credit
line and the index rate plus 4% (5.06% at January 3, 2004) for the term loans.
The primary lender has a first security interest in accounts receivable,
inventory, equipment and other assets.
6
The 2001 refinancing resulted in the forgiveness of certain indebtedness and
accrued interest payable to the Former Lender, which was accounted for as a
troubled debt restructuring. Accordingly, the Company recorded a gain in the
first quarter of 2001 of $4.2 million, which amount represents the difference
between the carrying value of the then existing debt to the Former Lender of
$13,686,581 (including accrued interest payable and deferred financing fees) and
the total amount of remaining payments to the Former Lender of $9,462,347,
including interest, under the terms of the refinancing. In accordance with the
accounting for troubled debt restructurings, no interest expense was recorded on
the $7 million obligation after February 5, 2001, since the actual variable rate
did not exceed 9.5%, the interest rate considered in determining the amount of
the gain to be recorded.
On April 3, 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 of
$9,727,861, including accrued interest and fees, and the payments due under the
new notes of $2,474,658, including interest and fees. The $1.325 million note
payable bears interest at 7% per annum and is payable 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
"April 2003 Refinancing"). The classification of long-term debt has been
determined in the accompanying December 28, 2002 consolidated balance sheet
based on the repayment terms after consideration of the April 2003 Refinancing.
On January 15, 2004, the Company's primary lender again amended the Company's
revolving credit facility and term loans. Under the terms of the amended
agreement, the lender increased the availability on the Company's revolving line
of credit by $400,000 and changed the fixed charge coverage ratio covenant for
2004 from 1.0 to 90% of the ratio as projected in the Company's budget. The
Company was not in compliance with one of its financial covenants for the fourth
quarter of 2003. The primary lender subsequently waived this event of default.
The Company had a mortgage loan, which is secured by a mortgage on the Company's
real property located on New Britain Avenue in Farmington Connecticut, and 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%. This loan was amended in October 2003 to provide for payments
of $16,423 including interest at 7.5% through February 28, 2006.
The note payable to the former shareholders of Apex Machine Tool Company Inc.
was amended on January 18, 2003 to provide for monthly payments of interest only
at 10.12% through December of 2003 and to extend the note's maturity date from
January 2, 2003 to January 5, 2004. The note was further amended to extend the
note's maturity date to April 5, 2004.
On March 5, 2004, a local bank refinanced the note payable to the former
shareholders of Apex Machine Tool Company Inc, paying that note in full (the
"March 2004 Refinancing"). The new mortgage loan, which is secured by a mortgage
on the Company's real property located at Spring Lane in Farmington Connecticut,
is due in 120 monthly installments of $12,452 including interest at 6.49% with a
balloon payment due on April 1, 2014. The monthly payment will be adjusted by
the bank every 5 years to reflect interest at the FHLBB Amortizing Advance Rate
plus 2.75%. The classification of long-term debt has been determined in the
accompanying January 3, 2004 consolidated balance sheet based on the repayment
terms after consideration of the March 2004 Refinancing.
The following table sets forth leased property under capital leases.
7
Class of Property 2003 2002
- ----------------- ---- ----
Machinery & equipment $530,522 $361,549
Less: accumulated amortization 99,818 54,232
-------- --------
$430,704 $307,317
======== ========
Aggregate annual maturities of long-term debt for the five year period
subsequent to January 3, 2004, are as follows: 2004--$2,254,142;
2005--$1,195,456; 2006--$163,076; 2007--$153,703; 2008--$159,678; 2009 and
thereafter--$3,999,277.
NOTE E -- PENSION PLANS
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 Company uses a September 30 measurement date for its pension plan.
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):
2003 2002
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,871 $ 5,198
Interest cost 361 348
Actuarial loss (gain) (117) 708
Benefits paid (393) (383)
---------- ----------
Benefit obligation at end of year $ 5,722 $ 5,871
========== ==========
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,024 $ 4,255
Actual return on plan assets 553 (133)
Employer contribution 235 328
Expenses (20) (43)
Benefits paid (393) (383)
---------- ----------
Fair value of plan assets at end of year $ 4,399 $ 4,024
========== ==========
(Unfunded) funded status $ (1,323) $ (1,846)
Unrecognized net actuarial loss 2,016 2,565
---------- ----------
Net amount recognized $ 693 $ 719
========== ==========
Amounts recognized in the consolidated
balance sheets consist of:
(Accrued) prepaid benefit liability $ (1,323) $ (1,846)
Minimum pension liability 2,016 2,565
---------- ----------
Net amount recognized $ 693 $ 719
========== ==========
Weighted-average assumptions:
Discount rate 6.50% 6.50%
Expected return on plan assets 7.00% 7.00%
8
Components of net periodic benefit cost:
Interest cost $ 361 $ 348
Expected return on plan assets (252) (269)
Amortization of actuarial loss 151 67
---------- ----------
Net periodic pension expense $ 260 $ 146
========== ==========
In determining the expected return on plan assets, the Company considers the
relative weighting of plan assets, the historical performance of total plan
assets and individual asset categories and economic and other indicators of
future performance. The Company may also consult with other professionals in
developing expected returns.
Asset management objectives include maintaining an adequate level of
diversification to reduce interest rate and market risk while also providing
adequate liquidity to meet benefit payment requirements.
PLAN ASSETS
Target
Allocation
Asset Category 2004 2003 2002
- -------------- ----- ---- ----
Equity securities 45%-75% 59% 40%
Debt securities 30%-50% 34% 48%
Real estate equity fund 0%-10% 6% 10%
Cash 0%-20% 1% 2%
--- ---
Total 100% 100%
=== ===
CASH FLOWS
Contributions
The Company expects to contribute $228,000 to its pension plan during 2004.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid (in thousands):
2004 $ 418
2005 413
2006 410
2007 412
2008 405
Years 2009 -2013 2,091
The Company maintains a defined contribution plan known as the EDAC Technologies
Corporation 401(k) Retirement Plan. All employees who have completed at least
three consecutive months of service and are age eighteen or older are eligible
to participate. For 2003 the Company did not provide matching contributions. For
2002 the Company matched 35% of employee contributions up to 15% of compensation
limited annually to $1,750. Employer contributions and expenses related to the
plan were $0 and $170,054 for fiscal 2003 and fiscal 2002, respectively.
NOTE F -- EMPLOYEE STOCK OWNERSHIP PLAN
Effective May 4, 1989, the Company established the EDAC Technologies Corporation
Employee Stock Ownership Plan (the ESOP). Shares were allocated to employees'
accounts through 1999. As of January 1, 2000, participation
9
in the plan was frozen. On October 11, 2002, the Company terminated the Plan and
distributed the assets. 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 in 2003.
NOTE G -- INCOME TAXES
The (benefit from) provision for income taxes is as follows (in thousands):
2003 2002 2001
---- ---- ----
Current (benefit) provision $ - $ (643) $ 961
Deferred provision - - 517
-------- ------ ------
Total (benefit from) provision for income taxes $ - $ (643) $1,478
======== ====== ======
The effective tax rate on income before income taxes is different from the
prevailing Federal and state income tax rates as follows (in thousands):
2003 2002 2001
-------- -------- --------
Income (loss) before income taxes $ 6,579 $(14,050) $ 6,891
======== ======== ========
Income tax at Federal statutory rate 2,237 $ (4,777) $ 2,343
State income taxes, net of Federal benefit - (688) 132
Other 933 (233) 255
Change in valuation allowance (3,170) 5,055 (1,252)
-------- -------- --------
$ - $ (643) $ 1,478
======== ======== ========
As of January 3, 2004 and in prior years, the Company provided a valuation
allowance to reserve against deferred tax assets since it was uncertain such
assets would be realized. During the year ended January 3, 2004, the valuation
allowance was decreased by $3,170,000 due to the current year income for
financial reporting purposes.
The tax effect of temporary differences giving rise to the Company's deferred
tax assets and liabilities are as follows (in thousands):
2003 2002
---- ----
Deferred tax assets:
Allowance for uncollectible
accounts receivable $ 91 $ 113
Debt restructuring - 1,022
Employee compensation and amounts withheld 133 174
Accrued expenses 26 29
Unicap and inventory reserves 300 382
Tax effect of net operating loss carryforwards 260 1,121
Alternative minimum tax credit carryforwards - 633
Minimum pension 786 999
Other 492 661
Goodwill 2,807 3,305
Valuation allowance (2,938) (6,177)
---------- ----------
1,957 2,262
---------- ----------
Deferred tax liabilities:
Property, plant and equipment 1,637 1,899
Pension 254 292
10
Other 66 71
---------- ----------
1,957 2,262
---------- ----------
Net deferred income taxes $ - $ -
========== ==========
Reflected in consolidated balance sheets as:
Net current deferred tax (liability) asset $ (259) $ (113)
Net long-term deferred tax asset (liability) 259 113
---------- ----------
$ - $ -
========== ==========
As of January 3, 2004, the Company has federal net operating loss carry forwards
of approximately $3.9 million, which expire through 2024. Furthermore, as of
January 3, 2004 the Company has alternative minimum tax credits of approximately
$250,000 which carry forward indefinitely for Federal income tax purposes.
However, due to the forgiveness of debt during 2003 (reference Footnote D), net
operating losses, credits and/or assets will be reduced by the exclusion from
income under Internal Revenue Code Section 108.
NOTE H -- COMMITMENTS AND CONTINGENCIES
Lease expense under operating leases was $42,290, $105,022, and $115,619, for
2003, 2002, and 2001, respectively. Minimum rental commitments as of January 3,
2004 for noncancelable operating leases with initial or remaining terms of one
year or more are as follows: 2004--$11,133; 2005--$7,658; 2006--$3,600;
2007--$3,725; 2008--$3,900; 2009 and thereafter-- $13,975.
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 July 29, 2002, Richard A. Dandurand, the Company's Chairman and Chief
Executive Officer, resigned. Dominick A. Pagano was appointed CEO and President
of the Company and Daniel C. Tracy assumed the position of Chairman of the
Company. Mr. Dandurand received $104,167 paid over 5 months in equal
installments that began on August 1, 2002. The Company recorded a charge of
$147,000, in the quarter ended September 28, 2002 related to Mr. Dandurand's
resignation.
On November 22, 2002, Ronald G. Popolizio, the Company's then Executive Vice
President and Chief Financial Officer resigned. The Company agreed to pay Mr.
Popolizio severance of $129,735 payable over 9 months commencing December 2002,
certain other expenses and $20,000 in 2003 for consulting services. The Company
recorded a charge of $190,000 in the fourth quarter of 2002 related to Mr.
Popolizio's resignation.
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.
As a result of the restructuring commencing in the fourth quarter of 2002 and
ending in the first quarter of 2003, the Company operated during 2003 as one
segment.
Through 2002 the Company had four reportable segments identified as Engineered
Precision Components, Precision Engineered Technologies, Precision Large
Machining and Apex Machine Tool Company. The major products and services of
Engineered Precision Components were jet engine components. The major products
and services of Precision Engineered Technologies were design, manufacture and
repair of spindles and design of tooling for the aerospace industry. The major
products and services of Precision Large Machining were machining of large jet
engine components. The major products and services of Apex Machine Tool Company
were design and manufacture of tools, fixtures and gages. The accounting
policies of the segments were the same as those described in the summary of
significant accounting policies. The Company evaluated the performance of these
11
segments based on segment profit or loss which represents each segment's share
of the Company's net income (loss). The amounts in this table are the amounts in
reports used by the Company's President for 2002 and 2001 (in thousands):
2002
----------------------------------------------------
Engineered Precision Precision Apex
Precision Engineered Large Machine
Components Technologies Machining Tool Co. Total
---------- ------------ --------- --------- --------
Revenues from
external
customers $ 8,992 $ 2,820 $ 1,838 $ 12,200 $ 25,850
Interest expense 162 37 78 465 742
Depreciation and
amortization 354 281 613 743 1,991
Income tax
expense (benefit) (197) (122) (117) (207) (643)
Cumulative effect
of adoption
of SFAS No. 142 (10,381) (10,381)
Segment loss (800) (491) (527) (11,589) (13,407)
2001
----------------------------------------------------
Engineered Precision Precision Apex
Precision Engineered Large Machine
Components Technologies Machining Tool Co. Total
---------- ------------ --------- --------- --------
Revenues from
external
customers $ 17,843 $ 7,109 $ 4,232 $ 15,727 $ 44,911
Interest expense 241 105 148 646 1,140
Depreciation and
amortization 345 369 621 970 2,305
Income tax expense 377 235 365 501 1,478
Segment profit 1,359 872 1,341 1,841 5,413
The Company did not maintain separate balance sheet information by segment and
the Company would be unable to create such information from existing financial
records without incurring considerable expense, effort and delay.
12
NOTE J -- QUARTERLY DATA (UNAUDITED)
Following is selected quarterly data for 2003 and 2002. All quarterly
information was obtained from unaudited consolidated financial statements not
otherwise contained herein. The unaudited results for any quarter are not
necessarily indicative of the results for any future period. The 2002 amounts
have been restated to reflect the adoption of SFAS No.142 in the first quarter.
2003 1st quarter 2nd quarter (1) 3rd quarter 4th quarter
---- ----------- --------------- ----------- -----------
Sales $ 6,109,333 $7,137,812 $ 6,437,696 $ 5,992,246
Gross profit 377,617 883,956 782,285 682,987
Income (loss) from operations (333,313) 121,325 119,262 (50,326)
Net (loss) income (490,912) 7,228,407 (51,712) (106,995)
Basic income (loss) per common share $ (0.11) $ 1.64 $ (0.01) $ (0.02)
Diluted income (loss) per common share $ (0.11) $ 1.60 $ (0.01) $ (0.02)
2002 1st quarter 2nd quarter 3rd quarter 4th quarter(3)
---- ----------- ----------- ----------- --------------
Sales $ 7,731,734 $ 6,274,246 $ 5,797,981 $ 6,046,206
Gross profit (loss) 505,979 330,342 310,078 (146,885)
Loss from operations (476,037) (593,614) (694,347) (1,197,961)
Loss before income taxes and
cumulative effect of change in
accounting principle (644,862) (765,649) (881,822) (1,376,292)
Loss before cumulative effect of change in
accounting principle (515,862) (612,057) (705,925) (1,191,990)
Cumulative effect of adoption of
SFAS No.142 (see Note A) (2) (10,381,077) - - -
Net loss (10,896,939) (612,057) (705,925) (1,191,990)
Basic and diluted per common share data:
Loss before cumulative effect of change in
accounting principle $ (0.12) $ (0.14) $ (0.16) $ (0.27)
Cumulative effect of adoption of
SFAS No.142 (see Note A) (1) (2.35) - - -
------------- ----------- ----------- --------------
Net loss $ (2.47) $ (0.14) $ (0.16) $ (0.27)
============= =========== =========== ==============
(1) In the second quarter of 2003, the Company realized a gain on debt
restructuring of $7,253,203.
(2) In the first quarter of 2002, the Company adopted SFAS No. 142 which
resulted in a charge of $10,381,077.
(3) The fourth quarter of 2002 included restructuring charges of $692,000 to
write down land, building and equipment held for sale and $112,000 for plant
consolidation expenses.
NOTE K -- PRO FORMA INFORMATION
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective December 30, 2001. A reconciliation follows of the net income
(loss) and income (loss) per share reported in the accompanying consolidated
statements of operations to the pro forma amounts adjusted for the exclusion of
goodwill amortization. No tax benefit has been reflected in the pro forma
adjustments since a valuation allowance is provided against the Company's
deferred tax asset. The pro forma results reflecting the exclusion of goodwill
amortization have been
13
prepared only to demonstrate the impact of goodwill amortization on net income
(loss) and net income (loss) per share and are for comparative purposes only (in
thousands).
2003 2002 2001
---------- ---------- ----------
Previously reported net income (loss) $ 6,579 $ (13,407) $ 5,413
Goodwill amortization -_ - 284
---------- ---------- ----------
Adjusted net income (loss) $ 6,579 $ (13,407) $ 5,697
========== ========== ==========
Net income (loss) per basic share:
Previously reported net income (loss) $ 1.49 $ (3.04) $ 1.25
Goodwill amortization - - 0.07
---------- ---------- ----------
Adjusted net income (loss) $ 1.49 $ (3.04) $ 1.32
========== ========== ==========
Net income (loss) per diluted share:
Previously reported net income (loss) $ 1.46 $ (3.04) $ 1.18
Goodwill amortization - - 0.06
---------- ---------- ----------
Adjusted net income (loss) $ 1.46 $ (3.04) $ 1.24
========== ========== ==========
14
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
EDAC Technologies Corporation
We have audited the consolidated balance sheet of EDAC Technologies Corporation
and subsidiaries (the "Company") as of January 3, 2004, and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and comprehensive income (loss) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The consolidated financial statements
for the year ended December 29, 2001 were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion, with an
explanatory paragraph for an uncertainty related to the Company's ability to
continue as a going concern, in their report dated February 8, 2002 (except with
respect to the matter discussed in Notes A and K to such financial statements as
to which the date was April 11, 2002).
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of EDAC Technologies Corporation and
subsidiaries as of January 3, 2004, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed above, the consolidated financial statements of EDAC Technologies
Corporation and subsidiaries for the year ended December 29, 2001 were audited
by other auditors who have ceased operations. As described in Note A, those
consolidated financial statements have been revised to reflect the effect of
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections", which was adopted by the
Company effective December 29, 2002. We audited the adjustment described in Note
A that was applied to revise the 2001 consolidated financial statements. Our
audit procedures with respect to the 2001 consolidated financial statements
included (i) agreeing the previously reported income before income taxes and
provision for income taxes to the previously issued consolidated financial
statements and the adjustment to reported income before income taxes and
provision for income taxes representing the reclassification of the
extraordinary gain, net of tax as a result of initially applying SFAS No. 145 to
the Company's underlying records obtained from management, and (ii) testing the
mathematical accuracy of the reconciliation of adjusted income before income
taxes and provision for income taxes to reported income before income taxes and
provision for income taxes and the related earnings per share amounts. In our
opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 consolidated financial statements of the Company other than with respect to
such adjustment and, accordingly, we do not express an opinion or any other form
of assurance on the 2001 consolidated financial statements taken as a whole.
/s/ Carlin, Charron & Rosen, LLP
Glastonbury, Connecticut
March 5, 2004
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
EDAC Technologies Corporation
Farmington, Connecticut
We have audited the accompanying consolidated balance sheet of EDAC Technologies
Corporation and subsidiaries as of December 28, 2002, and the related
consolidated statements of operations, changes in shareholders' equity (deficit)
and comprehensive income (loss) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 2002 financial statements based
on our audit. The consolidated financial statements for the year ended December
29, 2001 were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion with an explanatory paragraph for
uncertainty related to the Company's ability to continue as a going concern in
their report dated February 8, 2002 (except with respect to the matter discussed
in Notes A and K to such financial statements as to which the date was April 11,
2002).
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements present fairly, in
all material respects, the financial position of EDAC Technologies Corporation
and subsidiaries as of December 28, 2002, and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note A to the consolidated financial statements, effective
December 30, 2001, the Company changed its method of accounting for goodwill to
conform with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets.
As discussed above, the financial statements of EDAC Technologies Corporation
for the year ended December 29, 2001 were audited by other auditors who have
ceased operations. As described in Note K, those financial statements have been
revised to include the transitional disclosures required by SFAS No. 142, which
was adopted by the Company as of December 30, 2001. We audited the adjustment
described in Note K that was applied to revise the 2001 financial statements.
Our audit procedures with respect to the disclosures in Note K with respect to
2001 included (i) agreeing the previously reported net income to the previously
issued financial statements and the adjustment to reported net income
representing amortization expense recognized in such period related to goodwill
as a result of initially applying SFAS No. 142 to the Company's underlying
records obtained from management, and (ii) testing the mathematical accuracy of
the reconciliation of adjusted net income to reported net income. In our
opinion, such adjustment is appropriate and has been properly applied. However,
we were not engaged to audit, review, or apply any procedures to the 2001
consolidated financial statements of the Company other than with respect to such
adjustment and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 consolidated financial statements taken as a whole.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Hartford, Connecticut
February 7, 2003 (except with respect to the matters discussed in the third and
fourth paragraphs of Note D as to which the date is April 10, 2003)
COPY
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 29, 2001 and December 30, 2000, and the related consolidated statements
of operations, changes in shareholders' equity and comprehensive income and cash
flows for each of the three years in the period ended December 29, 2001. 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 29, 2001 and December 30, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 29, 2001 in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes A and K
to the consolidated financial statements, certain shareholders have made demands
which triggered change in control payments to certain executives. The amount of
the ultimate payments is not known at this time but is expected to be at a level
that would result in a covenant violation on the Company's revolving credit
facility and certain other long-term debt. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note A. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
/s/ Arthur Andersen LLP
Hartford, Connecticut
February 8, 2002 (except with respect to the matter discussed in Notes A and K,
as to which the date is April 11, 2002)
READERS OF THESE CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE AWARE THAT THIS
REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT AND THAT THIS
REPORT HAS NOT BEEN REISSUED OR UPDATED SINCE FEBRUARY 8, 2002 AND ARTHUR
ANDERSEN LLP COMPLETED ITS LAST POST-AUDIT REVIEW OF DECEMBER 29, 2001
CONSOLIDATED FINANCIAL INFORMATION ON APRIL 11, 2002. ARTHUR ANDERSEN LLP HAS
CEASED OPERATION AND HAS NOT CONSENTED TO THE INCORPORATION BY REFERENCE OF
THIS REPORT INTO THE COMPANY'S FORM 10-K.
OFFICERS
Dominick A. Pagano President and Chief Executive Officer
Glenn L. Purple Vice President-Finance and Secretary
BOARD OF DIRECTORS
Daniel C. Tracy Chairman
Dominick A. Pagano President and Chief Executive Officer
William B. Bayne, Jr. President and Chief Executive Officer, BBB
Corporation and 23rd Street Corporation
John Moses Private Investor
Stephen J. Raffay Retired Vice-Chairman Emhart Corporation
Ross C. Towne President and Chief Financial Officer, The
Washington Source, Inc.
CORPORATE OFFICES
1806 New Britain Avenue
Farmington, CT 06032
GENERAL COUNSEL
Robinson & Cole LLP
280 Trumbull Street
Hartford, CT 06103-3597
INDEPENDENT AUDITORS TRANSFER AGENT
Carlin, Charron & Rosen, LLP American Stock Transfer & Trust
628 Hebron Avenue 59 Maiden Lane
Glastonbury, CT 06033 New York, NY 10038
ANNUAL MEETING
The 2004 annual meeting of shareholders will be held on the date and at the time
and place indicated in the Notice of Annual Meeting and Proxy Statement
accompanying this report.
10-K INFORMATION
A COPY OF EDAC'S 2003 ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS AVAILABLE WITHOUT CHARGE BY WRITING TO: GLENN L. PURPLE,
SECRETARY, EDAC TECHNOLOGIES CORPORATION, 1806 NEW BRITAIN AVENUE, FARMINGTON,
CT 06032.