1
EXHIBIT 13
EDAC TECHNOLOGIES CORPORATION
GROS-ITE INDUSTRIES 1996
GROS-ITE SPINDLE ANNUAL
REPORT
2
EXHIBIT 13.1
TO OUR SHAREHOLDERS
The loss incurred by the Company in 1995 proved enlightening to management and
the Board of Directors. This served as a catalyst to initiate action in 1996
which can be categorized as the year of metamorphosis for your company.
Based on the results of 1995, it became apparent that the Company would require
major restructuring of management to meet the challenges of our market place
and future growth. Therefore, our primary objective in 1996 was to bring to
the management team a few experienced contemporary managers with the ability to
organize and lead the company through the required change process. The leader
selected is our new President and CEO, Edward J. McNerney. Ed, joined EDAC in
October and brings a wealth of experience in contemporary manufacturing
techniques with a proven track record. Under his leadership, and with the
assistance of the core group of managers at EDAC, the Company was restructured
into focused business units along product lines.
The costs of search fees and severance pay associated with the restructuring
resulted in a one time charge of $500,000 in the 4th quarter. In spite of
this, the Company managed to close 1996 with a modest profit of $7,077.
Overall, with the exception of the $500,000 one time charge, results for 1996
a significant improvement over the 1995 loss of $1,083,000.
With the new organization structure in place and aligned into business units
along product lines, our attention in 1997 will be on significant improvement
in operational performance, new market penetration, current market growth and
capital management.
Major focus areas will be:
o Reducing operating cost through implementation of Lean Manufacturing
techniques.
o Inventory reduction through just in time delivery contracts including
vendor managed inventory.
o Improvements in on time delivery through information services
improvements and visual management practices.
o Purchase new equipment for cost reduction, improved quality, reduction
of outsourced products and new product development.
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o Capitalize on the strength of existing aerospace markets to grow this
exciting portion of the Company's product line through superior service.
o Diversify into new markets to balance customer base through
diverse economic cycles.
We sincerely thank all of our valued EDAC associates for their extraordinary
efforts throughout 1996, our loyal customers for their continued support and
all of you our shareholders, for your continued confidence and support as we
bring about the necessary changes in the company to add value to our
shareholders.
/s/John J. DiFrancesco /s/Edward J. McNerney
John J. DiFrancesco Edward J. McNerney
Chairman CEO
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Edac Technologies Corporation, also known as Gros-Ite Industries, is a
diversified company. It primarily offers design and manufacturing services for
the aerospace industry in areas such as jet engine parts, special tooling,
equipment and gauges, and components used in the manufacture, assembly and
inspection of jet engines. Edac also designs and manufactures specialized
machines for a variety of other applications.
Gros-Ite Spindle specializes in the design, manufacture and repair of
precision spindles. Spindles are an integral part of numerous machine tools
which are found in virtually any type of manufacturing environment. For 14
years Gros-Ite Spindle has been servicing the industry with high quality
standard and custom spindles.
Edac maintains manufacturing and design facilities with computerized
numerically controlled machining centers, and grinding, welding, and
sheet metal fabrication, painting and assembly capabilities. Items
manufactured by Edac include precision rings, and other components
for jet engines, as well as industrial spindles and specialized machinery
designed by Edac or others and other assemblies requiring close tolerances.
Marketing and Competition
Edac has numerous competitors both in design and manufacturing.
Many of the independent firms with which it competes are smaller than Edac and
do not provide the variety of high quality services that Edac provides. Edac
also competes with its customers' in-house manufacturing
and technical services capabilities. Edac believes that it is able to
compete effectively with independent firms and customers' in-house capabilities
because of its emphasis on customer service, its experience and its competitive
pricing of its services.
For its fiscal year ended December 31, 1996, approximately 67% of Edac's
net sales were derived from sales to United Technologies Corporation, 8% from
Zapata Technologies Inc. and 25% through other industrial based customers.
5
MARKET INFORMATION
The Company's Common Stock is traded on the over-the-counter
market (NASDAQ).
High and low stock prices for the last two years were as
follows:
1996 1995
High Low High Low
First Quarter 1 8/16 14/16 1 2/16 12/16
Second Quarter 1 12/16 1 1/16 1 12/16 1
Third Quarter 1 10/16 1 1 10/16 14/16
Fourth Quarter 2 6/16 15/16 1 10/16 15/16
The approximate number of record holders of the Company's Common
Stock at March 25, 1997 was 300.
The Company has never paid cash dividends. The Company is prohibited
from paying cash dividends by certain loan agreements with its
bank (see Note C to the Company's consolidated financial
statements included elsewhere in this report).
SELECTED FINANCIAL INFORMATION
Years Ended December 31,
1996 1995 1994 1993 1992
-----------------------------------------------------------
(In thousands of dollars, except per share data)
SELECTED OPERATING DATA
Sales $30,249 $24,564 $22,239 $29,331 $38,252
Net income (loss) 7 (1,083) 72 741 1,476
Net income (loss)
per share 0 (.29) .02 .20 .40
SELECTED BALANCE SHEET DATA
Current assets $14,058 $14,215 $12,170 $12,179 $14,970
Total assets 19,917 20,352 16,326 16,634 19,785
Current liabilities 9,402 9,166 5,323 5,669 9,799
Working capital 4,656 5,049 6,847 6,510 5,171
Long-term obligations 5,043 5,854 4,831 4,959 4,724
Shareholders' equity 5,473 5,332 6,172 6,006 5,262
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Indications show that the aerospace industry markets will remain robust
for the next three years with a leveling thereafter out to five years. Order
bookings from EDAC's primary customers are up and remain strong.
The Company's decision to provide larger machining capabilities to respond to
the industries demand for larger engines has proven itself with this product
line representing 11% of 1996 sales, and approximately 20% of total 1997
forecasted sales. The Company intends to invest in additional capital
equipment to position itself for increased business in the second half of 1997.
RESULTS OF OPERATIONS
Revenues from the Company's principal markets are as follows:
In Thousands of Dollars 1996 1995 1994
----------------------- ------- ------- -------
Aerospace customers $20,284 $17,376 $15,810
Medical customers 22 --- 1,161
Other 9,943 7,188 5,268
Net sales increased 23% in 1996 from 1995. Aerospace sales increased
$2,908,000 or 17% from 1995 representing stronger sales to the company's
principal aerospace customer. Sales to other markets increased $2,755,000 or
38% representing very strong demand in our large machining business and a solid
increase in spindle sales. During 1996, the Company's principal aerospace
customer continued to reduce its vendor base as it has in prior years. The
Company remains an approved supplier and has been selected as a "going forward
supplier" of this customer. The Company's medical customer ceased doing
business with the Company in 1994.
Net sales increased $2,325,000 or 10% in 1995 from 1994. This represents
stronger sales to the Company's principal aerospace customer and increasing
sales in the larger machining area.
Cost of sales as a percentage of sales decreased in 1996 to 88% from 92%
in 1995. This was due to unusually high occupational and training costs in
1995, as well as the benefit of higher sales levels to cover fixed
manufacturing costs in 1996.
Cost of sales as a percentage of sales increased in 1995 to 92% from 86%
in 1994. This was due to additional costs incurred in 1995 associated with the
occupation and utilization of the Company's new manufacturing facility. Large
machines were moved from the existing facilities to the new facility to
consolidate all large turning operations. The Company also incurred substantial
costs in training the
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design department employees to enable them to work on the new graphic and
computer-aided design systems. These systems replace traditional designing on
drawing boards. Although there will be some recurring costs in training new
design employees and staying current with system updates, the above projects
were completed in 1995 and should not incur any substantial costs in the
future. Additionally, the Company accrued for projected losses on several
large customer orders.
Selling, general and administrative costs increased $478,871 in 1996 from
1995. This increase was a result of one time charges in the fourth quarter for
the restructuring of management, including severance costs for previous
managers and search fees for new executives.
In 1995, selling, general and administrative costs decreased $274,000 from
1994 primarily due to reduced bonus and travel costs offset slightly by costs
associated with additional sales personnel.
INTEREST AND OTHER
Interest expense for 1996 was $797,000, an increase of $179,000 from 1995.
This increase was due to the Company's bank increasing it's lending rate to
the company by 1%. For 1997, the bank has reduced the lending rate based on the
performance of the Company.
Interest expense in 1995 was $618,000, an increase of $185,000 from 1994.
This increase reflects borrowings of $4,300,000 primarily to construct a new
20,000 square foot building and borrowings to purchase machinery. The effect
of increased borrowings was partially offset by generally lower interest rates
throughout 1995 compared to 1994.
Other income for 1996 was $51,000 consisting primarily of a gain on an
investment. Other income for 1995 was $45,000 consisting primarily of
insurance proceeds received.
LIQUIDITY AND CAPITAL RESOURCES
The Company assesses its liquidity in terms of its ability to generate
cash to fund its operating and investing activities. Of particular importance
to the Company's liquidity are cash flows generated from operating activities,
capital expenditure levels and available bank lines of credit.
The following is selected cash flow data from the Statements of Cash
Flows:
In Thousands of Dollars 1996 1995 1994
Net cash flow from
operating activities $ 1,765 $ (1,336) $ 1,104
Net cash flow from
investing activities (533) (2,918) (621)
Net cash flow from
financing activities (1,195) 4,326 (509)
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Net cash flow from operating activities in 1996 results primarily from
cash generated from operations and reductions in inventories, offset partially
by higher levels of accounts receivable. Net cash flow from operating
activities in 1995 and 1994 primarily reflect net income (loss) and non-cash
charges against income. Net cash flow from investing activities for 1995
reflects the Company's investment in new building construction and the purchase
of machinery and equipment. Net cash flow from investing activities for 1996
and 1994 primarily reflects purchases of fixed assets consisting mainly of
machinery and equipment. Expenditures have been necessary to add capacity and
to increase productivity. Capital expenditures for 1997 are projected to be
$4,400,000. These expenditures will be funded through our revised bank debt
agreement for $3,000,000 and $1,400,000 of equipment financing from the
manufacturer.
The following is selected capitalization data from the Balance Sheets:
In Thousands of Dollars 12/31/96 12/31/95 12/31/94
--------------------------- -------- -------- --------
Revolving and equipment
lines of credit .......... $3,795 $4,651 $1,595
Current portion
long-term debt ........... 402 387 245
Long-term debt ............ 4,510 4,919 3,824
Shareholders' equity ...... 5,473 5,332 6,172
Debt to total
capitalization ........... 61% 65% 48%
Unused revolving line
of credit ................ 3,013 1,275 4,731
The Company has a revolving line of credit with its bank which provides
for borrowings of up to $7,000,000 ($3,208,146 outstanding at December 31,
1996) limited by a formula based on percentages of the Company's receivable and
inventory. Availability under that line of credit was $3,013,000 on December
31, 1996. The credit agreement, as amended on March 27, 1997, matures on March
31, 2000. Included in the amended agreement is a decrease in interest rates
(see Note C).
Management believes that the funds generated from operations, as well as
funds available from existing financing agreements, will be sufficient to meet
the Company's cash flow needs throughout 1997.
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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 31, 1996 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Edac Technologies Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 20, 1997 (except with respect
to the matter discussed in Note C,
as to which the date is March 27,
1997)
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CONSOLIDATED STATEMENTS OF OPERATIONS
EDAC TECHNOLOGIES CORPORATION
-----------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------ ------------- ------------
Sales:
Services $1,961,938 $1,197,656 $2,185,968
Products 28,287,147 23,366,278 20,052,882
------------ ------------- ------------
30,249,085 24,563,934 22,238,850
Cost of Sales 26,600,686 22,656,651 19,114,373
------------ ------------- ------------
Gross Profit 3,648,399 1,907,283 3,124,477
Selling, General and Administrative Expenses 2,896,007 2,417,136 2,691,447
------------ ------------- ------------
INCOME (LOSS) FROM OPERATIONS 752,392 (509,853) 433,030
Non-Operating Income (Expense):
Interest expense (796,742) (618,156) (433,173)
Other 51,427 44,790 71,658
------------ ------------- ------------
NET INCOME (LOSS) $ 7,077 $(1,083,219) $ 71,515
============ ============= ============
Weighted average number of shares of
common stock outstanding 3,799,951 3,760,789 3,724,018
============ ============= ============
Earnings (Loss) Per Share $.00 $(.29) $.02
============ ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED BALANCE SHEETS
EDAC TECHNOLOGIES CORPORATION
-----------------------------
December 31,
-----------------------------
1996 1995
----------- ------------
ASSETS
- ------
CURRENT ASSETS:
Cash $ 195,382 $ 158,077
Trade accounts receivable (net of
allowance for doubtful accounts of
$116,087 in 1996 and $40,000 in 1995) 3,407,924 1,650,840
Refundable income taxes - 106,000
Inventories 9,562,958 11,280,037
Prepaid expenses and other current
assets 351,109 103,197
Deferred income taxes 540,877 917,000
----------- -----------
TOTAL CURRENT ASSETS 14,058,250 14,215,151
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 394,821 394,821
Buildings 3,690,562 3,656,191
Machinery and equipment 8,958,059 8,682,242
----------- -----------
13,043,442 12,733,254
Less-accumulated depreciation 7,570,308 6,850,794
----------- -----------
5,473,134 5,882,460
----------- -----------
OTHER ASSETS 386,325 254,519
----------- -----------
TOTAL ASSETS $19,917,709 $20,352,130
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED BALANCE SHEETS (CONTINUED)
EDAC TECHNOLOGIES CORPORATION
-------------------------------
December 31,
-------------------------------
1996 1995
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Revolving and equipment lines of credit $3,794,571 $4,651,484
Current portion of long-term debt 402,267 387,366
Trade accounts payable 3,616,599 2,730,256
Employee compensation and amounts
withheld 737,827 613,815
Accrued expenses 850,532 783,561
----------- -----------
TOTAL CURRENT LIABILITIES 9,401,796 9,166,482
----------- -----------
LONG-TERM DEBT, less current portion 4,509,991 4,919,019
----------- -----------
OTHER LIABILITIES 12,000 18,000
----------- -----------
DEFERRED INCOME TAXES 521,000 917,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE G)
SHAREHOLDERS' EQUITY:
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued and outstanding--3,753,875
in 1996 and 3,653,540 in 1995 9,385 9,134
Additional paid-in capital 8,649,340 8,593,152
Accumulated deficit (2,991,358) (2,998,435)
----------- -----------
5,667,367 5,603,851
Less deferred ESOP compensation
expense (194,445) (272,222)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 5,472,922 5,331,629
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $19,917,709 $20,352,130
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
EDAC TECHNOLOGIES CORPORATION
<Caption
---------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------ ------ ------
Operating Activities:
Net income (loss) $7,077 $(1,083,219) $71,515
Adjustments to reconcile net income
(loss)
to net cash provided by (used in)
operating activities:
Deferred income taxes (19,877) (39,000) (114,000)
Amortization of deferred ESOP
compensation expense 77,777 77,777 77,777
Depreciation and amortization 796,795 969,223 907,811
Loss (gain) on sale of property
and equipment 13,892 (32,780) 11,915
Changes in operating assets and
liabilities:
Trade accounts receivable (1,757,084) (163,690) 343,913
Refundable income taxes 106,000 (106,000) ---
Inventories 1,717,079 (1,456,388) (150,965)
Prepaid expenses and other
current assets (247,912) (880) (10,658)
Trade accounts payable 886,343 646,555 (50,662)
Other current liabilities 190,983 131,373 (14,765)
Other liabilities (6,000) (278,840) 32,586
---------- ----------- ----------
Net cash provided by (used in)
operating activities 1,765,073 (1,335,869) 1,104,467
---------- ----------- ----------
Investing Activities:
Additions to property, plant and
equipment (498,471) (3,241,937) (696,359)
Proceeds from sales of property,
plant and equipment 104,650 196,655 231,532
( Increase) decrease in other assets (139,346) 127,285 (155,885)
---------- ----------- ----------
Net cash used in
investing activities $ (533,167) $(2,917,997) $(620,712)
---------- ----------- ----------
The accompanying notes are an integral part of these consolidated
financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
EDAC TECHNOLOGIES CORPORATION
---------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------- -------- -------
Financing Activities:
(Decrease) increase in revolving
line of credit, net $(856,913) $3,056,117 $(279,198)
Payments of long-term debt (394,127) (247,499) (246,550)
Issuance of long-term debt -- 1,484,440 --
Proceeds from exercise of options
for common stock, including
related income tax benefit 56,439 32,625 16,499
----------- --------- --------
Net cash (used in) provided by
financing activities (1,194,601) 4,325,683 (509,249)
----------- --------- --------
Increase (decrease) in cash 37,305 71,817 (25,494)
Cash at beginning of year 158,077 86,260 111,754
----------- --------- --------
Cash at end of year $195,382 $158,077 $86,260
=========== ========= ========
Supplemental Disclosure of
Cash Flow Information:
Interest Paid $796,637 $594,488 $427,763
Income taxes paid 27,000 139,000 130,000
The accompanying notes are an integral part of these consolidated
financial statements.
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CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
EDAC TECHNOLOGIES CORPORATION
Common Stock Additional
----------------------- Paid-In Accumulated
Shares Amount Capital Deficit
--------- ------ ---------- --------------
Balances at January 1, 1994 3,566,205 $8,916 $8,544,246 $(1,986,731)
Exercise of stock options,
including related income
tax benefit 29,334 73 16,426 --
Net income -- -- -- 71,515
--------- ----- --------- ------------
Balances at December 31, 1994 3,595,539 8,989 8,560,672 (1,915,216)
Exercise of stock options,
including related income
tax benefit 58,001 145 32,480 ---
Net loss -- -- -- (1,083,219)
--------- ----- --------- ------------
Balances at December 31, 1995 3,653,540 9,134 8,593,152 (2,998,435)
Exercise of stock options,
including related income
tax benefit 100,335 251 56,188 --
Net income -- -- -- 7,077
--------- ----- --------- ------------
Balances at December 31, 1996 3,753,875 $9,385 $8,649,340 $(2,991,358)
========= ===== ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EDAC TECHNOLOGIES CORPORATION
DECEMBER 31, 1996
NOTE A -- ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Until May 12, 1989, Edac Technologies Corporation (the Company) was a
subsidiary of Cade Industries, Inc. (Cade) which owned approximately 57% of the
Company's outstanding Common Stock. Effective May 12, 1989, Cade sold its
investment in the Company's Common Stock to a partnership comprised of certain
members of the Company's management and the Edac Technologies Corporation
Employee Stock Ownership Plan (ESOP). The Partnership owns 26.3% and the ESOP
owns 25.5% of the Company's outstanding Common Stock as of December 31, 1996.
Subsequent to year end, the Company's Common Stock held by the partnership was
distributed to the individual partners and the partnership was liquidated.
The Company and its subsidiaries design and manufacture tools, fixtures,
special machines, jet engine components, medical instrument components and
spindles. Although the Company and its subsidiaries offer both design and
manufacturing services to a number of different industries, the design and
manufacturing are interrelated and have essentially the same capabilities and,
in the opinion of management, the Company operates in one business segment.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries, Gros-Ite Industries, Inc. and
Natural Cool, Ltd. Intercompany transactions have been eliminated from the
consolidated financial statements.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. As of December 31, 1996, inventories consisted of the
following:
Raw materials $ 588,007
Work-in-progress 5,996,196
Finished goods 2,978,755
----------
Total inventories $9,562,958
==========
Property, Plant and Equipment: Property, plant and equipment are stated at
cost. Provisions for depreciation and amortization are computed using the
straight-line method over 3 to 12 years for machinery and equipment and 25
years for buildings for financial reporting purposes. For income tax reporting
purposes, straight-line and accelerated methods are used. In March 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121 requires a company
to review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of this standard did not have a material impact on
the Company's results of operations or financial position.
Earnings Per Share: Earnings per share is based on the weighted average number
of shares of common stock outstanding during the year, plus the dilutive
effect, if any, of outstanding stock options.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain of the amounts reflected in the financial
statements. Actual results could differ from those estimates.
Reclassifications: Certain prior period balances have been reclassified to
conform to the current year presentation.
17
NOTE B -- COMMON STOCK AND STOCK OPTIONS
On December 5, 1991, the Board of Directors adopted the 1991 Stock Option Plan
(the Plan). The Plan is non-qualified and provides for the granting of up to
325,000 options to purchase shares of the Company's Common Stock. The option
price is the fair market value of the shares on the date of the grant. Options
may be exercised at the rate of 33 1/3% six months after the grant date,
another 33 1/3% one year after the grant date and the remaining 33 1/3% two
years after the grant date. The maximum term of options granted is five years.
Options may be granted under the Plan through December 5, 2001. During 1991,
1995 and 1996, options to purchase 282,000 shares at $.5625 per share, 30,000
shares at $1.25 per share and 13,000 shares at $1.38 per share respectively, of
the Company's Common Stock were granted under the Plan.
On January 1, 1994, the Board of Directors adopted a stock option plan for the
purpose of granting 100,000 shares to an officer. On January 1, 1994, options
to purchase 100,000 shares were granted to an officer at an exercise price of
$.5625 per share. At December 31, 1996, 75,000 of these options were
exercisable. An additional 25,000 became exercisable on January 1, 1997.
On November 19, 1996, the Board of Directors adopted the 1996 Stock Option
Plan, (the 1996 Plan). The 1996 Plan is nonqualified and provides for granting
of up to 300,000 options to purchase shares of Common Stock in the Company.
The term of the options and vesting requirements shall be for such period as
the Stock Option committee designates. During 1996, options to purchase
100,000 shares at $1.00 per share were granted under the 1996 Plan.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, SFAS No. 123 which requires the measurement of
the fair value of stock options or warrants to be included in the statement of
operations or disclosed in the notes to financial statements. The Company has
determined that it will continue to account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123. The Company has computed the
pro forma disclosures required under SFAS No. 123 for options granted in 1995
and 1996 using the Black-Scholes option pricing model prescribed by SFAS No
123. The weighted average assumptions used are as follows:
1995 1996
------- -------
Risk free interest rate 5.95% 6.04%
Expected dividend yield None None
Expected lives 3 years 3 years
Expected volatility 100.8% 100.8%
Had compensation cost for the Company's 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 income (loss)
applicable to common shareholders would have been adjusted to reflect the
following pro forma amounts:
1995 1996
-------- --------
Income (loss) applicable to common shareholders:
As reported $(1,083,219) $7,077
Pro forma (1,092,328) (6,001)
Pro forma income (loss) per common share:
Primary earnings per share:
As reported $(.29) $.00
Pro forma (.29) .00
Fully diluted earnings per share
As reported $(.29) $.00
Pro forma (.29) .00
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
18
A summary of the status of the Company's stock option plans as of December 31,
1994, 1995, and 1996, and changes during the years then ended is presented
below:
1994 1995 1996
========================= ========================== ==========================
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
FIXED OPTIONS PRICE PRICE PRICE
- ------------- ---------- ------------- ---------- -------------- ----------- -------------
Outstanding at beginning of
year 191,004 $.5625 261,670 $.5625 230,335 $.6520
Granted 100,000 .5625 30,000 1.250 113,000 1.043
Exercised (29,334) .5625 (58,001) .5625 (100,335) .5625
Forfeited - - (3,334) .5625 - -
--------- ---------- ---------
Outstanding at end of year 261,670 .5625 230,335 .6520 243,000 .8712
========= ========== =========
Options exercisable at
year-end 186,670 .5625 160,335 .6054 95,000 .7072
Weighted-average fair
value of options granted
during the year $.81 $.68
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ----------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- WEIGHTED-
OUTSTANDING REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
12/31/96 LIFE PRICE AT 12/31/96 PRICE
- -------------------- ----------- ------------ ------------- ------------ -----------
$.5625 100,000 3 years $.5625 75,000 $.5625
1.000 100,000 4.9 1.000 0 1.000
1.250 30,000 3.5 1.250 20,000 1.250
1.380 13,000 4.5 1.380 0 1.380
----------- ------------
$.5625 to 1.38 243,000 4.2 .8712 95,000 .7072
=========== ============
19
NOTE C -- NOTES PAYABLE AND LONG TERM DEBT
Long-term debt consisted of the following:
<Captioin>
December 31
----------------------
1996 1995
---------- ----------
Note payable to bank in 60 monthly installments of $37,516,
including interest at 7.65% (except for the period from
April 10, 1996 through March 31, 1997 when the rate was
8.65%) with the remaining outstanding balance due on March 31, 2002. $3,371,554 $3,551,838
Note payable to bank in 56 monthly principal installments of
$5,556 commencing December 1, 1995 with a balloon payment of
$688,864 due on August 1, 2000. Interest at 7.83% (except
for the period from April 10, 1996 through March 31, 1997
when the rate was 8.83%). 933,333 1,000,000
Note payable to bank by Edac Technologies
Corporation Employee Stock Ownership Plan
(guaranteed by the Company). Principal is
due in 108 monthly installments of $6,481
commencing July 1, 1990. Interest at 95%
of the bank's base rate is due monthly. 194,445 272,222
Installment equipment note payable in quarterly
installments of $12,500 and monthly installments
based on 50% of the Company's profit, as defined,
on jobs performed by the equipment, commencing
November 28, 1995 and due March 31, 1998.
Interest imputed at 9%. Note collateralized by
the equipment. 412,926 482,325
--------- ---------
4,912,258 5,306,385
Less amounts due within one year 402,267 387,366
---------- ----------
$4,509,991 $4,919,019
========== ==========
The Company also has a Revolving Loan and Security Agreement (The Agreement)
which provided for a revolving line of credit with a borrowing base limited to
an amount which is the lesser of $7,000,000 or an amount determined by a formula
based on percentages of the Company's receivables and inventory. As of December
31, 1996, the revolving line of credit had a balance of $3,208,146 and requires
interest at the bank's base rate of interest plus 1% (9.25% at December 31,
1996). The unused availability on the line at December 31, 1996 was $3,013,645.
The Company also had two equipment loans under the Agreement with a balance of
$586,425 at December 31, 1996. These loans required interest at the base rate
plus 1.5% (9.75% at December 31, 1996).
Effective March 27, 1997 the Agreement was amended to increase the maximum
borrowings on the revolver to $9,000,000 and decrease the interest rate to the
bank's base rate (8.25% at December 31, 1996). The maturity on the revolver
was extended from March 31, 1997 to March 31, 2000. The two equipment loans
were also combined into one loan which requires monthly principal payments of
$9,020 plus interest at the bank's base rate. The equipment loan
terminates on March 31, 2002.
The amended Agreement also added an additional equipment line of credit for
$3,000,000. The Company can take advances on the line through March 31, 1998
during which period the Company will only be required to pay interest at the
bank's base rate. Commencing April 1, 1998, the Company will be required to
make principal payments based on a five year amortization schedule with
interest at the bank's base rate. The equipment line of credit terminates
March 31, 2003 and all outstanding principal and unpaid interest will be due.
20
To secure all obligations of the Company under the Agreement, the bank has a
first priority security interest in the Company's accounts receivable,
inventories, equipment, real estate and other assets. The Agreement requires,
among other things, minimum levels of net worth, no material adverse changes in
the financial condition of the Company and the maintenance of certain financial
ratios including debt to net worth and debt service. All borrowings under the
revolving line of credit are also at the discretion of the bank. The Agreement
also prohibits payment of dividends issuance, redemption or sale of common
stock and creation of certain other encumbrances and contingent liabilities
without the consent of the bank and limits the amount of annual capital
expenditures. The Company was in compliance with all loan covenants at
December 31, 1996.
Aggregate annual maturities of long-term debt for the five year period
subsequent to December 31, 1996 are as follows: 1997--$402,267;
1998--$3,671,101; 1999--$105,556; and 2000--$733,334.
NOTE D -- PENSION PLAN
The Company maintains a noncontributory defined benefit pension plan covering
substantially all employees meeting certain minimum age and service
requirements. The benefits are generally based on years of service and
employees' compensation during the last five years of employment. The
Company's policy is to contribute annually the amount necessary to satisfy the
requirements of the Employee Retirement Income Security Act of 1974.
In March 1993, the Board of Directors approved a curtailment to the plan which
resulted in the freezing of all future benefits under the plan as of April 1,
1993.
The following table sets forth the plan's funded status and amounts recognized
in the Company's financial statements:
December 31
1996 1995
---------- ----------
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$4,404,094 and $4,276,712
in 1996 and 1995, respectively $4,522,537 $4,423,092
========== ==========
Projected benefit obligation ...... $4,522,537 $4,423,092
Plan assets at fair value ......... 4,640,050 4,468,558
---------- ----------
Plan assets in excess of projected
benefit obligation ............... 117,513 45,466
Unrecognized net loss ............. 202,678 160,334
---------- ----------
Prepaid pension cost .............. $ 320,191 $ 205,800
========== ==========
21
Years Ended December 31
-------------------------------
1996 1995 1994
-------------------------------
Net pension cost included the
following components:
Service cost-benefits earned
during the period ............. $ -- $ -- $ --
Interest cost on projected
benefit obligation ............ 324,639 319,122 317,914
Actual return on plan assets ... (289,856) (512,481) 8,683
Net amortization and deferral .. 3,434 228,315 (300,633)
--------- --------- ---------
$ 38,217 $ 34,956 $ 25,964
========= ========= =========
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5% for 1996 and 1995, and 8.0%
for 1994. The expected long-term rate of return on plan assets was 7%.
In July 1991, the Company established a 401(k) defined contribution plan. The
Company matches 10% (20% commencing November 1, 1995) of employee
contributions up to 4% of compensation. Employer contributions and expenses
related to this plan were $52,690, $24,596, and $10,508, in 1996, 1995 and
1994, respectively.
NOTE E -- EMPLOYEE STOCK OWNERSHIP PLAN
Effective May 4, 1989, the Company established the Edac Technologies
Corporation Employee Stock Ownership Plan (the ESOP). Employees of the Company
are eligible to participate in the ESOP beginning six months following their
hire date. The Company makes annual contributions to the ESOP equal to the
ESOP's debt service. The ESOP shares initially were pledged as collateral for
its debt. As the debt is repaid, shares are released from collateral based on
the proportion of debt service paid in the year, and allocated to active
employees. The debt of the ESOP is recorded as debt of the Company and the
shares pledged as collateral are reported as unearned ESOP compensation
expense in the consolidated balance sheets. As shares are released from
collateral, the Company reports compensation expense. ESOP compensation
expense was $77,777 for the years ended December 31, 1996, 1995 and 1994.
Interest expense incurred on the debt was $18,381, $26,174, and $26,357, for
the years ended December 31, 1996, 1995 and 1994, respectively.
The ESOP shares as of December 31, 1996 were as follows:
1996 1995
------- -------
Allocated shares 575,505 477,386
Shares released
for allocation 109,586 109,586
Unreleased shares 273,962 383,548
------- -------
Total ESOP shares 959,053 970,520
======= =======
NOTE F -- INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards (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.
22
Income tax expense (benefit) are included in the financial statements as
follows (in 000's):
1996 1995 1994
---- ---- -----
Current $20 $39 $114
Deferred (20) (39) (114)
--- --- ----
$-- $-- $--
=== === ====
The effective tax rate on income before income taxes is different from the
prevailing Federal and state income tax rate as follows (in 000's):
Years Ended December 31,
------------------------
1996 1995 1994
------ -------- -----
Income (loss) before income taxes $ 7 $(1,083) $ 72
------ ------- -----
Income tax at Federal statutory rate $ 2 $ (368) $ 24
State income taxes-net of Federal benefit 1 (80) 5
Meals, Entertainment and Other (11) 68 41
Change in valuation allowance on
deferred income tax assets 8 380 (70)
------ ------- -----
$ -- $ -- $ --
====== ======= =====
For the year ended December 31, 1995, the Company increased its recorded
valuation allowance to reserve against assets for which it is considered
possible that a benefit will not be realized. For the years ended December 31,
1994, the change in the valuation allowance is due to realization of net
operating loss carryforwards, subject to limitations.
The tax effect of temporary differences giving rise to the Company's deferred
tax asset and liability at December 31, 1996 and 1995 are as follows (in
000's):
1996 1995
------ -----
Deferred tax liabilities:
Property, plant and equipment $ 872 $ 856
Capital leases 58 58
Other 202 57
------ -----
1,132 971
------ -----
Deferred tax assets:
Allowance for uncollectible
accounts receivable 48 17
Employee compensation and amounts withheld 145 58
Accrued expenses 83 66
Unicap and inventory reserves 528 776
Tax effect of net operating loss carryforwards 765 464
Alternative minimum tax credit carryforwards 285 285
Other 18 17
Valuation allowance (720) (712)
------ -----
$1,152 971
------ -----
Net deferred tax asset $ 20 $ --
====== =====
Reflected in balance sheet as:
Net current deferred tax asset $ 541 $ 917
Net long term deferred tax liability 521 917
------ -----
$ 20 $ --
====== =====
23
Due to the change in ownership during 1989 (see Note A), provisions of the
Internal Revenue Code restrict the utilization of net operating loss
carryforwards (NOLs) attributed to the period prior to the change in ownership.
As of December 31, 1996 and 1995, the Company has pre-change NOLs of
approximately $1,200,000 available to offset future federal taxable income of
which the Company is limited to annual utilization of approximately $181,000.
These NOLs expire in the year 2003. The Company also has post-change NOLs
totalling approximately $750,000 which will expire in 2011 for federal income
tax purposes. The Company has alternative minimum tax credits of approximately
$285,000 which carry forward indefinitely for Federal income tax purposes.
These credits can be used in the future to the extent that the Company's regular
tax liability exceeds amounts calculated under the alternative minimum tax
method.
NOTE G -- COMMITMENTS AND CONTINGENCIES
Lease expense under operating leases was $61,088, $60,074, and $16,710, for the
years ended December 31, 1996, 1995 and 1994, respectively. Minimum rental
commitments as of December 31, 1996 for noncancelable operating leases with
initial or remaining terms of one year or more are as follows: 1997--$62,306;
1998--$22,337; 1999--$19,765; 2000--$19,765; 2001 $12,491; 2002 and
thereafter-- $39,425.
NOTE H -- MAJOR CUSTOMERS
For the year ended December 31, 1996, sales to United Technologies Corporation
amounted to 67% of consolidated sales. For the year ended December 31, 1995,
sales to United Technologies Corporation and Zapata Technologies, Inc. amounted
to 69% and 10%, respectively, of consolidated sales. These customers operate in
the aerospace and packaging fields, respectively. For the year ended December
31, 1994, sales to United Technologies Corporation amounted to 69% of
consolidated sales.
At December 31, 1996, the Company had $1,505,500 of trade receivables due from
United Technologies Corporation, and $705,775 due from Zapata Technologies,
Inc.
24
OFFICERS
Edward J. McNerney President and Chief Executive Officer
Francis W. Moskey Vice President
Ronald G. Popolizio Vice President-Finance and Secretary
BOARD OF DIRECTORS
John Di Francesco Chairman
William J. Gallagher President, William J. Gallagher Company
Edward J. McNerney President and Chief Exeutive Officer
Francis W. Moskey Vice President
Stephen G.W. Walk President, Blanche P. Field LLC
CORPORATE OFFICES
1806 New Britain Avenue
Farmington, CT 06032
GENERAL COUNSEL
Reinhart, Boerner, Van Deuren, Norris & Rieselbach, s.c.
1000 North Water Street
Milwaukee, WI 53202
CORPORATE AUDITORS
Arthur Andersen LLP
One Financial Plaza
Hartford, CT 06103
TRANSFER AGENT
Firstar Trust Company
615 East Michigan Street
Milwaukee, WI 53202
10-K INFORMATION
Shareowners may obtain a copy of the 1996 Edac Technologies 10-K report filed
with the Securities and Exchange Commission by writing to: Ronald G.
Popolizio, Secretary, Edac Technologies Corporation, 1806 New Britain Avenue,
Farmington, CT 06032.