<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934 FOR THE FISCAL YEAR DECEMBER 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to .
----------- ------------
Commission file number 0-14275
Edac Technologies Corporation
(Exact Name of Registrant as Specified in Its Charter)
Wisconsin 39-1515599
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Identification No.)
Organization)
1806 New Britain Avenue, Farmington, Connecticut 06032
- ---------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (860)-677-2603
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
N/A N/A
------------------ ----------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0025 par value
-------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
<PAGE> 2
As of March 17, 1998, 3,834,550 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock (based upon the $9 3/8 average
bid and ask price on that date in the over-the-counter market) held by
nonaffiliates (excludes shares reported as beneficially owned by directors and
officers - does not constitute an admission as to affiliate status) was
approximately $25,092,187.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Into Which Portions of
DOCUMENT Document are Incorporated
-------- -------------------------
Annual Report to Shareholders for the
fiscal year ended December 31, 1997 Part II
Proxy Statement relating to
1998 Annual Meeting of Shareholders Part III
<PAGE> 3
PART I
Item 1. Business.
General
Edac Technologies Corporation ("Edac" or the "Company") was formed in 1985
for the purpose of acquiring Gros-Ite Industries, Incorporated (which had three
operating divisions: Time Engineering, Gros-Ite and Spectrum). In 1988 and 1989,
Edac sold the assets of its other operations and now operates only the Gros-Ite
division ("Gros-Ite").
Products
Edac currently offers design and manufacturing services for the aerospace
industry in areas such as special tooling, equipment and gauges, and components
used in the manufacture, assembly and inspection of jet engines. Edac also
specializes in the design and repair of precision spindles. Spindles are an
integral part of numerous machine tools which are found in virtually any type
of manufacturing environment.
Edac maintains manufacturing facilities with computerized, numerically
controlled machining centers, grinding, welding, and sheet metal fabrication,
painting and assembly capabilities. Items manufactured by Edac include precision
rings, and other components for jet engines, industrial spindles and specialized
machinery designed by Edac or others and other assemblies requiring close
tolerances.
Patents and Trademarks
Edac currently holds no patents or registered trademarks, tradenames or
similar intellectual property. The Company believes that the nature of its
business presently does not require the development of patentable products or
registered tradenames or trademarks to maintain market growth.
Marketing and Competition
Edac has numerous competitors both in design and manufacturing. Many of the
independent design firms with which it competes are smaller than Edac and do not
provide the variety of services that Edac provides. Edac also competes with its
customers' in-house design and technical services capabilities. Edac believes
that it is able to compete effectively with independent design firms and
in-house design staffs because of its experience and the timeliness and
competitive pricing of its services.
Many firms also compete with Edac's manufacturing operations. However, Edac
believes that it will be able to compete effectively with these firms on price,
ability to meet customer deadlines and the stringent quality control standards
it employs. Edac also believes that its integration of design and manufacturing
capabilities offers a competitive advantage.
Edac's manufactured products are sold primarily through individual purchase
orders on a quotation or bid basis. Its sales personnel and management maintain
contacts with purchasing sources to
<PAGE> 4
keep informed as to manufacturing projects available for quotation. Edac
occasionally enters into annual manufacturing contracts on specific components.
For its fiscal year ended December 31, 1997, approximately 68% and 4% of
Edac's net sales were derived from sales to United Technologies Corporation and
Zapata Technologies Inc., respectively.
Approximately 7% of Edac's design business is done on a time and material
basis based on hourly rates established annually. Most of Edac's manufacturing
is done on a firm quotation basis. Less than 10% of Edac's net sales are
attributable to government contracts subject to termination or re-negotiation at
the option of the U.S. Government. United Technologies Corporation annually
negotiates hourly billing rates for design work and is free to audit costs
actually charged.
Backlog
Edac's backlog as of December 31, 1997, was approximately $45,000,000
compared to $22,000,000 as of December 31, 1996. Backlog consists of accepted
purchase orders that are cancelable by the customer without penalty, except for
payment of costs incurred, and may involve delivery times that extend over
periods as long as three years. Edac presently expects to complete approximately
$28,000,000 of its December 31, 1997 backlog during the current fiscal year.
Employees
As of March 9, 1998, Edac had approximately 226 employees.
Item 2. Properties.
The properties at 1790 and 1798 New Britain Avenue were renovated in
1997 to improve production, increase capacity and improve the appearance both
interior and exterior. The building at 1806 New Britain Avenue was constructed
in 1995 for the Company's developing Large Machining operation.
<TABLE>
<CAPTION>
Square Owned or Principal
Address Feet Leased Activity
- ------- ---- ------ --------
<S> <C> <C> <C>
1790 New Britain Ave. 47,000 Owned Manufacturing
Farmington, CT. 06032 Design engineering
(1) services
1798 New Britain Ave. 20,800 Owned Design and manu-
Farmington, CT. 06032 (1) facture of spindles
and specialized
machines
1806 New Britain Ave. 19,200 Owned Manufacturing
Farmington, CT. 60632 (1)
1838 New Britain Ave. 10,000 Leased Warehouse
Farmington, CT. 06032
</TABLE>
<PAGE> 5
(1) Property subject to mortgage securing certain corporate indebtedness.
Item 3. Legal Proceedings.
Edac is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Information in response to this item is incorporated herein by reference
to "Market Information" on page 12 of Edac's 1997 Annual Report to Shareholders.
Item 6. Selected Financial Data.
Information in response to this item is incorporated herein by reference
to "Selected Financial Information" on page 13 of Edac's 1997 Annual Report to
Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Information in response to this item is incorporated herein by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 16 through 16 of Edac's 1997 Annual Report to Shareholders.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk.
The Company does not invest in derivative financial instruments, other
financial instruments or derivative commodity instruments.
Item 8. Financial Statements and Supplementary Data.
Information in response to this item is incorporated herein by reference
to pages 17 through 32 of Edac's 1997 Annual Report to Shareholders.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
<PAGE> 6
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information in response to this item is incorporated herein by
reference to "Election of Directors" in Edac's definitive Proxy Statement for
its 1998 Annual Meeting of Shareholders ("Edac's 1998 Proxy Statement"), which
will be filed within 120 days after the end of Edac's fiscal year ended
December 31, 1997.
Item 11. Executive Compensation.
Information in response to this item is incorporated herein by reference to
"Executive Compensation" in the 1998 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information in response to this item is incorporated herein by reference to
"Principal Security Holders and Security Holdings of Management" in Edac's 1998
Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information in response to this item is incorporated herein by reference to
"Certain Transactions" in Edac's 1998 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K.
(a) Documents filed:
1. Financial Statements.
The financial statements required to be filed by Item 8 hereof
have been incorporated by reference to Edac's 1997 Annual Report
to Shareholders and consist of the following:
Report of Independent Public Accountants
Consolidated Statements of Operations--Years ended December 31,
1997, 1996 and 1995.
Consolidated Balance Sheets--December 31, 1997 and 1996.
` Consolidated Statements of Cash Flows--Years ended
December 31, 1997, 1996 and 1995.
<PAGE> 7
Consolidated Statements of Changes in Shareholders'
Equity--Years ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial statement schedule.
The following financial statement schedule of Edac is included in
Item 14(d) hereof:
Report of Independent Public Accountants on Schedule
Schedule II: Valuation and qualifying accounts
All other schedules for which provisions are made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(b) Reports on Form 8-K
None.
(c) Exhibits:
See Exhibit Index included as the last part of this Report, which Index
is incorporated herein by this reference.
(d) Financial Statements and Schedules
Refer to Item 14(a) above for listing of financial statements and
schedule.
<PAGE> 8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Shareholders and Board of Directors of
Edac Technologies Corporation:
We have audited in accordance with generally accepted auditing standards the
financial statements included in Edac Technologies Corporation's annual report
to shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 13, 1998. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule presented
on Schedule II of this Form 10-K is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/Arthur Andersen LLP
Hartford, Connecticut
February 13, 1998
<PAGE> 9
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
EDAC TECHNOLOGIES CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. A COL B. COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONS
Balance at Beginning Charged to Costs Charged to Other Deductions Balance at End
DESCRIPTION of Year and Expenses Accounts-Describe Describe of Year
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 116,087 $ 47,287 $0 (1) 38,374 $ 125,000
Allowance for excess and obsolete
inventory and loss contracts 1,278,804 0 0 (2) 978,804 300,000
YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for
doubtful accounts 40,000 76,087 0 0 116,087
Allowance for excess and obsolete
inventory and loss contracts 1,786,212 0 0 (2) 507,408 1,278,804
YEAR ENDED DECEMBER 31, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for
doubtful accounts 40,000 0 0 0 40,000
Allowance for excess and obsolete
inventory and loss contracts 886,085 900,127 0 0 1,786,212
</TABLE>
(1) Represents write-off of specific accounts receivable.
(2) Represents disposition of inventory reserved against.
<PAGE> 10
SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf on March 17, 1998 by the undersigned, thereunto duly authorized.
EDAC TECHNOLOGIES CORPORATION
BY /s/ Edward J. McNerney
------------------------
Edward J. McNerney,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/John J. DiFrancesco . Chairman of the Board March 17, 1998
- ------------------------
John J. DiFrancesco
/s/Edward J. McNerney . Chief Executive Officer, March 17, 1998
- ------------------------ President and Director
Edward J. McNerney
/s/Ronald G. Popolizio . Vice President and Chief March 17, 1998
- ------------------------- Financial Officer
Ronald G. Popolizio (Principal Financial and
Accounting Officer)
/s/Francis W. Moskey . Vice-President March 17, 1998
- ------------------------ and Director
Francis W. Moskey
/s/Stephen G.W. Walk . Director March 17, 1998
- ------------------------
Stephen G.W. Walk
/s/Arnold Sargis . Director March 17, 1998
- ----------------------
Arnold Sargis
</TABLE>
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Page Number
- ------ -----------
<S> <C> <C>
3.1 Edac's Amended and Restated (1)
Articles of incorporation
3.2 Edac's By-Laws (5)
4.1 Edac's Amended and Restated (1)
Articles of incorporation
4.2 Sections of Edac's By-Laws (5)
10.1 Consulting Agreement between (1)
Gros-Ite and William Giannone
10.2 Gros-Ite division Pension Plan (1)
10.3 Edac Technologies Corporation (2)
Employee Stock Ownership Trust,
effective May 1, 1989
10.4 $700,000 Limited Recourse Term (2)
Promissory Note dated May 12, 1989
between the Plan and CNB
10.5 Edac Technologies Corporation (3)
1991 Stock Option Plan
10.6 $4,000,000 Term Promissory Note (4)
dated March 22, 1993 between
Edac and Shawmut
10.7 Stock Option Agreement dated (4)
January 1, 1994 between Edac and
Robert Whitty
10.8 Construction to Permanent Loan (5)
Promissory Note
10.9 Open-End Construction to Permanent (5)
Mortgage Deed
10.10 Sixth Amendment to Revolving Loan, (5)
Term Loan, Equipment Loan and
Security Agreement
10.11 Modification of Construction to (5)
Permanent Loan Promissory Note
and Open-End Construction to
Permanent Mortgage Deed
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C>
10.12 Seventh Amendment to Revolving Loan, (5)
Term Loan, Equipment Loan and
Security Agreement and
Reaffirmation of Guarantees
10.13 Eighth Amendment to Revolving Loan, (5)
Term Loan, Equipment Loan and
Security Agreement and
eaffirmation of Guarantees,
Modification of Notes and
Reaffirmation of Guarantees
10.14 Seventh Modification Agreement to (5)
Open-End Mortgage Deed
10.15 Second Modification of Construction (5)
to Permanent Loan Promissory Note
and Open-End Construction to
Permanent Mortgage Deed
10.16 Edac Technologies Corporation (6)
1996 Stock Option Plan
10.17 Letter Agreement between Edac and (6)
Edward J. McNerney
10.18 Ninth Amendment to Revolving loan, Term (7)
Loan, Equipment Loan and Security
Agreement, Modification of Notes and
Reaffirmation of Guarantees
10.19 Amended and Restated Revolving Promissory (7)
Note
10.20 Equipment Promissory Note III (7)
10.21 Amended and Restated Promissory Note (7)
10.22 Eighth Modification Agreement to Open-End (7)
Mortgage Deed
10.23 Third Modification of Construction to (7)
Permanent Loan Promissory Note and
Open-End Construction to Permanent
Mortgage Deed
10.24 Employment letter from Edac to Ronald G.
Popolizio
11 Statement regarding computation of
earnings per share
13 Edac's 1997 Annual Report to Shareholders
</TABLE>
<PAGE> 13
<TABLE>
<S> <C>
23 Consent of Arthur Andersen LLP,
independent public accountants
27 Financial Data Schedule
</TABLE>
(1) Exhibit incorporated by reference to the Company's
registration statement on Form S-1 dated August 6, 1985,
commission File No. 2-99491, Amendment No. 1.
(2) Exhibit incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1989.
(3) Exhibit incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1991.
(4) Exhibit incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1993.
(5) Exhibit incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
(6) Exhibit incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
(7) Exhibit incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997.
<PAGE> 1
EXHIBIT 10.24
<PAGE> 2
January 24, 1997
Mr. Ronald G. Popolizio
Eight Holmes Circle
Farmington, CT 06032
Dear Ron:
I'am delighted to confirm our offer for you to join us as Corporate V.P. of
Finance.
Terms of our offer as follows:
- - Compensation for Cobra Health costs current employer for approximately
12 months.
- - Salary $100,000.
- - Guaranteed minimum bonus for 1997 of 15% with an upside to 30% based
upon achieving agreed upon goals.
- - Three weeks paid vacation.
- - Stock option in the amount of 5,000 shares annually. Shares will be
vested within 6 months of granted, exerciseable within 5 years.
- - All normal health and holiday benefits.
Ron, I'am excited about the potential of Gros-Ite and confident that you joining
our company will be beneficial to you and Gros-Ite. I look forward to your
response.
Regards,
/s/Edward J. McNerney
Edward J. McNerney
President & C.E.O.
Accepted /s/Ronald G. Popolizio
Ronald G. Popolizio
<PAGE> 1
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
EDAC TECHNOLOGIES CORPORATION
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Basic:
Weighted average
shares outstanding 3,806,015 3,694,568 3,628,151
Net income (loss) $ 1,696,148 $ 7,077 $(1,083,219)
Net income (loss) per share $.45 $.00 $(.30)
=========== =========== ===========
Diluted:
Weighted average
shares outstanding 3,806,015 3,694,568 3,628,151
Net effect of dilutive stock
options based on the treasury
stock method using average
market price 174,118 105,623 --
----------- ----------- -----------
Total 3,980,133 3,800,191 3,628,151
=========== =========== ===========
Net income (loss) $ 1,696,148 $ 7,077 $(1,083,219)
Net income (loss) per share $.43 $.00 $(.30)
=========== =========== ===========
</TABLE>
<PAGE> 1
Exhibit 13
<PAGE> 2
Edac Technologies Corporation
Gros-Ite Industries 1997
Gros-Ite Spindle Annual
Report
<PAGE> 3
EDAC TECHNOLOGIES CORPORATION
INTRODUCTION
The revolution has arrived. It's called Kaizen, continuous improvement,
and you experience it everywhere at EDAC Technologies Corporation. Of
course, we use the absolute finest equipment available anywhere, but
that's not why EDAC quality is unsurpassed. EDAC quality begins and ends
with each EDAC individual. It's a relentless striving for doing it faster,
less expensively, leaner and more precisely. You see it in our people.
And you see it in our products. For each, there are none better. Are we
satisfied? Never.
COMPANY HISTORY
The company was founded in 1946 in Hartford, Connecticut by Wayne Gross and
Robert Hite as the Gros-ite Design Company, specializing in design
engineering services. Over the subsequent years, the company has expanded
its product offering to include precision machine spindles, precision
aerospace components and specialized tools and equipment.
The Company remained private until its public offering in 1985 and is
traded on the NASDAQ market under the symbol EDAC.
In 1996, the Corporation was reorganized under the leadership of a new team
of contemporary managers into focused business units based on its specific
products and markets.
We are committed to achieving quality growth within markets served and
diversifying into new markets through strategic acquisitions and new
product offerings.
Our foundation for growth will center around institutionalizing Lean
Manufacturing concepts throughout our organization. Continuous improvement,
i.e. Kaizen, will be the centerpiece of achieving benchmark quality,
service and value to our customers, shareholders and employees.
Lean Manufacturing concepts such as Kaizen, 5's, mistake proofing, etc.,
will permeate throughout our corporation via our PACE (people achieving
customer excellence) program. This program will empower every employee to
become an agent for change in our mission to achieve excellence.
We strongly believe that embracing and successfully employing lean
manufacturing concepts throughout our organization will provide us with a
competitive advantage with our customers, shareholders, and our employees.
MISSION STATEMENT
Our overriding mission is to be the company of choice for our customers,
shareholders, employees and community. We will achieve this stature by:
* Being flexible and easy to work with.
* Providing our customers with benchmark quality, service and
value.
* Providing shareholders superior return on their investment.
* Developing a world class working environment for our employees
health, safety, security and career growth.
* Being a good corporate citizen by supporting our local
community and charities.
The foundation for achieving our mission will be built around two promises.
1. Continuous Improvement. We will continuously raise the bar in
achieving excellence in all that we do.
2. Embracing Goodness in Our Behavior. We commit to being
professional, moral, ethical and caring in how we interface
with our customers, our co-workers and our community.
<PAGE> 4
FINANCIAL HIGHLIGHTS
[GRAPH]
SALES
(dollars in thousands)
<TABLE>
<CAPTION>
1994 1995 1996 1997
<S> <C> <C> <C> <C>
SALES 22,239 24,564 30,249 38,229
</TABLE>
[GRAPH]
OPERATING PROFIT
(dollars in thousands)
<TABLE>
<CAPTION>
1994 1995 1996 1997
<S> <C> <C> <C> <C>
OPERATING PROFIT 43 (510) 752 2,401
</TABLE>
[GRAPH]
STOCK PRICE
(at December 31 in dollars)
<TABLE>
<CAPTION>
1994 1995 1996 1997
<S> <C> <C> <C> <C>
STOCK PRICE 31/32 1 3/8 2 8 3/4
</TABLE>
[GRAPH]
NET INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
1994 1995 1996 1997
<S> <C> <C> <C> <C>
NET INCOME 72 (1,083) 7 1,696
</TABLE>
[GRAPH]
EARNINGS PER SHARE
(in dollars)
<TABLE>
<CAPTION>
1994 1995 1996 1997
<S> <C> <C> <C> <C>
EARNINGS PER SHARE 0.02 (0.30) 0.00 0.43
</TABLE>
<PAGE> 5
TO OUR SHAREHOLDERS:
Under the leadership of our president and CEO, Ed McNerney, 1997 will
be remembered in company annals as the year of a major breakthrough. Net income
and earnings per share set records for any year in our history. Operational
strategies we have pursued under our reconstituted management team yielded the
positive results we anticipated. Total sales were also at near-record levels for
the year, and the significant revenue gains achieved by several of our
individual business units validated our decision in 1996 to focus on the growth
and profitability of four distinct product lines.
Net income for the year climbed to $1,696,148, or 43 cents per diluted
share, approximately 240 times the net income of $7,077, or less than one cent
per share, for 1996. Sales rose 26.4 percent, to $38.2 million from $30.2
million for the prior year.
Much of this growth reflects the initial success of our commitment to
create an organizational structure and business culture that stresses the
participation of each individual in the pursuit of continuous improvement. Every
EDAC employee has been empowered to be an agent of change in our quest for
excellence, and we are institutionalizing Lean Manufacturing concepts that
enable EDAC to produce products faster, less expensively, and more precisely.
The culture is called Kaizen, and it is giving EDAC a competitive
advantage with our customers, shareholders and employees. It is visible in every
aspect of our operations, from the team centers on our shopfloors to the cross
functional Kaizen blitz in which employees implement the ideas they have
developed to improve productivity.
During 1997, employees applying Kaizen's "lean thinking" concepts
implemented changes that reduced set up times from 11 hours to one hour and from
three hours to 13 minutes. Turnaround time for spindle repair work has been
reduced from 8 to 12 weeks to 24 hours.
We have also been reconfiguring our manufacturing space to accommodate
a "pull system" that will allow goods to flow uninterrupted through the
facility, from delivery of the raw materials to shipment of the finished
product. This Kaizen-inspired system is nearing completion, and is already in
place at two of our business units.
<PAGE> 6
Kaizen is only one of the changes that contributed to our success in
1997. In late 1996, under its new executive management, EDAC's four principal
businesses were identified as Engineered Precision Spindles, Engineered
Precision Components, Engineered Solutions and Precision Large Machining, and we
are now able to measure the growth and profitability of product lines
encompassed by those four business units.
We are especially pleased with the results for the Large Machining and
Precision Engineered Components business units, which increased revenues in 1997
by 99.7 percent and 31.5 percent respectively. Both of these units serve the
aerospace industry.
Sales for Large Machining rose to $6.5 million in 1997, from $3.3
million in 1996, and sales of Precision Engineered Components exceeded $20
million. Engineered Solutions, which serves the aerospace, consumer product and
semiconductor markets, recorded sales of approximately $8 million in 1997, and
is experiencing rapid growth.
We are taking aggressive steps to update our three manufacturing
facilities and maintain world class housekeeping practices. EDAC has invested
more than $3 million in new, state-of-the-art production equipment, added
capacity and reduced costs.
One of the prime beneficiaries of our capital investments in 1997 is
the restructured and reorganized Spindles business unit, which received $800,000
of new machinery, and a new 1,500 square-foot 10K clean room. We also recruited
an experienced director of sales and marketing who is already generating new
high-margin orders for spindles that are used in grinders, lathes and automated
production lines.
Quality manufacturing is critical to the long-term success of all our
business units. Accordingly, EDAC is doing what is required to earn D1-9000
certification from Boeing Aircraft and ISO9001 quality certifications by the end
of 1998. The ISO9001 certification will improve our access to international
markets, which we look forward to entering for the first time.
In the meantime, our existing markets are strong and growing. The
outlook for the Aerospace market is particularly bright, and we are
participating in new, long-term aerospace projects with life cycles out to the
year 2027.
EDAC entered 1998 with backlog of more than $45 million, improved
productivity from our lean thinking concepts, updated equipment, additional
capacity and promising new sources of business. During the fourth quarter of
1997, we added a number of non-aerospace customers including The Gillette
Company, SVG
<PAGE> 7
Lithography Systems, Inc. and Kamatics Corporation, who serve consumer,
semiconductor and industrial bearings markets.
We have also augmented our board with three new directors, Mr. Lee
Morris, Mr. Arnold Sargis and Mr. Robert Gilchrist. Mr. Morris is chairman and
chief executive officer of the Robert E. Morris Corp., a distributor of state of
the art manufacturing machines and machine tools. Mr. Sargis is president of
A.J. Sargis and Associates, a lean manufacturing consulting firm. Prior to that
until 1995, Mr. Sargis was continuous improvement manager at Wiremold
Corporation. Mr. Gilchrist brings to EDAC his extensive engineering, marketing
and general management experience as an executive with Bendix, Kaman Corporation
and Ensign-Bickford Industries. He is currently managing director of Horton
International, Inc., an international management consulting and executive search
firm headquartered in New York City.
We believe EDAC is now positioned to move forward confidently in 1998
and beyond as we rationalize and expand our existing businesses, maximize the
benefits of our lean thinking manufacturing concepts, penetrate new markets and
pursue continual improvement of our quality, delivery and cost structure. We are
committed to creating value for our shareholders, customers and employees, and
it is our pledge to merit your support of EDAC.
Sincerely yours,
/s/John J. DiFrancesco
John J. DiFrancesco
Chairman of the Board
/s/Edward J. McNerney
Edward J. McNerney
President and CEO
<PAGE> 8
[GROS-ITE PRECISION ENGINEERED SPINDLES LETTERHEAD]
[PHOTO OF OVERALL FACTORY]
The Gros-ite Precision Engineered Business Unit designs, manufactures and
repairs spindles with precision rolling element bearings for grinding, boring,
milling and similar rotating devices for a wide variety of industrial
applications. Our repair warranty and turnaround are among the best in the
industry.
One piece flow reaps enormous cost savings and huge quality increases.
Setup time takes only minutes, not hours. Team center grouping of machines
eliminates inventory backups and pinpoints defects almost instantly.
[PHOTO OF COMPUTER]
Need a specialized spindle? We engineer our spindles to be job rated.
Whenever possible, your specifications will be improved. Advanced software is
utilized for the engineering analysis of spindle designs and applications.
[PICTURE OF WORKING BALANCING MACHINE]
Gros-ite Precision Engineered Spindles dynamically balances all rotating
components to the lowest balancing tolerances available anywhere.
[PHOTO OF CLEAN ROOM]
Was contamination the cause of your last failure? We assemble all
spindles in our class 10,000 Clean Room. Head-to-toe gear and extreme control
of humidity, temperature and particulates assure an unsurpassed spindle
lifecycle.
<PAGE> 9
Collage of photographs
<PAGE> 10
[GROS-ITE PRECISION ENGINEERED SOLUTIONS LETTERHEAD]
With both full service design and manufacturing capabilities, the Engineered
Solutions Division can deliver a competitively-priced, on-time project from
concept to production. We design and build jigs and fixtures, gauges, tools and
tool holders, material handling devices, and special machinery. Industries
served include aerospace, jet engine overhaul and repair, medical,
semiconductor, photographs and consumer products.
[PICTURE OF 3D COMPUTER DRAWING]
3D modeling of a complex gauge for inspecting a turbine engine airfoil.
Customers rely on our advanced software, unparalleled skill and rigorous quality
standards for producing their most demanding parts.
[PICTURE OF PERSON PRODUCING PROTOTYPE]
Using the state-of-the-art Alpha CNC controlled lathe to coring high nickel
alloy into a precision prototype jet engine component. We handle the most
difficult-to-machine materials on earth with ease and unrivaled precision.
[PICTURE OF PERSON OPERATING A MACHINE]
Building a part directly from the drawing. Kaizen: A shopfloor idea resulted
in our unique procedure of having the same technician both estimate and process
the job. Personal responsibility and quality soar.
<PAGE> 11
[GROS-ITE LARGE MACHINING LETTERHEAD]
Serving all major aircraft engine manufacturers, the Large Turning Division
produces low pressure turbine cases, hubs, rings and disks. We specialize in
such difficult-to-machine alloys as waspalloy, hastalloy, inconnel, titanium,
high nickel alloys, aluminum and stainless steels.
[PHOTO OF OVERALL SHOT OF LARGE MACHINING DIVISION]
Other large machining operations are dirty, dark and disorganized. EDAC's is
uniquely clean, spacious, highly organized, and brightly lit. All processes
occur on this one shopfloor for unequaled cost-efficiency and quality
control.
[PICTURE OF AEROSPACE PART]
Gauging a low pressure turbine case. Our probe equipped Summit unit measures
diameter turning capacities up to 144". More important, every EDAC
technician's push for continual improvement assures industry-leading quality.
[PICTURE OF EMPLOYEE NEXT TO TOOL BOX]
Kaizen: A shopfloor idea resulted in our Mobile Setup Unit, which contains
everything for setting up measuring and documenting. Every EDAC machine has
one. A 4-hour set-up now takes ten minutes!
[PICTURE OF COMPARISON TO SCALE]
Our hallmark is the manufacture of very large parts with exacting care.
Documenting the serial number of a low pressure turbine. In background, a
titanium case for a jet engine.
<PAGE> 12
[GROS-ITE PRECISION ENGINEERED COMPONENTS LETTERHEAD]
Many complex, zero tolerance components are built and assembled here for the
aircraft jet engine and medical industries. Precision assembly services
include assembly of jet engine sinc rings and medical devices, aircraft welding
and riveting, post assembly machining and sutton barrel finishing.
CNC 4- and 5-axis equipment can machine components of 4" to 42" diameters
working with today's most advanced alloys. A clean shopfloor is an attitude,
part of our never-ending quest for excellence.
[PICTURE OF EMPLOYEE OPERATING MACHINE]
Kaizen: A shopfloor idea reduce a hole drilling operation from two steps to one
using a countersink, dramatically cutting work time and cost. EDAC produces
many precision jet engine components for every major aerospace company. Each
part meets the industry's tightest tolerances, and all are customer-certified
for delivery without the customer's need to verify quality.
[PICTURE OF PRECISION PARTS]
[PICTURE OF SCHEDULING BOARD]
All jobs are scheduled by computer control. Visual management is used
throughout our operation, evident in our production control visual scheduling
board. Our on-time performance is industry-leading. Nobody else even comes
close.
[PICTURE OF TRAINING ROOM]
A Kaizen event: A problem is blitzed, including corrections so it doesn't keep
coming back. When a suggestion is approved, it is instantly implemented.
Kaizen training is continual and improvements happen FAST.
<PAGE> 13
Marketing and Competition
Edac has numerous competitors both in design and manufacturing.
Many of the independent firms with which Edac 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 the fiscal year ended December 31, 1997, approximately 68% of
Edac's net sales were to United Technologies Corporation, 4% were to Zapata
Technologies Inc. and 28% were to other industrial based customers.
MARKET INFORMATION
The Company's Common Stock trades on The Nasdaq Small Cap Market under the
symbol: "EDAC".
High and low stock prices for the last two years were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 2 7/16 1 8/16 1 8/16 14/16
Second Quarter 4 1/16 2 2/16 1 12/16 1 1/16
Third Quarter 5 4/16 2 15/16 1 10/16 1
Fourth Quarter 9 1/16 4 12/16 2 6/16 15/16
</TABLE>
The approximate number of shareholders of record plus beneficial shareholders of
the Company's Common Stock at March 3, 1998 was 1,180.
The Company has never paid cash dividends and does not anticipate making and
cash dividends in the foreseeable future. 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).
<PAGE> 14
SELECTED FINANCIAL INFORMATION
The following selected financial information for each of the years in the
five-year period ended December 31, 1997 have been derived from the financial
statements of the Company as audited by Arthur Andersen, LLP, independent
auditors, whose report with respect to fiscal 1997, 1996 and 1995 appears
elsewhere herein. The following data are qualified by reference to and should be
read in conjunction with the Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
-------------------------------------------------
(In thousands, except per share data)
SELECTED INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Sales $38,229 $30,249 $24,564 $22,239 $29,331
Net income (loss) 1,696 7 (1,083) 72 741
Net income (loss)
per diluted share .43 0 (.30) .02 .20
SELECTED BALANCE SHEET DATA
Current assets $15,196 $14,058 $14,215 $12,170 $12,179
Total assets 23,850 19,917 20,352 16,326 16,634
Current liabilities 10,695 9,402 9,166 5,323 5,669
Working capital 4,501 4,656 5,049 6,847 6,510
Long-term obligations 6,269 5,043 5,854 4,831 4,959
Shareholders' equity 6,886 5,473 5,332 6,172 6,006
</TABLE>
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1997 can best be summarized by one word--focus. We focused on four
distinct business units. We focused on continuous improvement in every aspect of
our organization. Lean thinking techniques, both on the floor and in the office,
have resulted in tangible competitive advantages. These advantages have aided us
in becoming the manufacturer of choice for our customers, employees and
shareholders.
Continuous improvement means just that. We will never be satisfied with
where we are. In the years to come, we will strive to raise the benchmark. The
aerospace market remains strong. The Company is forecasting robust sales, record
earnings and the addition of significant non-aerospace business for 1998.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and related notes thereto.
Revenues from the Company's principal markets are as follows:
<TABLE>
<CAPTION>
In Thousands of Dollars 1997 1996 1995
----------------------- ---- ---- ----
<S> <C> <C> <C>
Aerospace customers................. $28,758 $20,284 $17,376
Other............................... 9,471 9,965 7,188
</TABLE>
Net sales increased $7,980,000 or 26.4% in 1997 from 1996. Aerospace
sales increased $8,474,000 or 41.8% from 1996 representing stronger sales to the
company's principal aerospace customer and substantial gains in other aerospace
customers. Sales to other markets declined slightly, but are expected to
increase significantly in 1998. During 1997, the Company's principal aerospace
customer continued to reduce its vendor base as it has in prior years. During
this vendor base realignment, the Company has improved its performance and is
currently viewed as a leader by this customer.
Net sales increased $5,685,000 or 23% in 1996 from 1995. The increase
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 1997 to 84.5% from
88% in 1996. In 1997 the Company embraced lean manufacturing concepts. These
concepts, coupled with higher sales levels to cover fixed manufacturing costs,
resulted in lower cost of sales in a competitive environment.
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
<PAGE> 16
training costs in 1995, as well as the benefit of higher sales levels to cover
fixed manufacturing costs in 1996.
Selling, general and administrative expenses were $3,540,000 in 1997,
representing an increase of $644,000 or 22% from the 1996 level of $2,896,000.
As a percentage of sales, selling, general and administrative costs were 9.3% of
sales in 1997 and 9.6% of sales in 1996. The increase in these expenses was
largely due to increased management bonuses based on the achievement of
pre-established performance levels.
In 1996, selling, general and administrative expenses were $2,896,000,
representing an increase of $479,000 or 20% from the 1995 level of $2,417,000.
As a percentage of sales, selling, general and administrative costs were 9.6% of
sales in 1996 and 9.8% of sales in 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.
Interest expense for 1997 decreased 4% from $797,000 in 1996 to
$765,000. This decrease was due to the Company's bank decreasing its lending
rate to the Company by 1%, partially offset by the Company's increased
borrowings from the bank.
Interest expense for 1996 increased 29% from $618,000 in 1995 to
797,000. This increase was due to the Company's bank increasing its lending rate
to the Company by 1%.
Other income for 1997 and 1996 was $81,000 and $51,000, respectively.
These amounts consist 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 has met its working capital needs through funds generated
from operations and bank financing. The Company assesses its liquidity in terms
of its ability to generate cash to fund its operating and investing activities.
Of particular importance to the Company's liquidity are cash flows generated
from operating activities, capital expenditure levels and available bank lines
of credit.
The following is selected cash flow data from the Statements of Cash
Flows:
<TABLE>
<CAPTION>
In Thousands of Dollars 1997 1996 1995
----------------------- ---- ---- ----
<S> <C> <C> <C>
Net cash flow from
operating activities......... $ 1,677 $ 1,765 $ (1,336)
Net cash flow from
investing activities......... (3,642) (533) (2,918)
Net cash flow from
financing activities......... 1,908 (1,195) 4,326
</TABLE>
<PAGE> 17
Net cash flow from operating activities in 1997 results primarily from
cash generated from operations and reductions in prepaid expenses, offset
partially by higher levels of accounts receivable and inventories. Net cash flow
from operating activities in 1996 and 1995 primarily reflect net income (loss)
and non-cash charges against income. Net cash flow from investing activities for
1997 consists of capital expenditures necessary to add capacity and to increase
productivity. Net cash flow from investing activities for 1995 reflect the
Company's investment in new building construction and the purchase of machinery
and equipment.
The following is selected capitalization data from the Balance Sheets:
<TABLE>
<CAPTION>
In Thousands of Dollars 12/31/97 12/31/96 12/31/95
----------------------- -------- -------- --------
<S> <C> <C> <C>
Revolving and equipment
line of credit..................................... $ 4,107 $ 3,795 $ 4,651
Current portion
long-term debt..................................... 1,019 402 387
Long-term debt....................................... 5,369 4,510 4,919
Shareholders' equity................................. 6,886 5,473 5,332
Debt to total
capitalization..................................... 60% 61% 65%
Unused revolving line
of credit.......................................... 3,577 3,013 1,275
</TABLE>
The Company has a revolving line of credit with its bank which provides
for borrowings of up to $9,000,000 limited by a formula based on percentages of
the Company's receivable and inventory. At December 31, 1997, the Company had
$4,107,482 outstanding and availability of approximately $3,577,000 under the
line. 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 1998.
<PAGE> 18
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, 1997 and 1996, 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, 1997. 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 provides 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/Arthur Andersen LLP
Hartford, Connecticut
February 13, 1998
<PAGE> 19
CONSOLIDATED STATEMENTS OF OPERATIONS
EDAC TECHNOLOGIES CORPORATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales:
Products $35,384,389 $28,287,147 $23,366,278
Services 2,845,000 1,961,938 1,197,656
----------- ----------- -----------
38,229,389 30,249,085 24,563,934
Cost of Sales 32,287,962 26,600,688 22,656,651
----------- ----------- -----------
Gross Profit 5,941,427 3,648,399 1,907,283
Selling, General and Administrative
Expenses 3,540,278 2,896,007 2,417,136
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 2,401,149 752,392 (509,853)
Non-Operating Income (Expense):
Interest expense (765,200) (796,742) (618,156)
Other 81,199 51,427 44,790
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1,717,148 7,077 (1,083,219)
Provision for Income Taxes 21,000 - -
----------- ----------- -----------
NET INCOME (LOSS) $ 1,696,148 $ 7,077 $(1,083,219)
=========== =========== ===========
Basic Earnings (Loss) Per Common
Share (note A) $.45 $.00 $(.30)
Diluted Earnings (Loss) Per Common
Share (note A) $.43 $.00 $(.30)
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
EDAC TECHNOLOGIES CORPORATION
<TABLE>
<CAPTION>
------------------------------
December 31,
------------------------------
1997 1996
------------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 137,620 $ 195,382
Trade accounts receivable (net of allowance for
doubtful accounts of $125,000 in 1997 and $116,087
in 1996) 3,903,329 3,407,924
Inventories 10,186,211 9,562,958
Prepaid expenses and other current assets 44,138 351,109
Deferred income taxes 924,469 540,877
----------- -----------
Total Current Assets 15,195,767 14,058,250
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 394,821 394,821
Buildings 4,288,060 3,690,582
Machinery and equipment 10,546,404 8,958,059
----------- -----------
15,229,285 13,043,442
Less-accumulated depreciation 7,644,959 7,570,308
----------- -----------
7,584,326 5,473,134
----------- -----------
OTHER ASSETS 1,069,483 386,325
----------- -----------
TOTAL ASSETS $23,849,576 $19,917,709
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 21
CONSOLIDATED BALANCE SHEETS (CONTINUED)
EDAC TECHNOLOGIES CORPORATION
<TABLE>
<CAPTION>
-------------------------
December 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving and equipment lines of credit $ 4,107,482 $ 3,794,571
Current portion of long-term debt 1,018,928 402,267
Trade accounts payable 3,342,721 3,616,599
Employee compensation and amounts
withheld 1,380,272 737,827
Accrued expenses 845,528 850,532
----------- -----------
Total Current Liabilities 10,694,931 9,401,796
----------- -----------
LONG-TERM DEBT, less current portion 5,368,882 4,509,991
----------- -----------
OTHER LIABILITIES 9,000 12,000
----------- -----------
DEFERRED INCOME TAXES 891,000 521,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE G)
SHAREHOLDERS' EQUITY:
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued and outstanding--3,834,550
in 1997 and 3,753,875 in 1996 9,586 9,385
Additional paid-in capital 8,768,504 8,649,340
Accumulated deficit (1,295,210) (2,991,358)
----------- -----------
7,482,880 5,667,367
Less deferred ESOP compensation
expense (116,667) (194,445)
Less unfunded accrued pension costs (480,450) -
----------- -----------
Total Shareholders' Equity 6,885,763 5,472,922
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $23,849,576 $19,917,709
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
EDAC TECHNOLOGIES CORPORATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $1,696,148 $ 7,077 $(1,083,219)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Deferred income taxes (13,592) (19,877) (39,000)
Amortization of deferred ESOP
compensation expense 77,778 77,777 77,777
Depreciation and amortization 835,963 796,795 969,223
Loss (gain) on sale of property
and equipment 12,145 13,892 (32,780)
Changes in operating assets and
liabilities:
Trade accounts receivable (495,405) (1,757,084) (163,690)
Refundable income taxes -- 106,000 (106,000)
Inventories (623,253) 1,717,079 (1,456,388)
Prepaid expenses and other
current assets 306,971 (247,912) (880)
Trade accounts payable (273,878) 886,343 646,555
Other current liabilities 156,991 190,983 131,373
Other liabilities (3,000) (6,000) (278,840)
---------- ---------- -----------
Net cash provided by (used in)
operating activities 1,676,868 1,765,073 (1,335,869)
---------- ---------- -----------
Investing Activities:
Additions to property, plant and
equipment (3,057,652) (498,471) (3,241,937)
Proceeds from sales of property,
plant and equipment 108,016 104,650 196,655
(Increase) decrease in other assets (692,822) (139,346) 127,285
---------- ---------- -----------
Net cash used in
investing activities $(3,642,458) $ (533,167) $(2,917,997)
----------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 23
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
EDAC TECHNOLOGIES CORPORATION
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Financing Activities:
Increase (decrease) in revolving
line of credit, net $ 312,911 $ (856,913) $3,056,117
Payments of long-term debt (548,342) (394,127) (247,499)
Issuance of long-term debt 2,023,894 -- 1,484,440
Proceeds from exercise of options
for common stock, including
related income tax benefit 119,365 56,439 32,625
---------- ----------- ----------
Net cash provided by (used in)
financing activities 1,907,828 (1,194,601) 4,325,683
---------- ----------- ----------
(Decrease) increase in cash (57,762) 37,305 71,817
Cash at beginning of year 195,382 158,077 86,260
---------- ----------- ----------
Cash at end of year $ 137,620 $ 195,382 $ 158,077
========== =========== ==========
Supplemental Disclosure of
Cash Flow Information:
Interest Paid $ 759,907 $ 796,637 $ 594,488
Income taxes paid 33,659 27,000 139,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 24
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
EDAC TECHNOLOGIES CORPORATION
<TABLE>
<CAPTION>
Common Stock Additional
------------------- Paid-in Accumulated
Shares Amount Capital Deficit
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Balances at January 1, 1995 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)
Exercise of stock options,
including related income
tax benefit 80,675 201 119,164 --
Net income -- -- -- 1,696,148
--------- ------ ---------- -----------
Balances at December 31, 1997 3,834,550 $9,586 $8,768,504 $(1,295,210)
========= ====== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EDAC TECHNOLOGIES CORPORATION
DECEMBER 31, 1997
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 ESOP owns 22.4% of the Company's outstanding Common
Stock as of December 31, 1997. In January 1997, 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 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, 1997 and 1996, inventories consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Raw materials $ 2,031,633 $ 1,060,015
Work-in-progress 5,633,398 5,996,196
Finished goods 2,521,180 2,506,747
------------ -----------
Total inventories $ 10,186,211 $ 9,562,958
============ ===========
</TABLE>
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 Company adopted the standard on January 1, 1996. The adoption
of this standard did not have a material impact on the Company's results of
operations or financial position.
Other Assets: Included in other assets are deposits on machinery and equipment
and a 49% investment in and advances to Pegos Machine Corporation.
Earnings Per Share: In February 1997, the Financial Accounting Standards Board
adopted a new standard on accounting for earnings per share (EPS). This new
standard replaced the presentation of primary EPS with a presentation of basic
EPS and changed the fully diluted terminology to diluted. It also requires dual
presentation of basic and diluted EPS on the face on the income statement. The
standard became effective for the Company at December 15, 1997 and required
restatement of prior years' EPS.
<PAGE> 26
Basic earnings per common share are based on the average number of common shares
outstanding during the year. Diluted earnings per common share assumes, in
addition to the above, a dilutive effect of common share equivalents during the
year. Common share equivalents represent dilutive stock options using the
treasury method. The number of shares used in the earnings per common share
computation for 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic
Average common shares outstanding ..... 3,806,015 3,694,568 3,628,151
Diluted ................................. 174,118 105,623 --
--------- --------- ---------
Stock options
Average shares diluted ................ 3,980,133 3,800,191 3,628,151
</TABLE>
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.
New Accounting Standard: During 1997, the Financial Accounting Standards Board
issued SFAS No.130, "Reporting Comprehensive Income". This statement establishes
standards for separately reporting comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. Components of comprehensive income represent changes in
equity resulting from transactions and other events and circumstances from
nonowner sources. This statement is effective for fiscal years beginning after
December 15, 1997, and reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company plans to
adopt the new standard effective January 1, 1998.
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. During 1997, options to purchase 6,668
shares at $6.50 per share were granted from previously granted but forfeited
options 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. During 1997, 75,000 options from this grant were exercised and
at December 31, 1997, the remaining 25,000 options are exercisable.
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 of the Company. The term
of the options and vesting requirements shall be for such period as the Stock
Option Committee designates. Options to purchase 100,000 shares at $1.00 per
share were granted in 1996 and 5,000 shares at $1.813 per share, 75,000 shares
at $2.25 per share and 90,332 shares at $6.50 per share were granted under the
1996 Plan during 1997.
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
<PAGE> 27
disclosures required under SFAS No. 123 for options granted in 1995, 1996 and
1997 using the Black-Scholes option pricing model prescribed by SFAS No 123. The
weighted average assumptions used are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 5.95% 6.04% 5.16% to 5.65%
Expected dividend yield None None None
Expected lives 3 years 3 years 3 years
Expected volatility 100.8% 100.8% 86%
</TABLE>
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 net income (loss) applicable to common
shareholders would have been adjusted to reflect the following pro forma
amounts:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Income (loss) applicable to common shareholders:
As reported $(1,083,219) $7,077 $1,696,148
Pro forma (1,092,328) (6,001) 1,557,680
Pro forma net income (loss) per common share:
Basic earnings (loss) per share:
As reported $(.30) $.00 $.45
Pro forma (.30) .00 .41
Diluted earnings (loss) per share:
As reported $(.30) $.00 $.43
Pro forma (.30) .00 .39
</TABLE>
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.
<PAGE> 28
A summary of the status of the Company's stock option plans as of December 31,
1995, 1996, and 1997, and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------------- ------------------------------ ----------------------------------
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Shares Exercise Shares Exercise
- ------------- Price Price Price
----------------- --------------- ------------ ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning 261,670 $.5625 230,335 $.6520 243,000 $.8712
of year
Granted 30,000 1.250 113,000 1.043 177,000 4.5668
Exercised (58,001) .5625 (100,335) .5625 (80,675) .6119
Forfeited (3,334) .5625 - - - -
--------- --------- --------
Outstanding at end of year 230,335 .6250 243,000 .8712 339,325 2.9064
========= ========= ========
Options exercisable at 160,335 .6054 95,000 .7072 182,325 1.5364
year-end
Weighted-average fair
value of options granted
during the year $.81 $.68 $1.08
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------------
Number Weighted-Average Number Weighted-
Outstanding Remaining Weighted-Average Exercisable Average
Exercise Prices at Contractual Exercise at Exercise
12/31/97 Life Price 12/31/97 Price
- ------------------------- -------------- ---------------- ------------------ ------------- --------------------
<S> <C> <C> <C> <C> <C>
$.5625 25,000 2 years $.5625 25,000 $.5625
1.000 100,000 3.9 1.000 40,000 1.000
1.250 25,000 2.5 1.250 25,000 1.250
1.380 12,325 3.5 1.380 12,325 1.380
1.813 5,000 4.2 1.813 5,000 1.813
2.250 75,000 4.4 2.250 75,000 2.250
6.500 97,000 4.9 6.500 0 6.500
------- --------
$.5625 to 6.50 339,325 4.0 2.86 182,325 1.5364
======= ========
</TABLE>
<PAGE> 29
NOTE C -- NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
------------- -----------
<S> <C> <C>
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 balance due on March 31, 2002. $3,175,985 $3,371,554
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 is due monthly at
8.68% to May 4, 1999, then reverts to the bank's base rate. 866,666 933,333
Equipment line of credit with bank convertible into a promissory note payable in
60 monthly principal installments of $18,800 commencing April 1, 1998. Interest
at the bank's base rate is due monthly to March 31, 1999 then rate fixes at 9.23%. 1,127,973 -
Equipment note payable to bank in 60 monthly principal installments of $9,020
commencing May 1, 1997. Interest is due monthly at 8.64% to May 4, 1999, then
reverts to bank's base rate. 468,993 -
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. 116,667 194,445
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. 302,995 412,926
Installment equipment note payable in quarterly installments of $28,750 and
monthly installments based on 50% of the Company's profit, as defined, on jobs
performed by the equipment, commencing December 28, 1997 and due July 31,
2000. Interest imputed at 8.5%. Note collateralized by
the equipment. 328,531 -
---------- ----------
6,387,810 4,912,258
Less current portion of long-term debt 1,018,928 402,267
---------- ----------
$5,368,882 $4,509,991
========== ==========
</TABLE>
The Company also has a Revolving Loan and Security Agreement (The Agreement)
which provides for a revolving line of credit with a borrowing base limited to
an amount which is the lesser of $9,000,000 or an amount determined by a formula
based on percentages of the Company's receivables and inventory. As of December
31, 1997, the
<PAGE> 30
revolving line of credit had a balance of $4,107,482 and requires interest at
the rate of 7.84% to January 6, 1998 on the first $2,000,000 and the bank's base
rate of interest (8.5% at December 31, 1997), for the remainder. The unused
availability on the line at December 31, 1997 was $3,576,704.
Effective March 27, 1997 the Agreement was amended extending the maturity on the
revolver from March 31, 1997 to March 31, 2000. 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 (balance at December 31, 1997,
$1,127,973) 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 when all outstanding principal and unpaid interest will be due.
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, 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.
The Company was in compliance with all loan covenants at December 31, 1997.
Aggregate annual maturities of long-term debt for the five year period
subsequent to December 31, 1997 are as follows: 1998--$1,018,928;
1999--$760,275; 2000--$1,466,336; 2001--$600,230; 2002--$2,485,643; 2003 and
thereafter--$56,398.
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:
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$4,872,323 and $4,404,094
in 1997 and 1996, respectively ......... $ 4,972,526 $ 4,522,537
=========== ===========
Projected benefit obligation .................. $ 4,972,526 $ 4,522,537
Plan assets at fair value ..................... 4,827,200 4,640,050
----------- -----------
Plan assets in excess of projected
benefit obligation .......................... (145,326) 117,513
Unrecognized net loss ......................... 480,450 202,678
Less unfunded accrued pension costs ........... (480,450) --
----------- -----------
(Accrued) prepaid pension cost ................ $ (145,326) $ 320,191
=========== ===========
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Net pension cost included the following components:
Interest cost on projected
benefit obligation................................. $ 338,301 $ 324,639 $ 319,122
Actual return on plan assets......................... (413,883) (289,856) (512,481)
Net amortization and deferral........................ 118,919 3,434 228,315
------------ ---------- -----------
$ 43,337 $ 38,217 $ 34,956
============ ========== ==========
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7% for 1997 and 7.5% for 1996 and
1995. 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 20% of employee contributions up to 10% of compensation (10%
prior to November 1, 1995 and 20% for the period November 1, 1995 to December
31, 1996 of employee contributions up to 4% of compensation). Employer
contributions and expenses related to this plan were $72,991, $52,690, and
$24,596, in 1997, 1996 and 1995, 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 $77,778, $77,777 and $77,777 for the
years ended December 31, 1997, 1996 and 1995, respectively. Interest expense
incurred on the debt was $12,356, $18,381, and $26,174, for the years ended
December 31, 1997, 1996 and 1995, respectively. The ESOP shares as of December
31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Allocated shares 585,906 575,505
Shares released
for allocation 109,586 109,586
Unreleased shares 164,376 273,962
------- -------
Total ESOP shares 859,868 959,053
======= =======
</TABLE>
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.
Income tax expense (benefit) included in the financial statements are as follows
(in 000's):
<PAGE> 32
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ----------
<S> <C> <C> <C>
Current $ 34 $ 20 $ 39
Deferred (13) (20) (39)
----------- ------------ ----------
$ 21 $ -- $ --
=========== ============ ==========
</TABLE>
The effective tax rate on income (loss) before income taxes is different from
the prevailing Federal and state income tax rate as follows (in 000's):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Income (loss) before income taxes $ 1,717 $ 7 $ (1,083)
----------- ----------- ----------
Income tax at Federal statutory rate $ 584 $ 2 $ (368)
State income taxes-net of Federal benefit 119 1 (80)
Meals, entertainment and other (76) (11) 68
Change in valuation allowance on
deferred income tax assets (606) 8 380
----------- ----------- ----------
$ 21 $ -- $ --
=========== =========== ==========
</TABLE>
During 1995 the Company provided a valuation allowance to reserve against
deferred tax assets for which it was considered possible that a benefit would
not be realized. During 1997 the valuation allowance was reversed to the extent
that previously recorded deferred tax assets were realized.
The tax effect of temporary differences giving rise to the Company's deferred
tax asset and liability at December 31, 1997 and 1996 are as follows (in 000's):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $ 915 $ 872
Capital leases 58 58
Other 204 202
-------- ---------
1,177 1,132
-------- ---------
Deferred tax assets:
Allowance for uncollectible
accounts receivable 52 48
Employee compensation and amounts withheld 150 145
Accrued expenses 103 83
Unicap and inventory reserves 191 528
Tax effect of net operating loss carryforwards (state and federal) 542 765
Alternative minimum tax credit carryforwards 273 285
Other 13 18
Valuation allowance (114) (720)
-------- ---------
$ 1,210 1,152
-------- ---------
Net deferred tax asset $ 33 $ 20
======== =========
Reflected in balance sheet as:
Net current deferred tax asset $ 924 $ 541
Net long-term deferred tax liability 891 521
-------- -------
$ 33 $ 20
======== =========
</TABLE>
<PAGE> 33
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, 1997 and 1996, the Company has pre-change NOLs of
approximately $795,500 and $977,000, respectively, available to offset future
federal taxable income of which the Company is limited to annual utilization of
approximately $181,000. These NOLs expire in the year 2003. The Company also has
post-change NOL's totaling approximately $732,000 which will expire in 2011 for
federal tax purposes. In addition, the Company has state NOLs of approximately
$221,000 and $756,000 as of December 31, 1997 and 1996, respectively. The
Company has alternative minimum tax credits of approximately $273,000 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 $169,567, $61,088, and $60,074, for the
years ended December 31, 1997, 1996 and 1995, respectively. Minimum rental
commitments as of December 31, 1997 for noncancelable operating leases with
initial or remaining terms of one year or more are as follows: 1998--$45,087;
1999--$19,765; 2000--$19,765; 2001--$12,491; 2002 $3,425; 2003 and thereafter--
$36,000.
NOTE H -- MAJOR CUSTOMERS
For the years ended December 31, 1997 and 1996, sales to United Technologies
Corporation amounted to 68% and 67% of consolidated sales, respectively. 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.
At December 31, 1997, the Company had $1,220,043 of trade receivables due from
United Technologies Corporation, and $705,066 due from Zapata Technologies, Inc.
<PAGE> 34
OFFICERS
Edward J. McNerney President and Chief Executive Officer
Francis W. Moskey Vice President-New Business Development
Ronald G. Popolizio Vice President, CFO and Secretary
BOARD OF DIRECTORS
John DiFrancesco Chairman
William J. Gallagher President, William J. Gallagher Company
Robert J. Gilchrist Managing Director, Horton International, Inc.
Edward J. McNerney President and Chief Executive Officer
Lee Morris Chairman, Robert E. Morris Company
Francis W. Moskey Vice President
Arnold J. Sargis President, A. J. Sargis & Associates
Stephen G.W. Walk President, Blanche P. Field LLC
CORPORATE OFFICES
1806 New Britain Avenue
Farmington, CT 06032
GENERAL COUNSEL INVESTOR CONTACT
Reinhart, Boerner, Van Deuren, Norris Porter, Levay & Rose, Inc.
& Reiselbach, s.c. Seven Penn Plaza
1000 North Water Street New York, NY 10001
Milwaukee, WI 53202 (212) 564-4700
CORPORATE AUDITORS TRANSFER AGENT
Arthur Andersen LLP Firstar Trust Company
One Financial Plaza 1555 North River Center Drive
Hartford, CT 06103 Milwaukee, WI 53212
ANNUAL MEETING
The 1998 annual meeting of shareholders will be held on May 19, 1998 at 10:00
a.m. Eastern Daylight Time at the Farmington Country Club, 806 Farmington
Avenue, Farmington, CT.
10-K INFORMATION
A copy of the 1997 Edac Technologies Corporation 10-K report filed with the
Securities and Exchange Commission is available without charge by writing to:
Ronald G. Popolizio, Secretary, Edac Technologies Corporation, 1806 New Britain
Avenue, Farmington, CT 06032.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated February 13, 1998 on the financial statements and
schedule of EDAC Technologies Corporation incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and to
all references to our Firm included in the following registration statements:
1991 Stock Option Plan (File #33-48505), 1996 Stock Option Plan (File
#333-24857) and the Robert Whitty Stock Option Plan (File #333-18109).
/s/ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 18, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 137,620
<SECURITIES> 0
<RECEIVABLES> 3,903,329
<ALLOWANCES> 125,000
<INVENTORY> 10,186,211
<CURRENT-ASSETS> 15,195,767
<PP&E> 15,229,285
<DEPRECIATION> 7,644,959
<TOTAL-ASSETS> 23,849,576
<CURRENT-LIABILITIES> 10,694,931
<BONDS> 5,368,882
0
0
<COMMON> 9,586
<OTHER-SE> 6,876,177
<TOTAL-LIABILITY-AND-EQUITY> 23,849,576
<SALES> 38,229,389
<TOTAL-REVENUES> 38,229,389
<CGS> 32,287,962
<TOTAL-COSTS> 35,828,240
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 47,287
<INTEREST-EXPENSE> 765,200
<INCOME-PRETAX> 1,717,148
<INCOME-TAX> 21,000
<INCOME-CONTINUING> 1,696,148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,696,148
<EPS-BASIC> .45
<EPS-DILUTED> .43
</TABLE>
