<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
EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999.
[ ] 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 3, 1999, 4,269,080 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock (based upon the $4 7/8 closing
price on that date on the Nasdaq National 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
$15,691,000.
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 January 2, 1999 Part II
Proxy Statement relating to
1999 Annual Meeting of Shareholders Part III
All statements other than historical statements contained in this report on Form
10-K or deemed to be contained herein due to incorporation by reference to a
different document constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Without limitation, these
forward looking statements include statements regarding the Company's business
strategy and plans, statements about the adequacy of the Company's working
capital and other financial resources, statements about the Company's Year 2000
compliance and other statements herein that are not of a historical nature.
These forward-looking statements rely on a number of assumptions concerning
future events and are subject to a number of uncertainties and other factors,
many of which are outside of the Company's control, that could cause actual
results to differ materially from such statements. These include, but are not
limited to factors which could affect demand for the Company's products and
services such as general economic conditions and economic conditions in the
aerospace industry and the other industries in which the Company competes;
competition from the Company's competitors; the integration of the Company's
Apex operations; the ability of the Company's customers and suppliers to
adequately address their Year 2000 issues; and the Company's continued ability
to attract and retain qualified employees. The Company disclaims any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
<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 the Time Engineering and Spectrum operations. On June
29, 1998 Edac purchased certain assets and liabilities of the Apex Machine Tool
Company, Inc.
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 companies 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
<PAGE> 4
individual purchase orders on a quotation or bid basis. Its sales personnel and
management maintain contacts with purchasing sources to keep informed as to
manufacturing projects available for quotation. Edac occasionally enters into
annual manufacturing contracts on specific components.
For its fiscal years ended January 2, 1999, December 31, 1997 and 1996,
approximately 51%, 68% and 67%, respectively, of Edac's sales were sales to
United Technologies Corporation.
Approximately 6% of Edac's 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 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 January 2, 1999, was approximately $36,000,000 compared
to $45,000,000 as of December 31, 1997. 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
$22,000,000 of its January 2, 1999 backlog during the 1999 fiscal year.
Employees
As of March 1, 1999, Edac had approximately 387 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 of both
the 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
- ------- ---- ------ --------
<C> <C> <C> <C>
1790 New Britain Ave. 47,000 Owned Manufacturing
Farmington, CT. 06032 * Design engineering
services
1798 New Britain Ave. 20,800 Owned Design and manu-
Farmington, CT. 06032 * facture of spindles
and specialized
machines
1806 New Britain Ave. 19,200 Owned Manufacturing
Farmington, CT. 06032 *
</TABLE>
<PAGE> 5
<TABLE>
<C> <C> <C> <C>
21 Spring Lane 44,000 Owned Manufacturing
Farmington, CT 06032 * Design engineering
services
1838 New Britain Ave. 3,000 Leased Warehouse
Farmington, CT. 06032
17 Spring Lane 7,500 Owned Rental income
Farmington, CT 06032 *
</TABLE>
* 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 January 2, 1999.
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 13 of Edac's 1998 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 1998 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 14 through 15 of Edac's 1998 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.
<PAGE> 6
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information in response to this item is incorporated herein by
reference to pages 16 through 30 of Edac's 1998 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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 1999 Annual Meeting of Shareholders ("Edac's 1999 Proxy
Statement"), which will be filed within 120 days after the end of Edac's fiscal
year ended January 2, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
Information in response to this item is incorporated herein by reference to
"Executive Compensation" in the 1999 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 1999
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 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K.
(a) Documents filed:
1. Financial Statements.
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The financial statements required to be filed by Item 8 hereof
have been incorporated by reference to Edac's 1998 Annual
Report to Shareholders and consist of the following:
Report of Independent Public Accountants
Consolidated Statements of Operations--Years ended January 2,
1999 and December 31, 1997 and 1996.
Consolidated Balance Sheets--January 2, 1999 and
December 31, 1997.
Consolidated Statements of Cash Flows--Years ended January 2,
1999 and December 31, 1997 and 1996.
Consolidated Statements of Changes in Shareholders'
Equity--Years ended January 2, 1999 and December
31, 1997 and 1996.
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
Edac did not file any reports on Form 8-K during the last quarter of
the period covered by this Form 10-K.
(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.
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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 12, 1999. 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 12, 1999
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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 JANUARY 2, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for
doubtful accounts $ 125,000 $ 55,657 (1) $60,000 (2) $ 80,657 $ 160,000
Allowance for excess and obsolete
inventory and loss contracts 300,000 109,000 0 0 409,000
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for
doubtful accounts 116,087 47,287 0 (2) 38,374 125,000
Allowance for excess and obsolete
inventory and loss contracts 1,278,804 0 0 (3) 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 (3) 507,408 1,278,804
</TABLE>
(1) Result of Apex Machine Tool Company Inc. acquisition on June 30, 1998.
(2) Represents write-off of specific accounts receivable.
(3) 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 30, 1999 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.
Signatures Title Date
/s/John J. DiFrancesco Chairman of the Board March 30, 1999
- -----------------------------
John J. DiFrancesco
/s/Edward J. McNerney Chief Executive Officer, March 30, 1999
- ----------------------------- President and Director
Edward J. McNerney
/s/Ronald G. Popolizio Executive Vice President March 30, 1999
- ----------------------------- and Chief Financial Officer
Ronald G. Popolizio (Principal Financial and
Accounting Officer)
Director
- -----------------------------
James Biondi
<PAGE> 11
/s/William J. Gallagher Director March 30, 1999
- -----------------------------
William J. Gallagher
/s/Robert Gilchrist Director March 30, 1999
- -----------------------------
Robert Gilchrist
Director
- -----------------------------
Lee Morris
/s/Stephen G.W. Walk Director March 30, 1999
- -----------------------------
Stephen G.W. Walk
Director
- -----------------------------
Arnold Sargis
<PAGE> 12
EXHIBIT INDEX
Exhibit Sequential
Number Page Number
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)
<PAGE> 13
Permanent Loan Promissory Note
and Open-End Construction to
Permanent Mortgage Deed
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
Reaffirmation 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 Ninth Amendment to Revolving loan, Term (7)
Loan, Equipment Loan and Security Agreement,
Modification of Notes and Reaffirmation of
Guarantees
10.18 Amended and Restated Revolving Promissory (7)
Note
10.19 Equipment Promissory Note III (7)
10.20 Amended and Restated Promissory Note (7)
10.21 Eighth Modification Agreement to Open-End (7)
Mortgage Deed
10.22 Third Modification of Construction to (7)
Permanent Loan Promissory Note and Open-End
Construction to Permanent Mortgage Deed
10.23 Employment letter from Edac to Ronald G. (8)
Popolizio
10.24 Asset Purchase Agreement dated as of May 13, 1998 (9)
by and among Edac Technologies Corporation, Apex
Acquisition Corp., Apex Machine Tool Company,
Inc., Gerald S. Biondi, James G. Biondi and
Michael Biondi.
<PAGE> 14
10.25 Purchase Agreement dated as of May 13, 1998 by (9)
and between Edac Technologies Corporation,
Gerald S. Biondi, James G. Biondi and Michael
Biondi providing for the acquisition of the real
estate located at 17 and 21 Spring Lane,
Farmington, Connecticut.
10.26 Guaranty Agreement dated as of June 30, 1998 by (9)
and among Edac Technologies Corporation, as
guarantor, Apex Acquisition Corporation, Gerald S.
Biondi, James G. Biondi and Michael Biondi pursuant
to which Edac Technologies Corporation has
guaranteed all of the obligations of Apex
Acquisition Corporation under the real estate
purchase agreement.
10.27 Promissory note payable by Apex Acquisition (9)
Corporation to Gerald S. Biondi, James G. Biondi
and Michael Biondi under the real estate purchase
agreement.
10.28 Purchase agreement dated as of May 13, 1998 by and (9)
between Edac Technologies Corporation, Gerald S.
Biondi and James G. Biondi providing for the
acquisition, after the satisfaction of certain
pre-closing conditions, by Edac Technologies
Corporation or its wholly-owned subsidiary
of the property located at 55 Spring Lane,
Farmington, Connecticut.
10.29 Eleventh Amendment to Loans and Security Agreement, (9)
Modification of Notes and Reaffirmation of
Guaranties dated as of June 30, 1998 by and among
Fleet National Bank, Edac Technologies Corporation,
Gros-Ite Industries, Inc. and Apex Acquisition
Corporation.
10.30 Second Amended and Restated Promissory Note dated as (9)
of June 30, 1998 in the original principal amount of
$13 million payable by Edac Technologies Corporation
to Fleet National Bank.
10.31 Term Promissory Note dated June 30, 1998 in the (9)
principal amount of $14 million payable by Edac
Technologies Corporation to Fleet National Bank.
10.32 Fourth Modification of Construction to Permanent Loan (9)
Promissory Note and Open-End Construction to Permanent
Mortgage Deed dated as of June 30, 1998 by and among
Edac Technologies Corporation and Fleet National Bank.
10.33 Ninth Modification Agreement to Open-End Mortgage Deed (9)
dated as of June 30, 1998 by and between Edac
Technologies Corporation and Fleet National Bank.
<PAGE> 15
10.34 Guaranty Agreement dated as of June 30, 1998 from each (9)
of Apex Acquisition Corporation and Gros-Ite
Industries, Inc. to Fleet National Bank.
10.35 Open-End Mortgage Deed, Security Agreement, Collateral (9)
Assignment of Rents and Financing Statement dated as of
June 30, 1998 by and between Edac Technologies
Corporation and Fleet National Bank.
10.36 Security Agreement dated as of June 30, 1998 by and (9)
between Apex Acquisition Corporation and Fleet
National Bank.
10.37 Hazardous Substances Indemnity Agreement dated as of (9)
June 30, 1998 by and among Edac Technologies
Corporation, Apex Acquisition Corporation, Gros-Ite
Industries, Inc. and Fleet National Bank.
10.38 Agreement Regarding Purchase Price Adjustments dated (10)
September 24, 1998 by and between Edac Technologies
Corporation, Apex Machine Tool Company, Inc., Biondi
Tool Company, Inc., Gerald S. Biondi, James G. Biondi
and Michael Biondi.
10.39 1998 Stock Option Agreement
10.40 Tenth Amendment to Revolving loan, Term Loan, Equipment
Loan and Security Agreement, Modification of Notes and
Reaffirmation of Guarantees
10.41 Equipment Promissory Note IV
10.42 Twelfth Amendment to Loans and Security
Agreement,Modification of Notes and
Reaffirmation of Guaranties
10.43 Employment contract between Edac and
Edward J. McNerney
11 Earnings per share information has been
incorporated by reference to Edac's 1998
Annual Report to Shareholders
13 Edac's 1998 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Arthur Andersen LLP,
independent public accountants
<PAGE> 16
27 Financial Data Schedule
(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.
(8) Exhibit incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
(9) Exhibit incorporated by reference to the Company's Current Report
on Form 8-K dated June 30, 1998.
(10) Exhibit incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 4, 1998.
<PAGE> 1
EXHIBIT 10.39
EDAC TECHNOLOGIES CORPORATION
1998 EMPLOYEE STOCK OPTION PLAN
1. Purpose. The purpose of the Edac Technologies Corporation
1998 Employee Stock Option Plan is to: (a) promote the long-term growth and
profitability of the Company and its Subsidiaries; (b) provide directors,
officers and employees of the Company and its Subsidiaries with an incentive to
achieve long-term corporate objectives; (c) attract and retain directors,
officers and employees of outstanding competence; and (d) provide directors,
officers and employees with a stake in the Company's long-term success.
2. Definitions.
2.1 "Board of Directors" shall mean the Board of Directors
of the Company.
2.2 "Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time.
2.3 "Committee" shall mean the stock option committee
designated by the Board of Directors. If no stock option committee is
designated, the term "Committee" shall mean the compensation committee of the
Board of Directors.
2.4 "Common Stock" shall mean the $.0025 par value common
stock of the Company.
2.5 "Company" shall mean Edac Technologies Corporation.
2.6 "Fair Market Value" as of a given date shall mean the
last sale price of a share of Common Stock on such date on the Nasdaq Stock
Market or, if no such sales were reported on such date, on the next preceding
date on which sales were reported.
2.7 "Option" (or its plural) shall mean the option to
purchase Common Stock pursuant to this Plan.
<PAGE> 2
2.8 "Participant" shall mean an individual who has been
granted an Option under this Plan.
2.9 "Permanent Disability" shall mean the inability of a
Participant by reason of physical or mental illness or incapacity to perform his
or her duties on behalf of the Company or its Subsidiaries, as applicable, for a
continuous period of 90 days.
2.10 "Plan" shall mean the Edac Technologies Corporation
1998 Employee Stock Option Plan.
2.11 "Subsidiary" (or its plural) shall mean any corporation
which, at the time an Option is granted, qualifies as a subsidiary corporation
under section 425(f) of the Code or any similar provision hereafter enacted.
3. General.
3.1 Administration.
(a) The Plan shall be administered by the
Committee.
(b) The Committee shall have the authority,
in its sole discretion, from time to time: (i) to grant Options; (ii) to
prescribe such limitations, restrictions and conditions upon any such Options as
the Committee shall deem appropriate; and (iii) to interpret this Plan, to
adopt, amend and rescind rules and regulations relating to this Plan and to make
all other determinations and to take all other action necessary or advisable for
the implementation and administration of this Plan. A majority of the members of
the Committee shall constitute a quorum and the action of a majority of members
of the Committee present at any meeting at which a quorum is present, or action
unanimously adopted in writing without a meeting, shall be the action of the
Committee.
(c) All actions of the Committee taken pursuant to
this section 3.1 shall be final, conclusive and binding on all Participants
under this Plan. No member of the Committee shall be liable for any action taken
or decision made in good faith relating to this Plan.
3.2 Participation. The Committee may grant Options under
this Plan to any director, officer or employee of the Company or any of its
Subsidiaries who the Committee believes has contributed or who has the ability
to contribute to the long-term success of the Company or its Subsidiaries. In
granting such Options and
<PAGE> 3
determining their form and amount, the Committee shall give consideration to the
functions and responsibilities of the Participant, his or her potential
long-term contribution to profitability and sound growth of the Company and/or
its Subidiaries and such other factors as the Committee may deem relevant.
4. Option Terms and Conditions.
4.1 Governance. The grant of an Option shall be evidenced
by a written option agreement in a form approved by the Committee. Such Option
shall be subject to the terms and conditions of this Plan and, in addition, to
such other terms and conditions not inconsistent with this Plan which the
Committee may deem appropriate.
4.2 Exercise Period. The term of each Option shall be as
determined by the Committee; provided, however, that if the term of an Option is
to exceed ten years from the date of the grant thereof, such Option may not be
exercised prior to the tenth year and the term of such Option shall end one year
after the date such Option may first be exercised. No Option may be exercised
more than 90 days after a Participant's termination of employment or
directorship, whichever is applicable, except for termination for death,
disability or retirement after age 55, in which case no Option may be exercised
more than one year after such termination.
4.3 Option Price. The option price per share for the
Common Stock covered by any Option shall be determined by the Committee, but
shall not be less than the Fair Market Value of the Common Stock on the date the
Option is granted.
4.4 Exercise of Option. An Option may be exercised from
time to time by written notice by the Participant (or, if the Participant
transferred the Option to a trust pursuant to section 6.2, by the trustee or
other appropriate representative of the trust and/or its beneficiaries) to the
Secretary of the Company of such Participant's (or trust's) intent to exercise
the Option with respect to a specified number of shares. The specified number of
shares will be issued and transferred to the Participant (or the trust, as
applicable) upon receipt by the Secretary of the Company of such notice along
with payment for such shares and such other items or documentation as the
Committee shall reasonably request of the Participant (or the trust, as
applicable).
4.5 Payment of Purchase Price on Exercise. Each option
agreement shall provide that the purchase price for the shares with respect to
which an Option is exercised shall be paid to the Company in cash at the time of
exercise.
5. Aggregate Limitation on Shares of Common Stock. Shares of
Common Stock which may be issued pursuant to Options granted under this Plan may
be
<PAGE> 4
either authorized and unissued shares of Common Stock or authorized and issued
shares of Common Stock held by the Company as treasury stock. The number of
shares of Common Stock reserved for issuance under the Plan shall not exceed
300,000 shares, subject to adjustments pursuant to section 6.8 of this Plan. Any
shares of Common Stock subject to an Option which for any reason either
terminates unexercised or expires unexercised shall again be available for
issuance under this Plan.
6. Miscellaneous.
6.1 General Restriction. Any Option granted under this
Plan shall be subject to the requirement that, if at any time the Committee
determines that any listing or registration of the shares of Common Stock or any
consent or approval of any governmental body or any other agreement or consent
is necessary or desirable as a condition of the granting of an Option or
issuance of Common Stock upon exercise of an Option, such grant or issuance may
not be consummated unless such requirement is satisfied in a manner acceptable
to the Committee.
6.2 Nonassignability; Holding Period. No Option granted
under this Plan may be: (a) assigned or transferred by the Participant, except
by will or by the laws of descent and distribution or to a trust for the benefit
of the transferring Participant or his or her spouse and lineal descendants; or
(b) exercised for at least six months after the date of grant. During the life
of the Participant, any Option shall be exercisable only by such Participant or,
if the Option was transferred by the Participant to a trust in accordance with
this section 6.2, by the trustee of such trust or other appropriate
representative of the trust and/or its benficiaries.
6.3 Withholding Taxes. Whenever the Company proposes or is
required to issue or transfer shares of Common Stock under this Plan, the
Company shall have the right to require the Participant (or the trust, if
applicable) to remit to the Company an amount sufficient to satisfy any federal,
state and local withholding tax requirements prior to the delivery of any
certificate for such shares.
6.4 Investment Representation. Each option agreement may
provide that the Participant or recipient shall, upon demand by the Committee,
deliver to the Committee at the time of exercise of any Option a written
representation that the shares to be acquired under such exercise are to be
acquired for investment and not for resale or with a view to the distribution
thereof. Upon such demand, delivery of such representation prior to delivery of
any shares issued upon exercise of an Option shall be a condition precedent to
the right of the Participant or such other person to purchase any shares.
<PAGE> 5
6.5 No Right to Employment. Nothing in this Plan or in any
agreement entered into pursuant to this Plan shall confer upon any Participant
the right to continue in the employment of the Company or a Subsidiary or affect
any right which the Company or a Subsidiary may have to terminate the employment
of such Participant.
6.6 Nonuniform Determinations. The Committee's
determinations under this Plan (including, without limitation, the Committee's
determinations of the persons to be granted Options) need not be uniform and may
be made by it selectively among persons who receive, or are eligible to receive,
awards under this Plan, whether or not such persons are similarly situated.
6.7 No Rights as Shareholders. Recipients of Options under
this Plan shall have no rights as shareholders of the Company with respect
thereto unless and until certificates for shares of Common Stock are issued to
them.
6.8 Adjustment of Stock. If a change occurs in the
outstanding Common Stock of the Company due to any stock dividend,
recapitalization, reorganization, merger, consolidation, split-up, combination
or any similar transaction, the Committee shall appropriately adjust the number
of shares of Common Stock which may be issued under this Plan, the number of
shares of Common Stock subject to Options theretofore granted under this Plan,
the option price of such Options and any and all other adjustments deemed
appropriate by the Committee to prevent substantial dilution or enlargement of
the rights granted to a Participant. The Committee's determination hereunder
shall be final and binding on all parties.
6.9 Amendment or Termination of this Plan. The Committee,
with the approval of the Board of Directors, may, at any time, terminate this
Plan or any part thereof and may, from time to time, amend this Plan as it may
deem advisable. The termination or amendment of this Plan shall not, without the
consent of the Participant, affect such Participant's rights under Options
previously granted.
7. Effective Date of the Plan. The effective date of the Plan
shall be February 17, 1998.
<PAGE> 1
TENTH AMENDMENT TO REVOLVING LOAN,
TERM LOAN, EQUIPMENT LOAN AND SECURITY
AGREEMENT AND REAFFIRMATION OF GUARANTIES
This TENTH AMENDMENT TO REVOLVING LOAN, TERM LOAN, EQUIPMENT LOAN,
SECURITY AGREEMENT AND REAFFIRMATION OF GUARANTIES, dated as of May 22, 1998
(this "AMENDMENT") is by and between FLEET NATIONAL BANK F/K/A FLEET NATIONAL
BANK OF CONNECTICUT F/K/A SHAWMUT BANK CONNECTICUT, N.A., a national banking
association with a place of business at 777 Main Street, Hartford, Connecticut
06115 ("LENDER") and EDAC TECHNOLOGIES CORPORATION, a Wisconsin corporation with
a principal place of business at 1790 New Britain Avenue, Farmington,
Connecticut 06032 ("BORROWER").
On October 3, 1985, Lender and Borrower entered into a certain
Revolving Loan and Security Agreement which has been amended and restated in its
entirety by a certain Fifth Amended and Restated Revolving Loan, Term Loan,
Equipment Loan and Security Agreement dated February 28, 1995, as amended by a
certain Sixth Amendment to Revolving Loan, Term Loan, Equipment Loan and
Security Agreement dated July 31, 1995, as further amended by a certain Seventh
Amendment to Revolving Loan, Term Loan, Equipment Loan and Security Agreement
and Reaffirmation of Guaranties dated as of January 26, 1996, as further amended
by a certain Eighth Amendment to Revolving Loan, Term Loan, Equipment Loan and
Security Agreement and Reaffirmation of Guaranties dated as of April 10, 1996,
as further amended by a certain Ninth Amendment to Revolving Loan, Term Loan,
Equipment Loan, Security Agreement, Modification of Notes and Reaffirmation of
Guaranties dated as of March 27, 1997 and as further amended by this Amendment
(as amended and in effect from time to time, the "LOAN AGREEMENT"). Capitalized
terms used herein and not defined herein shall have the meanings given to them
in the Loan Agreement.
Pursuant to the Loan Agreement, the Lender has made: (i) a
$9,000,000.00 revolving loan (the "REVOLVING LOAN") as evidenced by a certain
Amended and Restated Revolving Promissory Note dated as of March 27, 1997 (the
"REVOLVING NOTE"), (ii) a $541,153.34 term loan (the "CONSOLIDATED EQUIPMENT
LOAN") as evidenced by a certain Amended and Restated Promissory Note dated
March 27, 1997 (the "CONSOLIDATED EQUIPMENT NOTE"), (iii) a $4,000,000.00 term
loan (the "TERM LOAN") as evidenced by a certain Term Promissory Note dated
March 22, 1993 (THE "TERM NOTE"), (iv) a $1,000,000.00 construction to permanent
loan (the "CONSTRUCTION LOAN") as evidenced by a certain Construction to
Permanent Loan Promissory Note dated July 31, 1995 (the "CONSTRUCTION NOTE"),
and (v) a $1,000,000.00 equipment loan (the "THIRD EQUIPMENT LOAN") as provided
by a certain Equipment Promissory Note III dated as of March 27, 1997 (the
"THIRD EQUIPMENT NOTE").
On July 30, 1992, Gros-Ite Industries, Inc. (the "GUARANTOR") executed
a guaranty of the obligations of the Borrower to the Lender, which guaranty has
been reaffirmed from time to time (the "GUARANTY"). The Loan Agreement,
Revolving Note, the Consolidated Note, the Third Equipment Note, the
Construction Note, the Term Note, the Guaranty and the related documents are
collectively referred to as the "LOAN DOCUMENTS".
Borrower has requested that Lender amend the Loan Agreement and the
Loan Documents in order to, among other things, (i) make a new $3,000,000
Equipment Line of Credit available to the Borrower ("EQUIPMENT LOAN IV"), and
(ii) make other amendments as set forth herein. Lender has advised Borrower that
Lender is prepared to make the loans and amendments requested on the condition
that Borrower join with Lender in this Amendment upon the terms and conditions
set forth herein.
In consideration of this Amendment and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Lender, Borrower and Guarantor hereby agree as follows.
I. Acknowledgments, Affirmations and Representations and Warranties.
A. The Borrower and Guarantor acknowledge and affirm that:
<PAGE> 2
1. All of the statements contained herein are true and
correct and that they understand that the Lender is relying on the truth and
completeness of such statements to enter into this Amendment.
2. As of May 20, 1998 and without regard to the financial
accommodations contemplated herein, the Borrower is legally and validly indebted
to the Lender in the principal amount of $4,874,887.23 with respect to the
Revolving Loan, $423,893.34 with respect to the Consolidated Loan, $2,900,000.00
with respect to the Third Equipment Loan, $3,089,220.07 with respect to the Term
Loan and $838,888.76 with respect to the Construction Loan, plus interest and
fees accrued and accruing thereon and costs and expenses of collection,
including without limitation, attorneys' fees, and there is no defense, offset
or counterclaim with respect to any of the foregoing or independent claim or
action against the Lender.
3. The Guarantor is legally and validly indebted to the
Lender by virtue of the Guaranty and there is no defense, offset or counterclaim
with respect thereto or claim or independent against the Lender.
B. The Borrower and the Guarantor represent and warrant to the
Lender that:
1. The resolutions previously adopted by the Board of
Directors of the Borrower and the Guarantor and provided to the Lender have not
in any way been rescinded or modified and have been in full force and effect
since their adoption to and including the date hereof and are now in full force
and effect, except to the extent that they have been modified or supplemented to
authorize this Amendment and the documents and transactions described herein.
2. The Borrower and the Guarantor have the corporate power
and authority to enter into, and have taken all necessary corporate action to
authorize, this Amendment and the transactions contemplated hereby.
3. All representations, warranties and covenants contained
in, and schedules and exhibits attached to, the Loan Documents are true and
correct on and as of the date hereof, are incorporated herein by reference and
are hereby remade.
4. The Borrower and the Guarantor are not currently in
default under any of the Loan Documents, and no condition exists which would
constitute an event of default under any of the Loan Documents but for the
giving of notice or passage of time, or both.
5. The consummation of the transactions contemplated
hereby is not prevented or limited by, nor does it conflict with or result in a
breach of terms, conditions or provisions of the Borrower's or Guarantor's
respective Certificates of Incorporation or Bylaws or any evidence of
indebtedness, agreement or instrument of whatever nature to which the Borrower
or any of the Guarantor is a party or by which any of them is bound, does not
constitute a default under any of the foregoing and does not violate any
federal, state or local law, regulation or order or any order of any court or
agency which is binding upon the Borrower or the Guarantor.
II. Amendments to Loan Documents.
A. Amendments to the Loan Agreement.
1. Amendment to Section 1. The following are hereby
inserted after Section 1.34 of the Loan Agreement:
1.35 "CONVERSION DATE II" means April 30, 1999.
1.36 "EQUIPMENT ADVANCE IV" means that term as
defined in Section 2.20.
-2-
<PAGE> 3
1.37 "EQUIPMENT LOAN IV" means all Equipment
Advances IV made pursuant to Section 2.20
and evidenced by the Equipment Note IV.
1.38 "EQUIPMENT NOTE IV" means that term as defined
in Section 2.20.
2. Sections 1.21, 1.22, 1.28, 1.30, 1.32 and 1.33
are hereby deleted in their entirety and replaced with the following:
1.21 "COST OF FUNDS ADVANCE" means any Advance,
Equipment Advance or Equipment Advance IV
that bears interest with reference to the
Cost of Funds.
1.22 "COST OF FUNDS LOANS" or "COST OF FUNDS
LOAN" means any Revolving Loan, Equipment
Loan, Equipment Loan IV or Second Term Loan
or any portion thereof which bears interest
with reference to the Cost of Funds.
1.28 "LIBOR ADVANCE" means any Advance, Equipment
Advance or Equipment Advance IV that bears
interest with reference to LIBOR.
1.30 "LIBOR LOANS" or "LIBOR LOAN" means the
Revolving Loan, Equipment Loan, Equipment
Loan IV or the Second Term Loan or any
portion thereof that bears interest with
reference to LIBOR.
1.32 "PRIME RATE ADVANCE" means any Advance,
Equipment Advance or Equipment Advance IV
that bears interest with reference to the
Prime Rate.
1.33 "PRIME RATE LOAN" or "PRIME RATE LOANS"
means the Revolving Loan, Equipment Loan,
Equipment Loan IV or Second Term Loan or any
portion thereof which bears interest with
reference to the Prime Rate.
3. The following is hereby inserted after Section 2.19 of
the Loan Agreement:
2.20 Equipment Line of Credit IV.
Equipment Advances. Subject to the terms and
conditions set forth in this Agreement,
Lender agrees to make advances (each an
"EQUIPMENT ADVANCE IV" and collectively
"EQUIPMENT ADVANCES IV") to Borrower from
time to time during the period from May ___,
1998 up to, but not including, April 30,
1999 (the "CONVERSION DATE II"); provided,
however, that at no time shall the aggregate
outstanding principal balance of all
Equipment Advances IV plus the aggregate
outstanding principal amount of any leases
entered into by the Borrower with Fleet
Credit Corporation exceed $3,000,000.00.
Equipment Note IV. All Equipment Advances IV
shall be evidenced by, and repaid with
interest in accordance with, a single
promissory note of Borrower in substantially
the form of EXHIBIT C-2 attached hereto,
duly completed, executed, and delivered to
Lender, in the principal amount of up to
$3,000,000.00 and dated May ____, 1998,
payable to Lender, (the "EQUIPMENT NOTE
IV"). Borrower hereby authorizes Lender to
record on the Equipment Note IV or in its
internal computerized records the amount of
each Equipment Advance IV and of each
payment of principal received by Lender on
account of the Equipment Loan IV, which
recordation shall, in the absence of
manifest error, be conclusive as to the
outstanding principal balance of the
Equipment Loan IV and shall be considered
correct and binding on Borrower provided,
however, that the failure to make such
recordation with respect to any Equipment
Advance IV or
-3-
<PAGE> 4
payment shall not limit or otherwise affect the
obligations of Borrower under this Agreement or
the Equipment Note IV.
Invoices. In the case of each Equipment
Advance IV, Borrower shall deliver to Lender
the following: (1) an invoice for the
equipment to be purchased certified by the
chief financial officer of Borrower as being
true, complete and correct, and showing that
the requested Equipment Advance IV does not
exceed eighty (80%) percent of the hard
costs thereof excluding registration fees,
taxes, shipping charges, delivery charges,
set-up charges, maintenance costs and any
and all other "soft costs", (2) if requested
by Lender, a UCC-1 financing statement or
UCC-3 amendment with respect to such
equipment and (3) any other additional
approvals, opinions, reports, and other
documents as may be required hereunder or as
Lender may reasonably request.
4. Sections 2.13 and 2.14 of the Loan Agreement are
hereby deleted and replaced with the following:
2.13 Non-Default Interest. The Borrower shall pay
interest to Lender monthly in arrears on the
first day of each month commencing on the
outstanding and unpaid principal balance of
the Revolving Loan, Second Term Loan,
Equipment Loan and Equipment Loan IV at a
rate per annum equal to, at Borrower's
election pursuant to Section 2.14 below, (i)
the Prime Rate, (ii) LIBOR plus two hundred
(200) basis points, or (iii) the Cost of
Funds plus two hundred (200) basis points.
Notwithstanding anything contained herein to
the contrary, if the Borrower achieves a
Debt Service Ratio (as defined in Section 10
of Exhibit A hereto) of greater than or
equal to 1.5 to 1.0 for the year to date
period tested, the portion of the Revolving
Loan which bears interest with respect to
the LIBOR Rate or the Cost of Funds Rate
will be reduced by twenty-five (25) basis
points for the quarter in which the Debt
Service Ratio was tested. Any change in the
interest rate resulting from a change in the
Prime Rate shall become effective as of the
opening of business on the day on which such
change in the Prime Rate shall become
effective.
2.14 Notice and Manner of Borrowing. Borrower shall
give Lender irrevocable notice by telecopy or
otherwise in writing of its request that Lender
make an Advance or Equipment Advance IV
hereunder, not later than 2:00 p.m. Hartford
time two (2) Business Days prior to the
proposed drawdown date thereof ("DRAWDOWN
Date"). Notice received by Lender after 2:00
p.m. Hartford, Connecticut time shall be
loaned against by Lender three (3) Business
Days after the proposed Drawdown Date.
Notwithstanding anything contained herein to
the contrary, for Prime Rate Advances, the
Borrower shall only be required to give such
notice not later than 2:00 p.m. on the Drawdown
Date. Each notice, in the case of a LIBOR
Advance or Cost of Funds Advance, shall
specify the duration of the Interest Period
therefor. Subject to the fulfillment of
the applicable conditions set forth in this
Agreement, Lender will make the Advance or
Equipment Advance IV in immediately
available funds by crediting the amount
thereof to Borrower's account with
Lender. Notwithstanding anything contained
herein to the contrary, the Borrower may only
elect LIBOR Loans or Cost of Funds Loans in
original principal amounts of not less
than $1,000,000.00.
5. EXHIBIT C-2 attached hereto is hereby attached to the Loan
Agreement as EXHIBIT C-2.
-4-
<PAGE> 5
B. Amendment to the Loan Documents. The Loan Documents, are
hereby amended to be made consistent with this Amendment.
III. Reaffirmation of Guaranty.
To induce the Lender to enter into this Amendment, the Guarantor hereby
(a) consents to this Amendment and (b) affirms and ratifies the Guaranty and
confirms that (i) the Guarantor does irrevocably and unconditionally guarantee
to the Lender the payment and performance from the Borrower of the Obligations
(as defined in the Guaranty) from the Borrower to the Lender, upon the terms and
conditions set forth in the Guaranty, (ii) the term Obligations includes,
without limitation, this Amendment, the Term Loan, the Construction Loan, the
Consolidated Equipment Loan, the Third Equipment Loan, the Revolving Loan, and
Equipment Loan IV, and (iii) the Guaranty remains in full force and effect.
IV. Miscellaneous.
A. Ratifications, Etc. Except as otherwise expressly set forth
herein, all terms and conditions of the Loan Agreement, the Revolving Note, the
Term Note, the Consolidated Equipment Note, the Third Equipment Note, the
Guaranty and the Loan Documents are ratified and shall remain in full force and
effect. Nothing herein shall be construed to be a waiver of any requirements of
the Loan Agreement and the Loan Documents except as expressly set forth herein.
B. Conditions Precedent. The effectiveness of this Amendment
shall be subject to the Lender's prior receipt of each of the following in form
and substance satisfactory to Lender and its counsel:
1. This Amendment, duly executed and delivered by the
Borrower and Guarantor and the Equipment Note IV,
duly executed and delivered by the Borrower;
2. Copies of all corporate action taken by the Borrower
and Guarantor, including resolutions of its Board of
Directors, authorizing the execution, delivery, and
performance of the Loan Documents to which it is a
party and each other document to be delivered
pursuant to this Amendment, certified as of the date
of this Amendment by the Secretary of the Borrower
and Guarantor;
3. A certificate or certificates, dated as of the date
of this Amendment, of the Secretary of the Borrower
and/or Guarantor certifying the names and true
signatures of the officers of the Borrower and
Guarantor authorized to sign the Loan Documents to
which the Borrower or Guarantor are a party and the
other documents to be delivered by the Borrower and
Guarantors under this Amendment and an opinion of
Borrower's counsel in form and substance satisfactory
to the Lender;
4. All fees and expenses, including legal fees and
related disbursements incurred by Lender in
connection with the structuring, negotiation,
preparation and closing of this Amendment and the
transactions related hereto;
C. Counterparts. This Amendment may be executed in any number of
counterparts, which together shall constitute one instrument.
D. Governing Law. This Amendment shall be construed and
interpreted in accordance with the laws of the State of Connecticut.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
an instrument under seal.
LENDER:
FLEET NATIONAL BANK f/k/a FLEET
NATIONAL BANK OF
CONNECTICUT f/k/a SHAWMUT BANK
CONNECTICUT, N.A.
By /s/Edgar Ezerins
-----------------------------------
Edgar Ezerins
Its Vice President
Duly Authorized
BORROWER:
EDAC TECHNOLOGIES CORPORATION
By /s/Ronald G. Popolizio
-----------------------------------
Ronald G. Popolizio
Its Vice President
Duly Authorized
GUARANTOR:
GROS-ITE INDUSTRIES, INC.
By /s/Ronald G. Popolizio
-----------------------------------
Its V.P. CFO
<PAGE> 1
EXHIBIT 10.41
EQUIPMENT PROMISSORY NOTE IV
Hartford, Connecticut
$ 3,000,000.00 May 22, 1998
FOR VALUE RECEIVED, the undersigned, EDAC TECHNOLOGIES CORPORATION, a
Wisconsin corporation with a place of business at 1790 New Britain Avenue,
Farmington, Connecticut 06032 (the "BORROWER") for value received, promises to
pay to the order of FLEET NATIONAL BANK, a national banking association,
(hereinafter referred to as the "LENDER") at its office at 777 Main Street,
Hartford, Connecticut 06115 or at such other place as the holder of this Note
may from time to time designate in writing, the principal sum of THREE MILLION
($3,000,000.00) DOLLARS (the "PRINCIPAL AMOUNT") or, if less, the aggregate
unpaid principal amount of all Equipment Advances IV made pursuant to that
certain Fifth Amended and Restated Revolving Loan, Term Loan, Equipment Loan and
Security Agreement dated February 28, 1995, as amended by a certain Sixth
Amendment to Revolving Loan, Term Loan, Equipment Loan and Security Agreement
dated July 31, 1995, as further amended by a certain Seventh Amendment to
Revolving Loan, Term Loan, Equipment Loan and Security Agreement and
Reaffirmation of Guaranties dated as of January 26, 1996, as further amended by
a certain Eighth Amendment to Revolving Loan, Term Loan, Equipment Loan and
Security Agreement and Reaffirmation of Guaranties dated as of April 10, 1996,
as further amended by a certain Ninth Amendment of Revolving Loan, Term Loan,
Equipment Loan and Security Agreement and Reaffirmation of Guaranties dated as
of March 27, 1997, and as further amended by a certain Tenth Amendment to
Revolving Loan, Term Loan, Equipment Loan, Security Agreement, Modification of
Notes and Reaffirmation of Guaranties dated of even date herewith between
Borrower and Lender (as amended and in effect from time to time, the "LOAN
Agreement"), together with (i) interest at the rate and in the manner provided
herein; (ii) all amounts which may become due under the Loan Agreement or any of
the other Loan Documents; (iii) any costs and expenses, including reasonable
attorneys' and appraiser's fees incurred in the collection of this Note or the
enforcement of the Loan Agreement or any of the other Loan Documents,
foreclosure thereunder or in any litigation or controversy arising from or
connected with this Note, the Loan Agreement or any of the other Loan Documents;
and (iv) all taxes or duties assessed upon said sum against Lender or upon the
debt evidenced hereby other than income or excise taxes. All amounts owing under
this Note and interest thereon shall be payable in legal tender of the United
States of America. Capitalized terms used herein and not otherwise defined shall
have the meanings given to them in the Loan Agreement.
This Note shall bear interest at an annual rate as selected by Borrower
pursuant to the terms of the Loan Agreement. Interest shall be payable as set
forth in the Loan Agreement.
The Borrower shall make interest only payments on the first day of each
month for the first year of this Loan and on the Conversion Date II at such
rates and in the manner as provided in the Loan Agreement. Monthly payments of
principal (based on a five-year straight-line amortization schedule) and accrued
interest shall be due and payable in arrears commencing on June 1, 1999 and
continuing on the first day of each succeeding month thereafter until the
outstanding Principal Amount, together with all interest accrued thereon has
been fully paid, except that if not sooner paid, the Principal Amount, together
with all accrued but unpaid interest thereon, shall be due and payable on May 1,
2004 or such earlier date as provided in the Loan Agreement (including by reason
of an acceleration upon the occurrence of an Event of Default) (the "MATURITY
DATE").
Interest on the Principal Amount shall be computed on the basis of a
360-day year for actual days elapsed and shall be payable at the rate and in the
manner as provided herein until all of said Principal Amount has been fully
paid, whether before or after the Maturity Date, by acceleration or otherwise,
and whether or not any judgment is obtained hereon.
In the event that Lender has not received, within fifteen (15) days of
its due date, any installment of the Principal Amount and interest (excluding
any Principal Amount and interest due upon the Maturity Date), or
<PAGE> 2
payment with respect to any other payment due under this Note, Borrower shall be
subject to a late charge equal to five (5%) percent of such payment.
Upon the occurrence of default by Borrower in the performance of any of
Borrower's obligations hereunder, or an Event of Default as defined in the Loan
Agreement or in any other Loan Documents, Lender may, at its option, accelerate
Borrower's obligations hereunder and declare the entire unpaid Principal Amount,
together with accrued interest and all other amounts then due which are
evidenced by this Note, to be immediately due and payable, without the necessity
for demand or additional notice. In addition, upon the occurrence of such
default or Event of Default or after the Maturity Date, the interest rate of
this Note shall increase without notice, as provided in the Loan Agreement.
Failure to exercise these options shall not constitute a waiver of the right to
exercise the same in the event of any subsequent default.
Borrower may prepay this Note only in accordance with the terms of the
Loan Agreement.
Notwithstanding any provisions of this Note, it is the understanding
and agreement of Borrower and Lender that the maximum rate of interest to be
paid by Borrower to Lender shall not exceed the highest of the maximum rate of
interest permissible to be charged by Lender under applicable laws. Any amount
paid in excess of such rate shall be deemed to be a payment in reduction of
principal except to the extent that such amount is in excess of the then
outstanding Principal Amount, in which event such excess shall be returned to
the Borrower.
This Note shall be governed by and construed in accordance with the
laws of the State of Connecticut. This Note shall bind the successors and
assigns of Borrower, and shall inure to the benefit of Lender and its successors
and assigns. This Note may not be changed or terminated orally, but only by an
agreement in writing signed by the party against whom enforcement of any such
change or termination is sought.
Whenever in this Note words of any gender appear, they shall be deemed
to apply equally to any other gender. Whenever used in this Note, the plural
shall include the singular and the singular shall include the plural, as the
context shall require. In the event that Borrower consists of more than one
person or entity, the obligations hereunder shall be joint and several.
-19-
<PAGE> 3
TO INDUCE LENDER TO ENTER INTO THE COMMERCIAL LOAN TRANSACTION
EVIDENCED BY THIS NOTE, THE LOAN AGREEMENT, AND ANY OTHER LOAN DOCUMENTS
EVIDENCING OR SECURING THE SAME, BORROWER AGREES THAT THIS IS A COMMERCIAL
TRANSACTION AND NOT A CONSUMER TRANSACTION, AND WAIVES ANY RIGHT TO NOTICE AND A
HEARING UNDER CHAPTER 903A OF THE CONNECTICUT GENERAL STATUTES, AS AMENDED, OR
OTHER STATUTE OR STATUTES AFFECTING PREJUDGMENT REMEDIES AND AUTHORIZES LENDER'S
ATTORNEY TO ISSUE A WRIT FOR A PREJUDGMENT REMEDY WITHOUT COURT ORDER, PROVIDED
THE COMPLAINT SHALL SET FORTH A COPY OF THIS WAIVER AND WAIVES ANY CLAIM IN
TORT, CONTRACT OR OTHERWISE AGAINST LENDER'S ATTORNEY WHICH MAY ARISE OUT OF
SUCH ISSUANCE OF A WRIT FOR A PREJUDGMENT REMEDY WITHOUT COURT ORDER. BORROWER
ACKNOWLEDGES AND STIPULATES THAT SUCH WAIVER AND AUTHORIZATION GRANTED ABOVE ARE
MADE KNOWINGLY AND FREELY AND AFTER FULL CONSULTATION WITH COUNSEL.
SPECIFICALLY, BORROWER RECOGNIZES AND UNDERSTANDS THAT THE EXERCISE OF LENDER'S
RIGHTS DESCRIBED ABOVE MAY RESULT IN THE ATTACHMENT OF OR LEVY AGAINST
BORROWER'S PROPERTY, AND SUCH WRIT FOR A PREJUDGMENT REMEDY WILL NOT HAVE THE
PRIOR WRITTEN APPROVAL OR SCRUTINY OF A COURT OF LAW OR OTHER JUDICIAL OFFICER
NOR WILL BORROWER HAVE THE RIGHT TO ANY NOTICE OR PRIOR HEARING WHERE BORROWER
MIGHT CONTEST SUCH A PROCEDURE. THE INTENT OF BORROWER IS TO GRANT TO LENDER FOR
GOOD AND VALUABLE CONSIDERATION THE RIGHT TO OBTAIN SUCH A PREJUDGMENT REMEDY
AND TO EXPRESS ITS BELIEF THAT ANY SUCH PREJUDGMENT REMEDY OBTAINED IS VALID AND
CONSTITUTIONAL. FURTHER, TO THE EXTENT ALLOWED UNDER APPLICABLE LAW, BORROWER
HEREBY WAIVES DEMAND, PRESENTMENT FOR PAYMENT, PROTEST, NOTICE OF PROTEST,
NOTICE OF DISHONOR, DILIGENCE IN COLLECTION, NOTICE OF NONPAYMENT OF THIS NOTE
AND ANY AND ALL NOTICES OF A LIKE NATURE.
EDAC TECHNOLOGIES CORPORATION
By:/s/ Ronald G. Popolizio
------------------------------------------
Ronald G. Popolizio
Its Vice President
(Duly Authorized)
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EXHIBIT 10.42
TWELFTH AMENDMENT TO LOANS AND SECURITY AGREEMENT,
MODIFICATION OF NOTES AND REAFFIRMATION OF GUARANTIES
This TWELFTH AMENDMENT TO LOANS AND SECURITY AGREEMENT AND
REAFFIRMATION OF GUARANTIES, dated as of November 25, 1998 (this "AMENDMENT") is
by and among FLEET NATIONAL BANK F/K/A FLEET NATIONAL BANK OF CONNECTICUT F/K/A
SHAWMUT BANK CONNECTICUT, N.A., a national banking association with a place of
business at 777 Main Street, Hartford, Connecticut 06115 ("LENDER"), EDAC
TECHNOLOGIES CORPORATION, a Wisconsin corporation with a principal place of
business at 1806 New Britain Avenue, Farmington, Connecticut 06032 ("BORROWER"),
APEX MACHINE TOOL COMPANY, INC., a Connecticut corporation with a mailing
address c/o Borrower at 1806 New Britain Avenue, Farmington, Connecticut 06032
("APEX") and GROS-ITE INDUSTRIES, INC., a Connecticut corporation with a mailing
address c/o Borrower at 1806 New Britain Avenue, Farmington, Connecticut 06032
("GROS-ITE" and collectively with Apex, "GUARANTOR").
On October 3, 1985, Lender and Borrower entered into a certain
Revolving Loan and Security Agreement which has been amended and restated in its
entirety by a certain Fifth Amended and Restated Revolving Loan, Term Loan,
Equipment Loan and Security Agreement dated February 28, 1995, as amended by a
certain Sixth Amendment to Revolving Loan, Term Loan, Equipment Loan and
Security Agreement dated July 31, 1995, as further amended by a certain Seventh
Amendment to Revolving Loan, Term Loan, Equipment Loan and Security Agreement
and Reaffirmation of Guaranties dated as of January 26, 1996, as further amended
by a certain Eighth Amendment to Revolving Loan, Term Loan, Equipment Loan and
Security Agreement and Reaffirmation of Guaranties dated as of April 10, 1996,
as further amended by a certain Ninth Amendment to Revolving Loan, Term Loan,
Equipment Loan, Security Agreement, Modification of Notes and Reaffirmation of
Guaranties dated May 27, 1997 between Borrower and Lender, as further amended by
a certain Tenth Amendment to Revolving Loan, Term Loan, Equipment Loan and
Security Agreement and Reaffirmation of Guaranties dated May 22, 1998 and as
further amended by a certain Eleventh Amendment to Loan and Security Agreement,
Modification of Notes and Reaffirmation of Guaranties dated as of June 30, 1998
(as amended and in effect from time to time, the "LOAN AGREEMENT"). Capitalized
terms used herein and not defined herein shall have the meanings given to them
in the Loan Agreement.
Pursuant to the Loan Agreement, the Lender has made: (i) a
$13,000,000.00 revolving loan (the "REVOLVING LOAN") as evidenced by a certain
Second Amended and Restated Revolving Promissory Note dated as of June 30, 1998
(the "REVOLVING Note"), (ii) a $14,000,000.00 term loan (the "ACQUISITION TERM
LOAN") as evidenced by a certain Term Promissory Note dated June 30, 1998 (the
"ACQUISITION TERM NOTE"), (iii) a $541,153.34 term loan (the "CONSOLIDATED
EQUIPMENT LOAN") as evidenced by a certain Amended and Restated Promissory Note
dated March 27, 1997 (the "CONSOLIDATED EQUIPMENT NOTE"), (iv) a $4,000,000.00
term loan (the "TERM LOAN") as evidenced by a certain Term Promissory Note dated
March 22, 1993 (the "TERM NOTE"), (v) a $1,000,000.00 construction to permanent
loan (the "CONSTRUCTION LOAN") as evidenced by a certain Construction to
Permanent Loan Promissory Note dated July 31, 1995 (the "CONSTRUCTION NOTE"),
(vi) a $3,000,000.00 equipment loan (the "THIRD EQUIPMENT LOAN") as evidenced by
a certain Equipment Promissory Note III dated as of March 27, 1997 (the "THIRD
EQUIPMENT NOTE") and (vii) a $3,000,000 equipment loan (the "FOURTH EQUIPMENT
LOAN") as evidenced by a certain Equipment Promissory Note IV dated as of May
22, 1998 (the "FOURTH EQUIPMENT NOTE").
Borrower has requested that Lender amend the Loan Agreement and the
Loan Documents in order to, among other things, make amendments to the financial
covenants in the Loan Agreement as set forth herein. Lender has advised Borrower
that Lender is prepared to make the amendments requested on the condition that
Borrower join with Lender in this Amendment upon the terms and conditions set
forth herein.
In consideration of this Amendment and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Lender, Borrower and Guarantor hereby agree as follows.
I. Acknowledgments, Affirmations and Representations and Warranties.
<PAGE> 2
A. The Borrower and Guarantor acknowledge and affirm that:
1. All of the statements contained herein are true and
correct and that they understand that the Lender is relying on the truth and
completeness of such statements to enter into this Amendment.
2. As of November 16, 1998 and without regard to the
financial accommodations contemplated herein, the Borrower is legally and
validly indebted to the Lender in the principal amount of $8,681,543.00 with
respect to the Revolving Loan, $14,000,000.00 with respect to the Acquisition
Term Loan, $369,773.00 with respect to the Consolidated Equipment Loan,
$2,600,000.00 with respect to the Third Equipment Loan, $1,618,737.00 with
respect to the Fourth Equipment Loan, $2,983,848.00 with respect to the Term
Loan and $805,555.00 with respect to the Construction Loan, plus interest and
fees accrued and accruing thereon and costs and expenses of collection,
including without limitation, attorneys' fees, and there is no defense, offset
or counterclaim with respect to any of the foregoing or independent claim or
action against the Lender.
3. Each Guarantor is legally and validly indebted to the
Lender by virtue of its Guaranty and there is no defense, offset or counterclaim
with respect thereto or claim or independent against the Lender.
B. The Borrower and each Guarantor represent and warrant to the
Lender that:
1. The resolutions previously adopted by the Board of
Directors of the Borrower and each Guarantor and provided to the Lender have not
in any way been rescinded or modified and have been in full force and effect
since their adoption to and including the date hereof and are now in full force
and effect, except to the extent that they have been modified or supplemented to
authorize this Amendment and the documents and transactions described herein.
2. The Borrower and each Guarantor have the corporate
power and authority to enter into, and have taken all necessary corporate action
to authorize, this Amendment and the transactions contemplated hereby.
3. All representations, warranties and covenants contained
in, and schedules and exhibits attached to, the Loan Documents are true and
correct on and as of the date hereof, are incorporated herein by reference and
are hereby remade.
4. The Borrower and each Guarantor are not currently in
default under any of the Loan Documents, and no condition exists which would
constitute an event of default under any of the Loan Documents but for the
giving of notice or passage of time, or both.
5. The consummation of the transactions contemplated
hereby is not prevented or limited by, nor does it conflict with or result in a
breach of terms, conditions or provisions of the Borrower's or each Guarantor's
respective Certificates of Incorporation or Bylaws or any evidence of
indebtedness, agreement or instrument of whatever nature to which the Borrower
or any of the Guarantors is a party or by which any of them is bound, does not
constitute a default under any of the foregoing and does not violate any
federal, state or local law, regulation or order or any order of any court or
agency which is binding upon the Borrower or each Guarantor.
II. Amendments to Loan Documents.
A. Amendments to the Loan Agreement.
1. Amendment to Exhibit A of the Loan Agreement.
Exhibit A of the Loan Agreement is hereby amended by:
a. Deleting Section 10 of Exhibit "A" to the
Loan Agreement in its entirety and
substituting the following in lieu thereof:
Debt Service Ratio. The Borrower shall
maintain as of the end of each calendar
quarter, for the year to date period, a
ratio of [(earnings before interest, taxes,
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<PAGE> 3
depreciation and amortization) minus
(Unfunded Capital Expenditures (pro rated
based upon the percentage of the calendar
year elapsed at the time of the covenant
testing)) to [(Current Maturities of
Long-Term Debt paid or scheduled to be paid
during the period to be tested) plus
(interest) plus (taxes) plus (dividends)] of
not less than (a) 1.05 to 1.0 as of December
31, 1998, and (b) 1.2 to 1.0 as of March 31,
1999 and at all times thereafter. "CURRENT
MATURITIES OF LONG TERM DEBT" shall mean all
indebtedness of Borrower (excluding the
Revolving Loan) which, in accordance with
GAAP may be properly classified as long term
debt, the portion of which is due within one
(1) year from the date of determination
thereof. "UNFUNDED CAPITAL EXPENDITURES"
means all Capital Expenditures which are not
funded with the proceeds of the Equipment
Loan IV, the Acquisition Term Loan, or the
Biondi Debt. "CAPITAL EXPENDITURES" shall
mean amounts paid by the Borrower in
connection with the purchase by the Borrower
of Capital Assets that would be required to
be capitalized and shown on the balance
sheet of the Borrower in accordance with
GAAP. "CAPITAL ASSETS" shall mean fixed
assets, both tangible (such as land,
buildings, fixtures, machinery and
equipment) and intangible (such as patents,
copyrights, trademarks, franchises and good
will); provided that Capital Assets shall
not include any item customarily charged
directly to expense or depreciated over a
useful life of twelve (12) months or less in
accordance with GAAP.
b. Deleting Section 13 of Exhibit "A" to the
Loan Agreement in its entirety and
substituting the following in lieu thereof:
Operating Leverage Ratio. The Borrower shall
maintain on a rolling four quarter basis a
ratio of [Funded Senior Debt] to [earnings
before interest, taxes, depreciation and
amortization] of not greater than (a) 5.25
to 1.0 as of December 31, 1998, (b) 4.9 to
1.0 as of March 31, 1999 and at all times
through September 30, 1999, (c) 3.75 to 1.0
as of December 31, 1999 and at all times
through September 30, 2000 and (d) 2.9 to
1.0 as of December 31, 2000 and at all times
thereafter. "FUNDED SENIOR DEBT" shall mean
all outstanding indebtedness of Borrower to
Lender and to James Biondi and Gerald
Biondi.
III. Reaffirmation of Guaranty.
To induce the Lender to enter into this Amendment, each Guarantor
hereby (a) consents to this Amendment and (b) affirms and ratifies its Guaranty
and confirms that (i) each Guarantor does irrevocably and unconditionally
guarantee to the Lender the payment and performance from the Borrower of the
Obligations (as defined in each Guaranty) from the Borrower to the Lender, upon
the terms and conditions set forth in the respective Guaranty, (ii) the term
Obligations includes, without limitation, this Amendment (the "MODIFICATION"),
the Term Loan, the Construction Loan, the Consolidated Equipment Loan, the Third
Equipment Loan, the Fourth Equipment Loan, the Revolving Loan and the
Acquisition Term Loan, and (iii) each Guaranty remains in full force and effect.
IV. Miscellaneous.
A. Ratifications, Etc. Except as otherwise expressly set forth herein,
all terms and conditions of the Loan Agreement, the Guaranty and the Loan
Documents are ratified and shall remain in full force and effect. Nothing herein
shall be construed to be a waiver of any requirements of the Loan Agreement and
the Loan Documents except as expressly set forth herein.
B. Conditions Precedent. The effectiveness of this Amendment shall be
subject to the Lender's prior receipt of each of the following in form and
substance satisfactory to Lender and its counsel:
1. This Amendment, duly executed and delivered by the
Borrower and each Guarantor;
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<PAGE> 4
2. Copies of all corporate action taken by the Borrower
and each Guarantor, including resolutions of their
Board of Directors, authorizing the execution,
delivery, and performance of the Loan Documents to
which each is a party and each other document to be
delivered pursuant to this Amendment, certified as of
the date of this Amendment by the Secretary of the
Borrower and each Guarantor;
3. A certificate or certificates, dated as of the date
of this Amendment, of the Secretary of the Borrower
and each Guarantor certifying the names and true
signatures of the officers of the Borrower and each
Guarantor authorized to sign the Loan Documents to
which the Borrower and each Guarantor is a party;
4. Opinion of counsel for Borrower and each Guarantor in
form and substance satisfactory to Lender.
5. All fees and expenses, including legal fees and
related disbursements incurred by Lender in
connection with the structuring, negotiation,
preparation and closing of this Amendment and the
transactions related hereto;
C. Counterparts. This Amendment may be executed in any number of
counterparts, which together shall constitute one instrument.
D. Governing Law. This Amendment shall be construed and
interpreted in accordance with the laws of the State of Connecticut.
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<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
an instrument under seal.
LENDER:
FLEET NATIONAL BANK F/K/A FLEET NATIONAL
BANK OF CONNECTICUT F/K/A
SHAWMUT BANK CONNECTICUT, N.A.
By:/s/ Edgar Exerins
------------------------------------------
Edgar Ezerins
Its Vice President
Duly Authorized
BORROWER:
EDAC TECHNOLOGIES CORPORATION
By:/s/Ronald G. Popolizio
------------------------------------------
Ronald G. Popolizio
Its Vice President
Duly Authorized
GUARANTOR:
GROS-ITE INDUSTRIES, INC.
By:/s/Ronald G. Popolizio
------------------------------------------
Ronald G. Popolizio
Its Secretary
APEX MACHINE TOOL COMPANY, INC. F/K/A
APEX ACQUISITION CORPORATION
By:/s/Ronald G. Popolizio
------------------------------------------
Ronald G. Popolizio
Its Vice President
<PAGE> 1
EXHIBIT 10.43
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is dated as of November 20, 1998, by
and between EDAC TECHNOLOGIES CORPORATION, a Wisconsin corporation ("Edac"), and
EDWARD J. MCNERNEY ("Mr. McNerney").
RECITAL
Edac desires to employ Mr. McNerney and Mr. McNerney is
willing to make his services available to Edac on the terms and conditions set
forth below.
AGREEMENTS
In consideration of the premises and the mutual agreements
which follow, the parties agree as follows:
1. Employment. Edac hereby employs Mr. McNerney and
Mr. McNerney hereby accepts employment with Edac on the terms and conditions set
forth in this Agreement.
2. Term. The initial term of Mr. McNerney's employment
hereunder shall commence on the date hereof and continue for a period of three
years, subject to earlier termination as set forth in this Agreement. The term
of Mr. McNerney's employment will automatically be extended one year on each
anniversary of the date of this Agreement unless either party notifies the other
to the contrary at least 90 days prior to any such anniversary. The term of
employment is referred to in this Agreement as the "Employment Term."
3. Duties. Mr. McNerney shall serve as the President and
Chief Executive Officer of Edac and will, under the direction of the Board of
Directors (the "Board"), faithfully and to the best of his ability, perform the
duties of such positions as determined by the Board from time to time. As the
President and Chief Executive Officer, Mr. McNerney shall be responsible for
managing the business and affairs of Edac in a professional manner with the
primary objective of enhancing shareholder value and ensuring that Edac's
customers, employees and suppliers are treated in a manner consistent with
Edac's Corporate Mission Statement. Without limiting the generality of the
foregoing, Mr. McNerney shall supervise the operations of Edac and perform those
duties normally associated with the offices of President and Chief Executive
Officer. Mr. McNerney shall also perform such additional duties and
responsibilities which may from time to time be reasonably assigned or delegated
by the Board. Mr. McNerney agrees to devote his entire business time, effort,
skill and attention to the proper discharge of such duties while employed by
Edac.
4. Compensation.
(a) Base Salary. Mr. McNerney shall receive a base
salary of $195,000 per year, payable in regular and equal installments in
accordance with Edac's payroll practices as in effect from time to time (the
"Base Salary"). Mr. McNerney's Base Salary shall be reviewed annually by the
Compensation Committee of the Board (the "Compensation Committee") to determine
appropriate increases, if any, in the Base Salary, but the Base Salary shall not
be reduced below the amount stated above without Mr. McNerney's written consent.
(b) Bonus. For each of Edac's fiscal years during
the Employment Term, Mr. McNerney shall be eligible to receive a cash bonus (the
"Cash Bonus"). The amount of the Cash Bonus for each fiscal year shall be
determined by the Compensation Committee by evaluating Mr. McNerney's
achievements in meeting the mutually agreed upon objectives during the fiscal
year. The Cash Bonus shall be paid to Mr. McNerney, subject to appropriate tax
withholding, as soon as practicable after the close of the fiscal year but, in
any event, no later than March 15.
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<PAGE> 2
(c) Stock Options. The Board strongly endorses the
concept that it is in the best interests of Edac and its shareholders to have
executives whose financial interests are closely-aligned with those of Edac's
shareholders. An effective method of achieving this objective is to reward
selected executives with stock options based on their contributions in meeting
long-term (two to five years) and short-term objectives which improve
shareholder value. The objectives and options to be awarded Mr. McNerney shall
be established by the Compensation Committee and management.
5. Fringe Benefits. During the Employment Term,
Mr. McNerney shall receive all normal benefits available to every Edac employee,
plus the following fringe benefits:
(a) Vacation. Mr. McNerney shall be entitled to
four weeks of paid vacation annually.
(b) Life Insurance. Edac shall pay the premiums on
Mr. McNerney's whole life insurance policy with Pacific Life Insurance Co.
(c) Automobile. Edac shall provide Mr. McNerney
with the use of a Company-owned or leased automobile. In addition, Edac shall
pay, or reimburse Mr. McNerney for his payment of, the ordinary and reasonable
expenses incurred in the normal operation of such automobile.
(d) Country Club. Pursuant to Edac's policy of
paying all dues and assessments of one country or social club membership for
certain of its key executive officers, Edac shall, during the Employment Term,
pay all dues and assessments associated with a family membership for Mr.
McNerney in the Farmington C. Club. Edac shall also reimburse Mr. McNerney for
all expenses incurred at such club on behalf of Edac.
(e) Reimbursement for Reasonable Business Expenses.
Edac shall pay or reimburse Mr. McNerney for reasonable expenses incurred by him
in connection with the performance of his duties pursuant to this Agreement,
including, but not limited to, travel expenses, expenses in connection with
trade shows, seminars, professional conventions or similar professional
functions and other reasonable business expenses.
6. Termination of Employment.
(a) Termination for Death, Disability or Cause.
Mr. McNerney's employment hereunder shall automatically terminate upon his
death. In addition, Edac shall be entitled to terminate Mr. McNerney's
employment at any time upon his "Disability." For purposes of this Agreement,
"Disability" shall mean a physical or mental sickness or injury which renders
Mr. McNerney incapable of performing the services required of him as an employee
of Edac and which does or may be expected to continue for more than three months
during any twelve-month period. Edac and Mr. McNerney shall determine the
existence of a Disability and the date upon which it occurred. In the event of a
dispute regarding whether or when a Disability occurred, the matter shall be
referred to a medical doctor selected by Edac and Mr. McNerney. If they fail to
agree upon such a medical doctor, Edac and Mr. McNerney shall each select a
medical doctor and the two doctors so selected shall together select a third
medical doctor who shall make the determination. The determination by the
selected medical doctor shall be conclusive and binding upon the parties hereto.
If it becomes apparent that the Disability
renders Mr. McNerney unable to discharge his responsibilities and is supported
by medical evidence that his return cannot be determined, Edac may, in its
discretion, terminate or modify this Agreement once it is established that Mr.
McNerney will not return to full-time status.
Edac may also terminate Mr. McNerney's
employment under this agreement for "Cause," effective immediately upon delivery
of notice to Mr. McNerney. "Cause" shall mean:
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<PAGE> 3
(i) the willful and continued failure of
Mr. McNerney to perform substantially Mr. McNerney's duties with Edac or its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to Mr. McNerney by the Board which specifically identifies the
manner in which the Board believes that Mr. McNerney has not substantially
performed his duties and after Mr. McNerney is given a reasonable period of time
to rectify or eliminate such failure;
(ii) the willful engaging by Mr. McNerney in
illegal conduct or gross misconduct which is materially and demonstrably
injurious to Edac; or
(iii) the commission by Mr. McNerney of
fraud or dishonesty with respect to Edac or a material misrepresentation by Mr.
McNerney to Edac's shareholders or directors.
Notwithstanding anything herein to the contrary, no act or failure to act, on
the part of Mr. McNerney, shall be considered "willful" unless it is done, or
omitted to be done, by Mr. McNerney in bad faith or without reasonable belief
that Mr. McNerney's action or omission was in the best interests of Edac. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of a more senior officer of Edac
or based upon the advice of counsel for Edac shall be conclusively presumed to
be done, or omitted to be done, by Mr. McNerney in good faith and in the best
interests of Edac. The cessation of employment of Mr. McNerney shall not be
deemed to be for Cause unless and until there shall have been delivered to Mr.
McNerney a copy of a resolution duly adopted by the Board at a meeting of the
Board called and held for such purpose (after reasonable notice is provided to
Mr. McNerney and Mr. McNerney is given an opportunity, together with counsel, to
be heard before the Board), finding that, in the good faith opinion of the
Board, Mr. McNerney is guilty of the conduct described in subparagraph (i), (ii)
or (iii) above, and specifying the particulars thereof in detail.
If Mr. McNerney's employment terminates due to
his Disability or death, or Mr. McNerney voluntarily terminates his employment
or is terminated by Edac for Cause, Mr. McNerney shall be entitled to receive
his Base Salary and vested fringe benefits prorated to the date of termination.
In addition, in the event of a termination due to Mr. McNerney's death or
Disability, Mr. McNerney shall also receive a prorated Cash Bonus for the year
of termination. The amount of the prorated Cash Bonus shall be determined by the
Compensation Committee and paid as soon as possible after such determination.
(b) Termination Without Cause. Notwithstanding
anything in this Agreement to the contrary, if Mr. McNerney's employment is
terminated by Edac for any reason other than for Cause, Disability or death, or
if this Agreement is terminated by Edac for what Edac believes is Cause or
Disability, and it is ultimately determined that Mr. McNerney was wrongfully
terminated, Mr. McNerney shall, as full and liquidated damages for such
termination, receive a severance payment equal to 24 months of Base Salary plus
two times the average of the three highest annual bonus payments Mr. McNerney
received during the five fiscal years prior to the termination or, if he was
employed less than five fiscal years at the time of termination, the average of
the annual bonuses paid to Mr. McNerney during his employment.
7. Noncompetition. The parties agree that Edac's supplier,
customer, vendor and employee contacts and relations are established and
maintained at great expense and, by virtue of Mr. McNerney's employment with
Edac, Mr. McNerney will have unique and extensive exposure to and personal
contact with Edac's suppliers, customers, vendors and employees and that he will
be able to establish a unique relationship with those individuals and entities
that will enable him, both during and after employment, to unfairly compete with
Edac. Further, the parties agree that the terms and conditions of the following
restrictive covenants are reasonable and necessary for the protection of Edac's
business, trade secrets and confidential information and to prevent great damage
or loss to Edac as a result of action taken by Mr. McNerney. Mr. McNerney
acknowledges that the noncompete restrictions and nondisclosure of confidential
information restrictions contained in this Agreement are reasonable and the
consideration provided for herein is sufficient to fully and adequately
compensate Mr. McNerney for agreeing to such restrictions. Mr. McNerney
acknowledges that he could continue to actively pursue his career and earn
sufficient compensation in the same or similar business without breaching any of
the restrictions contained
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in this Agreement. For purposes of this section 7 and section 8 below, "Edac"
shall refer to each of Edac Technologies Corporation and each of its
subsidiaries.
(a) During Term of Employment. Mr. McNerney
covenants and agrees that, during his employment with Edac, he shall not,
directly or indirectly, either individually or as an employee, principal, agent,
partner, shareholder, owner, trustee, beneficiary, co-venturer, distributor,
consultant or in any other capacity, participate in, become associated with,
provide assistance to, engage in or have a financial or other interest in any
business, activity or enterprise which is competitive with Edac or any successor
or assign of Edac. The ownership of less than a one percent interest in a
corporation whose shares are traded in a recognized stock exchange or traded in
the over-the-counter market, even though that corporation may be a competitor of
Edac, shall not be deemed financial participation in a competitor.
(b) Upon Termination of Employment. Mr. McNerney
agrees that for a two-year period after Mr. McNerney's employment with Edac
terminates for any reason, he will not, directly or indirectly, either
individually or as an employee, agent, partner, shareholder, owner, trustee,
beneficiary, co-venturer, distributor, consultant or in any other capacity:
(i) Request or advise any of the customers,
vendors, suppliers, or other business contacts of Edac who currently have or
have had business relationships with Edac within two years preceding the date of
such action, to withdraw, curtail or cancel any of their business or relations
with Edac.
(ii) Induce or attempt to induce any
employee, sales representative, supplier, consultant or personnel of Edac to
terminate his or her relationship or breach his or her agreements with Edac.
(iii) Participate in, become associated
with, provide assistance to, engage in or have a financial or other interest in
any business, activity or enterprise which is competitive with the business of
Edac or any successor or assign of Edac and which conducts such competitive
business within the United States; provided, however, that the ownership of less
than 1% of the stock of a corporation whose shares are traded in a recognized
stock exchange or traded in the over-the-counter market, even though that
corporation may be a competitor of Edac, shall not be deemed financial
participation in a competitor.
8. Confidential Information. The parties agree that Edac's
customers, business connections, customer lists, procedures, operations,
techniques, customer profiles and other aspects of its business are established
at great expense and protected as confidential information and provide Edac with
a substantial competitive advantage in conducting its business. The parties
further agree that, by virtue of Mr. McNerney's employment with Edac, he will
have access to, and be entrusted with, secret, confidential and proprietary
information, and that Edac would suffer great loss and injury if Mr. McNerney
would disclose this information or use it to compete with Edac. Therefore, Mr.
McNerney agrees that during the term of his employment, and for a period ending
on the earlier of (a) two years after the termination of his employment with
Edac or (b) the date on which the information referred to in this section
becomes publicly known through no fault of Mr. McNerney, he will not, directly
or indirectly, either individually or as an employee, agent, partner,
shareholder, owner, trustee, beneficiary, co-venturer, distributor, consultant
or in any other capacity, use or disclose, or cause to be used or disclosed, any
secret, confidential or proprietary information acquired by Mr. McNerney during
his employment with Edac whether owned by Edac prior to or discovered and
developed by Edac subsequent to Mr. McNerney's employment, and regardless of the
fact that Mr. McNerney may have participated in the discovery and the
development of that information.
9. Law of Torts and Trade Secrets. The parties agree that
nothing in this Agreement shall be construed to limit or negate the statutory or
common law of torts or trade secrets where it provides Edac with broader
protection than that provided herein.
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10. Waiver. The failure of either party to insist, in any
one or more instances, upon performance of the terms or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right
granted hereunder or of the future performance of any such term, covenant or
condition.
11. Notices. Any notice to be given hereunder shall be
deemed sufficient if addressed in writing, and delivered by registered or
certified mail or delivered personally, in the case of Edac, to its principal
business office, and in the case of Mr. McNerney, to his address appearing on
the records of Edac, or to such other address as he may designate in writing to
Edac.
12. Severability. If any provision of this Agreement is
held to be invalid or unenforceable for any reason whatsoever, it is agreed such
invalidity or unenforceability shall not affect any other provision of this
Agreement and the remaining covenants, restrictions and provisions hereof shall
remain in full force and effect and any court of competent jurisdiction may so
modify the objectionable provision as to make it valid, reasonable and
enforceable. Furthermore, the parties specifically acknowledge that the
provisions of sections 7(a), 7(b)(i), 7(b)(ii) and 7(b)(iii) are each separate
and independent agreements.
13. Amendment. This Agreement may only be amended by an
agreement in writing signed by all of the parties hereto.
14. Benefit. This Agreement shall be binding upon and inure
to the benefit of and shall be enforceable by and against Edac, its successors
and assigns and Mr. McNerney, his heirs, beneficiaries and legal
representatives. It is agreed that the rights and obligations of Mr. McNerney
may not be delegated or assigned.
15. Entire Agreement. Except for the Change of Control
Agreement between Mr. McNerney and Edac, if any, the provisions of which will
control in the event of a conflict with the provisions of this Agreement, this
Agreement constitutes the entire agreement between the parties hereto with
respect to the subject matter hereof and supersedes all prior agreements and
understandings among the parties with respect to such subject matter.
The parties have executed or caused this Agreement to be
executed as of the day, month and year first above written.
EDAC TECHNOLOGIES CORPORATION
BY/s/Robert Gilchrist
--------------------------------------
Its Compensation Committee Chairman
/s/Edward J. McNerney
-------------------------------------
Edward J. McNerney
-25-
<PAGE> 1
EDAC TECHNOLOGIES CORPORATION
ANNUAL REPORT
1998
<PAGE> 2
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's quality
is unsurpassed. Edac's quality begins and ends with each EDAC individual. It's a
relentless striving for doing it faster, less expensive, leaner and more
precisely. You see it in our people. 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 of
the Nasdaq National 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 specific products and
markets.
This is evident in our acquisition of the Apex Machine Tool Company in 1998. For
more than half a century, Apex has been one of America's foremost manufacturers
of high-precision fixtures, gauges, dies, and molds. Their unparalleled depth of
world-class equipment and industry-leading operator excellence is now being
galvanized by a company-wide continuous improvement, i.e., Kaizen blitz.
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. 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> 3
FINANCIAL HIGHLIGHTS
[GRAPH]
SALES
(dollars in thousands)
PAGE OF GRAPHS
COORDINATE POINTS
<TABLE>
<CAPTION>
95 96 97 98
----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
SALES (dollars in thousands) 24,564 30,249 38,229 53,162
OPERATING PROFIT (dollars in thousands) (510) 752 2,401 4,781
STOCK PRICE (at December 31, in dollars) 1.136 1.818 7.955 4.813
NET INCOME (dollars in thousands) (1,083) 7 1,696 2,276
EARNINGS PER SHARE (in dollars) (0.27) 0.00 0.39 0.50
</TABLE>
<PAGE> 4
TO OUR SHAREHOLDERS:
The past year was a busy one for EDAC's management and the entire EDAC team. In
addition to managing the process initiated in late 1996 of growing existing
business lines and implementing lean manufacturing techniques to improve
operational cost effectiveness, we acquired Apex Machine Tool Company, Inc. on
June 30,1998. Apex is a successful company with an excellent reputation in their
field of special and high precision tools, gages, machines, composite tools and
complex molds for plastic products. Apex is blessed with outstanding people and
is already making a significant contribution to EDAC.
The financial results for 1998 were most gratifying, with records established
for sales, operating and net profit and shareholders' equity. These results were
achieved while providing $705,000 for income taxes compared to $21,000 in 1997.
It is of interest to note that diluted earnings per share increased 28% in 1998
to $0.50 per share, while we were providing $0.16 per share for income taxes.
The well documented economic troubles in Asia have had some impact on our sales,
but effort is being channeled to expand our market share of existing markets as
well as aggressively pursuing some new markets here and abroad.
Our primary objectives this year are to continue the growth in sales, accelerate
the implementation of lean manufacturing concepts, significantly improve product
quality by refining process capabilities, reduce our debt through effective
utilization of assets, finalize the assimilation of Apex into the EDAC
family and improve customer service.
The progress we have enjoyed over the past three years would not have been
possible without the support and cooperation of the superior people who make up
EDAC. To support our pursuit of continuous improvement, which empowers every
employee to be an agent of change in our quest for excellence, we have expanded
training programs, especially in the areas of quality control and kaizen events.
Major progress has been achieved in these vital processes at all manufacturing
locations.
In August, Mr. James Biondi, former president and co-owner of Apex Machine Tool
Company, Inc. joined our Board of Directors. Obviously, Mr. Biondi brings a
wealth of experience and knowledge of the industries we serve to the Board. The
Board now consists of seven outside and one inside director. We believe this mix
demonstrates our commitment to best serve the interests of our shareholders,
customers and employees. It
<PAGE> 5
is appropriate to highlight that Mr. Francis W. Moskey, after more than fifty
years of service with the Company, has retired and resigned from the Board. Mr.
Moskey has made significant and lasting contributions during his long and
distinguished career. He is now a consultant for the company.
We are confident that EDAC will continue to grow and prosper in 1999 and beyond
into the new millenium. Our commitment to the Company's Mission Statement is
unwavering and we are determined to continue the trend of growth, improved
customer service and to maximize shareholder value in the years ahead.
Sincerely yours,
/s/John J. DiFrancesco
John J. DiFrancesco
Chairman of the Board
/s/Edward J. McNerney
Edward J. McNerney
President and CEO
<PAGE> 6
Collage of photographs
<PAGE> 7
[GROS-ITE LARGE MACHINING LETTERHEAD]
Low pressure turbine cases, rings, hubs, and disks are produced by the Large
Machining Division for all major aircraft engine manufacturers.
Difficult-to-machine alloys are our specialty. These include hastalloy,
inconnel, waspalloy, high nickel alloys, titanium, aluminum and stainless
steels.
[PHOTO OF OVERALL SHOT OF LARGE TURNING DIVISION]
Grouping all processes on this one shopfloor reaps unsurpassed cost-efficiency
and quality control. Unlike other large machining operations, which are dark,
dirty, and disorganized, EDAC's is uniquely spacious, organized, brightly lit,
and clean.
[PHOTO OF MACHINE AND PART]
Every EDAC technician's striving for continual improvement assures
industry-leading quality. Gauging a low pressure turbine case on our
probe-equipped Summit unit, which measures diameter turning capacities up to
144".
[PHOTO OF EMPLOYEE NEXT TO MACHINE]
Extremely tight tolerances apply when turning a jet engine shroud. The enormous
power and rigidity to work with super hard materials is provided only by this
total control, 4-axis Okuma LC50.
[PHOTO OF EMPLOYEE NEXT TO INSPECTION TABLE]
Kaizen: A 4-hour setup now takes ten minutes, thanks to a shopfloor idea. Every
EDAC machine now has a Mobile Setup Unit, which contains everything for setting
up, measuring and documenting.
<PAGE> 8
[GROS-ITE PRECISION ENGINEERED TECHNOLOGIES LETTERHEAD]
The Precision Engineered Technologies Division delivers 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. In addition, the division designs, manufactures, and repairs spindles
with precision rolling element bearings for grinding, boring, milling, and
similar rotating devices. Our spindle repair warranty and turnaround are among
the best in the world. Industries served include aerospace, jet engine overhaul
and repair, semiconductor, photographic and consumer products.
[PHOTO OF EMPLOYEE OPERATING MACHINE]
The power and rigidity of this state of the art Okuma Crown CNC Lathe is
critical for producing a prototype part from the world's most super hard
materials through to production.
[PHOTO OF EMPLOYEE OPERATING MACHINE]
KAIZEN: Enormous time and cost savings resulted from a shopfloor idea, the EDAC
Route Sheet, in which the entire part-production process is planned beforehand.
A large capacity, close-tolerance DeVlieg Jig Mill.
[PHOTO OF EMPLOYEE USING INSPECTION MACHINE]
Many customers have certified us to bypass the customer's quality control and
ship directly to their assembly and shipping areas. We combine today's most
advanced measuring equipment with today's most stringent standards.
<PAGE> 9
[GROS-ITE PRECISION ENGINEERED TECHNOLOGIES LETTERHEAD]
[PHOTO OF MACHINING ROOM]
Team center grouping of machines eliminates inventory backups and pinpoints
defects almost instantly. Enormous cost savings and huge quality increases
result from one piece flow. Setup time takes only minutes, not hours.
[PHOTO OF EMPLOYEE AND MACHINE]
For both size and geometric parameters, we grind to a fraction of the tolerance
recommended by bearing suppliers. Programming computer is used to run shafts on
an Okuma CNC cylindrical grinding machine.
[PHOTO OF EMPLOYEE TESTING SPINDLE]
Every new and repaired spindle undergoes precise testing and documentation for
vibration, temperature, and dimensional characteristics before shipment. A
certification is shipped with the spindle.
<PAGE> 10
[GROS-ITE PREISION ENGINEERED COMPONENTS LETTERHEAD]
Primarily serving the aircraft jet engine industry, the Precision Engineered
Components Division builds and assembles many complex, zero tolerance
components. Services include precision assembly of jet engine sinc rings,
aircraft riveting and welding, sutton barrel finishing, and post assembly
machining.
[PHOTO OF EMPLOYEE OPERATING MACHINE]
Continuous improvement includes staying ahead of the marketplace by constantly
upgrading equipment. The CNC Okuma LC50 has a state-of-the-art 4-axis turning
capability, allowing many operations with one machine.
[PHOTO OF 5 AXIS MACHINE]
Products of an unusually large 42" diameter can be milled by this MH80 5-axis
machine. For absolute repeatability, speed, and unmatched accuracy every time,
all machining equipment is CNC, computer numerically controlled.
[PHOTO OF AEROSPACE PARTS]
[PHOTO OF PRECISION PARTS]
Kaizen: Dramatic time and cost savings resulted when a shopfloor idea reduced a
hole drilling operation from two steps to one by using a countersink. Many
precision jet engine components are produced here for major aerospace companies.
Every part meets the industry's tightest tolerances. Certain customers have
certified us to deliver bypassing the customer's verification of quality.
[PHOTO OF TRAINING ROOM]
A Kaizen event: A team blitzes a problem, along with corrections so it won't
come back. Approved suggestions are implemented instantly. Kaizen training never
ends, and improvements happen NOW.
<PAGE> 11
[APEX MACHINE TOOL COMPANY LETTERHEAD]
Apex began in 1944 making precision gauges and that .0001"-tolerance mentality
now permeates the company more than ever. With its exceptionally large inventory
of state-of-the-art machinery and its world-class corps of expert toolmakers,
Apex is the industry benchmark for quality. Apex designs and builds many
closely-toleranced tools and molds used in manufacturing products for jet
engines, business machines, medical laboratory diagnostic work, computers,
consumer electronics, automotive, optical lenses, and cosmetic products.
[PHOTO OF EMPLOYEE AND MACHINE]
Setting up to machine a complex tool component. Our industry-leading workforce
achieves what others wouldn't even consider on these machines, such as wire
EDM'ing to .0001" accuracy.
[PHOTO OF PRECISION PART]
An extremely close tolerance, high finish mold cavity for a blood analyzer.
Truly displayed here is the rare EDM talent of the operator who configured this
complex "maze" of precision machining.
[PHOTO OF MACHINE OPERATOR]
CNC grinding of holes and contours. This top of the line jig achieves tolerances
as close as .000050" with absolute repeatability - a standard of excellence that
outpaces the industry.
[PHOTO OF MOLDS]
Apex molds produced these precision, plastic products. Our capability to machine
close tolerance parts and our skilled people enable us to achieve precise cavity
replication for large multi-mold programs.
<PAGE> 12
[EDAC TECHNOLOGIES CORPORATION LETTERHEAD]
Kaizen is an Attitude...
In a week-long continuous improvement, i.e., kaizen blitz, a team from different
parts of the company is turned loose on one specific work area. The results are
always spectacular. A frequent summing up: "Can we `kaizen' my work station
next?"
[PHOTO OF EMPLOYEE AT WORK STATION]
Kaizen: This work station now incorporates every tool it needs, including an
overhead hoist with air tools. A 1,500' walk for tools was cut to 50', for
immense savings in time and money.
[PHOTO OF RAPID RESPONSE TEAM BOARD]
Kaizen: When a three-week job must be done in two days, employee-designed Rapid
Response Teams create their own schedules to make it happen. Work schedules are
clearly posted for all to see.
[PHOTO OF MACHINE]
Kaizen: Run time is vastly increased by scheduled maintenance and a daily
walkaround with a checklist. Accessories were re-machined to be prepared in
advance, contributing to a 50% cut in setup time!
[PHOTO OF MACHINE AND WORK AREA]
Kaizen: Yellow-lined areas labeled "next job" and "current job" eliminate
wasteful searching. Everything is right here for fast setup of the next job
while the current job runs, saving time and travel.
<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 January 2, 1999, approximately 51% of Edac's
net sales were to United Technologies Corporation, 11% were to Nordam
Manufacturing, 10% were to a consumer products company and 28% were to other
industrial based customers.
MARKET INFORMATION
The Company's Common Stock trades on The Nasdaq National Market under the
symbol: "EDAC".
High and low stock prices for the last two years were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $9.205 $5.909 $2.273 $1.364
Second Quarter 16.500 8.409 3.694 1.932
Third Quarter 13.250 5.750 4.773 2.671
Fourth Quarter 7.000 3.688 8.239 4.318
</TABLE>
The approximate number of shareholders of record plus beneficial shareholders of
the Company's Common Stock at March 8, 1999 was 1,596.
The Company has never paid cash dividends and does not anticipate making any
cash dividends in the foreseeable future. The Company is prohibited from paying
cash dividends by certain loan agreements 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 January 2, 1999 have been derived from the financial
statements of the Company as audited by Arthur Andersen, LLP, independent
auditors, whose report with respect to fiscal 1998, 1997 and 1996 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>
1998 1997 1996 1995 1994
-----------------------------------------
(In thousands, except per share data)
SELECTED INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Sales $53,162 $38,229 $30,249 $24,564 $22,239
Net income (loss) 2,276 1,696 7 (1,083) 72
Diluted earnings (loss)
per common share 0.50 0.39 0.00 (0.27) 0.02
SELECTED BALANCE SHEET DATA
Current assets $20,881 $15,196 $14,058 $14,215 $12,170
Total assets 52,608 23,850 19,917 20,352 16,326
Current liabilities 20,245 10,695 9,402 9,166 5,323
Working capital 636 4,501 4,656 5,049 6,847
Long-term liabilities 22,780 6,269 5,043 5,854 4,831
Shareholders' equity 9,583 6,886 5,473 5,332 6,172
</TABLE>
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1998 was a year in which we built upon our philosophies established in
1997. We continued our upward sales and net income progression through increased
sales at Gros-Ite Industries, the acquisition of Apex Machine Tool Company, Inc.
("Apex") and through continuous improvement techniques that resulted in record
net sales of $53,162,000 up 39% from 1997 and record net income of $2,276,000 up
34% from 1997. What makes the net income even more impressive was in 1998 we had
income taxes of $705,000 compared to $21,000 in 1997. Income from operations
nearly doubled from 1997 levels to $4,781,000.
On June 29, 1998, Edac Technologies Corporation completed its
acquisition of Apex. Apex was a strategic acquisition for Edac, complementing
Gros-Ite Industries with its Design and Tooling businesses. Apex also helped
Edac diversify both within and outside of the aerospace industry. In addition,
Apex produces complex composite and injection molds. Apex is well known in the
industry for its high levels of precision manufacturing, its highly skilled
workforce and its reputation for quality and on-time delivery. We are proud to
call Apex Machine Tool Company, Inc. part of the Edac Technologies Corporation
family.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto.
Sales from the Company's principal markets are as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Aerospace customers............. $36,348 $28,758 $20,284
Other........................... 16,814 9,471 9,965
</TABLE>
Sales increased $14,933,000 or 39.1% in 1998 from 1997. Aerospace sales
increased $7,590,000 or 26.4% from 1997 representing stronger sales to the
company's principal aerospace customer and substantial gains in other aerospace
customers. Due to Edac's diversification efforts, sales to non-aerospace
customers increased $7,343,000 or 77.5%. Sales attributable to Apex accounted
for $9,901,000 of the Company's sales for 1998. In 1999 we will continue to
diversify both within and outside of the aerospace industry. During 1998, 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
<PAGE> 16
improved its performance and is currently viewed as a leader by this customer.
Sales for the Precision Engineered Technologies group increased 14% to
$13,155,000 in 1998 due primarily to the increase in sales to markets other than
the aerospace market. The Company's corporate diversification program, designed
to diversify our sales into other markets and reduce our dependence on the
aerospace industry has resulted in sales to the consumer products industry
reaching 10% of the Company's total sales for 1998. Sales to other non-aerospace
industries have also contributed to the increase in sales for this group.
Sales for the Precision Large Turning group increased 78% to
$11,552,000 in 1998. Expenditures for capital equipment in 1997 and early 1998
for machinery and equipment provided additional capacity resulting in the
increase in sales.
Sales for Engineered Precision Components decreased 8% to $18,554,000
in 1998 due primarily to the postponement in the third quarter of orders
scheduled for delivery in the third and fourth quarters to a major aerospace
customer.
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 increased significantly
in 1998.
Cost of sales as a percentage of sales decreased in 1998 to 81.5% from
84.5% in 1997. This decrease is a direct result of the efficiencies obtained
through lean manufacturing techniques. The Company also experienced higher sales
levels to cover fixed manufacturing costs.
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.
Selling, general and administrative expenses were $5,047,000 in 1998,
representing an increase of $1,507,000 or 42.6% from the 1997 level of
$3,540,000. The increase in these expenses was primarily the result of an
additional $962,000 of expenses attributable to Apex and additional costs for
selling and promotional expenses. As a percentage of sales, selling, general and
administrative costs were 9.5% of sales in 1998 and 9.3% of sales in 1997.
Selling, general and administrative expenses were $3,540,000 in 1997,
representing an increase of $644,000 or 22.2% from the 1996 level of $2,896,000.
As a percentage of sales, selling, general and
<PAGE> 17
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.
Interest expense for 1998 increased $1,126,000 from $765,000 in 1997 to
$1,891,000. This increase was due to additional debt incurred for the
acquisition of Apex.
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 interest
rate to the Company by 1%, partially offset by the Company's increased
borrowings from the bank.
Other income of $91,000 for 1998 consisted primarily of gains on sales
of assets and a gain on an investment.
Other income for 1997 and 1996 was $81,000 and $51,000, respectively.
These amounts consist primarily of a gain on an investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its working capital needs through funds generated
from operations and bank financing. The Company assesses its liquidity in terms
of its ability to generate cash to fund its operating and investing activities.
Of particular importance to the Company's liquidity are cash flows generated
from operating activities, capital expenditure levels and available bank lines
of credit.
The following is selected cash flow data from the Consolidated
Statements of Cash Flows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net cash provided by
operating activities............ $ 3,199 $ 1,677 $ 1,765
Net cash used in
investing activities............ (26,756) (3,642) (533)
Net cash provided by (used in)
financing activities............ 23,649 1,908 (1,195)
</TABLE>
Net cash provided by operating activities in 1998 results primarily
from net income prior to non-cash charges.
Net cash provided by 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
provided by operating activities in 1996 primarily reflects net income prior to
non-cash charges.
<PAGE> 18
Net cash used in investing activities for 1998 included $20,585,000 for
the acquisition of Apex and $6,682,000 for capital expenditures necessary to add
capacity and increase productivity. Net cash used in investing activities for
1997 and 1996 consists of capital expenditures necessary to add capacity and
increase productivity.
Net cash provided by financing activities resulted primarily from
Company borrowings from its bank.
Estimated capital expenditures for 1999 are approximately $1,500,000,
or 22% of the 1998 actual capital expenditures.
The following is selected capitalization data from the Consolidated Balance
Sheets (in thousands):
<TABLE>
<CAPTION>
1/2/99 12/31/97 12/31/96
------ -------- --------
<S> <C> <C> <C>
Revolving and equipment
lines of credit.................................... $ 7,512 $ 4,107 $3,795
Current portion of
long-term debt..................................... 4,760 1,019 402
Long-term debt,
less current portion............................... 21,606 5,369 4,510
Shareholders' equity................................. 9,583 6,886 5,473
Debt to total
capitalization..................................... 78% 60% 61%
Unused revolving line
of credit.......................................... 4,373 3,577 3,013
</TABLE>
The Company has a revolving line of credit with its bank which provides
for borrowings of up to $13,000,000 limited by a formula based on percentages of
the Company's accounts receivable and inventories. At January 2, 1999, the
Company had $7,512,407 outstanding and availability of approximately $4,373,000
under the line. The credit agreement, as amended on November 25, 1998, matures
on June 30, 2001(See Note C).
Management's philosophy for 1999 is to reduce the Company's debt by
more efficiently managing the assets of the Company, primarily by reducing
inventory levels and reducing capital expenditures from 1998 levels.
Based on the Company's current expectations for its business,
management believes that the funds generated from operations, as well as funds
available from existing financing agreements, will provide it with sufficient
liquidity to meet the current liquidity needs of the Company.
<PAGE> 19
OTHER MATTERS
The Year 2000 ("Y2K") issue affects computer and information technology
("IT") systems, as well as non-IT systems which include embedded technology such
as micro-processors and micro-controllers (or micro-chips) that have date
sensitive programs that do not properly recognize the year 2000. Systems that do
not properly recognize such information could generate inaccurate data or cause
a system to fail, resulting in a business interruption.
The Company has completed a comprehensive inventory and assessment of
its existing IT and non-IT systems and those of the Company's suppliers. This
assessment included obtaining written assurances from key vendors and suppliers
if possible. Costs incurred to date have been minimal.
The Company believes, based on preliminary information, that the costs
associated with remediation and verification to become Y2K compliant will not
exceed $150,000.
Although the Company has taken steps to address the Y2K problem, there
can be no assurance that the failure of the Company and /or its material third
parties to timely attain Y2K compliance or that the failures and/or impacts of
broader compliance failures by telephone, mail, data transfer or other utility
or general service providers of government or private entities will not have a
material adverse effect on the Company.
All statements other than historical statements contained in this
report on Form 10-K constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Without limitation,
these forward looking statements include statements regarding the Company's
business strategy and plans, statements about the adequacy of the Company's
working capital and other financial resources, statements about the Company's
Year 2000 compliance and other statements herein that are not of a historical
nature. These forward-looking statements rely on a number of assumptions
concerning future events and are subject to a number of uncertainties and other
factors, many of which are outside of the Company's control, that could cause
actual results to differ materially from such statements. These include, but are
not limited to, the risk factors set forth in the Company's annual report on
Form 10-K for the year ended January 2, 1999. The Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
<PAGE> 20
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------------------------
FOR THE YEARS ENDED
--------------------------------------------
January 2, December 31, December 31,
1999 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales:
Products $ 49,772,275 $ 35,384,389 $ 28,287,147
Services 3,390,000 2,845,000 1,961,938
------------ ------------ ------------
53,162,275 38,229,389 30,249,085
Cost of Sales 43,334,125 32,287,962 26,600,686
------------ ------------ ------------
GROSS PROFIT 9,828,150 5,941,427 3,648,399
Selling, General and Administrative Expenses 5,047,267 3,540,278 2,896,007
------------ ------------ ------------
INCOME FROM OPERATIONS 4,780,883 2,401,149 752,392
Non-Operating Income (Expense):
Interest expense (1,890,751) (765,200) (796,742)
Other 90,942 81,199 51,427
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 2,981,074 1,717,148 7,077
Provision for Income Taxes 704,802 21,000 -
------------ ------------ ------------
NET INCOME $ 2,276,272 $ 1,696,148 $ 7,077
============ ============ ============
Basic Earnings Per Common Share (Note A) $ 0.54 $ 0.41 $ 0.00
Diluted Earnings Per Common Share (Note A) $ 0.50 $ 0.39 $ 0.00
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 21
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 229,480 $ 137,620
Trade accounts receivable (net of
allowance for doubtful accounts of
$160,000 in 1998 and $125,000 in 1997) 6,745,433 3,903,329
Inventories 12,418,181 10,186,211
Prepaid expenses and other current
assets 321,730 44,138
Deferred income taxes 1,166,469 924,469
----------- -----------
Total Current Assets 20,881,293 15,195,767
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 865,182 394,821
Buildings 6,837,584 4,288,060
Machinery and equipment 20,119,609 10,546,404
----------- -----------
27,822,375 15,229,285
Less - accumulated depreciation 8,630,371 7,644,959
----------- -----------
19,192,004 7,584,326
----------- -----------
OTHER ASSETS:
Goodwill (net of accumulated
amortization of $224,706) 11,234,420 -
Other 1,300,146 1,069,483
----------- -----------
TOTAL ASSETS $52,607,863 $23,849,576
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 22
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving and equipment lines of credit $ 7,512,407 $ 4,107,482
Current portion of long-term debt 4,759,750 1,018,928
Trade accounts payable 3,623,598 3,342,721
Employee compensation and amounts
withheld 2,134,176 1,380,272
Accrued expenses 2,215,100 845,528
------------ ------------
Total Current Liabilities 20,245,031 10,694,931
------------ ------------
LONG-TERM DEBT, less current portion 21,606,043 5,368,882
------------ ------------
OTHER LIABILITIES 6,000 9,000
------------ ------------
DEFERRED INCOME TAXES 1,168,000 891,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE G)
SHAREHOLDERS' EQUITY:
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued and outstanding--4,261,580
in 1998 and 4,221,180 in 1997 10,654 10,553
Additional paid-in capital 9,033,162 8,767,537
Retained earnings (accumulated deficit) 981,062 (1,295,210)
------------ ------------
10,024,878 7,482,880
Less - deferred ESOP compensation
expense (38,889) (116,667)
Less - accumulated other comprehensive loss (403,200) (480,450)
------------ ------------
Total Shareholders' Equity 9,582,789 6,885,763
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 52,607,863 $ 23,849,576
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 23
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------
January 2, December 31, December 31,
1999 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 2,276,272 $ 1,696,148 $ 7,077
Adjustments to reconcile net income
to net cash provided by
operating activities:
Deferred income taxes 35,000 (13,592) (19,877)
Amortization of deferred ESOP
compensation expense 77,778 77,778 77,777
Depreciation and amortization 1,574,441 835,963 796,795
(Gain) loss on sale of property
and equipment (25,874) 12,145 13,892
Changes in operating assets and
liabilities:
Trade accounts receivable (172,467) (495,405) (1,757,084)
Refundable income taxes - - 106,000
Inventories (706,504) (623,253) 1,717,079
Prepaid expenses and other
current assets (250,239) 306,971 (247,912)
Trade accounts payable (359,093) (273,878) 886,343
Other current liabilities 752,680 156,991 190,983
Other liabilities (3,000) (3,000) (6,000)
------------ ------------ ------------
Net cash provided by
operating activities 3,198,994 1,676,868 1,765,073
------------ ------------ ------------
Investing Activities:
Additions to property, plant and
equipment (6,681,595) (3,057,652) (498,471)
Proceeds from sales of property,
plant and equipment 65,757 108,016 104,650
Acquisition of Apex
Machine Tool Company, Inc. (20,585,392) - -
Decrease (increase) in other assets 445,462 (692,822) (139,346)
------------ ------------ ------------
Net cash used in
investing activities $(26,755,768) $ (3,642,458) $ (533,167)
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 24
EDAC TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------
January 2, December 31, December 31,
1999 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Financing Activities:
Increase (decrease) in revolving
line of credit, net $ 3,404,925 $ 312,911 $ (856,913)
Payments of long-term debt (1,381,285) (548,342) (394,127)
Issuance of long-term debt 21,359,268 2,023,894 -
Proceeds from exercise of options
for common stock, including
related income tax benefit 265,726 119,365 56,439
------------ ------------ ------------
Net cash provided by (used in)
financing activities 23,648,634 1,907,828 (1,194,601)
------------ ------------ ------------
Increase (decrease) in cash 91,860 (57,762) 37,305
Cash at beginning of year 137,620 195,382 158,077
------------ ------------ ------------
Cash at end of year $ 229,480 $ 137,620 $ 195,382
============ ============ ============
Supplemental Disclosure of
Cash Flow Information:
Interest paid $ 1,716,435 $ 759,907 $ 796,637
Income taxes paid 5,700 33,659 27,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 25
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
EDAC TECHNOLOGIES CORPORATION
<TABLE>
<CAPTION>
Retained Deferred Accumulated
Additional Earnings ESOP Other
Common Paid-in (Accumulated Compensation Comprehensive
Stock Capital Deficit) Expense Lose Total
----------- ----------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $ 10,101 $ 8,592,185 $(2,998,435) $ (272,222) $ 5,331,629
Comprehensive income:
Net income 7,077 7,077
Other comprehensive income -
-----------
Total comprehensive income 7,077
-----------
ESOP deferred compensation expense 77,777 77,777
Exercise of stock options, including
related income tax benefit 251 56,188 56,439
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 10,352 8,648,373 (2,991,358) (194,445) 0 5,472,922
Comprehensive income:
Net income 1,696,148 1,696,148
Minimum pension liability adjustment (480,450) (480,450)
-----------
Total comprehensive income 1,215,698
ESOP deferred compensation expense 77,778 77,778
Exercise of stock options, including
related income tax benefit 201 119,164 119,365
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 10,553 8,767,537 (1,295,210) (116,667) (480,450) 6,885,763
Comprehensive income:
Net income 2,276,272 2,276,272
Minimum pension liability adjustment,
net of tax benefit of $270,000 77,250 77,250
-----------
Total comprehensive income 2,353,522
-----------
ESOP deferred compensation expense 77,778 77,778
Exercise of stock options, including
related income tax benefit 101 265,625 265,726
----------- ----------- ----------- ----------- ----------- -----------
Balances at January 2, 1999 $ 10,654 $ 9,033,162 $ 981,062 $ (38,889) $ (403,200) $ 9,582,789
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 26
EDAC TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999 AND DECEMBER 31, 1997
NOTE A - ORGANIZATION AND BUSINESS, ACQUISITION AND SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND BUSINESS
Until May 12, 1989, Edac Technologies Corporation (the Company) was a subsidiary
of Cade Industries, Inc. (Cade) which owned approximately 57% of the Company's
outstanding Common Stock. Effective May 12, 1989, Cade sold its investment in
the Company's Common Stock to a partnership comprised of certain members of the
Company's management and the Edac Technologies Corporation Employee Stock
Ownership Plan (ESOP). In January 1997, the Company's Common Stock held by the
partnership was distributed to the individual partners and the partnership was
liquidated. The ESOP owns 17.6% of the Company's outstanding Common Stock as of
January 2, 1999.
The accompanying consolidated financial statements include Edac Technologies
Corporation and its wholly owned subsidiaries, Gros-Ite Industries Inc. and Apex
Machine Tool Company, Inc. Results of operations of Apex Machine Tool Company,
Inc. are included in the Company's Consolidated Statements of Operations since
June 29, 1998, the effective date of the business combination described below.
ACQUISITION
On June 29, 1998, the Company consummated its acquisition of certain assets and
liabilities of Apex Machine Tool Company, Inc. (Apex). In connection with this
acquisition, the Company purchased two buildings from certain shareholders of
Apex. The transaction was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values at the date of the acquisition. The
following table summarizes the allocation of the cost of Apex to the net assets
acquired (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable............................................ $2,670
Inventories ................................................... 1,525
Prepaid expenses and other assets ............................. 27
Property, plant and equipment ................................. 6,316
Goodwill ...................................................... 11,378
Covenant not to compete ....................................... 100
Deferred loan costs ........................................... 657
Accounts payable and accrued expenses ......................... (2,088)
-------
$20,585
=======
</TABLE>
The acquisition was principally funded through borrowings under the Company's
revolving credit facility and borrowings under a $14,000,000 note payable with
the Company's principal lender. The seller also provided financing of $2,710,688
relating to the purchase of the two buildings used in the operation of Apex (See
Note C). The Company has a contingent purchase option for the purchase of 55
Spring Lane in Farmington, CT for $1,135,600. This option was not exercised as
of January 2, 1999.
The unaudited pro forma consolidated financial information for the fiscal years
ended January 2, 1999 and December 31, 1997 as though the acquisition of Apex
had been consummated at the beginning of the respective periods are as follows
(in thousands, except share data):
<PAGE> 27
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
---------- ------------
<S> <C> <C>
Sales $ 64,261 $ 58,323
Net income 2,820 3,174
Average shares (basic) 4,244,980 4,186,617
Basic income per share $ 0.66 $ 0.76
Average shares (diluted) 4,533,449 4,378,146
Diluted income per share $ 0.62 $ 0.72
</TABLE>
The unaudited information above includes proforma adjustments related to the
amortization of intangible assets, interest expense, certain operating expenses
and income taxes necessary to present the information had the acquisition been
consumated as of January 1, 1997.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: All significant intercompany transactions have been
eliminated from the consolidated financial statements.
Fiscal Year: Effective January 1, 1998, the Company changed its fiscal year to a
52 week fiscal period. The Company's fiscal year now ends on the Saturday
closest to December 31. This change did not result in a material difference for
the year ended January 2, 1999.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. As of January 2, 1999 and December 31, 1997, inventories
consisted of the following:
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
----------- ------------
<S> <C> <C>
Raw materials $ 2,519,411 $ 2,031,633
Work-in-progress 6,990,353 5,633,398
Finished goods 2,908,417 2,521,180
----------- -----------
Total inventories $12,418,181 $10,186,211
=========== ===========
</TABLE>
Long-Lived Assets: Property, plant and equipment are stated at cost. Provisions
for depreciation and amortization are computed using the straight-line method
over 3 to 12 years for machinery and equipment and 25 years for buildings for
financial reporting purposes.
The Company accounts for its investments in long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" (SFAS
No.121). SFAS No.121 requires a company to review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company recognizes an
impairment when the carrying value of the property exceeds its estimated fair
value less cost to sell.
Goodwill represents the excess of the purchase prices over the fair values of
net assets acquired in connection with the Apex acquisition. Goodwill is
amortized over 40 years. The Company monitors the overall profitability and
future expectations of profitability of Apex in order to assess whether any
impairment of recorded goodwill has occurred.
Earnings Per Share: 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 fiscal 1998, 1997 and 1996, are as follows:
<PAGE> 28
<TABLE>
<CAPTION>
January 2, December 31, December 31,
1999 1997 1996
---------- ------------ -------------
<S> <C> <C> <C>
Basic:
Average common shares outstanding 4,244,980 4,186,617 4,064,025
Diluted:
Dilutive effect of stock options 288,469 191,529 116,185
---------- ------------ -------------
Average shares diluted 4,533,449 4,378,146 4,180,210
========== ============ =============
</TABLE>
Stock options: The Company accounts for stock-based compensation for employees
in accordance with Accounting Principles Board Opinion No. 25.
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 Standards: During fiscal 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. The Company adopted the new standard effective January 1,
1998 and has included the required reporting of comprehensive income within the
consolidated statements of changes in shareholders' equity.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards requiring that each derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet either as an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations, and requires that a
company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. The adoption of this standard is not
expected to impact the Company's financial position or results of operations.
NOTE B -- COMMON STOCK AND STOCK OPTIONS
On July 1, 1998, the Company paid a ten percent stock dividend to all
shareholders of record as of June 16, 1998. Prior period common share
information has been retroactively restated to reflect the effect of the stock
dividend.
On December 5, 1991, the Board of Directors adopted the 1991 Stock Option Plan
(the Plan). The Plan is non-qualified and provides for the granting of up to
325,000 options to purchase shares of the Company's Common Stock. The option
price is the fair market value of the shares on the date of the grant. Options
may be exercised at the rate of 33 1/3% six months after the grant date, another
33 1/3% one year after the grant date and the remaining 33 1/3% two years after
the grant date. The maximum term of options granted is five years. Options may
be granted under the Plan through December 5, 2001.
On January 1, 1994, the Board of Directors adopted a stock option plan for the
purpose of granting 100,000 shares to an officer. The options were granted on
January 1, 1994 at an exercise price of $0.5625 per share. Options to purchase
25,000 shares became exercisable on October 1, 1994, January 1, 1995, January 1,
1996 and 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 300,967 options to purchase shares of Common Stock of the
<PAGE> 29
Company. The term of the options and vesting requirements shall be for such
period as the Stock Option Committee designates. The option price is not less
than the fair market value of the shares on the date of the grant.
On February 17, 1998, the Board of Directors adopted the 1998 Employee Stock
Option Plan (the 1998 Plan). The 1998 Plan is non-qualified and provides for
granting up to 330,000 options to purchase shares of Common Stock of the
Company. The terms of the options and vesting requirements shall be for such
period as the Stock Option Committee designates. The option price is not less
than the fair market value of the shares on the date of the grant.
The Company has computed the pro forma disclosures required under SFAS No. 123
for options granted in fiscal 1998, 1997 and 1996 using the Black-Scholes option
pricing model prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation". The weighted average assumptions used are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------
<S> <C> <C> <C>
Risk free interest rate 4.39% to 5.38% 5.16% to 5.65% 6.04%
Expected dividend yield None None None
Expected lives 3 years 3 years 3 years
Expected volatility 80% 86% 100.8%
</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>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) applicable to common shareholders:
As reported $2,276,272 $1,696,148 $ 7,077
Pro forma 2,153,232 1,557,680 (6,001)
Pro forma net income per common share:
Basic earnings per share:
As reported $ 0.54 $ 0.41 $ 0.00
Pro forma 0.51 0.37 0.00
Diluted earnings per share:
As reported $ 0.50 $ 0.39 $ 0.00
Pro forma 0.47 0.36 0.00
</TABLE>
<PAGE> 30
A summary of the status of the Company's stock option plans as of January 2,
1999 and December 31, 1997 and 1996, and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
PRICE PRICE PRICE
----------- --------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of 373,257 $ 2.64 267,300 $ 0.79 253,369 $ 0.59
year
Granted 157,000 0.58 194,700 4.15 124,300 0.95
Exercised (43,600) (88,743) 0.56 (110,369) 0.51
---------- ---------- ----------
Outstanding at end of year 486,657 3.74 373,257 2.64 267,300 0.79
========== ========== ==========
Options exercisable at
year-end 318,657 3.29 200,558 1.40 104,500 0.64
========== ========== ==========
Weighted-average fair
value of options granted
During the year $ 3.17 $ 0.98 $ 0.62
========== ========== ==========
</TABLE>
The following table summarizes information about stock options outstanding at
January 2, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-
OUTSTANDING EXERCISABLE AVERAGE
EXERCISE PRICE AT CONTRACTUAL EXERCISE AT EXERCISE
1/2/99 LIFE (IN YEARS) PRICE 1/2/99 PRICE
-------------- ------------- ---------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$ 0.91 110,000 2.9 $0.91 77,000 $0.91
1.14 27,500 1.5 1.14 27,500 1.14
1.25 6,957 2.5 1.25 6,957 1.25
1.65 1,500 3.2 1.65 1,500 1.65
2.05 82,500 8.4 2.05 82,500 2.05
5.50 135,000 9.9 5.50 - 5.50
5.91 101,200 8.9 5.91 101,200 5.91
7.73 22,000 9.2 7.73 22,000 7.73
============= ============
$0.91 to 7.73 486,657 7.2 3.74 318,657 3.29
============= ============
</TABLE>
<PAGE> 31
NOTE C -- NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
------------- ------------
<S> <C> <C>
Note payable to bank due in monthly installments of
$83,333 commencing July 1, 1999, increasing to
$250,000 on July 1, 2002 and increasing again to
$333,333 on July 1, 2003 with the final payment
due June 1, 2005. Interest is due monthly at the
rate of 7.525% on $9,000,000 through July 1, 2003
and 7.395% on $5,000,000 through July 3, 2000.
Interest then reverts to bank's base rate. $14,000,000 $ -
Note payable to bank due 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. 2,964,719 3,175,985
Note payable to bank due 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 8.18% to May 4, 1999, then
reverts to the bank's base rate. 800,000 866,666
Equipment note payable due in 60 monthly principal
installments of $50,000 commencing April 1, 1998.
Interest is due monthly at 8.73% through March 3, 2003. 2,550,000 1,127,973
Equipment note payable to bank due in 60 monthly
principal installments of $34,045 commencing June
1, 1999. Interest is due monthly at the bank's base rate . 2,042,717 -
Equipment note payable to bank due in 60 monthly
principal installments of $9,020 commencing May 1, 1997.
Interest is due monthly at 8.14% to May 4, 1999,
then reverts to bank's base rate. 360,753 468,993
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. 38,889 116,667
Note payable to former shareholders of Apex Machine
Tool Company, Inc. Principal is due in full on
January 1, 2000. Interest is due monthly at 10.12%. 2,710,688 -
Equipment note payable due in quarterly
and monthly installments with interest imputed
at 9%, repaid in 1998. - 302,995
Equipment note payable due in quarterly
installments of $28,750 and additional monthly
installments based on equipment utilization and results,
as defined, commencing December 28, 1997 and due July
31, 2000 with interest imputed at 8.5%. 898,027 328,531
----------- -----------
</TABLE>
<PAGE> 32
<TABLE>
<CAPTION>
<S> <C> <C>
26,365,793 6,387,810
Less - current portion of long-term debt 4,759,750 1,018,928
----------- ----------
$21,606,043 $5,368,882
=========== ==========
</TABLE>
During fiscal 1998, the Company amended its Revolving Loan and Security
Agreement (the Agreement) which provides for a revolving line of credit. The
amendment increased the borrowing base to an amount which is the lesser of
$13,000,000 or an amount determined by a formula based on percentages of the
Company's receivables and inventory. As of January 2, 1999, the revolving line
of credit had a balance of $7,512,407 and requires interest at the rate of 6.56%
to April 5, 1999 on $2,000,000 and 7.34% to July 1, 1999 on $5,000,000 with the
remainder at the bank's base rate of interest (7.75% at January 2, 1999). The
unused availability on the line at January 2, 1999 was $4,372,746.
The amendment also extended the maturity on the revolver from March 31, 2000 to
June 30, 2001. The amended Agreement also added an additional equipment line of
credit for $3,000,000. As of January 2, 1999, $2,042,717 has been drawn on this
line of credit with fixed repayment terms (see above). The Company can take
advances on the remaining line through April 30, 1999.
To secure all obligations of the Company under the Agreement, the bank has a
first priority security interest in substantially all of the Company's assets.
The revolver and related long-term debt is generally cross collateralized and
cross defaulting. 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 ratios.
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. During 1998, the Company obtained a
waiver for an instance of non-compliance under its financial covenants. The
Company was in compliance with all covenants as of January 2, 1999 and for the
year then ended.
Aggregate annual maturities of long-term debt for the five year period
subsequent to January 2, 1999 are as follows: 1999--$4,759,750;
2000--$3,725,479; 2001--$2,383,179; 2002--$5,268,615; 2003--$4,058,541; 2004 and
thereafter-$6,170,229.
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 changes in benefit obligations and plan
assets, and reconciles amounts recognized in the Company's consolidated balance
sheets (in thousands):
<TABLE>
<CAPTION>
1/2/99 12/31/97
------ --------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $4,973 $ 4,523
Interest cost 339 338
Actuarial loss 148 377
Benefits paid (332) (266)
------ --------
Benefit obligation at end of year $5,128 $ 4,972
====== ========
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
1/2/99 12/31/97
------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,827 $ 4,640
Actual return on plan assets 261 403
Employer contribution - 50
Benefits paid (332) (266)
------- --------
Fair value of plan assets at end of year $ 4,756 $ 4,827
======= ========
Funded status $ (372) $ (145)
Minimum pension liability 673 480
------- --------
Net amount recognized $ 301 $ 335
======= ========
Amounts recognized in the consolidated
balance sheets consist of:
Accrued benefit liability $ (372) $ (145)
Minimum pension liability 673 480
------- --------
Net amount recognized $ 301 $ 335
======= ========
Weighted-average assumptions:
Discount rate 6.75% 7.00%
Expected return on plan assets 7.00% 7.00%
Components of net periodic benefit cost:
Interest cost $ 339 $ 338
Expected return on plan assets (305) (295)
------- --------
Net periodic benefit expense $ 34 $ 43
======= ========
</TABLE>
In July 1991, the Company established a 401(k) defined contribution plan. The
Company matches 35% of employee contributions up to 15% of compensation limited
annually to $1,750 for 1998, 20% of employee contributions up to 10% of
compensation for 1997 and 20% of employee contributions up to 4% of compensation
for 1996. Employer contributions and expenses related to this plan were
$155,500, $72,991 and $52,690, in 1998, 1997 and 1996, respectively.
The Apex Machine Tool Company, Inc. Profit-Sharing and Retirement Plan (the
Plan), covers substantially all Apex employees who have completed more than one
year of service . Profit sharing contributions are made to the Plan at the
discretion of the Company's Board of Directors. The Plan also allows employees
to contribute tax deferred salary deductions into the Plan under Section 401(k)
of the Internal Revenue Code subject to certain limitations as defined in the
Plan. Matching contributions are made by the Company at a rate of 20% of
employees' contributions. The Company declared and made discretionary profit
sharing contributions and matching contributions of $28,000 for the period
subsequent to the acquisition from June 30, 1998 to January 2, 1999.
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, $77,778 and $77,777 for the
years ended January 2, 1999, December 31, 1997 and 1996, respectively. Interest
expense incurred on the debt was $6,026, $12,356 and $18,381, for the years
<PAGE> 34
ended January 2, 1999, December 31, 1997 and 1996, respectively. The ESOP shares
as of January 2, 1999 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
---------- ------------
<S> <C> <C>
Allocated shares 567,095 585,906
Shares released
for allocation 120,545 109,586
Unreleased shares 60,269 164,376
---------- ------------
Total ESOP shares 747,909 859,868
========== ============
</TABLE>
NOTE F -- INCOME TAXES
The Company accounts for income taxes under SFAS No. 109 "Accounting for Income
Taxes." Under SFAS No. 109, deferred tax assets or liabilities are computed
based on the difference between the financial statement and income tax bases of
assets and liabilities using the enacted marginal tax rate. Deferred income tax
expenses or benefits are based on the changes in the deferred tax assets and
liabilities from period to period.
The provision for (benefit from) income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current provision $670 $ 34 $ 20
Deferred provision (benefit) 35 (13) (20)
---- ---- ----
$705 $ 21 $ -
==== ==== ====
</TABLE>
The effective tax rate on income before income taxes is different from the
prevailing Federal and state income tax rates as follows (in thousands):
<TABLE>
<CAPTION>
January 2, December 31, December 31,
1999 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Income before income taxes $ 2,981 $ 1,717 $ 7
======= ========= ===========
Income tax at Federal statutory rate $ 1,014 $ 584 $ 2
State income taxes-net of Federal benefit - 119 1
Meals, entertainment and other (195) (76) (11)
Change in valuation allowance (114) (606) 8
------- --------- -----------
$ 705 $ 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 1998 and 1997, the valuation allowance was reversed to
the extent assets were considered realizable.
<PAGE> 35
The tax effect of temporary differences giving rise to the Company's deferred
tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1/2/99 12/31/97
------- --------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment $ 1,036 $ 663
Pension - 204
Goodwill 93 -
Other 205 310
------- --------
1,334 1,177
------- --------
Deferred tax assets:
Allowance for uncollectible
accounts receivable 63 52
Employee compensation and amounts withheld 291 150
Accrued expenses 142 103
Unicap and inventory reserves 267 191
Tax effect of net operating loss carryforwards (federal) 209 542
Alternative minimum tax credit carryforwards 312 273
Other 48 13
Valuation allowance - (114)
------- --------
1,332 1,210
------- --------
Net deferred tax (liability) asset $ (2) $ 33
======= ========
Reflected in consolidated balance sheet as:
Net current deferred tax asset $ 1,166 $ 924
Net long-term deferred tax liability (1,168) (891)
------- --------
$ (2) $ 33
======= ========
</TABLE>
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 January 2, 1999 and December 31, 1997, the Company has pre-change NOLs of
approximately $614,000 and $795,500, 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. In addition, the
Company has alternative minimum tax credits of approximately $312,000 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 $84,449, $169,567 and $61,088, for the
years ended January 2, 1999, December 31, 1997 and 1996, respectively. Minimum
rental commitments as of January 2, 1999 for noncancelable operating leases with
initial or remaining terms of one year or more are as follows: 1999--$129,455;
2000--$130,853; 2001--$109,582; 2002--$95,769; 2003 $26,686; 2004 and
thereafter-- $32,400.
Under the terms of an agreement executed May 3, 1995 with the State of
Connecticut, The Apex Machine Tool Company, Inc. (Apex) obtained a tax free
grant in the amount of $200,000, which is secured by a first lien on various
equipment and a second lien on the remainder of the Apex assets. The direct
financial assistance package requires Apex to maintain its operations in
Connecticut through May 3, 2005 and maintain certain employment levels. In the
event of a default of the conditions, Apex is required to immediately repay the
$200,000 grant plus interest at the rate of 7.5% per annum from the date of the
first grant payment.
NOTE H -- MAJOR CUSTOMERS
For the year ended January 2, 1999, sales to United Technologies Corporation,
Nordam Manufacturing and a consumer products company amounted to 51%, 11% and
10% of the Company's sales, respectively. For the years ended December 31,
<PAGE> 36
1997 and 1996, sales to United Technologies Corporation amounted to 68% and 67%
of sales, respectively. United Technologies Corporation and Nordam Manufacturing
operate in the aerospace field.
At January 2, 1999, the Company had $1,996,705 of trade receivables due from
United Technologies Corporation, $664,523 due from Nordam Manufacturing and
$650,213 due from a consumer products company.
NOTE I -- SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which established standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments. It also established standards for
related disclosures about products, services and geographic areas. Operating
segments are defined as components of an enterprise about which financial
information is available that is evaluated regularly by the Company's President
in deciding how to allocate resources and in assessing performance. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different products and serves
different markets.
The Company has four reportable segments identified as Engineered Precision
Components, Precision Engineered Technologies, Precision Large Machining and
Apex Machine Tool Company (since June 29, 1998). The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates the performance of these segments
based on segment profit or loss after income taxes. The Company allocates
certain administrative expenses to segments. The amounts in this table are the
amounts in reports used by the Company's President for the years ended January
2, 1999 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
For the Year ended January 2, 1999
----------------------------------------------------------------------
Engineered Precision Precision Apex
Precision Engineered Large Machine
Components Technologies Machining Tool Co. Total
---------- ------------ --------- -------- -------
<S> <C> <C> <C> <C> <C>
Revenues from
external
customers $ 18,554 $ 13,155 $ 11,552 $ 9,901 $53,162
Intersegment
revenues -- 4 -- 102 106
---------- ------------- --------- -------- -------
Total revenues 18,554 13,159 11,552 10,003 53,268
========== ============= ========= ======== =======
Allocated interest
expense 397 418 294 782 1,891
Allocated
depreciation and
amortization 390 377 440 367 1,574
Segment (loss)
profit (72) 678 1,218 452 2,276
Income tax (benefit)
expense (24) 210 390 129 705
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
For the Year ended December 31, 1997
-----------------------------------------------------
Engineered Precision Precision
Precision Engineered Large
Components Technologies Machining Total
---------- ------------ ---------- -------
<S> <C> <C> <C> <C>
Revenues from
external
customers $ 20,219 $ 11,512 $ 6,498 $38,229
Intersegment
revenues -- -- -- --
Allocated
interest expense 331 275 159 765
Allocated
depreciation and
amortization 322 256 258 836
Segment (loss)
profit 1,185 (667) 1,178 1,696
Income tax expense
11 -- 10 21
</TABLE>
Asset information is unavailable by segment. In December 1996, the Company
changed the structure of its internal organization creating reportable segments.
Accordingly, segment information for the year ended December 31, 1996 is
unavailable.
<PAGE> 38
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
January 2, 1999 and December 31, 1997, and the related consolidated statements
of operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended January 2, 1999. 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 January 2, 1999 and December 31, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended January 2, 1999 in conformity with generally accepted accounting
principles.
/s/ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 12, 1999
<PAGE> 39
OFFICERS
Edward J. McNerney President and Chief Executive Officer
Ronald G. Popolizio Executive Vice President, CFO and Secretary
BOARD OF DIRECTORS
James Biondi Former owner of Apex Machine Tool Company, Inc.
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
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 1999 annual meeting of shareholders will be held on May 18, 1999 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 1998 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
SUBSIDIARIES
Apex Machine Tool Company, Inc.
-26-
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements as follows: 1991 Stock Option
Plan (File #33-48505), 1996 Stock Option Plan (File #33-24857) and the Robert
Whitty Stock Option Plan (File #333-18109).
/s/ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> JAN-02-1999
<CASH> 229,480
<SECURITIES> 0
<RECEIVABLES> 6,745,433
<ALLOWANCES> 160,000
<INVENTORY> 12,418,181
<CURRENT-ASSETS> 20,881,293
<PP&E> 27,822,375
<DEPRECIATION> 8,630,371
<TOTAL-ASSETS> 52,607,863
<CURRENT-LIABILITIES> 20,245,031
<BONDS> 21,606,043
0
0
<COMMON> 10,654
<OTHER-SE> 9,572,135
<TOTAL-LIABILITY-AND-EQUITY> 52,607,863
<SALES> 53,162,275
<TOTAL-REVENUES> 53,162,275
<CGS> 43,334,125
<TOTAL-COSTS> 48,381,392
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 55,657
<INTEREST-EXPENSE> 1,890,751
<INCOME-PRETAX> 2,981,074
<INCOME-TAX> 704,802
<INCOME-CONTINUING> 2,276,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,276,272
<EPS-PRIMARY> .54
<EPS-DILUTED> .50
</TABLE>
