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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____________ to _______________
Commission file number: 0-14275
Edac Technologies Corporation
(Exact name of registrant as specified in its charter)
Wisconsin 39-1515599
--------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
1806 New Britain Avenue, Farmington, CT 06032
(Address of principal executive offices)
(860) 677-2603
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by section 13 or 15(d) of the Securities'
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
On October 30, 2002 there were outstanding 4,416,038 shares of
the Registrant's Common Stock, $0.0025 par value per share.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EDAC TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 28, December 29,
2002 2001
----------- -------------
ASSETS
CURRENT ASSETS:
Cash ........................... $ 77,269 $ 176,245
Trade accounts receivable, net
of reserve of $297,815 at
September 28, 2002 and $332,000
at December 29, 2001 .......... 2,931,800 5,080,106
Inventories, net ............... 5,764,265 6,677,257
Prepaid expenses and other ..... 127,076 89,069
Refundable income taxes ........ 457,118 217,603
Deferred income taxes .......... 909,649 909,649
----------- -----------
TOTAL CURRENT ASSETS .. 10,267,177 13,149,929
----------- -----------
PROPERTY, PLANT, AND EQUIPMENT ... 26,808,328 27,164,002
less-accumulated depreciation ... 14,572,189 13,526,674
----------- -----------
12,236,139 13,637,328
----------- -----------
OTHER ASSETS:
Goodwill, net (Notes B and E) ... -- 10,381,077
Other ........................... 15,000 30,000
----------- -----------
$22,518,316 $37,198,334
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EDAC TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 28, December 29,
2002 2001
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving line of credit ............. $ 1,377,249 $ 1,955,138
Current portion of long-term debt
and capital lease obligations ...... 17,597,521 17,409,544
Trade accounts payable ............... 2,144,546 1,740,910
Employee compensation and
amounts withheld .............. 1,673,875 2,440,420
Accrued expenses ..................... 749,176 1,008,798
------------ ------------
TOTAL CURRENT LIABILITIES ..... 23,542,367 24,554,810
------------ ------------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, less current portion .... 198,721 1,761,235
------------ ------------
DEFERRED INCOME TAXES .................. 910,000 910,000
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, par value $.0025 per
share; 10,000,000 shares authorized;
issued and outstanding 4,416,038
on September 28, 2002 and 4,346,038
on December 29, 2001 ............... 11,040 10,865
Additional paid-in capital ........... 9,349,980 9,240,295
(Accumulated deficit)
retained earnings ................. (10,530,807) 1,684,114
------------ ------------
(1,169,787) 10,935,274
Less: accumulated other
comprehensive loss ........... (962,985) (962,985)
------------ ------------
(2,132,772) 9,972,289
------------ ------------
$ 22,518,316 $ 37,198,334
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EDAC TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------------- ------------------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Sales ................................. $ 5,797,981 $ 10,753,279 $ 19,803,961 $ 34,361,796
Cost of sales ......................... 5,487,903 9,033,130 18,657,562 28,200,842
------------ ------------ ------------ ------------
Gross profit ...................... 310,078 1,720,149 1,146,399 6,160,954
Selling, general and
and administrative
expenses ............................ 1,004,425 1,022,271 2,910,397 3,761,264
------------ ------------ ------------ ------------
(Loss) income
from operations .................... (694,347) 697,878 (1,763,998) 2,399,690
Non-operating income
(expense):
Interest expense ............. (188,437) (250,053) (561,853) (935,508)
Other ........................ 962 76,485 33,518 99,734
------------ ------------ ------------ ------------
(187,475) (173,568) (528,335) (835,774)
(Loss) income before
income taxes, extraordinary
item and cumulative effect
of change in accounting
principle ........................... (881,822) 524,310 (2,292,333) 1,563,916
Benefit from (provision
for) income taxes ................... 175,897 (105,708) 458,489 (311,326)
------------ ------------ ------------ ------------
(Loss) income before
extraordinary item and
cumulative effect of change
in accounting principle ............. (705,925) 418,602 (1,833,844) 1,252,590
Extraordinary gain,
net of tax .......................... -- -- -- 2,822,234
Cumulative effect of
Change in accounting
principle (Notes B and E) ........... -- -- (10,381,077) --
------------ ------------ ------------ ------------
Net (loss) income ..................... $ (705,925) $ 418,602 $(12,214,921) $ 4,074,824
============ ============ ============ ============
Basic per common share data (Note B):
(Loss) income before
extraordinary item and
cumulative effect of change in
accounting principle ............... $ (0.16) $ 0.10 $ (0.41) $ 0.29
Extraordinary gain .................. -- -- -- 0.65
Cumulative effect of change
in accounting principle ............ -- -- (2.36) --
------------ ------------ ------------ ------------
Net (loss) income ................... $ (0.16) $ 0.10 $ (2.77) $ 0.94
============ ============ ============ ============
Diluted per common share data (Note B):
(Loss) income before
extraordinary item and
cumulative effect of change in
accounting principle ............... $ (0.16) $ 0.09 $ (0.41) $ 0.27
Extraordinary gain .................. -- -- -- 0.62
Cumulative effect of change
in accounting principle ............ -- -- (2.36) --
------------ ------------ ------------ ------------
Net (loss) income ................... $ (0.16) $ 0.09 $ (2.77) $ 0.89
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EDAC TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------ ------------
Operating Activities:
Net (loss) income .............. $(12,214,921) $ 4,074,824
Cumulative effect of change
in accounting principle ....... 10,381,077 --
Depreciation and amortization .. 1,508,543 1,764,705
Forgiveness of debt ............ -- (2,822,234)
Changes in working capital items 2,159,874 (636,386)
Other .......................... (34,170) (190,600)
------------ ------------
Net cash provided by
operating activities ........ 1,800,403 2,190,309
------------ ------------
Investing Activities:
Additions to property, plant
and equipment ................ (104,729) (271,248)
Proceeds from sales of property,
plant and equipment .......... 53,400 34,275
Other .......................... -- (71,848)
------------ ------------
Net cash used in
investing activities ........ (51,329) (308,821)
------------ ------------
Financing Activities:
Decrease in revolving
line of credit ............... (577,889) (616,612)
Payments of long-term debt ..... (1,398,815) (3,291,333)
Borrowings of long-term debt ... 24,278 2,000,000
Proceeds from exercise of common
stock options ................ 104,376 78,548
------------ ------------
Net cash used in
financing activities ........ (1,848,050) (1,829,397)
------------ ------------
Net (decrease)increase in cash ... (98,976) 52,091
Cash at beginning of period ...... 176,245 246,711
------------ ------------
Cash at end of period ............ $ 77,269 $ 298,802
============ ============
Supplemental Disclosure of
Cash Flow Information:
Interest paid ........... $ 563,253 $ 970,472
Income taxes paid ....... -- $ 840,000
Non-Cash Transaction:
Capital lease obligation $ -- $ 255,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EDAC TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 28, 2002
NOTE A - OPERATING ENVIRONMENT
On October 1, 2002, the Company was notified by its former lender that because
the Company had failed to make the $1,056,417 interest payment due under the
note on September 29, 2002, an event of default had occurred on its note with
the Company. As a result of the event of default, the former lender accelerated
all sums due under the note and demanded payment in full ($8,056,417 as of
September 29, 2002). The interest rate on the note increased by 5% effective
September 29, 2002. The former lender, under the Intercreditor and Subordination
Agreement with the current lender and the Company, is precluded from exercising
any rights or remedies with respect to any collateral securing the note for 180
days after September 29, 2002.
Additionally, on June 4, 2002, the Company was notified by its current lender
that an event of default had occurred on its revolving credit and term loans as
a result of the issuance of a going concern opinion on the Company's December
29, 2001 consolidated financial statements. The default notification increased
the interest rates charged to the Company by 1% effective June 1, 2002. As of
September 28, 2002, the Company was also in violation of its fixed coverage
ratio covenant on its revolving credit and term loans.
The mortgage loan contains cross default provisions with the revolving credit
and term loans in default. Accordingly, the amounts due to the former lender,
current lender and mortgage loan lender are reflected as current liabilities in
the accompanying consolidated balance sheet. Because of the default on the
revolving credit and term loans, the interest rate charged to the Company on its
mortgage loan could increase by 2%. As of November 8, 2002, the mortgage loan
lender has not notified the Company that the default rate will go into effect.
The note payable to the former shareholders of Apex matures on January 2, 2003
and is included in current liabilities in the September 28, 2002 condensed
consolidated balance sheet. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern. The
Company is working with its lenders to renegotiate the terms and covenants under
its credit facilities; however, there is no assurance that any changes will be
made or that the changes will be sufficient for the Company to comply with the
covenants and make scheduled payments. The Company is also working to reduce
operating expenses and diversify its customer base to improve its operating
results.
On July 29, 2002, Richard A. Dandurand, the Company's Chairman and Chief
Executive Officer, resigned. Dominick A. Pagano was appointed CEO and President
of the Company and Daniel C. Tracy assumed the position of Chairman of the
Company. Mr. Dandurand is receiving $104,167 payable over 5 months in equal
installments that began on August 1, 2002. The
date by which Mr. Dandurand has to exercise 60,000 vested stock options was
extended until March 31, 2003. The Company recorded a charge of $147,000, in the
quarter ended September 28, 2002 related to Mr. Dandurand's resignation.
The Company has engaged an independent consultant to review its selling
practices. Preliminary findings indicate that four former employees may have
violated certain customer purchasing practices. The impact of the violations has
yet to be determined. The Company has amended its compliance policies.
NOTE B - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and
adjustments to previously established loss provisions) considered necessary for
a fair presentation have been included. Operating results for the quarter ended
September 28, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 28, 2002. For further information, refer
to the financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 29, 2001.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. As of September 28, 2002 and December 29, 2001, inventories
consisted of the following:
SEPTEMBER 28, DECEMBER 29,
2002 2001
----------- -----------
Raw materials..... $ 739,074 $ 1,313,489
Work-in-progress . 3,965,028 4,548,469
Finished goods ... 1,861,884 1,849,481
----------- -----------
6,565,986 7,711,439
Reserve for excess
and obsolete
inventories ..... (801,721) (1,034,182)
----------- -----------
$ 5,764,265 $ 6,677,257
During the quarter ended March 30, 2002, the Company disposed of $691,000 of
obsolete inventory that had been reserved for in prior periods.
In April 2002, the Company's largest customer told the Company to delay work and
delivery on a significant portion of the Company's inventory due to the
customer's reduced requirements. The Company is in discussions with the customer
to receive payment for the inventory.
Earnings (Loss) Per Share: The number of shares used in the earnings (loss) per
common share computation for the three and nine month periods ended September
28, 2002 and September 29, 2001 are as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------- -----------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Basic:
Average common
shares outstanding..... 4,416,038 4,346,038 4,406,038 4,331,279
Diluted:
Dilutive effect of
stock options.......... - 217,048 - 243,026
---------- ---------- --------- ---------
Average common
shares diluted........... 4,416,038 4,563,086 4,406,038 4,574,305
========== ========== ========= =========
For the three and nine month periods ended September 28, 2002, there were
817,700 options outstanding, which were not included in the computation of
diluted earnings per share as such inclusion would be anti-dilutive. Options to
purchase 289,200 and 239,200 shares for the three and nine month periods ended
September 29, 2001, respectively, were not included in the computation of
diluted earnings per share as such inclusion would be anti-dilutive.
New Accounting Standards: In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 142,
"Goodwill and Other Intangible Assets." Upon the adoption of SFAS No. 142,
goodwill is no longer subject to amortization over its estimated useful life.
Instead, SFAS No. 142 requires that goodwill be evaluated at least annually for
impairment by applying a fair-value-based test and, if impairment exists, a
charge to earnings be recorded. During the quarter ended September 28, 2002, the
Company completed the testing of the goodwill balance as of December 30, 2001.
The test indicates that the goodwill, which related entirely to the Apex Machine
Tool ("Apex") acquisition in 1998, is impaired. The loss is a result of the
decline in the fair market value of Apex since the acquisition date due to a
reduction in Apex's sales volumes. The impairment loss was computed using the
estimated fair market value of Apex as of such date. The Company recorded the
impairment charge of $10,381,077 as a cumulative effect of a change in
accounting principle, as of December 30, 2001, and restated the Company's first
quarter of 2002 results (see Note E). No tax benefit was recorded due to
uncertainty of realization of the related deferred tax asset.
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective December 30, 2001. A reconciliation follows of the net income
and income per share reported in the accompanying Condensed Consolidated
Statements of Operations to the pro forma amounts adjusted for the exclusion of
goodwill amortization, net of related tax effect. The pro forma results
reflecting the exclusion of
goodwill amortization have been prepared only to demonstrate the impact of
goodwill amortization on net income and net income per share and are for
comparative purposes only (in thousands).
Three Months Nine Months
Ended Ended
Sept. 29, 2001 Sept 29, 2001
-------------- -------------
Reported net income.............. $ 419 $ 4,075
Add: Goodwill amortization
net of income tax......... 56 170
------- --------
Adjusted net income............ $ 475 $ 4,245
======= ========
Net income per basic share:
Reported net income............ $ 0.10 $ 0.94
Add - Goodwill amortization
net of income tax....... 0.01 0.04
------- --------
Adjusted net income............ $ 0.11 $ 0.98
======= ========
Net income per diluted share:
Reported net income............ $ 0.09 $ 0.89
Add - Goodwill amortization
net of income tax....... 0.01 0.04
------- --------
Adjusted net income............ $ 0.10 $ 0.93
======= ========
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4,44,and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that statement, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements". SFAS No. 145
also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers".
SFAS No. 145 amends SFAS No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The adoption of SFAS No. 145 will result in the reclassification of
the extraordinary gain, net of tax of $2.8 million in 2001 upon adoption of SFAS
No. 145 by the Company in fiscal 2003.
In June 2002,the FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS No. 146 nullifies Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". SFAS No. 146 is effective for the Company in fiscal 2003.
SFAS No. 146 will affect exit or disposal activities of the Company after fiscal
2002.
Comprehensive (Loss) Income: Comprehensive (loss) income is the same as net
(loss) income for the three and nine month periods ended September 28, 2002 and
September 29, 2001.
NOTE C -- SEGMENT INFORMATION
The following amounts are in thousands:
FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002
-------------------------------------------------------------------
ENGINEERED PRECISION PRECISION APEX
PRECISION ENGINEERED LARGE MACHINE
COMPONENTS TECHNOLOGIES MACHINING TOOL CO. TOTAL
---------- ------------ --------- -------- -----
Sales to external
customers............. $1,638 $871 $352 $2,937 $5,798
Segment
loss.................. (380) (16) (187) (123) (706)
FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2001
--------------------------------------------------------------------
ENGINEERED PRECISION PRECISION APEX
PRECISION ENGINEERED LARGE MACHINE
COMPONENTS TECHNOLOGIES MACHINING TOOL CO. TOTAL
---------- ------------ --------- -------- -----
Sales to external
customers............. $4,788 $1,668 $956 $3,341 $10,753
Segment
profit (loss)......... 318 34 101 (34) 419
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2002
-------------------------------------------------------------------
ENGINEERED PRECISION PRECISION APEX
PRECISION ENGINEERED LARGE MACHINE
COMPONENTS TECHNOLOGIES MACHINING TOOL CO. TOTAL
---------- ------------ --------- -------- -----
Sales to external
customers............. $7,312 $2,035 $1,584 $8,873 $19,804
Segment
loss.................. (549) (466) (296) (10,904) (12,215)
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001
--------------------------------------------------------------------------------
ENGINEERED PRECISION PRECISION APEX
PRECISION ENGINEERED LARGE MACHINE EXTRAORDINARY
COMPONENTS TECHNOLOGIES MACHINING TOOL CO. GAIN TOTAL
---------- ------------ ---------- -------- ------------- -----
Sales to external
customers............. $13,292 $5,554 $3,285 $12,231 $34,362
Segment
profit................ 181 225 403 444 2,822 4,075
Asset information is unavailable by segment.
NOTE D - FINANCING ARRANGEMENTS
Long-term debt consisted of the following:
SEPTEMBER 28, 2002 DECEMBER 29, 2001
------------------ -----------------
Term loans due in 35 monthly principal installments
of $122,734 commencing November 1, 2000
with a balloon payment due on September 29, 2003. (1) ....... $ 4,436,653 $ 5,594,044
Mortgage due to bank in 240 monthly installments
of $18,578 including interest. (1) .......................... 1,947,559 1,974,152
Note payable to former lender with principal due in
one payment on September 29, 2004. (1,2) .................... 9,462,347 9,462,347
Mortgage payable to former shareholders of Apex Machine
Tool Company, Inc. Monthly principal installments of $25,000
with a balloon payment due on January 2, 2003. Interest
at 10.12% is paid quarterly in advance ...................... 1,659,638 1,809,638
Equipment notes payable due in 36 monthly principal
payments of $700 and $674 .................................. 36,410 24,503
Capital lease obligations-equipment ........................... 253,635 306,095
17,796,242 19,170,779
Less - current portion of long-term debt ...................... 17,597,521 17,409,544
----------- -----------
$ 198,721 $ 1,761,235
=========== ===========
(1) Amount is classified as a current liability. (See Note A).
(2) Amount includes $2,462,347 of estimated interest recorded in accordance
with accounting for troubled debt restructurings. Interest was due on
September 29, 2002, and is included in current liabilities. (See Note A)
As a result of the default on the Company's revolving and term loans, the
Company's current lender reduced the borrowing availability on the Company's
revolving line of credit on June 4, 2002 by $350,000, on July 31, 2002 by
$175,000 and August 31, 2002 by $175,000. As of September 28, 2002, $1,377,249
was outstanding on the Company's revolving line of credit and $1,519,409 was
available for additional borrowings after giving effect to the $700,000
reduction in borrowing availability.
The mortgage note payable to the former shareholders of Apex Machine Tool
Company Inc. has been amended to provide for a moratorium on six principal
payments that would have been due over the six-month period commencing July 1,
2002. In July of 2002, a $25,000 penalty was paid in accordance with the note
since the entire principal had not been paid as of June 30, 2002, resulting in a
charge to interest expense of $25,000 in the second quarter of 2002. The
remaining terms of the note have not changed and the note is due in full on
January 3, 2003.
NOTE E - CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During the third quarter of 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets", as of December 30, 2001.
Amounts previously reported for the quarter ended March 30, 2002 on Form 10-Q
and as restated to reflect the impairment of the entire goodwill balance as of
December 29, 2001, are as follows: (in thousands)
FOR THE THREE MONTHS ENDED
MARCH 30, 2002
------------------------------------
AS REPORTED AS RESTATED
----------- -----------
Loss before cumulative effect of
change in accounting principle...... $ (516) $ (516)
Cumulative effect of change in
accounting principle .............. -- (10,381)
------- ----------
Net loss ............................ $ (516) $ (10,897)
======= ==========
Net loss per basic and diluted share:
Loss before cumulative effect of
change in accounting principle..... $ (0.12) $ (0.12)
Cumulative effect of change in
accounting principle ............. -- (2.77)
------- ----------
Net loss .......................... $ (0.12) $ (2.89)
======= ==========
NOTE F - SUBSEQUENT EVENT
In October 2002, the Company adopted a consolidation plan. Under the plan, the
Company will consolidate its four independent divisions into one entity,
allowing the Company to reduce overhead, improve operating efficiencies and
share resources. The consolidation will result in the physical relocation of 130
people and the related equipment without suspending operations. The
consolidation will commence in the fourth quarter of 2002 and is expected to be
completed in the first quarter of 2003. The Company expects to record a charge
to earnings in the fourth quarter for the consolidation of between $200,000 and
$400,000 related to expenditures related to the restructuring. Additionally, the
Company is in the process of quantifying the amount of any write-downs of
long-lived assets as a result of the consolidation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Sales. The Company's sales decreased $4,955,000, or 46.1%, and by $14,558,000,
or 42.4%, for the three and nine months ended September 28, 2002 compared to the
three and nine months ended September 29, 2001, respectively. Such decreases by
segment were as follows (in thousands):
FOR THE THREE MONTHS ENDED
-----------------------------------------
SEPT. 28, SEPT. 29,
SEGMENT 2002 2001 DECREASE
------- --------- --------- --------
Engineered Precision Components.............................................$1,638 $4,788 ($3,150)
Precision Engineered Technologies........................................... 871 1,668 (797)
Precision Large Machining................................................... 352 956 (604)
Apex Machine Tool Co........................................................ 2,937 3,341 (404)
FOR THE NINE MONTHS ENDED
-----------------------------------------
SEPT. 28, SEPT. 29,
SEGMENT 2002 2001 DECREASE
------- --------- --------- --------
Engineered Precision Components.............................................$7,312 $13,292 ($5,980)
Precision Engineered Technologies........................................... 2,035 5,554 (3,519)
Precision Large Machining................................................... 1,584 3,285 (1,701)
Apex Machine Tool Co. ...................................................... 8,873 12,231 (3,358)
A significant downturn in the machine tool industry accompanied by a rapid and
dramatic decline in the commercial jet engine marketplace caused severe customer
schedule changes, shipping delays and reductions of orders to the Company in the
first nine months of 2002 for all segments.
As of September 28, 2002, sales backlog was approximately $18,300,000 compared
to $29,000,000 as of December 29, 2001. The decrease of $10,700,000 is due the
downturn in the jet engine and machine tool industries causing a severe
reduction in orders received by the Company. Backlog consists of accepted
purchase orders that are cancelable by the customer without penalty, except for
payment of costs incurred. The Company presently expects to complete
approximately $3,300,000 of its September 28, 2002 backlog during the remainder
of the 2002 fiscal year. The remaining $15,000,000 of backlog is deliverable in
the fiscal year 2003 and beyond.
The Company and its largest customer agreed not to renew the current long-term
purchasing agreement beyond its maturity date of December 31, 2002. The parties
have agreed that the Company will continue to quote on the customer's future
requirements.
Cost of Sales. Cost of sales as a percentage of sales increased in the 2002
period to 94.7% from 84.0% and to 94.2% from 82.1% for the three and nine month
periods ended September 28, 2002 compared to the three and nine month periods
ended September 28, 2001, respectively. Cost of sales as a percentage of sales
increased primarily due to decreased sales levels to cover fixed manufacturing
costs. In addition, a rapid and dramatic decline in the commercial jet engine
marketplace caused severe schedule shifting and delays of orders which
negatively impacted productivity and gross margins in the Engineered Precision
Components and Precision Large Machining areas while the significant downturn in
the machine tool industry negatively impacted productivity and gross margins in
the Apex Machine Tool Co. and Precision Engineered Technologies areas. The
Company is working to improve productivity and reduce manufacturing costs.
Selling, General & Administrative Expenses. Selling, general and administrative
costs decreased by $18,000, or 1.7%, and by $851,000, or 22.6%, for the three
and nine month periods ended September 28, 2002 compared to the three and
nine-month periods ended September 28, 2001,
respectively. The decrease in these costs for the nine month period was mainly
the result of a $459,000 decrease in compensation and commissions due to lower
sales levels and layoffs and a $213,000 decrease in goodwill amortization
expenses due to a new accounting standard which decreases were partially offset
by a $329,000 increase in legal and consulting fees. The decrease for the
nine-month period was also due to costs of $451,000 incurred in the 2001 period
associated with the terminated sale of the Company's Precision Engineered
Components division.
Interest Expense. Interest expense decreased by $62,000 or 24.6% and by $374,000
or 39.9% for the three and nine months ended September 28, 2002. This is due to
the significant decrease in variable interest rates charged to the Company by
its lenders accompanied by lower indebtedness.
Interest expense for future periods will be impacted by default interest rates.
Effective June 1, 2002, the default interest rates on the Company's revolving
and term loans increased the interest rates charged to the Company by 1%.
Effective September 29, 2002, the default interest rate on the note from the
former lender increased the rate charged to the Company by 5%. Due to cross
default provisions, the default interest rate of up to 2% on the mortgage loan
may also go into effect.
Cumulative Effect of Change in Accounting Principle. During the quarter ended
September 28, 2002, the Company completed the testing of the goodwill balance as
of December 30, 2001. The test indicates that the goodwill, which related
entirely to the Apex Machine Tool acquisition in 1998, is impaired. The loss is
a result of the decline in the fair market value of Apex since the acquisition
date due to a reduction in Apex's sales volumes. The impairment loss was
computed using the estimated fair market value of Apex as of such date. The
Company recorded the impairment charge of $10,381,077 as a cumulative effect of
a change in accounting principle, as of December 30, 2001, and restated the
Company's first quarter of 2002 results (see Note E). No tax benefit was
recorded due to uncertainty of realization of the related deferred tax asset.
Liquidity and Capital Resources.
On October 1, 2002, the Company was notified by its former lender that because
the Company had failed to make the $1,056,417 interest payment due under the
note on September 29, 2002, an event of default had occurred on its note with
the Company. As a result of the event of default, the former lender accelerated
all sums due under the note and demanded payment in full ($8,056,417 as of
September 29, 2002). The interest rate on the note increased by 5% effective
September 29, 2002. The former lender, under the Intercreditor and Subordination
Agreement with the current lender and the Company, is precluded from exercising
any rights or remedies with respect to any collateral securing the note for 180
days after September 29, 2002.
Additionally, on June 4, 2002, the Company was notified by its current lender
that an event of default had occurred on its revolving credit and term loans as
a result of the issuance of a going concern opinion on the Company's December
29, 2001 consolidated financial statements. The default notification increased
the interest rates charged to the Company by 1% effective June 1, 2002. As of
September 28, 2002, the Company was also in violation of its fixed coverage
ratio covenant on its revolving credit and term loans.
The mortgage loan contains cross default provisions with the revolving credit
and term loans in default. Accordingly, the amounts due to the former lender,
current lender and mortgage loan lender are reflected as current liabilities in
the accompanying consolidated balance sheet. Because of the default on the
revolving credit and term loans, the interest rate charged to the Company on its
mortgage loan could increase by 2%. As of November 8, 2002, the mortgage loan
lender has not notified the Company that the default rate will go into effect.
The note payable to the former shareholders of Apex matures on January 2, 2003
and is included in current liabilities in the September 28, 2002 condensed
consolidated balance sheet. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern. The
Company is working with its lenders to renegotiate the terms and covenants under
its credit facilities; however, there is no assurance that any changes will be
made or that the changes will be sufficient for the Company to comply with the
covenants and make scheduled payments. The Company is also working to reduce
operating expenses and diversify its customer base to improve its operating
results.
The mortgage note payable to the former shareholders of Apex Machine Tool
Company Inc. has been amended to provide for a moratorium on six principal
payments that would have been due over the six-month period commencing July 1,
2002. In July of 2002, a $25,000 penalty was paid in accordance with the note
since the entire principal had not been paid as of June 30, 2002, resulting in a
charge to interest expense of $25,000 in the second quarter of 2002. The
remaining terms of the note have not changed and the note is due in full on
January 3, 2003.
In April 2002, the Company's largest customer told the Company to delay work and
delivery on a significant portion of the Company's inventory due to the
customer's reduced requirements. The Company is in discussions with the customer
to receive payment for the inventory.
In October 2002, the Company adopted a consolidation plan. Under the plan, the
Company will consolidate its four independent divisions into one entity,
allowing the Company to reduce overhead, improve operating efficiencies and
share resources. The consolidation will result in the physical relocation of 130
people and the related equipment without suspending operations. The
consolidation will commence in the fourth quarter of 2002 and is expected to be
completed in the first quarter of 2003. The Company expects to record a charge
to earnings in the fourth quarter for the consolidation of between $200,000 and
$400,000 related to expenditures related to the restructuring. Additionally, the
Company
is in the process of quantifying the amount of any write-downs of long-lived
assets as a result of the consolidation.
As of September 28, 2002, the Company's current liabilities exceed its current
assets by $13,275,190 as a result of the debt classified as current liabilities
as discussed above. As a result of the default on the Company's revolving and
term loans, the lender reduced the borrowing availability on the Company's
revolving line of credit on June 4, 2002 by $350,000, on July 31, 2002 by
$175,000 and August 31, 2002 by $175,000. As of September 28, 2002, $1,377,249
was outstanding on the Company's revolving line of credit and $1,519,409 was
available for additional borrowings after giving effect to the $700,000
reduction in borrowing availability. The Company is working with its lenders to
renegotiate the terms and covenants under its credit facilities.
Net cash provided by operating activities of $1,800,000 for the nine months
ended September 28, 2002, resulted primarily from lower receivables and
inventory amounts partially offset by lower accrued expenses and employee
compensation. The Company also extended its payment terms to suppliers. The
Company's accounts payable balance at September 28, 2002 represented 61 days of
payables outstanding compared to 31 days at December 29, 2001.
Net cash provided by operating activities of $2,190,000 for the nine months
ended September 29, 2001, resulted primarily from earnings and lower inventories
offset partially by lower accounts payable and higher accounts receivable.
Net cash used in investing activities of $51,000 for the nine months ended
September 28, 2002, consisted primarily of expenditures for machinery and
computer equipment.
Net cash used in investing activities of $309,000 for the nine months ended
September 29, 2001, consisted primarily of expenditures for machinery and
computer equipment.
Net cash used by financing activities of $1,848,000 for the nine months ended
September 28, 2002, resulted from repayments on the Company's revolving line of
credit and term debt, partially offset by proceeds from the exercise of common
stock options.
Net cash used in financing activities of $1,829,000 for the nine months ended
September 29, 2001, resulted primarily from bank repayments.
All statements other than historical statements contained in this report on Form
10-Q constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Without limitation, these forward
looking statements include statements regarding the Company's business strategy
and plans, statements about the adequacy of the Company's working capital and
other financial resources and other statements herein that are not of a
historical nature. These forward-looking statements rely on a number of
assumptions concerning future events and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, that could cause actual results to differ materially from such
statements. These include, but are not limited to, factors which could affect
demand for the Company's products and services such as general economic
conditions and economic conditions in the aerospace industry and the other
industries in which the Company competes; competition from the Company's
competitors; the Company's reliance on its largest customer and the effect of
the non-renewal of the Company's long-term agreement with that customer; the
adequacy of the Company's revolving credit facility and other sources of
capital; the Company's ability to renegotiate the terms and covenants of its
credit facilities and its ability to continue as a going concern if it is unable
to renegotiate such terms and covenants; the effect of the Company's
consolidation plan, including costs the Company may incur in implementing the
plan, charges that the Company may recognize relating to the plan and the
Company's ability to realize the anticipated benefits from the plan; and other
factors discussed in this report and in the Company's annual report on Form 10-K
for the year ended December 29, 2001. The Company disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 28, 2002 there have been no material changes in information
regarding quantitative and qualitative disclosure about market risk from the
information presented as of December 29, 2001 in the Company's Form 10-K except
that the Company is being charged default rates of interest (see Note A).
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure and procedures
The Chief Executive Officer and Chief Financial Officer of the Company evaluated
the disclosure controls and procedures as of September 28, 2002 and concluded
that the Company's disclosure controls and procedures are functioning as
intended to ensure that the information required to be disclosed by the Company
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms.
Change in internal controls
There were no significant changes in internal controls or in other factors that
could significantly affect the internal controls subsequent to September 28,
2002.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Edac's Amended and Restated Articles of Incorporation
3.2 Edac's Amended and Restated By-laws
10.1 Consulting Agreement dated July 18, 2002 between Edac and
Dominick A. Pagano
10.2 Separation Agreement and General Release dated July 29, 2002
between Edac and Richard A. Dandurand.
10.3 Employment Agreement dated August 13, 2002 between Edac and
Dominick A. Pagano.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDAC TECHNOLOGIES CORPORATION
November 15, 2002 By /s/Ronald G. Popolizio
----------------------------------
Ronald G. Popolizio, Chief Financial
Officer and duly authorized officer
CERTIFICATIONS
I, Dominick A. Pagano, President and Chief Executive Officer of Edac
Technologies Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Edac
Technologies Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002
/s/Dominick A. Pagano
--------------------------------------
Dominick A. Pagano
President and Chief Executive Officer
I, Ronald G. Popolizio, Chief Financial Officer of Edac Technologies
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Edac
Technologies Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 15, 2002
/s/Ronald G. Popolizio
-------------------------------
Ronald G. Popolizio
Chief Financial Officer
EXHIBIT INDEX
Page Number
in Sequential
NUMBER DESCRIPTION Numbering System
- ------ ----------- ----------------
3.1 Edac's Amended and Restated Articles of (1)
Incorporation
3.2 Edac's Amended and Restated By-laws (2)
10.1 Consulting Agreement dated July 18, 2002 between
Edac and Dominick A. Pagano.
10.2 Separation Agreement and General Release dated
July 29, 2002 between Edac and Richard A. Dandurand.
10.3 Employment Agreement dated August 13, 2002
between Edac and Dominick A. Pagano.
(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 Current Report on Form
8-K dated February 19, 2002.