-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VyMgOzgkS9O9iq2ApMOnnP+11aufMmNa2/zb7K4dQFy3YanqkHQBVp6udgwLUcPh Nw/5yLVfjiqBO4C31NH8Xg== 0000031617-99-000004.txt : 19990318 0000031617-99-000004.hdr.sgml : 19990318 ACCESSION NUMBER: 0000031617-99-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDO CORP CENTRAL INDEX KEY: 0000031617 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 110707740 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03985 FILM NUMBER: 99567040 BUSINESS ADDRESS: STREET 1: 14 04 111TH ST CITY: COLLEGE POINT STATE: NY ZIP: 113561434 BUSINESS PHONE: 7183214000 MAIL ADDRESS: STREET 1: 14 04 111TH ST CITY: COLLEGE POINT STATE: NY ZIP: 11356-1434 10-K405 1 ANNUAL REPORT ON FORM 10-K - ------------------------------------------------------------------------------- FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File Number December 31, 1998 1-3985 EDO CORPORATION Exact name of Registrant as specified in its charter. State of Incorporation: IRS Employer Identification No.: New York 11-0707740 Address of principal executive offices: 60 East 42nd Street, Suite 5010, New York, New York 10165 Telephone No.: (212) 716-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of each exchange on which registered: Common Shares New York Stock Exchange par value $1 per share 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 the 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. [ ] State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 1, 1999 ................................ $42,576,242 Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of March 1, 1999 ................................. 6,642,268 Documents Incorporated by Reference Portions of the Definitive Proxy Statement of the Registrant, dated March 17, 1999, are incorporated by reference into Part III. - ------------------------------------------------------------------------------- Table of Contents PART I................................................................... 1 ITEM 1. BUSINESS....................................................... 1 DEFENSE & AEROSPACE SYSTEMS.............................................. 1 Marine and Aircraft Systems.............................................. 1 Aircraft Stores Suspension and Release Equipment......................... 1 Airborne Mine Countermeasures Systems.................................... 1 Combat Systems........................................................... 2 Command, Control and Communications Systems.............................. 2 Undersea Warfare Sonar................................................... 2 Technology Services and Analysis......................................... 2 Electro-Ceramic Products................................................. 2 Fiber Composite Products................................................. 2 SATELLITE PRODUCTS....................................................... 3 DISCONTINUED OPERATIONS.................................................. 3 RESEARCH AND DEVELOPMENT................................................. 4 MARKETING AND INTERNATIONAL SALES........................................ 4 BACKLOG.................................................................. 5 GOVERNMENT CONTRACTS..................................................... 5 COMPETITION AND OTHER FACTORS............................................ 5 EMPLOYEES................................................................ 6 EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 6 ITEM 2. PROPERTIES..................................................... 6 ITEM 3. LEGAL PROCEEDINGS.............................................. 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 6 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................... 7 ITEM 6. SELECTED FINANCIAL DATA........................................ 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 7 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...... 7 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 7 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................... 7 PART III................................................................. 7 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 7 ITEM 11. EXECUTIVE COMPENSATION........................................ 7 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 7 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 7 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................................... 8 SIGNATURES............................................................... 9 SELECTED FINANCIAL DATA.................................................. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................ 11 BUSINESS................................................................. 11 RESULTS OF OPERATIONS - 1998 COMPARED TO 1997............................ 11 FINANCIAL CONDITION...................................................... 12 RESULTS OF OPERATIONS - 1997 COMPARED TO 1996............................ 13 MARKET RISKS............................................................. 13 NEW ACCOUNTING STANDARD.................................................. 13 YEAR 2000................................................................ 14 COMMON SHARE PRICES...................................................... 15 DIVIDENDS................................................................ 15 "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995....................................................... 15 CONSOLIDATED STATEMENTS OF EARNINGS...................................... 16 CONSOLIDATED BALANCE SHEETS.............................................. 17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.......................... 18 CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 20 QUARTERLY FINANCIAL INFORMATION (UNAUDITED).............................. 32 PART I ITEM 1. BUSINESS The term "Registrant" as used in this Annual Report refers to EDO Corporation. The term "Company" as used in this Annual Report, except where the context otherwise requires, includes the Registrant and its subsidiaries. EDO Corporation was incorporated in New York in 1925 by Earl Dodge Osborn, from whose initials "EDO" is derived. The Company designs and manufactures advanced electronic, mechanical and electro-optical systems and engineered materials for domestic and international defense and industrial markets. The Company organizes its business into two segments, which constitute its continuing operations: Defense and Aerospace Systems; and Satellite Products. A description of the principal products of the Company within the two segments is set forth below. In 1996, the Company sold its general aviation floats business and announced the discontinuance of its energy-related businesses. See Note 4 on page 22 of this Report. In 1997, the Company also discontinued certain of its former Acoustic Products product lines. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 11 through 15, and Note 18 on page 30 of this Report for information regarding the cost of compliance with environmental regulations. Certain business segment information on the Company's continuing operations is set forth in Note 19 on pages 30 and 31 of this report. The following discussion relates to the Company's continuing operations. DEFENSE & AEROSPACE SYSTEMS The Company's Defense and Aerospace Systems segment, which accounted for 85%, 78% and 73% of consolidated net sales for 1998, 1997 and 1996, respectively, includes marine and aircraft systems, combat systems, electro-ceramic products and fiber composite products. Marine and Aircraft Systems Marine and aircraft systems include the design, development and manufacture of sophisticated mechanical, electromechanical, structural, hydrodynamic and aerodynamic systems for military use. Additionally, the Company provides logistics support for such products following initial hardware deliveries including spare and repair parts, upgrade modifications, training and technical services. The revenue from these support functions is a significant portion of sales. The major marine and aircraft systems are aircraft stores suspension and release equipment and airborne mine countermeasures systems. Aircraft Stores Suspension and Release Equipment The Company developed and manufactured bomb release units (BRU) for the U.S. Air Force F-15E, ejection release units (ERU) for the Tornado Multirole Combat Aircraft and jettison release mechanisms (JRM) for the U.S. Navy F-14 aircraft. In 1998, the Company continued production of BRUs for the F-15E for an international customer under prior orders received and new orders received in 1998, and provided spare parts support for Tornado ERUs previously produced. In addition, the Company continued the development of the Advanced Medium Range Air To Air Missile (AMRAAM) launcher for the F-22 air superiority fighter. Customer-sponsored development for this missile launcher, which employs new internal carriage technology, is expected to continue throughout 1999. In addition, an order for long lead material for the first two production F-22 aircraft was received in 1998. In 1997, the Company received a subcontract from Boeing for development of new weapons carriage technology for application to the Joint Strike Fighter and future aircraft. This effort is expected to continue throughout 1999. Sales of aircraft stores suspension and release equipment represented 19% of consolidated net sales in 1998, 1997 and 1996. Airborne Mine Countermeasures Systems The Company is the only manufacturer of the MK 105 helicopter-towed magnetic minesweeping system designed and developed by the Company in conjunction with the U.S. Navy and upgraded in 1995. The first production contract for this upgrade was received at the end of 1995. An additional production contract was received in 1996. Production under these contracts is expected to continue throughout 1999. An additional production order for these upgrades was received in 1998. Production under this contract will also continue throughout 1999. In 1994, the Company began work on a new U.S. Navy funded contract to develop a lightweight, self contained, helicopter-towed magnetic sweep for shallow water applications. This system underwent U.S. Navy testing and evaluation in 1996 and was used in fleet and NATO operations in 1997. In 1998, the Company received an additional contract for the development of an acoustic sweep for shallow water application. Work on this contract will continue through 1999. In addition, the Company continued to provide logistic Page 1 support for MK 105 systems previously provided to both the U.S. Navy and an international customer. For 1998, 1997 and 1996, respectively, sales of airborne mine countermeasures systems represented 14%, 12% and 7% of consolidated net sales. Combat Systems Combat systems include the design, development and manufacture of command, control and communications systems, undersea warfare systems and technology services and analysis related to such. In addition, the Company provides logistics support including spare and repair parts, training and technical services for such products. Command, Control and Communications Systems Command, control and communication systems include integrated command systems, tactical data links, display consoles and communication control and monitoring systems for domestic and international customers. In 1998, work continued on NATO Ship-Shore-Ship Buffer (SSSB) systems deliverable to several international customers in 1998 and 1999. Additionally in 1998, a contract for a major integrated combat system was received from an international customer. Work on this contract is expected to continue through 2001. Undersea Warfare Sonar The Company has been a supplier of undersea warfare systems for more than forty years. In 1997, the Company completed and delivered a major signal processing subsystem of an upgrade to the U.S. Navy's AN/SQQ-89 undersea warfare system to Northrop-Grumman and Lockheed Martin. Additional funding was received in 1998 from Lockheed Martin for work on the AN/SQQ-89. Logistics, maintenance and training support was provided for EDO sonar systems installed in FF-1052 class ships in service for several international navies. Work continued in 1998 for an international customer on a major upgrade to the EDO Model 610E sonar system. Work under this contract is expected to continue through 2003. In 1997, the Company received an order for an additional Model 610E upgraded sonar system for a new class of ship for this same international customer. Work on this contract continued throughout 1998 and will be completed in 1999. Technology Services and Analysis In July 1998, the Company acquired substantially all of the assets of the Technology Services Group of Global Associates, Ltd. The business provides technical services to various agencies of the U.S. Department of Defense. Such services include management services, operations analysis including but not limited to wargaming, modeling and simulation, and systems analysis. Electro-Ceramic Products Piezoceramic elements convert acoustic energy to electrical energy and form the basis of many defense and commercial products ranging from military sonars to ink jet printers. The Company is one of North America's leading manufacturers of piezoceramic components for defense applications and also provides ceramics to several commercial markets. The Company has automated and improved its production processes and is focusing its efforts on industrial markets in addition to maintaining its position as a leading supplier of ceramics for military applications. For 1998, 1997 and 1996, respectively, sales of piezoceramics represented 18%, 13% and 11% of consolidated net sales. The Company also designs and produces military and commercial transducers which it provides for EDO acoustic systems as well as for the market. The Company is developing products for the active vibration control marketplace. This initiative is intended to apply the Company's expertise in piezoceramic materials and transducers to reduce vibration emanating from industrial machinery. Specifically, the Company has developed a product for vibration reduction in cylindrical grinders. In addition, the Company is delivering products it designed and manufactured to reduce vibration in the manufacturing process for semiconductors. In December 1998, the Company acquired substantially all of the assets of Zenix Products, Inc. which manufactures ferrite and dielectric ceramics for the wireless communications base station industry. Fiber Composite Products The Company's fiber composite products focus on the development, production and after-market support of its traditional composite water and waste tanks for the commercial aviation market. This concentrated technical and marketing effort has yielded long-term production contracts from Boeing. For 1998, 1997 and 1996, sales of fiber composite products represented 11%, 11% and 10% of consolidated net sales, respectively. In December 1998, the Company acquired Specialty Plastics, Inc., a manufacturer of fiberglass piping principally for the deep water offshore oil industry. Page 2 SATELLITE PRODUCTS The Satellite Products segment, which accounted for 15%, 22% and 24% of consolidated net sales for 1998, 1997 and 1996, respectively, includes electro-optic systems supplied to the satellite market. Electro-optic systems include the design, development and manufacture of products and systems for satellites. The primary products include infrared earth sensors and sun sensors which are used to provide satellites with information relative to stabilization and orbit position. In 1998, the Company continued to provide earth sensor assemblies for Hughes' GEO and ICO satellites, to NASA for the Television and Infrared Observation Satellite (TIROS), for the Motorola Iridium communication satellite constellation and earth and sun sensor assemblies to DASA for the Loral Globalstar constellation. New orders were received in 1998 for earth sensor assemblies from TRW, Hughes and Lockheed Martin and for follow-on orders for additional sensors for Iridium. In addition, the Company continues to work on the Boeing Global Positioning System (GPS) IIF program. DISCONTINUED OPERATIONS The Company's former energy-related businesses consisted of the following: its wholly-owned subsidiary EDO Energy Corporation, which provided program management activities for compressed natural gas vehicles (CNGVs) and other alternative fuel projects; its wholly-owned subsidiary EDO Automotive Natural Gas, Inc. ("EDO ANGI"), which designed and manufactured CNGV refueling stations and related equipment; and a 50.4% interest in EDO (Canada) Ltd. ("ECL"), which designed and manufactured LiteRider(R) fuel cylinders. The products of these businesses were generally sold through independent distributors and dealers to end users, and by employees of these businesses to original equipment manufacturers. Due to the historical and projected growth rates and financial returns of the energy-related businesses failing to meet the Company's strategic criteria, the Company decided in September 1996 to divest itself from these businesses. Accordingly, in 1996, the Company recorded a provision for loss of $7,000,000, consisting of $2,000,000 in operating losses for the phase out period, and $5,000,000 for reduction of asset values and provisions for estimated future disposal costs. In 1997, the Company sold the net assets of its EDO-ANGI subsidiary. The EDO Energy operations were mostly discontinued in 1997 and ceased in 1998. In 1997, ECL made a voluntary assignment in bankruptcy pursuant to the Bankruptcy and Insolvency Act of Canada and subsequently liquidated its assets through the equivalent of Chapter 7 of the U.S. bankruptcy laws. The Company believes that adequate provision for the ultimate loss on disposal of these businesses has been made in the Company's financial statements, which provision is described in Note 4 on page 22 of this Report. Page 3 RESEARCH AND DEVELOPMENT Research and development, performed both under development contracts with customers and at Company expense, are important factors in the Company's business. The Company's research and development efforts involve approximately 110 employees in the fields of combat systems, acoustic, electronic, hydrodynamic, aerodynamic, structural and material engineering. Research and development programs are designed to develop new products and to extend the capability of existing products and to assess their commercial potential. Customer-sponsored research and development programs are principally related to military programs. Major customer-sponsored research and development programs include: improvements to the MK 105 mine countermeasures system; development of a new shallow-water mine countermeasures system; development of new aircraft weapons carriage technology; developments in combat systems integration; and development of new earth and sun sensors for satellites. Expenditures under development contracts with customers vary in amount from year to year because of the timing of contract funding and other factors. In 1998, customer-sponsored research and development expenditures in the aggregate were essentially at the same level as in 1997. Principal current Company-funded research and development includes: image and signal processing and other improvements for combat systems, improvements to minesweeping technology, new techniques for aircraft weapons carriage, continued development of satellite-based sensors and the application of acoustic and ceramic technologies to vibration control. The following table sets forth research and development expenditures for the periods presented. =========================================================== Year Ended December 31, 1998 1997 1996 (in thousands) ----------------------------------------------------------- Customer-sponsored $ 22,400 $ 23,000 $ 17,800 Company-funded 3,500 2,100 1,000 Total $ 25,900 $ 25,100 $ 18,800 =========================================================== MARKETING AND INTERNATIONAL SALES Sales of the Company's defense products to both the U.S. and foreign governments are usually made under negotiated long-term contracts or subcontracts covering one or more years of production. The Company believes that its long history of association with its military customers is an important factor in the Company's overall business, and that the experience gained through this history has enhanced the Company's ability to anticipate its customers' needs. The Company's approach to its defense business is to anticipate specific customer needs and to develop systems to meet those needs either at its own expense or pursuant to research and development contracts. The Company sells defense products as a prime contractor and through subcontracts with other prime contractors. In addition to defense sales to the U.S. Department of Defense, the Company also sells defense equipment to the U.S. Government for resale to foreign governments under the Foreign Military Sales program and, subject to approval by the U.S. Department of State, directly to foreign governments. The Company's satellite products are generally sold directly to spacecraft manufacturers and integrators both domestically and abroad. Where sold internationally, the products are subject to U.S. Department of State export controls. Commercial products are sold in industrial and commercial markets. In foreign markets, piezoelectric and electronic products are generally sold commercially through a network of sales representatives. Fiber-reinforced composite products are sold, in certain product areas, on a direct basis and, in other product areas, through sales representatives. It is generally the Company's policy to denominate all foreign contracts in U.S. dollars and seek not to incur significant costs in connection with long-term foreign contracts until the Company has received advance payments or letters of credit on amounts due under the contracts. Recently, however, the Company has not always been able to do so. Refer to Note 19 on pages 30 and 31 of this Report for the amount of export sales for the last three fiscal years. Page 4 BACKLOG A significant portion of the Company's sales are to prime contractors, the U.S. Department of Defense and foreign governments pursuant to long-term contracts. Accordingly, the Company's backlog of unfilled orders consists in large part of orders under these contracts. As of December 31, 1998, the Company's total backlog was approximately $151.8 million, as compared with $111.6 million on December 31, 1997. Of the total backlog as of December 31, 1998, approximately 49% is scheduled for delivery in 1999. GOVERNMENT CONTRACTS Sales to the U.S. Government, as a prime contractor and through subcontracts with other prime contractors, accounted for 47% of the Company's 1998 consolidated net sales compared with 41% in 1997 and 36% in 1996, and consisted primarily of sales to the Department of Defense. Such sales do not include sales of military equipment to the U.S. Government for resale to foreign governments under the Foreign Military Sales program. The Company's defense business can be and has been significantly affected by changes in national defense policy and spending. The Company's U.S. Government contracts and subcontracts and certain foreign government contracts contain the usual required provisions permitting termination at any time for the convenience of the government with payment for work completed and committed along with associated profit at the time of termination. The Company's contracts with the Department of Defense consist of fixed-price contracts, cost-reimbursable contracts and incentive contracts of both types. Fixed-price contracts provide fixed compensation for specified work. Cost-reimbursable contracts require the Company to perform specified work in return for reimbursement of costs (to the extent allowable under government regulations) and a specified fee. In general, while the risk of loss is greater under fixed-price contracts than under cost-reimbursable contracts, the potential for profit under such contracts is greater than under cost-reimbursable contracts. Under both fixed-price incentive contracts and cost-reimbursable incentive contracts, an incentive adjustment is made in the Company's fee based on attainment of performance, scheduling, cost, quality or other goals. The distribution of the Company's government contracts among the categories of contracts referred to above varies from time to time, although in recent years only a small percentage of the Company's contracts have been on a cost-reimbursable or incentive basis. COMPETITION AND OTHER FACTORS Some of the Company's products are sold in markets containing a number of competitors substantially larger than the Company and with greater financial resources. Direct sales of military products to U.S. and foreign governments are based principally on product performance, cost and reliability. Such products are generally sold in competition with products of other manufacturers that may fulfill an equivalent function, but which are not direct substitutes. The Company purchases certain materials and components used in its systems and equipment from independent suppliers. These materials and components are normally not purchased under long-term contracts unless the Company has actually received a long-term sales contract requiring them. The Company believes that most of the items it purchases are obtainable from a variety of suppliers and it normally obtains alternative sources for major items, although the Company is sometimes dependent on a single supplier or a few suppliers for some items. It is difficult to state precisely the Company's market position in all of its product lines because information as to the volume of sales of similar products by its competitors is not generally available and the relevant markets are often not precisely defined. However, the Company believes that it is a significant factor in the markets for stores release mechanisms for military aircraft, military sonar systems, military data links, helicopter-towed mine countermeasures systems, piezoelectric ceramics, and satellite attitude and position sensors. Although the Company owns some patents and has filed applications for additional patents, it does not believe that its businesses depend significantly upon its patents. In addition, most of the Company's U.S. Government contracts license it to use patents owned by others. Similar provisions in the U.S. Government contracts awarded to other companies make it impossible for the Company to prevent the use by other companies of its patents in most domestic defense work. Page 5 EMPLOYEES As of December 31, 1998, the Company employed 776 persons. EXECUTIVE OFFICERS OF THE REGISTRANT ============================================================================== Name Age Position, Term of Office and Prior Positions - ------------------------------------------------------------------------------ Frank A. Fariello 64 Chairman of the Board since 1997 and Chief Executive Officer since 1994. He was President from 1993 to 1998. Director since 1982. William J. Frost 57 Vice President-Administration since 1994, Assistant Secretary since 1995. Marvin D. Genzer 58 Vice President since 1990, General Counsel since 1988, and Secretary since 1995. Ira Kaplan 63 President since 1998 and Chief Operating Officer since 1997, prior to which he was Executive Vice President since 1997. He was Corporate Vice President since 1995, and Vice President and General Manager of the Government Systems Division since 1989. Kenneth A. Paladino 41 Vice President-Finance and Treasurer since 1995, prior to which he was Controller since 1989. ============================================================================== Each executive officer is appointed by the Board of Directors (the "Board"), and holds office until the first meeting of the Board following the next succeeding annual meeting of shareholders, and thereafter until a successor is appointed and qualified, unless the executive officer dies, is disqualified, resigns or is removed in accordance with the Company's By-Laws. ITEM 2. PROPERTIES All operating properties are leased facilities and the Company's facilities are adequate for present purposes. All facilities in the following listing are suitable for expansion by using available but unused space, leasing additional available space, or by physical expansion of leased buildings. The Company's obligations under the various leases are set forth in Note 17 on page 29 of this Report. Set forth below is a listing of the Company's principal plants and other materially important physical properties. All locations are used for the Defense and Aerospace Systems segment, except the Shelton, CT facility, which is used for the Satellite Products segment. ============================================================================== Location Approximate Floor Area (in sq. ft.) - ------------------------------------------------------------------------------ Marine and Aircraft Systems North Amityville, NY 85,000 Combat Systems Chesapeake, VA 30,000 Barnes Shelton, CT 72,000 Electro-Ceramic Products Salt Lake City, UT 117,000 Fiber Science Salt Lake City, UT 105,000 Technology Services and Analysis Falls Church, VA 29,000 Specialty Plastics Baton Rouge, LA 29,000 ============================================================================== ITEM 3. LEGAL PROCEEDINGS The information responsive to this item is set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 11 through 15, and in Note 18 on page 30 of this Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information responsive to this item is set forth under the headings "Common Share Prices" on page 15 and "Dividends" on page 15, together with dividend information contained in the "Consolidated Statements of Shareholders' Equity" on page 18 and Note 9 on page 24 of this Report. ITEM 6. SELECTED FINANCIAL DATA The information responsive to this item is set forth under the heading "Selected Financial Data" on page 10 of this Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information responsive to this item is set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 11 through 15 of this Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information responsive to this item is set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 11 through 15 of this Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company, together with the Independent Auditors' Report thereon of KPMG LLP and the unaudited "Quarterly Financial Information" are set forth on pages 16 through 32 of this Report. 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 regarding directors is set forth under the headings "Election of Directors" and "The Board of Directors and Its Committees" on pages 1 through 3, and "Section 16(a) Beneficial Ownership Reporting Compliance" on page 10 of the Company's Proxy Statement dated March 17, 1999, which is incorporated by reference. Information regarding executive officers is set forth in Part I of this Report under "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information regarding compensation of the Company's executive officers is set forth under the heading "Compensation of Executive Officers" on pages 5 through 9 of the Company's Proxy Statement dated March 17, 1999, which is incorporated by reference, except for such information required by Item 402(k) and (l) of Regulation S-K, which shall not be deemed to be filed as part of this Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is set forth under the headings "Securities Ownership of Directors and Executive Officers" on page 4 and "Principal Shareholders" on page 10 of the Company's Proxy Statement dated March 17, 1999, which is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. Page 7 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules and Exhibits 1. Financial Statements. The consolidated financial statements as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996, together with the report thereon of KPMG LLP, independent auditors, dated February 12, 1999, appear on pages 16 through 31 of this Report. 2. Financial Statement Schedules. Schedules have been omitted either because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits. Exhibits which are noted with an asterisk (*) are management contracts or compensatory plans or arrangements. 3(i) Certificate of Incorporation of the Company and amendments thereto dated June 14, 1984, July 18, 1988 and July 22, 1988 (incorporated by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994), as further amended by amendment thereto dated July 29, 1998 (filed herewith). 3(ii) By-Laws of the Company. Incorporated by reference to Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 4(a) Loan Agreement, dated as of September 9, 1998, between Mellon Bank, NA, et. al., and EDO Corporation. Incorporated by reference to Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 1998. 4(b) Amendment No. 1 to the Loan Agreement referred to in Exhibit 4(a) above, effective December 31, 1998. 4(c) Guarantee Agreement, dated as of July 22, 1988, restated as amended through Amendment No. 13, effective December 31, 1998, made by the Company in favor of Mellon Bank as successor in interest to Fleet Bank as successor in interest to NatWest Bank and Manufacturers Hanover Trust Company. 10(a)* EDO Corporation 1996 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10(b)* EDO Corporation Executive Termination Agreements, as amended through November 24, 1989, between the Company and three employees. Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10(c)* Executive Life Insurance Plan Agreements, as amended through January 23, 1990, between the Company and 30 employees and retirees. Incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10(d)* Form of Directors' and Officers' Indemnification Agreements between EDO Corporation and 14 current Company directors and officers. Incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10(e) Consent Decree, entered on November 25, 1992, amongst the United States, EDO Corporation, Plessey, Inc., Vernitron Corporation and Pitney Bowes, Inc. 10(f) EDO Corporation 1997 Non-Employee Director Stock Option Plan. Incorporated by reference to Appendix A to the Company's Definitive Proxy Statement dated March 21, 1997. 10(g) EDO Corporation Compensation Plan for Directors (filed herewith). 21 List of Subsidiaries. 23 Consent of Independent Auditors to the incorporation by reference in the Company's Registration Statements on Form S-8 of their report included in Item 14(a)1 of this Annual Report on Form 10-K. 24 Powers of Attorney used in connection with the execution of this Annual Report on Form 10-K. 27 Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were required to be filed during the three months ended December 31, 1998. Page 8 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 by the undersigned, its chief financial and accounting officer, thereunto duly authorized. EDO CORPORATION (Registrant) Dated: March 17, 1999 By: Kenneth A. Paladino ----------------------------- Vice President-Finance Pursuant to the requirements of Instruction D to Form 10-K under the Securities Exchange Act of 1934, this Report has been signed below on March 17, 1999 by the following persons on behalf of the Registrant and in the capacities indicated. Signature Title Kenneth A. Paladino Vice President-Finance and Treasurer __ Frank A. Fariello Chairman of the Board, | Chief Executive Officer | and Director | William J. Frost Vice President- | Administration | and Assistant Secretary | Marvin D. Genzer Vice President, General | Counsel and Secretary |- By: Kenneth A. Paladino Ira Kaplan President and | --------------------- Chief Operating Officer | Attorney-in-Fact Robert E. Allen Director | Robert Alvine Director | Mellon C. Baird Director | George M. Ball Director | Joseph F. Engelberger Director | Robert M. Hanisee Director | Michael J. Hegarty Director | James M. Smith Director | George A. Strutz, Jr. Director __| Page 9 SELECTED FINANCIAL DATA EDO CORPORATION AND SUBSIDIARIES (Not Covered by Independent Auditors' Report) =============================================================================== 1998 1997 1996 1995 1994 (in thousands, except per share amounts) - ------------------------------------------------------------------------------- Summary of Operations Net sales Defense and Aerospace Systems $ 81,403 73,708 68,716 63,842 69,777 Satellite Products 14,657 20,654 25,870 15,090 11,479 - ------------------------------------------------------------------------------- Total 96,060 94,362 94,586 78,932 81,256 =============================================================================== Operating earnings (loss) Defense and Aerospace Systems 10,315 6,164 8,711 6,990 (1,879) Satellite Products (3,056) (1,528) (1,931) (1,625) (12,704) Litigation settlement income 2,200 2,900 - - - Write-off of anticipated environmental recovery - - - - (5,400) Restructuring charge - - - - (1,127) Postretirement health care curtailment gain - - 7,120 - - - ------------------------------------------------------------------------------- Operating earnings (loss) 9,459 7,536 13,900 5,365 (21,110) - ------------------------------------------------------------------------------- Net interest expense (428) (459) (766) (1,199) (2,160) Other (expense) income, net (100) (50) (66) (41) 335 - ------------------------------------------------------------------------------- Earnings (loss) before Federal income taxes 8,931 7,027 13,068 4,125 (22,935) Provision (benefit) for Federal income taxes 700 - - - (3,800) =============================================================================== Earnings (loss) from: Continuing operations 8,231 7,027 13,068 4,125 (19,135) Discontinued operations - - (8,637) (1,465) (3,421) =============================================================================== Net earnings (loss) 8,231 7,027 4,431 2,660 (22,556) Dividends on preferred shares(a) 1,063 1,127 1,179 1,239 1,333 - ------------------------------------------------------------------------------- Net earnings (loss) available for common shares $ 7,168 5,900 3,252 1,421 (23,889) =============================================================================== Per Common Share Data Basic net earnings (loss) Continuing operations $ 1.09 0.94 1.99 0.50 (3.69) Discontinued operations $ - - (1.45) (0.25) (0.61) - ------------------------------------------------------------------------------- Total $ 1.09 0.94 0.54 0.25 (4.30) Diluted net earnings (loss) $ 0.94 0.81 0.46 0.20 (4.30) Cash dividends per common share $ 0.115 0.10 - - 0.14 Other Information Working capital $ 40,718 44,477 37,382 33,582 31,374 Depreciation and amortization of fixed assets $ 3,871 4,186 3,471 4,568 5,677 Plant and equipment expenditures $ 3,621 4,083 4,227 1,800 1,731 Total assets $126,753 108,801 94,223 95,526 94,747 Long-term debt $ 28,000 29,317 29,317 29,317 29,317 ESOT loan obligation $ 8,955 10,368 11,676 12,887 14,007 Shareholders' equity $ 38,051 28,135 19,823 14,997 11,610 Backlog of unfilled orders $151,800 111,557 102,981 85,558 70,682 =============================================================================== (a) ESOP Convertible Cumulative Preferred Shares, Series A (hereinafter referred to as "preferred shares") Page 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS The Company conducts its business in two segments: Defense and Aerospace Systems; and Satellite Products. The Defense and Aerospace Systems segment represents 85% of the Company's sales and includes the military and advanced material products. The Satellite Products segment represents 15% of the Company's sales and includes satellite and other space products. RESULTS OF OPERATIONS - 1998 COMPARED TO 1997 Net sales for 1998 were $96.1 million compared to net sales of $94.4 million in 1997, an increase of 2%. Sales in the Defense and Aerospace Systems segment increased 10% to $81.4 million as a result of increased sales of mine countermeasures, command and control and sonar systems and five months of sales of the newly acquired technical services business. These increases and additional sales were partially offset by lower sales in the Satellite Products segment, which decreased from $20.7 million to $14.7 million primarily due to delays in the receipt of orders. These orders have subsequently been received and are included in the 1998 year-end backlog. Total operating earnings for 1998 increased to $9.5 million, an increase of $2.0 million or 27% over the $7.5 million recorded in 1997. This increase resulted from a favorable mix of higher margin programs and an increase in pension income of approximately $1.0 million. In 1998 and 1997 operating earnings include income from litigation settlements of $2.2 million and $2.9 million, respectively. The settlements occurred in the respective fourth quarters and related to an environmental matter that is more fully explained in Note 18 to the Consolidated Financial Statements. The fourth quarter results include a Satellite Products segment loss of $2.1 million in 1998, discussed below, and in 1997, product line discontinuance charges of $2.0 million in the Defense and Aerospace Systems segment and $0.6 million in the Satellite Products segment. Operating earnings in the Defense and Aerospace Systems segment in 1998 were $10.3 million, an increase of 66% compared to operating earnings of $6.2 million in 1997. The 1997 operating earnings include a $2.0 million charge related to the discontinuance of certain acoustic instrument products. An operating loss of $3.1 million was recorded in the Satellite Products segment in 1998 compared to an operating loss of $1.5 million in 1997. The 1998 operating loss occurred substantially in the fourth quarter, where a loss of $2.1 million was recorded, primarily as a result of a technical problem on a fixed price program that has since been resolved. In addition to this technical problem, the Satellite Products segment experienced a 29% reduction in sales in 1998 due to the previously mentioned delayed orders and the resulting unabsorbed overhead. As a result of expense reductions and the eventual receipt of the previously mentioned delayed orders, the Satellite Products segment is expected to be profitable in the first quarter of 1999. The 1997 loss in the Satellite Products segment included a $0.6 million charge as a result of the discontinuance of a microscope product line. Selling, general and administrative expenses in 1998 were $15.3 million compared to $13.8 million in 1997. This increase resulted primarily from the inclusion of the expenses of EDO Technology Services and Analysis, which was acquired in July 1998 (Note 2) and increased expenditures related to business development activities. Company-funded research and development increased by 67% to $3.5 million compared to $2.1 million in 1997. This increase is consistent with the Company's strategy of increased investment in product development. Customer-sponsored research and development was $22.4 million in 1998 compared to $23.0 million in 1997. Customer-sponsored research and development is included in cost of sales and represents the engineering development portion of programs where new products are being developed or technologies are being advanced. Interest expense, net of interest income, was $0.4 million in 1998 and $0.5 million in 1997. Interest expense primarily represents the interest accrued on the 7% Convertible Subordinated Debentures Due 2011. In the fourth quarter of 1998 the Company began recording a provision for Federal income taxes as it fully recognized the benefit associated with its tax net operating loss carryforward. The Company expects to record a higher Federal income tax effective rate commencing in the first quarter of 1999. Net earnings available for common shares in 1998 were $7.2 million compared to $5.9 million in Page 11 1997. Basic net earnings per share were $1.09 in 1998 compared to $0.94 in 1997. Basic net earnings per share calculations are based on a weighted average of 6.5 million and 6.3 million common shares outstanding in 1998 and 1997, respectively. Diluted net earnings per share were $0.94 in 1998 as compared to $0.81 in 1997. FINANCIAL CONDITION The Company's cash, cash equivalents and marketable securities decreased by $0.9 million in 1998 to $33.3 million compared to $34.2 million in 1997. The net decrease results from cash flow from operations of $9.2 million offset primarily by purchases of capital equipment of $3.6 million, outlays for acquisitions of $5.6 million and payments of preferred and common dividends of $1.8 million. Cash flow from operations in 1998 was $8.4 million lower than the $17.6 million received in 1997 primarily as a result of increases in accounts receivable and inventories as well as a reduction in the amount of net contract advances received. Consistent with the Company's strategic plans to grow the Company by adding to its core capabilities, three acquisitions were made during 1998. In July 1998, the Company acquired substantially all of the assets of the Technology Services Group of Global Associates, Ltd., now operating as EDO Technology Services and Analysis (EDO TSA), for $4.2 million in cash. EDO TSA provides technical services to various agencies of the U.S. Department of Defense and is expected to enhance the Company's ability to offer forward-looking integrated combat system products to U.S. and international customers. For the five months the Company owned EDO TSA it recorded sales of $3.4 million, and was accretive to earnings. In December 1998, the Company acquired all of the stock of Specialty Plastics, Inc., now operating as EDO Specialty Plastics, for a $5.4 million note, due January 1999. EDO Specialty Plastics manufactures and installs lightweight fiber composite pipe for use on offshore, deep-water oil production platforms. EDO Specialty Plastics is expected to expand and diversify the addressable market for EDO's fiber composite products. The Company expects EDO Specialty Plastics to be accretive to earnings in 1999. In December 1998, the Company acquired the assets of Zenix Products Inc. (Zenix) for approximately $0.7 million. Zenix manufactures ferrite and dielectric ceramics for the wireless communications base station industry. In February 1999 the Company announced that it had retained an investment banking firm to evaluate strategic alternatives regarding its Satellite Products segment to determine how it best fits with the Company's long-term growth plan. The alternatives include the possible sale of this business. The Company has outstanding $29.3 million of 7% Convertible Subordinated Debentures Due 2011 (the Debentures). Commencing in 1996 and until the retirement of these debentures, the Company is making annual sinking fund payments of $1.75 million. As of December 31, 1998 the Company had $0.4 million of these debentures remaining in treasury, which will be used toward a portion of the 1999 payment. The Company has classified the balance of the 1999 installment, or $1.3 million, as a current obligation. The Company has an ESOT loan obligation with a balance at December 31, 1998 of $9.0 million at an interest rate of 82% of the prime lending rate. The repayment of this obligation is funded through dividends on the Company's preferred shares and cash contributions. The obligation is scheduled to be repaid in 2003. In 1998, the Company established a new $30.0 million secured multi-year revolving credit facility through a syndicate of banks, which replaced the Company's previous $15.0 million secured line of credit. This larger facility was established to be available for acquisitions as well as for standby letters of credit, which are often required by international customers when the Company receives contract advances. As of December 31, 1998 there were approximately $15.2 million of standby letters of credit outstanding, and there have not been any direct borrowings. The Company has contracts to provide sonar equipment to the Brazilian government and the Brazilian Navy. The contracts are denominated in U.S. dollars and have an aggregate value of $25 million. The Brazilian Real/U.S. Dollar exchange rate has increased significantly during the life of these contracts and, while the Brazilian customers have met their payment and other obligations under the contracts to date and have not given the Company any reason to believe that they will not continue to meet their obligations, there can be no assurance that the financial situation in Brazil will not adversely affect the Company's timely realization of the full benefits of these contracts. The Company is incurring costs in connection with the remediation of a Superfund site (noted above and more fully explained in Note 18 to the Consolidated Financial Statements). The Company has expensed all of the costs it has incurred, as well as a discounted estimate of all future costs related to this matter. The liability for these future costs as of December 31, 1998 is approximately $3.0 million of which $0.5 million is classified as a current liability. Approximately Page 12 38% of this liability will be expended over the next five years. The Company believes that it has adequate liquidity and sufficient capital to fund its current operating plans. Backlog increased to $151.8 million at December 31, 1998 from $111.6 million at December 31, 1997. RESULTS OF OPERATIONS - 1997 COMPARED TO 1996 Net sales for 1997 were $94.4 million compared to $94.6 million in 1996. The increase of $5.0 million in the Defense and Aerospace Systems segment, attributable primarily to mine countermeasures and sonar systems, was offset by the decrease of $5.2 million in the Satellite Products segment. Total operating earnings in 1997 improved 11% to $7.5 million compared to $6.8 million in 1996, excluding the effect of a $7.1 million non-cash curtailment gain from the discontinuance of medical benefits for Medicare eligible retirees in 1996. Operating earnings in 1997 in the Defense and Aerospace Systems segment decreased by $2.5 million and included a charge of $2.0 million associated with the discontinuance of certain acoustic product lines, as discussed in Note 3 to the Consolidated Financial Statements. The operating loss in 1997 in the Satellite Products segment included a charge of $0.6 million associated with the discontinuance of a microscope product line. These charges were offset by income from a litigation settlement of $2.9 million related to an environmental matter (see Note 18 to the Consolidated Financial Statements). Selling, general and administrative expenses in 1997 decreased to $13.8 million from $15.6 million in 1996, primarily as a result of the decrease in sales in the Satellite Products segment and the discontinuance of the microscope product line noted above. Company-funded research and development expenditures doubled in 1997 to $2.1 million from $1.0 million in 1996, consistent with the Company's strategy of increased investment in product development. Customer-sponsored research and development, which is included in cost of sales, increased $5.2 million to $23.0 million in 1997. Interest expense, net of interest income, was $0.5 million in 1997 compared to $0.8 million in 1996 due to increased interest income on higher average balances of interest-earning assets. Interest expense consisted primarily of the interest accrued on the 7% Convertible Subordinated Debentures Due 2011. In 1997 and 1996, the Company did not have a provision for Federal income taxes due to the utilization of tax loss carryforwards. Net earnings available for common shares in 1997 were $5.9 million compared to $3.3 million in 1996. Net earnings in 1996 included a $7.0 million loss from the discontinuance of the Company's energy-related business (see Note 4 to the Consolidated Financial Statements) and, as noted above, a $7.1 million curtailment gain. Basic net earnings per share were $0.94 in 1997 and $0.54 in 1996, based on weighted average common shares outstanding of 6.3 million and 6.0 million, respectively. Diluted net earnings per share were $0.81 in 1997 and $0.46 in 1996. MARKET RISKS The Company's outstanding indebtedness as of December 31, 1998 is comprised of the Debentures and the ESOT loan obligation, as discussed above. The Debentures bear interest at a fixed rate and the interest on the ESOT loan obligation fluctuates with the prime lending rate. The Company does not believe it has a material exposure to fluctuations in interest rates. Additionally, the Company does not believe it has a material exposure to fluctuations in foreign currencies since substantially all contracts with foreign customers are denominated in U.S. dollars. In limited instances where supply contracts are not denominated in U.S. dollars, the Company has the corresponding portion of the contract from its foreign customer denominated in the currency of its supplier. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This statement requires companies to record derivatives on the balance sheet as assets or liabilities at their fair value. In certain circumstances, changes in the value of such derivatives may be required to be recorded as gains or losses. Management believes that the impact of this statement will not have a material effect on the Company's consolidated financial statements. Page 13 YEAR 2000 The year 2000 issue ("Y2K") affects computer systems having date-sensitive programs that may not properly recognize the year 2000. Y2K is reputed to be able to cause computers and computer controlled equipment to cease functioning. The Company has conducted several informal Y2K reviews over the last two years of its products and internal systems. Based on these reviews, the only area where the Company has noted that Y2K could materially affect the Company's operations or products is that failures or miscalculations could be caused in the computerized accounting programs provided by outside vendors and used at the Company. The applicable vendors have provided modifications to their programs to deal with Y2K and these modifications are currently being tested. Initial testing has shown these modifications to be mostly effective. If these modifications do not eventually prove entirely successful, the Company would be required to seek other methods to process its accounting information. The Company's formal Y2K program was established in 1998 to ensure that the Company's initial conclusions were correct. The program is conducted under the direction of its Vice President & General Counsel and the oversight of the Audit Committee of the Board of Directors. The Y2K "Committee" consists of a Y2K coordinator from each operating location and has met once to date. The Committee will meet formally five times, or more if necessary, over the next 10 months to review plans and to share results of each of the Committee member's efforts. The Company's Y2K program addresses Y2K from four perspectives: the Company looks at the products and services it sells to determine whether Y2K will impact their performance; the Company looks at the materials, products and services it buys to determine whether the suppliers of such materials, products and services or the materials, products or services themselves will be impacted by Y2K in such a way as to adversely impact the Company's operations; the Company looks at its interfaces with its customers and suppliers to determine whether Y2K will adversely affect such interfaces; and the Company reviews its internal operations, including engineering, manufacturing, finance and administrative (office and facilities equipment, general purpose computers and related systems) to determine whether Y2K will adversely affect any of these functions. The formalized Y2K program will encompass three phases: Phase 1 will establish a baseline of Y2K compliance by a thorough review and audit of each of the above four perspectives and determine readiness by analysis and/or actual testing as necessary. This phase has been in process and is expected to be completed in March 1999. Phase 2 will determine a budget and actions necessary to bring into compliance any areas determined to be either deficient, potentially deficient or in an indeterminable state and a schedule for implementation completion. This phase is expected to be completed in June 1999. Phase 3 will verify by analysis and actual test that any material Y2K issues have been corrected and that all systems are Y2K compliant. This phase will be completed by the third quarter of 1999. Contingency plans will also be established at that time. The costs of the above Y2K program are being expensed as incurred and to date have been minor. Based upon the Company's review over the last two years and its findings to date, the Company does not believe that any other costs associated with Y2K will be material. To date, the total cost associated with the above Y2K program and required modifications and conversions, if any, have not been completely determined, although they are not presently expected by the Company to be material to its consolidated financial position, results of operations or liquidity. However, if the modifications to accounting programs provided by outside vendors do not prove entirely successful, the cost of replacing these programs could have a material adverse effect. The Company presently expects that any necessary remedial costs will be likewise expensed. As part of the Company's Y2K program, the Company is currently seeking information regarding Y2K compliance from vendors, customers, manufacturers and financial institutions associated with the Company. However, given the reliance on third party information as it relates to their compliance programs, no assurance can be given that the Company's information systems or operations will not be affected by third-party failures to complete their Y2K projects on a timely basis. Page 14 COMMON SHARE PRICES EDO common shares are traded on the New York Stock Exchange. As of February 1, 1999, there were 2,352 shareholders of record (brokers and nominees counted as one each). The price range in 1998 and 1997 was as follows: =================================================================== 1998 1997 High Low High Low ------------------------------------------------------------------- 1st Quarter 9-5/8 8-1/16 7-7/8 6-3/8 2nd Quarter 9-3/4 8-1/2 8-15/16 6-3/8 3rd Quarter 10-7/8 6-11/16 10-3/4 7-5/8 4th Quarter 8-3/4 6-3/4 10-5/8 8-1/4 =================================================================== DIVIDENDS During 1998, the Board of Directors approved the payment of cash dividends of $0.025 per common share in the first quarter and $0.03 per share in the second, third and fourth quarters. During 1997, the Board of Directors approved the payment of quarterly cash dividends of $0.025 per common share. The Company's revolving credit agreement places certain limits on the payment of cash dividends. See Note 9 to the Consolidated Financial Statements. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Annual Report on Form 10-K and in the message to shareholders contained in the Annual Report to Shareholders for 1998 relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934. Forward-looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the following for each of the types of information as noted below. U.S. and international military program sales, follow-on procurement, contract continuance, and future program awards, upgrades and spares support are subject to: U.S. and international military budget constraints and determinations; U.S. congressional and international legislative body discretion; U.S. and international government administration policies and priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in U.S. and international government procurement timing, strategies and practices; and the general state of world military readiness and deployment. Commercial satellite programs and equipment sales, follow-on procurement, contract continuance and future program awards are subject to: establishment and continuance of various consortiums for satellite constellation programs; delay in launch dates due to equipment, weather or other factors beyond the control of the Company; and development of sufficient customer base to support a particular satellite constellation program. Other commercial product sales are subject to: success of product development programs currently underway or planned; competitiveness of current and future product production costs and prices; and market and consumer base development for new product programs. Achievement of margins on sales, earnings and cash flow can be affected by: unanticipated technical problems; government termination of contracts for convenience; decline in expected levels of revenues; underestimation of anticipated costs on specific programs; risks inherent in integrating recent acquisitions into the Company's overall structure; and risks associated with year 2000 compliance by the Company, its customers, suppliers and other third parties. Expectations of future Federal income tax rates can be affected by a variety of factors, including amounts of profits relating to foreign sales. The Company has no obligation to update any forward-looking statements. Page 15 CONSOLIDATED STATEMENTS OF EARNINGS EDO CORPORATION AND SUBSIDIARIES =============================================================================== December 31 1998 1997 1996 (in thousands, except per share amounts) - ------------------------------------------------------------------------------- Continuing Operations: Income Net sales $ 96,060 $ 94,362 $ 94,586 Other - 119 388 - ------------------------------------------------------------------------------- 96,060 94,481 94,974 - ------------------------------------------------------------------------------- Costs and Expenses Cost of sales (including a $2,000 charge for the discontinuance of a product line in 1997) 69,940 73,981 71,561 Selling, general and administrative 15,344 13,785 15,631 Research and development 3,517 2,079 1,002 Litigation settlement income (2,200) (2,900) - Postretirement health care curtailment gain - - (7,120) - ------------------------------------------------------------------------------- 86,601 86,945 81,074 - ------------------------------------------------------------------------------- Operating Earnings 9,459 7,536 13,900 Non-operating Income (Expense) Interest income 1,893 1,838 1,427 Interest expense (2,321) (2,297) (2,193) Other, net (100) (50) (66) - ------------------------------------------------------------------------------- (528) (509) (832) - ------------------------------------------------------------------------------- Earnings before Federal income taxes 8,931 7,027 13,068 Federal income tax expense 700 - - - ------------------------------------------------------------------------------- Earnings from Continuing Operations 8,231 7,027 13,068 Discontinued Operations: Loss from operations of discontinued energy business - - (1,637) Loss from discontinuance, including provision of $2,000 for operating losses during phase out period - - (7,000) - ------------------------------------------------------------------------------- Loss from Discontinued Operations - - (8,637) - ------------------------------------------------------------------------------- Net Earnings 8,231 7,027 4,431 Dividends on preferred shares 1,063 1,127 1,179 - ------------------------------------------------------------------------------- Net Earnings Available for Common Shares $ 7,168 $ 5,900 $ 3,252 =============================================================================== Earnings (Loss) Per Common Share: Basic: Continuing operations $ 1.09 $ 0.94 $ 1.99 Discontinued operations - - (1.45) - ------------------------------------------------------------------------------- Net Earnings $ 1.09 $ 0.94 $ 0.54 =============================================================================== Diluted: Continuing operations $ 0.94 $ 0.81 $ 1.67 Discontinued operations - - (1.21) - ------------------------------------------------------------------------------- Net Earnings $ 0.94 $ 0.81 $ 0.46 =============================================================================== See accompanying Notes to Consolidated Financial Statements. Page 16 CONSOLIDATED BALANCE SHEETS EDO CORPORATION AND SUBSIDIARIES =============================================================================== December 31 1998 1997 (in thousands, except share and per share amounts) - ------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 21,801 $ 20,351 Marketable securities 11,519 13,851 Accounts receivable 39,853 32,421 Inventories 9,830 6,816 Deferred tax asset, net 1,280 - Prepayments and other 2,177 5,564 - ------------------------------------------------------------------------------- Total current assets 86,460 79,003 - ------------------------------------------------------------------------------- Property, plant and equipment, net 13,964 12,865 Notes receivable 2,300 3,000 Cost in excess of fair value of net assets acquired, net 11,736 6,792 Other assets 12,293 7,141 - ------------------------------------------------------------------------------- $ 126,753 $ 108,801 =============================================================================== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 24,427 $ 21,773 Contract advances and deposits 14,538 12,753 Note payable 5,460 - Current portion of long-term debt 1,317 - - ------------------------------------------------------------------------------- Total current liabilities 45,742 34,526 - ------------------------------------------------------------------------------- Long-term debt 28,000 29,317 ESOT loan obligation 8,955 10,368 Postretirement obligation 3,443 3,526 Environmental obligation 2,562 2,929 Shareholders' Equity: Preferred shares, par value $1 per share (liquidation preference $213.71 per share or $12,960 in the aggregate in 1998), authorized 500,000 shares, 60,641 issued in 1998 and 64,843 in 1997 61 65 Common shares, par value $1 per share, authorized 25,000,000 shares, 8,453,902 issued in both years 8,454 8,454 Additional paid-in capital 30,142 32,546 Retained earnings 35,294 27,641 - ------------------------------------------------------------------------------- 73,951 68,706 Less: Treasury shares at cost (1,821,634 shares in 1998 and 2,054,474 shares in 1997) (25,775) (29,201) ESOT loan obligation (8,955) (10,368) Deferred compensation under Long-Term Incentive Plan (1,170) (1,002) - ------------------------------------------------------------------------------- Total shareholders' equity 38,051 28,135 - ------------------------------------------------------------------------------- $ 126,753 $ 108,801 =============================================================================== See accompanying Notes to Consolidated Financial Statements. Page 17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY EDO CORPORATION AND SUBSIDIARIES =============================================================================== 1998 1997 1996 (in thousands) Amount Shares Amount Shares Amount Shares - ------------------------------------------------------------------------------- Preferred shares Balance at beginning of year $ 65 65 $ 68 68 $ 71 71 Shares converted to common shares (4) (4) (3) (3) (3) (3) - ------------------------------------------------------------------------------- Balance at end of year 61 61 65 65 68 68 - ------------------------------------------------------------------------------- Common shares - ------------------------------------------------------------------------------- Par value of shares issued 8,454 8,454 8,454 8,454 8,454 8,454 - ------------------------------------------------------------------------------- Additional paid-in capital Balance at beginning of year 32,546 35,438 37,847 Exercise of stock options (645) (1,132) (227) Shares used for payment of directors' fees (71) (64) (57) Shares used for Long- Term Incentive Plans (369) (721) (1,146) Conversion of preferred shares to common shares (1,319) (975) (979) - ------------------------------------------------------------------------------- Balance at end of year 30,142 32,546 35,438 - ------------------------------------------------------------------------------- Retained earnings Balance at beginning of year 27,641 22,368 19,116 Net earnings 8,231 7,027 4,431 Common share dividends (11.5 cents and 10 cents per share in 1998 and 1997, respectively) (755) (627) - Dividends on preferred shares (1,063) (1,127) (1,179) Tax benefit of unallocated preferred share dividends 1,240 - - - ------------------------------------------------------------------------------- Balance at end of year 35,294 27,641 22,368 - ------------------------------------------------------------------------------- Treasury shares at cost Balance at beginning of year (29,201) (2,054) (34,240) (2,409) (37,604) (2,646) Shares used for exercise of stock options 998 62 2,491 175 393 28 Shares used for payment of directors' fees 167 11 149 11 106 7 Shares used for Long- Term Incentive Plans 938 66 1,421 100 1,883 133 Shares used for conversion of preferred shares 1,323 93 978 69 982 69 - ------------------------------------------------------------------------------- Balance at end of year (25,775) (1,822) (29,201) (2,054) (34,240) (2,409) - ------------------------------------------------------------------------------- ESOT loan obligation Balance at beginning of year (10,368) (11,676) (12,887) Repayments made during year 1,413 1,308 1,211 - ------------------------------------------------------------------------------- Balance at end of year (8,955) (10,368) (11,676) - ------------------------------------------------------------------------------- Deferred compensation under Long-Term Incentive Plan Balance at beginning of year (1,002) (589) - Shares used for Long- Term Incentive Plans (569) (700) (737) Amortization of Long- Term Incentive Plan deferred expense 401 287 148 - ------------------------------------------------------------------------------- Balance at end of year (1,170) (1,002) (589) - ------------------------------------------------------------------------------- Total Shareholders' Equity $38,051 $28,135 $19,823 =============================================================================== See accompanying Notes to Consolidated Financial Statements. Page 18 CONSOLIDATED STATEMENTS OF CASH FLOWS EDO CORPORATION AND SUBSIDIARIES =============================================================================== Years Ended December 31 1998 1997 1996 (in thousands) - ------------------------------------------------------------------------------- Operating Activities: Earnings from continuing operations $ 8,231 $ 7,027 $ 13,068 Adjustments to earnings to arrive at cash provided by continuing operations: Postretirement health care curtailment gain - - (7,120) Depreciation and amortization 4,574 6,027 5,303 Write-down of acoustic product line inventory - 1,500 - Deferred compensation expense 401 287 148 Common shares issued for directors' fees 96 85 49 Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable (3,862) 97 (8,913) Inventories (2,791) (322) 93 Prepayments, other assets and other 1,299 (5,279) (4,341) Accounts payable and accrued liabilities (556) 256 5,178 Contract advances and deposits 1,785 7,944 (833) - ------------------------------------------------------------------------------- Cash provided by continuing operations 9,177 17,622 2,632 Net cash used by discontinued operations - - (1,804) Investing Activities: Purchase of property, plant and equipment (3,621) (4,083) (4,227) Cash paid for acquisitions, net of cash acquired (5,648) - - Sale (purchase) of marketable securities 2,332 (13,851) - Proceeds from assets held for sale - - 1,976 - ------------------------------------------------------------------------------- Cash used by investing activities (6,937) (17,934) (2,251) Financing Activities: Proceeds from exercise of stock options 353 1,359 166 Payments received on notes receivable 675 313 263 Payment of common share cash dividends (755) (627) - Payment of preferred share cash dividends (1,063) (1,127) (1,179) - ------------------------------------------------------------------------------- Cash used by financing activities (790) (82) (750) =============================================================================== Net increase (decrease) in cash and cash equivalents 1,450 (394) (2,173) Cash and cash equivalents at beginning of year 20,351 20,745 22,918 - ------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 21,801 $ 20,351 $ 20,745 =============================================================================== Supplemental disclosures: Cash paid for: Interest $ 2,052 $ 2,058 $ 2,072 Income taxes $ 1,386 $ 1,137 $ 190 =============================================================================== See accompanying Notes to Consolidated Financial Statements. Page 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 EDO CORPORATION AND SUBSIDIARIES (1) Summary of Significant Accounting Policies (a) Principles of Consolidation and Business The consolidated financial statements include the accounts of EDO Corporation and all wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates in two segments, Defense and Aerospace Systems and Satellite Products (Note 19). The Company discontinued its energy-related business in 1996 (Note 4). (b) Cash Equivalents The Company considers all securities with an original maturity of three months or less at the date of acquisition to be cash equivalents. (c) Marketable Securities The Company's marketable securities, consisting of U.S. government-backed securities, mortgage-backed securities and corporate bonds, are categorized as available-for-sale. The securities have been reflected at cost, which approximates market value at December 31, 1998 and 1997. (d) Revenue Recognition Sales under long-term, fixed-price contracts, including pro-rata profits, are generally recorded based on the relationship of costs incurred to date to total projected final costs or, alternatively, as deliveries are made or services are provided. Estimated losses on long-term contracts are recorded when identified. Sales under cost reimbursement contracts are recorded as costs are incurred. Sales on other than long-term contract orders (principally commercial products) are recorded as shipments are made. (e) Inventories Inventories under long-term contracts and programs reflect all accumulated production costs, including factory overhead, initial tooling and other related costs (including general and administrative expenses relating to certain of the Company's defense contracts), less the portion of such costs charged to cost of sales. Inventory costs in excess of amounts recoverable under contracts are charged to cost of sales when they become known. All other inventories are stated at the lower of cost (principally first-in, first-out method) or market. (f) Depreciation and Amortization Depreciation and amortization of property, plant and equipment have been provided primarily using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease periods. Deferred financing costs are amortized on a straight-line basis over the life of the related financing. The unamortized balances of $1,382,000 and $1,012,000 are included in other assets at December 31, 1998 and 1997, respectively. (g) Cost in Excess of Fair Value of Net Assets Acquired (Goodwill) The excess of the total acquisition costs over the fair value of net assets acquired of approximately $16.4 million ($11.7 million, net of accumulated amortization at December 31, 1998) is being amortized on a straight-line basis over fifteen to thirty years. The Company assesses the recoverability of unamortized goodwill by determining whether the amortization of the goodwill balance over its estimated life can be recovered through the undiscounted projected future cash flows of the acquired business. (h) Long-Lived Assets The Company reviews long-lived assets to be held and used or disposed of for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable when measured by comparing the carrying amount of an asset to the future net cash flows expected to be generated by the asset. Page 20 (i) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) Treasury Shares Common shares held as treasury shares are recorded at cost, with issuances from treasury recorded at average cost. Treasury shares issued for directors' fees are recorded as an expense for an amount equal to the fair market value of the common shares on the issuance date. (k) Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share," which the Company adopted in the fourth quarter of 1997. Under SFAS No. 128, the Company presents basic and diluted earnings per share (Note 13). (l) Financial Instruments The fair value and book value of the Company's 7% Convertible Subordinated Debentures Due 2011 and ESOT obligation at December 31, 1998 were $34,167,000 and $38,272,000, respectively (Notes 9 and 10), and at December 31, 1997 were $35,368,000 and $39,685,000, respectively. The net carrying value of notes receivable approximates fair value based on current rates for comparable commercial mortgages. The fair value of the environmental obligation (Note 18) approximates its carrying value since it has been discounted. The fair values of all other financial instruments approximate book values because of the short-term maturities of these instruments. (m) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Among the more significant estimates included in these consolidated financial statements are the estimated costs to complete contracts in process, the estimated remediation costs related to the environmental matter discussed in Note 18 and the collectibility of receivables. Actual results could differ from these and other estimates. (n) Accounting for Stock-Based Compensation The Company records compensation expense for employee stock options and warrants only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. The Company has elected not to implement the fair value based accounting method for employee stock options and warrants, but has elected to disclose the pro forma net earnings and pro forma earnings per share for employee stock option and warrant grants made beginning in 1995 as if such method had been used to account for stock-based compensation cost (Note 14). (o) Comprehensive Income In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a separate financial statement included in a full set of financial statements. The Company has not provided additional financial statement disclosure since the Company has no items of other comprehensive income and, therefore, comprehensive income equaled net earnings for each of the three years ended December 31, 1998. Page 21 (2) Acquisitions In July 1998, the Company acquired substantially all of the assets of the Technology Services Group of Global Associates, Ltd., now operating as EDO Technology Services and Analysis (EDO TSA), for $4.2 million in cash. EDO TSA provides technical services to various agencies of the U.S. Department of Defense. The acquisition has been accounted for as a purchase and, accordingly, the operating results of EDO TSA have been included in the Company's consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair market value of net assets acquired of approximately $2.4 million is being amortized over fifteen years. In December 1998, the Company acquired all of the stock of Specialty Plastics, Inc., now operating as EDO Specialty Plastics, in exchange for a $5.4 million note, due January 1999. EDO Specialty Plastics manufactures and installs lightweight fiber composite pipe for use on offshore, deep-water oil production platforms. The acquisition has been accounted for as a purchase and, accordingly, the operating results of EDO Specialty Plastics have been included in the Company's consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair market value of net assets acquired of approximately $2.9 million is being amortized over twenty years. Also in December 1998, the Company acquired the assets of Zenix Products Inc. (Zenix) for approximately $0.7 million in cash. In addition, the Company is required to pay the sellers a royalty of five percent of future sales, up to a maximum of $1.2 million. Zenix manufactures ferrite and dielectric ceramics for the wireless communications base station industry. Unaudited pro forma results of operations, assuming these acquisitions had been made at the beginning of each period, which include adjustments to interest expense, interest income, amortization expense and income tax expense are as follows: ============================================================================== 1998 1997 (unaudited) (in thousands) - ------------------------------------------------------------------------------ Net sales $ 107,017 $ 111,698 Net earnings available for common shares 6,967 5,339 - ------------------------------------------------------------------------------ Basic earnings per common share $ 1.06 $ 0.85 Diluted earnings per common share $ 0.89 $ 0.72 ============================================================================== The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the purchases been made at the beginning of the periods, or of the results which may occur in the future. (3) Consolidation and Discontinuance of Product Lines In December 1997, the Company made the decision to consolidate its Acoustic Products product lines. Several products were consolidated into the Company's Electro-Ceramic Products operations and Combat Systems operations, and several were discontinued. In connection with the consolidation, the Company recorded a charge in 1997 (included in cost of sales) of $2,000,000, which was principally comprised of the write-down of inventory related to the discontinued product lines to its net realizable value. (4) Discontinued Operations Pursuant to a Board of Directors resolution in September 1996, the Company adopted a plan to exit its energy-related businesses. Those businesses included: the Company's 50.4% interest in EDO (Canada) Limited, a manufacturer of compressed natural gas (CNG) fuel cylinders; EDO Automotive Natural Gas Inc. (EDO ANGI), a designer and manufacturer of CNG refueling stations and related equipment; and EDO Energy Corporation, a wholly owned subsidiary of the Company involved in program management activities in CNG and other alternative fuel projects. In April 1997, the Company sold EDO ANGI for approximately the book value of the related net assets. In May 1997, EDO (Canada) Ltd. made a voluntary assignment in bankruptcy pursuant to the Bankruptcy and Insolvency Act of Canada. EDO Energy Corporation satisfied most of its obligations in 1997 and ceased operations in 1998. The terms of these events did not result in a modification to the loss from discontinuing the businesses provided in 1996. The consolidated financial statements of the Company reflect the effects of the Company's decision to treat its energy-related businesses as discontinued operations. Accordingly, the revenues, costs and expenses, and cash flows associated with the energy-related businesses are excluded from the respective captions in the Consolidated Statements of Earnings and Statements of Cash Flows. The net operating results of these entities are reported as "Loss from discontinued operations"; and the cash flows of these entities are reported as "Net cash used by discontinued operations." Net sales of the discontinued operations prior to the date of discontinuance were $9,321,000 for the year ended December 31, 1996. Page 22 (5) Accounts and Notes Receivable Accounts receivable included $21,161,000 and $17,917,000 at December 31, 1998 and 1997, respectively, representing unbilled revenues. Substantially all of the unbilled balances at December 31, 1998 will be billed and are expected to be collected during 1999. Total receivables due from the United States government, either directly or as a subcontractor to a prime contractor with the government, were $23,330,000 and $11,822,000 at December 31, 1998 and 1997, respectively. The notes receivable of $3,225,000 at December 31, 1998, of which $925,000 is included in current assets, relate to the sale of the Company's College Point facility in January 1996. The notes are due in varying annual amounts through 2004 and bear interest at 7%. The notes receivable are secured by a mortgage on the related facility. (6) Inventories Inventories are summarized by major classification as follows at December 31, 1998 and 1997: ================================================== 1998 1997 (in thousands) -------------------------------------------------- Raw material and supplies $ 4,292 $ 3,471 Work-in-process 5,262 3,120 Finished goods 276 225 -------------------------------------------------- $ 9,830 $ 6,816 ================================================== (7) Property, Plant and Equipment, Net The Company's property, plant and equipment at December 31, 1998 and 1997, and their related useful lives are summarized as follows: ================================================================ 1998 1997 (in thousands) Life ---------------------------------------------------------------- Machinery and equipment $ 43,177 $ 53,418 3 - 10 years Leasehold improvements 10,385 8,687 lease terms ---------------------------------------------------------------- 53,562 62,105 Less accumulated depreciation and amortization 39,598 49,240 ---------------------------------------------------------------- $ 13,964 $ 12,865 ================================================================ (8) Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consisted of the following at December 31, 1998 and 1997: ======================================================================= 1998 1997 (in thousands) ----------------------------------------------------------------------- Trade payables $ 5,320 $ 4,205 Employee compensation and benefits 3,253 3,092 Current portion of environmental obligation 464 571 Other 15,390 13,905 ----------------------------------------------------------------------- $ 24,427 $ 21,773 ======================================================================= Page 23 (9) Long-Term Debt and Line of Credit Long-term debt of the Company at December 31, 1998 and 1997 consisted of the 7% Convertible Subordinated Debentures Due 2011 that were issued in November 1986. The debentures are convertible at the rate of 45.45 common shares for each $1,000 principal amount, which is equivalent to $22 per share. Debentures are redeemable at the option of the Company at par and at the option of the holder under certain circumstances involving a change in control of the Company. The Company is required to make sinking fund payments of $1,750,000 per year. As of December 31, 1998, the Company had $433,000 of these debentures remaining in treasury which may be used to satisfy a portion of the sinking fund requirements for 1999. The remaining amount due in 1999 of $1,317,000 is reflected in the current portion of long-term debt. The carrying value of the debentures as of December 31, 1998 is $29,317,000. The Company estimates the fair value of the debentures as of December 31, 1998 to be approximately $25,212,000 based on yields of comparable financial instruments. The Company has a $30.0 million revolving line of credit agreement with a syndicate of banks for both short-term borrowings and letters of credit. The agreement expires on August 27, 2001 and provides that the portion available for potential cash borrowings be reduced by the amount of outstanding letters of credit. As of December 31, 1998, the Company has outstanding approximately $15.2 million of letters of credit. Borrowings under the agreement bear interest based on the bank's prime rate plus adjustments of up to 0.25% depending on the ratio of net total debt to earnings as defined in the agreement. There are certain covenants placed on the Company that require that several predetermined ratios be maintained. At December 31, 1998, the Company was in compliance with such covenants. In addition, payments of common share dividends will be limited to $0.28 per common share in any twelve-month period. This obligation is secured by the Company's accounts receivable, inventory, machinery and equipment. There have been no direct borrowings under this agreement. Borrowings under this agreement would be senior to the debentures described above. (10) Employee Stock Ownership Plan and Trust The Company's Employee Stock Ownership Plan (ESOP) provides retirement benefits to substantially all employees. During 1998, 1997 and 1996, respectively, cash contributions of $1,020,000, $942,000 and $879,000 were made to the ESOP. As of December 31, 1998, there were 247,943 common shares in the ESOP. During 1988, the Employee Stock Ownership Trust (ESOT) purchased 89,772 preferred shares from the Company for approximately $19,185,000. The preferred shares are being allocated to employees through 2003 on the basis of compensation. The preferred shares provide for dividends of 8% per annum, which are deductible by the Company for Federal and state income tax purposes. The tax benefit that is attributable to unallocated preferred shares is reflected as an increase to retained earnings. Each unallocated preferred share is convertible at its stated conversion rate into 10 common shares. Allocated preferred shares are convertible at the greater of the stated conversion rate or the fair value of each preferred share ($214 at December 31, 1998) divided by the current market price of each common share. As of December 31, 1998, 59,547 preferred shares have been allocated, 30,225 preferred shares remained unallocated, and 29,131 of the allocated preferred shares have been converted into 782,534 common shares. Until converted, each preferred share is entitled to 12.3 votes. The preferred shares are entitled to vote on all matters presented to holders of common shares voting together as a class, except that certain amendments and mergers could entitle the holders of preferred shares to vote separately as a class. The ESOP provides for pass-through of voting rights to the ESOP participants and beneficiaries. The ESOT purchased the preferred shares from the Company using the proceeds of a borrowing guaranteed by the Company. The ESOT services this obligation with the dividends received on the preferred shares and any additional contributions from the Company as required. Principal and interest payments on the note of the ESOT are to be made in quarterly installments through 2003. Interest is charged at 82% of the prime lending rate. During 1998, 1997 and 1996, respectively, the Company's cash contributions and dividends on the preferred shares were used to repay principal of $1,413,000, $1,308,000 and $1,211,000 and pay interest of $693,000, $780,000 and $865,000. The guarantee agreement provides that, if the Company is in default under the revolving line of credit agreement described in Note 9, such default will also be considered a default under the guarantee agreement, permitting the lender to demand payment of the full amount of the borrowing. The guarantee agreement also provides that the Company may be obligated to prepay the ESOT loan through redemption of the preferred shares at $213.71 per share upon the occurrence of certain prepayment events. Page 24 The fair value of the ESOT obligation approximates book value since the interest rate is prime-based and accordingly is adjusted for market rate fluctuations. The ESOT's borrowing guaranteed by the Company is reflected as a liability on the balance sheet with an equal amount as a reduction of shareholders' equity, offsetting the increase in the capital stock accounts. As the principal portion of the note is repaid through 2003, the liability and the ESOT loan obligation will be reduced concurrently. (11) Federal Income Taxes The 1998, 1997 and 1996 provision for Federal income taxes for continuing operations was comprised of the following amounts: ================================================ 1998 1997 1996 (in thousands) ------------------------------------------------ Federal Current $ 740 $ - $ - Deferred (40) - - ------------------------------------------------ Total $ 700 $ - $ - ================================================ State income taxes of $586,000, $313,000 and $257,000 in 1998, 1997 and 1996, respectively, are included in selling, general and administrative expenses. The effective Federal income tax rate differed from the statutory Federal income tax rate for the following reasons: ============================================================== Percent of Pretax Earnings 1998 1997 1996 -------------------------------------------------------------- Tax at statutory rate 34.0% 34.0% 34.0% Preferred share dividends (2.0) (2.4) (1.2) Decrease in valuation allowance (16.0) (28.3) (29.4) Foreign Sales Corporation benefit (1.7) - - Other, net (6.5) (3.3) (3.4) -------------------------------------------------------------- Effective Federal income tax rate 7.8% - - ============================================================== The items that comprise the significant portions of deferred tax assets and liabilities as of December 31, 1998 and 1997 are as follows: ====================================================================== 1998 1997 (in thousands) ---------------------------------------------------------------------- Deferred Tax Assets Postretirement obligation other than pensions $ 1,171 $ 1,199 U.S. net operating loss carryforwards 2,006 2,853 Environmental obligation - 958 R&D and alternative minimum tax credit carryforwards 2,662 2,138 Deferred compensation 1,659 1,792 Capital loss carryforwards 976 976 Other 143 1,080 ---------------------------------------------------------------------- Total deferred tax assets 8,617 10,996 Less: Valuation allowance (976) (3,477) ---------------------------------------------------------------------- 7,641 7,519 ---------------------------------------------------------------------- Deferred Tax Liabilities Depreciation and amortization 2,407 3,535 Identifiable intangible asset 763 - Prepaid pension asset 2,541 1,796 Other 650 2,188 ---------------------------------------------------------------------- Total deferred tax liabilities 6,361 7,519 ---------------------------------------------------------------------- Net deferred tax asset $ 1,280 $ - ====================================================================== Deferred income tax assets as of December 31, 1998 include U.S. net operating loss carryforwards and capital loss carryforwards for income tax purposes of approximately $5,900,000 and $2,870,000, respectively, primarily expiring in 2009 and 2000, respectively. R&D credits expire in the years 2008 and 2009. Realization of these assets is dependent on future taxable earnings and capital gains. A valuation allowance has been established at December 31, 1998 for the portion of the deferred tax asset representing capital loss carryforwards since management cannot conclude that it is more likely than not that such asset will be realized. Page 25 (12) Shareholders' Equity At various times beginning in 1983, the Board of Directors has authorized and subsequently increased by amendments, a plan to purchase an aggregate amount of 4,190,000 common shares. As of December 31, 1998, the Company had acquired approximately 3,957,000 common shares in open market transactions at prevailing market prices. Approximately 2,135,000 of these shares have been used for various purposes, including: conversion of preferred shares; contributions of common shares to the ESOP; grants pursuant to the Company's Long-Term Incentive Plans; payment of directors' fees; partial payment of a 50% stock dividend; and stock options exercised. As of December 31, 1998 and 1997, respectively, the Company held 1,821,634 and 2,054,474 common shares in its treasury for future use. At December 31, 1998, the Company had reserved, authorized and unissued common shares for the following purposes: ====================================================== Shares ------------------------------------------------------ Conversion of 7% Convertible Subordinated Debentures Due 2011 1,332,458 Stock option and long-term incentive plans 908,450 Conversion of preferred shares 1,081,000 ------------------------------------------------------ 3,321,908 ====================================================== (13) Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: ========================================================================= 1998 1997 1996 (in thousands) ------------------------------------------------------------------------- Numerator: Net earnings available for common shares $ 7,168 $ 5,900 $ 3,252 Impact of assumed conversion of preferred shares 125 97 - ------------------------------------------------------------------------- Numerator for diluted calculation $ 7,293 $ 5,997 $ 3,252 ========================================================================= Denominator: Weighted average common shares outstanding 6,549 6,261 5,975 Dilutive effect of stock options 155 151 111 Dilutive effect of conversion of preferred shares 1,081 983 1,054 ------------------------------------------------------------------------- Denominator for diluted calculation 7,785 7,395 7,140 ========================================================================= The assumed conversion of the convertible debentures was anti-dilutive for all periods presented. Page 26 (14) Stock Plans The Company has granted nonqualified stock options to officers, directors and other key employees under plans approved by the shareholders in 1996 and 1997, which replaced all previous stock option and long-term incentive plans, for the purchase of its common shares at the fair market value of the common shares on the dates of grant. Options under the 1996 plan generally become exercisable on the third anniversary of the date of the grant and expire on the tenth anniversary of the date of the grant. The 1996 plan will expire in 2005. Options under the 1997 plan, which pertains only to non-employee directors, are immediately exercisable and expire on the tenth anniversary of the date of the grant. The 1997 plan will expire in 2006. Changes in options outstanding are as follows: =============================================================================== 1998 1997 1996 Weighted Shares Weighted Shares Weighted Shares Average Subject Average Subject Average Subject Exercise to Exercise to Exercise to Price Option Price Option Price Option - ------------------------------------------------------------------------------- Beginning of year $ 6.55 688,950 $ 6.57 737,313 $ 6.54 767,800 Options granted 8.66 100,750 7.20 157,750 5.54 27,500 Options exercised 6.29 (87,600) 7.26 (175,313) 5.12 (27,662) Options expired/ cancelled 11.21 (21,150) 6.39 (30,800) 6.30 (30,325) - ------------------------------------------------------------------------------- End of year $ 6.72 680,950 $ 6.55 688,950 $ 6.57 737,313 - ------------------------------------------------------------------------------- Exercisable at year end $ 6.43 488,544 =============================================================================== The options outstanding as of December 31, 1998 are summarized in ranges as follows: =========================================================================== Range of Weighted Average Number of Weighted Average Exercise Prices Exercise Price Options Outstanding Remaining Life --------------------------------------------------------------------------- $ 3.07- 5.99 $ 3.76 172,000 6 years 6.00- 8.99 7.67 498,450 4 years 9.00-11.56 10.12 10,500 5 years --------------------------------------------------------------------------- 680,950 =========================================================================== In 1998, 25,774 common shares held greater than six months were utilized to exercise stock options. The 1996 plan also provides for restricted common share long-term incentive awards as defined under the plan. All common shares authorized under the previous plans not yet awarded were canceled upon the approval of the 1996 plan. As of December 31, 1998, plan participants had been awarded 298,500 restricted common shares. Deferred compensation is recorded for the fair value of the restricted common share awards on the date of grant and is amortized over the five-year period the related services are provided. The amount charged to operations in 1998, 1997 and 1996 was $401,000, $287,000 and $148,000, respectively. As of December 31, 1998, 227,500 shares are available for grant as stock options or awards. The per share weighted-average fair value of stock options granted was $2.58, $2.77 and $2.70 in 1998, 1997 and 1996, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1998 - expected dividend yield of 1.4%, risk free interest rate of 5.0%, expected stock volatility of 20%, and an expected option life of 7-1/2 years; 1997 - expected dividend yield of 1.3%, risk free interest rate of 5.5%, expected stock volatility of 30%, and an expected option life of 7-1/2 years; 1996 - expected dividend yield of 0%, risk free interest rate of 6%, expected stock volatility of 40%, and an expected option life of 7-1/2 years. The Company applies APB Opinion No. 25 in accounting for its stock option grants and, accordingly, no compensation cost has been recognized in the financial statements for its stock options, which have exercise prices equal to or greater than the fair values of the common shares on the dates of the grant. Had the Company determined compensation cost based on the fair values at the grant dates for its stock options under SFAS No. 123, the Company's earnings from continuing operations, and basic and diluted earnings from continuing operations per common share would have been reduced to the pro forma amounts indicated below: ===================================================================== 1998 1997 1996 (in thousands, except per share amounts) --------------------------------------------------------------------- Earnings from continuing operations: As reported $ 8,231 $ 7,027 $ 13,068 Pro forma 7,938 6,879 13,007 Basic earnings per share: As reported $ 1.09 $ 0.94 $ 1.99 Pro forma 1.05 0.92 1.98 Diluted earnings per share: As reported $ 0.94 $ 0.81 $ 1.67 Pro forma 0.90 0.79 1.66 ===================================================================== Page 27 Pro forma earnings from continuing operations reflect only options granted beginning in 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma earnings from continuing operations amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 was not considered. (15) Other Employee Benefit Plans The Company maintains a noncontributory defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's highest five-year average base salary in the final ten years of employment. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined and tax deductible. The net pension income for 1998, 1997 and 1996 was $2,192,000, $1,185,000, and $1,285,000, respectively. The expected long-term rate of return on plan assets was 9.0% in 1998, 1997 and 1996. The actuarial computations assumed a discount rate on benefit obligations at December 31, 1998 and 1997 of 6.75% and 7.0%, respectively. The assumed rate of compensation increase approximates the Company's previous experience. The assets of the pension plan consist primarily of equity and fixed income securities, which are readily marketable. A summary of the components of net periodic pension income follows: ======================================================================= 1998 1997 1996 (in thousands) ----------------------------------------------------------------------- Service cost $ (1,495) $ (1,380) $ (1,277) Interest on projected benefit obligation (6,124) (5,999) (5,359) Expected return on plan assets 9,586 8,527 7,777 Amortization of transitional assets 8 8 8 Amortization of prior service cost (208) (208) (119) Amortization of gain 425 237 255 ----------------------------------------------------------------------- Net pension income $ 2,192 $ 1,185 $ 1,285 ======================================================================= The following sets forth the funded status of the plan as of December 31: ================================================================= 1998 1997 (in thousands) ----------------------------------------------------------------- Change in projected benefit obligation: Projected benefit obligation at beginning of year $ 88,654 $ 76,290 Service cost 1,495 1,380 Interest cost 6,124 5,999 Benefits paid (5,600) (5,350) Actuarial loss 4,580 10,335 ----------------------------------------------------------------- Projected benefit obligation at end of year $ 95,253 $ 88,654 ----------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 109,793 97,837 Actual return on plan assets 7,242 17,306 Benefits paid (5,600) (5,350) ----------------------------------------------------------------- Fair value of plan assets at end of year $111,435 $109,793 ----------------------------------------------------------------- Funded status $ 16,182 $ 21,139 Unrecognized net gain (9,636) (16,985) Unrecognized prior service cost 952 1,160 Unrecognized net assets (25) (33) ----------------------------------------------------------------- Prepaid pension cost (in other assets) $ 7,473 $ 5,281 ================================================================= In addition, the Company established in 1988 a supplemental defined benefit plan for substantially all employees. In 1998, 1997 and 1996, the net pension expense for this plan was approximately $126,500, $125,900, and $64,800, respectively. The Company also has a supplemental retirement plan for officers and certain employees under which the Company has agreed to pay a predetermined retirement benefit. In the event of preretirement death or disability, the plan provides for similar benefits. Total expenses under this plan in 1998, 1997 and 1996 were $672,000, $600,000 and $585,000, respectively. Page 28 (16) Postretirement Health Care and Life Insurance Benefits The Company provides certain health care and life insurance benefits to qualified retired employees and dependents at certain locations. These benefits are funded on a pay-as-you-go basis, with the retiree paying a portion of the cost through contributions, deductibles and coinsurance provisions. The Company has always retained the right to modify or terminate the plans providing these benefits. In accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," the Company recognizes these benefit expenses on an accrual basis as the employees earn them during their employment rather than when they are actually paid. Postretirement health care and life insurance expense (income) included the following components: ====================================================================== 1998 1997 1996 (in thousands) ---------------------------------------------------------------------- Service cost $ 41 $ 36 $ 42 Interest cost 237 250 320 Amortization of prior service cost - - (796) Amortization of net unrecognized gain - (15) (36) ---------------------------------------------------------------------- Total postretirement health care and life insurance expense (income) $ 278 $ 271 $ (470) ====================================================================== During 1996, the Company recognized a non-cash curtailment gain of $7,120,000 in connection with the discontinuance of postretirement medical benefits for Medicare-eligible retirees. This gain represents the reversal of a significant portion of the postretirement obligation established upon the adoption of SFAS No. 106 in 1993. The funded status and breakdown of the postretirement health care and life insurance benefits are as follows as of December 31: ======================================================== 1998 1997 (in thousands) -------------------------------------------------------- Change in accumulated postretirement benefit obligation: Accumulated benefit obligation at beginning of year $ 3,574 $ 3,521 Service cost 41 36 Interest cost 237 250 Benefits paid (392) (794) Participant contributions 31 54 Actuarial loss 15 380 Change in discount rate 66 127 -------------------------------------------------------- Unfunded accumulated postretirement benefit obligation at end of year $ 3,572 $ 3,574 Unrecognized net loss (129) (48) -------------------------------------------------------- Accrued postretirement benefit cost $ 3,443 $ 3,526 ======================================================== Actuarial assumptions used in determining the accumulated postretirement benefit obligation include a discount rate of 6.75% and 7.0% at December 31, 1998 and 1997, respectively, and estimated increases in health care costs. The Company has limited its increase in health care costs to 5% per year by requiring the retirees to absorb any costs in excess of 5% and has used such rate to measure its obligation. (17) Commitments and Contingencies The Company is contingently liable under the terms of letters of credit (Note 9) aggregating approximately $15,221,000 at December 31, 1998, should it fail to perform in accordance with the terms of its contracts with foreign customers. At December 31, 1998, the Company and its subsidiaries were obligated under building and equipment leases expiring between 1999 and 2012. Minimum future rentals under those obligations with noncancellable terms in excess of one year are as follows: 1999 - $ 3,764,000 2000 - $ 3,717,000 2001 - $ 3,670,000 2002 - $ 3,301,000 2003 - $ 3,047,000 Thereafter - $ 8,961,000 Rental expense under such leases for the years ended December 31, 1998, 1997 and 1996 amounted to $3,221,000, $3,555,000 and $3,490,000, respectively. Page 29 (18) Legal Matters The Company and three other companies entered into a consent decree with the Federal government for the remediation of a Superfund site. The Superfund site has been divided into three operable units. The consent decree relates to two of the operable units. The third operable unit has not been formally studied. The Company believes that the aggregate amount of the obligation and timing of cash payments associated with these two operable units are reasonably fixed and determinable. Accordingly, the environmental obligation has been discounted at five percent. Management estimates that as of December 31, 1998, the discounted liability over the remainder of the twenty-seven years related to these two operable units is approximately $3.0 million of which approximately $0.5 million has been classified as current and is included in accounts payable and accrued liabilities. Approximately $1.2 million of the $3.0 million liability will be incurred over the next five years. In 1998 and 1997, the Company settled with one of its insurance carriers for $2,200,000, net of associated costs of $300,000, and $2,900,000, respectively, which was recorded as litigation settlement income. All $5,100,000 was collected in 1998. The Company is also involved in other environmental cleanup efforts, none of which management believes is likely to have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. Additionally, the Company and its subsidiaries are subject to certain legal actions that arise out of the normal course of business. It is management's belief that the ultimate outcome of these actions will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. (19) Business Segments The Company operates in two segments that have been organized by the products and services they offer, as follows: Defense and Aerospace Systems, and Satellite Products. The Defense and Aerospace Systems segment sells its products and services primarily to customers in the defense industry. The Satellite Products segment sells its products to customers in the satellite industry. Domestic government sales, which include sales to prime contractors of the government, amounted to 47%, 41% and 36% of net sales, which were 49%, 44% and 44% of Defense and Aerospace Systems net sales and 33%, 30% and 16% of Satellite Products net sales for 1998, 1997 and 1996, respectively. Export sales comprised 30%, 33% and 35% of net sales for 1998, 1997 and 1996, respectively. Principal products and services by segment are as follows: Defense and Aerospace Systems Segment Marine and Aircraft Systems Aircraft Stores Suspension and Release Equipment Airborne Mine Countermeasures Systems Combat Systems Command, Control and Communications Systems Undersea Warfare Sonar Technology Services and Analysis Electro-Ceramic Products Fiber Composite Products Satellite Products Segment Page 30 ================================================================= 1998 1997 1996 (in thousands) ----------------------------------------------------------------- Net sales: Defense and Aerospace Systems $ 81,403 $ 73,708 $ 68,716 Satellite Products 14,657 20,654 25,870 ----------------------------------------------------------------- $ 96,060 $ 94,362 $ 94,586 ----------------------------------------------------------------- Operating earnings (loss): Defense and Aerospace Systems $ 10,315 $ 6,164 $ 8,711 Satellite Products (3,056) (1,528) (1,931) Litigation settlement income 2,200 2,900 - Postretirement health care curtailment gain - - 7,120 ----------------------------------------------------------------- $ 9,459 $ 7,536 $ 13,900 Net interest expense 428 459 766 Other expense 100 50 66 ----------------------------------------------------------------- Earnings before Federal income taxes $ 8,931 $ 7,027 $ 13,068 ----------------------------------------------------------------- Identifiable assets: Defense and Aerospace Systems $ 56,066 $ 31,561 $ 34,083 Satellite Products 22,133 27,909 27,961 Corporate 48,554 49,331 32,179 ----------------------------------------------------------------- $126,753 $108,801 $ 94,223 ----------------------------------------------------------------- Depreciation and amortization: Defense and Aerospace Systems $ 2,008 $ 3,507 $ 3,380 Satellite Products 2,235 2,343 1,765 Corporate 331 177 158 ----------------------------------------------------------------- $ 4,574 $ 6,027 $ 5,303 ----------------------------------------------------------------- Capital Expenditures: Defense and Aerospace Systems $ 3,121 $ 1,788 $ 660 Satellite Products 488 2,180 3,365 Corporate 12 115 202 ----------------------------------------------------------------- $ 3,621 $ 4,083 $ 4,227 ================================================================= KPMG LLP INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders EDO Corporation We have audited the accompanying consolidated balance sheets of EDO Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of EDO Corporation and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Melville, New York February 12, 1999 Page 31 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth unaudited quarterly financial information for 1998 and 1997 (in thousands, except per share amounts). ============================================================================== First Quarter Second Quarter Third Quarter Fourth Quarter 1998 1997 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------ Net sales $23,301 $23,704 $23,397 $23,193 $23,171 $23,246 $26,191 $24,219 Operating earnings 1,943 1,784 2,369 1,835 2,431 1,916 2,716 2,001a Net earnings 1,905 1,561 2,278 1,703 2,272 1,878 1,776 1,885 Earnings per share: Basic 0.25 0.21 0.31 0.23 0.30 0.25 0.23 0.25 Diluted 0.22 0.18 0.27 0.20 0.26 0.22 0.20 0.22 Preferred dividends paid 277 290 263 281 264 281 259 275 ============================================================================== (a) Includes a charge of approximately $2,000 for the consolidation and discontinuance of an Acoustic Products product line. Page 32 EXHIBIT INDEX Exhibits which are noted with an asterisk (*) are management contracts or compensatory plans or arrangements. 3(i) Certificate of Incorporation of the Company and amendments thereto dated June 14, 1984, July 18, 1988 and July 22, 1988 (incorporated by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994), as further amended by amendment thereto dated July 29, 1998 (filed herewith). 3(ii) By-Laws of the Company. Incorporated by reference to Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 4(a) Loan Agreement, dated as of September 9, 1998, between Mellon Bank, NA, et. al., and EDO Corporation. Incorporated by reference to Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 26, 1998. 4(b) Amendment No. 1 to the Loan Agreement referred to in Exhibit 4(a) above, effective December 31, 1998. 4(c) Guarantee Agreement, dated as of July 22, 1988, restated as amended through Amendment No. 13, effective December 31, 1998, made by the Company in favor of Mellon Bank as successor in interest to Fleet Bank as successor in interest to NatWest Bank and Manufacturers Hanover Trust Company. 10(a)* EDO Corporation 1996 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10(b)* EDO Corporation Executive Termination Agreements, as amended through November 24, 1989, between the Company and three employees. Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10(c)* Executive Life Insurance Plan Agreements, as amended through January 23, 1990, between the Company and 30 employees and retirees. Incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10(d)* Form of Directors' and Officers' Indemnification Agreements between EDO Corporation and 14 current Company directors and officers. Incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10(e) Consent Decree, entered on November 25, 1992, amongst the United States, EDO Corporation, Plessey, Inc., Vernitron Corporation and Pitney Bowes, Inc. 10(f) EDO Corporation 1997 Non-Employee Director Stock Option Plan. Incorporated by reference to Appendix A to the Company's Definitive Proxy Statement dated March 21, 1997. 10(g) EDO Corporation Compensation Plan for Directors (filed herewith). 21 List of Subsidiaries. 23 Consent of Independent Auditors to the incorporation by reference in the Company's Registration Statements on Form S-8 of their report included in Item 14(a)1 of this Annual Report on Form 10-K. 24 Powers of Attorney used in connection with the execution of this Annual Report on Form 10-K. 27 Financial Data Schedule. EX-3.I 2 EXHIBIT 3(I) - AMENDMENT TO CERTIFICATE OF INCORPORATION Certificate of Amendment of the Certificate of Incorporation of EDO Corporation Under Section 805 of the Business Corporation Law Frank A. Fariello, the Chairman and Chief Executive Officer, and Marvin D. Genzer, the Secretary, of EDO Corporation, certify as follows: 1. The name of the corporation is EDO Corporation (the "Company"). 2. The Certificate of Incorporation was filed by the Department of State on October 16, 1925. 3. The Certificate of Incorporation is amended to change the location of the office of the Company and the address to which the Secretary of State shall mail a copy of process in any action or proceeding against the Company that is served upon him or her. 4. Article FOURTH of the Certificate of Incorporation is amended to read as follows: The office of the Corporation is to be located in the City of New York, Borough of Manhattan, County of New York and State of New York. The Secretary of State of the State of New York is hereby designated as the agent of the Corporation upon whom process in any action or proceeding against it may be served within the State of New York, and the address to which the Secretary of State shall mail a copy of any process against the Corporation which may be served upon him or her pursuant to law is EDO Corporation, 60 East 42nd Street, Suite 5010, New York, NY 10165. 5. The above amendment to the Certificate of Incorporation was authorized by vote of the Company's Board of Directors, pursuant to Sections 803(b)(1) and 803(b)(2) of the New York Business Corporation Law. IN WITNESS WHEREOF, we have executed this certificate and affirm the truth of the statements set forth herein under penalty of perjury on this 29 day of July, 1998. s/Frank A. Fariello - ---------------------------------- Frank A. Fariello Chairman & Chief Executive Officer s/Marvin D. Genzer - ---------------------------------- Marvin D. Genzer Secretary EX-4.B 3 EXHIBIT 4(B) - AMENDMENT NO. 1 TO LOAN AGREEMENT AMENDMENT No. 1 TO LOAN AGREEMENT FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") dated as of December 31, 1998, between EDO CORPORATION (the "Borrower") and MELLON BANK, N.A. ("Mellon"), EUROPEAN AMERICAN BANK ("EAB") and KEYBANK, NA ("KeyBank"; Mellon, EAB and Key Bank are hereinafter each referred to individually as a "Lender", and collectively as the "Lenders"); Mellon, as issuer of the Letters of Credit (Mellon, in such capacity, and any successor issuing bank shall be referred to hereinafter as the "Issuing Bank") and Mellon, as agent for the Lenders and the Issuing Bank (Mellon, in such capacity, and any successor agent shall be referred to hereinafter as the "Agent"). BACKGROUND A. The Lenders, the Issuing Bank, the Agent and the Borrower entered into that certain Loan Agreement dated as of September 9, 1998 (the "Original Loan Agreement"), pursuant to which the Lenders and the Issuing Bank made available to the Borrower the credit facilities described therein. The Original Loan Agreement as amended hereby and hereafter from time to time shall be referred to herein as the "Loan Agreement." All terms capitalized but not defined herein shall have the meanings given to such terms in the Loan Agreement. B. The Lenders, the Issuing Bank, the Agent and the Borrower desire to amend the Original Loan Agreement to allow the Borrower to declare and pay dividends on the Borrower's preferred stock in accordance with the Loan Agreement as amended hereby. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and intending to be legally bound, the parties hereto agree as follows: Article I AMENDMENTS TO LOAN AGREEMENT SECTION 1.1 Amendments to the Loan Agreement. The parties hereto agree to amend the Loan Agreement as follows: (A) Section 6.30 of the Loan Agreement is hereby amended by adding the following language at the end of Section 6.30: "provided further that the Borrower may declare and pay dividends on preferred stock of the Borrower held by the ESOT in the aggregate amount up to the lesser of (1) the percentage dividend required to be paid under such preferred stock or (2) the amounts necessary to satisfy the portion of the ESOT's and/or the trustee of the ESOT's payment obligations to Mellon under the ESOT Loan Documents." (B) Exhibit 3.6 of the Loan Agreement is hereby amended by substituting therefor Exhibit 3.6 attached hereto and made a part hereof. SECTION 1.2 Incorporation of Terms. The terms of this Amendment are hereby incorporated into the Loan Agreement. Article II REPRESENTATIONS, WAIVERS SECTION 2.1 Borrower's Representations and Warranties. The Borrower represents and warrants to the Lenders, the Issuing Bank and the Agent that, as of the date of execution of this Amendment: (A) The representations and warranties set forth in Article V of the Loan Agreement are true and correct as to the Borrower and its Subsidiaries as of the date hereof except to the extent the Borrower has previously notified the Agent, the Lenders and the Issuing Bank in writing of subsequent circumstances, which subsequent circumstances, the Borrower hereby represents, do not constitute a Default or Event of Default; (B) No Default or Event of Default has occurred or is continuing, and (C) The Loan Documents continue in full force and effect and the Borrower does not have any charge, lien, claim or offset against Lender, or defenses to enforcement of the Loan Documents by Lender. SECTION 2.2 Amounts Outstanding. The Borrower hereby represents and warrants to the Lenders, the Issuing Bank and the Agent that as of the date of execution of this Amendment Exhibit 2.2 attached hereto and made a part hereof accurately reflects all Loans and Letters of Credit outstanding under the Loan Agreement. The Borrower hereby reaffirms its obligations under the Loan Agreement, including without limitation its obligation to repay such Loans and reimburse draws under such Letters of Credit as s et forth in the Loan Agreement. The Lenders and the Issuing Bank each reaffirms its obligations under the Loan Agreement including without limitation the obligation of each Lender to reimburse the Issuing Bank to the extent of its Pro Rata Share, for draws under the Letters of Credit to the extent not reimbursed by the Borrower. Article III MISCELLANEOUS SECTION 3.1 Modifications. This Amendment contains all of the modifications to the Loan Agreement. No further modifications shall be deemed effective, unless in writing executed by the parties hereto. SECTION 3.2 No Waivers. Except as expressly set forth herein, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Lender under the Loan Agreement, nor constitute a waiver of any Default or Event of Default or any provision of the Loan Agreement. SECTION 3.3 Governing Law. This Amendment shall be construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. SECTION 3.4 Counterparts. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. SECTION 3.5 Binding Effect. This Amendment shall become effective as of December 31, 1998 when it shall have been executed by the Borrower, the Agent, the Issuing Bank and the Lenders, and it shall thereafter be binding upon and inure to the benefit of the Borrower, the Agent, the Issuing Bank and the Lenders and their respective successors and assigns, except that the Borrower shall not have the right to assign any right or obligation hereunder or any interest herein. SECTION 3.6 No Novation. The Loan Agreement, as amended hereby, shall remain in full force and effect. Execution of this Amendment shall not constitute a novation between the Borrower, the Agent, the Issuing Bank and the Lenders. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. EDO CORPORATION By: s/Kenneth A. Paladino, V.P. - -------------------------------- By: s/Peter A. Dontas, V.P. - -------------------------------- MELLON BANK, N.A. (as Lender, the Agent, and Issuing Bank) By: s/George Goodman, V.P. - -------------------------------- EUROPEAN AMERICAN BANK By: s/James V. Maiorino, V.P. - -------------------------------- KEYBANK, NA Date of Execution: March , 1999 EX-4.C 4 EXHIBIT 4(C) - GUARANTEE AGREEMENT GUARANTEE AGREEMENT (Restated as Amended through Amendment #13 effective December 31, 1998) GUARANTEE, dated as of July 22, 1988, made by EDO CORPORATION, a New York corporation (the "Guarantor"), in favor of Mellon Bank, N.A. (the "Bank"). W I T N E S S E T H : WHEREAS, pursuant to the Term Loan Agreement, dated as of July 22, 1988 (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement"), between EDO Corporation Employee Stock Ownership Plan (the "ESOP"), and the Bank, the Bank has agreed to make a loan to the ESOP upon the terms and subject to the conditions set forth therein, to be evidenced by the Term Note issued by the ESOP thereunder; WHEREAS, it is a condition precedent to the obligation of the Bank to make its loan to the ESOP under the Loan Agreement that the Guarantor shall have executed and delivered this Guarantee to the Bank. NOW, THEREFORE, in consideration of the premises and to induce the Bank to make its loan to the ESOP under the Loan Agreement, the Guarantor hereby agrees with the Bank as follows: 1. Defined Terms. Unless otherwise defined herein (including in Schedule 1 hereto), terms which are defined in the Loan Agreement and used herein are so used as so defined. As used herein, "Obligations" shall mean the unpaid principal of and interest on the Term Note and all other obligations and liabilities of the ESOP to the Bank, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Loan Agreement, the Term Note, the Pledge Agreement or the Basic Documents and any other document made, delivered or given in connection therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to the Bank) or otherwise. 2. Guarantee. The Guarantor hereby unconditionally and irrevocably guarantees to the Bank the prompt and complete payment and performance by the ESOP when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. The Guarantor further agrees to pay any and all expenses (including, without limitation, all reasonable fees and disbursements of counsel) which may be paid or incurred by the Bank in enforcing, or obtaining advice of counsel in respect of enforcing, any of its rights under this Guarantee. The Guarantor agrees that whenever, at any time, or from time to time, it shall make any payment to the Bank on account of its liability hereunder, it will notify the Bank in writing that such payment is made under this Guarantee for such purpose. No payment or payments made by the ESOP or any other Person or received or collected by the Bank from the ESOP or any other Person by virtue of any action or proceeding or any set-off or appropriation or application, at any time or from time to time, in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of the Guarantor hereunder which shall, notwithstanding any such payment or payments, remain liable for the amount of the Obligations until the Obligations are paid in full. 2.1 Collateral. (a) Security Interests. As security for the performance of this Guarantee and the other Basic Documents, including without limitation the payment and performance of all Obligations, whether absolute or contingent, matured or unmatured, direct or indirect, sole, joint, several, or joint and several, similar or dissimilar, due to become due or heretofore or hereafter contracted or acquired (collectively the "Guarantee Liabilities"), each Guarantor hereby grants, pledges, and assigns to the Bank, a security interest in all assets of such Guarantor constituting personal property now owned or hereafter acquired including, without limitation, (i) all Accounts, Chattel Paper, Equipment (whether or not constituting fixtures but excluding motor vehicles title to which is evidenced by a certificate of title), Documents, Instruments, General Intangibles (including, but not limited to, any and all interests in trademarks, service marks, patents, licenses, permits, copyrights, contracts and agreements), including without limitation such Guarantor's rights under all present and future contracts (to the extent assignments thereof are not prohibited by their terms), authorizations, permits and licenses issued or granted to such Guarantor by any governmental agency, whether federal, state or local for the ownership and operation of its business, and all proceeds of sale thereof, (ii) all Inventory of such Guarantor held for sale or lease or to be furnished under contracts of service, (iii) all books, records, tapes, information, data, stored material, computer media, passwords, access codes arising or related to such Guarantor's business, now existing or hereafter acquired (collectively, "Books and Records"), (iv) any account maintained by such Guarantor with the Bank or any affiliate of the Bank and all cash held therein, and (v) all proceeds and products of the foregoing, including casualty insurance thereon, now owned or hereafter acquired by such Guarantor. (b) Further Security. As further security for payment of the Guarantee Liabilities: (i) each Guarantor shall execute and deliver a pledge agreement (the "Guarantee Pledge Agreement") in favor of the Bank, pursuant to which it will grant to the Bank a lien on and security interest, in (A) 100% of the capital stock in each Subsidiary of such Guarantor, organized under the laws of one of the states or territories of the United States, whether now existing or hereafter created or acquired, (B) 65% of the capital stock of each Subsidiary of such Guarantor, organized under the laws of a jurisdiction other than a state or territory oft United States, whether now existing or hereafter created or acquired, and (C) obligations owed by such Guarantor to any other Guarantor, whether now existing or hereafter created; (ii) each Guarantor shall deliver to the Bank original stock certificates and instruments (if any) representing the property pledged pursuant to the Guarantee Pledge Agreement, together with powers executed in blank; and (iii) each Guarantor shall deliver executed UCC-1 financing statements as to such pledges and security interests in form and substance as required by the Bank. (c) Financing Statements; Certificates of Title. Each Guarantor will join with the Bank in executing such financing statements and continuation statements (in form satisfactory to the Bank) under the Uniform Commercial Code as the Bank may specify, and will pay the cost of filing the same in such public offices as the Bank shall designate. Each Guarantor agrees to take whatever action the Bank reasonably requests to perfect and to continue perfection of the Bank's security interest in the Collateral. (d) Landlord's Waiver. Each Guarantor shall exercise reasonable commercial efforts to cause the owners of the locations identified on Exhibit 2.1(f) attached hereto to execute and deliver to the Bank an instrument (in form satisfactory to the Bank) by which each such owner waives its right to distrain on any of the Collateral, and by which such owner grants to the Bank the right (but not the obligation) to cure any default by such Guarantor under the applicable lease (each, a "Landlord's Waiver"). (e) The Bank's Rights With Respect to Accounts, Chattel Paper, Instruments and General Intangibles. With respect to any Account, Chattel Paper, Instrument and General Intangible that is Collateral hereunder, upon the occurrence and continuance of a Guarantee Event of Default which has resulted in the acceleration of the Term Loan, the Bank shall have the right at any time and from time to time, with notice to the appropriate Guarantor or Guarantors (which may be oral or written), to: (i) endorse in the name of such Guarantor all proceeds of the Accounts, Chattel Paper, Instruments and General Intangibles payable to such Guarantor that may come to the Bank; (ii) notify Purchasers under such Guarantor's Accounts, Chattel Paper, Instruments and General Intangibles that such Accounts, Chattel Paper, Instruments and General Intangibles have been assigned to the Bank, forward invoices to such Purchasers directing them to make payments to the Bank, collect all Accounts, Chattel Paper, Instruments and General Intangibles of such Guarantor in the Bank's or such Guarantor's name, and take control of any cash or non-cash proceeds of such Guarantor's Accounts, Chattel Paper, any Instruments and General Intangibles; (ii) compromise, extend, or renew any Account, Chattel Paper, Instrument or General Intangible of such Guarantor or deal with such Guarantor's Accounts, Chattel Paper, Instruments and General Intangibles as the Bank may deem advisable; (D) make exchanges, substitutions, or surrenders of Collateral; and (E) take control of any cash or non-cash proceeds of any Collateral. (f) Places of Business; Location of Collateral. (i) The Guarantors represent that (A) the properties listed on part A of Exhibit 2.1(f) attached hereto serve as each Guarantor's chief place of business, chief executive office, and the place where it keeps its Books and Records, and (B) all of the locations where any one or more Guarantors keep Equipment or Inventory having an aggregate value in excess of $1,000,000.00 are listed on part B of Exhibit 2.1(f) attached hereto.(ii) Each Guarantor will notify the Bank prior to (A) any change in the location of the chief place of business or chief executive office of such Guarantor, (B) any change in the place where such Guarantor keeps its Equipment and/or Inventory or its Books and Records, (C) the establishment of any new or the discontinuance of any existing place of business of such Guarantor, and (D) the establishment of any new or the discontinuance of any location where Inventory, Equipment or Books and Records are kept by such Guarantor. (iii) Except for the temporary removal of mobile Equipment in the ordinary course of a Guarantor's business, no Guarantor will permit any of their Equipment having aggregate value of $1,000,000.00 or more to be removed from its current location or any of their Inventory having an aggregate value of $1,000,000.00 or more to be so removed without giving the Bank prior written notice and then, only if and to the extent the Bank retains a first priority, perfected security interest therein. (g) Accounts. With respect to each Account represented on EDO's Consolidated balance sheet each Guarantor represents that: (A) except as reflected on such Consolidated balance sheet, such Account is not evidenced by a judgment, an Instrument or Chattel Paper or secured by a letter of credit (except (1) such judgment as has been assigned, (2) such Instrument or Chattel Paper as has been endorsed and delivered to the Bank and (3) such letter of credit as has been assigned and delivered to the Bank) and represents a bona fide completed transaction; (B) except as reflected on such Consolidated balance sheet, the amount shown on such Guarantor's Books and Records and on any list, invoice or statement furnished to the Bank is owing to such Guarantor; (C) such Guarantor has good title to the Account free and clear of all liens and encumbrances except for Permitted Encumbrances; (D) the Account has not been transferred to any other Person, and, at the time such Account is created, no person except such Guarantor or Purchaser has any claim thereto or to the goods or services represented thereby; (E) except as reflected on such Consolidated balance sheet, no partial payment against any Account has been made by anyone other than as noted on such Guarantor's Books and Records and (F) except as reflected on such Consolidated balance sheet, to the best of such Guarantor's knowledge, except as reflected on such Consolidated balance sheet, no set-off or counter claim to such Account exists, and no agreement has been made with any person under which any deduction or discount may be claimed. The Guarantors shall be deemed not to have made a misrepresentation with respect to this Section 2.1(g) unless such representation would constitute a misrepresentation under Section 3.7(A) of the Revolving Credit Loan Agreement. The Guarantors will promptly notify the Bank if any Account arises out of contracts with the United States, any United States state, territory or local government or any department, agency or instrumentality thereof, furnish the Bank with copies of each such contract, at the Bank's request, and execute any instruments and take any steps in order that (subject to the following sentence) all moneys due and to become due under any such contract shall be assigned to the Bank and notice given under the Federal Assignment of Claims Act (or applicable state statute, if any). The Bank agrees not to deliver any such notices or assignments to the applicable United States or other United States state, territory or local governmental department, agency or instrumentality unless and until there occurs a Guarantee Event of Default and then the Bank shall deliver such notices of assignment only if it determines in good faith that under the circumstances it is reasonable to do so to protect its rights in and to such Accounts or the proceeds thereof or in anticipation of exercising its rights hereunder as a result of such Guarantee Event of Default. Each Guarantor will (i) if requested by the Bank, furnish to the Bank copies, with such duplicate copies as the Bank may request, of any invoice applicable to each of its Accounts; (ii) inform the Bank immediately of any delay in performance by such Guarantor or claims made in regard to its Accounts which alone or in the aggregate with other claims or delays could likely have a Material Adverse Effect; and (iii) furnish the Bank with such other reports as the Bank may from time to time reasonably request. (h) Chattel Paper; Letters of Credit and Instruments. Each Guarantor covenants that it will deliver to the Bank promptly all copies (or if requested by the Bank, all originals) of (i) all letters of credit securing Accounts except to the extent, permitted under the Revolving Credit Loan Agreement, (ii) Chattel Paper, and/or (iii) Instruments now in its possession or hereafter acquired, each properly assigned and/or endorsed over to the Bank, the originals which letters of credit, Chattel Paper and Instruments delivered to the Bank shall be held by the Bank as security hereunder. The Guarantors shall remain solely responsible for the observance and performance of all of its or their covenants and obligations under all Chattel Paper and Instruments, and the Bank shall not be required to observe or perform any such covenants or obligations. (i) Equipment. Each Guarantor represents, warrants and agrees that (i) such Guarantor has good title to its Equipment (other than leased Equipment), subject only to the security interests created hereby and Permitted Encumbrances; and (ii) such Guarantor will not dispose of any of its Equipment other than in the ordinary course of business and then in accordance with the terms of this Agreement, or permit any of its Equipment to become a fixture or an accession to other property unless the Bank's security interest therein would continue to be a perfected, first lien priority security interest therein. (j) Expenses of Bank. The Guarantors will reimburse the Bank within ten (10) days after demand for all reasonable expenses (including the reasonable fees and expenses of legal counsel for the Bank) in connection with the enforcement of the Bank's rights to take possession of the Collateral and the proceeds thereof and to hold, collect, render in compliance with applicable laws and regulations (including without limitation Environmental Laws), prepare for sale, sell and dispose of the Collateral. (k) Notices. If notice of sale, disposition or other intended action by the Bank with respect to the Collateral is required by the U.C.C. or other applicable law, any notice thereof sent to the appropriate Guarantor at its address listed herein or such other address of such Guarantor as may from time to time be shown on the records of the Bank at least ten days prior to such action, shall constitute reasonable notice to such Guarantor. (l) Insurance; Discharge of Taxes, etc. The Bank shall have the right at any time and from time to time, with or without notice to any Guarantor, to (i) obtain insurance covering any of the Collateral if the appropriate Guarantor fails to do so, (ii) discharge taxes, liens, security interests or other encumbrances at any time levied or placed on any of the Collateral and (iii) pay for the maintenance and preservation of any of the Collateral. The Guarantors will reimburse the Bank, on demand, with interest thereon at the Default Rate for any payment the Bank makes, or any reasonable expense the Bank incurs under this authorization. Each Guarantor assigns to the Bank all rights to receive the proceeds of insurance covering the Collateral. If there exists a Guarantee Event of Default and an acceleration of the Term Note, the Guarantors authorize the Bank to apply such proceeds as a prepayment of the Term Note, subject to the Agent's pari passu rights under the Revolving Credit Loan Agreement, and as set forth in the Intercreditor Agreement. In the event that there does not exist a Guarantee Event of Default and an acceleration of the Term Note, such proceeds shall be subject to Section 2.6 of the Revolving Credit Loan Agreement. If the Revolving Credit Loan Agreement has been terminated and all of EDO's obligations thereunder have been discharged in full and there does not exist a Guarantee Event of Default and an acceleration of the Term Note, at the Guarantor's written request , the Bank shall make such proceeds available to such Guarantor for the repair or replacement of damaged Collateral if and on condition that (A) such Guarantor proceeds diligently to cause such replacement and/or repair, and (B) any excess proceeds remaining after such repair and/or replacement shall be applied by the Bank as a prepayment of the Term Note. (m) Waiver and Release by the Guarantors. Each Guarantor (i) waives protest of all commercial paper at any time held by the Bank on which such Guarantor is in any way liable, notice of nonpayment at maturity of any and all Accounts and, except where required hereby or by law, notice of action taken by the Bank under any of the Basic Documents, and (ii) releases the Bank from all claims for loss or damage caused by any failure to collect any Account or by any act or omission on the part of the Bank or its officers, agents and employees, except to the extent resulting from the willful misconduct or gross negligence as determined in a final judgment of a court of competent jurisdiction or a settlement tantamount to such formal order. (n) Records and Reports. Each Guarantor shall keep accurate and complete records of its Accounts (and the collection thereof), General Intangibles, Chattel Paper, Instruments, Documents and Inventory and furnish the Bank such information about its Accounts, General Intangibles, Chattel Paper, Instruments, Documents, and Inventory as the Bank may reasonably request. The Bank shall have the right to conduct periodic examinations and verifications of such Guarantor's Books and Records, which examination may include, without limitation, verifications of Accounts by contacting Purchasers; provided that if there then exists no Guarantee Event of Default, the Bank shall conduct such verifications with such Guarantor's assistance (which such Guarantor agrees to provide) using such Guarantor's letterhead with responses to be returned to a lock box under the Bank's control. Each Guarantor agrees to make its Books and Records available to the Bank at such Guarantor's principal place of business for purposes of such examination. Provided there does not exist a Guarantee Event of Default, the Bank agrees to give such Guarantor at least two (2) Business Days prior notice of such examination (which notice need not be in writing) and to conduct such examination during normal business hours. The Guarantors shall reimburse the Bank for the reasonable costs and expenses of any such examination conducted following the occurrence and during the continuation of a Guarantee Event of Default. (o) Further Assurances. From time to time the Guarantors will execute and deliver to the Bank such additional instruments as the Bank may reasonably request to effectuate the purposes of this Agreement and to assure to the Bank, as secured party, a perfected, first priority security interest in the Collateral. (p) Application of Proceeds of Collateral. After the occurrence of a Guarantee Event of Default, all proceeds of Collateral shall be applied (i) to the costs of preservation and liquidation of such Collateral and the Bank's exercise of its rights hereunder then (ii) to all other Guarantee Liabilities. (q) Continuing Collateral. The Bank shall be under no obligation to proceed first against (a) any part of the Collateral before proceeding against any other part of the Collateral, (b) any Guarantor before any other Guarantor. It is expressly agreed that all of the Collateral stands as equal security for all Guarantee Liabilities and the other obligations of the Guarantors hereunder and the Bank shall have the right to proceed against or sell any and/or all of the Collateral in any order, or simultaneously, as it, in its sole discretion, shall determine. (r) Section 8 of the Guarantee is hereby amended by deleting the address of the Bank set forth therein and substituting, in lieu thereof , the following: "1735 Market Street, Philadelphia, PA 19101." 3. Right of Set-off. The Bank is hereby irrevocably authorized at any time and from time to time without notice to the Guarantor, any such notice being hereby waived by the Guarantor, to set off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, at any time held or owing by the Bank to or for the credit or the account of the Guarantor, or any part thereof in such amounts as the Bank may elect, on account of the liabilities of the Guarantor hereunder and claims of every nature and description of the Bank against the Guarantor, in any currency, whether arising hereunder, under the Loan Agreement, the Term Note, any other Basic Document, or otherwise in connection herewith, as the Bank may elect, whether or not the Bank has made any demand for payment. The Bank shall notify the Guarantor promptly of any such set-off and the application made by the Bank of the proceeds thereof, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Bank under this paragraph are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Bank may have. 4. No Subrogation. Notwithstanding any payment or payments made by the Guarantor hereunder, or any set-off or application of funds of the Guarantor by the Bank, the Guarantor shall not be entitled to be subrogated to any of the rights of the Bank against the ESOP or against any collateral security or guarantee or right of offset held by the Bank for the payment of the Obligations, nor shall the Guarantor seek any reimbursement from the ESOP in respect of payments made by the Guarantor hereunder, until all amounts owing to the Bank by the ESOP on account of the Obligations are paid in full. If any amount shall be paid to the Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by the Guarantor in trust for the Bank, segregated from other funds of the Guarantor, and shall, forthwith upon receipt by the Guarantor, be turned over to the Bank in the exact form received by the Guarantor (duly indorsed by the Guarantor to the Bank, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Bank may determine. 5. Amendments, etc. with respect to the Obligations. The Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against the Guarantor, and without notice to or further assent by the Guarantor, any demand for payment of any of the Obligations made by the Bank may be rescinded by the Bank, and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Bank, and the Loan Agreement, the Term Note, the Pledge Agreement or any other Basic Document and any other document in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Bank may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Bank for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. The Bank shall have no obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Guarantee or any property subject thereto. 6. Guarantee Absolute and Unconditional. The Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Bank upon this Guarantee or acceptance of this Guarantee; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Guarantee; and all dealings between the ESOP or the Guarantor, on the one hand, and the Bank, on the other, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Guarantee. The Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the ESOP or the Guarantor with respect to the Obligations. This Guarantee shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity or enforceability of the Loan Agreement, the Term Note, the Pledge Agreement, or any other Basic Document, any of the Obligations or any collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Bank, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the ESOP against the Bank, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the ESOP or the Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the ESOP for the Obligations, or of the Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against the Guarantor, the Bank may, but shall be under no obligation to, pursue such rights and remedies as it may have against the ESOP or any other Person or against any collateral security or guarantee for the Obligations or any right of offset with respect thereto, and any failure by the Bank to pursue such other rights or remedies or to collect any payments from the ESOP or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the ESOP or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve the Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Bank against the Guarantor. 7. Reinstatement. This Guarantee shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Bank upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the ESOP or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the ESOP or any substantial part of its property, or otherwise, all as though such payments had not been made. 8. Payments. The Guarantor hereby agrees that the Obligations will be paid to the Bank without set-off or counterclaim in U.S. Dollars at the office of the Bank located at 270 Park Avenue, New York, New York 10017. 9. Representations and Warranties. The Guarantor represents and warrants that: (a) each of the Guarantor and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power to own its assets and to transact the business in which it is presently engaged, is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, and is in compliance with all Requirements of Law except to the extent that the failure to so qualify or comply therewith could not have a material adverse effect on the business, operations, property or financial or other condition of the Guarantor and its Subsidiaries taken as a whole. (b) the Guarantor has the corporate power, authority and legal right to make, deliver and perform the Basic Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of the Basic Documents to which it is a party. No consent of any other Person, and no consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of the Basic Documents to which it is a party. (c) the execution, delivery and performance by the Guarantor of the Basic Documents to which it is a party will not violate any Requirement of Law or any Contractual Obligation of the Guarantor and will not result in, or require, the creation or imposition of any Lien on any of its property, assets or revenues pursuant to any Requirement of Law or Contractual Obligation. (d) there is no litigation, investigation or other proceeding of or before any arbitrator or Governmental Authority pending or threatened against the Guarantor or any of its Subsidiaries or any of its or their assets or with respect to the Basic Documents or any of the transactions contemplated thereby, which, if adversely determined, would have a material adverse effect on the business, assets or financial condition of the Guarantor and its Subsidiaries taken as a whole. (e) the Basic Documents to which the Guarantor is a party have been duly executed and delivered on behalf of the Guarantor and constitute legal, valid and binding obligations of the Guarantor enforceable against the Guarantor in accordance with their respective terms except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (f) (i) the ESOP is a trust duly existing under the laws of the State of New York and is a stock bonus plan qualified under Section 401(a) of the Code and the provisions of the ESOP satisfy the requirements for employee stock ownership plans set forth in Section 4975(e)(7) of the Code. The Trustee executing the Basic Documents on behalf of the ESOP has adequate authority to do so under the ESOP's organizational documents. No "prohibited transaction" under ERISA or the Code has occurred with respect to the ESOP or will occur upon the execution of the Term Note or the other Basic Documents; (ii) the ESOP has the power, authority and legal right to make, deliver and perform the Basic Documents to which it is a party and to borrow under the Loan Agreement and has taken all necessary action to authorize the borrowings on the terms and conditions of the Loan Agreement and to authorize the execution, delivery and performance of the Basic Documents to which it is a party. No consent of any Person, and no further consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any Governmental Authority is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of the Basic Documents to which it is a party. The Basic Documents to which the ESOP is a party have been duly executed and delivered on behalf of the ESOP, and the Basic Documents to which ESOP is a party constitute legal, valid and binding obligations of the ESOP enforceable against the ESOP in accordance with their respective terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally; (iii) the execution, delivery and performance by the ESOP of the Basic Documents to which it is a party, the borrowings and the use of the proceeds thereof will not violate any Requirement of Law or any Contractual Obligation of the ESOP and will not result in, or require, the creation or imposition of any Lien on any of its property, assets or revenues pursuant to any Requirement of Law or Contractual Obligation; (iv) no litigation, investigation or other proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Guarantor, threatened against the Trustee or the ESOP or any of the assets of the ESOP (a) with respect to the Basic Documents or any of the transactions contemplated thereby, or (b) which, if adversely determined, would have a material adverse effect on the business, assets or financial condition of the ESOP; (v) the ESOP is not in default in the payment or performance of any of its Contractual Obligations in any respect which could be materially adverse to the business, operations, property or condition (financial or otherwise) of the ESOP or which could materially adversely affect the ability of the ESOP to perform its obligations under any of the Basic Documents to which it is a party. No Default or Event of Default has occurred and is continuing. The ESOP is not in default under any order, award or decree of any arbitrator or Governmental Authority binding upon or affecting it or by which any of its assets may be bound or affected, and no such order, award or decree materially adversely affects the ability of the ESOP to perform its obligations under any of the Basic Documents to which it is a party; (vi) the Term Loan is an exempt loan within the meaning of Treasury Regulation Section 54.4975-7(b)(1)(iii). Neither the Term Loan nor the taking of any action contemplated by the Basic Documents is a "prohibited transaction" within the meaning of Section 4975 of the Code or Sections 406 and 408 of ERISA, or violates any provision of the ESOP; and (vii) the ESOP has filed copies of all statements and reports which are required to be filed with any Governmental Authority, except to the extent that failure to file any such statements or reports would not have a material adverse effect on the assets or financial condition of the ESOP. (g) (i) neither the Guarantor nor any of its Subsidiaries is in default in the payment or performance of any Contractual Obligations in any respect which could be materially adverse to the business, operations, property or condition (financial or otherwise) of the Guarantor and its Subsidiaries taken as a whole or which could materially adversely affect the ability of the Guarantor to perform its obligations under any of the Basic Documents to which it is a party, (b) no Guarantee Event of Default hereunder and no Default or Event of Default under any of the Basic Documents has occurred and is continuing and (c) neither the Guarantor nor any of its Subsidiaries is in default under any order, award or decree of any Governmental Authority binding upon or affecting the Guarantor or any of its Subsidiaries, and no such order, award of decree materially adversely affects the ability of the Guarantor to perform its obligations under any of the Basic Documents to which it is a party. (h) all of the shares of the Pledged Stock (as defined in the Pledge Agreement) have been duly and validly issued and are fully paid and non-assessable. Assuming that the Bank or its duly appointed agent therefor obtains and maintains continuous possession of the Pledged Stock, the Pledge Agreement creates in favor of the Bank a first priority security interest in such Pledged Stock, and the proceeds thereof, pledged thereunder. (i) the proceeds of the borrowings pursuant to the Loan Agreement will not be used for any purpose which would violate or be inconsistent with Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. (j) the Guarantor is not an "investment company" or a company "controlled" by an "investment company" (as each of the quoted terms is defined or used in the Investment Company act of 1940, as amended). (k) the consolidated balance sheet of the Guarantor and its Subsidiaries as at December 31, 1987 and the related consolidated statement of income and retained earnings for the fiscal year then ended (copies of which have heretofore been furnished to the Bank) have been prepared in accordance with GAAP applied consistently throughout the period involved, are complete and correct and present fairly the consolidated financial condition of the Guarantor and its Subsidiaries as at such date and the results of their operations for such fiscal year; since such date there has been no material adverse change in the business, operations, property or financial or other condition of the Guarantor and its Subsidiaries taken as a whole. Neither the Guarantor nor izs Subsidiaries has any material Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment which is not reflected in the foregoing statements or in the notes thereto. (l) The representations and warranties of each Guarantor set forth in Article V of the Revolving Credit Loan Agreement and in Section 4 of the Guarantee and Security Agreement, in each case as of September 9, 1998 (the "Original Revolving Credit Loan Agreement Representations and Warranties"), are true and correct as to each Guarantor (making such representations and warranties) as of September 9, 1998 and the Original Revolving Credit Loan Agreement Representations and Warranties (together with those defined terms used therein) are hereby incorporated into this Guarantee. Each Guarantor acknowledges and agrees that the Original Revolving Credit Loan Agreement Representations and Warranties are in addition to the other representations and warranties set forth in this Guarantee and shall in no way limit such other representations and warranties. Additionally, for the sole purpose of this Subsection 9(l), any amendment, supplement or modification to any of the Original Revolving Credit Loan Agreement Representations and Warranties after September 9, 1998 shall not be deemed to amend, supplement or modify the Original Revolving Credit Loan Agreement Representations and Warranties as incorporated herein by reference unless agreed to in writing by the Bank and the Guarantor. (m) EDO's guarantee hereunder of principal of (and premium if any) and interest on the Obligations constitutes "Senior Indebtedness", as such term is defined in the Indenture dated November 15, 1986 between EDO and Manufacturers Hanover Trust Company." 10. Affirmative and Negative Covenants. (a) The Guarantor hereby covenants and agrees with the Bank that, from and after the date of this Guarantee until the Obligations are paid in full, unless otherwise consented to in writing by the Bank, the Guarantor shall: (i) Notices. Promptly give notice to the Bank of (a) the occurrence of any Guarantee Event of Default under this Agreement or of any default under any instrument or other agreement of the Guarantor or any of its Subsidiaries, (b) the receipt of any notice from the Internal Revenue Service of its intent to issue an adverse determination letter to the effect that the ESOP is not a qualified plan, and (c) any default or event of default under any instrument or other agreement binding upon the ESOP which default is likely to have a material adverse effect on the financial condition of the ESOP or on the ability of the ESOP to perform its obligations under the Basic Documents. Each notice pursuant to this subsection shall be accompanied by a statement of the president or chief executive officer of the Guarantor setting forth details of the occurrence referred to therein and stating what action the Guarantor proposes to take with respect thereto. (ii) Compliance of ESOP. Cause and require the ESOP (i) to use the proceeds of the Term Loan exclusively for the acquisition of employer securities (within the meaning of-Code Section 409(l)), (ii) subject to compliance with ERISA, to make principal payments in the amounts and at the time the ESCP is required to make principal payments of the Term Note, (iii) to comply with the requirements for an "exempt loan" to the ESOP as defined in Treasury Regulations Section 54.4975-7 and the requirements, if any, of Treasury Regulations which may be promulgated from time to time with respect to Code Section 133, (iv) promptly, upon receipt thereof, to deliver to the Bank each determination letter from the Internal Revenue Service stating that the ESOP is an employee stock ownership plan qualified under Code Sections 401(a) and 4975(e)(7), and (v) to be operated and administered as a qualified employee stock ownership plan under Section 401(a) of the Code and, to the extent applicable, Sections 409 and 4975(e)(7) of the Code and to be in material compliance with all applicable requirements of ERISA (including Titles I and II) and the Code and Regulations thereunder as from time in effect and applicable to the ESOP. (iii) Contribution to ESOP. Contribute to the ESOP such amounts as may be required to enable the ESOP to repay the Term Note in accordance with the terms thereof. (b) No Amendments. The Guarantor hereby covenants and agrees with the Bank that, from and after the date of this Guarantee until the Obligations are paid in full, unless otherwise consented to in writing by the Bank, the Guarantor shall not, nor will it permit any Subsidiary to, directly or indirectly, without the prior written consent of the Bank, permit the modification or waiver of or any change in any of the provisions of the Basic Documents. (c) The covenants of each Guarantor set forth in Article VI of the Revolving Credit Loan Agreement and in Section 5 of the Guarantee and Security Agreement, as of September 9, 1998 (the "Original Revolving Credit Loan Agreement Covenants"), together with those defined terms used therein, are hereby incorporated into this Guarantee. Each Guarantor acknowledges and agrees to comply with such Original Revolving Credit Loan Agreement Covenants (made by such Guarantor) and that the Original Revolving Credit Loan Agreement Covenants are in addition to the covenants and other agreements set forth in this Guarantee and shall in no way limit such other covenants and other agreements. Additionally, for the sole purpose of this Subsection 10(c), any amendment, supplement or modification of any of the Original Revolving Credit Loan Agreement Covenants after September 9, 1998 shall not be deemed to amend, supplement or modify the Original Revolving Credit Loan Agreement Covenants as incorporated herein by reference unless agreed to in writing by the Bank and the Guarantor." (d) No Guarantor shall create or acquire any Subsidiary unless (in addition to meeting the requirements set forth in Section 6.15(C) of the Revolving Credit Loan Agreement as incorporated herein by Subsection 10(c) hereof) (i) if such Subsidiary is a Domestic Subsidiary, such Subsidiary becomes a guarantor hereunder and assumes the Guarantee Liabilities pursuant to a joinder and assumption documents satisfactory to the Bank and grants to the Bank a first priority lien and security interest in and to all assets of such Subsidiary, and (ii) if such Subsidiary is a Foreign Subsidiary, the Bank has consented thereto, which consent may be conditional on, among other things, an amendment to this Guarantee satisfactory to the Bank and (iii) if such Subsidiary is a Domestic Subsidiary all of the stock of such Subsidiary is pledged as Collateral to secure the Guarantee Liabilities and if such Subsidiary is a Foreign Subsidiary, 65% of the stock of such Subsidiary is pledged as Collateral to secure the Guarantee Liabilities in each case, on a pari passu basis with the rights of the Agent under the Revolving Credit Loan Agreement. (e) Now and at all times hereafter, EDO's guaranty hereunder of principal of (and premium, if any) and interest on the Obligations shall constitute "Senior Indebtedness", as such term is defined in the Indenture dated November 15, 1986 between EDO and Manufacturers Hanover Trust Company. 11. Events of Default. Upon the occurrence and continuation of any of the following events (each a "Guarantee Event of Default"): (i) any representation or warranty or statement made by the Guarantor in any of the Basic Documents to which the Guarantor is a party or which is contained in any certificate, document, financial or other statement furnished at any time under or pursuant to the Basic Documents shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (ii) failure by the Guarantor to make any payment to the Bank on account of its obligations hereunder or to perform or observe any other term, covenant or agreement contained in Sections 6.3, 6.4, 6.7, 6.8, 6.10, 6.12, 6.15, 6.17, 6.19, 6.20, 6.21 or 6.24 through 6.31 of the Revolving Credit Loan Agreement as of September 9, 1998 on its part to be performed or observed; or (iii) an Event of Default (as defined in the Loan Agreement) shall occur and be continuing under the Loan Agreement; or (iv) default by the Guarantor in the observance or performance of any other agreement contained herein or in any of the Basic Documents to which the Guarantor is a party, and, if such default is capable of being cured, such default shall continue unremedied for a period ending 30 days after the earlier of (1) the date a Responsible Officer (as defined in the Revolving Credit Loan Agreement as of September 9, 1998) of the Guarantor shall have discovered such default and (2) the date written notice of such de fault has been given to the Guarantor by the Bank; or (v) an Event of Default (as defined in the Revolving Credit Loan Agreement as of September 9, 1998) shall occur and be continuing under the Revolving Credit Loan Agreement; or (vi) an Event of Default (as defined in the Revolving Credit Loan Agreement as may be amended from time to time) shall occur and be continuing under the Revolving Credit Loan Agreement. then, and in any such event, (a) if such event is a Guarantee Event of Default specified in paragraph (iv) above, automatically the Guarantor shall be obligated to purchase on the next succeeding Business Day the Term Note from the holder thereof for a purchase price paid in U.S. dollars in immediately available funds equal to the then outstanding balance of all principal and accrued interest remaining due and payable under such Term Note, plus any other amounts (including but not limited to any indemnity payments) owing to such holder from the ESOP or the Guarantor pursuant to any of the Basic Documents, calculated as of the date of such purchase and (b) if such event is any other Guarantee Event of Default, the Bank may, by notice of default to the Guarantor, declare this Guarantee Agreement to be in default, whereupon the Guarantor shall be obligated to purchase the Term Note from the holder thereof on such Business Day as shall be specified in such notice of default (such purchase date to occur not less than 1 Business Day nor more than 60 Business n@ays from the date of receipt of such notice) for a purchase price paid in U.S. dollars in immediately available funds equal to the then outstanding balance of all principal and accrued interest remaining due and payable under such Term Note, plus any other amounts (including but not limited to any indemnity payments) owing to such holder from the ESOP or the Guarantor pursuant to any of the Basic Documents, calculated as of the date of such purchase. 12. Purchase Recruirement. At any time on or after the earlier of (i) the seventh anniversary of the Closing Date, (ii) the date upon which the ESOP Rate is increased due to a Determination of Taxability, and (iii) the date upon which the Guarantor shall be liable to pay indemnification amounts pursuant to Section 20 hereof, the Guarantor may, upon prior written notice to the Bank, require the Bank or the holder of the Term Note to sell the Term Note to the Guarantor on such Business Day as shall be specified in such notice (such purchase date to occur with respect to clause (i) at the option of the Bank and with respect to clauses (ii) and (iii) at the option of the Guarantor) not less than 3 Business Days nor more than 60 Business Days from the date of receipt of such notice) for a purchase price paid in U.S. dollars in immediately available funds equal to the then outstanding balance of all principal and accrued interest remaining due and payable under such Term Note, plus any other amounts'(including but not limited to any indemnity payments) owing to such holder from the ESOP or the Guarantor pursuant to any of the Basic Documents, calculated as of the date of such purchase. 13. Purchase Terms. In the event the Guarantor purchases the Term Note under any of the circumstances contemplated in Section 11 or Secticn 12 above, then in such event (a) such Term Note shall be purchased by the Guarantor from the holder thereof without recourse and without representation or warranty of any kind as to such Term Note and (b) upon the payment in full of the purchase price for the Term Note all rights of the Bank under the Pledge Agreement and all Pledged Stock pledged under the Pledge Agreement shall be assigned and deliver without recourse and without representation or warranty of any kind to the Guarantor. 14. Severability. Any provision of this Guarantee which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Paragraph Headings. The paragraph headings used in this Guarantee are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. No Waiver; Cumulative Remedies. The Bank shall not by any act (excent by a written instrument pursuant to paragrah 17 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to haie acquiesced in any Guarantee Event of Default or any Loan Agreement Default or Event of Default or in any breach of any of the terms and conditions hereof or of the other Basic Documents. No failure to exercise, nor any delay in exercising, on the part of the Bank, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Bank of any right or remedy hereunder or under any of the other Basic Documents on any one occasion shall not be construed as a bar to any right or remedy which the Bank would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 17. Waivers and Amendments; Successors and Assigns; Governing Law. None of the terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Guarantor and the Bank, provided that any provision of this Guarantee may be waived by the Bank in a letter or agreement executed by the Bank or by telex or facsimile transmission from the Bank. This Guarantee shall be binding upon the successors and assigns of the Guarantor and shall inure to the benefit of the Bank and its successors and assigns. This Guarantee shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. 18. Notices. Notices by the Bank to the Guarantor may be given by mail, by telex or by facsimile transmission, addressed to the Guarantor at its address set forth under its signature below and shall be effective (a) in the case of mail, 3 days after deposit in the postal system, first class postage pre-paid and (b) in the case of telex or facsimile transmissions, when sent. The Guarantor may change its address and transmission numbers by written notice to the Bank. 19. Jurisdiction; Venue. Any legal action or proceeding with respect to this Agreement, the Term Note or any of the other Basic Documents may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York and, by execution and of this Agreement, the Guarantorhereby accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts. The Guarantor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Guarantor, as the case may be, at its address referred to herein, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of the Bank or the Guarantor to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Guarantor or the Bank, as the case may be, in any other jurisdiction. The Guarantor and the Bank hereby irrevocably and unconditionally waive any objection that they may now or hereafter have to the venue in New York of any action described in this Section 19, or that such proceeding was brought in an inconvenient court, and agrees not to plead or claim the same. The Guarantor and the Bank hereby irrevocably and unconditionally waive trial by jury in any legal action or proceeding referred to in this Section 19. 20. Indemnification. 20.1 Agreement to Indemnify. Upon the occurrence of any Indemnification Event (as defined in subsection 20.2), the Guarantor shall pay to the Bank such amounts as are described in subsection 20.4. 20.2 Indemnification Event. For the purposes of this Section 20, an "Indemnification Event" means a payment of tax by the Bank, or an offset against any tax refund or other amount otherwise due to the Bank, as a result of, or in conjunction with, any of the events set forth below: (i) The issuance of an IRS Notice (as defined in subsection 20.3) to the Bank, and (A) the failure of the Guarantor to exercise its contest rights within the period specified in subsection 20.6 or (B) if the Guarantor exercises its contest rights within the period specified in subsection 20.6, the termination of said contest; (ii) The occurrence of a final and unappealable decision, judgment, decree or other order by the Tax Court or by any other court of competent jurisdiction holding that the Bank is liable for the tax on prohibited transactions imposed by Section 4975 of the Code with respect to the Term Loan provided that the Guarantor shall have had the opportunity to exercise any applicable rights of contest granted to it under subsection 20.6; or (iii) The execution of a closing agreement by the Bank under Section 7121 of the Code to which the Guarantor has consented. For the purposes of this Section 20 a decision, judgment, decree or order holding that the Bank is liable for the tax on prohibited transactions is "unappealable" if the time for taking a timely appeal has elapsed or if the Bank and the Guarantor agree that an appeal will not be taken with respect to the issue of the tax on prohibited transactions. 20.3 IRS Notice. For the purposes of this Section 20, "IRS Notice" means a revenue agent's report or notice of proposed adjustment, or a notice of deficiency issued by the Internal Revenue Service to the Bank, which asserts or is premised upon the Bank's liability for the tax on prohibited transactions imposed by Section 4975 of the Code with respect to the Term Loan. (For the purposes of this Agreement, the Term Loan with respect to which the Bank's liability for the tax on prohibited transactions is asserted shall be called the "Challenged Loan".) 20.4 Indemnification Amounts. The amounts to be paid by the Guarantor to the Bank upon the occurrence of an Event of Indemnification shall equal: (i) the amount of any tax paid by the Bank, which constitutes a tax on prohibited transactions, as defined in either Section 4975(a) or Section 4975(b) of the Code, with respect to the Term Loan; plus (ii) the amount of any interest and of any penalties, additions to tax and additional amounts payable under Chapter 68 of the Code (collectively "Penalties") which are paid by the Bank with respect to the tax on prohibited transactions described in subsection 20.4(i); plus (iii) any amount necessary to hold the Bank harmless on an after-tax basis from all taxes required to be paid under the laws of any Federal, state or local government or taxing authority that are attributable to the receipt of any amounts from the Guarantor under this subsection 20.4 such taxes to be calculated at the maximum statutory rate applicable to the Bank in the year of such payment. For the purposes of this subsection 20.4, payment by the Bank includes the payment of estimated taxes, a reduction of the Bank's net operating loss, or an offset against any tax refund or other amount otherwise due the Bank. 20.5 Prompt Payment of Indemnification Amounts. Payments under subsection 20.4 shall be paid by the Guarantor promptly on written demand by the Bank. If the Guarantor shall fail to pay any amount payable under this Section 20 on the date due pursuant to this section, the Guarantor shall also pay, to the extent permissible by law, interest on such un,paid amount at a rate per annum equal to 2-1/2% above the MHTC Rate from such due date until such amount is paid. 20.6 Contest of Claims. (a) If an IRS Notice is issued to the Bank, the Bank shall notify the Guarantor promptly of such claim, shall forbear payment of the tax claimed for the lesser of 30 days after giving such notice or until the end of the taxable period, as defined in Section 4975(f)(2) of the Code (the "Taxable Period") if such forbearance is permitted by law, shall advise the Guarantor of all action taken or proposed to be taken by the Internal Revenue Service, and, if the conditions set forth in subsection 20.6(b) have been met, shall contest such proposed adjustment in good faith, ect, owever, to the following conditions: (i) the Bank need not undertake administrative proceedings beyond the level of an auditing agent with respect to any proposed adjustment; (ii) although the Bank will keep the Guarantor informed as to the progress of such litigation and will consult with the Guarantor's counsel, if requested, the conduct of such litigation shall remain within the sole discretion of the Bank and its tax counsel; (iii) the Bank shall determine the court of competent jurisdiction in which to contest such proposed adjustment; (b) the Bank's obligation to contest a proposed adjustment pursuant to subsection 20.6(a) shall arise only if, within the earlier of 30 days after notice to the Guarantor from the Bank of such proposed adjustment or the end of the Taxable Period, each of the following conditions shall be met: (i) the Guarantor shall in writing request that such proposed adjustment be contested and agree to indemnify the Bank in a manner satisfactory to the Bank for any liability or loss which the Bank may incur as a result of contesting the proposed adjustment and to pay the Bank on demand all costs and expenses that the Bank may incur in connection with contesting such proposed adjustment, including, without limitation, attorneys', accountants', and like professional fees and disbursements, and the amount of any interest or penalties that may be payable as a result of contesting such proposed adjustment; (ii) the Guarantor shall furnish to the Bank an opinion of counsel reasonably satisfactory to the Bank to the effect that there exists a meritorious claim that no prohibited transaction occurred with respect to the Challenged Loan; and (iii) the Guarantor shall have deposited into an escrow account with the Bank, an escrow agent, an amount in cash equal to the tax on prohibited transactions imposed under Section 4975(a) of the Code, and, if the Challenged Loan is not repaid by the Borrower before the end of the Taxable Period, the tax on prohibited transactions imposed under Section 4975(b) of the Code. (c) If the Bank shall have elected to contest such proposed adjustment by paying the amount of the tax attributable to the proposed adjustment and filing a claim for refund (and, upon denial of such claim for refund, commencing a suit for refund in the forum chosen by the Bank in its sole discretion), the Bank shall be paid the funds deposited in escrow by the Guarantor with the Bank, as escrow agent, pursuant to subsection 20.6(b)(iii) hereof, to be applied by the Bank in payment of such tax, and the Guarantor shall promptly deliver to the Bank such additional amounts as may be needed for that purpose. Upon receipt by the Bank of a refund or credit of such tax, the Bank shall pay to the Guarantor forthwith the amount of such refund or credit. (d) If the Bank shall elect to contest such proposed adjustment by filing a petition in the Tax Court, upon a final determination by the Tax Court (or, if the decision of the Tax Court shall be appealed, upon the determination of such appeal) all or such portion of the funds deposited by the Guarantor in escrow with the Bank, as escrow agent, pursuant to subsection 20.6(b)(iii) hereof shall be delivered to the Bank as shall be required to pay the tax determined to be due with respect to such proposed adjustment. Any balance remaining in such escrow account (or, if such final determination shall provide that no prohibited transaction occurred with respect to the Challenged Loan, the entire amount of such escrow account) shall promptly be returned by the Bank, as escrow agent, to the Guarantor. (e) Although any contest pursuant to this section 20.6 shall be controlled by the Bank and its tax counsel, upon the Guarantor's reqest, the Bank and its tax counsel shall permit the Guarantor and its tax counsel to participate, with respect to the issue of the Bank's liability for any tax on prohibited transactions imposed by Section 4975 of the Code with respect to the Term Loan in all proceedings before the Internal Revenue Service or any court, such participation may, with the consent of the Bank, include attendance at any meetings, hearings, trials, and arguments, the provision of any documentation, protests, memoranda of factor or law, and briefs, the making of oral arguments and Presentations, the selection of witnesses, and the negotiation of stipulations of fact. (f) In event that any court issues a decision, judgment, decree or other order holding that the Bank is liable for the tax on prohibited transactions imposed by section 4975 of the Code with respect to the Term Loan, the Guarantor shall have the right to request the Bank to appeal such decision, judgment, decree or other order, provided, that the Guarantor shall furnish to the Bank an opinion of counsel reasonably satisfactory to the Bank to the effect that there exists a meritorious claim that no prohibited transaction occurred with respect to the Challenged Loan and valid grounds for appeal of the aforementioned decision, judgment, decree or other order and provided, further, that the Bank shall have sole discretion as to the decision whether or not to make such an appeal. 20.7 Successors and Assigns; Survival. (a) This Section 20 shall be binding upon and inure to the benefit of the Guarantor and the Bank and their respective successors and assigns, notwithstanding the amendment or termination of this Agreement or of any of the rights or obligations of any of the parties thereto, except that the Guarantor may not assign or transfer any of its rights or delegate any of its obligations under this Section 20, without the prior written consent of the Bank. (b) The obligations of the Guarantor under this Section 20 shall survive the payment in full of all sums due under the Term Note and shall continue in effect until all amounts due hereunder have been paid and in any event until five days after all statutes of limitation have run (after taking into account all extensions and suspensions thereof) in respect of any taxable year (or portion thereof), during which any payment of interest on the Term Note or any payment pursuant to this Section 12 was received or accrued. 21. Payment of Expenses. The Guarantor agrees (a) to pay or reimburse the Bank for all its out-of-pocket costs and expenses incurred in connection with the negotiation, preparation and execution of this Agreement, the Loan Agreement, the Term Note and the other Basic Documents and of any amendment, supplement or modification to this Agreement, the Loan Agreement, the Term Note or the other Basic Documents, including, without limitation, the reasonable fees and disbursements of Simpson Thacher Bartlett, counsel to the Bank, (b) to pay or reimburse the Bank for all its costs and expenses incurred in connection with the enforcement or reservation of any rights under this Agreement, the Loan Agreement, the Term Note and the other Basic Documents, including, without limitation, the reasonable fees and disbursements of Simpson Thacher & Bartlett, counsel to the Bank, and (c) to pay, indemnify, and hold harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, out-of-pocket costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the Loan Agreement, the Term Note and any of the other Basic Documents (all the foregoing being herein collectively, called the "indemnified liabilities"), provided that the Guarantor shall have no obligation under this clause (d) with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Bank. The agreements in this subsection shall survive repayment of the Term Note and all other Obligations. IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly executed and delivered as of the date first above written. EDO CORPORATION, By s/Michael J. Hegarty Title: Vice President Address for Notices: 14-04 lllth Street College Point, New York 11356 Attention: Chief Financial Officer Schedule 1 GUARANTEE DEFINITIONS "Accounts": shall have the meaning given to such term in the U.C.C. "Affiliate": shall have the meaning given to such term in the Revolving Credit Loan Agreement as of the date hereof. "Agent": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "Books and Records": shall have the meaning given to such term in Section 2.1 hereof. "Chattel Paper": shall have the meaning given to such term in the U.C.C. "Collateral": shall mean all property which serves or is intended to serve, whether now or in the future, as collateral for any of the Guarantee Liabilities hereunder. "Consolidated": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "Default Rate": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "Documents": shall have the meaning given to such term in the U.C.C. "Domestic Subsidiary": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "EDO": shall mean EDO Corporation, a New York corporation. "EDO Subsidiaries": shall mean EDO Western Corporation, EDO International Corporation, Barnes Engineering Co., EDO Sports, Inc., EDO Energy Corporation, EDO Automotive Natural Gas, Inc., EDO Acquisition II, Inc. and EDO Foreign Sales Corporation and any other direct or indirect Subsidiary of EDO now existing or hereafter created. "Environmental Law": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "Equipment": shall have the meaning given to such term in the U.C.C. "Foreign Subsidiary" shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "General Intangibles": shall have the meaning given to such term in the U.C.C. "Guarantee and Security Agreement": shall mean the Guarantee and Security Agreement among the EDO Subsidiaries dated as of September 9, 1998 and entered into in connection with the execution of the Revolving Credit Loan Agreement. "Guarantee Pledge Agreement": shall have the meaning given to such term in Section 2.1 hereof. "Guarantee Liabilities": shall have the meaning given to such term in Section 2.1 hereof. "Guarantor": shall mean EDO and the EDO Subsidiaries, jointly and severally. "Instruments": shall have the meaning given to such term in the U.C.C. "Intercreditor Agreement": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "Inventory": shall have the meaning given to such term in the U.C.C. "Landlord's Waiver": shall have the meaning given to such term in Section 2.1 hereof. "Loans": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "Material Adverse Effect": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "Original Revolving Credit Loan Agreement Representations and Warranties": shall have the meaning given to such term in Section 9(l) hereof. "Original Revolving Credit Loan Agreement Covenants": shall have the meaning given to such term in Section 10(c) hereof. "Permitted Encumbrances": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "Purchaser": shall mean a buyer of goods or services from a Guarantor . "Revolving Credit Loan Agreement": shall have the meaning set forth in the Second Amendment to Basic Documents among the Bank, EDO Corporation and the Trustee dated as of September 9,1998. "Revolving Credit Loan Documents": shall have the meaning set forth in the Second Amendment to Basic Documents among the Bank, each Guarantor and the Trustee dated as of September 9, 1998. "Subsidiary": shall have the meaning given to such term in the Revolving Credit Loan Agreement, as of the date hereof. "U.C.C.": shall mean the Uniform Commercial Code as adopted in the Commonwealth of Pennsylvania. EX-10.E 5 EXHIBIT 10(E) - CONSENT DECREE IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CONNECTICUT UNITED STATES OF AMERICA Plaintiff, CIVIL ACTION NO. 591CV00078 V. EDO Corporation, Plessey Incorporated, Vernitron Corporation and Pitney Bowes, Inc. Defendants. CONSENT DECREE TABLE OF CONTENTS Page I. BACKGROUND 1 II. JURISDICTION 4 III. PARTIES TOUND 5 IV. DEFINITIONS 6 V. GENERAL PROVISIONS 14 VI. PERFORMANCE OF THE WORK BY SETTLING DEFENDANTS 19 VII U.S. EPA PERIODIC REVIEW TO ASSURE PROTECTION OF HUMAN HEALTH AND THE ENVIRONMENT 25 VIII. ADDITIONAL WORK 26 IX. QUALITY ASSURANCE; SAMPLING 28 X. ACCESS AND INSTITUTIONAL CONTROLS 29 XI. REPORTING REQUIREMENTS 32 XII. SUBMISSIONS REOUIRING AGENCY APPROVAL 34 XIII. REMEDIAL PROJECT MANAGER/PROJECT COORDINATORS 35 XIV. ASSURANCE OF ABILITY TO COMPLETE WORK 36 XV. TRUST FUND 38 XVI. CERTIFICATION OF COMPLETION OF WORK 39 XVII. ENDANGERMENT AND FUTURE RESPONSE 40 XVIII. REIMBURSEMENT OF RESPONSE COSTS 42 XIX. INDEMNIFICATION AND INSURANCE 46 XX. FORCE MAJEURE 48 XXI. DISPUTE RESOLUTION 50 XXII. STIPULATED PENALTIES 54 XXIII. COVENANTS NOT TO SUE BY PLAINTIFFS 58 ii XXIV. CONTRIBUTION PROTECTION 64 XXV. COVENANTS BY DEFENDANTS; ASSIGNMENT OF CLAIMS 65 XXVI. ACCESS TO INFORMATION 66 XXVII. RETENTION OF RECORDS 68 XXVIII. NOTICES AND SUBMISSIONS 69 XXIX. EFFECTIVE DATE 70 XXX. RETENTION OF JURISDICTION 71 XXXI. TERMINATION 71 XXXII. MODIFICATION 72 XXXIII. COMMUNITY RELATIONS 72 XXXIV. LODGING AND OPPORTUNITY FOR PUBLIC COMMENT 73 XXXV. SIGNATORIES 73 LIST OF APPENDICES I. Record of Decision - Second Operable Unit II. Statement of Work III. Site Maps IV. Settling Defendants iii I. BACKGROUND The United States of America ("United States"), on behalf of the Administrator of the United States Environmental Protection Agency ("EPA"), filed a complaint in this matter pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. section 9601 et seq., as amended (hereinafter "CERCLA"); EPA pursuant to Section 105 of CERCLA, 42 U.S.C. section 9605, placed the Kellogg-Deering Well Field Site in Norwalk, CT (the "Site") in 1984 on the National Priorities List, set forth at 40 C.F.R. Part 300, Appendix B, by publication in the Federal Register on September 21, 1984, 49 Fed. Reg. 37070; Pursuant to Section 117(b) and (d) of CERCLA 42 U.S.C. section 9617(b) and (d), EPA provided public notice of its adoption of the remedial action plan for the first operable unit of the Kellogg-Deering Wellfield Site embodied in the form of the Record of Decision (ROD), including notice of the ROD's availability to the public; EPA commenced in December, 1987, the Supplemental RI/FS for the second operable unit pursuant to 40 C.F.R. section 300.68; -2 - EPA completed the Supplemental RI for the second operable unit in July, 1989, and completed the Supplemental FS in July, 1989; On July 26, 1989, pursuant to Section 117 of CERCLA, 42 U.S.C. section 9617, EPA published notice of the completion of the Supplemental FS and of the proposed plan for the second operable unit and provided opportunity for public comment between July 26 and August 25, 1989; Certain persons, including certain Settling Defendants, provided comments on EPA's proposed plan for the second operable unit and to such comments EPA provided a summary of responses; The decision by EPA on the selected remedy for the second operable unit is embodied in a Record of Decision for the second operable unit ("Second Operable Unit ROD"), executed on September 29, 1989, to which the State of Connecticut has given its concurrence. The "Second Operable Unit ROD" includes a discussion of the reasons EPA selected the remedy for the second operable unit and an explanation of any significant changes in the plan from that proposed; Pursuant to Section 117(b) and (d) of CERCLA, 42 U.S.C. 9617(b) and (d), EPA provided public notice of its adoption of the remedial action plan for the second operable unit embodied in -3- the form of the "Second Operable Unit ROD," including notice of the Second Operable Unit ROD's availability to the public; In accordance with Section 121(f) of CERCLA, 42 U.S.C. section 9621(f), EPA notified the State of Connecticut on May 23, 1990, of negotiations with potentially responsible parties ("PRPs") regarding the scope of the remedial design and remedial action for the second operable unit for the Site, and EPA has provided the State of Connecticut with an opportunity to participate in such negotiations and be a party to any settlement; the State participated in such negotiations but has elected not to be a party to this settlement; In accordance with Section 122(j) of CERCLA, 42 U.S.C. section 9622(j), EPA on May 23, 1990, notified the Federal Natural Resource Trustees of negotiations with PRPs regarding the scope of the remedial design and remedial action for the second operable unit at the Site, and has encouraged the participation of the Trustees in such negotiations; EPA, the Paying Settling Defendants and the Settling Defendants (collectively "The Parties") agree that the remedy selected in the Second operable Unit ROD as adopted by EPA and embodied in the Statement of Work herein is protective of the public health and the environment and is consistent with CERCLA -4- and the National Contingency Plan ("NCP"); the Parties desire to settle this matter; Pursuant to the Special Notice Procedures of Section 122(e) of CERCLA, 42 U.S.C. section 9622(e), the Parties have negotiated an agreement to implement a remedy consistent with the Second Operable Unit ROD, which remedy is set forth in the Statement of Work attached as Appendix II of this Consent Decree. The Settling Defendants and the Paying Settling Defendants that have entered into this Consent Decree ("Defendants") do not admit any liability to the Plaintiffs arising out of the transactions or occurrences alleged in the Complaints. The Parties recognize, and the Court by entering this Consent Decree finds, that implementation of this Consent Decree will expedite the cleanup of the Site, will avoid prolonged and complicated litigation between the Parties, and that entry of this Consent Decree is therefore in the public interest; NOW, THEREFORE, it is hereby Ordered, Adjudged, and Decreed: II. JURISDICTION 1. This Court has jurisdiction over the subject matter of these actions pursuant to the following: 28 U.S.C. sections 1331, 1345; 42 U.S.C. sections 9606, 9607, and 9613(b). This Court also has personal jurisdiction over the Defendants. Venue in this -5- District is proper under 42 U.S.C. section 9613(b). For purposes of this Consent Decree and the underlying Complaint, Defendants waive all objections and defenses that they may have to personal jurisdiction and to jurisdiction of the Court or to venue in this District. The Complaint states claims against Settling Defendants and Paying Settling Defendants upon which relief may be granted. Settling Defendants and Paying Settling Defendants shall not challenge this Court's jurisdiction to enter and enforce this Consent Decree. III. PARTIES BOUND 2. This Consent Decree applies to and is binding upon the United States and upon the Paying Settling Defendants and the Settling Defendants and their directors, officers, employees, shareholders, agents, successors, assigns, trustees, and contractors. Any change in ownership or corporate status of a Settling Defendant or Paying Settling Defendant, including any transfer of property, shall in no way alter such Settling Defendant's or Paying Settling Defendant's responsibility under this Consent Decree. Settling Defendants shall provide a copy of this Consent Decree to any contractors and subcontractors hired to perform the Work required by this Consent Decree and shall condition all contracts and subcontracts entered into hereunder upon performance of the Work in conformity with the terms of this Consent Decree. Settling Defendants shall -6- nonetheless be responsible for ensuring that their contractors and subcontractors perform the work contemplated herein in accordance with this Consent Decree. With regard to the activities undertaken pursuant to this Consent Decree, each contractor and subcontractor shall be deemed to be related by contract to the Settling Defendants within the meaning of Section 107(b)(3) of CERCLA, 42 U.S.C. section 9607(b)(3). Thus, as to acts or omissions of contractors, the Settling Defendants shall not assert a defense based upon CERCLA Section 107(b)(3), 42 U.S.C. section 9607(b)(3). IV. DEFINITIONS 3. Unless noted to the contrary, the terms of this Consent Decree shall have the meaning assigned to those terms by CERCLA and its implementing regulations. Whenever the terms listed below are used in this Consent Decree and the Appendices attached hereto, the following definitions shall apply: "Additional Work" shall mean all activities required by Section VIII herein. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. sections 9601 et seq. -7- "Cleanup Standards" shall mean the numerical criteria respecting the degree of cleanup to be achieved in the groundwater and soil at the Site. These criteria are set forth in the Statement of Work attached hereto. "Complex" shall mean the area encompassing the Elinco/Pitney Bowes/Matheis Court Complex located at 270 1/2, 272, 276 and 280 Main Avenue in Norwalk, Connecticut, as delineated on the Site maps attached hereto as Appendix III. "Contractor" shall mean the company or companies retained by the Settling Defendants to undertake and complete the work required by this Consent Decree. Each contractor and subcontractor shall be qualified to do those portions of the work for which it is retained. "CT DEP" shall mean the Connecticut Department of Environmental Protection. "Day" shall mean a calendar day unless expressly stated to be a working day. "Working day" shall mean a day other than a Saturday, Sunday, or legal holiday. In computing any period of time under this Consent Decree, where the last day would fall on a Saturday, Sunday, or federal or state legal holiday, the period shall run until the end of the next working day. -8- "Defendents" shall mean Settling Defendants and "Paying Settling Defendants". "Downgradient Area" as defined in the "Second Operable Unit ROD" refers to areas at the Site in which trichloroethene ("TCE") concentrations were found to be between 5 micrograms per liter ("ug/1") and 6,600 ug/l from data collected during the Supplemental RI. For purposes of this Consent Decree, the Downgradient Area refers to the area of groundwater contamination downgradient of the Source Remediation Area as defined herein. The Downgradient Area is delineated on the Site map attached hereto as Appendix III. "EPA" shall mean the United States Environmental Protection Agency. "Entry" of the Consent Decree, for purpose of determining the obligations of the Settling Defendants and Paying Settling Defendants which are dependent upon that date, shall be the earlier of-(!) the date notice of the entry of the Consent Decree is received by the Settling Defendants and Paying Settling Defendants, or (2) five calendar days following the date notice of entry of the Decree is mailed to the Parties by the Court. "Facility" shall have the meaning provided in Section 101(9) of CERCLA, 42 U.S.C. section 9601(9). -9- "Hazardous Substance" shall have the meaning provided in Section 101(14) of CERCLA, 42 U.S.C. 9601(14). "Institutional Controls" shall mean the land use and deed restrictions and other regulations and controls developed pursuant to this Consent Decree and the Statement of Work to restrict soil excavation in areas of soil contamination at the Complex and restrictions on well installations and use in areas of groundwater contamination in the Source Area and Downgradient Area. "National Contingency Plan" or "NCP" shall mean the National Contingency Plan promulgated pursuant to Section 105 of CERCLA, 42 U.S.C. section 9605, codified at 40 C.F.R. Part 300, including any amendments thereto. "Operation and Maintenance" or "O & M" shall mean all activities required under the Operation and Maintenance Plan approved or developed by Plaintiff pursuant to this Consent Decree and Section VI of the Statement of Work. "Paragraph" shall mean a portion of this Consent Decree identified by an arabic numeral. -10- "Parties" shall mean the United States, the Settling Defendants and the Paying Settling Defendants. "Paying Settling Defendants" shall mean those Parties listed in Appendix IV and-who make the payments required by Section XVIII, Paragraph 48b. of this Consent Decree. "Performance Standards" shall mean the criteria respecting the degree and method of cleanup to be achieved at the Site, including all location, chemical, and action specific applicable or relevant and appropriate standards, requirements, criteria and limitations identified in the Second Operable Unit ROD and the SOW or by EPA prior to Certification of Completion of the Work and all other health or environmentally related numerical standards in the Second Operable Unit SOW. Performance Standards include all Cleanup Standards. "Plaintiff" shall mean the United States and its agencies and departments. "RCRA" (Resource Conservation and Recovery Act) shall mean the Solid Waste Disposal Act, as amended, 42 U.S.C. sections 6901 et seq. -11- "Remedial Action" shall mean all activities required by the Consent Decree, including any Additional work required under Section VIII hereof, except for operation and Maintenance. "Response Costs" shall mean any costs incurred by Plaintiff with respect to the Site pursuant to 42 U.S.C. sections 9601 et seq.; as set forth herein. "Section" shall mean a portion of this Consent Decree identified by a roman numeral and including one or more paragraphs. "Second Operable Unit Record of Decision" or "Second Operable Unit ROD" shall mean the EPA Record of Decision relating to the second operable unit for the Site signed on September 29, 1989, by the Acting Regional Administrator, EPA Region I, and all attachments thereto. The Second Operable Unit ROD is attached as Appendix I. "Settling Defendants" shall mean those Defendants who both are listed in Appendix IV and who sign this Consent Decree and make payments required under Section XVIII, Paragraphs 48a. and 49 of this Consent Decree. "Site" for purposes of this Consent Decree shall mean the area delineated on Appendix III as the SRA and all areas outside -12- of the SRA that are necessary to monitor the effectiveness of the Second Operable Unit remedial actions. "Source Area" as defined in the "Second Operable Unit ROD" refers to the area at the Site where contaminated groundwater plume concentrations were found to be above 6,600 ug/l of trichloroethene ("TCE") from data collected during the Supplemental RI. The Source Area includes the Elinco/Pitney Bowes/Matheis Court Complex as well as an adjacent area extending approximately 400 feet west and approximately 500 feet southeast of the Complex. "Source Remediation Area" or "SRA" shall mean the Complex and the area within the boundary lines as shown on the map in Appendix III and bounded as described below: on the west by the railroad tracks, on the north by a line extending between the railroad tracks and the northwest corner of the complex, on the south by a line extending from the intersection of Broad Street and the railroad tracks to the southeast corner of the complex, and all of the complex property itself. "State" shall mean the State of Connecticut. "Statement of Work" or "SOW" shall mean statement of work for implementation of the remedial design, remedial action, and operation and maintenance of the remedial action for the second -13 - operable unit at the Site, as set forth in Appendix II and any modifications thereto in accordance with this Consent Decree. "United States" shall mean the United States of America, including the United States Environmental Protection Agency. "Waste Material" shall mean (1) any substance meeting the definition provided in Section 101(14) of CERCLA, 42 U.S.C. 9601(14); (2) any "pollutant" or "contaminant" under Section 101(33) of CERCIA, 42 U.S.C. section 9601(33); or (3) any "hazardous waste" under Section 1004(5) of SWDA, 42 U.S.C. section 6903(5). "Work" shall mean all work or other activities or obligations required by this Consent Decree, including but not limited to Remedial Action and Operation and Maintenance and any activities required to be undertaken pursuant to Section VIII. "Workplan" or "Work plan" shall mean a work plan or work plans for design and implementation of the Work required under this Consent Decree and the Statement of Work and any modifications thereto in accordance with this Consent Decree and the Statement of Work. -14 - V. GENERAL PROVISIONS 4. Objectives of the Parties The objectives of the Parties in entering into this Consent Decree are to protect public health, welfare and the environment from releases or threatened releases of Waste Materials at and from the Site by the investigation, development, design and implementation of remedial and monitoring programs by the Settling Defendants and reimbursement of certain Response Costs incurred by EPA by the Settling Defendants and Paying Settling Defendants. 5. Commitment of Settling Defendants and Paying Settling Defendants a. Settling Defendants agree jointly and severally to finance and perform all Work, including the remedial design and remedial action work set forth in Section VI, and to reimburse the United States for Response Costs and stipulated penalties as provided herein. b. In the event of the insolvency, inability or refusal of any one or more Settling Defendants to implement the requirements of this Consent Decree, the remaining Settling Defendants agree to complete all such requirements. However, in such an event the Settling Defendants shall meet and attempt to provide an alternate allocation of financial responsibility to complete all such requirements. The Dispute Resolution provisions of this Consent Decree shall govern the failure of the -15- Settling Defendants to arrive at a mutually agreeable allocation of responsibility. c. The Work set forth in Section VI shall be completed in accordance with the standards, specifications and within the time periods prescribed in Section VI and in the SOW, or any amendment thereto agreed to by the Parties or approved by the Court. d. The Defendants agree that with respect to any suit or claim for contribution brought by or against them for matters related to this Consent Decree they will notify the United States within ten (10) working days of the initiation of such suit or claim. e. In any subsequent administrative or judicial proceeding initiated by the United States for injunctive relief, recovery of response costs, or other appropriate relief relating to the Kellogg-Deering Wellfield Site, Settling Defendants and Paying Settling Defendants shall not assert, and may not maintain, any defense or claim based upon the principles of waiver or claim-splitting or otherwise based upon any contention that the claims raised by the United States or the State in the subsequent proceeding were or should have been brought in the instant case; provided, however, that nothing in this Paragraph affects the enforceability of the covenants not to sue set forth in Section XXIII. f. The United States may, in its unreviewable discretion, excuse or postpone any of the Settling Defendants -16- obligations under this Consent Decree but only in a manner consistent with Section XXXII. 6. Permits and Approvals a. All activities undertaken by the Settling Defendants pursuant to this Consent Decree shall be undertaken in accordance with the requirements of Section 121(d) of CERCLA and the NCP. The United States has determined that the obligations and procedures authorized under this Consent Decree are consistent with the NCP. b. Except as provided in Section 121(e) of CERCLA and the NCP, no permit shall be required for any portion of the Work conducted entirely onsite. Where any portion of the Work requires a federal or state permit or approval under CERCLA and the NCP, Settling Defendants shall timely submit applications and take all other actions necessary to obtain all such permits or approvals. c. Settling Defendants shall include in all contracts or subcontracts entered into for work required under this Consent Decree, provisions stating that such contractors or subcontractors, including their agents and employees, shall perform all activities required by such contracts or subcontracts in compliance with all applicable laws and regulations. d. This Consent Decree is not, and shall not be construed to be, a permit issued pursuant to any federal or state statute or regulation. -17- 7. Conveyance of the Site a. Within thirty (30) days after the entry of this Consent Decree, Settling Defendants shall record a certified copy of this Consent Decree with the Recorder's Office [or Registry of Deeds], Town of Norwalk, Fairfield County, State of Connecticut with respect to each property that is part of the Complex. Thereafter, each deed, title, or other instrument of conveyance for all such property shall contain a notice stating that the property is subject to this Consent Decree and shall reference the recorded l ocation of the Consent Decree and any restrictions applicable to the property under this Consent Decree. b. The obligations of each Settling Defendant who owns any interest in property included in the Site, with respect to the provision of access under Section X and the implementation of Institutional Controls under Section X, shall run with the land and shall be binding upon any and all such Settling Defendants and any and all persons who subsequently acquire any such interest or portion thereof (hereinafter "Successors-in-Title"). Within ten (10) working days after the entry of this Consent Decree, each Settling Defendant who owns any interest in property included in the Site shall record at the Registry of Deeds, or other office where land ownership and transfer records are maintained for the property, a notice of obligation to provide access and related covenants. Each subsequent deed to any such property included in the Site shall reference the recorded location of such notice and covenants applicable to the property. -18- In addition, each such Settling Defendant shall provide for conveyancing and recording of easements for access to such property to the United States for purposes of monitoring and implementation of the activities required under this Consent Decree. The granting of such easements pursuant to this paragraph shall not operate to make the United States an owner or operator of the Site for purposes of liability under any environmental statute administered by EPA. c. Any Settling Defendant that owns an interest in property included in the Site and any Successor-in-Title shall, within thirty (30) days prior to the conveyance of any such interest, give written notice of this Consent Decree to the grantee and written notice to EPA of the proposed conveyance, including the name and address of the grantee, and the date on which notice of the Consent Decree was given to the grantee. In the event of any such conveyance, the Settling Defendants' obligations under this Consent Decree shall continue to be met by the Settling Defendant and, subject to approval by the United States, by the grantee. Violation of the provisions of Paragraph 4.a and 4.c of this Consent Decree by any Settling Defendant who owns interests in property included in the Site shall not render the other Settling Defendants to be in violation of this Consent Decree. d. Settling Defendants and Paying Settling Defendants shall not use any portion of the Site in any manner which would adversely affect the integrity of any treatment system or -19- monitoring system installed pursuant to this Consent Decree as determined by EPA. VI. PERFORMANCE OF THE WORK BY SETTLING DEFENDANTS 8. The Settling Defendants shall perform the Work for the Site as described in this Decree; in the "Second Operable Unit ROD," attached hereto as Appendix I; in the Statement of Work (which the Parties agree is consistent with the Second Operable Unit ROD), attached hereto as Appendix II; and any modifications thereto. The Second Operable Unit ROD, the SOW, or any amendment thereto agreed to by the Parties or approved by the Court are hereby incorporated by reference and made a part of this Consent Decree. The Work shall be performed in accordance with all the provisions of this Consent Decree, the SOW, or any amendment. thereto agreed to by the Parties or approved by the Court and all design specifications, Work Plans or other plans or schedules attached to or approved pursuant to the SOW. Any modifications to the SOW, design specifications, Work Plans or other plans or schedules that are proposed by the Settling Defendants shall be effective upon approval by EPA, after opportunity for review and comment by the State. In the event of any conflict between the Consent Decree and the SOW, the Consent Decree shall control. In the event of any conflict between the Second Operable Unit ROD and the Consent Decree or the SOW, the Consent Decree or the SOW -20- shall control. As described with particularity in the SOW, the major components of the remedial action for the Site are as follows: 1) a source control component which will involve the design, installation, monitoring, operation, and maintenance of a soil vapor vacuum extraction system in the unsaturated zone at the Elinco/Pitney Bowes/Matheis Court Complex which will intercept laterally and vertically all areas of subsurface soil contamination until soil cleanup standards are attained; 2) a management of migration component which will involve the design, installation, monitoring, operation and maintenance of a groundwater extraction, treatment and disposal system for the Source Remediation Area; and 3) institutional controls which shall involve restrictions on soil excavation in areas of soil contamination at the Complex and restrictions on well installations and use in areas of groundwater contamination in the Source Area and Downgradient Area. 9. In order to expedite the design of the remedial action at the Site, Settling Defendants agree to commence and perform certain remedial design-related activities as described herein and in the SOW as a contractual obligation effective upon the lodging of this Consent Decree with the Court. All oversight response costs incurred prior to the entry of the Consent Decree shall be reimbursed after entry in accordance with Section XVIII. 10. All remedial design work to be performed by Settling Defendants pursuant to this Consent Decree shall be under the -21- direction and supervision of a qualified contractor. Within thirty (30) days after the lodging of this Consent Decree, the Settling Defendants shall notify EPA and the State, in writing, of the name, title, and qualifications of any supervising contractor and the names of principal contractors and/or subcontractors proposed to be used in carrying out the remedial design work to be performed pursuant to this Consent Decree. Selection of any such contractor shall be subject to disapproval by EPA, after opportunity for review and comment by the State. If EPA, after opportunity for review and comment by the State, disapproves of the selection of any contractor, the Settling Defendants shall submit a list of contractors to EPA and the State within twenty-one (21) days of receipt of the disapproval of the contractor previously selected. EPA, after opportunity for review and comment by the State, will, if practicable, within twenty-one (21) days of receipt of the list, provide written notice of the names of contractors that the Plaintiff disapproves. The Settling Defendants may at their election select any one not disapproved on the list. After selection of a contractor, Settling Defendants shall notify EPA and the State of the name of the contractor within fourteen (14) calendar days following receipt of notice. 11. All remedial action work to be performed by the Settling Defendants pursuant to this Consent Decree shall be under the direction and supervision of a qualified contractor. Within thirty (30) days after Settling Defendants receive notice -22 - that EPA, after opportunity for review and comment by the State, has approved or modified the Settling Defendants' remedial design for each remedial component, pursuant to Section VI.A. of the SOW, the Settling Defendants shall notify EPA and the State in writing of the name, title and qualifications of any supervising Contractor and the names of principal contractors and/or subcontractors proposed to be used in carrying out the remedial action work to be performed pursuant to this Consent Decree. Selection of any such contractor and/or subcontractor shall be subject to disapproval by the Plaintiff in accordance with the provisions of Paragraph 10. 12. Appendix II to this Consent Decree provides a Statement of Work for the completion of remedial design and remedial action at the Site. This Statement of Work is incorporated into and made an enforceable part of this Consent Decree. 13. The following work shall be performed by Settling Defendants: a. In accordance with the schedule set forth in the SOW, Settling Defendants shall commence Remedial Design activities as described in the Statement of Work. b. The Remedial Design activities shall include, but not be limited to, the following tasks and submissions: Initial Remedial Steps, including the submittal of an Indoor Air ,Monitoring Plan and a Groundwater Monitoring Plan in accordance with the schedule in Section V.A. of the SOW; submittal of a PreDesign Work Plan for Contaminated Soils and a Pre-Design Work -23 - Plan for Contaminated Groundwater in the Source Remediation Area, including a schedule for performance of all activities, as described in and in accordance with the schedule in section V.B. of the SOW; implementation of the Pre-Design Work Plans as approved by EPA, and in accordance with the approved schedule, as described in Section V.E. of the SOW; submission of the reports for each of items described in the approved Pre-Design Work Plans for approval by EPA, as described in Section V.E. of the SOW; submittal of a Pre-Design Report for Contaminated Soils and a Pre-Design Report for Contaminated Groundwater in the Source Remediation Area for approval by EPA, and in accordance with the approved schedule, as described in Section V.E. of the SOW; submittal of a Remedial Design for Contaminated Soils at the Complex and a Remedial Design for Contaminated Groundwater in the Source Remediation Area, including a schedule for performance of all activities, as described in and in accordance with the schedule in Section V.F. of the SOW; implementation of the Remedial Action according to the Remedial Designs, as approved by EPA, and in accordance with the approved schedule and as described iri Section VI of the SOW; selection of the Remedial Action Contractor(s), as described in Section VI.A of the SOW and Paragraph 11 of this Consent Decree; and submittal of the Remedial Action Work Plan for Contaminated Soil and a Remedial Action Work Plan for Contaminated Groundwater in the Source Remediation Area, including a schedule for performance of all -24 - activities, as described in and in accordance with the schedule in Section VI of the SOW. c. Settling Defendants shall implement the Work detailed in the Statement of Work upon approval or modification of the Work Plans by EPA, after opportunity for reveiew and comment by the State, pursuant to the procedures in Section XII. Unless otherwise directed by EPA and except for operation of the currently existing groundwater pump and treat system at the Complex, the Settling Defendants shall not commence Remedial Action activities until approval by EPA of the Remedial Action Work Plans and entry of the Consent Decree. Upon approval by EPA, a Work Plan and any submissions required by it or this Consent Decree shall be deemed incorporated into and made an enforceable part of this Consent Decree. All Work shall be conducted in accordance with the National Contingency Plan, the EPA Superfund Remedial Design and Remedial Action Guidance, any additional guidance provided by EPA, and the requirements of this Consent Decree, including the standards, specifications and schedule contained in the SOW and Work Plans approved in accordance with this Consent Decree and the SOW. d. Upon entry of this Consent Decree, all obligations concerning Remedial Design are subject to enforcement pursuant to this Consent Decree, including but not limited to stipulated penalties, as set forth herein. 14. The Parties acknowledge and agree that neither the SOW nor Work Plans approved pursuant to this Consent Decree and the -25- SOW constitute a warranty or representation of any kind by Plaintiff that the SOW or such Work Plans will achieve the cleanup and performance standards set forth in the ROD and in the SOW and shall not foreclose Plaintiff from seeking performance of all terms and conditions of this Consent Decree, including achieving the applicable Performance and Cleanup Standards. 15. The Work performed by Settling Defendants pursuant to this Consent Decree must achieve the Cleanup and Performance Standards identified in the SOW. VII. U.S. EPA PERIODIC REVIEW TO ASSURE PROTECTION OF HUMAN HEALTH AND THE ENVIRONMENT 16. To the extent required by Section 121(c) of CERCLA, 42 U.S.C. section 9621(c), and any applicable regulations, EPA shall review the remedial action at the Site at least every five (5) years after initiation of the remedial action to assure that human health and the environment are being protected by the remedial action being implemented. Prior to EPA Certification of Completion of the Work, Settling Defendants shall conduct the requisite studies, investigations, or other response actions as determined necessary by EPA in order to permit EPA to conduct the review of the Site required by Section 121(c) of CERCLA. If upon such review and after providing Settling Defendants with reasonable opportunity for comment, EPA, after opportunity for -26- review and comment by the State, determines prior to the Certification of the Completion of the Work that further response action is appropriate at the Site in accordance with Section 104 or 106 of CERCIA, then Settling Defendants shall implement such action. Any dispute regarding the necessity for, or scope of such further response action shall be based upon the administrative record and shall be subject to judicial review pursuant to the dispute resolution provisions in Section XXI hereof to the extent permitted by, and in accordance with, Section 113 of CERCLA, 42 U.S.C. section 9613. 17. As provided by Sections 113(k) and 117 of CERCLA, 42 U.S.C. sections 9613(k) and 9617, and the National Contingency Plan, Settling Defendants will have an opportunity to submit comments for the record on any proposed subsequent response action during the public comment period. Settling Defendants shall be provided with an opportunity to confer with EPA on any additional work proposed by EPA during the 5-year review process. Selection of any subsequent response action shall be based on the administrative record. VIII. ADDITIONAL WORK 18. In the event that EPA, after opportunity for review and comment by the State, or the Settling Defendants determine that Additional Work, including Additional Work identified during the CERCLA Section 121(c) review process, is necessary to meet the -27- Performance Standards described in Section VI above, or is necessary to protect human health or the environment, notification of such Additional Work will be provided to the EPA Remedial Project Manager and Project Coordinators designated pursuant to this Consent Decree. 19. Any Additional Work determined to be necessary by Settling Defendants is subject to approval by EPA, after opportunity for review and comment by the State. 20. Any Additional Work determined to be necessary by Settling Defendants and approved by EPA, after opportunity for review and comment by the State, or determined to be necessary by EPA, after opportunity for review and comment by the State, and after providing Settling Defendants with reasonable opportunity for comment, to meet the Performance and Cleanup Standards or to protect human health and the environment shall be completed by Settling Defendants in accordance with standards, specifications, and schedules approved or established by EPA. 21. Unless otherwise stated by EPA, within thirty (30) days of receipt of notice by EPA that Additional Work is necessary, or otherwise agreed to by the Parties, the Settling Defendants shall submit for approval by EPA, after opportunity for review and comment by the State, a work plan for the Additional Work. The -plan shall conform to the requirements of this Consent Decree, the National Contingency Plan, Superfund Remedial Design and Remedial Action Guidance and any additional guidance documents provided by EPA. Upon approval pursuant to the procedures set -28- forth in Section XII, Settling Defendants shall implement the plan for Additional Work in accordance with the schedule contained therein. IX. QUALITY ASSURANCE; SAMPLING 22. Settling Defendants shall use quality assurance, quality control, and chain of custody procedures in accordance with EPA's "Interim Guidelines and Specifications For Preparing Quality Assurance Project Plans" (QAM-005/80) and subsequent amendments to such guidelines upon notification to Settling Defendants of such amendments by EPA. Settling Defendants shall submit as part of work plans or monitoring plans, including, but not limited to, the Indoor Air Monitoring Plan, the Groundwater Monitoring Plan, Pre-Design Work Plans and Remedial Action Work Plans, Project operation Plans ("POPs") that are consistent with the SOW and applicable guidelines to EPA for approval pursuant to Section XII. Sampling data generated consistent with the POPs shall be admissible as evidence, without objection, in any proceeding under Section XXI of this Consent Decree. Settling Defendants shall assure that EPA personnel or authorized representatives are allowed access to any laboratory utilized by Settling Defendants in implementing this Consent Decree. In addition, Settling Defendants shall have a designated laboratory analyze samples submitted by EPA for quality assurance monitoring. -29- 23. Settling Defendants shall make available to EPA the results of all sampling and/or tests or other data generated by Settling Defendants with respect to the implementation of this Consent Decree, and shall submit these results in monthly progress reports as described in Section XI of this Consent Decree. 24. At the request of EPA, Settling Defendants shall allow split or duplicate samples to be taken by EPA, and/or its authorized representatives, of any samples collected by Settling Defendants pursuant to the implementation of this Consent Decree. Settling Defendants shall notify EPA not less than twenty-eight (28) days in advance of any sample collection activity. In addition, EPA shall have the right to take any additional samples that EPA deems necessary. 25. Notwithstanding any provision of this Consent Decree, the United States shall retain all of its information gathering, and inspection authorities and rights under CERCLA, RCRA and any other applicable statute or regulations. X. ACCESS AND INSTITUTIONAL CONTROLS 26. From the date of the lodging of this Consent Decree the United States and its representatives, including but not limited to EPA, its employees, agents, authorized representatives, and contractors, shall have access at all times to the Site and any -30- property to which access is required for the implementation of this Consent Decree, to the extent access to the property is owned, controlled by or available to Settling Defendants, for the purposes of conducting any activity authorized by or related to this Consent Decree, including, but not limited to: a. Monitoring the Work or any other activities taking place on the property; b. Verifying any data or information submitted to the, United States; c. Conducting investigations relating to contamination at or near the Site; d. Obtaining samples; e. Assessing the need for or planning and implementing additional response actions at or near the Site; and f. Inspecting and copying records, operating logs, contracts, or other documents required to assess Settling Defendants' compliance with this Consent Decree; and g. Assessing Settling Defendants' compliance with this Consent Decree. From the date of the entry of this Consent Decree, Settling Defendants shall impose and maintain the necessary Institutional Controls, as determined by EPA, after opportunity for review and comment by the State, to the extent that the property to which they relate are owned, controlled by or available to the Settling Defendants. -31- 27. To the extent that any area where Work or Additional Work is to be performed under this Consent Decree or any area subject to Institutional Controls is owned or controlled by persons other than Settling Defendants, Settling Defendants shall use best efforts to secure from such persons access for Settling Defendants, the United States, including EPA, and its employees, agents and authorized representatives, contractors or consultants as necessary to effectuate implementation of this Consent Decree and to secure the Institutional Controls. For purposes of this Paragraph, "best efforts" may include, but is not limited to, offer by the Settling Defendants of the payment of a reasonable sum of money in consideration of access and Institutional Controls for the purpose of obtaining the right to perform the Work or Additional Work or the imposition of Institutional Controls. Settling Defendants shall not be required to pay money to Elinco Associates for the purpose of obtaining the right to perform the Work or Additional Work or the imposition of Institutional Controls. If access or Institutional Controls are not obtained within one hundred and eighty (180) days of the date of the lodging of this Consent Decree, or within one hundred and eighty (180) days of the date EPA determines in writing to Settling Defendants that additional access or Institutional Controls beyond those previously secured is necessary, Settling Defendants shall promptly notify the United States in writing. EPA may thereafter, consistent with its authority, assist Settling Defendants in obtaining access or Institutional -32 - Controls. Settling Defendants shall, in accordance with Section XVIII herein, reimburse the United States for all costs not inconsistent with the NCP incurred by it in obtaining access and Institutional Controls. 28. Notwithstanding any provision of this Consent Decree, the United States retains all of its access authorities and rights under CERCLA, RCRA and any other applicable statute or regulations. XI. REPORTING REQUIREMENTS 29. Settling Defendants shall submit to EPA written monthly progress reports which: (a) describe the actions which have been taken toward achieving compliance with this Consent Decree during the previous month; (b) include all results of sampling and tests and all other data received by Settling Defendants during the course of the Work in the previous month; (c) include all plans and procedures completed under Work Plans during the previous month; (d) describe all actions, data and plans which are scheduled for the next month and provide any other information relating to the progress of construction that is necessary to assess compliance under this Consent Decree; (e) include .information regarding percentage of completion, unresolved delays encountered or anticipated that may affect the future schedule for implementation of the Statement of Work or Work Plans including, without limitation, efforts made to gain access and -33- institutional controls, and a description of efforts made to mitigate those delays or anticipated delays. These progress reports are to be submitted to EPA by the tenth day of every month following the date of the lodging of this Consent Decree until EPA certifies Completion of the Work. 30. Upon the occurrence of any event during performance of the work which, pursuant to Section 103 of CERCLA, 42 U.S.C. section 9603 and/or Section 304 of the Emergency Planning and Community Right-To-Know Act (EPCRA), 42 U.S.C. section 11004, requires reporting, Settling Defendants shall upon becoming aware of such an event, promptly orally notify the EPA Remedial Project Manager ("RPM"), and the EPA Geographic Section Chief designated pursuant to Section XIII, or in the event of the unavailability of the EPA RPM, the Emergency Response Unit in addition to the reporting required by Section 103 and Section 304 of EPCRA. Within twenty (20) days of becoming aware of such an event, Settling Defendants shall furnish to Plaintiff a written report setting forth the events which occurred and the measures taken, and to be taken, in response thereto. Within thirty (30) days of the conclusion of the activiiy'described by the report in the previous sentence, Settling Defendants shall submit a report setting forth all actions taken to respond thereto. -34 - SUBMISSIONS REOUIRING AGENCY APPROVAL 31. After review of any plan, report or other item which is required to be submitted for approval pursuant to this Consent Decree, EPA, after opportunity for review and comment by the State, shall either: (1) approve the submission; (2) disapprove the submission, notifying Settling Defendants of deficiencies; (3) modify the submission to cure the deficiencies after giving the Settling Defendants sufficient and reasonable information and time to respond to such; or (4) direct that the Settling Defendants modify the submission. 32. In the event of approval or EPA modification, Settling Defendants shall proceed to take any action required by the plan, report, or other item, as approved or modified. 33. Upon receipt of a notice of disapproval or a request for a modification, Settling Defendants shall, within twenty (20) days thereafter, correct the deficiencies and resubmit the plan, report, or other item for approval. Notwithstanding a notice of a disapproval, Settling Defendants shall proceed to take any action required by any non-deficient portion of the submission unless otherwise directed by EPA. Implementation of non-deficient portions of the submission shall not relieve Settling Defendants of their liability for stipulated penalties under Section XXII. 34. If, upon resubmission, the plan, report, or item is not approved by EPA, after opportunity for review and comment by the -35- State, EPA may deem Settling Defendants to be in violation of this Consent Decree. XIII. REMEDIAL PROJECT MANAGER/PROJECT COORDINATORS 35. Within thirty (30) days of the lodging of this Consent Decree, the Settling Defendants shall notify EPA, in writing, of the name, address and telephone number of the Settling Defendants' Project Coordinator and an Alternate Project Coordinator. The Settling Defendants' Project Coordinator shall have responsibility for implementation of the Work at the Site by the Settling Defendants. EPA will designated Remedial Project Manager and a Geographic Section Chief within the same ten (10) day period. If any Party decides to change its designated Project Coordinator or RPM, the name, address, and telephone number of the successor shall be given to the other Parties within five (5) working days before the change is to be effective unless impracticable, but in no event later than the actual day the change is made. 36. Plaintiff may designate other representatives, including EPA and state employees, and federal and state contractors and consultants, to observe and monitor the progress of any activity undertaken pursuant to this Consent Decree. EPA's RPM shall have the authority lawfully vested in an RPM and On-Scene Coordinator ("OSCII) by the National Contingency Plan, 40 C.F.R. Part 300. In addition, the EPA RPM shall have authority -36- consistent with the National Contingency Plan, to halt, conduct, or direct any work required by this Consent Decree, and to take any necessary response action when he or she determines that conditions at the Site may constitute an emergency situation or may present an immediate threat to public health or welfare or the environment. Prior to taking such action to halt, conduct, or direct any work to take any response actions, the EPA RPM shall make reasonable efforts to consult with the Settling Defendants' Project Coordinator or Alternate Project Coordinator. XIV. ASSURANCE OF ABILITY TO COMPLETE WORK 37. Settling Defendants shall demonstrate their ability to complete the Work and to pay all claims that arise from the performance of the Work by obtaining within 30 days of entry of this Consent Decree one of the following: a. A surety bond guaranteeing performance of the Work; b. one or more letters of credit equalling the total estimated cost of the Work; c. A guarantee to perform the Work by a one or more parent corporation, sibling corporation, subsidiary, or unrelated corporation which has a substantial business relationship with at least one of the Settling Defendants; or d. Internal financial information regarding Settling Defendants' net worth, cash flow, total liabilities, and current rating for most recent bond issuances sufficient to demonstrate -37- to EPA's satisfaction that one or more Settling Defendants have the financial ability to complete the Work. 38. If the Settling Defendants seek to demonstrate the ability to complete the Work through a guarantee by a third party, they must provide financial information regarding the guarantor's net worth, cash flow, total liabilities, and current rating for their most recent bond issuance sufficient to demonstrate to EPA's satisfaction that the guarantor(s) has (have) the financial ability to finance completion of the Work. If Settling Defendants seek to demonstrate ability to complete the Work by means of internal financial information, they shall resubmit sworn statements conveying such information annually, on the anniversary of the effective date of this Consent Decree. To the extent any Settling Defendant whose stock is publicly traded submits information that is provided to the Securities and Exchange Commission, EPA will accept that information, subject to supplementation by such Settling Defendant as is necessary to satisfy the requirements of 40 C.F.R. section 264.143(f). 39. In the event that EPA determines at any time that such financial assurances are inadequate, Settling Defendants shall, within 30 days of receipt of notice of EPA's determination, obtain and present for approval to EPA, one of the other forms of financial assurance listed in Paragraph 37. Settling Defendants' inability to demonstrate financial ability to complete the Work shall not excuse performance of any activities required under this Consent Decree. -38 - XV. TRUST FUND 40. Within thirty (30) days of the date of the entry of this Consent Decree, Settling Defendants shall present to EPA for approval as to form a fully executed trust agreement (the "Trust Agreement") establishing the 270-280 Main Avenue Area Trust Fund (the "Trust Fund") and shall notify EPA of the identity and qualifications of the trustee(s). The Trust Agreement shall confer upon the Trustee all powers and authorities necessary to finance the obligations of the Settling Defendants under this Consent Decree. Money paid into the Trust Fund by Settling Defendants shall be used solely to pay proper and necessary expenses pursuant to this Consent Decree, including expenses of administering the Trust. The Trust Fund may not be used to pay stipulated penalties that may be required to be paid pursuant.to Section XXII and shall not be used to pay attorneys' fees or other litigation costs of the Settling Defendants. 41. Notwithstanding anything in the Trust Agreement, Settling Defendants shall be jointly and severally liable to the United States for compliance with this Consent Decree. Settling Defendants shall provide EPA with written notice at least ten (10) days in advance of any proposed change in the'Trust Agreement or of the Trustee. EPA, through its approval of the terms and conditions of the Trust Agreement or otherwise, does -39- not guarantee the monetary sufficiency of the Trust Fund nor the legal sufficiency of the Trust Agreement. 42. The Trust Agreement shall provide that the Trustee shall, within sixty (60) days of his appointment and every ninety (90) days thereafter, submit to Settling Defendants and EPA, financial reports that include the amount of money currently in the Trust Fund. Settling Defendants shall make payments to the Trust Fund when and to the extent necessary to ensure the uninterrupted progress and timely completion of the Work. 43. The failure of any Settling Defendant to pay for its share of the proper and necessary expenses of this Consent Decree shall not excuse timely completion of any obligation under this Consent Decree. XVI. CERTIFICATION OF COMPLETION OF WORK 44. Within ninety (90) days after Settling Defendants conclude that the Work has been fully performed, Settling Defendants shall so notify the United States Department of Justice, EPA, and the State and shall schedule and conduct a precertification inspection to be attended by Settling Defendants and EPA. Such inspection shall be followed within thirty (30) days by a written report signed by the Settling Defendants' project coordinator and by a registered professional engineer certifying that all such activities have been completed in full satisfaction of the pertinent requirements of this Consent -40- Decree. If EPA, after opportunity for review and comment by the State, determines that the Work or any portion thereof has not been completed in accordance with this Consent Decree, EPA shall notify Settling Defendants in writing of the activities that must be done to complete the Work and shall set forth in the notice a schedule for performance of such activities after providing Settling Defendants with reasonable opportunity for comment. Settling Defendants shall perform all activities described in the notice in accordance with the specifications and schedules established therein. 45. If EPA, after opportunity for review and comment by the State, concludes, following the initial or any subsequent notification of completion of Work by Settling Defendants, that all Work has been performed in accordance with this Consent Decree, EPA shall so certify in writing to Settling Defendants. This certification shall constitute the "Certification of Completion of Work" for purposes of this Consent Decree, including Section XXIII (Plaintiffs' Covenants Not to Sue). XVII. ENDANGERMENT AND FUTURE RESPONSE 46. In the event of any action or occurrence during the performance of the Work or pursuant to or in violation of any of the Institutional Controls that causes or threatens a release of Waste Material on, at, or from the Site that is not contemplated by the SOW, or that may present an endangerment to public health -41- or welfare or the environment, settling Defendants shall immediately take all appropriate action consistent with the NCP to prevent, abate, or minimize such release or endangerment, and shall immediately notify the EPA RPM, or if that is impracticable, the EPA Emergency Response Unit, Region I. Settling Defendants shall take such action in accordance with all applicable provisions of the Health and Safety Plan developed pursuant to the SOW and approved by EPA. The Settling Defendants shall develop and submit a response plan to EPA within ten (10) days or as soon thereafter as is practicable. The provisions of Section XII apply to the submission of such response plan, except that the time period for resubmission after disapproval shall be five (5) working days rather than the thirty (30) days unless extended by EPA. In the event that Settling Defendants fail to take appropriate response action consistent with the NCP as required by this Section and EPA takes such action instead, Settling Defendants shall reimburse all costs of the response action not inconsistent with the NCP. Payment of such response costs shall be made in the manner described in Paragraph 49 of Section XVIII, within thirty (30) days of Settling Defendants' receipt of demand for payment. 47. Nothing in the preceding Paragraph shall be deemed to limit the power and authority of the United States, or this Court to take, direct, or order all appropriate action to protect public health, welfare, or the environment or to prevent, abate, -42- or minimize an actual or threatened release of hazardous substances on, at, or from the Site. XVIII. REIMBURSEMENT OF RESPONSE COSTS 48.a. Within forty-five (45) days of the entry of this Consent Decree, Settling Defendants shall, jointly and severally, pay to EPA $560,000 and interest accrued thereon from the date of lodging to the date of entry at the rate established by Section 107(a) of CERCLA, in the form of a certified check made payable to "EPA Hazardous Substances Superfund," and referencing the Kellogg-Deering Well Field Superfund Site, CERCLA Number CTD980670814 and DOJ Case Number 90-11-2-582, in reimbursement of Response Costs incurred by the United States prior to entry relating to the Site. The certified check shall-be forwarded-to EPA Region I, Attn: Superfund Accounting, P.O. Box 360197M, Pittsburgh, PA 15251. Copies of the check and any transmittal letter shall be sent to the Regional Hearing Clerk, EPA Region I, J.F.K. Federal Building, Boston, MA 02203. 48.b. Within forty-five (45) days of the entry of this Consent Decree, Paying Settling Defendants shall, jointly and severally, pay to EPA $240,000 and interest accrued thereon from the date of lodging to the date of entry at the rate established by Section 107(a) of CERCLA, in the form of a certified check made payable to "EPA Hazardous Substances Superfund," and -43- referencing the Kellogg-Deering Well Field Superfund Site, CERCLA Number CTD980670814 and DOJ Case Number 90-11-2-582, in reimbursement of Response Costs incurred by the United States prior to entry relating to the Site. The certified check shall be forwarded to EPA Region I, Attn: Superfund Accounting, P.O. Box 360197M, Pittsburgh, PA 15251. Copies of the check and any transmittal letter shall be sent to the Regional Hearing Clerk, EPA Region I, J.F.K. Federal Building, Boston, MA 02203. 49a. Settling Defendants shall reimburse the United States for all costs incurred by it in connection with: the review or development of plans, reports, and other items; overseeing or verifying the Work pursuant to this Consent Decree; undertaking action to prevent, abate, or minimize a release or endangerment pursuant to Section XVII; securing access to the Site or other property to which access is required for the performance of the Work; securing Institutional Controls; conducting the review of the Site required by Section 121(c) of CERCLA in accordance with Section VII; and enforcing and monitoring compliance with this Consent Decree. The United States, through EPA, shall send Settling De7fendants a demand for payment of such costs, together with an itemized accounting and explanation of such costs, on an annual basis, with each demand to be made as soon as practicable after each anniversary date of the entry of this Consent Decree. For purposes of this Paragraph, an itemized accounting and explanation shall consist of a summary of costs in dollars by category of costs, including payroll, travel,-indirect costs and -44- contracts, and a brief narrative summary of the work performed during the billing period. Payment shall be made in the manner described in Paragraph 48 above, within thirty (30) days of Settling Defendants' receipt of the demand for payment. b. During the pendency of and pending the resolution of any dispute relating to the payment of costs pursuant to Section XXI herein, the Settling Defendants shall not be required to tender payment of any disputed costs to EPA under this Section, provided that, during the pendency of the resolution of the dispute, such disputed costs shall be paid into an interest-bearing account within forty five (45) calendar days of receipt of a demand for payment. c. In the event that Settling Defendants prevail in whole or in part in any dispute resolution under Section XXI relating to costs, the Settling Defendants shall pay only that much of the costs and interest thereon as are appropriate pursuant to the resolution of the dispute. d. In the event the Settling Defendants do not prevail in any dispute resolution under Section XXI, the Settling Defendants shall be liable to EPA for all the moneys in the interest-bearing escrow account, such moneys to be paid to EPA within forty-five (45) calendar days of the final resolution of the dispute. e. The total amount of costs recoverable from Settling Defendants pursuant to paragraph 49-a of t his Consent Decree, excepting enforcement costs incurred by the United States in -45- response to Settling Defendants' non-compliance with this Consent Decree, shall be one million dollars. 50a. In the event that the payments required by Paragraphs 48a. and 49 are not made timely, Settling Defendants shall pay interest on the unpaid balance at the rate established by the Department of the Treasury pursuant to 31 U.S.C. section 3717 and 4 C.F.R. section 102.13. Settling Defendants shall, jointly and severally, further pay and a six (6) percent per annum penalty charge, to be assessed if Settling Defendants have not paid in full within ninety (90) days after the payment is due. Payments made under this Paragraph shall be in addition to such other remedies or sanctions available to Plaintiffs by virtue of Settling Defendants' failure to make timely payments under this Section. 50b. In the event that the payments required by Paragraph 49b. are not made timely, Paying Settling Defendants shall pay interest on the unpaid balance at the rate established by the Department of the Treasury pursuant to 31 U.S.C. 3717 and 4 C.F.R. 102.13. Paying Settling Defendants shall, jointly and severally, further pay a six (6) percent per annum penalty charge, to be assessed if Paying Settling Defendants have not paid in full within ninety (90) days after the payment is due. Payments made under the Paragraph shall be in addition to such other remedies or sanctions available to Plaintiffs by virtue of Settling Defendants' or Paying Settling Defendants' failure to make timely payments under this Section. -46- XIX. INDEMNIFICATION AND INSURANCE 51. The United States does not assume any liability by entering into this agreement or by virtue of any designation of Settling Defendants as EPA's authorized representatives, if such occurs, under Section 104(e) of CERCLA. 52. Settling Defendants shall indemnify and save and hold harmless the United States and its officials, agents, employees, contractors, and representatives from any and all claims or causes of action or other costs incurred by the United States including, but not limited to attorneys fees and other expenses of litigation and settlement arising from or on account of acts or omissions of Settling Defendants, their officers, employees, agents, contractors, subcontractors, and any persons acting on their behalf or under their control, in carrying out activities pursuant to this Consent Decree, including any claims arising from any designation of the Settling Defendants as EPA's authorized representatives under Section 104(e) of CERCLA. The United States shall not be held out as a party to any contract entered into by or on behalf of Settling Defendants in carrying out activities pursuant to this Consent Decree. Neither Settling Defendants nor any such contractor shall be considered an agent of the United States. 53. Settling Defendants waive any claims or causes of action against and shall indemnify and hold harmless the United -47- States, and its officials, agents, employees, contractors, and representatives for damages or reimbursement, or set-off of any payments made or to be made to the United States, arising from or on account.of any contract, agreement, or arrangement between any one or more of Settling Defendants and any person for performance of work on or relating to the Site, including claims on account of construction delays. Settling Defendants do not waive any claims that arise solely from actions or omissions of Plaintiff or its employees or contractors that are based on gross negligence. 54. Prior to commencing any on-Site work, Settling Defendants shall secure, and shall maintain for the duration of this Consent Decree: i) comprehensive general liability and automobile insurance with limits of $1 million, and $1 million respectively, in each case naming as insured the United States and the State. In addition, for the duration of this Consent Decree, Settling Defendants shall satisfy, or shall ensure that their contractors or subcontractors satisfy, all applicable laws and regulations regarding the provision of worker's compensation insurance for all persons performing work on behalf of Settling Defendants in furtherance of this Consent Decree. Prior to commencement of onsite work under this Consent Decree, Settling Defendants shall provide to EPA certificates of such insurance and a copy of each insurance policy. If Settling Defendants demonstrate by evidence satisfactory to EPA that any contractor or subcontractor maintains insurance equivalent to that described -48- above, or insurance covering the same risks but in a lesser amount, then with respect to that contractor or subcontractor Settling Defendants need provide only that portion of the insurance described above which is not maintained by the contractor or subcontractor. XX. FORCE MAJEURE 55. "Force Majeure" is defined for the purposes of this Consent Decree as an event arising from causes entirely beyond the control of Settling Defendants and of any entity controlled by Settling Defendants, including their contractors and subcontractors, which delays or prevents the performance of any obligation under this Consent Decree notwithstanding Settling Defendants' best efforts to avoid the delay. The requirement that the Settling Defendants exercise "best efforts to avoid the delay" includes using best efforts to anticipate any potential Force Majeure event and best efforts to address the effects of any potential Force Majeure event (i) as it is occurring and (ii) following fhe potential Force Majeure event, such that the delay is minimized to the greatest extent possible. "Force Majeure" does not include unanticipated or increased costs, changed financial circumstances, or non-attainment of the cleanup or performance standards and requirements set forth in Section VI hereof or in the SOW. -49- 56. When circumstances occur which may delay or prevent the completion of any obligation of the Consent Decree, whether or not caused by a Force Majeure event, Settling Defendants shall notify the EPA RPM orally of the circumstances within forty-eight (48) hours after Settling Defendants first become aware of such circumstances. If the EPA RPM is unavailable, Settling Defendants shall notify the Director of the Waste Management Division, EPA Region I. Within five (5) working days after Settling Defendants first become aware of such circumstances, Settling Defendants shall supply to Plaintiff in writing an explanation of the cause(s) of any actual or expected delay, the anticipated duration of any delay, the measures taken and to be taken by Settling Defendants to prevent or minimize the delay, and the timetable for implementation of such measures. Settling Defendants shall exercise best efforts to avoid or minimize any delay and any effects of a delay. Failure to give timely oral and written notice to Plaintiff in accordance with this Paragraph shall constitute a waiver of any claim of Force majeure with respect to the circumstances in question. 57. If EPA agrees that an event delaying or preventing the completion of an obligation under this Consent Decree is or was caused by a Force Majeure event, then EPA shall notify Settling Defendants in writing as soon as practicable of its agreement to provide such additional time as may be necessary to allow the completion of the specific phase of the Work and/or any succeeding phase of the Work directly affected by such delay, -50- which additional time shall be no longer than the actual delay resulting from the Force Majeure event or shall allow for the completion of a substitute activity in furtherance of the Work if EPA determines that a substitute activity is appropriate. In proceedings on any dispute regarding a delay or prevention in performance, Settling Defendants shall have the burden of proving by a preponderance of the evidence (1) that the delay is or was caused by a Force Majeure event, and (2) that the amount of additional time requested is necessary to compensate for that event. 58. Delay in achievement of any milestone established by the RD/RA Work Plan and/or other relevant documents shall not automatically justify or excuse delay in Achievement of any subsequent milestone unless Settling Defendants can demonstrate to EPA's satisfaction that a subsequent milestone is dependent upon a prior milestone. XXI. DISPUTE RESOLUTION 59. Any dispute which arises under or with respect to this Consent Decree or the SOW shall in the first instance be the subject of informal negotiations between the parties to the dispute. The period for informal negotiations shall not exceed thirty (30) days from the time EPA or the Settling Defendants receives written notice of the existence of a dispute, unless it is extended by agreement between Plaintiff and. Settling -51- Defendants. The dispute shall be considered to have arisen when one Party notifies the other Parties in writing that there is a dispute. The period for informal negotiations shall end when EPA provides its position on the disputed matter to Settling Defendants in writing. 60. In the event that the Parties cannot resolve a dispute by informal negotiations under the preceding Paragraph, then the position advanced by EPA shall be considered binding unless, within ten (10) working days after the end of the informal negotiations period, Settling Defendants invoke the dispute resolution procedures of this Section by giving written notice to the United States and EPA. After receiving such notice from Settling Defendants, EPA shall notify Settling Defendants of its unreviewable decision regarding whether the dispute is to be resolved on the administrative record under Paragraph 62 below. Settling Defendants shall waive any rights to contest EPA's determination that the dispute is subject to resolution under Paragraph 62 below. The filing of such a petition shall not stay or otherwise delay the administrative proceeding under Paragraphs 62 through 65. 61. The dispute resolution procedures of this Section shall be the exclusive mechanism to resolve disputes arising under or with respect to this Consent Decree or the SOW and shall apply to all provisions of this Consent Decree and SOW unless otherwise expressly provided. Invocation of the procedures of this Section shall not of itself extend or postpone any obligation of Settling -52- Defendants under this Consent Decree or the SOW and no such extension or postponement shall occur unless agreed to in writing by EPA or ordered by this Court. Stipulated penalties shall accrue from the first day of noncompliance with any provision of this Consent Decree or the SOW. In proceedings on any dispute under this Section, Settling Defendants shall bear the initial burden of coming forward with evidence and of persuasion on factual issues. 62. Any dispute under this Section which relates to the selection, extent, or adequacy of any aspect of the Work, including, but not limited to, the selection of any alternate treatment technology for contaminated groundwater, the selection of the disposal method for treated groundwater and the selection of soil cleanup standards, shall be resolved on the administrative record maintained by EPA. Any dispute concerning action taken by EPA pursuant to Section IV.D of the SOW shall not be considered one that relates to the selection, extent, or adequacy of any aspect of the Work and shall not be subject to Dispute Resolution under Section XXI. The administrative record sha,ll include the written notification of dispute, all Statements of Position, as hereinafter defined in Paragraph 63, and any other materials submitted by the Parties in support of their positions and shall be available at all reasonable times for review by the Parties after the record has been prepared. 63. Within fifteen (15) working days after receiving notice from EPA that a dispute is subject to resolution on the -53 - administrative record, Settling Defendants shall serve on the other Parties a written statement of their position on the matter in dispute ("Statement of Position"), including any factual data, analysis, or opinion supporting that position and all supporting documentation relied upon. Any party wishing to contest the Settling Defendants' position shall serve a Statement of Position (in EPA's case, a Supplemental Statement of Position), including supporting documentation, on the other Parties no later than ten (10) days after receipt of Settling Defendants' Statement of Position. EPA may extend the time periods for exchange of Statements of Position or, in the event that these ten-day periods for exchange of Statements of Position may delay the Work, they may be shortened in accordance with notice by EPA. 64. Upon review of the administrative record, the Director of the Waste Management Division, EPA Region I, shall issue a final decision resolving the dispute. 65. Any decision of EPA pursuant to the preceding Paragraph shall be reviewable by this Court, provided that a Notice of Judicial Appeal is filed within (10) days of receipt of EPA's decision. With respect to matters covered by Paragraph 62 judicial review of such a decision shall be conducted on the administrative record, and EPA's decision shall be upheld unless Settling Defendants can demonstrate it is arbitrary and capricious or otherwise not in accordance with law. 66. If EPA determines that a dispute'is not subject to Paragraph 62, then the position on the dispute advanced by EPA -54- following informal negotiations shall be considered binding on all Parties unless, within ten (10) days after receipt of the determination that Paragraph 62 is inapplicable, Settling Defendants file a petition with this Court setting forth the matter in dispute, the efforts made by the Parties to resolve it, the relief requested, and the schedule, if any, within which the dispute must be resolved to ensure orderly implementation of this Consent Decree and the SOW. In proceedings on any dispute, Settling Defendants shall bear the burden of coming forward with evidence and of persuasion on factual issues. Nothing herein shall prevent the United States from arguing that the Court should apply the arbitrary and capricious standard of review to all disputes under this Consent Decree or the SOW. 67. Notwithstanding the invocation of the procedures stated in this Section, Settling Defendants shall continue to perform their obligations under this Consent Decree or the SOW that are undisputed or that EPA determines are not affected substantially by the disputed issue unless otherwise agreed to by the Parties or ordered by this Court. XXII. STIPULATED PENALTIES 68. Settling Defendants shall be jointly and severally liable for stipulated penalties in the amounts set forth in this Paragraph to the United States for failure to comply with the requirements of this Consent Decree, unless excused under -55- Paragraph 57. "Compliance" by Settling Defendants shall include completion of any activity under this Consent Decree or any plan approved under this Consent Decree in a manner consistent with the requirements herein within the specified time schedules established by and approved under this Consent Decree. a. For each and every violation of the reporting requirements contained in Section XI, five hundred dollars ($500) per day per violation. b. For all other violations: Period of Delay Penalty Per Violation Per Day lst through 5th day $ 1,500 6th through 15th day $ 5,000 16th through 30th day $ 7,500 31st day and beyond $10,000 69. All penalties shall begin to accrue on the day that performance is due or other failure or refusal to comply occurs, and shall continue to accrue through the final day of the noncompliance. Penalties relating to the adequacy of any reports, plans or other items requiring EPA's response shall begin to accrue on the due date of such submittals and shall continue to accrue for thirty days, at which point penalties shall stop accruing until EPA notifies Settling Defendant of the violation, whereupon accrual of penalties shall resume. With respect to all other violations, penalties shall accrue from the date of violation regardless of whether the United States has -56- notified Settling Defendants of a violation. Separate penalties shall accrue for each separate failure or refusal to comply with the terms or conditions of this Consent Decree, provided that in the event a report, plan or other item requiring EPA approval is disapproved for more than one reason, only a single stipulated penalty shall be owed for each day of noncompliance stemming from such disapproval. 70. All penalties due to EPA under this Section shall be payable within forty-five (45) days of receipt by Settling Defendants of notification of noncompliance. Interest shall begin to accrue on the unpaid balance at the end of said period, at the rate established by the Department of the Treasury under 31 U.S.C. section 3717. Settling Defendants shall pay a six (6) percent per annum penalty charge to be assessed if the penalty is not paid within ninety (90) days after it is due. 71. Stipulated penalties due to EPA shall be paid by certified check made payable to "EPA Hazardous Substances Superfund" and referencing DOJ case number 90-11-2-582 and shall be mailed to EPA Region I, Attn: Superfund Accounting, P.O. Box 360197M, Pittsburgh, PA 15251. Copies of the checks and any transmittal letters shall be sent to the United States. EPA has the unreviewable discretion to waive or reduce payments otherwise due under this Section. 72. Neither the filing of a petition to resolve a dispute nor the payment of penalties shall alter in-any way Settling -57- Defendants' obligation to complete the performance required hereunder. 73. No payment made under this Section shall be tax deductible. 74. If Settling Defendants fail to pay stipulated penalties, the United States may institute a proceeding to collect the penalties, as well as late charges and interest. Notwithstanding the stipulated penalties provision of this Section, EPA may also assess civil penalties and/or bring an action in the U.S. District Court pursuant to Sections 109 and 122 of CERCLA, 42 U.S.C. sections 9609 and 9622, as amended by SARA, to enforce the provisions of this Consent Decree. Such remedies shall not, however, b e used to obtain penalties for any alleged noncompliance with respect to which Settling Defendants have prevailed in Dispute Resolution under this Consent Decree, and the Plaintiff shall not commence any action or proceeding seeking penalties against Settling Defendants with respect to noncompliance which is the subject of a pending active dispute resolution proceeding under this Consent Decree. Payment of stipulated penalties shall not preclude EPA from electing to pursue any other remedy or sanction to e nforce this Consent Decree, and nothing shall preclude EPA from seeking statutory penalties against Settling Defendants for violations of statutory or regulatory requirements. Settling Defendants reserve the right to argue that the amounts of stipulated penalties already paid by the Settling Defendants for a particular violation should -58- be considered in the award of any monetary sanctions or penalties that the Settling Defendants may be required to pay in the event the United States seeks additional relief against the Settling Defendants for the same noncompliance. 75. Settling Defendants may dispute the United States' right to the stated amount of penalties by invoking the Dispute Resolution procedures under Section XXI herein. Penalties shall accrue but need not be paid during the dispute resolution period. If a disputed matter is submitted to the District Court, the period of dispute shall end upon the rendering of a decision by the District Court regardless of whether any party appeals such decision. If Settling Defendants do not prevail upon resolution, the United States has the right to collect all penalties which accrued prior to and during the period of dispute. If Settling Defendants prevail upon resolution, Settling Defendants shall pay only such penalties as the resolution requires. XXIII. COVENANTS NOT TO SUE BY PLAINTIFFS 76. Settling Defendants and Paying Settling Defendants. In consideration of the actions that will be performed and the payments that will be made by the Settling Defendants and the Paying Settling Defendants under the terms of the Consent Decree, and except as specifically provided in Paragraphs 78, 79, and 81 of this Section, the United States covenants not to sue or to take administrative action under its authorities against Settling -59- Defendants and Paying Settling Defendants for Covered Matters. With respect to all such liability, (except for any future liability relating to response activities at the Site tot identified in the Second Operable Unit ROD or the SOW), these covenants not to sue shall take effect upon the receipt by EPA of the payments required by Paragraphs 48 and 49 of Section XVIII. With respect to future liability, these covenants not to sue shall take effect upon Certification of Completion of the Work pursuant to Paragraphs 44 and 45. These covenants not to sue are conditioned upon complete and satisfactory performance by Settling Defendants and Paying Settling Defendants of their respective obligations under this Consent Decree. These covenants not to sue extend only to the Settling Defendants and Paying Settling Defendants and do not extend to any other person or entity. 77. Except as provided in Paragraphs 78, 79, and 81, Covered Matters shall include any and all claims for civil liability to the United States arising under sections 106 and 107(a) of CERCLA, 42 U.S.C. sections 9606 or 9607(a), and under Section 7003 of RCRA, 42 U.S.C. section 6973, for performance of the Work at the site identified in the Second Operable Unit ROD or the SOW, performance of any Additional Work that is undertaken pursuant to Section VIII, and reimbursement of any Response Costs incurred by the United States with respect to Operable Unit One and Operable Unit Two of the Kellogg Deering Wellfield Superfund Site, whether incurred prior or subsequent to the entry of this Consent Decree. -60- 78. Pre-certification reservations. Notwithstanding any other provision of this Consent Decree, the United States reserves the right to institute proceedings in this action or in a new action, or to issue an Administrative Order, seeking to compel Settling Defendants and Paying Settling Defendants (1) to perform additional response actions at the Site or (2) to reimburse the United States for response costs if, prior to Certification of Completion of the Work: a. conditions at the site, previously unknown to the United States, are discovered after the entry of this Consent Decree; b. information is received by the United States, in whole or in part, after the entry of this Consent Decree, and the EPA Administrator or his delegate finds, based on these previously unknown conditions or this information together with any other relevant information, that the Work is not protective of human health and the environment; or c. information is received by the United States in whole or in part after entry of the Consent Decree and the EPA Administrator or his delegate finds based on this new information that the achievement of groundwater Cleanup Standards is not technically impracticable. The preceding sentence shall only be effective where groundwater cleanup standards have been excused or altered under Section IV.D of the SOW. 79. Post-certification reservations.- Notwithstanding any other provision of this Consent Decree, the United States -61- reserves the right to institute proceedings in this action or in a new action, or to issue an Administrative Order, seeking to compel Settling Defendants and Paying Settling Defendants (1) to perform additional response actions at the Site or (2) to reimburse the United States for response costs if, subsequent to Certification of Completion of Work: a. conditions at the Site, previously unknown to the United States, are discovered after the Certification of Completion of Work; or b. information is received by the United States, in whole or in part, after the Certification of Completion of Work, and the EPA Administrator or his delegate finds, based on these previously unknown conditions or this information together with other relevant information, that the Work is not protective of human health and the environment; or c. information is received by the United States in whole or in part after Certification of Completion of Work an d the EPA Administrator or his delegate finds based on this new information that the achievement of groundwater Cleanup Standards is not technically impracticable. The preceding sentence shall be effective where groundwater cleanup standards have been excused or altered under Section IV.D of the SOW. The above-mentioned reservation of rights in Paragraphs 78 and 79 includes the right to institute proceedings in this action or in a new action to seek reimbursement of costs incurred as a -62- result of actions undertaken pursuant to Section 121(c) of CERCLA, 42 U.S.C. section 9621(c). 80. For purposes of Paragraph 78, the information received by the United States prior to entry of this Consent Decree and all conditions known to the United States at such time shall include that information and those conditions set forth in the Supplemental Record of Decision for the Kellogg-Deering Site, the administrative record supporting the Supplemental Record of Decision and all information contained in written submissions made to EPA during the public comment period. For purposes of Paragraph 79, the information received by and the conditions known to the United States shall include that information and those conditions set forth in the Supplemental Record of Decision, the administrative record supporting the Supplemental Record of Decision and all information contained in written submissions made to EPA during the public comment period and any information received by the United States pursuant to the requirements of this Consent Decree. 81. General reservations of-rights as to Settling Defendants. The covenants not to sue set forth in Paragraphs 76 and 77 do not pertain to any matters other than those expressly specified to be Covered Matters. The United States reserves, and this Consent Decree is without prejudice to, all rights against Settling Defendants and Paying Settling Defendants with respect to all other matters. In addition, the following are specifically identified as matters that are not covered matters: -63- a. claims based on a failure or refusal by Settling Defendants or Paying Settling Defendants to meet a requirement of the Consent Decree; b. liability arising from the past, present, or future disposal, release, or threat of release of Waste Material outside of the Site and not attributable to the Site; c. liability for the disposal of any Waste Material taken from the Site; d. liability for damages for injury to, destruction of, or loss of natural resources; e. any matter as to which the United States is owed indemnification under Section XIX above: f. criminal liability; g. all response costs other than those expressly included in Covered Matters, including, but not limited to, any action undertaken pursuant to a subsequent Record of Decision; h. liability for violations of federal law which occur during implementation of the Work. 82. Notwithstanding any other provision of this Consent Decree, the United States retains all authority and reserves all rights to take any and all response actions authorized by law. 83. Notwithstanding any other provisions in this Consent Decree, the covenant not to sue in this Section shall not relieve the Settling Defendants of their obligation to meet and maintain compliance with the requirements set forth in this Consent Decree, including the conditions in the Second Operable Unit ROD, -64 - and the United States reserves its rights to take response actions at the Site in the event of a breach of the terms of this Consent Decree and to seek recovery of costs incurred after entry of the Consent Decree: (1) resulting from such a breach; (2) relating to any portion of the Work funded or performed by the United States or (3) incurred by the United States as a result of having to seek judicial assistance to remedy conditions at or adjacent to the Site. 84. Nothing in this Consent Decree shall constitute or be construed as a release or a covenant not to sue regarding any claim or cause of action against any person, firm, trust, joint venture, partnership, corporation or other entity not a signatory to this Consent Decree for any liability it may have arising out of or relating to the Site. XXIV. CONTRIBUTION PROTECTION 85. Subject to the reservations of rights in Section XXIII, Paragraphs 7.8, 79 and 81, the United States agrees that by entering into and carrying out the terms of this Consent Decree, the Settling Defendants and the Paying Settling Defendants will have resolved their liability to the United States for Covered Matters as defined in Section XXIII, Paragraph 77, pursuant to Section 113(f) of CERCLA and shall not be liable for claims for contribution for Covered Matters. -65- 86. Plaintiff expressly reserves the right to continue to sue any person(s) other than the Settling Defendants and the Paying Settling Defendants in connection with the Site. 87. Settling Defendants and Paying Settling Defendants further retain and reserve the right to assert claims against other Settling Defendants and Paying Settling Defendants, with respect to any agreements relating to the performance of their obligations under this Consent Decree. 88. Nothing in this Consent Decree shall be construed to create any rights in or grant any cause of action to any person not a party to this Consent Decree. Except as provided in Paragraph 89, each of the Parties expressly reserves any and all rights (including any right to contribution), defenses, claims, demands, and causes of action which each party may have with respect to any matter, transaction, or occurrence relating in any way to the Site against any person not a party hereto. XXV. COVENANTS BY DEFENDANTS; ASSIGNMENT OF CLAIMS 89. Defendants hereby covenant not to sue and agree not to assert any claims or causes of action against the United States for any claims related to or arising from Covered Matters or any response action taken with respect to Operable Unit One or Operable Unit Two of this Consent Decree, including, but not limited to, any direct or indirect claim for reimbursement from -66- the Hazardous Substance Superfund (established pursuant to the Internal Revenue Code, 26 U.S.C. section 9507), through CERCLA Sections 106(b)(2), 111 or 112 or otherwise, or to seek any other costs, damages, or attorneys fees from the United States arising out of response activities at the Site. To the extent necessary to assure the United States' ability to collect from non-settling parties response costs not reimbursed by Settling Defendants and Paying Settling Defendants, Settling Defendants and Paying Settling Defendants hereby assign to the United States all claims or causes of action that they may have against any entities that are not Settling Defendants or Paying Settling Defendants regarding "Covered Matters" as defined in Paragraph 77. Nothing in this Consent Decree shall be deemed to constitute preauthorization of a claim within the meaning of Section 111 of CERCLA, 42 U.S.C. section 9611, or 40 C.F.R. section 300.25(d). XXVI. ACCESS TO INFORMATION 90. Settling Defendants shall provide to EPA, upon request, copies of all documents and information within their possession and/or control or that of their contractors or agents relating to activities at the Site or to the implementation of this Consent Decree, including sampling, analysis, chain of custody records, manifests, trucking logs, receipts, reports, sample traffic routing, correspondence, or other documents or information related to the Work. Settling Defendants shall also make -67- available to EPA, for purposes of investigation, information gathering, or testimony, their employees, agents, or representatives with knowledge of relevant facts concerning the performance of the Work. 91. Settling Defendants may assert business confidentiality claims covering part or all of the documents or information submitted to Plaintiff under this Consent Decree to the extent permitted by and in accordance with Section 104(e)(7) of CERCLA, 42 U.S.C. section 9604(e)(7), and 40 C.F.R. section 2.203(b). Documents or information determined to be confidential by EPA will be afforded the protection specified in 40 C.F.R. Part 2, Subpart B. If no claim of confidentiality accompanies specific documents or information when they are submitted to EPA, or if EPA has notified Settling Defendants that the documents or information are not confidential under the standards of Section 104(e)(7) of CERCLA, the public may be given access to such documents or information without further notice to Settling Defendants. 92. No claim of confidentiality shall be made with respect to any sampling or analytical data or any other documents or information evidencing conditions at or around the Site. 93. In the event that this Court is called upon to resolve a dispute concerning implementation of this Consent Decree, the Parties waive any evidentiary objection to the admissibility into evidence of the results of any analysis of samples conducted by or for a party pursuant to this Consent Decree unless a party can demonstrate that there was significant noncompliance with -68- applicable chain of custody, or laboratory procedures, or a clear error in reporting. Further, the parties waive their right to contest the validity of any data unless it is established that such data has not been validated in accordance with all relevant quality assurance and quality control procedures established by or pursuant to this Consent Decree. XXVII. RETENTION OF RECORDS 94. Until six years after EPA Certification of Completion of the Work, each of the Settling Defendants and the Paying Settling Defendants shall preserve and retain all records and documents now in its possession or control as of the date of lodging of the Consent Decree that relate in any manner to the Site. After this document retention period, Defendants shall notify the United States at least ninety (90) calendar days prior to the destruction of any such records or documents, and, upon request by the United States, Defendants shall deliver all such records or documents to EPA. 95. Until six years after Certification of Completion of the Work and termination of this Consent Decree, Settling Defendants shall preserve, and shall instruct their contractors and agents to preserve, all documents, records, and information of whatever kind, nature or description relating to the performance of the Work. Upon Certification of Completion of the Work, Settling Defendants shall deliver all such documents, -69- records and information to EPA. EPA may in its sole discretion waive this requirement in whole or in part. 96. Settling Defendants and Paying Settling Defendants each individually hereby certify that they have no knowledge that they have altered, mutilated, discarded, destroyed or otherwise disposed of any records, documents or other information relating to their potential liability with regard to the Site since notification of potential liability by the United States which, for purposes of this provision shall be July 24, 1986. XXVIII. NOTICES AND SUBMISSIONS 97. Whenever, under the terms of this Consent Decree, written notice is required to be given or a report or other document is required to be sent by one party to another, it shall be directed to the individuals and the addresses specified below, unless those individuals or their successors give written notice of a change to the other Parties. Written notice as specified herein shall constitute complete satisfaction of any written notice requirement of the Consent Decree with respect to the United States EPA, and the Settling Defendants, respectively. As to the United States: Chief, Environmental Enforcement Section Environment and Natural Resources Division Department of Justice 10th & Pennsylvania Avenue, N.W. Washington, D.C. 20530 Re: DOJ -70- and Director, Waste Management Division United States Environmental Protection Agency, Region I JFK Federal Building Boston, MA 02203 and EPA RPM Kellogg-Deering Site Connecticut Section Waste Management Division J.F.K. Federal Building Boston, MA 02203 As to the State: Kellogg-Deering Project Coordinator Christine Atkinson Site Remediation Division Department of Environmental Protection 165 Capitol Avenue Hartford, CT 06101 [203-566-5486] As to the Settling Defendants: The Defendants' Project Coordinator As to the Paying Settling Defendants: Jones, Day Reavis & Pague 599 Lexington Avenue New York, NY Attn: Debra Rothberg XXIX. EFFECTIVE DATE 98. Except as to Paragraph 9, 10 and 13, 26, 35 and 94 which are effective upon lodging of this Consent Decree with the -71- Court, the effective date of this Consent Decree shall be the date upon which this Consent Decree is entered by the Court. XXX. RETENTION OF JURISDICTION 99. This Court will retain jurisdiction for the purpose of enabling any of the Parties to apply to the Court at any time for such further order, direction, and relief as may be necessary or appropriate for the construction or modification of this Consent Decree, or to effectuate or enforce compliance with its terms, or to resolve disputes in accordance with Section XXI hereof. XXXI. TERMINATION l00. Upon notice by the United States to the Court that EPA, after opportunity for review and comment by the State, has certified the Work as complete and that Settling Defendants have satisfied their obligations under Section XVIII [Response Costs], Section XXII [Stipulated Penalties], Section XVII [Endangerment and Emergency Response], and Section VIII [Additional Work], this Consent Decree shall terminate upon the motion of any of the Parties. Termination of this Consent Decree shall not affect the Covenants Not to Sue (Sections XXIII and XXV above), including all reservations pertaining to those covenants, shall not affect Section XXIV (Contribution Protection] and shall not affect any -72 - continuing obligation of Settling Defendants under Sections V, VI, VII, VIII, X, XI, XV, XIX, XXVI, and XXVII. XXXII. MODIFICATION 101. No material modification shall be made to this Consent Decree without written notification to and written approval of the Parties and the Court. The notification required by this Section shall set forth the nature of and reasons for the requested modification. No oral modification of this consent Decree shall be effective. Modifications that do not materially alter the requirements of this Consent Decree may be made upon the written consent of EPA, and of the Settling Defendants' Project coordinator, which consent shall be filed with this Court. Nothing in this Paragraph shall be deemed to alter the Court's power to supervise or modify this Consent Decree; notwithstanding the above, modifications to the SOW or the RD/RA Work Plan shall be made by written agreement between EPA and the Settling Defendants. XXXIII. COMMUNITY RELATIONS 102. Settling Defendants shall cooperate with EPA in providing information regarding the Work to the public. As requested by EPA, Settling Defendants shall participate in the preparation of such information for dissemination to the public -73- and in public meetings which may be held or sponsored by EPA to explain activities at or relating to the Site. Settling Defendants shall submit a Community Relations Support Plan as a section of every POP in accordance with the SOW which specifies the support to be provided to EPA for community relations. XXXIV. LODGING AND OPPORTUNITY FOR PUBLIC COMMENT 103. This Consent Decree shall be lodged with the Court for a period of not less than thirty (30) days for public notice and comment in accordance with Section 122(d)(2) of CERCLA, 42 U.S.C. section 9622(d)(2), and 28 C.F.R. section 50.7. The United States reserves the right to withdraw or withhold its consent if the comments regarding the Consent Decree disclose facts or considerations which indicate that the Consent Decree is inappropriate, improper, or inadequate. Defendants consent to the entry of this Consent Decree without further notice. XXXV. SIGNATORIES 104. Each undersigned representative of a Defendant to this Consent Decree certifies that he or she is fully authorized to enter into the terms and conditions of this Consent Decree and to execute and legally bind such party to this document. 105. Each Defendant shall identify, -on the attached signature page, the name, address and telephone number of an -74- agent who is authorized to accept service of process by mail on behalf of that party with respect to all matters arising under or relating to this Consent Decree. Defendants hereby agree to accept service in that manner and to waive the formal service requirements set forth in Rule 4 of the Federal Rules of Civil Procedure, including service of a summons, and any applicable local rules of this Court. 106. This Consent Decree may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SO ORDERED THIS DAY OF 19-. United States District Judge THE UNDERSIGNED PARTIES enter into this Consent Decree relating to the Superfund Site. - 73 - FOR THE UNITED STATES OF AMERICA Date: s/Richard B. Stewart - ---------------------------------- Assistant Attorney General Envirorment and Natural Resources Division U.S. Department of Justice Washington, D.C. 20530 s/Cynthia S. Huber - ---------------------------------- Environmental Enforcement Section Environment and Natural Resources Division U.S. Department of Justice Washington, D.C. 20530 s/Paul Keough - ---------------------------------- Acting Regional Administrator, Region I U.S. Environmental Protection Agency s/Richard N. Palmer - ---------------------------------- UNITED STATES ATTORNEY DISTRICT OF CONNECTICUT UNITED STATES ATTORNEYS' OFFICE 141 CHURCH STREET NEW HAVEN, CT 06510 -74- THE UNDERSIGNED PARTY enters into this Consent Decree relating to the Kellogg-Deering Well Field Superfund Site. FOR EDO Corporation Date: September 26, 1990 s/Marvin D. Genzer - ---------------------------------- Vice President Agent Authorized to Accept Service on Behalf of EDO: Name: Law Department Title: EDO Corporation Address: 14-04 111th Street College Point, NY 11356 Telephone: (718) 321-4443 -74- THE UNDERSIGNED PARTY enters into this Consent Decree relating to the Kellogg-Deering Well Field Superfund Site. FOR Plessey Incorporated Date: October 25, 1990 s/Patricia A. Hoffman - ---------------------------------- Assistant Secretary Agent Authorized to Accept Service on Behalf of Plessey Incorporated Name: Patricia A. Hoffman Title: Assistant Secretary Address: 5700 W. Touhy Avenue, Chicago, IL 60648 Telephone: (312) 763-1900 x2227 -76- THE UNDERSIGNED PARTY enters into this Consent Decree relating to the Kellogg-Deering Well Field Superfund Site. FOR PITNEY BOWES INC. Date: October 30, 1990 s/John T. Schmidt - ---------------------------------- Agent authorized to Accept Service on Behalf of PITNEY BOWES INC.: Name: CT Corporation System Title: Address: 1 Commercial Plaza, Hartford, Connecticut 06103 Telephone: (203) 275-8333 -76a - THE UNDERSIGNED PARTY enters into this Consent Decree relating to the Kellogg-Deering Well Field Superfund Site. FOR VERNITRON CORPORATION s/Elliot N. Konopko - ---------------------------------- Date: Nov. 13, 1990 Agent Authorized to Accept Service on Behalf of Vernitron Corporation: Name: Elliot N. Konopko Title: Secretary and General Counsel Address: 645 Madison Avenue New York, N.Y. 10022 Telephone: (212) 593-7900 EX-10.G 6 EXHIBIT 10(G) - COMPENSATION PLAN FOR DIRECTORS EDO Corporation Compensation Plan for Directors 1. Purpose. The Purpose of the EDO Corporation (the "Company") Compensation Plan for Directors (the "Plan") is to provide one-half of Director's retainer in the form of Company Common Shares, and also to provide its Directors with the opportunity to defer receipt of their cash compensation to a future date. The Company has adopted this Plan in recognition of the valuable services of these Directors and the desire to increase the alignment of the interests of Directors with those of shareholders and to provide them with additional flexibility in their personal financial planning. 2. Compensation in Stock One-half of a Director's retainer shall be paid in Common Shares of the Company. Such shares shall be distributed on the last Friday of each quarter in an amount equal to one-half of a Director?s earned quarterly retainer based on the Fair Market Value on such date. A Director may elect to receive any or all of the remainder of any cash compensation due such Director in the form of Common Shares of the Company by election made in the same manner and under comparable irrevocable terms as election for the deferral feature. Such additional Common Shares shall be distributed at the same time and in the same manner as those for one-half of the Director?s retainer. 3. Eligibility for Deferral Feature. Any Director of the Board of the Company who receives compensation for his or her services on the Board is eligible to participate in the deferral feature of the Plan. 4. Election to Participate in Deferral Feature. (a) Any eligible Director may elect, prior to the beginning of each calendar year, but no later than December 31st of the preceding year, to participate in the deferral feature of the Plan and defer receipt of either all or part of the cash compensation that would otherwise have been payable to him or her for services as a Director (including his or her annual retainer, committee and meeting fees) to a distribution date defined in Section 6. A new Director may make an election with respect to future cash compensation including cash compensation earned in the first year of eligibility, within 30 days after becoming eligible. (b) The election will be made on a written form called a "Notice of Election" signed by the Director and delivered to the Secretary of the Company. This election will continue in effect for future years in which the Director is eligible to participate unless the Director submits a written request revoking or revising his or her election on a Notice of Election form. Any revocation or revised deferral election will be applicable only to compensation the Director may earn for services performed in the future and will be effective as of January 1st of the year specified, provided that the signed Notice of Election form has been received by the Company by December 31st of the preceding calendar year. (c) Nothing in this Section prevents a Director from filing an election not to participate for a calendar year and thereafter filing another election to participate in the deferral feature of the Plan for any subsequent calendar year. 5. Deferral Accounts. A deferred compensation account will be established for each Director participating in the deferral feature ("Participant") as a bookkeeping instrument. Credits will be made to a Participant's account on the same dates compensation would have otherwise been paid to him or her currently. Compensation can be deferred in the form of cash or stock. Cash deferrals will be credited with interest, compounded quarterly, until distribution is made in full. The interest rate for purposes of this deferral feature of the Plan will be the most recent published average one-year U.S. Treasury Bill rate as published by the Federal Reserve Board on the day interest is computed. Deferrals in the form of stock will be converted to stock units based on the closing reported sales price of EDO Common Shares par value $1 ("Common Shares"), on the New York Stock Exchange (consolidated trading) (the "Fair Market Value") on the day that monies would have otherwise been paid. Stock units will be credited with cash or stock dividends that will be converted into stock units based on the Fair Market Value on these dates. 6. Distribution of Deferred Compensation. Amounts deferred and accumulated interest or dividends will be credited to a Participant's account and be paid out according to either of two schedules: a lump sum, or in annual installments not to exceed 10 years. The Participant will indicate his or her choice of payment schedule on the election form. Payment(s) will commence on January 1st of the following year in which the Participant ceases to be a Director of the Company, or the date specified by the Participant in his or her election form. Stock units or cash amounts held pending distribution shall continue to accrue dividends or interest as provided in Section 5 until the date of distribution. Any tax required by any governmental authority to be withheld shall be deducted from each distribution under the deferral feature of the Plan. Distribution of stock units shall be in Common Shares, or, at the election of the Participant, in the cash equivalent at the Fair Market Value on the date of distribution. Any modification of a prior election to receive Common Shares or cash payment in a lump sum distribution or in annual installments shall, be made no later than the end of the calendar year preceding the year in which the Participant ceases to serve as a Director. 7. Designation of a Beneficiary. Each Participant will designate one or more beneficiaries to receive all amounts due upon his or her death. If a Participant designates more than one beneficiary, any cash or stock payments to such beneficiaries shall be made in equal shares unless the Participant has designated otherwise. In the absence of any designated beneficiary, all compensation accrued to the date of death will be paid to the Participant's estate. Any beneficiary designation, change or cancellation may be made in writing at any time. A Participant shall bear full responsibility for the accuracy and legal sufficiency of his or her beneficiary designation. 8. Change in Distribution Schedule. (a) In the event of death, or permanent disability of a Participant before full payment has been made, the Committee (as defined below) in its sole discretion shall be permitted to pay the balance of any deferred amount in one lump sum to the Participant or his or her designated beneficiary regardless of any distribution schedule the Participant has requested. (b) The Participant will be considered disabled for the purposes of this Plan if the administrative Committee determines, based on medical evidence, that the Participant is disabled, mentally or physically, and is, therefore, unable to continue his or her services to the Company. 9. Administration of the Plan. The Plan will be administered by the Compensation Committee of the Board of Directors (the "Committee") which will consist of not less than three members selected by the Board. This administrative Committee will have the right to interpret the provisions of the Plan. However, no Director may participate in any decision which would specifically affect his or her own deferral account. All decisions regarding payments or amendments to the Plan will be subject to the approval of the Board of Directors of the Company. 10. Rights of a Participant. Income deferred under this Plan will not be segregated from the general funds of the Company and no Participant will have any claim on any specific assets of the Company. To the extent that any Participant acquires a right to receive benefits under this Plan, his or her right will be no greater than the right of any unsecured general creditor of the Company and is not assignable or transferable except to his or her beneficiary or estate as defined in Section 7. 11. Amendment and Termination. (a) The Plan may be amended from time to time by resolution of the Board of Directors to comply with changes in the laws of the State and Federal Government having jurisdiction over the Company. The amendment of any one or more provisions of the Plan shall not affect the remaining provisions of the Plan. No amendment shall reduce any benefits accrued by any Participant prior to the amendment. (b) The Board of Directors has the right to alter the method of crediting dividends or interest to deferral accounts or to cease crediting future dividends or interest at any time. (c) The Board of Directors has the right to terminate the Plan at any time. Any amount accumulated prior to the Plan's termination will continue to be subject to the provisions of the Plan. 12. Arbitration of Disputes. Any disagreement, dispute, controversy or claim arising out of, or relating to, this Plan or interpretation or validity hereof shall be settled exclusively and finally by arbitration. The arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association. 13. Notices. Notices and elections under this Plan must be in writing. A notice or election is deemed delivered if it is delivered personally or if it is mailed by registered or certified mail to the person at his or her last known business address. 14. Applicable Law. This Plan shall be interpreted under the laws of the State of New York without reference to its conflict of law rules. EX-21 7 EXHIBIT 21 - SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES The following are subsidiaries of the Company, the respective jurisdictions of their incorporation and names (if any) under which they do business. The Company owns all of the voting securities (including directors' qualifying shares owned beneficially by the Company) of each such subsidiary except the Company owns only approximately 50% of EDO (Canada) Limited. The names of particular subsidiaries of the Company have been omitted. When considered in the aggregate as a single subsidiary, these omitted subsidiaries do not constitute a "significant subsidiary" as such term is defined in Rule 1-02(v) of Regulation S-X of the Securities Exchange Act of 1934, as amended. Jurisdiction Name Under Which of Subsidiary Name Incorporation Does Business EDO Western Corporation Utah EDO Electro-Ceramics Barnes Engineering Company Delaware EDO Barnes EDO (Canada) Limited Canada EDO Operations (Israel) Ltd. Israel EDO Foreign Sales Corporation U.S. Virgin Islands EDO Sports, Inc. Delaware EDO Western International Corporation Delaware EDO International Corporation Delaware VT Technologies, Inc. Delaware EDO Energy Corporation Delaware EDO Automotive Natural Gas, Inc. Delaware Specialty Plastics, Inc. Louisiana EDO Specialty Plastics EDO Acquisition II, Inc, Delaware EDO Technology Services and Analysis EX-23 8 EXHIBIT 23 - KPMG LLP CONSENT Exhibit 23 KPMG LLP Consent of Independent Auditors The Board of Directors EDO Corporation: We consent to incorporation by reference in Registration Statement Nos.2-69243, 33-1526 and 33-28020 on Form S-8 of EDO Corporation of our report dated February 12, 1999, relating to the consolidated balance sheets of EDO Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of EDO Corporation. KPMG LLP Melville, New York March 15, 1999 EX-24 9 EXHIBIT 24 - POWERS OF ATTORNEYS EXHIBIT 24 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Kenneth A. Paladino and Marvin D. Genzer, and each of them, with full power of substitution, the undersigned's true and lawful attorneys and agents to execute in his name and on his behalf, in any and all capabilities, the Annual Report on Form 10-K of EDO Corporation (the "Company"), a New York corporation, for the fiscal year ended December 31, 1998, and any and all other instruments which such attorneys and agents, or either of them, deem necessary or advisable to enable the Company to comply with the annual reporting requirements of the Securities Exchange Act of 1934, as amended, and the rules, regulations and requirements of the Securities and Exchange Commission; and the undersigned hereby ratifies and confirms as his own act and deed all that such attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. Either of such attorneys and agents shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned have subscribed their signatures this 17th day of March, 1999. Robert E. Allen Robert Alvine Mellon C. Baird George M. Ball Joseph F. Engelberger Frank A. Fariello William J. Frost Marvin D. Genzer Robert M. Hanisee Michael J. Hegarty Ira Kaplan James M. Smith George A. Strutz, Jr. EX-27 10 ART. 5 FDS FOR 1998 YEAR 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000 YEAR DEC-31-1998 DEC-31-1998 21,801 11,519 39,853 0 9,830 86,460 53,562 39,598 126,753 45,742 36,955 8,454 0 61 29,536 126,753 96,060 96,060 69,940 86,601 100 171 (2,321) 8,931 700 7,168 0 0 0 7,168 1.09 0.94
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