0000916641-01-501394.txt : 20011030
0000916641-01-501394.hdr.sgml : 20011030
ACCESSION NUMBER: 0000916641-01-501394
CONFORMED SUBMISSION TYPE: 424B1
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20011026
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: 424B1
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-69764
FILM NUMBER: 1766778
BUSINESS ADDRESS:
STREET 1: 60 EAST 42ND STREET
STREET 2: SUITE 5010
CITY: NEW YORK
STATE: NY
ZIP: 10165
BUSINESS PHONE: 2127162000
MAIL ADDRESS:
STREET 1: 14 04 111TH ST
CITY: COLLEGE POINT
STATE: NY
ZIP: 11356-1434
424B1
1
d424b1.txt
FINAL PROSPECTUS
FILED PURSUANT TO RULE NO. 424(b)(1)
REGISTRATION NOS. 333-69764 and 333-72220
PROSPECTUS
4,500,000
[LOGO EDO Corporation]
Common Shares
-------------------------------------------------------------------------------
We are offering 3,041,100 of our common shares and the EDO Employee Stock
Ownership Trust, or the selling shareholder, is offering, on behalf of the
participants of the EDO Employee Stock Ownership Plan, 1,458,900 of our common
shares. We will not receive any of the proceeds from the sale of shares by the
selling shareholder. Our common shares are traded on the New York Stock
Exchange under the symbol "EDO." We have filed an application to list the
common shares offered by us on the New York Stock Exchange.
The last reported sale price of our common shares on October 25, 2001 was
$26.59 per share.
One of the underwriters, First Union Securities, Inc., is acting under the
trade name Wachovia Securities.
We have granted the underwriters a 30-day option to purchase up to an
additional 675,000 of our common shares to cover over-allotments at the public
offering price, less the underwriting discount.
Investing in our common shares involves risks. See "Risk Factors" beginning
on page 7 of this prospectus.
Per
share Total
------ ------------
Public offering price...................................... $23.50 $105,750,000
Underwriting discounts and commissions..................... $ 1.29 $ 5,805,000
Proceeds, before expenses, to us........................... $22.21 $ 67,542,831
Proceeds, before expenses, to the selling shareholder...... $22.21 $ 32,402,169
The shares will be ready for delivery on or about October 31, 2001.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
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Wachovia Securities____________________________________________________SG Cowen
The date of this prospectus is October 25, 2001.
Photographs showing EDO Corporation's products and equipment which incorporates
those products:
A helicopter-towed MK-105 mine sweeper
An F-22 aircraft launching a missile
Employees working at a micro-electronics manufacturing facility
Radar jamming equipment for military aircraft
A technician looking through a microscope at a satellite product that provides
signal conversion
A technician looking at underwater sonar equipment for submarines
Electronic components for fiber optic communications networks
A fleet of B-1B Bombers on the ground
An advanced fiber composite structure for an unmanned aircraft
Equipment used to test electronic warfare components of aircraft
A rack used to release bombs
Vacuum waste holding tanks for use on commercial aircraft
Lockheed Martin Joint Strike Fighter aircraft in flight
Boeing Joint Strike Fighter aircraft with our swing-arm bomb release
assembly shown in the weapons bay
TABLE OF CONTENTS
Page
----
Forward-Looking Statements............................................... i
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 12
Price Range of Common Shares............................................. 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Selected Consolidated Financial Data..................................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 23
Management............................................................... 40
Principal and Selling Shareholders....................................... 43
Legal Matters............................................................ 46
Experts.................................................................. 46
Where You Can Find More Information...................................... 46
Incorporation by Reference............................................... 47
Underwriting............................................................. U-1
Index to Consolidated Financial Statements............................... F-1
--------------------------------------------------------------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to
provide you with different information. When you make a decision about whether
to invest in our common shares, you should not rely on any information other
than the information contained or incorporated by reference in this prospectus.
We are not making an offer to sell these securities in any jurisdiction where
the offer or sale is not permitted. You should assume that the information
appearing in this prospectus is accurate as of the date on the front cover of
this prospectus only and you should assume the information contained in any
document incorporated by reference in this prospectus is accurate only as of
the date of that document. Our business, financial condition, results of
operations and prospects may have changed since those dates.
----------------
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "anticipate,"
"believe," "continue," "could," "estimate," "expect," "intend," "may," "might,"
"plan," "potential," "predict," "should" or "will" or the negative of such
terms or other comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties and other factors, including
the risks outlined under "Risk Factors," that may cause our or our industry's
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. You should not place undue reliance on these
forward-looking statements. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future
results, performance or achievements.
i
PROSPECTUS SUMMARY
This summary is not complete and may not contain all of the information that
may be important to you. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and the consolidated financial
statements and related notes, before making an investment decision. Unless we
state otherwise, the information we present in this prospectus assumes no
exercise of the underwriters' over-allotment option. In this prospectus, "EDO
Corporation," "EDO," "we," "us" and "our" refers to EDO Corporation and its
subsidiaries and "selling shareholder" refers to the EDO Employee Stock
Ownership Trust, the entity that holds our common shares for the EDO Employee
Stock Ownership Plan.
Our Company
We are a leading supplier of sophisticated, highly engineered products and
systems for defense, aerospace and industrial applications. Since our founding
in 1925, we have developed core competencies in advanced electronics,
electromechanical systems, information systems and engineered materials. We
have established leading positions in a number of niche markets, employing
proprietary technologies and capabilities. We believe our products and systems
are mission-critical, standard equipment on a wide range of military aircraft,
including the F-14, F-15, F-16, F/A-18, F-22, Tornado, F-2, EA-6B and B-1B. Our
products and systems are also found on a variety of U.S. and foreign naval
ships and submarines, commercial aircraft and both military and commercial
spacecraft.
We are a direct supplier, or prime contractor, to the U.S. Department of
Defense, referred to as the DoD. We are also a first tier supplier, which is a
direct supplier to prime contractors in the aerospace and defense industries,
including BAE Systems plc, Boeing Company, Lockheed Martin Corporation,
Northrop Grumman Corporation and Raytheon Company. Our customers include more
than 20 foreign governments, including those of countries in Europe, South
America and Asia. For the six months ended June 30, 2001, we had net sales of
$126.9 million and earnings before interest, taxes, depreciation, amortization,
non-cash ESOP compensation expense and merger-related expenses, which we refer
to as EBITDA, of $18.6 million. On June 30, 2001, our backlog of unfilled, firm
customer orders was $295.9 million, up from $252.9 million at December 31,
2000.
Market Overview
In fiscal year 1999, the U.S. defense budget increased after an extended
real dollar decline in spending that had persisted since the mid-1980s. Further
increases in spending followed in fiscal years 2000 and 2001. If enacted, the
amended fiscal year 2002 DoD budget request of about $343.5 billion would
amount to a $27.3 billion increase in funding over the level appropriated for
fiscal year 2001. The DoD has indicated that, in light of overall budget
constraints, it is allocating increased resources to advanced electronics,
smart weapons and communications and information technologies. We expect
increased spending in these areas to continue as the DoD pursues this strategy.
The U.S. defense industry has undergone significant consolidation in recent
years, resulting in the emergence of a small number of major prime contractors.
Consolidation has also affected smaller companies, which are seeking to improve
their capabilities and market penetration through acquisitions, building their
value as strategic suppliers to prime contractors. We expect prime contractors
to increasingly rely on their key suppliers to improve efficiency and
competitiveness. We believe this situation creates an attractive opportunity
for established niche suppliers to play a critical role in the evolution of the
defense industrial base.
Competitive Strengths
. Extensive Experience and Leading Position in Core Markets. We believe
that decades of research and development, production and operational
experience have provided us with proprietary knowledge and capabilities
in our niche markets, including our markets for electronic countermeasure
systems for aircraft, aircraft stores suspension and release units,
airborne mine countermeasure systems and piezoelectric ceramics for
underwater sensors. As a result of this extensive experience, we have
secured a leading position in our niche markets and developed long-
standing relationships as a supplier and strategic partner with many of
our government and prime contractor customers.
. Incumbent Supplier Status on Major Platforms. We derive a significant
portion of our revenues from our incumbent position on a wide range of
military and commercial aircraft and spacecraft, naval ships and
submarines. This incumbency provides us with a sustained revenue stream,
including development funding and revenue from production, provision of
spare parts, repairs, field support and system upgrades. The up-front
investment by our customers associated with these platforms is also
significant, making it costly to replace suppliers and creating barriers
to entry for potential competitors.
. Technological Leadership Supporting New Product Development. We believe
that we are a technological leader in our niche markets. Our goal is to
use our technical expertise to develop new products and reduce our
customers' program costs and risks, positioning us as a preferred
supplier to our prime contractor customers. We benefit from significant
levels of customer-funded research and development in support of new
product and technology development. We believe that our research and
development efforts contribute significantly to our success in new
product development. Our resulting reputation as a technology leader has
helped us forge strategic alliances with some of our prime contractor
customers. These initiatives position us to play an important role in
future defense programs.
. Experienced Leadership Team. Our leadership team of nine senior
executives has an average of 34 years of experience in either or both of
the military or aerospace and defense industries. They have developed
strong customer relationships within the U.S. Government, many foreign
governments, and with aerospace and defense prime contractors. Our
management team also has successfully completed our merger with AIL
Technologies, Inc., or AIL, and has integrated five other acquisitions
since 1998.
Business Strategy
Our strategy is to strengthen our position as a leading supplier of mission-
critical systems and products to the major prime contractors in the aerospace
and defense industries, the U.S. Government and foreign customers. Our strategy
includes the following elements:
. Leverage Technical Expertise and Incumbency Positions. We intend to
pursue new growth opportunities that enable us to employ our strong
technical capabilities and incumbent position on key platforms.
. Exploit Outsourcing Opportunities. We intend to emphasize our position as
a critical supplier of larger subsystems to take advantage of the trend
of prime contractors outsourcing these subsystems, rather than individual
components, to reduce costs and improve system performance.
. Strengthen and Expand via Strategic Acquisitions. We expect to enhance
and strengthen our competitive position through the continued,
disciplined pursuit of strategic acquisitions that complement our
leadership position in niche markets.
. Pursue Early Integration of Our Products. We intend to actively
participate at the early stages of our customers' program development,
thereby increasing the likelihood of the early integration of our
products and our long-term involvement in these programs.
2
. Penetrate New International Markets. We intend to continue the expansion
of our international business by marketing selected products and advanced
technologies developed under our existing domestic contracts to our
foreign customers.
Recent Developments
We plan to report our financial results for the quarter ended September 29,
2001 on or about October 31, 2001. In advance of that report and in
anticipation of this offering, on October 22, 2001, we announced that we expect
earnings per diluted share for the quarter ended September 29, 2001 to be in
the range of $0.28 to $0.30 and EBITDA for the same period to be approximately
$9.9 million. In addition, we stated that we expect revenues for the quarter
ended September 29, 2001 to be approximately $60 million.
On October 9, 2001, we acquired Dynamic Systems, Inc., a privately-held
company based in Alexandria, Virginia. Dynamic Systems, which will become part
of our Systems and Analysis Group, provides professional and information
technology services primarily to the DoD and other government agencies. For the
most recent twelve-month period, Dynamic Systems had revenue of approximately
$17 million.
----------------
We are incorporated in New York, and our principal executive office is
located at 60 East 42nd Street, Suite 5010, New York, New York 10165. We have
facilities located in New York, Pennsylvania, Virginia, Utah, California and
Louisiana. Our telephone number is (212) 716-2000. You may also obtain
additional information about us from our website, www.edocorp.com. The
information on our website is not part of this prospectus.
3
The Offering
We are offering............................ 3,041,100 shares
The selling shareholder is offering........ 1,458,900 shares
Common shares to be outstanding after this
offering.................................. 17,877,394 shares
Use of proceeds............................ We intend to use our net proceeds
to retire portions of our
outstanding debt obligations, for
potential acquisitions and for
general corporate purposes. See
"Use of Proceeds." We will not
receive any of the net proceeds
from the sale of shares by the
selling shareholder.
Dividend policy............................ We have paid a cash dividend on
our common shares at an annual
rate of $0.12 per share since the
second quarter of 1998. Although
we have no current intention of
changing our dividend policy, our
board of directors periodically
reviews our dividend policy and
may change it in the future in
accordance with our capital
needs.
Risk factors............................... See "Risk Factors" beginning on
page 7 and the other information
included and incorporated by
reference in this prospectus for
a discussion of factors you
should carefully consider before
deciding to invest in our common
shares.
New York Stock Exchange symbol............. EDO
The total number of outstanding common shares above is based on 14,836,294
common shares outstanding as of June 30, 2001, and does not include:
. 675,000 shares issuable by EDO upon exercise of the underwriters' over-
allotment option;
. as of June 30, 2001, options to purchase a total of 850,720 common shares
outstanding (with a weighted-average exercise price of $7.58 per share),
of which options for a total of 438,352 shares were then exercisable
(with a weighted-average exercise price of $6.71);
. 137,391 common shares reserved for future issuance under our stock plans;
and
. 1,014,262 common shares issuable upon conversion of our 7% convertible
subordinated debentures then outstanding.
4
Summary Consolidated Financial Data
The financial data set forth below should be read in conjunction with the
sections of this prospectus entitled "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements and related notes included in this prospectus.
Years Ended December 31, Six Months Ended
---------------------------- ------------------
July 1, June 30,
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
(audited) (unaudited)
(dollars in thousands, except per share
data)
Statement of Earnings Data:
Net sales................... $ 81,403 $ 97,936 $206,822 $ 85,595 $126,927
Costs and expenses:
Cost of sales.............. 57,817 72,337 151,512 65,078 94,768
Selling, general and
administrative............ 11,649 13,602 29,205 10,009 16,285
Research and development... 2,382 2,748 5,371 2,136 3,982
Non-recurring (income)
expenses(1)............... (2,200) -- 11,495 8,943 1,318
-------- -------- -------- -------- --------
Total.................... 69,648 88,687 197,583 86,166 116,353
-------- -------- -------- -------- --------
Operating earnings (loss)... 11,755 9,249 9,239 (571) 10,574
Non-operating (expense)
income..................... (528) (555) (2,654) (736) (841)
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes............... 11,227 8,694 6,585 (1,307) 9,733
Income tax expense
(benefit).................. 880 2,610 5,264 (118) 3,795
-------- -------- -------- -------- --------
Earnings (loss) from:
Continuing operations...... 10,347 6,084 1,321 (1,189) 5,938
Discontinued operations.... (2,116) (4,064) -- -- --
-------- -------- -------- -------- --------
Net earnings (loss)......... 8,231 2,020 1,321 (1,189) 5,938
Dividends on preferred
shares(2).................. 1,063 1,000 881 458 194
-------- -------- -------- -------- --------
Net earnings (loss)
available for common
shares..................... $ 7,168 $ 1,020 $ 440 $ (1,647) $ 5,744
======== ======== ======== ======== ========
Per Common Share Data:
Basic net earnings (loss):
Continuing operations...... $ 1.42 $ 0.76 $ 0.05 $ (0.20) $ 0.48
Discontinued operations.... (0.33) (0.61) -- -- --
-------- -------- -------- -------- --------
Total.................... $ 1.09 $ 0.15 $ 0.05 $ (0.20) $ 0.48
======== ======== ======== ======== ========
Diluted net earnings
(loss).................... $ 0.94 $ 0.15 $ 0.05 $ (0.20) $ 0.46
======== ======== ======== ======== ========
Cash dividends per share.... $ 0.115 $ 0.12 $ 0.12 $ 0.06 $ 0.06
Weighted average common
shares outstanding:
Basic...................... 6,549 6,701 9,601 8,211 11,905
Diluted.................... 7,785 8,032 10,662 8,211 12,433
Other Data:
EBITDA(3)................... $ 13,998 $ 12,869 $ 31,802 $ 11,988 $ 18,638
Depreciation and
amortization............... 2,343 3,390 9,441 3,189 5,432
Capital expenditures........ 3,133 4,032 3,861 1,407 6,797
Backlog..................... 130,151 133,880 252,888 267,110 295,861
Six Months Ended
June 30, 2001
December 31, -----------------------
2000 Actual As Adjusted(5)
------------ -------- --------------
(dollars in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities.............................. $ 16,621 $ 5,330 $ 52,074
Working capital.......................... 37,552 41,670 92,214
Total assets............................. 214,254 208,462 255,206
Total debt(4)............................ 49,444 43,299 23,208
Shareholders' equity..................... 65,818 74,680 141,515
5
(1) Reflects $2,200,000 in the year ended December 31, 1998 of litigation
settlement income, and $11,495,000, $8,943,000 and $1,318,000,
respectively, in the year ended December 31, 2000 and the six months ended
July 1, 2000 and June 30, 2001 for the write-off of purchased in-process
research and development and EDO-AIL merger related costs.
(2) ESOP Convertible Cumulative Preferred Shares, Series A.
(3) EBITDA consists of earnings before interest, taxes, depreciation and
amortization, excluding the write-off of purchased in-process research and
development, merger-related costs and non-cash ESOP expense. Items excluded
from EBITDA are significant components in understanding and assessing
financial performance. EBITDA is a measure commonly used by financial
analysts and investors to evaluate the financial results of companies in
our industry, and we believe it therefore provides useful information to
investors. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operations, investing or
financing activities, or other financial statement data presented in the
consolidated financial statements as indicators of financial performance or
liquidity. Because EBITDA is not a measure of financial performance
determined in accordance with generally accepted accounting principles and
is susceptible to varying calculations, EBITDA as presented may not be
comparable to similarly titled measures of other companies.
(4) Includes ESOT loan obligation, note payable and current portion of long-
term debt.
(5) Adjusted to reflect the sale by us of 3,041,100 shares of common stock in
this offering and the application of the estimated net proceeds as
described in "Use of Proceeds."
6
RISK FACTORS
You should carefully consider the risks described below together with all of
the other information included or incorporated by reference in this prospectus
before making an investment decision. If any of the following risks actually
occurs, our business, financial condition or results of operations could be
harmed, the trading price of our common shares could decline and you may lose
all or part of your investment.
RISKS RELATED TO OUR BUSINESS
Reductions in government spending may adversely affect our results of
operations.
A reduction in purchases of our products by domestic and foreign government
agencies may have a material adverse effect on our business because a
significant portion of our net sales are derived from contracts directly or
indirectly with these government agencies. In the years ended December 31,
1998, 1999 and 2000, we derived about 50%, 48% and 63%, respectively, of net
sales from direct and indirect contracts with the U.S. Government and derived
about 32%, 34% and 18%, respectively, of net sales from export sales to foreign
governments. We anticipate that the proportion of our sales derived from
contracts with the U.S. and foreign governments during 2001 will more closely
resemble our mix of business in 2000 than the prior years. The development of
our business will depend upon the continued willingness of the U.S. and foreign
governments to commit sufficient resources to existing and new defense programs
and, in particular, to continue to purchase our products and services. Although
defense spending in the U.S. has recently increased, further increases may not
continue and any proposed budget or supplemental budget request may not be
approved. In addition, the DoD may not continue to focus its spending on
technologies that we incorporate in our products.
The U.S. Government may terminate or modify our existing contracts or its
contracts with the prime contractors for which we are a subcontractor, which
could adversely affect our revenue.
A significant portion of our revenues are derived from U.S. Government
contracts, directly or indirectly. There are inherent risks in contracting with
the U.S. Government, including risks peculiar to the defense industry, which
could have a material adverse effect on our business, financial condition or
results of operations. Laws and regulations permit the U.S. Government to:
. terminate contracts for its convenience;
. reduce or modify contracts or subcontracts if its requirements or
budgetary constraints change;
. cancel multi-year contracts and related orders if funds for contract
performance for any subsequent year become unavailable;
. adjust contract costs and fees on the basis of audits done by its
agencies; and
. control or prohibit the export of our products.
If the U.S. Government terminates our contracts for convenience, we may only
recover our costs incurred or committed for settlement expenses and profit on
work completed prior to the termination. Additionally, most of our backlog
could be adversely affected by any modification or termination of contracts
with the U.S. Government or contracts the prime contractors have with the U.S.
Government. The U.S. Government regularly reviews our costs and performance on
its contracts, as well as our accounting and general business practices. The
U.S. Government may reduce the reimbursement for our fees and contract-related
costs as a result of such an audit.
Our business is subject to various laws and regulations that are more
restrictive because we are a contractor and subcontractor to the U.S.
Government.
As a contractor and subcontractor to the U.S. Government, we are subject to
various laws and regulations that are more restrictive than those applicable to
non-government contractors. We are required to obtain and
7
maintain material governmental authorizations and approvals to run our business
as it is currently conducted. Examples of the approvals we need include a
license to operate an FAA repair station and U.S. State Department approval of
our foreign exports. New or more stringent laws or government regulations, if
adopted and enacted, could have a material adverse effect on our business.
Responding to governmental audits, inquiries or investigations may involve
significant expense and divert management attention. Also, an adverse finding
in any such audit, inquiry or investigation could involve fines, injunctions or
other sanctions.
If we fail to win competitively awarded contracts in the future, we may
experience a reduction in our sales, which could negatively affect our
profitability.
We obtain many of our U.S. Government contracts through a competitive
bidding process. We cannot assure you that we will continue to win
competitively awarded contracts or that awarded contracts will generate sales
sufficient to result in our profitability. We are also subject to risks
associated with the following:
. the frequent need to bid on programs in advance of the completion of
their design (which may result in unforeseen technological difficulties
and cost overruns);
. the substantial time and effort, including the relatively unproductive
design and development required to prepare bids and proposals, spent for
competitively awarded contracts that may not be awarded to us;
. design complexity and rapid technological obsolescence; and
. the constant need for design improvement.
Our government contracts may be subject to protest or challenge by
unsuccessful bidders or to termination, reduction or modification in the event
of changes in government requirements, reductions in federal spending or other
factors. In addition, failure to obtain a renewal or follow-on contract with
respect to any significant contract or a number of lesser contracts with the
U.S. Government or foreign governments would result in a loss of revenues. If
revenues from the award of new contracts fail to offset this loss, it could
have a material adverse effect on our results of operations and financial
position.
A large majority of our contracts are fixed-price, and we may face increased
risks of cost overruns or losses on our contracts.
The majority of our government contracts and subcontracts are firm, fixed-
price contracts providing for a predetermined fixed price for the products we
make regardless of the costs we incur. At times, we must therefore make pricing
commitments to our customers based on our expectation that we will achieve more
cost-effective product designs and automate more of our manufacturing
operations. The manufacture of our products requires a complex integration of
demanding processes involving unique technical skill sets. In addition, the
expense of producing products can rise due to increased costs of materials,
components, labor, capital equipment or other factors. As a result, we face
risks of cost overruns or order cancellations if we fail to achieve forecasted
product design and manufacturing efficiencies or if products cost more to
produce than expected.
We may be required to reduce our profit margins on contracts on which we use
the percentage-of-completion accounting method.
We record sales and profits on substantially all of our contracts using
percentage-of-completion methods of accounting. As a result, revisions made to
our estimates of sales and profits are recorded in the period in which the
conditions that require such revisions become known and can be estimated.
Although we believe that our profit margins are fairly stated and that adequate
provisions for losses for our fixed price contracts are recorded in our
financial statements, as required under U.S. generally accepted accounting
principles, we cannot assure you that our contract profit margins will not
decrease or our loss provisions will not increase materially in the future.
8
Our products and systems may be rendered obsolete by our inability to adapt to
technological change.
The rapid change of technology continually affects our product applications
and may directly impact the performance of our products. For our electronic
warfare products, we are required to improve reliability and maintainability,
extend frequency ranges and provide advanced jamming techniques. We can give
you no assurances that we will successfully maintain or improve the
effectiveness of our existing products, nor can we assure you that we will
successfully identify new opportunities and continue to have the needed
financial resources to develop new products in a timely or cost-effective
manner. In addition, products manufactured by others may render our products
and systems obsolete or non-competitive. If any of these events occur, our
results of operations may be adversely affected.
The unsuccessful integration of a business or business segment we acquire could
have a material adverse effect on our operating results.
One of our key operating strategies is to pursue selective acquisitions. We
review and actively pursue possible acquisitions on a continuous basis. We do
not currently have any commitments, agreements or understandings to acquire any
specific businesses or other material assets. We may not be able to identify
acquisitions at prices attractive to us or on terms that are otherwise
satisfactory to us. Our acquisition strategy may require additional debt or
equity financing, resulting in additional leverage or dilution of ownership. We
may not be able to finance acquisitions on terms that are satisfactory to us.
We cannot assure you that any future acquisition will be consummated, or that
if consummated, we will be able to integrate such acquisition successfully
without a material adverse effect on our financial condition or results of
operations. Moreover, any acquisition could involve other risks, including:
. diversion of management's attention from existing operations;
. potential loss of key employees or customers of acquired companies; and
. exposure to unforeseen liabilities of acquired companies.
We may be required to defend lawsuits or pay damages in connection with the
alleged or actual harm caused by our products.
We face an inherent business risk of exposure to product liability claims in
the event that the use of our products is alleged to have resulted in
unintended harm to others or to property. Although we maintain general
liability and product liability insurance, we may incur significant liability
if product liability lawsuits against us are successful. We cannot assure you
that such coverage will be adequate to cover all claims that may arise or that
it will continue to be available to us on acceptable terms.
We may incur substantial environmental liability arising from our activities
involving the use of hazardous materials.
Our business is subject to certain federal, state, local and foreign laws,
regulations and ordinances governing the use, manufacture, storage, handling
and disposal of hazardous materials and certain waste products. From time to
time, our operations have resulted or may result in noncompliance with
environmental laws or liability for the costs of investigating and cleaning up,
and certain damages resulting from, sites of past spills, disposals or other
releases of hazardous materials. In addition, we have been identified as a
potentially responsible party pursuant to the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, or
corresponding state environmental laws, for the cleanup of contamination
resulting from past disposals of hazardous materials at certain sites where we,
with others, sent waste in the past. We became a party to a consent decree as a
result of our potential responsibility for contamination caused by the disposal
of hazardous materials. See "Business--Legal Proceedings." We cannot assure you
that such matters, or any similar liabilities that arise in the future, will
not exceed our resources, nor can we completely eliminate the risk of
accidental contamination or injury from these materials.
9
Political and economic instability in foreign markets may have a material
adverse effect on our operating results.
Foreign sales represented about 18% of our total sales in 2000, and we
intend to increase the amount of foreign sales we make in the future. Foreign
sales are subject to numerous risks, including political and economic
instability in foreign markets, restrictive trade policies of foreign
governments, economic conditions in local markets, inconsistent product
regulation by foreign agencies or governments, the imposition of product
tariffs and the burdens of complying with a wide variety of international and
U.S. export laws and differing regulatory requirements. If we fail to increase
our foreign sales it could have a material adverse effect on our results of
operations.
Terrorist attacks may have an adverse effect on our business in the future.
Following the September 11, 2001 terrorist attack, we have experienced no
material adverse effect on our business. However, we are unable to predict with
certainty any future adverse impact from these types of attacks or related
outbreaks of hostilities.
Concentration of voting power and certain provisions in our charter documents
could make a merger, tender offer or proxy contest difficult and may adversely
affect the price of our common shares.
At June 30, 2001, the EDO Employee Stock Ownership Trust, or ESOT, owned
6,140,994 common shares (or 41% of the outstanding common shares), of which
1,458,900 are being sold in this offering. The EDO ESOP will control 26% of the
voting power of our capital stock after this offering, assuming the
underwriters do not exercise their over-allotment option. The trustee of the
plan follows its obligations under the trust agreement and its fiduciary duties
when voting allocated shares under the plan. The procedure the trustee
generally follows is to receive direction from each of the plan participants
with respect to each of his or her allocated shares, and then to vote all
shares in accordance with the direction received. The market may perceive that
the concentration of voting power in the hands of a single employee stock
ownership plan creates a potential barrier against another party acquiring us.
This perception could result in lower market prices for our common shares.
In addition, our Certificate of Incorporation and By-Laws provide for a
classified board of directors and restrict the ability of shareholders to call
special meetings. These provisions could delay or impede the removal of
incumbent directors and could make it more difficult to effect a merger, tender
offer or proxy contest, even if such events might be favorable to our
shareholders. Moreover, certain agreements to which we are a party, including
loan and executive officer agreements, contain provisions that impose increased
costs in the event of a change of control.
If we are unable to protect our intellectual property rights adequately, the
value of our commercial products could be diminished.
The value of our commercial products is increased, in part, by obtaining,
maintaining and enforcing our patents and other proprietary rights. While we
take precautionary steps to protect our technological advantages and
intellectual property and rely in part on patent, trademark, trade secret and
copyright laws, we cannot assure you that the precautionary steps we have taken
will completely protect our intellectual property rights. In the event a
competitor successfully challenges our patents or licenses, we could incur
substantial litigation costs that could have a material adverse effect on our
operating results and financial condition.
RISKS RELATED TO THIS OFFERING
The price of our common shares may be volatile due to lower trading volume and
lower public ownership.
The market price of our common shares has been and may continue to be
volatile. In particular, the volatility of our shares is influenced by lower
trading volume and lower public ownership relative to other publicly held
competitors. For example, our stock price has ranged from $7.19 per share to
$28.75 per share for
10
the twelve months ended September 30, 2001. Our average weekly trading volume
for the twelve months ended September 30, 2001 was about 366,944 shares. Having
a relatively high percentage of our shares owned by the EDO ESOP and long-term
institutional holders means that our stock is relatively less liquid and thus
more susceptible to large price fluctuations.
The following factors, among others, may have a significant impact on the
market price of our common shares:
. the sale or attempted sale of a large amount of our common shares into
the market;
. announcements of technological innovations or new products by us or our
competitors;
. announcements of acquisitions by us or our competitors; and
. publicity regarding actual or potential governmental contracts, or to
products under development by us or our competitors.
You will suffer immediate and substantial dilution.
The offering price per share will significantly exceed our current net
tangible book value per share. Accordingly, you will suffer immediate and
substantial dilution. The exercise of outstanding options to purchase our
common shares will result in further dilution to new investors.
We will have broad discretion over use of proceeds.
We intend to use the net proceeds from this offering to retire portions of
our outstanding debt obligations, for potential acquisitions and for general
corporate purposes. We intend to seek and investigate acquisition opportunities
actively as they become available. Future events, including changes in
competitive conditions, our ability to identify appropriate acquisition
candidates, the availability of other financing and funds generated from
operations and the status of our business from time to time, may make changes
in the allocation of the net proceeds of this offering necessary or desirable.
After this offering if there are sales of a substantial number of our common
shares in the public market, the market price of our common shares may fall.
Upon completion of this offering, we will have 17,877,394 common shares
outstanding (based upon shares outstanding as of June 30, 2001) or 18,552,394
if the underwriters exercise their over-allotment option in full. All of these
shares, including the 4,500,000 shares offered hereby (or 5,175,000 shares if
the underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act.
The selling shareholder, together with our executive officers and directors,
who together hold 7,357,580 common shares (all of which are eligible for sale
under Rule 144 on the date of this offering), will enter into lock-up
agreements with the underwriters pursuant to which the holders will agree not
to offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of, directly or indirectly, any of their common shares, or any shares
that they may acquire through the exercise of stock options or warrants, for a
period of 90 days beginning on the date of this offering, without the prior
written consent of First Union Securities, Inc. on behalf of each of the
underwriters. Among other exceptions, these lock-ups do not apply to common
shares allocated to our executive officers in their ESOP accounts, or shares in
the process of being distributed to plan participants. In addition, these lock-
ups do not apply to shares to be transferred by the selling shareholder in the
ordinary course of business to satisfy future requests for distributions or
diversifications by retiring or retired participants, or as otherwise required
by ERISA or the Internal Revenue Code. See "Underwriting."
As of June 30, 2001, options to purchase a total of 850,720 common shares
were outstanding under our stock option plans, of which options for a total of
438,352 shares were then exercisable. Of the total options exercisable, options
for 229,631 shares were held by executive officers and directors subject to the
lock-up agreements described above.
11
USE OF PROCEEDS
We expect to receive net proceeds of about $66.8 million from the sale of
the 3,041,100 common shares offered by us in this offering, or about $81.8
million from the sale of the 3,716,100 common shares if the underwriters
exercise their over-allotment option in its entirety, at a public offering
price of $23.50 per share and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
We will not receive any proceeds from the sale of the 1,458,900 common
shares by the selling shareholder.
We intend to use our net proceeds to retire portions of our outstanding debt
obligations, for potential acquisitions and for general corporate purposes. We
intend to repay all of our outstanding term loans, or about $20.1 million,
which as of June 30, 2001 had an interest rate of 5.71%, and under the terms of
our credit facility would mature in 2005. Pending the uses listed above, we
intend to invest the net proceeds of this offering in short-term, investment
grade, interest-bearing securities.
PRICE RANGE OF COMMON SHARES
Our common shares are listed on the New York Stock Exchange under the symbol
"EDO." The following table sets forth the high and low sale prices of our
common shares rounded to the nearest penny for the periods indicated.
High Low
------ ------
Fiscal 1999
First Quarter.................................................. $ 8.69 $ 6.44
Second Quarter................................................. 7.56 6.13
Third Quarter.................................................. 9.38 5.75
Fourth Quarter................................................. 6.19 5.13
Fiscal 2000
First Quarter.................................................. $ 6.94 $ 5.75
Second Quarter................................................. 7.00 5.63
Third Quarter.................................................. 9.13 5.75
Fourth Quarter................................................. 10.44 7.31
Fiscal 2001
First Quarter.................................................. $15.10 $ 7.19
Second Quarter................................................. 22.95 12.75
Third Quarter.................................................. 28.75 14.90
Fourth Quarter (through October 25, 2001)...................... 31.90 22.80
On October 25, 2001, the last reported sale price of our common shares on
the New York Stock Exchange was $26.59 per share. There were about 2,271 record
holders and about 2,531 beneficial holders, excluding participants in the EDO
ESOP, of our common shares as of October 19, 2001.
DIVIDEND POLICY
In each of the years ended December 31, 1998, 1999 and 2000, we declared and
paid cash dividends on our common shares. We have paid a quarterly cash
dividend on our common shares at an annual rate of $0.12 per share since the
second quarter of 1998. Although we have no current intention of changing our
dividend policy, our board of directors periodically reviews our dividend
policy and may change it in the future in accordance with our capital needs.
On March 8, 2001, all of our preferred shares were converted to
approximately 1.1 million common shares. Accordingly, no preferred dividends
were paid after March 8, 2001, nor will preferred dividends be paid for these
shares in future quarters.
12
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2001:
. on an actual basis; and
. on an adjusted basis to give effect to the sale of 3,041,100 shares of
common shares offered by us in this offering at a price of $23.50 per
share (after deducting estimated underwriting discounts and commissions
and estimated offering expenses) and the application of the net proceeds.
You should read the information below together with our consolidated financial
statements and related notes appearing at the end of the financial statements
included in this prospectus.
As of June 30, 2001
---------------------
Actual As Adjusted
-------- -----------
(dollars in
thousands)
Cash, cash equivalents and marketable securities........ $ 5,330 $ 52,074
======== ========
Total debt (includes ESOT loan obligation, note payable
and current portion of long-term debt)................. $ 43,299 $ 23,208
-------- --------
Shareholders' equity:
Preferred shares, $1 par value, 500,000 shares
authorized; none issued(1)............................. -- --
Common shares, $1 par value; 25,000,000 shares
authorized; 16,074,377 shares issued, actual;
19,115,477 shares issued, as adjusted.................. 16,074 19,115
Additional paid-in capital.............................. 56,980 120,774
Retained earnings....................................... 39,661 39,661
Treasury shares at cost (1,238,083 shares).............. (16,733) (16,733)
ESOT loan obligation.................................... (4,891) (4,891)
Unearned ESOP shares.................................... (15,116) (15,116)
Deferred compensation under Long-Term Incentive Plan.... (450) (450)
Management group receivable............................. (845) (845)
-------- --------
Total shareholders' equity.......................... 74,680 141,515
-------- --------
Total capitalization................................ $117,979 $164,723
======== ========
--------
(1) Reflects the conversion of 49,229 shares of preferred stock held by the EDO
Employee Stock Ownership Trust into 1,067,281 shares of common shares on
March 8, 2001.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of earnings data set forth below for the
fiscal years ended December 31, 1998, 1999 and 2000 as well as the selected
consolidated balance sheet data set forth below as of December 31, 1999 and
2000 are derived from our audited consolidated financial statements, which are
included in, and incorporated by reference into, this prospectus. The selected
consolidated statement of earnings data set forth below for the fiscal years
ended December 31, 1996 and 1997 as well as the selected consolidated balance
sheet data set forth below as of December 31, 1996, 1997 and 1998 are derived
from our audited consolidated financial statements, which are not included in
this prospectus. The statement of earnings data for the years ended December
31, 1996, 1997, 1998 and 1999 and the balance sheet data as of December 31,
1996, 1997, 1998 and 1999, are derived from the consolidated financial
statements that have been audited by KPMG LLP, independent auditors. The
statement of earnings data for the year ended December 31, 2000 and the balance
sheet data as of December 31, 2000 are derived from the consolidated financial
statements that have been audited by Ernst & Young LLP, independent auditors.
The unaudited statement of earnings data for the six months ended July 1, 2000
and June 30, 2001 are derived from the consolidated financial statements
incorporated by reference in this prospectus. The unaudited financial
statements have been prepared on the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of our operating results for such periods. The operating results
for the six months ended June 30, 2001 are not necessarily indicative of the
results to be expected for any other interim period or any future fiscal year.
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and
related notes for the fiscal year ended December 31, 2000 which are included in
this prospectus.
Years Ended December 31, Six Months Ended
-------------------------------------------- -----------------
July 1, June 30,
1996 1997 1998 1999 2000 2000 2001
------- ------- ------- ------- -------- ------- --------
(audited) (unaudited)
(dollars in thousands, except per share data)
Statement of Earnings
Data:
Net sales............... $68,716 $73,708 $81,403 $97,936 $206,822 $85,595 $126,927
Costs and expenses:
Cost of sales.......... 51,603 58,142 57,817 72,337 151,512 65,078 94,768
Selling, general and
administrative........ 8,649 8,809 11,649 13,602 29,205 10,009 16,285
Research and
development........... 844 1,688 2,382 2,748 5,371 2,136 3,982
Non-recurring (income)
expenses(1)........... (7,120) (2,900) (2,200) -- 11,495 8,943 1,318
------- ------- ------- ------- -------- ------- --------
Total................ 53,976 65,739 69,648 88,687 197,583 86,166 116,353
------- ------- ------- ------- -------- ------- --------
Operating earnings
(loss)................. 14,740 7,969 11,755 9,249 9,239 (571) 10,574
Non-operating (expense)
income
Interest, net........... (766) (459) (428) (785) (2,438) (764) (1,040)
Other, net.............. (66) (50) (100) 230 (216) 28 199
------- ------- ------- ------- -------- ------- --------
Total................ (832) (509) (528) (555) (2,654) (736) (841)
------- ------- ------- ------- -------- ------- --------
Earnings (loss) before
income taxes........... 13,908 7,460 11,227 8,694 6,585 (1,307) 9,733
Income tax expense
(benefit).............. -- -- 880 2,610 5,264 (118) 3,795
------- ------- ------- ------- -------- ------- --------
Earnings (loss) from:
Continuing
operations............ 13,908 7,460 10,347 6,084 1,321 (1,189) 5,938
Discontinued
operations............ (9,477) (433) (2,116) (4,064) -- -- --
------- ------- ------- ------- -------- ------- --------
Net earnings (loss)..... 4,431 7,027 8,231 2,020 1,321 (1,189) 5,938
Dividends on preferred
shares(2).............. 1,179 1,127 1,063 1,000 881 458 194
------- ------- ------- ------- -------- ------- --------
Net earnings (loss)
available for common
shares................. $ 3,252 $ 5,900 $ 7,168 $ 1,020 $ 440 $(1,647) $ 5,744
======= ======= ======= ======= ======== ======= ========
14
Years Ended December 31, Six Months Ended
----------------------------------------------- ------------------
July 1, June 30,
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
(audited) (unaudited)
(dollars in thousands, except per share data)
Per Common Share Data:
Basic net earnings
(loss):
Continuing
operations............ $ 2.13 $ 1.01 $ 1.42 $ 0.76 $ 0.05 $ (0.20) $ 0.48
Discontinued
operations............ (1.59) (0.07) (0.33) (0.61) -- -- --
------- -------- -------- -------- -------- -------- --------
Total................ $ 0.54 $ 0.94 $ 1.09 $ 0.15 $ 0.05 $ (0.20) $ 0.48
======= ======== ======== ======== ======== ======== ========
Diluted net earnings
(loss):................ $ 0.46 $ 0.81 $ 0.94 $ 0.15 $ 0.05 $ (0.20) $ 0.46
======= ======== ======== ======== ======== ======== ========
Cash dividends per
share.................. $ -- $ 0.10 $ 0.115 $ 0.12 $ 0.12 $ 0.06 $ 0.06
Weighted average common
shares outstanding:
Basic.................. 5,975 6,261 6,549 6,701 9,601 8,211 11,905
Diluted................ 7,140 7,395 7,785 8,032 10,662 8,211 12,433
Other Data:
EBITDA(3)............... $18,252 $ 11,603 $ 13,998 $ 12,869 $ 31,802 $ 11,988 $ 18,638
Depreciation and
amortization........... 3,578 3,684 2,343 3,390 9,441 3,189 5,432
Capital expenditures.... 903 1,903 3,133 4,032 3,861 1,407 6,797
Backlog................. 77,296 93,028 130,151 133,880 252,888 267,110 295,861
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and marketable
securities............. $20,890 $ 34,467 $ 33,510 $ 29,642 $ 16,621 $ 16,966 $ 5,330
Working capital......... 26,671 31,599 32,674 35,110 37,552 51,547 41,670
Total assets............ 90,801 107,556 124,630 124,491 214,254 218,829 208,462
Total debt(4)........... 40,993 39,685 43,732 36,483 49,444 60,306 43,299
Shareholders' equity.... 19,823 28,135 38,051 40,241 65,818 61,316 74,680
--------
(1) Reflects $7,120,000 in the year ended December 31, 1996 of post-retirement
health care curtailment gain, $2,900,000 and $2,200,000, respectively, in
the years ended December 31, 1997 and 1998 of litigation settlement income,
and $11,495,000, $8,943,000 and $1,318,000, respectively, in the year ended
December 31, 2000 and the six months ended July 1, 2000 and June 30, 2001
for the write-off of purchased in-process research and development and EDO-
AIL merger related costs.
(2) ESOP Convertible Cumulative Preferred Shares, Series A.
(3) EBITDA consists of earnings from continuing operations before interest,
taxes, depreciation and amortization, excluding the write-off of purchased
in-process research and development, merger-related costs and non-cash ESOP
expense. Items excluded from EBITDA are significant components in
understanding and assessing financial performance. EBITDA is a measure
commonly used by financial analysts and investors to evaluate the financial
results of companies in our industry, and we believe it therefore provides
useful information to investors. EBITDA should not be considered in
isolation or as an alternative to net income, cash flows generated by
operations, investing or financing activities, or other financial statement
data presented in the consolidated financial statements as indicators of
financial performance or liquidity. Because EBITDA is not a measure of
financial performance determined in accordance with generally accepted
accounting principles and is susceptible to varying calculations, EBITDA as
presented may not be comparable to similarly titled measures of other
companies.
(4) Includes ESOT loan obligation, note payable and current portion of long-
term debt.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and related notes included elsewhere in this
prospectus. The results described below are not necessarily indicative of the
results to be expected in any future period. This discussion and analysis
contains forward-looking statements that are subject to certain risks and
uncertainties and assumptions. As a result of many factors including, but not
limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus, our actual results may differ materially from those anticipated in
these forward-looking statements.
Overview
We are a leading supplier of sophisticated, highly engineered products and
systems for defense, aerospace and industrial applications. We believe our
advanced electronic, electromechanical systems, information systems and
engineered materials are mission-critical, standard equipment on a wide range
of military aircraft. We have three reporting segments: Defense, Communications
and Space Products and Engineered Materials, which represented 71%, 12% and
17%, respectively, of our net sales for the year ended December 31, 2000.
Our Defense segment provides integrated defense systems and components
including electronic warfare systems, subsystems and test equipment, aircraft
stores suspension and release systems, airborne mine countermeasure systems,
integrated combat systems and undersea warfare sonar systems for military
forces and governments worldwide. Our Communications and Space Products segment
supplies antenna products and space sensor communications products for the
remote sensing, communication and navigation industries. Our Engineered
Materials segment supplies electro-ceramic products and advanced fiber
composite and structural products for the communication, navigation, chemical,
petrochemical, paper and oil industries for the commercial infrastructure and
military markets.
Historically, in connection with our customary analysis of our long-term,
fixed-price contracts, for which we recognize revenue based on the relationship
of costs incurred to total projected final costs, we have recognized
proportionally more revenue in our fourth quarter than we have in each of the
first three quarters of the year.
In January 2000, we sold our satellite orientation sensor products business,
Barnes Engineering Company. Accordingly, our consolidated financial statements
treat the satellite products business as a discontinued operation. Revenues,
costs and expenses, assets and liabilities, cash flows and backlog associated
with the satellite products business have been excluded from the respective
captions in the consolidated financial statements and discussion below.
Merger with AIL Technologies, Inc.
On April 28, 2000, our wholly-owned subsidiary merged with AIL Technologies
Inc., referred to as AIL. This merger, referred to as the EDO-AIL merger, was
accounted for as a purchase and is included in our results of operations from
that date. The results of operations for the periods presented are materially
affected by the timing of the EDO-AIL merger.
Under the merger agreement and share purchase agreements with certain AIL
shareholders, all of the outstanding shares of common stock and preferred stock
of AIL were exchanged for 6,553,194 newly-issued EDO common shares valued at
$39.4 million. In addition, the AIL stockholders received a cash payment
totaling $13.3 million. The merged company also assumed AIL debt of $29.7
million. Of the newly-issued shares, 5.3 million were held in trust by AIL's
Employee Stock Ownership Plan, referred to as the AIL ESOP.
As of the closing of the EDO-AIL merger, the AIL ESOP was our largest
shareholder holding about 39% of our outstanding common shares. As of January
1, 2001, the AIL ESOP and the existing EDO ESOP were merged into a single plan.
As of March 8, 2001, the existing preferred shares in the EDO ESOP were
converted into about 1.1 million common shares. As of June 30, 2001, the merged
ESOP held about 42% of our outstanding common shares.
16
Acquisition History
In November 1999, we acquired the outstanding stock of M. Technologies Inc.,
an integrator of aircraft weapons and avionics systems, for $3 million in cash
paid at closing and $1.5 million to be paid in equal annual installments over
three years. The first payment of $0.5 million was made in November 2000.
In December 1998, we acquired all of the outstanding stock of Specialty
Plastics, Inc., a manufacturer and installer of lightweight fiber composite
pipe, for a $5.5 million note which was paid in January 1999.
In December 1998, we acquired substantially all of the assets of Zenix
Products Inc., a manufacturer of ferrite and dielectric ceramics, for $0.7
million in cash plus a royalty of 5% of future sales up to a maximum of $1.2
million.
In July 1998, we acquired for $4.2 million in cash, substantially all of the
assets of the Technology Services Group of Global Associates, Ltd., a technical
services provider to various agencies of the DoD.
All of these acquisitions have been accounted for as purchase business
combinations and are included in our results of operations from their
respective acquisition dates. The results of operations for the periods
presented are not materially affected by the timing of these acquisitions.
Recent Developments
We plan to report our financial results for the quarter ended September 29,
2001 on or about October 31, 2001. In advance of that report and in
anticipation of this offering, on October 22, 2001, we announced that we expect
earnings per diluted share for the quarter ended September 29, 2001 to be in
the range of $0.28 to $0.30 and EBITDA for the same period to be approximately
$9.9 million. In addition, we stated that we expect revenues for the quarter
ended September 29, 2001 to be approximately $60 million.
On October 9, 2001, we acquired Dynamic Systems, Inc., a privately-held
company based in Alexandria, Virginia. Dynamic Systems, which will become part
of our Systems and Analysis Group, provides professional and information
technology services primarily to the DoD and other government agencies. For the
most recent twelve-month period, Dynamic Systems had revenue of approximately
$17 million.
Results of Operations
Comparison of six months ended July 1, 2000 and June 30, 2001
Net sales for the six months ended June 30, 2001 increased 48% when compared
to the six months ended July 1, 2000. Net sales by segment, were as follows:
Six Months Ended Increase
---------------- from
July 1, June 30, prior
2000 2001 period
------- -------- --------
(dollars in
thousands)
Defense............................................ $61,426 $ 93,766 52.7%
Communications and Space Products.................. 7,624 15,063 97.6
Engineered Materials............................... 16,545 18,098 9.4
------- --------
Total............................................ $85,595 $126,927 48.3%
======= ========
Net sales for the first six months of 2001 increased to $126.9 million from
$85.6 million for the comparable period of 2000. This increase comprised sales
growth of $32.3 million for the Defense segment, $7.4 million for the
Communications and Space Products segment, and $1.6 million for the Engineered
Materials segment. The sales growth for the first six months of 2001 over the
first six months of 2000 attributable to the EDO-AIL merger was $28.5 million
in the Defense segment and $7.4 million in the Communication and Space Products
segment. Since the EDO-AIL merger was completed at the end of April 2000, the
first six months of 2000 reflected two months of combined operations, while the
first six months of
17
2001 reflected a full six months of combined operations. In addition, there
were increases in sales of aircraft stores suspension and release equipment,
integrated combat systems, electro-ceramic products and advanced fiber
composite structural products in the first six months of 2001 compared to the
first six months of 2000.
Operating earnings in the first six months of 2001 (before considering one-
time EDO-AIL merger-related costs of $1.3 million) increased to $11.9 million
or 9.4% of net sales from $8.4 million or 9.8% of net sales for the comparable
period of 2000. The increase in operating earnings was primarily attributable
to the EDO-AIL merger, and the decrease as a percentage of net sales was due to
losses in the Communications and Space Products segment. For the six months
ended June 30, 2001, net earnings available for common shares increased to $5.7
million or $0.46 per diluted common share on 12.4 million diluted shares from a
net loss of $1.6 million or $0.20 per diluted common share on 8.2 million
diluted shares in the comparable period of 2000.
Selling, general and administrative expenses in the first six months of 2001
increased to $16.3 million or 12.8% of net sales from $10.0 million or 11.7% of
net sales for the comparable period of 2000. This increase was primarily
attributable to the EDO-AIL merger and increased bid and proposal costs.
Research and development expense in the first six months of 2001 increased
to $3.9 million or 3.1% of net sales from $2.1 million or 2.5% of net sales for
the same period of 2000. The increase was primarily attributable to
expenditures in the Communications and Space Products segment, relating to
fiber optics product development.
Interest expense was $1.6 million for the first six months of 2001 and the
comparable period of 2000.
Income tax expense for the first six months of 2001 reflected our estimated
effective rate of 39% for the year ending December 31, 2001. This compares to
an income tax benefit at an effective rate of 9% for the first six months of
2000. The effective tax benefit of 9% for the first six months of 2000 was
principally attributable to a write-off of $6.7 million of purchased in-process
research and development and other expenses associated with the EDO-AIL merger
that were not deductible for income tax purposes.
Dividends on preferred shares in the first six months of 2001 decreased to
$0.2 million compared to $0.5 million for the same period of 2000, due to the
conversion of all outstanding preferred shares into 1,067,281 common shares on
March 8, 2001. No preferred dividends were paid after March 8, 2001, nor will
preferred dividends be paid for these shares in future quarters.
Comparison of Fiscal Year 1999 to 2000
Net sales for the year ended December 31, 2000 increased 111% compared to
the year ended December 31, 1999. Sales by segment, were as follows:
Increase
from
prior
1999 2000 year
------- -------- --------
(dollars in
thousands)
Defense............................................ $66,381 $147,045 121.5%
Communications and Space Products.................. -- 25,026 --
Engineered Materials............................... 31,555 34,751 10.1
------- --------
Total............................................ $97,936 $206,822 111.2%
======= ========
During 1999, we conducted our businesses in two segments: Defense and
Aerospace Systems; and Engineered Materials.
Net sales from continuing operations for the year ended December 31, 2000
increased to $206.8 million from $97.9 million for the year ended December 31,
1999. This increase comprised sales growth of $80.7 million for the Defense
segment, $25.0 million for the Communications and Space Products segment, and
$3.2
18
million for the Engineered Materials segment. The sales growth attributable to
the EDO-AIL merger was $67.3 million in the Defense segment and $25.0 million
in the Communications and Space Products segment. The sales growth attributable
to the M. Technologies, Inc. acquisition was $5.4 million in the Defense
segment. In addition, net sales increases were recorded in airborne mine
countermeasure systems, aircraft stores suspension and release equipment,
integrated combat systems, technology services, and electro-ceramic products.
Operating earnings from continuing operations for the year ended December
31, 2000 (before considering one-time EDO-AIL merger related costs of $11.5
million) increased to $20.7 million or 10.0% of net sales from $9.2 million or
9.4% of net sales for the year ended December 31, 1999, of which $4.8 million
resulted from the EDO-AIL merger. One-time costs related to the EDO-AIL merger
included $6.7 million associated with the write-off of purchased in-process
research and development and $4.8 million of other merger-related costs.
Operating earnings in the Defense segment increased to $17.5 million in 2000
from $7.0 million in 1999. The growth is attributable to the EDO-AIL merger,
$9.1 million, and increased earnings in airborne mine countermeasures systems.
Operating loss in the Communications and Space Products segment was
$11.5 million, all from the EDO-AIL merger, principally associated with
research and development activity including the write off of in-process
research and development described below. Operating earnings in the Engineered
Materials segment increased to $3.3 million from $2.2 million in 1999 resulting
from increased sales of electro-ceramics and advanced fiber composite
structural products. For the year ended December 31, 2000, net earnings from
continuing operations available for common shares decreased to $0.4 million or
$0.05 per diluted common share from $5.1 million or $0.65 per diluted common
share for the year ended December 31, 1999, reflecting the above changes and
the differential in income taxes described below.
Selling, general and administrative expenses for the year ended December 31,
2000 increased to $29.2 million or 14.1% of net sales from $13.6 million or
13.9% of net sales for the year ended December 31, 1999. The increase was
attributable to the selling, general and administrative expenses of AIL.
Research and development expenditures increased to $5.4 million, or 2.6% of
net sales in 2000 from $2.7 million, or 2.8% of net sales in 1999. The increase
was attributable to expenditures at AIL primarily associated with development
of the Ku-Ku Band Down Converter discussed under "--In-Process Research and
Development" below.
Interest expense net of interest income increased to $2.4 million or 1.2% of
net sales for the year ended December 31, 2000 from $0.8 million or 0.8% of net
sales for the year ended December 31, 1999 principally due to the borrowings
made under the credit facility of AIL in existence at the time of the EDO-AIL
merger.
The income tax provision for the year ended December 31, 2000 reflects our
effective income tax rate of 79.9% compared to 30% for the year ended December
31, 1999. The increased effective income tax rate was principally due to the
write-off of $6.7 million of purchased in-process research and development in
the quarter ended July 1, 2000, which was not deductible for income tax
purposes, and other non-deductible items associated with the EDO-AIL merger.
Comparison of Fiscal Year 1998 to 1999
Net sales for the year ended December 31, 1999 increased 20.3% compared to
sales for the year ended December 31, 1998. Net sales by segment were as
follows:
Increase
from
prior
1998 1999 year
------- ------- --------
(dollars in
thousands)
Defense and Aerospace Systems....................... $53,785 $66,381 23.4%
Engineered Materials................................ 27,618 31,555 14.3
------- -------
Total............................................. $81,403 $97,936 20.3%
======= =======
19
During 1999 and 1998, we conducted our businesses in two segments: Defense
and Aerospace; and Engineered Materials.
Net sales from continuing operations for the year ended December 31, 1999
increased to $97.9 million from $81.4 million for the year ended December 31,
1998. Sales in the Defense and Aerospace Systems segment increased 23% to $66.4
million due to increases in sales of aircraft stores suspension and release
equipment; airborne mine countermeasures systems; integrated combat systems;
and technology services and analysis. This increase was partially offset by
lower sales of undersea warfare sonar. The increase in aircraft stores
suspension and release equipment sales was partially due to sales of M.
Technologies, Inc., which was acquired in November 1999. The increase in
technology services and analysis sales was due to sales of EDO Technology
Services and Analysis, which was acquired in July 1998. Sales in the Engineered
Materials segment increased 14% to $31.6 million due to the acquisition of EDO
Specialty Plastics in December 1998. This increase was partially offset by
lower sales of electro-ceramic products and fiber composite waste tanks due to
reduced orders.
Operating earnings for the year ended December 31, 1999 decreased to $9.2
million or 9.4% of net sales from $11.8 million or 14.4% of net sales in the
year ended December 31, 1998, which included litigation settlement income of
$2.2 million. Operating earnings in the Defense and Aerospace Systems segment
for the year ended December 31, 1999 increased to $7.0 million from $6.0
million in the year ended December 31, 1998, due to the increased net sales
noted above. Operating earnings in the Engineered Materials segment decreased
to $2.2 million for the year ended December 31, 1999 from $3.6 million for the
year ended December 31, 1998. Decreased operating earnings was primarily due to
the decrease in sales of electro-ceramic products and advanced fiber composite
structural products. For the year ended December 31, 1999, net earnings from
continuing operations available for common shares decreased to $5.1 million or
$0.76 per common share on 6.7 million shares from $9.3 million or $1.42 per
common share on 6.5 million shares for the year ended December 31, 1998. For
the year ended December 31, 1999, net earnings per common share from continuing
operations decreased to $0.65 per diluted common share from $1.21 per diluted
common share for the year ended December 31, 1998.
Selling, general and administrative expenses for the year ended December 31,
1999 increased to $13.6 million or 13.9% of net sales from $11.6 million or
14.3% of net sales for the year ended December 31, 1998.
Research and development for the year ended December 31, 1999 increased to
$2.7 million or 2.8% of net sales from $2.4 million or 2.9% of net sales for
the year ended December 31, 1998. This increase was consistent with our
strategy of increased investment in product development. Customer-sponsored
research and development decreased to $18.9 million for the year ended December
31, 1999 from $22.3 million for the year ended December 31, 1998. Customer-
sponsored research and development was included in cost of sales and represents
the engineering development portion of programs where new products are being
developed or technologies were being advanced.
Interest expense, net of interest income, increased to $0.8 million for the
year ended December 31, 1999 from $0.4 million for the year ended December 31,
1998. This increase was principally due to lower interest income as a result of
lower levels of average invested cash. Interest expense primarily represents
the interest paid on the 7% Convertible Subordinated Debentures Due 2011.
Income tax provision reflects our effective rate for the year ended December
31, 1999 of 30%, compared to 7.8% for the year ended December 31, 1998, as we
fully recognized the benefit associated with its tax net operating loss
carryforwards in the fourth quarter of 1998.
In-Process Research and Development
The acquired in-process research and development, referred to as IPR&D,
related to a project that had not reached technological feasibility and had no
alternative future uses, and thus, the amounts allocated to such project were
expensed as of the date of the EDO-AIL merger. This development project related
to a generic satellite subsystem called a Ku-Ku Band Down Converter for the
fixed satellite service market. The converter
20
represented a single channel providing signal conversion from uplink
frequencies in the 14GHz range to the downlink frequencies in the 12GHz range.
At the time of the EDO-AIL merger, it was estimated that 90% of the development
effort had been completed and the remaining development effort would take about
six months to complete. This project is now completed, resulting in sales in
2001 of Ku-Ku Band Converters.
During 2000 and the first six months of 2001, the efforts required to
develop the in-process technology of this project into commercially viable
products principally related to the completion of planning, designing,
prototyping and testing functions that were necessary to establish that the
down converter produced would meet its design specifications, including
technical performance features and functional requirements. Future results will
also be subject to uncertain market events and risks that are beyond our
control, such as trends in technology, government regulations, market size and
growth and product introduction by competitors.
Liquidity and Capital Resources
Balance Sheet
Our cash, cash equivalents and marketable securities decreased to $5.3
million at June 30, 2001 from $16.6 million at December 31, 2000. This decrease
was due to $0.6 million used by operations, $6.8 million for purchases of
capital equipment, $3.2 million for the repurchase of subordinated debentures,
$1.9 million payment of long-term debt and $1.1 million for payment of common
and preferred dividends. These decreases were partially offset by $2.4 million
of proceeds from exercises of stock options.
Accounts receivable increased to $75.3 million at June 30, 2001 from $69.0
million at December 31, 2000 primarily due to increases in billed receivables
resulting from an increase in sales in the second quarter of 2001 compared to
the fourth quarter of 2000.
Inventories increased to $26.6 million at June 30, 2001 from $24.9 million
at December 31, 2000 primarily due to increases in work-in-progress in the
Communications and Space Products segment.
The notes receivable of $3.5 million at June 30, 2001 (of which $0.4 million
was in current assets) were comprised of the $1.2 million note related to the
sale of property at Deer Park in June 2000 and $2.3 million in notes related to
the sale of our former College Point facility in January 1996. The Deer Park
facility note is due in monthly installments through July 2015 and bears
interest at a rate of 7.5% per annum. The College Point notes are due in annual
amounts through September 2004 with a final payment of $1.3 million due on
December 31, 2004 and bear interest at 7.0% per annum. The latter notes
receivable are secured by a mortgage on the facility.
Financing Activities
As of June 30, 2001 we had outstanding $22.3 million of 7% Convertible
Subordinated Debentures due 2011. Commencing in 1996 and until retirement of
these debentures, we are making annual sinking fund payments of $1.8 million,
which are due each December 15. During the second quarter of 2001, we purchased
$0.1 million face value of these debentures for $0.1 million. As of June 30,
2001, we had $3.9 million of these debentures in treasury to be used to satisfy
our annual sinking fund requirements.
We have an ESOT loan obligation with a balance at June 30, 2001 of $4.9
million at an interest rate of 82% of the prime lending rate. This obligation
represents the borrowing by the EDO ESOT guaranteed by us. The EDO ESOT has
serviced this obligation with the dividends received on our preferred shares
and cash contributions from us. As described above under "--Merger with AIL
Technologies, Inc.," as of January 1, 2001 the AIL ESOP and the existing EDO
ESOP were merged into a single plan, and the preferred shares issued by us and
held by the EDO ESOT were converted into 1,067,281 shares of our common shares
effective March 8, 2001. As of June 30, 2001, the merged ESOT restructured its
direct loan from us to extend the maturity date to December 31, 2017. As a
result of the conversion of the preferred shares, debt service on the ESOP will
be funded through dividends paid by us on our common shares and cash
contributions from us. As part of this restructuring, the aforementioned EDO
ESOT loan obligation of $4.9 million was paid in full on July 30, 2001.
21
During the third quarter of 2000, we completed negotiations for a new $69
million long-term credit facility with a consortium of banks co-led by Mellon
and EAB. The credit facility includes $19 million in five-year term debt,
payable in quarterly installments of $950,000, and $50 million in revolving
debt. Borrowings under the agreement bear interest based on LIBOR plus
applicable margin of up to 2.00% depending on the consolidated leverage ratio
as defined in the agreement. Borrowings are secured by our accounts receivable,
inventories and property, plant and equipment. Proceeds from the term debt were
used to repay existing term debt acquired in the EDO-AIL merger. The current
portion of the term debt of $3.8 million at June 30, 2001 reflects the amounts
due in the next twelve months. At June 30, 2001, we were in compliance with our
debt covenants. At June 30, 2001, there were no borrowings under the revolving
credit facility of $50.0 million and there were outstanding letters of credit
of $18.8 million, leaving available borrowing capacity of $31.2 million.
Capital expenditures in the first six months of 2001 increased to $6.8
million from $1.4 million for the same period of 2000. The increase was due
primarily to expenditures at our owned 726,000 square foot facility located in
Deer Park, NY, in anticipation of its potential sale and leaseback.
We believe that we have adequate liquidity and sufficient capital to fund
our currently anticipated requirements for working capital, capital
expenditures, research and development expenditures and principal and interest
payments.
Backlog
The backlog of unfilled orders at June 30, 2001 increased to $295.9 million
from $267.1 million at July 1, 2000 and $252.9 million at December 31, 2000.
New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards, or FASB, No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment to FASB Statement No.
133." These statements require all derivatives to be recorded on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. The effect of the adoption of these statements on our
financial position and results of operations was immaterial.
Business Combinations and Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and other intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. In
addition, Statement 141 eliminates the pooling-of-interests method of
accounting for business combinations.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of Statement 142 is expected to result in a decrease
in amortization expense in 2002 of approximately $0.7 million. In addition,
goodwill recorded as a result of any acquisitions completed subsequent to the
issuance of Statement 142 during 2001 would not be amortized. During 2002, we
will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002. We have not yet
determined what the effect of these tests will be on our earnings and financial
position.
22
BUSINESS
Overview
We are a leading supplier of sophisticated, highly engineered products and
systems for defense, aerospace and industrial applications. Since our founding
in 1925, we have developed core competencies in advanced electronics,
electromechanical systems, information systems and engineered materials. We
have established leading positions in a number of niche markets, employing
proprietary technologies and capabilities. We believe our products and systems
are mission-critical, standard equipment on a wide range of military aircraft,
including the F-14, F-15, F-16, F/A-18, F-22, Tornado, F-2, EA-6B and B-1B. Our
products and systems are also found on a variety of U.S. and foreign naval
ships and submarines, commercial aircraft, and both military and commercial
spacecraft.
We are a prime contractor to the DoD and a first-tier supplier to major
companies in the aerospace and defense industries, including BAE Systems,
Boeing, Lockheed Martin, Northrop Grumman and Raytheon. Our customers also
include over 20 foreign governments, including those of countries in Europe,
South America and Asia. For the six months ended June 30, 2001, we had net
sales of $126.9 million and EBITDA of $18.6 million. On June 30, 2001, our
backlog of unfilled, firm customer orders, was $295.9 million, up from $252.9
million at December 31, 2000.
On April 28, 2000, we completed the merger of our wholly-owned subsidiary
with AIL. In the transaction each share of AIL common stock was exchanged for
1.3296 EDO common shares (equivalent to 6,553,194 EDO common shares valued at
$39.4 million). In addition, AIL stockholders received a cash payment of $13.3
million. The merged company also assumed AIL debt of $29.7 million. AIL became
our wholly-owned subsidiary effective upon the merger, and the transaction was
intended to qualify as a tax-free reorganization. In addition to AIL, we have
completed five other acquisitions since 1998.
The principal systems and products in each of our business sectors are
listed in the table below.
Communications & Space
Defense Products Engineered Materials
71% of 2000 Net Sales 12% of 2000 Net Sales 17% of 2000 Net Sales
--------------------------- ------------------------ --------------------------
. Electronic Warfare . Antenna Products . Electro-Ceramic
Systems Products
. Aircraft Stores . Space Sensor & . Advanced Fiber Composite
Suspension Communication Products Structural Products
& Release Equipment
. Airborne Mine
Countermeasure Systems
. Integrated Combat Systems
. Undersea Systems
Market Overview
Defense Spending
In fiscal year 1999, the U.S. defense budget increased after an extended
real dollar decline in spending that had persisted since the mid-1980s. Further
increases in spending followed in fiscal years 2000 and 2001. This increase in
spending has been primarily driven by a need to upgrade and replace aging
military systems and to invest in next-generation technology. The total defense
budget (including Department of Energy and other
23
defense-related activities) for fiscal year 2001 was $316.2 billion, including
a $5.6 billion supplemental funding. The total defense budget for fiscal year
2002, if approved, would increase the defense budget to as much as $343.5
billion.
Consolidation and Outsourcing
The defense industry has undergone significant consolidation since the early
1990s. Merger and acquisition activity among the largest defense companies has
resulted in the emergence of five major prime contractors active in U.S.
markets: Boeing, General Dynamics Corporation, Lockheed Martin, Northrop
Grumman and Raytheon. The consolidation trend continues among smaller industry
participants, many of whom are seeking to improve efficiencies and expand
capabilities and market penetration.
We expect that a continued focus on efficiency and cost reduction will drive
increased levels of outsourcing by prime contractors in the defense industry.
As the prime contractors continue to evaluate their core competencies and
competitive positions, focusing their resources on larger programs and
platforms, we expect them to continue to exit non-strategic business areas and
procure these needed subsystems and components on more favorable terms from
their suppliers. We believe successful suppliers will be able to use their
resources to complement and support, rather than compete with the prime
contractors. We anticipate that the relationships between the prime contractors
and their suppliers will continue to evolve, particularly with regard to
specialized niches, in which a number of suppliers enjoy near sole-source
status. This evolution is likely to involve established niche suppliers, like
us, early in the process of developing future programs and system upgrades. We
believe that early participation in the design and development of these
programs will provide established niche suppliers with a competitive advantage
in securing new business.
Technology Advancement
We believe that advances in military capabilities created by the
introduction of new technologies, which have accelerated over the past decade,
are likely to continue in the foreseeable future. For example, the Small
Diameter Bomb, or SDB, initiative allows for a greater number of targeted
weapons to be employed on each aircraft, significantly increasing mission
effectiveness. Similarly, stealth technology allows aircraft to operate with a
decreased chance of detection, increasing tactical capability and pilot safety.
We believe suppliers with capabilities in these areas, such as us, are well
positioned to benefit from the further development and introduction of
precision guided munitions, stealth technology, electronic warfare and other
technology-driven investments. This benefit should carry over to the
modernization of existing platforms and systems, as well as for the development
and production of new front line war fighting systems.
Competitive Strengths
Extensive Experience and Leading Position in Core Markets
Our research and development, production and operational experience has
provided us with proprietary knowledge and capabilities in our niche markets.
As a result, we believe that we have secured a leading position in our key
niche markets and developed long-standing relationships as a supplier and
strategic partner with many of our government and prime contractor customers.
Our key niche markets include those for electronic countermeasure systems for
aircraft, aircraft stores suspension and release units, airborne mine
countermeasure systems and piezoelectric ceramics for underwater sensors. We
face a limited number of competitors with similar capabilities in these niche
markets. For example, on the basis of our established technical credentials and
reputation as a leading provider of munitions suspension and release equipment,
both competing teams selected us as the weapons bay integrator and supplier of
weapons release units in the Joint Strike Fighter, or JSF, development program.
24
Incumbent Supplier Status on Major Platforms
We derive a significant portion of our revenue from our incumbent position
on a wide range of military aircraft (such as the F-14, F-15, F-16, F/A-18, F-
22, Tornado, F-2, EA-6B and B-1B), commercial aircraft, military and commercial
spacecraft, naval ships and submarines. As of September 30, 2001, the estimated
value (based on original contract prices) of our products installed and
currently in use by customers, which we refer to as installed base, was about
$7 billion. This installed base provides us with a sustained revenue stream,
including development funding and revenue from production, provision of spare
parts, repairs, field support and system upgrades. Our equipment is often
viewed as mission-critical, standard equipment on these platforms, increasing
our customer's support of and continued investment in this equipment. The up-
front investment by our customers associated with these platforms is also
significant, making it costly to replace suppliers and creating barriers to
entry for potential competitors.
Technological Leadership Supporting New Product Development
We believe that we are a technological leader in our niche markets. Our goal
is to use our technical expertise to develop new products and reduce our
customers' program costs and risks, positioning us as a preferred supplier to
our prime contractor customers. We benefit from significant levels of customer-
funded research and development in support of new product and technology
development. We believe that our early participation in the design and
development of future programs and system upgrades will provide us with a
competitive advantage in securing new business. In addition, we believe that
our reputation as a technology leader has resulted in strategic alliances with
some of our prime contractor customers aimed at developing technology for next-
generation platforms. Recent new product development includes the following:
. We were selected by both competing teams for the JSF program to be the
weapons bay integrator and supplier of weapons release units for this
next-generation aircraft.
. We were selected by Raytheon and Lockheed Martin, two of the three teams
who were competing for two contracts to be awarded for the SDB program
development, to develop the stores suspension and release mechanisms. In
September 2001, Lockheed Martin was selected to continue the development
of the SDB.
. We were selected in an international competition by a Pacific Rim country
to provide an active and passive towed sonar system for operations close
to shore against conventional submarines.
. We are in final negotiations to team with a major systems prime
contractor to develop next-generation electronic attack and support
jamming systems for aircraft.
. We developed a multiple weapons smart carriage system for new and
existing F-16 and F/A-18 aircraft designed to support the increasing use
of precision guided munitions.
. We developed a system that permits clear communication of global
positioning system, or GPS, navigation information for precision guided
munitions, and manned or unmanned aircraft operating in hostile
electromagnetic environments.
Experienced Leadership Team
Our leadership team of nine senior executives has an average of 34 years of
experience in either or both of the military or aerospace and defense
industries. They have developed strong customer relationships within the U.S.
Government, many foreign governments, and with aerospace and defense prime
contractors. These relationships play a significant role in the sale and
marketing of our products by our management. Our management team also has
successfully completed our merger with AIL and has integrated five acquisitions
since 1998.
25
Business Strategy
Our strategy is to strengthen our position as a leading supplier of mission-
critical systems and products to the major prime contractors in the aerospace
and defense industries, the U.S. Government and foreign customers. Our strategy
includes the following elements:
Leverage Technical Expertise and Incumbency Positions
As a leader in our core niche markets, we intend to pursue new growth
opportunities that enable us to employ our strong technical capabilities and
diverse base of products. We intend to continue to leverage our incumbent
position on key platforms and established track record in bidding for upgrades
and next-generation platform development. Where possible, we intend to exploit
our status as one of a limited number of suppliers in our niche markets to
supply multiple bidders in competitions for new business, such as the JSF
development program.
Exploit Outsourcing Opportunities
We intend to take advantage of a trend toward outsourcing by our customers.
To the extent that prime contractors continue to focus on systems integration
of major platforms, we anticipate that these companies will continue to turn to
selected suppliers, like us, for key products and systems that they do not want
to produce on their own. We intend to work closely with our customers,
leveraging our core competencies to help them reduce development costs and
associated risks, and improve system performance.
Strengthen and Expand via Strategic Acquisitions
We expect to enhance and strengthen our competitive position through the
continued, disciplined pursuit of strategic acquisitions. In particular, we
intend to pursue acquisitions which will complement our present technologies,
resulting in our ability to offer a broader base of products and supporting our
leadership position in our key niche markets. For example, our acquisition of
M. Technologies enabled us to combine our mechanical and electrical expertise,
and to offer a complete subsystem for stores suspension and release. We also
successfully completed our merger with AIL and integrated five other
acquisitions since 1998. Based on our recent experience, we believe similar
opportunities to improve our efficiency and competitive position can be
achieved through additional acquisitions.
Pursue Early Integration of Our Products
We intend to actively participate at the early stages of our customers'
program development, thereby increasing the likelihood of the early integration
of our products and our long-term involvement in these programs. For example,
our engineering teams gain unique insight into our customers' near-term and
future needs through customer-sponsored symposiums and frequent technical
interchange meetings.
Penetrate New International Markets
We intend to continue the expansion of our international business by
marketing selected products and advanced technologies developed under our
existing domestic contracts to our foreign customers. Several of our products
and systems are well positioned to meet the needs of international customers.
For example:
. There are about 1,520 F-16 and about 389 F/A-18 aircraft owned by
international customers. To the extent that a portion of this fleet is
upgraded to accommodate precision guided munitions, we will market our
bomb release units, the BRU-57 and BRU-55 Smart Rack, that are currently
being sold to the U.S. Air Force and U.S. Navy.
. A similar marketing opportunity exists for our OASIS mine countermeasure
system. The U.S. Navy has recently notified us that they will award us
the development contract for the OASIS system. The OASIS
26
system has been designed to be compatible for use by foreign navies and
will be significantly lighter than our existing MK-105 system, making it
suitable for a broader range of customers.
. We are currently under contract with a number of our foreign customers to
sell commercial aviation and high performance military antennas that we
originally developed for the U.S. market.
Our Business Segments
Defense
Our Defense segment designs, develops and manufactures sophisticated
electronic, mechanical, electro-mechanical, structural, pneumatic, hydrodynamic
and aerodynamic systems for military use. Additionally, we provide logistics
support for such products, including spare parts and repairs, hardware and
software upgrades and modifications, training and technical services. The
revenue from these support functions is a significant portion of our total
sales.
Our Defense segment accounted for 71% of consolidated net sales for 2000 and
74% of consolidated net sales for the first six months of 2001. The following
table lists the primary sectors in our Defense segment in order of net sales,
together with the principal products and programs in each sector.
Primary Selected
Sector (Product/Program) Customer Application/Description
-------------------------------- --------------- -----------------------------
Electronic Warfare Systems
AN/ALQ-161 Defensive Avionics U.S. Air Force Situational awareness and
System protection from radar-guided
and infrared guided missile
threats for the B1-B
aircraft.
AN/ALQ-99 Universal Exciter U.S. Navy Provides the support jamming
techniques and modulations to
defeat threats to friendly
aircraft for the EA-6B
aircraft.
Aircraft Stores Suspension &
Release Equipment
AVEL (Advanced Vertical Eject Lockheed Martin Carries and ejects the AMRAAM
Launcher) from the F-22 weapons bay.
BRU (Bomb Release Unit) U.S. Air Force Carries and ejects weapons
U.S. Navy from military aircraft,
Lockheed Martin including the F-15, F-14,
Boeing Tornado and F-2.
Sumitomo
BRU Smart Rack U.S. Air Force Enhances payload capability
U.S. Navy to carry multiple smart
weapons, as well as multiple
older and current generation
weapons for the F-16 and F/A-
18E/F.
Airborne Mine Countermeasure
Systems
MK-105 Helicopter-Towed U.S. Navy Deployable fleet support
Magnetic Minesweeping System Japanese Navy system which detonates sea
mines by emulating magnetic
and acoustic characteristics
of ships.
OASIS (Organic Airborne/Surface U.S. Navy Provides fleet-wide organic
Influence Sweep) capability to detonate sea
mines by emulating magnetic
and acoustic characteristics
of ships.
SWIMS (Shallow Water Influence U.S. Navy Helicopter-towed device that
Mine Sweep) detonates shallow water sea
mines by emulating magnetic
and acoustic characteristics
of ships.
27
Selected
Sector (Product/Program) Primary Customer Application/Description
------------------------------- --------------------- ------------------------
Integrated Combat Systems
AMCM (Airborne Mine U.S. Navy Airborne mine warfare
Countermeasures) tactical data link.
SSSB (Ship Shore Ship Buffer) NATO Countries Tactical data links and
land-based Command,
Control, Communications,
Computer and
Intelligence (C4I)
systems.
Turnkey Combat System Norwegian Coast Guard Provide turnkey
integrated combat
systems (radars, sonars,
communication,
navigation, etc.).
Undersea Systems
ALOFTS (Active Low Frequency Pacific Rim country Active/passive towed
Towed Array Sonar) sonar system for close-
to-shore operations
against conventional
submarines.
Hull-Mounted Sonars, Model 997 Brazilian Navy Medium frequency, hull-
mounted search sonar.
Electronic Warfare Systems
Our electronic warfare products include defensive electronic countermeasure
systems for the U.S. Air Force and tactical support jamming exciter subsystems
for the U.S. Navy. Electronic warfare products also include airborne,
battlefield and ground surveillance radars and monolithic microwave integrated
circuit (MMIC) receiver downconverters for the airborne and shipboard
electronic support measures market.
Our AN/ALQ-161 is the defensive avionics system that protects the U.S. Air
Force B-1B bomber from radar guided and infrared guided missile threats.
Designed in the early 1980's specifically for the B-1B aircraft, we delivered
the AN/ALQ-161 system and spares to all 100 aircraft in the B-1B fleet. Sales
on the B-1B program to date exceed $4 billion. Our current efforts consist of
multiple contracts and task orders to provide logistic support and capability
upgrades to the AN/ALQ-161 systems. For the year-to-date through July 31, 2001,
awards on this program were over $19 million and included $9.5 million of
repairs and spares, $4 million of sustaining engineering services and software
modifications, and $5.5 million of redesign tasks to support spare parts
manufacturing. The B-1B aircraft currently is expected by the DoD to be in
operation through 2040.
We were the original designer and integrator of the AN/ALQ-99 Tactical
Support Jamming System for the EA-6B aircraft in the 1960s. We have been under
contract for support and modifications for this aircraft's systems and
subsystems since then. We are currently under contract with the U.S. Navy to
upgrade the Universal Exciter on the EA-6B aircraft. The Universal Exciter is
the electronics unit in the AN/ALQ-99 support jamming subsystem that provides
the specific electronic jamming technique waveforms and modulations that defeat
enemy air defense systems. In the 1980s, we produced and delivered 579
Universal Exciters to the U.S. Navy. Under the current upgrade program, we
retrofit these units with modifications that improve reliability and
maintainability, extend frequency range and provide advanced jamming
techniques. As of July 31, 2001, we had delivered 293 Universal Exciter Upgrade
units to the U.S. Navy. To date, the Universal Exciter Upgrade program has
generated over $300 million in revenues. The 2001 awards include extending our
current contract of 402 units by an additional 78 units, bringing the total
quantity of production units contracted to 480 and extending the period of
performance of the production contract through August 2003. In addition to the
contract award for the additional 78 units, we received an $8.1 million award
in March 2001 to provide subassembly spares. The EA-6B aircraft currently is
expected by the DoD to be in operation through 2015.
Net sales of electronic warfare products represented 23% of consolidated net
sales in 2000 and 25% of consolidated net sales in the first six months of
2001.
28
Aircraft Stores Suspension and Release Equipment
Over the last two decades we have developed and manufactured BRUs for the F-
15 aircraft ejection release units, referred to as ERUs, for the Tornado Multi-
Role Combat Aircraft and jettison release mechanisms for the F-14 aircraft. In
2000, we continued production of F-15 BRUs for the U.S. Air Force and two
international customers and provided spare parts support for Tornado ERUs. In
addition, we completed the customer sponsored development of the AMRAAM
launcher for the F-22 aircraft and are currently in production of the AMRAAM
launcher. For the JSF program, we have been selected by both competing prime
contractors, Lockheed Martin and Boeing, as the weapons bay integrator and
supplier of weapons release units on this aircraft. On the Boeing team, we have
also been awarded a contract to develop a mechanized structure for the JSF,
specifically the swing arm system and the landing gear pod. In 2001, we secured
a position on the Lockheed Martin team, which was one of the two teams selected
for development of the SDB program. These programs, in concert with company
sponsored research and development in pneumatic BRU technology, support our
leadership position in this market.
In 1999, we purchased M. Technologies, Inc., which developed the BRU-57
Smart Rack for the U.S. Air Force. This equipment enhances the payload
capability of aircraft such as the F-15 and F-16 to carry multiple smart
weapons such as the Joint Standoff Weapon, the Joint Direct Attack Munition and
the Wind Corrected Munitions Dispenser. A variant (BRU-55) provides the same
capability for U.S. Navy aircraft such as the F-18.
Net sales of aircraft stores suspension and release equipment represented
13% of consolidated net sales in 2000 and 14% of consolidated net sales in the
first six months of 2001.
Airborne Mine Countermeasure Systems
We believe we are the only manufacturer of airborne naval minesweeping
equipment in the world. The principal system of this type used by the U.S.
Navy, the MK-105 helicopter towed system, was designed and developed by us
starting in 1957. In the early 1990s, we developed a significant upgrade under
contract, followed by an initial production contract in 1996. During 1998, we
received an additional order for kits to upgrade existing MK-105 systems. We
continue to provide spares and logistics support for these systems to the U.S.
Navy and an international customer. We also continue to function as the U.S.
Navy maintenance depot for the MK-105 systems.
In 1994, we began work under contract with the U.S. Navy to develop a
lightweight helicopter towed mine sweeper for shallow water applications. We
received a production contract for these systems in 1999 with delivery expected
to continue through 2001. During 2000, we continued work under two U.S. Navy
contracts received in 1998 and 1999 to enhance the acoustic influence of these
minesweeping systems. In July 2001, we submitted a proposal for the next
generation minesweeping system, OASIS. On August 22, 2001, the Navy informed us
of their intention to award this contract to us in the fourth quarter of 2001.
Net sales of airborne mine countermeasures systems represented 11% of
consolidated net sales in 2000 and 9% of consolidated net sales in the first
six months of 2001.
Integrated Combat Systems
We act as a systems integrator for naval C4I systems. In this role, we
integrate all of a ship's sensor systems, including radar, sonar,
communications and Identification Friend or Foe, or IFF, to provide situational
awareness in a common data and display format for a ship's commander.
Integration contracts typically include the requirement for development of
integration software that allows the various subsystems to intercommunicate and
produce common information displays. In 1998, we began integration of a combat
system for the upgrade of a major class of ship for an international customer.
The integrated system includes radars, sonars, internal and external
communications and navigation subsystems, fire control subsystems,
29
helicopter control subsystems, display equipment and integration software to
produce common tactical displays. This program is expected to be completed in
2003.
Command, control and communications systems include integrated command
systems, tactical data links, display consoles and communication control and
monitoring systems for domestic and international customers. In 2001, work
continued on NATO SSSB systems deliverable to several international customers.
Net sales of integrated combat systems represented 6% of consolidated net
sales in 2000 and 6% of consolidated net sales in the first six months of 2001.
Undersea Systems
We have been a supplier of undersea systems including sonar sensors,
underwater communication systems, and depth sounding and speed measuring
equipment for over 40 years. During 2001, work has continued on a contract for
an international customer to deliver a major upgrade to the EDO Model 610E
sonar system. Deliveries under this contract are expected to continue into
2003. In addition to the upgrade, we delivered a new Model 610E sonar system
for a new class of ship in construction by the same international customer.
Further, during 2000 and 2001, we have continued to provide logistics,
maintenance and training support services for EDO sonar systems installed in
former U.S. Navy FF-1052 class ships now in service in several international
navies. In 2000, we were awarded a major contract from a new international
customer to deliver the recently developed EDO Model 980 sonar systems for
installation in a new class of naval ship under construction by the customer.
Development and delivery of the systems will extend into 2006. Additionally, in
2000, we received a contract from the Naval Undersea Warfare Center to develop
and produce a new depth sounding system, AN/BQN-17, for U.S. Navy attack
submarines. Deliveries of thirty AN/BQN-17 units will continue into 2002.
Net sales of undersea systems represented 4% of consolidated net sales in
2000 and 2% of consolidated net sales in the first six months of 2001.
Other Products
In addition to the products mentioned above, we also manufacture
environmental products and produce interference cancellation systems for a
variety of applications, including a special operations aircraft, the U.S.
Navy's Extended Range Guided Munition and SATCOM satellite receivers, as well
as provide technology services for the strategic planning, development and
execution of military programs.
30
Communications and Space Products
Our Communications and Space Products segment accounted for 12% of
consolidated net sales for 2000 and 12% of consolidated net sales in the first
six months of 2001. The following table lists the primary sectors in our
Communications and Space Products segment in order of of net sales, together
with the principal products and programs in each sector.
Selected
Sector (Product/Program) Primary Customer Application/Description
------------------------------ --------------------- -------------------------
Antenna Products
Anti-Jam GPS Raytheon, Provide jam-free GPS
NAVAIR reception and navigation
through spatial-nulling
for military transport
and strike aircraft such
as the F/A-18, AV-8B, C-
130 and Comanche.
Commercial Aviation Antennas Boeing, Communication and
Gulfstream, Cessna, navigation antennas for
Aviall the 737, 747, 757, 767,
777, GIV, GV, Citation,
King Air, and
aftermarket.
Conformal Low Observable Boeing, Functions on stealth-
Communication Antennas Lockheed Martin critical platforms for
the F/A-18 E/F, F-117 and
various next-generation
stealth aircraft.
Direction-Finding Antennas Condor Systems CAI (Circular-Array-
Interferometer)
antenna systems for
submarines, surface
vessels, military
aircraft and UAVs
(unmanned aerial
vehicles).
EW (Electronic Warfare) Elettronica Broadband, high-power
Antennas horns and broadband
spirals for military
aircraft including
fighters and helicopters.
Shipboard Antennas Northrop Grumman, HF/VHF/UHF
BAE Systems, Communications, U.S. Navy
Honeywell ships, including the DDG-
Class, LHD-Class and LPD-
Class, and foreign
applications.
UHF SATCOM Antennas Alenia Over-the-horizon voice
and data transmissions
via satellite.
Ultra Wideband Blade Antennas Raytheon Airborne direction
finding systems and
electronic intelligence.
Space Sensor and
Communication Products
FSS (Fixed Satellite Service) Boeing Satellite Converts microwave uplink
Down Converters Systems frequency band to
required downlink
frequency band for FSS
applications.
High Sensitivity Receiver Major prime Intelligence,
Systems contractors surveillance and
reconnaissance
applications.
Microwave Subsystems Classified Signal intelligence
and Payloads collection.
OC-192 Optical Microwave TyCom Microwave components for
Components OC-192 long haul fiber
optic transmission.
Power Monitors Boeing Satellite Provides monitoring of
Systems, microwave output power of
Lockheed Martin transponders on
communication satellites.
Radiometric Receivers Ball Aerospace, Scientific and
U.S. Navy meteorological
environmental sensing.
S-Band Communications NASA, Provides
Receiver Subsystem United Space Alliance communications/telemetry
link for the space
shuttle.
31
Antenna Products
We design and produce antenna systems for a wide variety of military and
commercial applications including communications, electronic warfare,
navigation, radar and wireless Local Area Networks, or LANs. In 2000, our
antenna business was 60% military and 40% commercial. Our military antennas are
deployed on many different types of platforms and vehicles including fixed wing
and rotary aircraft, UAVs, satellites, aircraft carriers and other surface
ships, submarines, and ground vehicles. Our commercial antennas are used on
commercial airliners as well as general aviation aircraft.
We have a broad customer and product base in this business. In 2000 and
2001, we sold more than 70,000 antennas of 200 different types to more than 100
different original equipment manufacturers and after-market customers. A large
portion of our revenues result from spare part sales and repair services for an
installed base of antennas in excess of 500,000 units.
In 2000 and 2001, we made substantial progress toward developing new antenna
products via both internally-funded and customer-sponsored research and
development. During this period, we entered into major contracts for
development of low observable, anti-jam GPS and extremely wide bandwidth
electronic warfare and communication antennas.
Net sales of antenna products represented 7% of consolidated net sales in
2000 and 9% of consolidated net sales in the first six months of 2001.
Space Sensor and Communication Products
We manufacture a wide array of products for space payloads that meet the
high reliability standards required by the industry. These products include
components, subassemblies and major subsystems that are sold directly to the
government for military and civil systems, or to prime contractors for both
government and commercial applications. We employ the same design and
manufacturing skills to produce a line of microwave components for the fiber
optic communications market. The three principal products of this division are
Sensors and Subsystems, Commercial Communication Products and Space Products.
Sensors and Subsystems include larger subsystems, up to full satellite
payloads, for remote sensing instruments employing microwave measurements of
the earth and its atmosphere, and classified government programs.
Commercial Communication Products include a line of OC-192 compatible
microwave devices for the ultra-long-haul fiber optic market. Two devices are
in full-scale production, and another five devices are in development. We
expect to be in production for at least two of these devices within the next
three quarters.
Space Products include numerous high-performance microwave subsystems for
both civil and commercial communication satellite systems, including the FSS
market. We also participate in multiple aspects of the overall NASA
communications network linking the Space Shuttle, geo-synchronous and low earth
orbit satellites with ground stations.
Net sales of space sensor and communications products represented 5% of
consolidated net sales in 2000 and 3% of consolidated net sales in the first
six months of 2001.
32
Engineered Materials
Our Engineered Materials segment accounted for 17% of consolidated net sales
for 2000 and 14% of consolidated net sales for the first six months of 2001.
The following table lists the primary sectors in our Engineered Materials
segment in order of net sales, together with the principal products and
programs in each sector.
Selected
Sector (Product/Program) Primary Customer Application/Description
------------------------------ ----------------------- ------------------------
Electro-Ceramic Products
BQN-17 Secure Depth Sounder U.S. Navy Measures the depth of
System water below the keel of
the SSN 688 class attack
submarines, Trident
class of submarines and
the DD-21 next-
generation naval surface
vessel.
Microwave Ceramics Manufacturers for the Active and passive
wireless infrastructure components for cellular
market and GPS applications.
Piezoelectric Ceramic Shapes Various military Piezoceramic elements
customers convert acoustic energy
to electrical energy and
vice versa forming the
basis of many defense
and commercial products.
WAA (Wide Aperture Array) U.S. Navy, Used to detect and
Northrop Grumman compute a radius of
curvature range to
targets for the SSN 688
class submarines,
Seawolf class submarines
and the Virginia class
submarines.
Advanced Fiber Composite
Structural Products
Fiberglass Piping Systems and Gulf of Mexico and Design, manufacture and
Installation West Africa oil install topside piping
platforms systems for offshore oil
and gas platforms and
petrochemical plants.
Pressure and Vacuum Tanks Boeing Lightweight structural
composite pressure and
vacuum vessels for
holding potable water
and waste on commercial
aircraft.
VT-1 Launch Tubes Thales Air Defense Precision composite
launch cannisters for
the storage and firing
of guided missiles.
Electro-Ceramic Products
Piezoceramic elements convert acoustic energy to electrical energy and vice
versa, and form the basis of many defense and commercial products ranging from
military sonars to ink jet printers. We are one of North America's leading
manufacturers of piezoceramic components for defense applications and we also
provide material and related transducers to several commercial markets. While
more than 50% of our piezoceramic sales are for defense applications, we are
increasing our efforts to expand our industrial business, while maintaining our
position in the defense market.
Our business is vertically integrated with in-house manufacturing and
development of piezoelectric, dielectric and ferrite ceramic materials, coupled
with state-of-practice mixed analog and digital electronics and software
engineering. We believe this combination of engineered active materials and
electronics capabilities makes us competitive in several niche markets.
Examples of our products include underwater acoustic transducers for use in
all areas of undersea warfare, piezoelectric shapes for a variety of
industries, as well as microwave ceramics for the wireless communication
industry.
33
In December 1998, we acquired substantially all of the assets of Zenix
Products, Inc., which manufactures ferrite and dielectric ceramics for the
wireless communications base station industry. During 1999, this business was
moved and integrated into our electro-ceramic products facility in Salt Lake
City. Production operations for ferrite and dielectric ceramic products in Salt
Lake City commenced in the fourth quarter of 1999.
Work continued in 2000 and 2001 on a contract awarded from the U.S. Navy in
1999 for development and production of a new underwater communications
transducer, called the TR232. Deliveries under this contract are expected to
extend into 2004. Additionally, we were awarded a contract by the U.S. Navy for
initial production of hydrophone stave assemblies used in the WAA sonar systems
installed in Los Angeles and Seawolf class attack submarines. Initial
deliveries under this contract had commenced by mid-2001.
Net sales of electro-ceramic products represented 9% of consolidated net
sales in 2000 and 8% of consolidated net sales in the first six months of 2001.
Advanced Fiber Composite Structural Products
Our fiber-reinforced advanced structural product capabilities include
design, development, qualification, production and after-market support of
advanced composite structures. Our primary focus includes commercial and
military aviation, defense systems, and offshore oil-drilling markets. We
remain the exclusive supplier of vacuum waste holding tanks for all of Boeing's
commercial aircraft. In 2001, we signed a five-year contract with Boeing, which
extends production and delivery requirements until 2007.
Late in 2000, we successfully completed the delivery of the leading and
trailing edge structure of the wing of Boeing's first two Unmanned Combat
Aerial Vehicles. Early in 2001, we signed a long-term contract with Thales Air
Defense to develop, qualify and produce VT-1 launch canisters in support of
current NATO requirements.
In the third quarter of 2001, we completed the fabrication and installation
of topside piping systems for one Caribbean and three new Gulf of Mexico
deepwater platforms. In the third quarter of 2001, we received an order from
another major oil company to provide an updated design and delivery of a full-
scale composite buoyancy module by the end of the year.
Net sales of advanced fiber composite structural products represented 8% of
consolidated net sales in 2000 and 6% of consolidated net sales in the first
six months of 2001.
Research and Development
Research and development, performed both under development contracts with
customers and at our expense, is an important element to the success of our
business. Our research and development efforts involve about 126 employees in
the fields of communications and space, antennas, electronic warfare, combat
systems, and acoustic, electronic, hydrodynamic, aerodynamic, structural and
material engineering. Research and development programs are intended to develop
new products and assess their market potential, and to extend the capability of
existing products.
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 OASIS; development of new aircraft weapons carriage technology;
development in combat systems integration including command and control
software development; development of a new shallow-water sonar; development of
low observable anti-jam GPS antennas; and development of new underwater
communications transducer products.
34
Expenditures under development contracts with customers vary in amount from
year to year because of the timing of contract funding and other factors.
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
systems; application of composites for structural uses; development of
communication equipment, including fiber optic equipment; electronic
countermeasures and advanced GPS antennas; improvements to sonar systems,
including processing and detection enhancements, improvements for noise
reduction and interference cancellation; modifications to our base of combat
systems software products to allow seamless migration of these products to the
latest generation of computer hardware architectures; development of new
piezoelectric and composite materials; and development of new capabilities for
our Field Test Simulator product to increase the functionality and flexibility
of operation.
The following table sets forth research and development expenditures for the
years presented.
Years Ended December
31,
-----------------------
1998 1999 2000
------- ------- -------
(dollars in thousands)
Customer-sponsored................................... $22,300 $18,900 $38,400
EDO-funded........................................... 2,400 2,700 5,400
------- ------- -------
Total.............................................. $24,700 $21,600 $43,800
======= ======= =======
Customers
Net sales to the U.S. Government, consisting primarily of sales to the DoD
as a prime contractor and through subcontracts with other prime contractors,
accounted for about 63% of our 2000 consolidated net sales compared with about
48% in 1999 and about 50% in 1998. Such sales do not include sales of military
equipment to the U.S. Government on behalf of foreign governments under the
Foreign Military Sales program. These U.S. Government customers, which include
the Air Force, Navy, Army, Marines and classified customers, exercise
independent purchasing power. As a result, sales to the U.S. Government are
generally regarded as sales to multiple customers. Our largest program,
relating to the upgrade of the Universal Exciter which provides radar and
communications jamming for the EA-6B aircraft, encompasses seven separate
contracts which together totaled 14.9% of sales for the six months ended June
30, 2001.
Sales and Marketing
Sales of our 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. We believe that our long history of association
with our military customers is an important factor in our overall business, and
that the experience gained through this history has enhanced our ability to
anticipate our customers' needs. Our approach to our defense business is to
anticipate specific customer needs and to develop systems to meet those needs
either at our own expense or pursuant to research and development contracts.
Many of our employees, including our Chief Executive Officer and our Vice
President--Washington Operations, are actively involved in the marketing of our
defense products in the U.S. and abroad. We also have about 40 international
sales representatives concentrating on the marketing of our defense products in
foreign countries.
We sell defense products as a prime contractor and through subcontracts with
other prime contractors. In addition to defense sales to the DoD, we also sell
defense equipment to the U.S. Government on behalf of foreign governments under
the Foreign Military Sales program and, subject to approval by the U.S.
Department of State, directly to foreign governments.
35
Commercial products are sold in industrial and commercial markets. In
foreign markets, piezoelectrics, antennas and electronic products are generally
sold commercially through a network of sales representatives. Fiber-reinforced
composite products are sold directly and through sales representatives.
It is generally our 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 we have received advance payments or letters of credit
on amounts due under the contracts.
Backlog
We define backlog as the value of contract awards and orders received from
customers, which have not been recognized as sales. Backlog does not include
contract awards received from the U.S. Government for which the U.S. Government
has not appropriated funds, nor does it include unexercised options in U.S.
Government contracts. A significant portion of our sales are to prime
contractors, the DoD and foreign governments pursuant to long-term contracts.
Accordingly, our backlog consists in large part of orders under these
contracts. As of June 30, 2001 our total backlog was about $295.9 million as
compared with $252.9 million as of December 31, 2000.
Government Contracts
Our defense business can be and has been significantly affected by changes
in national defense policy and spending. Our 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 U.S. Government with payment for work completed and committed along with
associated profit at the time of termination.
Our contracts with the DoD 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 us to perform specified work in return for reimbursement of
costs (to the extent allowable under U.S. 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 our fee based on attainment of performance,
scheduling, cost, quality or other goals.
Government Regulation
As a supplier to the U.S. Government, our contracts and subcontracts are
subject to the Federal Acquisition Regulation, or FAR, system, which was
established to codify and publish uniform policies and procedures applicable to
acquisitions by all executive agencies. We are also subject to specific federal
agency acquisition regulations that implement or supplement the FAR, such as
the Department of Defense FAR Supplement, or DFARS. The FAR regulates all
aspects of the federal acquisition process including acquisition planning,
contract award and contract administration. It also includes provisions related
to the determination of the type of contract to be awarded for a particular
acquisition and the implementation of socioeconomic programs such as those
related to small business programs, labor laws and environmental matters.
Matters related to allowability of costs under contracts, intellectual
property, contract financing, termination, protests, disputes and appeals are
also covered.
To the extent that our contracts with the U.S. Government involve access to
classified information, we must also comply with the National Industrial
Security Program Operating Manual, or NISPOM. This manual provides detailed
information regarding the requirements for handling and protecting classified
information, as
36
well as for obtaining security clearances for facilities at which classified
work will be performed and for providing individual security clearances for
those personnel having access to classified information. Obtaining and
retaining security clearances is a necessary condition for the award of
classified contracts. Were we to lose security clearances as a result of
security violations, we would not be eligible to complete our then current
classified contracts or to be awarded new classified contracts.
In addition, our sale and marketing of goods overseas are subject to the
U.S. Export Control regime. Export licenses or other export authorizations may
be required to export our products abroad depending upon the nature of the
goods, services or technical data being exported, as well as the country to
which the export is to be made. This is no guarantee that an application for
export licenses or other authorizations will be granted or approved. Goods of a
commercial nature are subject to regulatory control by the Department of
Commerce's Bureau of Export Administration and to the detailed Export
Administration Regulations. Goods of a military nature are subject to the
regulatory control of the Department of State, Office of Defense Trade
Controls, which administers the International Traffic in Arms Regulations which
implements the Arms Export Control Act's export control provisions. The export
license/export authorization process is often time-consuming. Violation of
export control regulations can subject the company to fines and other
penalties, such as losing the ability to export for a period years, that can
have an adverse effect on company operations and business plans.
Competition
Some of our products are sold in markets containing a number of competitors
substantially larger than us and with greater financial resources. Direct sales
of military products to the U.S. Government and foreign governments are based
principally on product performance, cost and reliability. Our ability to
compete for defense contracts depends on a variety of factors, including:
. the effectiveness and innovation of our research and development
programs;
. our ability to offer better program performance than our competitors at a
lower cost; and
. the availability of our facilities, equipment and personnel to undertake
the programs for which we compete.
We derive a majority of our sales from contracts with the U.S. Government
and its prime contractors. These contracts are principally awarded on the basis
of negotiations or competitive bids. We believe that we will continue to be a
successful participant in the business areas in which we compete, based upon
the quality and cost competitiveness of our products and services.
It is difficult to state precisely our market position in all of our product
lines because information as to the volume of sales of similar products by our
competitors is not generally available and the relevant markets are often not
precisely defined.
Suppliers
We purchase some materials and components used in our systems and equipment
from independent suppliers. These materials and components normally are not
purchased under long-term contracts unless a long-term sales contract with one
of our customers requires them to be. We believe that most of the items we
purchase are obtainable from a variety of suppliers. We normally seek to have
alternative sources for major items, although we are sometimes dependent on a
single supplier or a few suppliers for some items.
Intellectual Property
Although we own a significant number of patents and have filed applications
for additional patents, we do not believe that our businesses depend heavily
upon our patents. In addition, most of our U.S. Government contracts license us
to use patents owned by others. Similar provisions in the U.S. Government
contracts awarded to other companies make it impossible for us to prevent the
use by other companies of our patents in most domestic defense work.
37
Employees
As of July 31, 2001, we employed 1,525 persons, of whom 555 were engaged in
engineering activities. A total of 173 employees have advanced degrees. As of
July 31, 2001, two of our employees were represented by collective bargaining
agreements. All employees who have been employed by us for more than one month
own our common shares through their participation in our ESOP. We believe that
relations with our employees are good.
Properties
All of our facilities except for the Deer Park, NY facility are leased. We
believe our facilities are adequate for our 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.
At June 30, 2001, we and our subsidiaries were obligated under building and
equipment leases expiring between 2001 and 2012. Rental expense for continuing
operations under such leases for the years ended December 31, 2000, 1999 and
1998 amounted to $3,885,000, $2,885,000 and $2,412,000, respectively.
Set forth below is a listing of our principal plants and other material
physical properties.
Approximate Floor Area
Segments Location (In Square Feet)
-------- -------- ----------------------
Defense and Communications &
Space Deer Park, NY 726,000(1)
Engineered Materials Salt Lake City, UT 117,000
Engineered Materials Salt Lake City, UT 105,000
Defense North Amityville, NY 92,000
Defense Westlake Village, CA 40,000
Defense Chesapeake, VA 32,000
Defense Lancaster, CA 32,000
Engineered Materials Baton Rouge, LA 29,000
Defense Huntingdon, PA 14,000
Defense Falls Church, VA 13,000
--------
(1) We are currently in the process of reducing the space we occupy in our Deer
Park, NY facility to decrease our overhead, and upon completion of this
reduction, we expect that the approximate floor area will be about 383,000
square feet.
Legal Proceedings
We and three other companies entered into a consent decree in 1990 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
and, accordingly, no liability has been recorded by us. We believe that the
aggregate amount of the obligation and timing of cash payments associated with
the two operable units subject to the consent decree are reasonably fixed and
determinable. Accordingly, we have discounted the environmental obligation at
5%. Our management estimates that as of December 31, 2000, the discounted
liability over the remainder of the twenty-five years related to these two
operable units is about $2.4 million of which about $0.4 million has been
classified as current and is included in accounts payable and accrued
liabilities. About $0.7 million of the $2.4 million liability will be incurred
over the next five years. In 1998 and 1997, we settled with one of our
insurance carriers for $2.2 million, net of associated costs of $0.3 million,
and $2.9 million, respectively, which was recorded as litigation settlement
income. All $5.1 million was collected in 1998.
38
We are also involved in other environmental cleanup efforts, none of which
we believe is likely to have a material adverse effect on our consolidated
financial position, results of operations, or liquidity.
Additionally, we and our subsidiaries are subject to certain legal actions
that arise out of the normal course of business. It is our management's belief
that the ultimate outcome of these actions will not have a material adverse
effect on our consolidated financial position, results of operations, or
liquidity.
39
MANAGEMENT
Executive Officers and Directors
Each executive officer is elected by the Board of Directors 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 our By-Laws. Additionally, the Chief Executive
Officer, as provided by our By-Laws, appoints other officers as required.
The following table sets forth information regarding our executive officers
and directors as of October 15, 2001:
Name Age Position
---- --- --------
James M. Smith.......... 60 President and Chief Executive Officer; Director
Darrell L. Reed......... 57 Vice President--Finance, Treasurer, Assistant Secretary
and Chief Financial Officer
William J. Frost........ 60 Vice President--Administration and Secretary
Jon A. Anderson......... 59 Vice President--Washington Operations
Patricia D. Comiskey.... 50 Vice President--Human Resources
George P. Fox........... 59 Group Vice President--Electronic Systems Group
Milo Hyde............... 48 Group Vice President--Systems and Analysis Group
Harvey N. Kreisberg..... 65 Vice President--Corporate Development
Frank Otto.............. 52 Group Vice President--Integrated Systems and Structures
Neil A. Armstrong....... 71 Chairman and Director
Robert E. Allen......... 57 Director
Robert Alvine........... 63 Director
Mellon C. Baird......... 70 Director
George M. Ball.......... 67 Director
Robert M. Hanisee....... 63 Director
Michael J. Hegarty...... 62 Director
Ronald L. Leach......... 67 Director
George A. Strutz, Jr.... 68 Director
James M. Smith is our President and Chief Executive Officer and has held
these positions since May 2000. From January 1992 until April 2000, he was
President and CEO of AIL, with which he had been affiliated since 1967. Mr.
Smith is a graduate engineer and has extensive experience in the aerospace and
defense industries, including leading the effort in a multi-billion dollar
avionics program contracted directly with the DoD. Mr. Smith serves on the
Board of the National Defense Industrial Association and was recently appointed
to the Board of Trustees of the Naval War College Foundation.
Darrell L. Reed is our Vice President--Finance, Treasurer, Assistant
Secretary and Chief Financial Officer and has held these positions since April
2000. From 1990 until April 2000, he was Vice President and Chief Financial
Officer of AIL. Prior to joining AIL he owned and operated an aerospace and
defense consulting firm, and has over 30 years of aerospace and defense
experience. Mr. Reed is a member of the Board of Directors of NTL, Inc. and is
the past Chairman of the Board of Directors of the United Way of Long Island.
William J. Frost is our Vice President--Administration and Secretary and has
held these positions since 1994 and 2001, respectively. He is principally
responsible for risk management, public and media relations, and corporate
secretarial functions. Mr. Frost has been affiliated with us for 34 years.
After 25 years within our operating units, principally in financial management,
he has been a member of the corporate staff for the past nine years.
40
Jon A. Anderson is our Vice President--Washington Operations and has held
this position since August 2001. Mr. Anderson serves as our principal interface
with the senior leadership in the Administration, Congress, the DoD and other
U.S. Government agencies. From May 2000 until August 2001, Mr. Anderson was our
Director of Government Relations. Prior to that, he worked for AIL as Director
of Government Relations. Prior to joining us, Mr. Anderson was Director of
Defense Relations at Eaton Corporation, the corporate parent of what would
evolve into AIL. Prior to joining Eaton Corporation, Mr. Anderson served for 20
years with the U.S. Air Force in various capacities, including Legislative
Director to the Secretary of Defense and Special Assistant to the Secretary of
the Air Force.
Patricia D. Comiskey is our Vice President--Human Resources and has held
this position since July 2001. From May 2000 until July 2001, Ms. Comiskey was
our Director of Human Resources. Prior to that she worked for AIL as Director
of Human Resources, where she assumed expanding responsibilities that included
the growth of AIL to a multi-facility staff. Ms. Comiskey was affiliated with
AIL for 21 years, and upon our merger with AIL, she assumed responsibility for
corporate-wide human resource matters.
George P. Fox is our Group Vice President--Electronic Systems Group and has
held this position since April 2000. Mr . Fox is a graduate engineer and after
serving in the U.S. Army Service Corps, he joined the predecessor to AIL in
1969. Mr. Fox has considerable experience in military avionics and large-scale
systems integration. Previously, he served as Operations Manager since 1997.
Milo Hyde is our Group Vice President--Systems and Analysis and has held
this position since April 2000. Mr. Hyde joined us in 1985 and served since
1990 as General Manager of the Combat Systems Division. Prior to joining us, he
served 11 years as a surface warfare officer in the United States Navy.
Harvey N. Kreisberg is our Vice President--Corporate Development and has
held this position since January 2001. Mr. Kreisberg is responsible for mergers
and acquisitions, strategic planning, and business development. He was
Director, Corporate Development and, before that, Director, Business
Development National, at AIL, which he joined in 1981. Mr. Kreisberg has three
engineering degrees and, prior to joining AIL, worked for TRW, Booz Allen &
Hamilton, and founded and operated an engineering and planning company.
Frank Otto is our Group Vice President--Integrated Systems and Structures
and has held this position since April 2000. Mr. Otto is a graduate engineer
and has been with us since 1979. Over the course of his career, he has obtained
considerable experience in the aircraft armament and mine countermeasure
fields. He most recently served as General Manager of the Marine & Aircraft
Systems Division since 1994.
Neil A. Armstrong is our Chairman, and is also President of Lorian, Inc., a
professional service company. He was a director and Chairman of the Board of
AIL from 1997 to 2000, and a director and Chairman of the Board of AIL Systems
Inc., the predecessor of AIL, from 1989 to 2000. Mr. Armstrong is a director of
USX Corporation and RTI International Metals, Inc.
Robert E. Allen is a Managing Director of Redding Consultants, Inc., a
management consulting firm. Mr. Allen has been associated with Redding
Consultants, Inc. since January 1982.
Robert Alvine is Chairman of the Board, President and Chief Executive
Officer of I-Ten Management Corp., an investment, mergers and acquisitions, and
management company, and, since 2000, Senior Operating Partner of DeSai Capital
Management Inc., a public and private equity investment company.
Mellon C. Baird is Senior Vice President of Titan Corporation and President
and Chief Executive Officer of Titan Systems Corporation, an information
systems, products and services company, a wholly-owned subsidiary of Titan
Corporation, and was, until 1998, Chairman of the Board, President and Chief
Executive Officer of Delfin Systems when it was purchased by Titan Corporation.
He is a director of Software Spectrum, Inc. and Hawker Pacific Aerospace
Corporation.
41
George M. Ball is Chairman of Philpott, Ball & Werner, an investment banking
firm. Mr. Ball has been affiliated with Philpott, Ball & Werner since August
1991. He is a director of BB Walker Company.
Robert M. Hanisee is a Managing Director of Trust Company of the West, an
investment management company. Mr. Hanisee has been affiliated with Trust
Company of the West since April 1991. He is a director and member of the
Compensation Committee of Illgen Simulation Technology Inc. In addition, Mr.
Hanisee is a director of Marine Biotech, Inc., and a director and a member of
the Audit Committee of Titan Corporation.
Michael J. Hegarty is a director and the President and Chief Executive
Officer of Flushing Financial Corporation and Flushing Savings Bank, a federal
chartered savings bank, and was, until 1998, its Executive Vice President and
Chief Operating Officer. Until 1995, he was our Vice President--Finance,
Treasurer and Secretary.
Ronald L. Leach retired from Eaton Corporation in 1997 where he was, prior
to retirement, Vice President--Accounting. He was a director of AIL
Technologies, Inc. from 1997 to 2000, and a director of AIL Systems Inc., the
predecessor of AIL, from 1991 to 2000.
George A. Strutz, Jr. is President and Chief Executive Officer of Strutz and
Company, Inc., a consulting and management advisory company. Until 1997, he was
President and Chief Executive Officer of Clopay Corporation, manufacturer and
marketer of specialty plastic films and building products.
42
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of common shares as of October 15, 2001, and as adjusted to reflect
the sale of our common shares offered in this offering: (1) each shareholder
who is known by us to own beneficially more than 5% of our common shares; (2)
each member of our board of directors; (3) each of our Named Executive
Officers; and (4) all of our directors and executive officers as a group.
Unless otherwise indicated, to our knowledge, all persons listed below have
sole voting and investment power with respect to their common shares, except to
the extent authority is shared by spouses under applicable law. Unless other
noted, the address of each shareholder is c/o EDO Corporation, 60 East 42nd
Street, Suite 5010, New York, NY 10165.
Shares
Beneficially Shares Beneficially
Owned Before Owned After
Offering(1) Offering(1)
--------------------- Number of -------------------
Name and Address of Shares Being
Beneficial Owners Number Percent Offered Number Percent**
------------------- --------- ------- ------------ --------- ---------
EDO Corporation Employee
Stock Ownership Trust.. 6,140,994(3) 41.32% 1,458,900 4,682,094 26.19%
HSBC Bank USA
452 Fifth Avenue, 17th
Floor
New York, NY 10018-2706
Loomis Sayles & Co.,
L.P. .................. 991,192(24) 6.67 -- 991,192 5.54
One Financial Center
Boston, MA 02111
Basso Securities Ltd. .. 874,463(32) 5.56 874,463 4.66
1281 East Main Street
Stamford, CT 06902
Robert. E. Allen(2)..... 36,541(4) * -- 36,541 *
Robert Alvine(2)........ 40,068(5) * -- 40,068 *
Jon A. Anderson(2)...... 26,997(6) * 3,803(7) 23,194 *
Neil A. Armstrong(2).... 45,777(8) * -- 45,777 *
Mellon C. Baird(2)...... 18,768(9) * -- 18,768 *
George M. Ball(2)....... 27,768(10) * -- 27,768 *
Patricia D.
Comiskey(2)............ 54,018(11) * 5,062(12) 48,956 *
George P. Fox(2)........ 59,688(13) * 5,136(14) 54,552 *
William J. Frost(2)..... 33,790(15) * 11,075(16) 22,715 *
Robert M. Hanisee(2).... 50,408(17) * -- 50,408 *
Michael J. Hegarty(2)... 80,708(18) * -- 80,708 *
Milo Hyde(2)............ 50,023(19) * 3,000(20) 47,023 *
Harvey Kreisberg(2)..... 21,976(21) * 3,500(22) 18,476 *
Ronald L. Leach(2)...... 20,391(23) * -- 20,391 *
Frank Otto(2)........... 22,396(25) * 9,006(26) 13,390 *
Darrell L. Reed(2)...... 157,625(27) 1.06 5,324(28) 152,301 *
James M. Smith(2)....... 435,732(29) 2.93 5,704(30) 430,028 2.41
George A. Strutz,
Jr.(2)................. 33,912(31) * -- 33,912 *
All directors and
executive officers as a
group(2)............... 1,216,586 8.19 51,610 1,164,976 6.52
--------
* Represents beneficial ownership of less than one percent of our common
shares.
** Assumes no exercise of the underwriters' overallotment option.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Applicable percentage ownership is
based on 14,860,672 common shares outstanding as of September 29, 2001 and
17,901,772 shares outstanding immediately following the completion of this
offering, except for the percentage ownership of Basso Securities Ltd.
which is calculated based on 15,735,135 common shares outstanding assuming
conversion as of September 29, 2001 of the 7% convertible subordinated
debentures beneficially owned by Basso and 18,776,235 shares outstanding
immediately following the completion of this offering.
43
(2) Some of the shares indicated are subject to stock options exercisable
within 60 days of September 29, 2001.
(3) Represents our common shares held by the ESOT established to hold the
assets of the EDO Employee Stock Ownership Plan, all of which are held for
the benefit of the participants under the plan. Under the terms of the EDO
ESOP, common shares which have been allocated to the account of a
participant are required to be voted in accordance with the direction of
such participant, subject to the trustee's fiduciary duty. Our common
shares that are not so allocated are deemed to be proportionately
allocated solely for the purpose of determining how these common shares
are to be voted. We believe that the ESOT is not the beneficial owner of
these common shares, as the trustee under the ESOT has no voting or
investment power with respect to these common shares.
(4) Includes 13,541 shares held directly and 23,000 shares subject to options
exercisable within 60 days.
(5) Includes 17,068 shares held directly and 23,000 shares subject to options
exercisable within 60 days.
(6) Includes 22,424 shares held directly, 3,803 shares allocated to Mr.
Anderson's account under the EDO ESOP, and 770 shares subject to options
exercisable within 60 days.
(7) Mr. Anderson directed the trustee of the ESOT to sell the maximum amount
of shares beneficially owned by Mr. Anderson that may be sold for his
account under the EDO ESOP.
(8) Includes 27,743 shares held directly and 18,034 shares subject to options
exercisable within 60 days.
(9) Includes 5,768 shares held directly and 13,000 shares subject to options
exercisable within 60 days.
(10) Includes 4,768 shares held directly and 23,000 shares subject to options
exercisable within 60 days.
(11) Includes 46,579 shares held directly, 5,062 shares allocated to Ms.
Comiskey's account under the EDO ESOP, 1,000 restricted shares held
pursuant to the Long Term Incentive Plan, or LTIP, and 1,377 shares
subject to options exercisable within 60 days.
(12) Ms. Comiskey directed the trustee of the ESOT to sell the maximum amount
of shares beneficially owned by Ms. Comiskey that may be sold for her
account under the EDO ESOP.
(13) Includes 51,675 shares held directly, 5,136 shares allocated to Mr. Fox's
account under the EDO ESOP, 1,500 restricted shares held pursuant to the
LTIP, and 1,377 shares subject to options exercisable within 60 days.
(14) Mr. Fox directed the trustee of the ESOT to sell the maximum amount of
shares beneficially owned by Mr. Fox that may be sold for his account
under the EDO ESOP.
(15) Includes 9,215 shares held directly, 11,075 shares allocated to Mr.
Frost's account under the EDO ESOP, 7,000 restricted shares held pursuant
to the LTIP, and 6,500 shares subject to options exercisable within 60
days.
(16) Mr. Frost directed the trustee of the ESOT to sell the maximum amount of
shares beneficially owned by Mr. Frost held in his account under the EDO
ESOP.
(17) Includes 19,908 shares held directly, 1,500 shares held by Mr. Hanisee's
spouse, and 29,000 shares subject to options exercisable within 60 days.
(18) Includes 67,708 shares held directly, and 13,000 shares subject to options
exercisable within 60 days.
(19) Includes 3,863 shares held directly, 6,610 shares allocated to Mr. Hyde's
account under the EDO ESOP, 9,000 restricted shares held pursuant to the
LTIP, and 30,550 shares subject to options exercisable within 60 days.
(20) Mr. Hyde directed the trustee of the ESOT to sell 3,000 shares
beneficially owned by Mr. Hyde held in his account under the EDO ESOP.
(21) Includes 14,917 shares held directly, 4,957 shares allocated to Mr.
Kreisberg's account under the EDO ESOP, 1,000 restricted shares held
pursuant to the LTIP, and 1,102 shares subject to options exercisable
within 60 days.
(22) Mr. Kreisberg directed the trustee of the ESOT to sell 3,500 shares
beneficially owned by Mr. Kresiberg held in his account under the EDO
ESOP.
(23) Includes 6,745 shares held directly and 12,516 shares subject to options
exercisable within 60 days.
(24) Loomis Sayles, in its capacity as investment banker, may be deemed the
beneficial owner of these common shares which are owned by numerous
investment counseling clients. Loomis Sayles disclaims any beneficial
interest in any of these securities.
44
(25) Includes 4,390 shares held directly, 9,006 shares allocated to Mr. Otto's
account under the EDO ESOP, and 9,000 restricted shares held pursuant to
the LTIP.
(26) Mr. Otto directed the trustee of the ESOT to sell the maximum amount of
shares beneficially owned by Mr. Otto that may be sold for his account
under the EDO ESOP.
(27) Includes 130,444 shares held directly, 66,477 shares held by Mr. Reed's
spouse, 5,324 shares allocated to Mr. Reed's account under the EDO ESOP,
17,500 restricted shares held pursuant to the LTIP, and 4,357 shares
subject to options exercisable within 60 days.
(28) Mr. Reed directed the trustee of the ESOT to sell the maximum amount of
shares beneficially owned by Mr. Reed that may be sold for his account
under the EDO ESOP.
(29) Includes 383,980 shares held directly, 66,477 shares held by Mr. Smith's
spouse, 8,188 shares held by Mr. Smith's son, 5,704 shares allocated to
Mr. Smith's account under the EDO ESOP, 30,000 restricted shares held
pursuant to the LTIP, and 16,048 shares subject to options exercisable
within 60 days.
(30) Mr. Smith directed the trustee of the ESOT to sell the maximum amount of
shares beneficially owned by Mr. Smith that may be sold for his account
under the EDO ESOP.
(31) Includes 20,912 shares held jointly with Mr. Strutz's spouse and 13,000
shares subject to options exercisable within 60 days.
(32) Issuable upon conversion of our 7% convertible subordinated debentures
beneficially owned by Basso Securities Ltd., as an advisor (portfolio
manager) to certain funds managed by DKR Management Company Inc. (DKRMCI).
Basso Securities Ltd. disclaims beneficial ownership of these securities.
45
LEGAL MATTERS
The validity of our common shares offered hereby will be passed upon for us
by Dechert, Philadelphia, Pennsylvania. Legal matters relating to the offering
will be passed upon for the underwriters by Sidley Austin Brown & Wood LLP, San
Francisco, California. Legal matters relating to the selling shareholder will
be passed upon by McDermott Will & Emery, Chicago, Illinois.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 2000, and for the year then ended, as set
forth in their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
KPMG LLP, independent auditors, have audited our consolidated financial
statements at December 31, 1999, and for the two years then ended, as set forth
in their report. We have included our financial statements in the prospectus
and elsewhere in the registration statement in reliance on KPMG LLP's report,
given on their authority as experts in accounting and auditing.
We have agreed to indemnify and hold KPMG LLP harmless against and from any
and all legal costs and expenses incurred by KPMG LLP in successful defense of
any legal action or proceeding that arises as a result of KPMG LLP's consent to
the inclusion and or incorporation by reference of its audit reports dated
February 15, 2000 on our past consolidated financial statements and related
financial statement schedule included and or incorporated by reference in this
prospectus.
WHERE YOU CAN FIND MORE INFORMATION
Because we are subject to the informational requirements of the Exchange
Act, we file reports, proxy statements and other information with the
Securities and Exchange Commission, or the SEC. You may read and copy these
reports, proxy statements and other information at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also obtain copies of those materials at
prescribed rates from the public reference section of the SEC at 450 Fifth
Street, N.W. Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at (800) SEC-0330. In
addition, we are required to file electronic versions of those materials with
the SEC through the SEC's EDGAR system. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act with respect to the securities offered under this prospectus.
This prospectus does not contain all of the information in the registration
statement, parts of which we have omitted, as allowed under the rules and
regulations of the SEC. You should refer to the registration statement for
further information with respect to us and our securities. Statements contained
in this prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, we refer you to the copy of each
contract or document filed as an exhibit of the registration statement. Copies
of the registration statement, including exhibits, may be inspected without
charge at the SEC's principal office in Washington, D.C., and you may obtain
copies form this office upon payment of the fees prescribed by the SEC.
46
We will furnish without charge to each person to whom a copy of this
prospectus is delivered, upon written or oral request, a copy of any and all of
these filings (except exhibits, unless they are specifically incorporated by
reference into this prospectus). You should direct any requests for copies to:
EDO Corporation
60 East 42nd Street
Suite 5010
New York, NY 10165
Attention: William J. Frost
Telephone: (212) 716-2000
INCORPORATION BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. We incorporate by reference in this
prospectus the information contained in the following documents:
. our annual report on Form 10-K for the year ended December 31, 2000 filed
with the SEC on April 4, 2001;
. pages 27-52 from our amended annual report on Form ARS for the year ended
December 31, 2000 filed with the SEC on April 3, 2001;
. our quarterly reports on Form 10-Q for the quarters ended March 31, 2001
and June 30, 2001 filed with the SEC on May 14, 2001 and August 14, 2001,
respectively;
. our definitive proxy statement on Schedule 14A filed with the SEC on
April 2, 2001;
. the description of our common shares contained in our registration
statement on Form S-2 filed with the SEC on June 9, 1983, including any
amendment or report filed for the purpose of updating such description;
. our current report on Form 8-K filed with the SEC on October 12, 2001;
and
. all documents that we file with the SEC under Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 until all the securities
that we may offer under this prospectus are sold.
You may obtain copies of those documents from us, free of cost, by contacting
us at the address or telephone number provided in "Where You Can Find More
Information" above.
Information that we file later with the SEC and that is incorporated by
reference in this prospectus will automatically update and supersede
information contained in this prospectus. You will be deemed to have notice of
all information incorporated by reference in this prospectus as if that
information was included in this prospectus.
47
UNDERWRITING
The underwriters named below have severally and not jointly agreed with us
and the selling shareholder, subject to the terms and conditions set forth in
an underwriting agreement, to purchase from us and the selling shareholder the
number of common shares set forth opposite their names below.
Number of
Underwriter Shares
----------- ---------
First Union Securities, Inc...................................... 2,125,000
SG Cowen Securities Corporation.................................. 2,125,000
CJS Securities, Inc. ............................................ 125,000
Sidoti & Company, LLC............................................ 125,000
---------
Total.......................................................... 4,500,000
=========
The underwriters have agreed to purchase all of the shares referred to above
if any of those shares are purchased. If an underwriter defaults, the
underwriting agreement provides that the purchase commitments of the non-
defaulting underwriters may be increased or the underwriting agreement may be
terminated.
Our common shares are offered by the underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of legal
matters by counsel for the underwriters and other conditions. The underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part.
First Union Securities, Inc., (acting under the trade name Wachovia
Securities) is an indirect, wholly-owned subsidiary of Wachovia Corporation.
Wachovia Corporation conducts its investment banking, institutional, and
capital markets businesses through its various bank, broker-dealer and nonbank
subsidiaries (including First Union Securities, Inc.) under the trade name of
Wachovia Securities. Any references to Wachovia Securities in this prospectus
supplement, however, do not include Wachovia Securities, Inc., member NASD/SIPC
and a separate broker-dealer subsidiary of Wachovia Corporation and an
affiliate of First Union Securities, Inc., which may or may not be
participating as a selling dealer in the distribution of the securities offered
by this prospectus supplement.
Commissions and Discounts. The underwriters have advised us that they
propose to offer the common shares to the public at the public offering price
set forth on the cover page of this prospectus and to certain dealers at such
price less a concession of not more than $0.76 per share, of which $0.10 may be
reallowed to other dealers. After the completion of this offering, the public
offering price, concession and reallowance to dealers may be changed.
The following table shows the public offering price, underwriting discounts
and commissions and proceeds before expenses to us. This information assumes
either no exercise or full exercise by the underwriters of their over-allotment
option.
Per Share Without Option With Option
--------- -------------- ------------
Public offering price................ $23.50 $105,750,000 $121,612,500
Underwriting discounts and
commissions......................... $ 1.29 $ 5,805,000 $ 6,675,750
Proceeds, before expenses, to us..... $22.21 $ 67,542,831 $ 82,534,581
Proceeds, before expense, to the
selling shareholder................. $22.21 $ 32,402,169 $ 32,402,169
The expenses of this offering, not including the underwriting discounts and
commissions, are estimated at $700,000 and are payable by us.
Over-allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 675,000 additional common shares at the same price per share as
we and the selling shareholder will receive for the 4,500,000 shares that the
underwriters have agreed to purchase, less the underwriting discount shown on
the cover page of this prospectus. To the extent
U-1
that the underwriters exercise this option, each of the underwriters will have
a firm commitment, subject to conditions, to purchase approximately the same
percentage of the additional shares that the number of common shares to be
purchased by it shown in the above table represents as a percentage of the
4,500,000 shares offered by this prospectus.
Indemnity. We and the selling shareholder have agreed to indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act, or to contribute to payments that the underwriters may be
required to make in respect of those liabilities.
Lock-up Agreements. Our directors and executive officers will agree that,
for a period of 90 days after the date of this prospectus, they will not,
without the prior written consent of Wachovia Securities, offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, any shares of
our capital stock or any securities convertible into, or exercisable or
exchangeable for, shares of our capital stock, except for any transfer of
shares of capital stock or other securities to us to pay the exercise price of
stock options or the purchase price of securities purchased from us under
employee benefit plans, except for common shares allocated to our executive
officers in their ESOP accounts, gifts of capital stock or other securities
where the donee enters into a substantially similar lock-up agreement. The
selling shareholder will agree that, for a period of 90 days after the date of
this prospectus, it will not, without the prior written consent of Wachovia
Securities, offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our capital stock or any securities
convertible into, or exercisable or exchangeable for shares of our capital
stock, except for shares that are in the process of being distributed to plan
participants, shares to be transferred by the selling shareholder in the
ordinary course of business to satisfy future requests for distributions or
diversifications by retiring or retired participants and otherwise as required
by ERISA or the Internal Revenue Code. In addition, we will agree that, for a
period of 90 days after the date of this prospectus, we will not, without the
prior written consent of Wachovia Securities, offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our
capital stock or any securities convertible into, or exercisable or
exchangeable for, shares of our capital stock, except for the shares being sold
in the offering; and except that we may issue and sell common shares and stock
options pursuant to our stock purchase and stock option plans as in effect on
the date of this prospectus and common shares upon the exercise of stock
options that we have issued or in the future may issue under our stock option
plans, we may issue securities pursuant to the conversion of convertible
securities outstanding on the date hereof, we may issue securities to the ESOP
in the ordinary course of business, and we may file a registration statement
under the Securities Act with respect to any of these shares. Wachovia
Securities, in its sole discretion and at any time or from time to time,
without notice, release all or any portion of the shares or other securities
subject to the lock-up agreements.
Trading Market For Our Common Shares. Our common shares are quoted on the
New York Stock Exchange under the symbol "EDO."
Stabilization. The underwriters have advised us that, pursuant to Regulation
M under the Exchange Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the common shares at a level
above that which might otherwise prevail in the open market.
. A "stabilizing bid" is a bid for or the purchase of the common shares on
behalf of the underwriters for the purpose of fixing or maintaining the
price of the common shares.
. A "syndicate covering transaction" is a bid for or the purchase of the
common shares on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with this offering.
. A "penalty bid" is an arrangement permitting the underwriters to reclaim
the selling concession otherwise accruing to an underwriter in connection
with the offering if the common shares originally sold by that
underwriter is purchased by the underwriters in a syndicate covering
transaction and has therefore not been effectively placed by that
underwriter.
U-2
The underwriters have advised us that these transactions may be effected on
the New York Stock Exchange or otherwise. Neither we nor any of the
underwriters makes any representation that the underwriters will engage in any
of the transactions described above or that these transactions, once commenced,
will not be discontinued without notice. Neither we nor any of the underwriters
makes any representation or prediction as to the direction or magnitude of the
effect that the transactions described above, if commenced, may have on the
market price of our common shares.
Passive Market Making. In connection with this offering, certain
underwriters and selling group members, if any, may engage in passive market
making transactions in the common shares on the New York Stock Exchange in
accordance with Rule 103 of Regulation M, during a period before the
commencement of offers or sales of common shares and extending through
completion of the distribution. Passive market makers must comply with
applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess
of the highest independent bid for that security; if all independent bids are
lowered below the passive market maker's bid, however, that bid must then be
lowered when specified purchase limits are exceeded.
Other Relationships. Some of the underwriters and their affiliates have
provided financial advisory, commercial or investment banking or other
financial services to us from time to time for which they have received
customary fees and expenses. The underwriters and their affiliates may, from
time to time, engage in other transactions with us and perform other services
for us in the ordinary course of their business.
U-3
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets.............................................. F-2
Consolidated Statements of Earnings...................................... F-3
Consolidated Statements of Earnings...................................... F-4
Consolidated Statements of Cash Flows.................................... F-5
Notes to Consolidated Financial Statements............................... F-6
EDO Corporation and Subsidiaries Consolidated Statements of Earnings..... F-9
EDO Corporation and Subsidiaries Consolidated Balance Sheets............. F-10
EDO Corporation and Subsidiaries Consolidated Statements of Shareholders'
Equity.................................................................. F-11
EDO Corporation and Subsidiaries Consolidated Statements of Cash Flows... F-12
Notes to Consolidated Financial Statements............................... F-13
Independent Auditors' Reports............................................ F-29
Report of Management..................................................... F-31
Quarterly Financial Information (Unaudited).............................. F-31
F-1
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, June 30,
2000 2001
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 2,208 $ 5,142
Marketable securities................................ 14,413 188
Accounts receivable, less allowances................. 69,023 75,304
Inventories.......................................... 24,914 26,618
Deferred tax asset, net.............................. 3,333 3,302
Prepayments and other................................ 4,840 2,742
-------- --------
Total current assets................................ 118,731 113,296
Property, plant and equipment, net.................... 57,485 59,235
Notes receivable...................................... 3,254 3,081
Cost in excess of fair value of net assets acquired,
net.................................................. 14,724 10,359
Other assets.......................................... 20,060 22,491
-------- --------
$214,254 $208,462
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............. $ 44,060 $ 46,713
Contract advances and deposits....................... 31,719 20,684
Current portion of note payable...................... 429 429
Current portion of long-term debt.................... 4,971 3,800
-------- --------
Total current liabilities........................... 81,179 71,626
Note payable.......................................... 463 463
Long-term debt........................................ 37,800 33,716
Deferred income taxes, net............................ 1,239 1,239
ESOT loan obligation.................................. 5,781 4,891
Postretirement benefits obligations................... 19,973 20,011
Environmental obligation.............................. 2,001 1,836
Shareholders' equity:
Preferred shares, par value $1 per share (liquidation
preference $213.71 per share or $10,521 in the
aggregate in 2000), authorized 500,000 shares,
49,229 issued in 2000............................... 49 --
Common shares, par value $1 per share, authorized
25,000,000 shares, issued 15,007,096 in 2000 and
16,074,377 in 2001.................................. 15,007 16,074
Additional paid-in capital........................... 58,614 56,980
Retained earnings.................................... 34,803 39,661
Accumulated other comprehensive loss................. (61) --
-------- --------
108,412 112,715
Less: Treasury shares at cost (1,370,222 shares in
2000 and 1,238,083 shares in 2001)................... (19,388) (16,733)
ESOT loan obligation................................ (5,781) (4,891)
Unearned ESOP shares................................ (15,782) (15,116)
Deferred compensation under Long-Term Incentive
Plan............................................... (423) (450)
Management group receivable......................... (1,220) (845)
-------- --------
Total shareholders' equity.......................... 65,818 74,680
-------- --------
$214,254 $208,462
======== ========
See accompanying Notes to Consolidated Financial Statements.
F-2
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share and per share amounts)
For the three months ended
--------------------------
July 1, 2000 June 30, 2001
------------ -------------
(unaudited)
Net sales........................................... $56,593 $66,776
Costs and expenses:
Cost of sales..................................... 43,220 49,858
Selling, general and administrative............... 6,539 8,477
Research and development.......................... 1,552 2,190
Write-off of purchased in-process research and
development and merger-related costs............. 8,943 772
------- -------
60,254 61,297
------- -------
Operating (loss) earnings........................... (3,661) 5,479
Non-operating income (expense):
Interest income................................... 396 268
Interest expense.................................. (1,012) (734)
Other, net........................................ (75) 62
------- -------
(691) (404)
------- -------
(Loss) earnings before income taxes................. (4,352) 5,075
Income tax benefit (expense)........................ 1,033 (1,980)
------- -------
Net (loss) earnings................................. (3,319) 3,095
Dividends on preferred shares....................... 213 --
------- -------
Net (loss) earnings available for common shares..... $(3,532) $ 3,095
======= =======
(Loss) earnings per common share:
Basic............................................. $ (0.37) $ 0.25
Diluted........................................... $ (0.37) $ 0.24
Weighted average common shares outstanding:
Basic............................................. 9,661 12,370
======= =======
Diluted........................................... 9,661 13,824
======= =======
See accompanying Notes to Consolidated Financial Statements.
F-3
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
For the six months ended
--------------------------
July 1, 2000 June 30, 2001
------------ -------------
(unaudited)
Net sales........................................... $85,595 $126,927
Costs and expenses:
Cost of sales..................................... 65,078 94,768
Selling, general and administrative............... 10,009 16,285
Research and development.......................... 2,136 3,982
Write-off of purchased in-process research and
development and merger-
related costs.................................... 8,943 1,318
------- --------
86,166 116,353
------- --------
Operating (loss) earnings........................... (571) 10,574
Non-operating income (expense):
Interest income................................... 876 587
Interest expense.................................. (1,640) (1,627)
Other, net........................................ 28 199
------- --------
(736) (841)
------- --------
(Loss) earnings before income taxes................. (1,307) 9,733
Income tax benefit (expense)........................ 118 (3,795)
------- --------
Net (loss) earnings................................. (1,189) 5,938
Dividends on preferred shares....................... 458 194
------- --------
Net (loss) earnings available for common shares..... $(1,647) $ 5,744
======= ========
(Loss) earnings per common share:
Basic............................................. $ (0.20) $ 0.48
Diluted........................................... $ (0.20) $ 0.46
Weighted average common shares outstanding:
Basic............................................. 8,211 11,905
======= ========
Diluted........................................... 8,211 12,433
======= ========
See accompanying Notes to Consolidated Financial Statements.
F-4
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the six months ended
--------------------------
July 1, 2000 June 30, 2001
------------ -------------
(unaudited)
Operating activities:
Net (loss) earnings................................ $ (1,189) $ 5,938
Adjustments to net (loss) earnings to arrive at
cash used by operating activities:
Depreciation...................................... 2,617 4,876
Amortization...................................... 572 556
Write-off of purchased in-process research and
development...................................... 6,700 --
Bad debt expense.................................. 70 18
Gain on repurchase of debentures.................. (129) (171)
Gain on sale of property, plant and equipment..... (7) (56)
Gain on sale of marketable securities............. -- (81)
Deferred compensation expense..................... 312 121
ESOP compensation expense......................... 399 1,115
Non-cash compensation expense..................... -- 278
Common shares issued for directors' fees.......... 28 87
Real estate tax assessment adjustment............. -- 7,846
Changes in operating assets and liabilities,
excluding effects of acquisition:
Accounts receivable.............................. (9,756) (6,114)
Inventories...................................... 2,712 (1,704)
Prepayments and other assets..................... (3,603) (1,892)
Accounts payable and accrued liabilities......... (4,762) (421)
Contact advances and deposits.................... 1,219 (11,035)
-------- --------
Cash used by continuing operations.................. (4,817) (639)
Net cash provided by discontinued operations........ 8,641 --
Investing activities:
Cash paid for acquisition of AIL................... (15,004) --
Payments received on notes receivable.............. -- 173
Purchase of property, plant and equipment.......... (1,407) (6,797)
Proceeds from sale of property, plant and
equipment......................................... 5,858 226
Purchase of marketable securities.................. (414) (56)
Sale or redemption of marketable securities........ 500 14,454
-------- --------
Cash (used) provided by investing activities........ (10,467) 8,000
Financing activities:
Proceeds from exercise of stock options............ 44 2,383
Proceeds from management group receivables......... -- 376
Borrowings under line of credit.................... 1,000 --
Repayments of borrowings under line of credit...... (3,000) --
Repayments of long-term debt....................... (1,508) (1,900)
Repurchase of debentures........................... (1,386) (3,184)
Purchase of treasury shares........................ -- (1,021)
Payment of common share cash dividends............. (610) (887)
Payment of preferred share cash dividends.......... (458) (194)
-------- --------
Cash used by financing activities................... (5,918) (4,427)
-------- --------
Net (decrease) increase in cash and cash
equivalents........................................ (12,561) 2,934
Cash and cash equivalents at beginning of period.... 13,799 2,208
-------- --------
Cash and cash equivalents at end of period.......... $ 1,238 $ 5,142
======== ========
Supplemental disclosures:
Cash paid for:
Interest.......................................... $ 919 $ 1,431
Income taxes...................................... $ 673 $ 4,770
See accompanying Notes to Consolidated Financial Statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Financial Statements
The accompanying unaudited, consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, therefore, do not
include all information and footnotes normally included in consolidated
financial statements prepared in conformity with generally accepted accounting
principles. They should be read in conjunction with the consolidated financial
statements of EDO Corporation and Subsidiaries (the "Company") for the fiscal
year ended December 31, 2000 included in this prospectus.
The accompanying consolidated financial statements are unaudited and include
all adjustments (consisting of normal recurring adjustments and accruals) that
management considers necessary for a fair presentation of its consolidated
financial position and results of operations for the interim periods presented.
The results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the entire year.
Acquisition
On April 28, 2000, a wholly owned subsidiary of the Company merged with AIL
Technologies, Inc. (the "EDO-AIL Merger"). In connection with the EDO-AIL
merger, the Company issued 6,553,194 of its common shares valued at $39.4
million, and made cash payments aggregating $13.3 million in exchange for all
of the outstanding common and preferred shares of AIL Technologies, Inc. In
addition, the Company incurred $2.7 million in transaction costs. The merger
was accounted for using the purchase method and is included in the Company's
results of operations since the date of acquisition. The transaction resulted
in goodwill of $2.8 million, which is being amortized over fifteen years.
Unaudited pro forma results of operations, assuming the acquisition had been
made at the beginning of 2000, which include adjustments to interest expense,
amortization expense and income tax expense are as follows:
Six months ended
July 1, 2000
----------------
(in thousands)
Net sales................................................... $128,852
Net loss available for common shares........................ $ (8,848)
Basic loss per share........................................ $ (0.83)
Inventories
Inventories are summarized by major classification as follows:
December 31, 2000 June 30, 2001
----------------- -------------
(in thousands)
Raw materials and supplies................... $ 7,431 $ 7,726
Work-in-process.............................. 16,170 18,064
Finished goods............................... 1,313 828
------- -------
$24,914 $26,618
======= =======
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share.
Three months ended Six months ended
-------------------- -----------------
July 1, June 30, July 1, June 30,
2000 2001 2000 2001
--------- --------- ------- --------
(in thousands) (in thousands)
Numerator:
Net (loss) earnings available for
common shares......................... $ (3,532) $ 3,095 $(1,647) $ 5,744
Impact of assumed conversion of
preferred shares...................... -- -- -- 9
Interest expense avoided related to
assumed conversion of subordinated
debentures............................ -- 274 -- --
--------- --------- ------- -------
Numerator for diluted calculation...... $ (3,532) $ 3,369 $(1,647) $ 5,753
========= ========= ======= =======
Denominator:
Weighted average common shares
outstanding........................... 9,661 12,370 8,211 11,905
Dilutive effect of stock options....... -- 287 -- 219
Dilutive effect of conversion of
preferred shares...................... -- -- -- 309
Dilutive effect of conversion of
subordinated debentures............... -- 1,167 -- --
--------- --------- ------- -------
Denominator for diluted calculation.... 9,661 13,824 8,211 12,433
========= ========= ======= =======
Employee Stock Ownership Plan and Trust
At the end of 2000, the Company sponsored two Employee Stock Ownership
Plans, the existing EDO Employee Stock Ownership Plan ("EDO ESOP"); and the AIL
Employee Stock Ownership Plan ("AIL ESOP") that was acquired in connection with
the EDO-AIL merger. These two plans were merged into a single plan effective as
of January 1, 2001, and the existing preferred shares in the former EDO ESOP
were converted into 1,067,281 common shares on March 8, 2001. The merged ESOP
provides retirement benefits to substantially all employees.
Comprehensive Income
Comprehensive loss for the three- and six-month periods ended July 1, 2000
was $3,345,000 and $1,218,000, respectively. Comprehensive income for the
three-and six-month periods ended June 30, 2001 was $3,044,000 and $6,030,000,
respectively.
Business Segments
EDO Corporation supplies highly engineered products for governments and
industry worldwide. The Company believes that the majority of its advanced
electronic, electromechanical and information systems and engineered materials
are products which are critical to the mission success of its customers. The
Company has three reporting segments: Defense, Communications and Space
Products, and Engineered Materials.
The Defense segment provides integrated defense systems and components
including radar countermeasure systems, aircraft weapons storage and release
systems, airborne mine countermeasures systems, remote sensors, information
technology, and support systems and services for military forces and
governments worldwide. The Communications and Space Products segment addresses
the remote sensing, communication, and navigation industries and produces
ultra-miniature electronics and a broad line of antennas. The Engineered
Materials segment supplies piezoelectric ceramics and advanced composites for
the communication, navigation, chemical, petrochemical, paper and oil
industries for the commercial infrastructure and military markets.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three months ended Six months ended
-------------------- -----------------
July 1, June 30, July 1, June 30,
2000 2001 2000 2001
--------- --------- ------- --------
(in thousands) (in thousands)
Net sales:
Defense................. $ 40,726 $ 49,081 $61,426 $ 93,766
Communications and Space
Products............... 7,624 8,551 7,624 15,063
Engineered Materials.... 8,243 9,144 16,545 18,098
--------- --------- ------- --------
$56,593 $ 66,776 $85,595 $126,927
========= ========= ======= ========
Operating (loss)
earnings:
Defense................. $ 3,460 $ 4,445 $ 5,911 $ 9,691
Communications and Space
Products............... (7,476) 240 (7,476) (775)
Engineered Materials.... 355 794 994 1,658
--------- --------- ------- --------
(3,661) 5,479 (571) 10,574
Net interest expense.... (616) (466) (764) (1,040)
Other, net.............. (75) 62 28 199
--------- --------- ------- --------
(Loss) earnings before
income taxes........... $ (4,352) $ 5,075 $(1,307) $ 9,733
========= ========= ======= ========
Merger-related costs attributable to the EDO-AIL Merger are included in the
segments as follows:
Six months ended Six months ended
July 1, 2000 June 30, 2001
---------------- ----------------
Defense.................................... $1,563 $ 898
Communications and Space Products.......... 6,980 208
Engineered Materials....................... 400 212
------ ------
Total.................................... $8,943 $1,318
====== ======
F-8
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31
--------------------------
1998 1999 2000
------- ------- --------
(in thousands, except
per share amounts)
Continuing Operations:
Net sales......................................... $81,403 $97,936 $206,822
------- ------- --------
Costs and Expenses
Cost of sales.................................... 57,817 72,337 151,512
Selling, general and administrative.............. 11,649 13,602 29,205
Research and development......................... 2,382 2,748 5,371
Write-off of purchased in-process research and
development and
merger-related costs............................ -- -- 11,495
Litigation settlement income..................... (2,200) -- --
------- ------- --------
69,648 88,687 197,583
------- ------- --------
Operating Earnings................................ 11,755 9,249 9,239
Non-operating Income (Expense)
Interest income.................................. 1,893 1,634 1,881
Interest expense................................. (2,321) (2,419) (4,319)
Other, net....................................... (100) 230 (216)
------- ------- --------
(528) (555) (2,654)
------- ------- --------
Earnings before income taxes...................... 11,227 8,694 6,585
Income tax expense................................ 880 2,610 5,264
------- ------- --------
Earnings from Continuing Operations............... 10,347 6,084 1,321
Discontinued Operations:
(Loss) earnings from discontinued satellite
products business, net of
income tax benefit (expense)..................... (2,116) 609 --
Loss on disposal (including provision of $530 for
operating losses
during phase-out period), net of income tax
benefit.......................................... -- (4,673) --
------- ------- --------
Loss from Discontinued Operations................. (2,116) (4,064) --
------- ------- --------
Net Earnings....................................... 8,231 2,020 1,321
Dividends on preferred shares...................... 1,063 1,000 881
------- ------- --------
Net Earnings Available for Common Shares........... $ 7,168 $ 1,020 $ 440
------- ------- --------
Earnings (loss) Per Common Share:
Basic:
Continuing operations............................ $ 1.42 $ 0.76 $ 0.05
Discontinued operations.......................... (0.33) (0.61) --
------- ------- --------
Net Earnings....................................... $ 1.09 $ 0.15 $ 0.05
------- ------- --------
Diluted:
Continuing operations............................ $ 1.21 $ 0.65 $ 0.05
Discontinued operations.......................... (0.27) (0.50) --
------- ------- --------
Net Earnings....................................... $ 0.94 $ 0.15 $ 0.05
======= ======= ========
See accompanying Notes to Consolidated Financial Statements.
F-9
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
------------------
1999 2000
-------- --------
(in thousands,
except share and
per share
amounts)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,799 $ 2,208
Marketable securities..................................... 15,843 14,413
Accounts receivable, less allowances of $232 in 1999 and
$981 in 2000............................................. 32,818 69,023
Inventories............................................... 12,188 24,914
Deferred tax asset, net................................... 2,336 3,333
Prepayments and other..................................... 2,299 4,840
-------- --------
Total current assets.................................... 79,283 118,731
-------- --------
Property, plant and equipment, net......................... 10,218 57,485
Notes receivable........................................... 1,450 3,254
Cost in excess of fair value of net assets acquired, net... 9,050 14,724
Other assets............................................... 16,351 20,060
Net assets of discontinued operations...................... 8,139 --
-------- --------
$124,491 $214,254
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 23,108 $ 44,060
Contract advances and deposits............................ 19,153 31,719
Current portion of note payable........................... 397 429
Current portion of long-term debt......................... 1,515 4,971
-------- --------
Total current liabilities............................... 44,173 81,179
-------- --------
Note payable............................................... 892 463
Long-term debt............................................. 26,250 37,800
Deferred income taxes, net................................. -- 1,239
ESOT loan obligation....................................... 7,429 5,781
Postretirement benefits obligations........................ 3,402 19,973
Environmental obligation................................... 2,104 2,001
Shareholders' equity:
Preferred shares, par value $1 per share (liquidation
preference $213.71 per share or $10,521 in the aggregate
in 2000), authorized 500,000 shares, 57,384 issued in
1999 and 49,229 in 2000.................................. 57 49
Common shares, par value $1 per share, authorized
25,000,000 shares,
8,453,902 issued in 1999 and 15,007,096 issued in 2000... 8,454 15,007
Additional paid-in capital................................ 28,483 58,614
Retained earnings......................................... 35,667 34,803
Accumulated other comprehensive loss...................... (255) (61)
-------- --------
72,406 108,412
Less: Treasury shares at cost (1,693,867 shares in 1999 and
1,370,222 shares in 2000)............................. (23,967) (19,388)
ESOT loan obligation..................................... (7,429) (5,781)
Unearned ESOP shares..................................... -- (15,782)
Deferred compensation under Long-Term Incentive Plan..... (769) (423)
Management group receivables............................. -- (1,220)
-------- --------
Total shareholders' equity.............................. 40,241 65,818
-------- --------
$124,491 $214,254
======== ========
See accompanying Notes to Consolidated Financial Statements.
F-10
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
1998 1999 2000
--------------- --------------- ---------------
Amount Shares Amount Shares Amount Shares
------- ------ ------- ------ ------- ------
(in thousands)
Preferred shares
Balance at beginning of
year...................... $ 65 65 $ 61 61 $ 57 57
Shares converted to common
shares.................... (4) (4) (4) (4) (8) (8)
------- ------ ------- ------ ------- ------
Balance at end of year..... 61 61 57 57 49 49
------- ------ ------- ------ ------- ------
Common shares
Balance at beginning of
year...................... 8,454 8,454 8,454 8,454 8,454 8,454
Shares issued for purchase
of AlL Technologies,
Inc....................... -- -- -- -- 6,553 6,553
------- ------ ------- ------ ------- ------
Balance at end of year..... 8,454 8,454 8,454 8,454 15,007 15,007
------- ------ ------- ------ ------- ------
Additional paid-in capital
Balance at beginning of
year...................... 32,546 30,142 28,483
Exercise of stock options.. (645) (112) (141)
Shares used for payment of
directors' fees........... (71) (132) (125)
Purchase of AlL
Technologies, Inc......... -- -- 33,733
Shares used for Long-Term
Incentive Plan............ (369) -- (432)
Conversion of preferred
shares to common shares... (1,319) (1,415) (3,227)
ESOP shares committed to be
released.................. -- -- 323
------- ------- -------
Balance at end of year..... 30,142 28,483 58,614
------- ------- -------
Retained earnings
Balance at beginning of
year...................... 27,641 35,294 35,667
Net earnings............... 8,231 2,020 1,321
Common share dividends
(11.5 cents, 12 cents and
12 cents per share in
1998, 1999 and 2000,
respectively)............. (755) (806) (1,428)
Dividends on preferred
shares.................... (1,063) (1,000) (881)
Tax benefit of unallocated
preferred share
dividends................. 1,240 159 124
------- ------- -------
Balance at end of year..... 35,294 35,667 34,803
------- ------- -------
Accumulated other
comprehensive loss
Balance at beginning of
year...................... -- -- (255)
Unrealized (loss) gain on
marketable securities, net
of income tax............. -- (255) 194
------- ------- -------
Balance at end of year..... -- (255) (61)
------- ------- -------
Treasury shares at cost
Balance at beginning of
year...................... (29,201) (2,054) (25,775) (1,822) (23,967) (1,694)
Shares used for exercise of
stock options............. 998 62 149 11 280 20
Shares used for payment of
directors' fees........... 167 11 240 17 251 18
Shares used for Long-Term
Incentive Plan............ 938 66 -- -- 813 57
Shares used for conversion
of preferred shares....... 1,323 93 1,419 100 3,235 229
------- ------ ------- ------ ------- ------
Balance at end of year..... (25,775) (1,822) (23,967) (1,694) (19,388) (1,370)
------- ------ ------- ------ ------- ------
ESOT loan obligation
Balance at beginning of
year...................... (10,368) (8,955) (7,429)
Repayments made during
year...................... 1,413 1,526 1,648
------- ------- -------
Balance at end of year..... (8,955) (7,429) (5,781)
------- ------- -------
Deferred compensation under
Long-Term Incentive Plan
Balance at beginning of
year...................... (1,002) (1,170) (769)
Shares used for Long-Term
Incentive Plan............ (569) -- (392)
Amortization of Long-Term
Incentive Plan deferred
expense................... 401 401 738
------- ------- -------
Balance at end of year..... (1,170) (769) (423)
------- ------- -------
Unearned ESOP Compensation
Balance at beginning of
year...................... -- -- --
Purchase of AlL
Technologies, Inc......... -- -- (17,302)
ESOP compensation expense.. -- -- 1,520
------- ------- -------
Balance at end of year..... -- -- (15,782)
------- ------- -------
Management Group Receivables
Balance at beginning of
year...................... -- -- --
Purchase of AlL
Technologies, Inc......... -- -- (1,220)
------- ------- -------
Balance at end of year..... -- -- (1,220)
------- ------- -------
Total Shareholders' Equity.. $38,051 $40,241 $65,818
------- ------- -------
Comprehensive income
Net earnings............... $ 8,231 $ 2,020 $ 1,321
Unrealized (loss) gain on
marketable securities, net
of income tax benefit of
$131 in 1999 and expense
of $100 in 2000........... -- (255) 194
------- ------- -------
Comprehensive income....... $ 8,231 $ 1,765 $ 1,515
------- ------- -------
See accompanying Notes to Consolidated Financial Statements.
F-11
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
-------------------------
1998 1999 2000
------- ------- -------
(in thousands)
Operating Activities:
Earnings from continuing operations................. $10,347 $ 6,084 $ 1,321
Adjustments to earnings to arrive at cash provided
by continuing operations:
Depreciation....................................... 2,004 2,572 7,740
Amortization....................................... 339 818 1,701
Deferred tax (benefit) expense..................... (50) 740 1,292
Write-off of purchased in-process research and
development....................................... -- -- 6,700
Bad debt expense................................... 98 -- 287
Gain on repurchase of debentures................... -- (147) (215)
Gain on sale of property, plant and equipment...... -- -- (7)
Deferred compensation expense...................... 401 401 738
ESOP compensation expense.......................... -- -- 1,843
Common shares issued for directors' fees........... 96 108 126
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Accounts receivable................................ (7,886) (1,796) (4,388)
Inventories........................................ (2,871) (2,938) (2,214)
Prepayments and other assets....................... 1,274 (5,050) (1,825)
Accounts payable, accrued liabilities and other.... (469) (1,062) (11,923)
Contract advances and deposits..................... 870 5,564 8,116
------- ------- -------
Cash provided by continuing operations.............. 4,153 5,294 9,292
Net cash provided by discontinued operations........ 4,461 5,952 --
Investing Activities:
Purchase of plant and equipment.................... (3,133) (4,032) (3,861)
Payments received on notes receivable.............. 675 575 168
Proceeds from sale of property, plant and
equipment......................................... -- -- 4,569
Proceeds from sale of discontinued operations...... -- -- 8,641
Cash paid for acquisitions, net of cash acquired... (5,648) (2,638) (15,004)
Sale (purchase) of marketable securities........... 2,332 (4,709) 1,723
------- ------- -------
Cash used by investing activities................... (5,774) (10,804) (3,764)
Financing Activities:
Proceeds from exercise of stock options............ 353 37 139
Borrowings under line of credit.................... -- -- 9,000
Repayments of borrowings under line of credit...... -- -- (18,000)
Repayments of long-term debt....................... -- -- (3,570)
Repurchase of debentures........................... -- (1,405) (1,879)
Payment made on note payable....................... -- (5,460) (500)
Payment of common share cash dividends............. (755) (806) (1,428)
Payment of preferred share cash dividends.......... (1,063) (1,000) (881)
------- ------- -------
Cash used by financing activities................... (1,465) (8,634) (17,119)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 1,375 (8,192) (11,591)
Cash and cash equivalents at beginning of year...... 20,616 21,991 13,799
------- ------- -------
Cash and cash equivalents at end of year............ $21,991 $13,799 $ 2,208
------- ------- -------
Supplemental disclosures:
Cash paid for:
Interest........................................... $ 2,052 $ 2,002 $ 3,500
Income Taxes....................................... $ 1,386 $ 2,126 $ 3,756
See accompanying Notes to Consolidated Financial Statements.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000
(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 three segments: Defense, Communications and Space
Products and Engineered Materials (Note 19). The Company discontinued its
former satellite products business (Barnes Engineering Company) in 1999 (Note
3).
(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) 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. These projections are revised throughout the lives of the contracts
and adjustments to profits resulting from such revisions are made cumulative to
the date of change, which may affect current period earnings. 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.
(d) 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.
Inventoried costs related to certain of the Company's product lines include
quantities beyond what is required for orders under contracts. These costs are
incurred to help maintain stable and efficient production schedules. The
Company believes that sufficient markets exist for these product lines and that
no loss will be incurred upon disposition.
Under the contractual arrangements by which progress payments are received,
the United States Government has a title to or a security interest in the
inventories identified with related contracts.
(e) Depreciation and Amortization
Property, plant and equipment are stated at cost. Depreciation and amortization
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 $1,058,000 and
$1,066,000 are included in other assets at December 31, 1999 and 2000,
respectively.
(f) Long-Lived Assets
Intangible assets are stated at cost. The excess of the total acquisition costs
over the fair value of net assets acquired of approximately $16.0 million
($14.7 million, net of accumulated amortization at December 31, 2000) is being
amortized on a straight-line basis over fifteen to twenty years.
The carrying values of intangible and other long-lived assets are
periodically reviewed to determine if any impairment indicators are present. If
it is determined that such indicators are present and the review indicates that
the assets will not be recoverable, based on the undiscounted estimated cash
flows over the remaining amortization and depreciation period, their carrying
values are reduced to estimated fair value. Impairment indicators include,
among other conditions, cash flow deficits, an historic or anticipated decline
in
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
revenue or operating profit, adverse legal or regulatory developments,
accumulation of costs significantly in excess of amounts originally expected to
acquire the asset and a material decrease in the fair value of some or all of
the assets. Assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows
generated by other asset groups. No such impairment exists at December 31,
2000.
(g) 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.
(h) 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.
(i) Financial Instruments
The fair value and book value of the Company's 7% Convertible Subordinated
Debentures Due 2011 and ESOT obligation at December 31, 1999 were $31,429,000
and $35,194,000, respectively (Notes 9 and 10), and at December 31, 2000 were
$28,781,000 and $31,452,000, respectively. The net carrying value of notes
receivable approximates fair value based on current rates for comparable
commercial mortgages. The fair values of the environmental obligation (Note 18)
and notes payable approximate their carrying values since they have been
discounted.
The fair values of all other financial instruments approximate book values
because of the short-term maturities of these instruments.
(j) 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 collectability of receivables. Actual results could differ from
these and other estimates.
(k) Stock-Based Compensation
The Company accounts for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. Under APB 25, because the
exercise price of the Company's stock options is set equal to the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
(l) Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and on June 15, 2000, issued Statement No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an Amendment to FASB Statement No. 133." These statements establish
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
The Company is required to adopt these statements in the first quarter of 2001.
The Company has assessed the impact of these statements on its consolidated
financial statements and believes that the effect of the adoption of these
statements will not be material to the Company's operating results or financial
position.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(m) Reclassifications
Certain reclassifications have been made to prior year presentations to conform
to current year presentation.
(2) Acquisitions
A wholly-owned subsidiary of the Company merged with AIL Technologies, Inc.
(AIL) on April 28, 2000 (the "EDO-AIL merger"). In connection with the EDO-AIL
merger, the Company issued 6,553,194 of its common shares valued at
$39.4 million, and made cash payments aggregating $13.3 million in exchange for
all of the outstanding common and preferred shares of AIL. In addition, the
Company incurred $2.7 million of transaction costs. The merger was accounted
for using the purchase method and is included in the Company's results of
operations since the date of acquisition. The transaction resulted in goodwill
of $6.8 million, which is being amortized over fifteen years.
Associated with this merger and included in operating earnings in 2000 are
$6.7 million of a write-off of purchased in-process research and development
("IPR&D"), described more fully below, $1.5 million of severance costs, and
$3.3 million of other merger-related costs. Such costs are included in write-
off of purchased in-process research and development and merger-related costs
in the accompanying consolidated statement of earnings. The $1.5 million of
severance costs pertains to an AIL employee group of approximately 200. As of
December 31, 2000, $0.6 million has been paid and $0.9 million is recorded in
accounts payable and accrued liabilities.
The IPR&D relates to a project that had not reached technological
feasibility and had no alternative future uses, and thus, the amounts allocated
to the project were expensed as of the date of acquisition. The development
project related to a generic satellite sub-system called a Ku-Ku Band Down
Converter for a fixed satellite service market. The converter represents a
single channel providing signal conversion from uplink frequencies in the 14GHz
range to the downlink frequencies in the 12GHz range. At the time of the EDO-
AIL merger, it was estimated that 90% of the development effort had been
completed and the remaining development effort would take approximately six
months to complete, with a cost of approximately $1.0 million.
The income approach was utilized for the valuation analysis of the IPR&D.
This approach focused on the income-producing capability of the asset, which
was based on relative market sizes, growth factors and expected trends in
technology. This approach also included analysis of the stage of completion of
the project, estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net cash
flows from such projects, and discounting the net cash flows back to their
present value using a rate commensurate with the relative risk levels. The rate
used in discounting the net cash flows from the IPR&D was 25%.
The efforts required to develop the in-process technology of this project
into commercially viable products principally relate to the completion of
planning, designing, prototyping, and testing functions that are necessary to
establish that the down converter produced will meet its design specifications,
including technical performance features and functional requirements. The
Company has reviewed its projections of revenues and estimated costs of
completion and has compared these projections with results through December 31,
2000. In the aggregate, the expense projections have increased approximately
$0.5 million from the original forecasts.
Unaudited pro forma results of operations, assuming the EDO-AIL merger had
been completed at the beginning of each period, which include adjustments to
interest expense, amortization expense and income tax expense are as follows:
1999 2000
---- ----
(unaudited)
(in thousands)
Net sales from
continuing
operations.......... $244,008 $250,080
Net loss from
continuing
operations available
for common shares... $ (1,464) $ (1,961)
Basic loss per common
share from
continuing
operations.......... $ (0.14) $ (0.18)
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
The pro forma results of operations are not necessarily indicative of the
actual results of operations that would have occurred had this merger been
completed at the beginning of the periods, or of the results which may occur in
the future.
In November 1999, the Company acquired the outstanding stock of
M.Technologies Inc., an integrator of aircraft weapons and avionics systems,
for $3.0 million in cash paid at closing and $1.5 million to be paid over three
years. The note payable ($892,000 at December 31, 2000) has been recorded at
its present value in the accompanying consolidated balance sheet at an interest
rate of 8% as of December 31, 2000. The acquisition has been accounted for as a
purchase, and accordingly, the operating results of M.Technologies 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 $4.4 million is being amortized over fifteen
years. On a pro forma basis, had the M.Technologies acquisition taken place as
of the beginning of 1999, results of operations for that period would not have
been materially affected.
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 $2.1 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 $5.5
million note, which was paid in 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 $2.6 million is being amortized
over twenty years.
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.
(3) Discontinued Operations
In November 1999, the Board of Directors of the Company approved the decision
to sell its satellite products business (Barnes Engineering Company), which
sale was completed on January 31, 2000. The sale price of $10.0 million was
subject to adjustment relating to changes in net assets of the business from
July 31, 1999 through the closing date, which resulted in a decrease of
approximately $1.3 million. In addition, the Company has agreed to indemnify
the buyer for certain contract-related costs aggregating an estimated $2.3
million. The estimated adjustment for the changes in net assets and the
estimated indemnification costs were included in the loss on disposal of the
satellite products business in 1999. During 2000, approximately $1.7 million of
costs were incurred. The remaining liability at December 31, 2000 of $0.6
million is included in accounts payable and accrued liabilities (Note 8).
The revenues, costs and expenses, assets and liabilities, cash flows and
backlog associated with the satellite products business have been excluded from
the respective captions in the accompanying consolidated financial statements.
In 1999, the estimated loss on disposal is net of aggregate settlement and
curtailment gains of $950,000 and $47,000 relating to the impact of the
disposal on the Company's pension and
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
postretirement benefit plans, respectively. In addition, the net (loss)
earnings from discontinued operations prior to the measurement date and the
estimated loss on disposal are reflected in the accompanying consolidated
statements of earnings net of the related income tax benefit (expense). In
1998, the loss from discontinued operations is net of a $180,000 tax benefit.
In 1999, the earnings from discontinued operations are net of a $261,000 tax
expense, and the estimated loss on disposal is net of a $1,833,000 tax benefit.
Summarized financial information for the discontinued operations is as follows:
1998 1999
------- -------
Net sales................................................... $14,657 $14,123
Net (loss) earnings......................................... (2,116) 609
1999
-------
Current assets (primarily accounts receivable).............. $ 5,906
Noncurrent assets (primarily plant and equipment and
goodwill).................................................. 3,968
Current liabilities......................................... (1,735)
-------
Net assets of discontinued operations....................... $ 8,139
=======
(4) Marketable Securities
The Company determines the appropriate classification of securities at the time
of purchase and reevaluates such designation as of each balance sheet date. All
marketable securities are classified as available-for-sale securities.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of shareholders'
equity. Realized gains and losses, interest and dividends and declines in value
judged to be other-than-temporary are included in interest income (expense).
The cost of securities sold is based on the specific identification method. The
following is a summary of the fair value of available-for-sale securities at
December 31:
1999 2000
------- -------
(in thousands)
Corporate bonds................................................ $ 5,320 $ 5,459
Obligations of U.S. Government Agencies........................ 4,345 4,484
Mutual funds................................................... 5,211 3,488
Mortgage-backed securities..................................... 967 982
------- -------
Total......................................................... $15,843 $14,413
======= =======
The available-for-sale debt securities have maturities ranging from July
2002 to March 2004.
(5) Accounts and Notes Receivable
Accounts receivable included $18,407,000 and $37,060,000 at December 31, 1999
and 2000, respectively, representing unbilled revenues. Substantially all of
the unbilled balances at December 31, 2000 will be billed and are expected to
be collected during 2001. Total receivables due from the United States
government, either directly or as a subcontractor to a prime contractor with
the government, were $16,897,000 and $22,364,000 at December 31, 1999 and 2000,
respectively.
Notes receivable at December 31, 2000 include $2,500,000 which relates to
the sale of the Company's College Point facility in January 1996, of which
$375,000 is included in current assets. The notes are due in equal quarterly
amounts through September 2004 with a final payment of $1,300,000 due on
December 31, 2004 and bear interest at 7%. The notes receivable are secured by
a mortgage on the facility. Also included in notes receivable at December 31,
2000 is $1,182,000 related to the sale of certain parcels of land and a
building at the Company's AIL subsidiary in June 2000, of which $52,000 is
included in current assets. The gain on the sale was not material as the
carrying value approximated the sales value.
(6) Inventories
Inventories are summarized by major classification as follows at December 31,
1999 and 2000:
1999 2000
------- -------
(in thousands)
Raw material and supplies...................................... $ 4,475 $ 7,431
Work-in-process................................................ 7,182 16,170
Finished goods................................................. 531 1,313
------- -------
$12,188 $24,914
======= =======
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(7) Property, Plant and Equipment, Net
The Company's property, plant and equipment at December 31, 1999 and 2000, and
their related useful lives are summarized as follows:
1999 2000 Life
------- ------- -----------
(in thousands)
Land............................................... $ -- $18,080
Buildings and improvements......................... -- 26,244 10-30
Machinery and equipment............................ 28,568 39,859 3-19 years
Leasehold improvements............................. 8,789 10,245 Lease terms
------- ------- -----------
37,357 94,428
Less accumulated depreciation and amortization..... 27,139 36,943
------- -------
$10,218 $57,485
======= =======
(8)Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following at December
31, 1999 and 2000:
1999 2000
------- -------
(in thousands)
Trade payables................................................. $ 4,065 $ 5,463
Employee compensation and benefits............................. 3,596 13,474
Income taxes payable........................................... 3,410 6,604
Current portion of environmental obligation.................... 434 369
Indemnification liability...................................... 2,280 577
Other.......................................................... 9,323 17,573
------- -------
$23,108 $44,060
======= =======
(9) Long-Term Debt and Line of Credit
Long-term debt of the Company at December 31, 2000 consisted of the 7%
Convertible Subordinated Debentures Due 2011 that were issued in November 1986
and term debt under the Company's credit facility. At December 31, 1999, long-
term debt was comprised solely of the debentures. 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. During 1999 and
2000, the Company purchased $1.6 million and $2.1 million, respectively, of the
debentures for $1.4 million and $1.9 million, respectively, and recognized a
gain of $0.2 million and $0.2 million, respectively, which is included in other
non-operating income in the accompanying consolidated statement of earnings. As
of December 31, 2000, the Company had $579,000 of these debentures remaining in
treasury, which may be used to satisfy a portion of the sinking fund
requirements for 2001. The remaining amount due in 2001 of $1,171,000 is
reflected in the current portion of long-term debt. The carrying value of the
debentures as of December 31, 2000 is $25,671,000. The Company estimates the
fair value of the debentures as of December 31, 2000 to be approximately
$23,000,000 based on yields of comparable financial instruments and recent
transactions.
During the third quarter of 2000, the Company entered into a $69.0 million
long-term credit facility with a consortium of banks co-led by Mellon and EAB.
The credit facility includes $19.0 million in five-year term debt, payable in
quarterly installments of $950,000, and $50.0 million in revolving debt.
Proceeds from the term debt were used to repay then existing term debt acquired
as a result of the EDO-AIL merger. The agreement expires on June 30, 2005 and
provides that the portion available for potential cash borrowings from
revolving debt be reduced by the amount of outstanding letters of credit. As of
December 31, 2000, the Company has outstanding approximately $20.2 million of
letters of credit. Borrowings under the agreement bear interest based on LIBOR
plus applicable margin of up to 2.00% depending on the consolidated leverage
ratio as defined in the agreement. There are certain covenants placed on the
Company that require that several predetermined ratios be maintained. At
December 31, 2000, the Company was in compliance with such covenants. In
addition, payments of quarterly common share dividends are limited to 50% of
consolidated net income in the preceding calendar quarter. This obligation is
secured by the Company's accounts receivable, inventory, machinery and
equipment. Borrowings under this agreement are senior to the debentures
described above. As of December 31, 2000, the Company has $17.1 million of term
debt outstanding, of which $3.8 million is included in the current portion of
long-term debt.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
Principal maturities of the term loan and sinking fund requirements for the
debentures for the years ending December 31 are as follows:
2001................... $ 4,971
2002................... 5,550
2003................... 5,550
2004................... 5,550
2005................... 3,650
Thereafter............. 17,500
-------
Total................. $42,771
=======
The Company and a bank have an interest rate swap arrangement which extends
through September 30, 2002. Pursuant to the agreement, a portion of the
Company's term loan will be fixed at 5.99% interest. Gains and losses resulting
from the interest rate swap arrangement are recorded as adjustments to interest
expense in the period to which they relate.
(10) Employee Stock Ownership Plan and Trust
The Company sponsors two Employee Stock Ownership plans: the existing EDO
Employee Stock Ownership Plan ("EDO ESOP"); and the AIL Employee Stock
Ownership Plan ("AIL ESOP") that was acquired in connection with the EDO-AIL
merger. These two plans were merged into a single plan effective as of January
1, 2001 ("merged ESOP"), and the existing preferred shares from the former EDO
ESOP were converted into 1,067,281 common shares as of March 8, 2001. The
merged ESOP provides retirement benefits to substantially all employees. A
discussion of each prior plan follows.
EDO ESOP
During 1988, the EDO Employee Stock Ownership Trust ("EDO 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 ($185 at December 31, 2000) divided
by the current market price of each common share. As of December 31, 2000,
71,270 preferred shares have been allocated, 18,502 preferred shares remained
unallocated, and 40,543 of the allocated preferred shares have been converted
into 1,111,398 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. Upon redemption, preferred shares will be exchanged
for common shares, which will vote along with all other outstanding common
shares. The EDO ESOP provides for pass-through of voting rights to the EDO ESOP
participants and beneficiaries.
The EDO ESOT purchased the preferred shares from the Company using the
proceeds of a borrowing guaranteed by the Company. The EDO 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 EDO ESOT are to be made in quarterly installments
through 2003. Interest is charged at 82% of the prime lending rate. During
1998, 1999 and 2000, respectively, the Company's cash contributions and
dividends on the preferred shares were used to repay principal of $1,413,000,
$1,526,000 and $1,648,000 and pay interest of $693,000, $541,000 and $504,000.
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 EDO ESOT loan
through redemption of the preferred shares at $213.71 per share upon the
occurrence of certain prepayment events.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
The EDO ESOT's borrowing guaranteed by the Company is reflected as a
liability on the accompanying consolidated balance sheets 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 EDO ESOT loan obligation, included in shareholders'
equity, will be reduced concurrently. During 1998, 1999 and 2000, respectively,
cash contributions of $1,020,000, $1,048,000 and $1,232,000 were made to the
EDO ESOP and were recorded as compensation expense. As of December 31, 2000,
there were 180,363 common shares in the EDO ESOP.
The fair value of the EDO ESOT obligation approximates book value since the
interest rate is prime-based and accordingly is adjusted for market rate
fluctuations.
AIL ESOP
The AIL ESOP held AIL common shares prior to the EDO-AIL merger which were
converted to EDO common shares. The cost basis of the unearned AIL ESOP shares
are recorded as a reduction to shareholders' equity, offsetting the increase in
the capital stock accounts. As AIL ESOP shares are committed to be released to
plan participants, the earned AIL ESOP shares are released from the unearned
AIL ESOP shares account based on the cost of the shares to the AIL ESOP. The
allocation to participants is based on (i) $600 per employee at the market
value of the common shares and (ii) pro rata based on compensation.
Compensation expense is recorded based on the market value of the Company's
common shares. The Company records the difference between the market value of
shares committed to be released and the cost of these shares to the AIL ESOP to
additional paid-in capital.
The Company recorded compensation expense of approximately $1.8 million
subsequent to the EDO-AIL merger and contributed approximately $2.0 million to
the AIL ESOP to cover the AIL ESOP's debt service requirements. At December 31,
2000, the 2,519,533 unearned AIL ESOP shares that have not been committed to be
released have an aggregate market value of approximately $18.6 million.
(11) Income Taxes
The 1998, 1999 and 2000 provision for income taxes for continuing operations
comprised the following amounts:
1998 1999 2000
---- ------ ------
(in thousands)
Federal
Current................................................... $930 $1,870 $3,042
Deferred.................................................. (50) 740 1,539
---- ------ ------
subtotal Federal........................................... $880 $2,610 $4,581
---- ------ ------
State
Current................................................... $ -- $ -- $ 930
Deferred.................................................. -- -- (247)
---- ------ ------
subtotal State............................................. $ -- $ -- $ 683
---- ------ ------
Total...................................................... $880 $2,610 $5,264
==== ====== ======
For the years ended 1998 and 1999, state franchise and alternative minimum
taxes were recorded in selling, general and administrative expenses in the
amount of $586,000 and $482,000, respectively.
The effective income tax rate differed from the statutory Federal income tax
rate for the following reasons:
Percentage of
Pretax Earnings
-----------------
1998 1999 2000
----- ---- ----
Tax at statutory rate... 34.0% 34.0% 34.0%
State taxes net of
Federal benefit........ -- -- 9.3
Write-off of purchased
in-process research and
development............ -- -- 34.6
Non-deductible
goodwill............... -- -- 3.8
Preferred share
dividends.............. (2.0) (2.1) (2.6)
Decrease in valuation
allowance.............. (16.0) -- --
Foreign sales
corporation benefit.... (1.7) (3.3) (2.1)
Other, net.............. (6.5) 1.4 2.9
----- ---- ----
Effective income tax
rate................... 7.8% 30.0% 79.9%
===== ==== ====
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
The items that comprise the significant portions of deferred tax assets and
liabilities as of December 31, 1999 and 2000 are as follows:
1999 2000
------- -------
(in thousands)
Deferred Tax Assets
Postretirement benefits obligation other than pensions....... $ 1,157 $ 5,936
Federal tax credits related to R&D and alternative minimum
tax......................................................... 3,797 2,043
Executive compensation and other............................. -- 902
Deferred revenue............................................. -- 1,815
Loss on sale of discontinued operations...................... 1,666 --
Deferred compensation........................................ 1,723 2,021
Capital loss carryforwards................................... 976 --
Inventory valuation.......................................... 573 1,979
Other........................................................ 1,158 1,686
------- -------
Total deferred tax assets.................................... 11,050 16,382
Less: Valuation allowance.................................... (976) --
------- -------
10,074 16,382
Deferred Tax Liabilities
Depreciation and amortization................................ 1,781 9,944
Identifiable intangible asset................................ 725 828
Prepaid pension asset........................................ 3,623 2,296
Prepaid real estate taxes.................................... -- 460
Other........................................................ 1,609 760
------- -------
Total deferred tax liabilities............................... 7,738 14,288
------- -------
Net deferred tax asset....................................... $ 2,336 $ 2,094
======= =======
Research and development credits expire in the years 2008 and 2009. A
valuation allowance had been established at December 31, 1999 for the portion
of the deferred tax asset representing capital loss carryforwards. Such
carryforwards have expired in 2000.
(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, 2000, the Company had acquired
approximately 3,957,000 common shares in open market transactions at prevailing
market prices. Approximately 2,589,000 of these shares have been used for
various purposes, including: conversion of preferred shares; contributions of
common shares to the EDO 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, 1999 and 2000,
respectively, the Company held 1,693,867 and 1,370,222 common shares in its
treasury for future use.
At December 31, 2000, the Company had reserved, authorized and unissued
common shares for the following purposes:
Shares
---------
Conversion of 7% Convertible Subordinated Debentures Due 2011......... 1,166,747
Stock option and long-term incentive plans............................ 1,270,675
Conversion of preferred shares........................................ 993,000
---------
3,430,422
=========
(13) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
1998 1999 2000
------ ------ -------
(in thousands)
Numerator:
Earnings from continuing operations available for common
shares................................................. $9,284 $5,084 $ 440
Impact of assumed conversion of preferred shares........ 125 153 119
------ ------ -------
Numerator for diluted calculation....................... $9,409 $5,237 $ 559
------ ------ -------
Denominator:
Denominator for basic calculation....................... 6,549 6,701 9,601
Dilutive effect of stock options........................ 155 56 68
Dilutive effect of conversion of preferred shares....... 1,081 1,275 993
------ ------ -------
Denominator for diluted calculation..................... 7,785 8,032 10,662
====== ====== =======
The assumed conversion of the convertible debentures was anti-dilutive for
all periods presented.
(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
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
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 1999 2000
------------------------------- ------------------------------- -------------------------------
Weighted Average Shares Subject Weighted Average Shares Subject Weighted Average Shares Subject
Exercise Price to Option Exercise Price to Option Exercise Price to Option
---------------- -------------- ---------------- -------------- ---------------- --------------
Beginning of year....... $ 6.55 688,950 $6.72 680,950 $6.61 612,350
Options granted......... 8.66 100,750 8.42 21,000 6.58 428,121
Options exercised....... 6.29 (87,600) 3.42 (10,500) 4.87 (19,775)
Options
expired/cancelled...... 11.21 (21,150) 8.43 (79,100) 7.46 (172,485)
------- ------- --------
End of year............. $ 6.72 680,950 $6.61 612,350 $6.46 848,211
======= ======= ========
Exercisable at year
end.................... $6.03 517,795
========
The options outstanding as of December 31, 2000 are summarized as follows:
Weighted Weighted
Range of Average Number of Average
Exercise Exercise Options Remaining
Prices Price Outstanding Life
-------- -------- ----------- ---------
$3.07-5.69 $3.81 147,500 4 years
6.13-8.69 7.01 695,711 7 years
9.09 9.09 5,000 7 years
-------
848,211
=======
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, 2000, plan participants had been awarded 358,500
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, 1999 and 2000 was $401,000, $401,000 and $738,000,
respectively. As of December 31, 2000, 422,464 shares are available for
additional awards.
The per share weighted-average fair value of stock options granted was
$2.58, $3.17 and $3.22 in 1998, 1999 and 2000, 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; 1999--expected dividend yield of 2.0%, risk free interest rate of
6.5%, expected stock volatility of 30%, and an expected option life of 7 1/2
years; 2000--expected dividend yield of 1.3%, risk free interest rate of 6.5%,
expected stock volatility of 42%, and an expected option life of 7 1/2 years.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
The Company applies APB Opinion No. 25 in accounting for its stock option
grants and, accordingly, no compensation cost has been recognized in the
consolidated 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,
"Accounting for Stock-Based Compensation," 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 1999 2000
------- ------ ------
(in thousands, except
per share amounts)
Earnings from continuing operations:
As reported............................................. $10,347 $6,084 $1,321
Pro forma............................................... 10,054 5,778 1,139
Basic earnings per common share:
As reported............................................. $ 1.42 $ 0.76 $ 0.05
Pro forma............................................... 1.37 0.71 0.03
Diluted earnings per common share:
As reported............................................. $ 1.21 $ 0.65 $ 0.05
Pro forma............................................... 1.17 0.61 0.03
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) Retirement Plans
The Company maintains noncontributory defined benefit pension plans 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.
EDO Plans
The net pension income for 1998, 1999 and 2000 was $2,192,000, $2,233,000 and
$4,235,000, respectively. The expected long-term rate of return on plan assets
was 9.0% in 1998, 1999 and 2000. The actuarial computations assumed a discount
rate on benefit obligations at December 31, 1999 and 2000 of 7.5%. 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 1999 2000
------- ------- -------
(in thousands)
Service cost........................................ $(1,495) $(1,544) $(1,189)
Interest on projected benefit obligation............ (6,124) (5,970) (6,087)
Expected return on plan assets...................... 9,586 9,732 10,328
Amortization of transitional assets................. 8 8 8
Amortization of prior service cost.................. (208) (208) (102)
Amortization of gain................................ 425 215 1,277
------- ------- -------
Net pension income.................................. $ 2,192 $ 2,233 $ 4,235
======= ======= =======
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
In 1999, in connection with the sale of the Company's satellite products
business (Note 3), the Company recognized an aggregate settlement/ curtailment
gain of $950,000.
The following sets forth the funded status of the plan as of December 31:
1999 2000
-------- --------
(in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year........... $ 95,253 $ 83,368
Service cost................................................ 1,544 1,189
Interest cost............................................... 5,970 6,087
Benefits paid............................................... (5,881) (6,106)
Actuarial gain.............................................. (10,662) (3,114)
Settlement/curtailment gain................................. (2,856) --
-------- --------
Projected benefit obligation at end of year................. $ 83,368 $ 81,424
Change in plan assets:
Fair value of plan assets at beginning of year.............. 111,435 117,961
Actual return on plan assets................................ 15,032 (8,892)
Benefits paid............................................... (5,881) (6,106)
Expected transfer of settlement/curtailment assets.......... (2,625) --
-------- --------
Fair value of plan assets at end of year.................... $117,961 $102,963
-------- --------
Funded status............................................... $ 34,593 $ 21,539
Unrecognized net gain....................................... (24,528) (7,146)
Unrecognized prior service cost............................. 607 506
Unrecognized net assets..................................... (16) (8)
-------- --------
Prepaid pension cost (in other assets)...................... $ 10,656 $ 14,891
======== ========
In addition, in 1988, the Company established a supplemental defined benefit
plan for substantially all employees. In 1998, 1999 and 2000, the net pension
expense for this plan was approximately $127,000, $130,000, and $162,000,
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, 1999 and 2000
were $672,000, $602,000 and $625,000, respectively.
AIL Plans
AIL Defined Benefit Pension Plan
The net pension income for the period subsequent to the EDO-AIL merger which is
included in the consolidated financial statements was $385,000. The expected
long-term rate of return on plan assets was 10.0%. The actuarial computations
assumed a discount rate on benefit obligations at December 31, 2000 of 7.5%.
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 for the period
subsequent to the EDO-AIL merger included in the consolidated financial results
follows:
(in thousands)
Service cost..................................................... $(1,630)
Interest cost.................................................... (5,273)
Expected return on plan assets................................... 7,288
-------
Net pension income............................................... $ 385
=======
The following sets forth the funded status of the AIL Defined Benefit
Pension Plan as of December 31, 2000:
(in thousands)
Change in projected benefit obligation:
Projected benefit obligation at April 30, 2000 (date of
purchase of AIL Technologies, Inc.)........................... $117,721
Service cost................................................... 1,630
Interest cost.................................................. 5,273
Benefits paid.................................................. (5,450)
Actuarial gain................................................. (3,898)
--------
Projected benefit obligation at end of year.................... $115,276
--------
Change in plan assets:
Fair value of plan assets at April 30, 2000.................... $112,518
Actual return on plan assets................................... 4,387
Benefits paid.................................................. (5,450)
--------
Fair value of plan assets at end of year....................... $111,455
--------
Funded status.................................................. $ (3,821)
Unrecognized net gain.......................................... (997)
--------
Accrued benefit cost........................................... $ (4,818)
========
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
AIL Non-Qualified Plan
The AIL Non-Qualified Plan is a defined benefit plan which provides
supplemental benefits to certain participants who are covered by the qualified
defined benefit plan. Benefits are based on years of service and certain
compensation that is excluded under the qualified plan. In 2000, the net
pension expense for this plan subsequent to the EDO-AIL merger was $93,000.
401(k) Plans
In 2000, there were four 401(k) plans sponsored by the Company that covered
substantially all employees. Certain of these plans provide for matching
contributions at the Company's discretion. Such matching contributions were not
material for the three years in the period ended December 31, 2000.
(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 as benefits are provided, 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.
EDO Postretirement Benefit Plan
Postretirement health care and life insurance expense included the following
components:
1998 1999 2000
---- ---- ----
(in thousands)
Service cost.................................................... $ 41 $ 80 $ 57
Interest cost................................................... 237 276 239
Amortization of net unrecognized loss........................... -- 43 --
---- ---- ----
Total postretirement health care and life insurance expense..... $278 $399 $296
==== ==== ====
In 1999 in connection with the sale of the Company's satellite products
business (Note 3), the Company recognized a curtailment gain of $47,000.
The funded status and breakdown of the postretirement health care and life
insurance benefits are as follows as of December 31:
1999 2000
------ ------
(in
thousands)
Change in accumulated postretirement benefit obligation:
Accumulated benefit obligation at beginning of year........... $3,572 $3,402
Service cost.................................................. 80 57
Interest cost................................................. 276 239
Benefits paid................................................. (419) (380)
Participant contributions..................................... 26 33
Actuarial loss (gain)......................................... 695 (124)
Change in discount rate....................................... (208) --
Effect of curtailment......................................... (620) --
------ ------
Unfunded accumulated postretirement benefit obligation at end
of year...................................................... $3,402 $3,227
Unrecognized net gain......................................... -- 124
------ ------
Accrued postretirement benefit cost........................... $3,402 $3,351
====== ======
Actuarial assumptions used in determining the accumulated postretirement
benefit obligation include a discount rate of 7.5% at December 31, 1999 and
2000 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.
AIL Postretirement Benefit Plan
Postretirement expense for the period subsequent to the EDO-AIL merger included
in the consolidated financial statements comprised the following:
(in thousands)
Service cost..................................................... $ 53
Interest cost.................................................... 468
----
Total postretirement expense..................................... $521
====
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
The funded status and breakdown of the postretirement benefits are as
follows as of December 31, 2000:
(in thousands)
Change in accumulated postretirement benefit obligation:
Accumulated benefit obligation at April 30, 2000 (date of
purchase of AIL Technologies, Inc.)........................... $9,422
Service cost................................................... 53
Interest cost.................................................. 468
Benefits paid.................................................. (70)
Actuarial gain................................................. (997)
------
Unfunded accumulated postretirement benefit obligation at end
of year....................................................... $8,876
Unrecognized net gain.......................................... 997
------
Accrued postretirement benefit cost............................ $9,873
======
Actuarial assumptions used in determining the accumulated postretirement
benefit obligation include a discount rate of 7.5% at December 31, 2000.
(17) Commitments and Contingencies
The Company is contingently liable under the terms of letters of credit (Note
9) aggregating approximately $20,198,000 at December 31, 2000, should it fail
to perform in accordance with the terms of its contracts with foreign
customers.
At December 31, 2000, the Company and its subsidiaries were obligated under
building and equipment leases expiring between 2001 and 2012. The aggregate
future minimum lease commitments under those obligations with noncancellable
terms in excess of one year are as follows:
2001--$4,452,000
2002--$4,135,000
2003--$3,490,000
2004--$2,184,000
2005--$1,860,000
Thereafter--$6,737,000
Rental expense for continuing operations under such leases for the years
ended December 31, 1998, 1999 and 2000 amounted to $2,412,000, $2,885,000 and
$3,885,000, respectively.
(18) Legal Matters
The Company and three other companies entered into a consent decree in 1990
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 and, accordingly, no liability has been recorded by the
Company. The Company believes that the aggregate amount of the obligation and
timing of cash payments associated with the two operable units subject to the
consent decree are reasonably fixed and determinable. Accordingly, the
environmental obligation has been discounted at five percent. Management
estimates that as of December 31, 2000, the discounted liability over the
remainder of the twenty-five years related to these two operable units is
approximately $2.4 million of which approximately $0.4 million has been
classified as current and is included in accounts payable and accrued
liabilities. Approximately $0.7 million of the $2.4 million liability will be
incurred over the next five years. In 1997 and 1998, the Company settled with
one of its insurance carriers for $2.9 million, and $2.2 million net of
associated costs of $0.3 million, respectively, which was recorded as
litigation settlement income. All $5.1 million 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 determines its operating segments based upon an analysis of its
products and services, production processes, types of customers, economic
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
characteristics, and the related regulatory environment. The Company's
continuing operations are conducted in three business segments: Defense,
Communications and Space Products and Engineered Materials. The Defense segment
provides integrated front-line warfighting systems, including radar
countermeasure systems, aircraft weapons storage and release systems, airborne
mine countermeasure systems and sonar systems. The Communications and Space
Products segment addresses the needs of the remote sensing, communication,
navigation and electronic warfare industries with ultra-miniature electronics
and a broad line of antennas. The Engineered Materials segment supplies
piezoelectric ceramics and advanced composites for the communication,
navigation, chemical, petrochemical, paper and oil industries for civilian
infrastructure and for the military.
Domestic government sales, which include sales to prime contractors of the
government, amounted to 50%, 48% and 63% of net sales, which were 57%, 58% and
70% of Defense's net sales, 0%, 0% and 60% of Communications and Space
Products' net sales and 36%, 26% and 33% of Engineered Materials' net sales for
1998, 1999 and 2000, respectively. Export sales comprised 32%, 34% and 18% of
net sales for 1998, 1999 and 2000, respectively.
Principal products and services by segment are as follows:
Defense Segment
. Electronic Warfare
. Environmental Products
. Aircraft Stores Suspension and Release Equipment
. Airborne Mine Countermeasures Systems
. Integrated Combat Systems
. Command, Control and Communications Systems
. Undersea Systems
. Technology Services
. Interference Cancellation
Communications and Space Products Segment
. Antenna Products
. Space Sensor and Communications Products
Engineered Materials Segment
. Electro-Ceramic Products
. Advanced Fiber Composite Structural Products
1998 1999 2000
-------- -------- --------
(in thousands)
Net sales from continuing operations:
Defense......................................... $ 53,785 $ 66,381 $147,045
Communications and Space Products............... -- -- 25,026
Engineered Materials............................ 27,618 31,555 34,751
-------- -------- --------
$ 81,403 $ 97,936 $206,822
-------- -------- --------
Operating earnings from continuing operations:
Defense......................................... $ 5,966 $ 7,012 $ 17,457
Communications and Space Products............... -- -- (11,516)
Engineered Materials............................ 3,589 2,237 3,298
Litigation settlement income.................... 2,200 -- --
-------- -------- --------
$ 11,755 $ 9,249 $ 9,239
Net interest expense............................. (428) (785) (2,438)
Other (expense) income, net...................... (100) 230 (216)
-------- -------- --------
Earnings before income taxes..................... $ 11,227 $ 8,694 $ 6,585
-------- -------- --------
Identifiable assets:
Defense......................................... $ 33,511 $ 43,455 $111,868
Communications and Space Products............... -- -- 32,666
Engineered Materials............................ 23,368 26,522 29,139
Net assets of discontinued operations........... 19,820 8,139 --
Corporate....................................... 47,931 46,375 40,581
-------- -------- --------
$124,630 $124,491 $214,254
======== ======== ========
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
1998 1999 2000
------ ------ ------
(in thousands)
Depreciation and amortization:
Defense.................................................. $ 935 $1,331 $5,150
Communications and Space Products........................ -- -- 1,857
Engineered Materials..................................... 1,068 1,653 1,882
Corporate................................................ 340 406 552
------ ------ ------
$2,343 $3,390 $9,441
------ ------ ------
Capital Expenditures:
Defense.................................................. $2,100 $1,114 $1,679
Communications and Space Products........................ -- -- 450
Engineered Materials..................................... 1,021 2,890 1,705
Corporate................................................ 12 28 27
------ ------ ------
$3,133 $4,032 $3,861
====== ====== ======
In 2000, the costs related to the write-off of purchased in-process research
and development and other merger-related costs attributable to the EDO-AIL
merger are included in the segments as follows:
(in thousands)
Defense......................................................... $ 3,342
Communications and Space Products............................... 7,595
Engineered Materials............................................ 558
-------
Total.......................................................... $11,495
=======
F-28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
EDO Corporation
We have audited the accompanying consolidated balance sheet of EDO
Corporation and subsidiaries as of December 31, 2000, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2000 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of EDO
Corporation and subsidiaries at December 31, 2000 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
New York, New York
February 26, 2001
F-29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
EDO Corporation
We have audited the accompanying consolidated balance sheet of EDO
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1999. 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, 1999, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Melville, New York
February 15, 2000
F-30
REPORT OF MANAGEMENT
Management is responsible for the preparation of EDO Corporation's
consolidated financial statements and all related information appearing in the
Company's Annual Report on Form 10-K. The consolidated financial statements and
notes have been prepared in conformity with accounting principles generally
accepted in the United States and include certain amounts that are estimates
based upon currently available information and management's judgment of current
conditions and circumstances.
To provide reasonable assurance that assets are safeguarded against loss
from unauthorized use or disposition and that accounting records are reliable
for preparing financial statements, management maintains a system of accounting
and other controls. However, even an effective internal control system, no
matter how well designed, has inherent limitations--including the possibility
of circumvention or overriding of controls--and, therefore, can provide only
reasonable assurance with respect to financial statement presentation. The
system of accounting and other controls is improved and modified in response to
changes in business conditions and operations and recommendations made by the
independent auditors.
The Audit Committee of the Board of Directors, which is composed of
directors who are not employees, meets periodically with management, and the
independent auditors to review the manner in which these groups are performing
their responsibilities and to carry out the Audit Committee's oversight role
with respect to auditing, internal controls and financial reporting matters.
The independent auditors periodically meet privately with the Audit Committee
and have access to its individual members.
EDO engaged Ernst & Young LLP, independent auditors, to audit the
consolidated financial statements in accordance with auditing standards
generally accepted in the United States, which include consideration of the
internal control structure. Their report appears on the previous page.
James M. Smith Darrell L. Reed
------------------------------------- -------------------------------------
James M. Smith President and Chief Darrell L. Reed
Executive Officer Vice President and Chief Financial
Officer
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited quarterly financial information for
1999 and 2000 (in thousands, except per share amounts).
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- ---------------- ----------------
1999 2000 1999 2000 1999 2000 1999 2000
------- ------- ------- ------- ------- ------- ------- -------
Net sales from
continuing operations.. $23,022 $29,002 $23,661 $56,593 $23,812 $59,979 $27,441 $61,248
Net earnings (loss):
Continuing operations.. 1,188 2,130 1,320 (3,319)a 1,677 38b 1,899 2,472c
Discontinued
operations............ 232 -- 211 -- (3,509) -- (998) --
------- ------- ------- ------- ------- ------- ------- -------
Total................. 1,420 2,130 1,531 (3,319) (1,832) 38 901 2,472
Earnings (loss) per
share:
Basic:
Continuing operations.. 0.14 0.28 0.16 (0.37) 0.21 (0.02) 0.25 0.20
Discontinued
operations............ 0.03 -- 0.03 -- (0.52) -- (0.15) --
------- ------- ------- ------- ------- ------- ------- -------
Total................. 0.17 0.28 0.19 (0.37) (0.31) (0.02) 0.10 0.20
Diluted:
Continuing operations.. 0.12 0.24 0.14 (0.37) 0.18 (0.02) 0.21 0.19
Discontinued
operations............ 0.03 -- 0.02 -- (0.43) -- (0.12) --
------- ------- ------- ------- ------- ------- ------- -------
Total................. 0.15 0.24 0.16 (0.37) (0.25) (0.02) 0.09 0.19
Preferred dividends
paid.................. 259 245 249 213 247 212 245 211
a. Includes write-off of purchased in-process research and development costs of
$6,700 and merger-related costs of $2,243.
b. Includes merger-related costs of $932.
c. Includes merger-related costs of $1,620.
F-31
Photographs showing EDO Corporation's products and equipment which incorporates
those products:
Universal Exciter radar jamming equipment for EA-6B aircraft
A ship-towed sonar system used for operations close to shore against submarines
A U.S. Navy EA-6B aircraft on takeoff
A fiber composite structure
An antenna used to determine target direction
Personnel supporting document conversion, computers and logistics
Manufacture of electronic warfare semiconductor device
An F-16 aircraft displaying double capacity bomb racks for precision weapons
Ceramic shapes used to convert acoustic energy to and from electrical energy
Equipment to enhance clear communications in high interference environments
A computer displaying integrated combat system
[LOGO] EDO Corporation
4,500,000 Common Shares
--------------
PROSPECTUS
October 25, 2001
--------------
Wachovia Securities
SG Cowen
(Joint Lead Managers)