S-3 1 ds3.txt FORM S-3 As filed with the Securities and Exchange Commission on September 21, 2001. Registration No. 333- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 EDO CORPORATION (Exact name of registrant as specified in its charter) New York 3812 11-0707740 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.) of incorporation or Classification Code Number) organization)
60 East 42nd Street Suite 5010 New York, NY 10165 (212) 716-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) James M. Smith President and Chief Executive Officer 60 East 42nd Street Suite 5010 New York, NY 10165 (212) 716-2000 (Name, address including zip code, and telephone number, including area code, of agent for service) With copies to: Christopher G. Karras, Esq. Eric S. Haueter, Esq. Sarah B. Gelb, Esq. Sidley Austin Brown & Wood llp Dechert 555 California Street 4000 Bell Atlantic Tower San Francisco, CA 94104 1717 Arch Street (415) 772-1231 Philadelphia, PA 19103 (215) 994-4000
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
Proposed maximum Proposed maximum Title of each class of Number of offering aggregate securities to be shares to be price per share offering Amount of registered registered (1) (2) price registration fee ------------------------------------------------------------------------------------------- Common shares, $1 par value.................. 4,600,000 $24.155 $111,113,000 $27,779.00
-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (1) Includes 600,000 shares which the underwriters will have the option to purchase from the registrant to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended. Based on the average of the high and low prices of the common shares reported on the New York Stock Exchange on September 18, 2001. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended or until this registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion Preliminary Prospectus, dated September 21, 2001 PROSPECTUS 4,000,000 [LOGO EDO Corporation] Common Shares -------------------------------------------------------------------------------- We are offering 1,700,000 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, 2,300,000 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." The last reported sale price of our common shares on September 19, 2001 was $24.29 per share. -------------------------------------------------------------------------------- Investing in our common shares involves risks. See "Risk Factors" beginning on page 7 of this prospectus.
Per share Total ----- ----- Public offering price.............................................. $ $ Underwriting discounts and commissions............................. $ $ Proceeds, before expenses, to us................................... $ $ Proceeds, before expenses, to the selling shareholder.............. $ $
We have granted the underwriters a 30-day option to purchase up to an additional 600,000 of our common shares to cover over-allotments, at the public offering price, less the underwriting discount. 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. The shares will be ready for delivery on or about , 2001. -------------------------------------------------------------------------------- First Union Securities, Inc. SG Cowen The date of this prospectus is , 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 Underwriting............................................................. 46 Legal Matters............................................................ 48 Experts.................................................................. 48 Where You Can Find More Information...................................... 48 Incorporation by Reference............................................... 49 Index to 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 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 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. 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............................ 1,700,000 shares The selling shareholder is offering........ 2,300,000 shares Common shares to be outstanding after this offering.................................. 16,536,294 shares Use of proceeds............................ We intend to use our net proceeds to retire portions of our outstanding debt obligations, for potential acquisitions and 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: . 600,000 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 $ 23,561 Working capital.......................... 37,552 41,670 63,701 Total assets............................. 214,254 208,462 226,693 Total debt(4)............................ 49,444 43,299 23,208 Shareholders' equity..................... 65,818 74,680 113,002
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 1,700,000 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 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. 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. 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 9 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. 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 6,298,477 common shares (or 42% of the outstanding common shares), of which 2,300,000 are being sold in this offering. The EDO ESOP will control 21% 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 Bylaws 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 $6.94 per share to $22.95 per share since August 31, 2000. Our average weekly trading volume for the twelve months ended August 31, 2001 was about 283,826 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; 10 . 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 16,536,294 common shares outstanding (based upon shares outstanding as of June 30, 2001) or 17,136,294 if the underwriters exercise their over-allotment option in full. All of these shares, including the 4,000,000 shares offered hereby (or 4,600,000 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), have entered into lock-up agreements with the underwriters pursuant to which the holders have agreed 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 $38.3 million from the sale of the 1,700,000 common shares offered by us in this offering, or about $52.1 million from the sale of the 2,300,000 common shares if the underwriters exercise their over-allotment option in its entirety, at an assumed public offering price of $24.29 per share (based on the last reported sale price for our common shares on the New York Stock Exchange on September 19, 2001) 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 2,300,000 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 (through September 19, 2001)..................... 28.00 14.90
On September 19, 2001, the last reported sale price of our common shares on the New York Stock Exchange was $24.29 per share. There were about 2,238 record holders and about 3,000 beneficial holders, excluding particpants in the EDO ESOP, of our common shares as of August 31, 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 1,700,000 shares of common shares offered by us in this offering at an assumed price of $24.29 per share (based on the last reported sale price for our common shares of the New York Stock Exchange on September 19, 2001 and 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 $ 23,561 ======== ======== 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; 17,774,377 shares issued, as adjusted.................. 16,074 17,774 Additional paid-in capital.............................. 56,980 93,602 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.......................... 74,680 113,002 -------- -------- Total capitalization................................ $117,979 $136,210 ======== ========
-------- (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.
Six Months Ended Years Ended December 31, ----------------- -------------------------------------------- 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
Six Months Ended Years Ended December 31, ------------------ ----------------------------------------------- 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 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. 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. 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. 16 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. 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 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. 17 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 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 18 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 ======= =======
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 19 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 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. 20 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. 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. 21 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 August 31, 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 competing for two contracts to be awarded for the SDB program development, to develop the stores suspension and release mechanisms. . 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 have agreed to partner with Northrop Grumman 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 positioning 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.
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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 Brazil 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 to 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. To date, the AN/ALQ-99 program has generated more than $2 billion in revenues. 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 1970s and early 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. 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 2018. 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 positions on the Lockheed Martin and Raytheon teams 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 in 1967. In the early 1990s, we developed a significant upgrade under contract, followed by an initial production contract in 1995. During 1999, 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 by October 15, 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. 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 55% military and 45% 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 100,000 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. Three devices are in full-scale production, and another six devices are in development. We expect to be in production for 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 2005. 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 market 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 the year 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 August 24, 2001:
Name Age Position ---- --- -------- James M. Smith.......... 60 President and Chief Executive Officer; Director Darrell L. Reed......... 56 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....... 70 Chairman and Director Robert E. Allen......... 57 Director Robert Alvine........... 63 Director Mellon C. Baird......... 70 Director George M. Ball.......... 66 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 serves as the our principal interface with the senior leadership in the Administration, Congress, the DoD and other U.S. Government agencies. 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 August 24, 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) 41.39% 2,300,000 3,840,994 23.23% HSBC Bank USA 452 Fifth Avenue, 17th Floor New York, NY 10018-2706 Loomis Sayles & Co., L.P. .................. 991,192(24) 6.78 -- 991,192 5.99 One Financial Center Boston, MA 02111 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) * 5,075(16) 28,715 * 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) 2.94 5,704(30) 430,028 2.60 George A. Strutz, Jr.(2)................. 33,912(31) * -- * All directors and executive officers as a group(2)............... 1,216,586 8.20 45,610 1,170,976 7.08
-------- * 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 14,836,294 common shares outstanding as of June 30, 2001 and 16,536,294 shares outstanding immediately following the completion of this offering. (2) Some of the shares indicated are subject to stock options exercisable within 60 days of June 30, 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 ESOP, common shares which have been allocated to the account of a participant are required 43 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 such EDO 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 intends to direct 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 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 intends to direct 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 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 intends to direct 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 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 intends to direct the trustee of the ESOT to sell 5,075 shares beneficially owned by Mr. Frost held in his account under the 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 intends to direct the trustee of the ESOT to sell 3,000 shares beneficially owned by Mr. Hyde held in his account under the 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 intends to direct the trustee of the ESOT to sell 3,500 shares beneficially owned by Mr. Kresiberg held in his account under the 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. (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 intends to direct 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 ESOP. 44 (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 intends to direct 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 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 intends to direct 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 ESOP. (31) Includes 20,912 shares held jointly with Mr. Strutz's spouse and 13,000 shares subject to options exercisable within 60 days. 45 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...................................... SG Cowen Securities Corporation.................................. --------- Total.......................................................... 4,000,000 =========
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. 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 $ per share, of which $ 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................. Underwriting discounts and commissions.......................... Proceeds, before expenses, to us...... Proceeds, before expense, to the selling shareholder..................
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 600,000 additional common shares at the same price per share as we and the selling shareholder will receive for the 4,000,000 shares that the underwriters have agreed to purchase, less the underwriting discount shown on the cover page of this prospectus. To the extent 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 4,000,000 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 and the selling shareholder have agreed that, for a period of 90 days after the date of this prospectus, they will not, without the prior written consent of First Union Securities, Inc., 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 46 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, 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 have agreed that, for a period of 90 days after the date of this prospectus, we will not, without the prior written consent of First Union Securities, Inc., 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, and we may file a registration statement under the Securities Act with respect to any of these shares. First Union Securities, Inc., 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. 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. 47 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. 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, 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. 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 48 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 stock contained in our registration statement on Form 8-A filed with the SEC on November 9, 1983 under Section 12(g) of the Exchange Act, including any amendment or report filed for the purpose of updating such description; 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" immediately 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. 49 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Consolidated Balance Sheets.............................................. F-2 Consolidated Statement 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 38/b/ 1,899 2,472/c/ 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] 4,000,000 Common Shares -------------- PROSPECTUS , 2001 -------------- First Union Securities, Inc. SG Cowen (Joint Lead Managers) PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The expenses to be paid by EDO Corporation in connection with the distribution of the securities being registered, other than underwriting discounts and commissions, are as follows:
Amount (1) ---------- Securities and Exchange Commission Registration Fee............... $ 27,779 New York Stock Exchange Listing Fee............................... 25,650 Accounting Fees and Expenses...................................... 75,000 Blue Sky Fees and Expenses........................................ 1,000 Legal Fees and Expenses........................................... 300,000 Printing and Engraving Expenses................................... 250,000 Miscellaneous Fees and Expenses................................... 20,571 -------- Total............................................................. $700,000 ========
-------- (1) All amounts are estimates except the SEC filing fee and the New York Stock Exchange listing fee. Item 15. Indemnification of Directors and Officers With certain limitations, Sections 721 through 726 of the Business Corporation Law of the State of New York permit a corporation to indemnify any of its directors or officers made, or threatened to be made, a party to an action or proceeding by reason of the fact that such person was a director or officer of such corporation unless a judgment or other final adjudication adverse to the director or officer establishes that his or her acts were committed in bad faith or were the result of active and deliberative dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact financial profit or other advantage to which he or she was not legally entitled. Section 402(b) of the Business Corporation Law of the State of New York permits New York corporations to eliminate or limit the personal liability of directors to the corporation or its shareholders for damages for any breach of duty in such capacity except liability (i) of a director (a) whose acts or omissions were in bad faith, involved intentional misconduct or a knowing violation of law, (b) who personally gained a financial profit or other advantage to which he or she was not legally entitled or (c) whose acts violated certain other provisions of New York law or (ii) for acts or omissions prior to May 4, 1988. Our bylaws provide that we shall indemnify any person made, or threatened to be made, a party to an action or proceeding (other than one by us or in our right to procure judgement in our favor), whether civil or criminal, including an action by or in the right of any other corporation which any one of our directors or officers served in any capacity at our request, by reason of the fact that he, his testator or interstate, was one of our directors or officers, or served such other corporation in any capacity, against judgements, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service of any other corporation, not opposed to, our best interests and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful. We shall indemnify any person made, or threatened to be made, a party to an action by us or in our right to procure a judgement in our favor by reason of the fact that he, his testator or interstate, is or was one of our directors or officers, or is or was serving at our request as a director or officer of any other company, against amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred by him in connection with the defense or settlement of such action, if such director or officer acted, in good II-1 faith, for a purpose which he reasonably believed to be in, or, in the case of service of any other corporation, not opposed to, our best interests, except that no indemnification shall be made in respect of a threatened action, or a pending action which is settled or otherwise disposed of, or any claim, issue or matter as to which such person shall have been adjudged to be liable to us, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, any court of competent jurisdiction, determines upon application that, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper. We have indemnification agreements with each of our directors [and executive officers] which sets forth the terms stated in the paragraph above for each individual. A form of these indemnification agreements is incorporated by reference to Exhibit 10(d) to our Annual Report on Form 10-K for the year ended December 31, 1996. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits Incorporated by reference to the Exhibit Index following page II-3. (b) Financial Statement Schedules None. Schedules have been omitted since they are not required or are not applicable or the required information is shown in the financial statements or related notes. Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range II-2 may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby undertakes: (1) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York on September 21, 2001. EDO CORPORATION James M. Smith By: _______________________________________ James M. Smith President and Chief Executive Officer
POWER OF ATTORNEY KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James M. Smith and Darrell L. Reed, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments (including post- effective amendments) to this Registration Statement and sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Ruling 462 promulgated under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Name Capacity Date ---- -------- ---- James M. Smith President and Chief Executive September 21, ____________________________________ Officer and Director 2001 James M. Smith (principal executive officer) Darrell L. Reed Vice President, Finance, September 21, ____________________________________ Treasurer, Chief Financial 2001 Darrell L. Reed Officer and Assistant Secretary (principal financial and accounting officer) Robert E. Allen Director September 21, ____________________________________ 2001 Robert E. Allen Robert Alvine Director September 21, ____________________________________ 2001 Robert Alvine
II-4
Name Capacity Date ---- -------- ---- Neil A. Armstrong Chairman and Director September 21, ____________________________________ 2001 Neil A. Armstrong Mellon C. Baird Director September 21, ____________________________________ 2001 Mellon C. Baird George M. Ball Director September 21, ____________________________________ 2001 George M. Ball Robert M. Hanisee Director September 21, ____________________________________ 2001 Robert M. Hanisee Michael J. Hegarty Director September 21, ____________________________________ 2001 Michael J. Hegarty Ronald L. Leach Director September 21, ____________________________________ 2001 Ronald L. Leach George A. Strutz, Jr. Director September 21, ____________________________________ 2001 George A. Strutz, Jr.
II-5 EXHIBIT INDEX
Exhibit Number Document ------- -------- 1* Underwriting Agreement by and among EDO Corporation, HSBC Bank USA, as the trustee of the EDO Employee Stock Ownership Plan, First Union Securities, Inc. and SG Cowen Securities Corporation. 2(a) Agreement and Plan of Merger by and among EDO Corporation, EDO Acquisition III Corporation and AIL Technologies, Inc. as amended and restated dated January 2, 2000, incorporated by reference to Exhibit 2(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 2(b) Management Stock Purchase Agreement dated as of January 2, 2000 between EDO Corporation as Buyer and eleven individuals as Sellers, relating to the purchase and sale of shares of common shares of AIL Technologies, Inc. incorporated by reference to Exhibit 2(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 2(c) Stock Purchase Agreement dated as of January 2, 2000 between EDO Corporation, as Buyer, and Defense Systems Holding Co., as Seller, relating to the purchase and sale of shares of common shares of AIL Technologies, Inc. incorporated by reference to Exhibit 2(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 5(a)* Opinion of Dechert 23(a) Consent of Ernst & Young LLP, Independent Auditors. 23(b) Consent of KPMG LLP, Independent Auditors. 23(c)* Consent of Dechert (included in the opinion filed as Exhibit 5(a)). 24(a) Power of Attorney (included on signature pages hereto).
-------- * To be filed by amendment