-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PjHHjo3zQD53j3duIkwjOOugFO1u813Ah+OqQEfWt8wHCM9tHTj09PTj5i1SdBQJ 30C5AsSS/xEtZgzB1mWPbA== 0000950123-01-505527.txt : 20010815 0000950123-01-505527.hdr.sgml : 20010815 ACCESSION NUMBER: 0000950123-01-505527 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDO CORP CENTRAL INDEX KEY: 0000031617 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 110707740 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03985 FILM NUMBER: 1708314 BUSINESS ADDRESS: STREET 1: 60 EAST 42ND STREET STREET 2: SUITE 5010 CITY: NEW YORK STATE: NY ZIP: 10165 BUSINESS PHONE: 2127162000 MAIL ADDRESS: STREET 1: 14 04 111TH ST CITY: COLLEGE POINT STATE: NY ZIP: 11356-1434 10-Q 1 y52421e10-q.txt EDO CORPORATION 1 Page 1 of 17 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-3985 EDO CORPORATION (Exact name of registrant as specified in its charter) New York No. 11-0707740 (State or other jurisdiction (I.R.S. Employee of incorporation or organization) Identification No.) 60 East 42nd Street, Suite 5010, New York, NY 10165 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 716-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding at June 30, 2001 - ------------------------------------- --------------------------------- Common shares, par value $1 per share 14,836,294 2 Page 2 EDO CORPORATION INDEX
Page No. Face Sheet 1 Index 2 Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 3 Consolidated Statements of Earnings - Three Months Ended June 30, 2001 and July 1, 2000 4 Consolidated Statements of Earnings - Six Months Ended June 30, 2001 and July 1, 2000 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and July 1, 2000 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Part II Other Information Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature 17
3 Page 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements EDO Corporation and Subsidiaries Consolidated Balance Sheets (in thousands, except share and per share amounts)
June 30, 2001 December 31, 2000 (unaudited) Assets Current assets: Cash and cash equivalents $ 5,142 $ 2,208 Marketable securities 188 14,413 Accounts receivable, less allowances 75,304 69,023 Inventories 26,618 24,914 Deferred tax asset, net 3,302 3,333 Prepayments and other 2,742 4,840 --------- --------- Total current assets 113,296 118,731 Property, plant and equipment, net 59,235 57,485 Notes receivable 3,081 3,254 Cost in excess of fair value of net assets acquired, net 10,359 14,724 Other assets 22,491 20,060 --------- --------- $ 208,462 $ 214,254 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 46,713 $ 44,060 Contract advances and deposits 20,684 31,719 Current portion of note payable 429 429 Current portion of long-term debt 3,800 4,971 --------- --------- Total current liabilities 71,626 81,179 Note payable 463 463 Long-term debt 33,716 37,800 Deferred income taxes, net 1,239 1,239 ESOT loan obligation 4,891 5,781 Postretirement benefits obligations 20,011 19,973 Environmental obligation 1,836 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, 49,229 issued in 2000 -- 49 Common shares, par value $1 per share, authorized 25,000,000 shares, issued 16,074,377 in 2001 and 15,007,096 in 2000 16,074 15,007 Additional paid-in capital 56,980 58,614 Retained earnings 39,661 34,803 Accumulated other comprehensive income (loss) -- (61) --------- --------- 112,715 108,412 Less: Treasury shares at cost (1,238,083 shares in 2001 and 1,370,222 shares in 2000) (16,733) (19,388) ESOT loan obligation (4,891) (5,781) Unearned ESOP shares (15,116) (15,782) Deferred compensation under Long-Term Incentive Plan (450) (423) Management group receivable (845) (1,220) --------- --------- Total shareholders' equity 74,680 65,818 --------- --------- $ 208,462 $ 214,254 ========= =========
See accompanying Notes to Consolidated Financial Statements. 4 Page 4 EDO Corporation and Subsidiaries Consolidated Statements of Earnings (in thousands, except per share amounts)
For the three months ended June 30, 2001 July 1, 2000 (unaudited) Net sales $ 66,776 $ 56,593 Costs and expenses Cost of sales 49,858 43,220 Selling, general and administrative 8,477 6,539 Research and development 2,190 1,552 Writeoff of purchased in-process research and development and merger-related costs 772 8,943 -------- -------- 61,297 60,254 -------- -------- Operating earnings (loss) 5,479 (3,661) Non-operating income (expense) Interest income 268 396 Interest expense (734) (1,012) Other, net 62 (75) -------- -------- (404) (691) -------- -------- Earnings (loss) before income taxes 5,075 (4,352) Federal Income tax (expense) benefit (1,980) 1,033 -------- -------- Earnings (loss) 3,095 (3,319) Dividends on preferred shares -- 213 -------- -------- Net earnings (loss) available for common shares $ 3,095 $ (3,532) ======== ======== Earnings (loss) per common share: Basic $ 0.25 $ (0.37) Diluted $ 0.24 $ (0.37) Weighted average common shares outstanding: Basic 12,370 9,661 ======== ======== Diluted 13,824 9,661 ======== ========
See accompanying Notes to Consolidated Financial Statements. 5 Page 5 EDO Corporation and Subsidiaries Consolidated Statements of Earnings (in thousands, except per share amounts)
For the six months ended June 30, 2001 July 1, 2000 (unaudited) Net sales $ 126,927 $ 85,595 Costs and expenses Cost of sales 94,768 65,078 Selling, general and administrative 16,285 10,009 Research and development 3,982 2,136 Write-off of purchased in-process research and development and merger-related costs 1,318 8,943 --------- --------- 116,353 86,166 --------- --------- Operating earnings (loss) 10,574 (571) Non-operating income (expense) Interest income 587 876 Interest expense (1,627) (1,640) Other, net 199 28 --------- --------- (841) (736) --------- --------- Earnings (loss) before income taxes 9,733 (1,307) Income tax (expense) benefit (3,795) 118 --------- --------- Earnings (loss) 5,938 (1,189) Dividends on preferred shares 194 458 --------- --------- Net earnings (loss) available for common shares $ 5,744 $ (1,647) ========= ========= Earnings (loss) per common share: Basic $ 0.48 $ (0.20) Diluted $ 0.46 $ (0.20) Weighted average common shares outstanding: Basic 11,905 8,211 ========= ========= Diluted 12,433 8,211 ========= =========
See accompanying Notes to Consolidated Financial Statements. 6 Page 6 EDO Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
For the six months ended June 30, 2001 July 1, 2000 (unaudited) Operating activities: Earnings (loss) $ 5,938 $ (1,189) Adjustments to earnings (loss) to arrive at cash used: Depreciation 4,876 2,617 Amortization 556 572 Write-off of purchased in-process research and development -- 6,700 Bad debt expense 18 70 Gain on repurchase of debentures (171) (129) Gain on sale of property, plant and equipment (56) (7) Gain on sale of marketable securities (81) -- Deferred compensation expense 121 312 ESOP compensation expense 1,115 399 Non-cash compensation expense 278 -- Common shares issued for directors' fees 87 28 Real estate tax assessment adjustment 7,846 -- Changes in, excluding effects of acquisition: Accounts receivable (6,114) (9,756) Inventories (1,704) 2,712 Prepayments and other assets (1,892) (3,603) Accounts payable and accrued liabilities (421) (4,762) Contract advances and deposits (11,035) 1,219 -------- -------- Cash used by continuing operations (639) (4,817) 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 (6,797) (1,407) Proceeds from sale of property, plant and equipment 226 5,858 Purchase of marketable securities (56) (414) Sale or redemption of marketable securities 14,454 500 -------- -------- Cash provided (used) by investing activities 8,000 (10,467) Financing activities: Proceeds from exercise of stock options 2,383 44 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 (1,900) (1,508) Repurchase of debentures (3,184) (1,386) Purchase of treasury shares (1,021) -- Payment of common share cash dividends (887) (610) Payment of preferred share cash dividends (194) (458) -------- -------- Cash used by financing activities (4,427) (5,918) Net increase (decrease) in cash and cash equivalents 2,934 (12,561) Cash and cash equivalents at beginning of year 2,208 13,799 -------- -------- Cash and cash equivalents at end of period $ 5,142 $ 1,238 ======== ======== Supplemental disclosures: Cash paid for: Interest $ 1,431 $ 919 Income taxes $ 4,770 $ 673
See accompanying Notes to Consolidated Financial Statements. 7 Page 7 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 filed by the Company on Form 10-K with the Securities and Exchange Commission on April 2, 2001. 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 from continuing operations $ 128,852 Net loss from continuing operations available for common shares $ (8,848) Basic loss per share from continuing operations $ (0.83)
8 Page 8 Inventories Inventories are summarized by major classification as follows:
June 30, 2001 Dec. 31, 2000 (in thousands) Raw materials and supplies $ 7,726 $ 7,431 Work-in-process 18,064 16,170 Finished goods 828 1,313 ------- ------- $26,618 $24,914 ======= =======
Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share.
Three months ended Six months ended June 30, July 1, June 30, July 1, 2001 2000 2001 2000 (in thousands) (in thousands) Numerator: Earnings (loss) available for common shares $ 3,095 $(3,532) 5,744 (1,647) Impact of assumed conversion of preferred shares -- -- 9 -- Interest expense avoided related to assumed conversion of subordinated debentures 274 -- -- -- ------- ------- ------- ------- Numerator for diluted calculation $ 3,369 $(3,532) 5,753 (1,647) ======= ======= ======= ======= Denominator: Weighted average common shares outstanding 12,370 9,661 11,905 8,211 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 13,824 9,661 12,433 8,211 ======= ======= ======= =======
9 Page 9 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 As of June 30, 2001, accumulated other comprehensive income (loss) included in the accompanying consolidated balance sheet represents unrealized holding gains (losses) on available-for-sale marketable securities. Comprehensive income for the three-and six-month period ended June 30, 2001 was $3,044,000 and $6,030,000, respectively. Comprehensive loss for the three- and six-month periods ended July 1, 2000 was $3,345,000 and $1,218,000, respectively. Business Segments EDO Corporation supplies highly engineered products for governments and industries 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.
Three months ended Six months ended June 30, July 1 June 30, July 1, 2001 2000 2001 2000 Net sales: Defense $ 49,081 $ 40,726 $ 93,766 $ 61,426 Communications and Space Products 8,551 7,624 15,063 7,624 Engineered Materials 9,144 8,243 18,098 16,545 -------- -------- -------- -------- $ 66,776 $ 56,593 $126,927 $ 85,595 ======== ======== ======== ========
10 Page 10 Operating earnings (loss): Defense $ 4,445 $ 3,460 $ 9,691 $ 5,911 Communications and Space Products 240 (7,476) (775) (7,476) Engineered Materials 794 355 1,658 994 -------- -------- -------- -------- 5,479 (3,661) 10,574 (571) Net interest expense (466) (616) (1,040) (764) Other, net 62 (75) 199 28 -------- -------- -------- -------- Earnings (loss) before income taxes $ 5,075 $ (4,352) $ 9,733 $ (1,307) ======== ======== ======== ========
Merger-related costs attributable to the EDO-AIL Merger are included in the segments as follows:
Six months ended Six months ended June 30, 2001 July 1, 2000 Defense $ 898 $1,563 Space and Communications Products 208 6,980 Engineered Materials 212 400 ------ ------ Total $1,318 $8,943 ====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following information should be read in conjunction with the Consolidated Financial Statements as of and for the period ended June 30, 2001, which reflect the results of operations of the Company including the EDO-AIL merger from April 28, 2000. Accordingly, the Company's results of operations for the three and six months ended June 30, 2001 and the Company's financial condition as of June 30, 2001 are significantly affected by this acquisition. Merger with AIL Technologies Inc. In January 2000, the Company announced that its Board of Directors approved the merger (the "EDO-AIL merger") of a wholly-owned subsidiary of the Company with AIL Technologies Inc. ("AIL"). The EDO-AIL merger, which was completed on April 28, 2000, was accounted for as a purchase and is included in the Company's results of operations from that date. The results of operations for the periods presented are materially affected by the inclusion of the results of AIL for the entire three- and six-month periods ended June 30, 2001 compared to a partial inclusion of the results of AIL for the three- and six-month periods ended July 1, 2000. 11 Page 11 Under the merger agreement and share purchase agreements with certain AIL shareholders, all of the outstanding common and preferred shares of AIL were exchanged or purchased for 6,553,194 newly issued EDO common shares valued at $39.4 million and a cash payment aggregating $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 ("AIL ESOP"). The AIL ESOP was EDO's largest shareholder, holding approximately 39% of EDO's outstanding common shares upon completion of the EDO-AIL merger. 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 approximately 1.1 million common shares. The merged ESOP held approximately 42% of EDO's outstanding common shares as of June 30, 2001. In conjunction with this plan merger, the trust under the AIL ESOP was merged with and into the trust under the EDO ESOP effective June 30, 2001. Three Months Ended June 30, 2001 compared with the Three Months Ended July 1, 2000 Sales for the second quarter of 2001 increased to $66.8 million from $56.6 million reported in the second quarter of 2000. This increase comprised sales growth of $8.4 million for the Defense segment, $0.9 million for the Communications and Space Products segment, and $0.9 million for the Engineered Materials segment. Since the EDO-AIL merger was completed at the end of April 2000, the second quarter of 2000 reflected two months of combined operations, while the second quarter of 2001 reflected a full three months of combined operations. The sales growth for the second quarter of 2001 over the second quarter of 2000 attributable to the EDO-AIL merger is $6.5 million in the Defense segment and $0.9 million in the Communication and Space Products segment. In addition, there were increases in sales of airborne mine countermeasures systems, electro-ceramic products and advanced fiber composite structural products in the second quarter of 2001 compared to the second quarter of 2000. Operating earnings in the second quarter of 2001 (before considering one-time EDO-AIL merger-related costs of $0.8 million) increased to $6.3 million or 9.4% of sales from $5.3 million or 9.3% of sales for the same period of 2000. The increase in operating earnings was attributable primarily to the EDO-AIL merger. For the second quarter of 2001, net income available for common shares was $3.1 million, or $0.24 per diluted common share on 13.8 million diluted shares, which include 1.2 million dilutive shares associated with the assumed conversion of the Company's convertible subordinated debentures. This compares to a net loss available for common shares of $3.5 million, or $0.37 per diluted common share on 9.7 million diluted shares in the second quarter of 2000. Selling, general and administrative expenses in the second quarter of 2001 increased to $8.5 million from $6.5 million in the comparable quarter of 2000. This increase was primarily attributable to the selling, general and administrative expenses of AIL Technologies, Inc., which the Company acquired at the end of April, 2000, and increased bid and proposal expenses. At 12.7% of the net sales in the second quarter of 2001, the level of selling, general and administrative expenses was consistent with the 11.6% of net sales in the prior year's second quarter. Interest expense in the second quarter of 2001 decreased to $0.7 million from $1.0 million for the same period last year. The reduction is attributable to the lower average debt levels, partially due to the repurchase of debentures. 12 Page 12 The income tax expense for the 2001 second quarter reflected the Company's estimated effective rate of 39% for the year ending December 31, 2001. This compares to an income tax benefit at an effective rate of 24% for the second quarter of 2000. The effective tax benefit of 24% for the second quarter of 2000 is 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 which were not deductible for income tax purposes. Company-sponsored research and development expenditures increased to $2.2 million in the second quarter of 2001 from $1.6 million in the second quarter of 2000. The increase was primarily attributable to expenditures in the Communications and Space Products segment, relating to fiber optics product development. There were no dividends on preferred shares in the second quarter of 2001 compared to $0.2 million for the same period of 2000, since all outstanding preferred shares were converted into 1,067,281 common shares on March 8, 2001. Therefore, no preferred dividends were paid after March 8, 2001, nor will preferred dividends be paid for these shares in future quarters. Six Months Ended June 30, 2001 compared with the Six Months Ended July 1, 2000 Sales for the first six months of 2001 increased to $126.9 million from $85.6 million reported in the first six months 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 is $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 sales from $8.4 million or 9.8% of sales for the same period of 2000. The increase in operating earnings was primarily attributable to the EDO-AIL merger, and the decrease in percent margin was due to losses in the Communications and Space Products segment. For the six months ended June 30, 2001, net income available for common shares was $5.7 million or $0.46 per diluted common share on 12.4 million diluted shares. This compares to a net loss available for common shares of $1.6 million or $0.20 per diluted common share on 8.2 million diluted shares in the comparable six months of 2000. Selling, general and administrative expenses in the first six months of 2001 increased to $16.3 million from $10.0 million for the same period of 2000. This increase was primarily attributable to the selling, general and administrative expenses of AIL Technologies, Inc., which the Company acquired at the end of April 2000, and increased bid and proposal costs. At 12.8% of net sales in the first six months of 2001, the level of selling, general and administrative expenses was consistent with the 11.7% of net sales in the prior year's first six months. Interest expense was $1.6 million for both periods. 13 Page 13 The income tax expense for the first six months of 2001 reflected the Company's 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 is 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 which were not deductible for income tax purposes. Company-sponsored research and development expenditures increased to $3.9 million in the first six months of 2001 from the $2.1 million for the same period of 2000. The increase is primarily attributable to expenditures in the Communications and Space Products segment, relating to fiber optics product development. 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, since all outstanding preferred shares were converted into 1,067,281 common shares on March 8, 2001. Therefore, no preferred dividends were paid after March 8, 2001, nor will preferred dividends be paid for these shares in future quarters. Liquidity and Capital Resources The Company's cash, cash equivalents and marketable securities decreased by $11.3 million to $5.3 million at June 30, 2001 from $16.6 million at December 31, 2000. This decrease was due to $0.6 million used by operations, $6.8 million for purchases of capital equipment, $3.2 million for the repurchase of subordinated debentures, $1.9 million payment of long-term debt, and $1.1 million for payment of common and preferred dividends. These decreases were partially offset by $2.4 million of proceeds from exercises of stock options. Accounts receivable increased to $75.3 million at June 30, 2001 from $69.0 million at December 31, 2000 primarily due to increases in billed receivables resulting from an increase in sales in the second quarter of 2001 compared to the fourth quarter of 2000. Inventories increased to $26.6 million at June 30, 2001 from $24.9 million at December 31, 2000 primarily due to increases in work-in-progress in the Communications and Space 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 the Company's 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. The Company has outstanding $22.3 million of 7% Convertible Subordinated Debentures due 2011. Commencing in 1996 and until retirement of these debentures, the Company is making annual sinking fund payments of $1.8 million, which are due each December 15th. During the second quarter of 2001, the Company purchased $0.1 million face value of these debentures for $0.1 million. As of June 30, 2001, the Company had $3.9 million of these debentures in treasury to be used to satisfy its annual sinking fund requirements. 14 Page 14 The Company has an Employee Stock Ownership Trust ("EDO 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 the Company. The EDO ESOT services this obligation with the dividends received on the Company's preferred shares and cash contributions from the Company. 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 the Company and held by the EDO ESOP were converted into 1,067,281 shares of the Company's common stock effective March 8, 2001. As of June 30, 2001, the merged ESOP restructured its direct loan from the Company 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 the Company on its common shares and cash contributions from the Company. 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 the Company 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 the Company's 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 long-term debt of $3.8 million at June 30, 2001 reflects the amounts due in the next twelve months. At June 30, 2001, the Company was in compliance with its 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 the Company's owned 726,000 square foot facility located in Deer Park, NY, in anticipation of its potential sale and leaseback. This facility houses the Defense Programs and Technologies, Antenna Products and Space and Communications Products operations. The Company believes that it has adequate liquidity and sufficient capital to fund its currently anticipated requirements for working capital, capital expenditures, research and development expenditures and interest payments. 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, EDO Corporation adopted Statement of Financial Accounting Standards ("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 the Company's financial position and results of operations was immaterial. 15 Page 15 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. The Company 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 the Statement 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 the Statement during 2001 would not be amortized. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 The statements in this quarterly report and in oral statements that may be made by representative of the Company relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995, Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchanges Act of 1934. Forward-looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include but are not limited to the following for each of the types of information noted below. U.S. and international military program sales, follow-on procurement, contract continuance, and future program awards, upgrades and spares support are subject to U.S. and international military budget constraints and determinations; U.S. congressional and international legislative body discretion; U.S. and international government administration policies and priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in U.S. and international government procurement timing, strategies and practices; and the general state of world military readiness and deployment. Commercial satellite programs and equipment sales, follow-on procurement, contract continuance and future program awards are subject to: establishment and continuance of various consortiums for satellite constellation programs; delay in launch dates due to equipment, weather or other factors beyond the control of the Company; and development of sufficient customer base to support a particular satellite constellation program. Commercial product sales are subject to: success of product development programs currently underway or planned; competitiveness of current and future product production costs and prices and market and consumer base development of new product programs. 16 Page 16 Achievement of margins on sales, earnings and cash flow can be affected by; unanticipated technical problems; government termination of contracts for convenience; decline in expected levels of sales; underestimation of anticipated costs on specific programs; and risks inherent in integrating recent acquisitions into the Company's overall structure. Expectations of future Federal income tax rates can be affected by a variety of factors, including amounts of profits relating to foreign sales. The Company has no obligation to update any forward-looking statements, PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10(j) Change of Control Agreement dated as of March 15, 2001, by and between the Company and Darrell L. Reed. 10(k) Change of Control Agreement dated as of March 17, 2001, by and between the Company and William J. Frost. (b) Reports on Form 8-K None. 17 Page 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EDO Corporation ----------------------------------------- (Registrant) by: D.L. Reed ----------------------------------------- D.L. Reed - Vice President - Finance (Principal Financial Officer) Date: August 14, 2001 EX-10.J 3 y52421ex10-j.txt CHANGE OF CONTROL AGREEMENT DATED MARCH 15, 2001 1 Exhibit 10(j) AGREEMENT made this 15th day of March, 2001 by and between EDO Corporation, a New York corporation having its office and principal place of business at 60 East 42 Street, Suite 5010, New York, NY 10165 (the "Company"), and Darrell L. Reed, residing at 1455 Washington Blvd., Stamford, CT ("Executive"). W I T N E S S E T H: --------------------- WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2); WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions which either event may raise among management may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: 2 GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change in Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall be cancelled as of December 31, 2001; provided, however, in the event there is an intervening Change in Control, such cancellation shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then be cancelled automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. ARTICLE 1 Principal Undertaking 1.1. If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a three (3) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article II), then Executive shall be paid by the Company, subject to Article 6, the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4); - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2. The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination" (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed a 36-month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 1.3. The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against -2- 3 such amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 Current Salary and Other Compensation Benefit Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs; plus - the full amount, if any, of any incentive or special award which Executive earned but which has not yet been paid. ARTICLE 3 Other Salary and Incentive Compensation Benefits Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to three times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) an amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. ARTICLE 4 Pension Adjustment Payment Payment of this portion of Special Severance Pay Benefits shall consist of the following: - an amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been -3- 4 entitled if the three (3) years after the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 Stock Option Adjustment The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 Long-Term Incentive Plan or any predecessor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 Taxes 6.1. In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2. Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 6.3. If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced (but not below zero) to the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cape"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. -4- 5 6.4. If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. 6.5. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount" or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6. For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7. If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service -5- 6 proceeding (a "Final Determination") that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8. In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if Executive's good faith claim for refund or credit is denied. 6.9. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in -6- 7 respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10. Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in Paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). ARTICLE 7 Benefit Plans If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a three (3) year period after a Change in Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for Good Reason, except for death, voluntary retirement or for Cause, then, for three (3) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life, health and accident, and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an applicable plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock Ownership Plan, the EDO Corporation Payroll Based Employee Stock Ownership Plan nor the EDO Corporation Employees 401(k) Savings Plan. ARTICLE 8 No Mitigation Required Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the -7- 8 result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 Definition of "Change in Control" and "Potential Change in Control" 9.1. "Change in Control" shall mean an occurrence in which: (i) a "person," including a "group," other than the Company's Employees Stock Ownership Trust (a "Person"), becomes the "beneficial owner" ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of Directors of the Company (as the terms "persons," "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transactions not involving Executive in an interest other than in his capacity as Executive. 9.2. "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial Ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial Ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of Directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which if obtained would result in a Change in Control occurring, or -8- 9 (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 Termination for Cause 10.1. If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2. The following are the only reasons for which the Company may terminate Executive's services for Cause without further obligations under this Agreement: - for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; - for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; - for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; - for misconduct causing a serious violation by the Company of state or federal laws; - for theft of Company funds or corporate assets; or - for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 Definition of "Termination for Good Reason" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following, or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or -9- 10 (ii) during the three (3) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executive's responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. ARTICLE 12 Successors, Binding Agreement 12.1. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause after a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2. As used in this Agreement, "Company" shall include any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. -10- 11 12.3. This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts would still be payable if he had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 13 Miscellaneous Provisions 13.1. The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 13.2. Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Corporate Counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4. No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 13.5. All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6. Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. -11- 12 13.9. The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13.10. In the event of any action or proceeding between the parties arising out of this Agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to Continue such action or proceeding. EDO Corporation By: JAMES M. SMITH ------------------------------------------- President Executive DARRELL REED ------------------------------------------- Darrell L. Reed -12- EX-10.K 4 y52421ex10-k.txt CHANGE OF CONTROL AGREEMENT DATED MARCH 17,2001 1 Exhibit 10(k) AGREEMENT made this 17th day of March, 2001 by and between EDO Corporation, a New York corporation having its office and principal place of business at 60 East 42 Street, Suite 5010, New York, NY 10165 (the "Company"), and William J. Frost, residing at 27 Manchester Road, Huntington, NY 11743 ("Executive"). W I T N E S S E T H: -------------------- WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2); WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions which either event may raise among management may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: 2 GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change in Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall be cancelled as of December 31, 2001; provided, however, in the event there is an intervening Change in Control, such cancellation shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then be cancelled automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. ARTICLE 1 Principal Undertaking 1.1. If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article 11), then Executive shall be paid by the Company, subject to Article 6 the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4); - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2. The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination" (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed an 18-month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 1.3. The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against such -2- 3 amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 Current Salary and Other Compensation Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs; plus - the full amount, if any, of any incentive or special award which Executive earned but which has not yet been paid. ARTICLE 3 Other Salary and Incentive Compensation Benefits Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to one and one-half (1-1/2) times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) an amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. ARTICLE 4 Pension Adjustment Payment Payment of this portion of Special Severance Pay Benefits shall consist of the following: - an amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been -3- 4 entitled if the one and one-half (1-1/2) years after the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 Stock Option Adjustment The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 Long-Term Incentive Plan or any predecessor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 Taxes 6.1. In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2. Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 6.3. If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced (but not below zero) to the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. -4- 5 6.4. If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. 6.5. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (B) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6. For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: (A) Federal income taxes at the highest applicable marginal rate of Federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (B) any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in Federal incomes taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7. If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final -5- 6 Determination") that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, the aggregate "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net after tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8. In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if Executive's good faith claim for refund or credit is denied. 6.9. In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in -6- 7 respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10. Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in Paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). ARTICLE 7 Benefit Plans If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for Good Reason, except for death, voluntary retirement or for Cause, then, for one and one-half (1-1/2) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life, health and accident, and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an applicable plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock Ownership Plan, the EDO Corporation Payroll Based Employee Stock Ownership Plan nor the EDO Corporation Employees 401(k) Savings Plan. ARTICLE 8 No Mitigation Required Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the -7- 8 result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 Definition of Change in Control" and "Potential Change in Control" 9.1. "Change in Control" shall mean an occurrence in which: (i) a "person," including a "group," other than the Company's Employees Stock Ownership Trust (a "Person"), becomes the "beneficial owner" ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of Directors of the Company (as the terms "persons," "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transactions not involving Executive in an interest other than in his capacity as Executive, 9.2. "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial Ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial Ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of Directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which if obtained would result in a Change in Control occurring, or -8- 9 (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 Termination for Cause 10.1. If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2. The following are the only reasons for which the Company may terminate Executive's services for Cause without further obligations under this Agreement: - for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; - for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; - for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; - for misconduct causing a serious violation by the Company of state or federal laws; - for theft of Company funds or corporate assets; or - for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 Definition of "Termination for Good Reason" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following, or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or -9- 10 (ii) during the one and one-half (1-1/2) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executive's responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. ARTICLE 12 Successors, Binding Agreement 12.1. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause alter a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2. As used in this Agreement, "Company" shall include any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. -10- 11 12.3. This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts would still be payable if he had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 13 Miscellaneous Provisions 13.1. The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 13.2. Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Corporate Counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4. No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 13.5. All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6. Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7. No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. -11- 12 13.9. The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13.10. In the event of any action or proceeding between the parties arising out of this Agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to continue such action or proceeding. EDO Corporation By: JAMES M. SMITH ----------------------------------- President Executive WILLIAM J. FROST ----------------------------------- William J. Frost -12- -----END PRIVACY-ENHANCED MESSAGE-----