-----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, N1c1a0DYsmBg8t7sR5tA7I+L4gV+K829y8/5B9lTbhdTHxUl3EaaNY6xAjxbiM36 88dN4JAOHOHHHVZDjzovtQ== 0000950123-01-508117.txt : 20020410 0000950123-01-508117.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950123-01-508117 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011109 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: 1779430 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 y54637e10-q.txt EDO CORP FORM 10-Q 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 September 29, 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 September 29, 2001 - ------------------------------------- --------------------------------- Common shares, par value $1 per share 14,850,672
Page 2 EDO CORPORATION INDEX
Page No. Face Sheet 1 Index 2 Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets - September 29, 2001 and December 31, 2000 3 Consolidated Statements of Earnings - Three Months Ended September 29, 2001 and 4 September 30, 2000 Consolidated Statements of Earnings - 5 Nine Months Ended September 29, 2001 and September 30, 2000 Consolidated Statements of Cash Flows - Nine Months Ended September 29, 2001 and September 30, 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 6. Exhibits and Reports on Form 8-K 16 Signature 17
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)
September 29, 2001 December 31, 2000 Assets (unaudited) Current assets: Cash and cash equivalents $ 6,163 $ 2,208 Marketable securities 189 14,413 Accounts receivable, less allowances 69,684 69,023 Inventories 25,931 24,914 Deferred tax asset, net 3,302 3,333 Prepayments and other 2,652 4,840 --------- --------- Total current assets 107,921 118,731 Property, plant and equipment, net 61,255 57,485 Notes receivable 3,073 3,254 Cost in excess of fair value of net assets acquired, net 10,173 14,724 Other assets 24,201 20,060 --------- --------- $ 206,623 $ 214,254 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 46,950 $ 44,060 Contract advances and deposits 14,586 31,719 Current portion of note payable 429 429 Current portion of long-term debt 3,800 4,971 --------- --------- Total current liabilities 65,765 81,179 Note payable 463 463 Borrowings under revolver 6,000 - Long-term debt 32,736 37,800 Deferred income taxes, net 1,239 1,239 ESOT loan obligation -- 5,781 Postretirement benefits obligations 20,118 19,973 Environmental obligation 1,685 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 57,170 58,614 Retained earnings 43,048 34,803 Accumulated other comprehensive loss -- (61) --------- --------- 116,292 108,412 Less: Treasury shares at cost (1,223,705 shares in 2001 and 1,370,222 shares in 2000) (16,539) (19,388) ESOT loan obligation - (5,781) Unearned ESOP shares (19,901) (15,782) Deferred compensation under Long-Term Incentive Plan (390) (423) Management group receivable (845) (1,220) ---------- --------- Total shareholders' equity 78,617 65,818 ---------- --------- $ 206,623 $ 214,254 ========= =========
See accompanying Notes to Consolidated Financial Statements. Page 4 EDO Corporation and Subsidiaries Consolidated Statements of Earnings (in thousands, except per share amounts)
For the three months ended Sept. 29, 2001 Sept. 30, 2000 (unaudited) Net sales $ 60,353 $ 59,979 Costs and expenses Cost of sales 43,520 45,213 Selling, general and administrative 7,800 8,595 Research and development 1,875 1,766 Write-off of purchased in-process research and development and merger-related costs -- 932 -------- -------- 53,195 56,506 -------- -------- Operating earnings 7,158 3,473 Non-operating income (expense) Interest income 101 414 Interest expense (889) (1,527) Other, net (82) 196 -------- -------- (870) (917) -------- -------- Earnings before income taxes 6,288 2,556 Income tax expense (2,455) (2,518) -------- -------- Earnings 3,833 38 Dividends on preferred shares -- (212) -------- -------- Net earnings (loss) available for common shares $ 3,833 $ (174) ======== ======== Earnings (loss) per common share: Basic $ 0.32 $ (0.02) Diluted $ 0.30 $ (0.02) Weighted average common shares outstanding: Basic 12,107 10,934 ======== ======== Diluted 13,431 10,934 ======== ========
See accompanying Notes to Consolidated Financial Statements. Page 5 EDO Corporation and Subsidiaries Consolidated Statements of Earnings (in thousands, except per share amounts)
For the nine months ended Sept. 29, 2001 Sept. 30, 2000 (unaudited) Net sales $ 187,280 $ 145,574 Costs and expenses Cost of sales 138,288 110,291 Selling, general and administrative 24,085 18,604 Research and development 5,857 3,902 Write-off of purchased in-process research and development and merger-related costs 1,318 9,875 --------- --------- 169,548 142,672 --------- --------- Operating earnings 17,732 2,902 Non-operating income (expense) Interest income 688 1,290 Interest expense (2,516) (3,167) Other, net 117 224 --------- --------- (1,711) (1,653) --------- --------- Earnings before income taxes 16,021 1,249 Income tax expense (6,250) (2,400) --------- --------- Earnings (loss) 9,771 (1,151) Dividends on preferred shares (194) (670) --------- --------- Net earnings (loss) available for common shares $ 9,577 $ (1,821) ========= ========= Earnings (loss) per common share: Basic $ 0.80 $ (0.20) Diluted $ 0.77 $ (0.20) Weighted average common shares outstanding: Basic 11,972 9,119 ========= ========= Diluted 13,594 9,119 ========= =========
See accompanying Notes to Consolidated Financial Statements. Page 6 EDO Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
For the nine months ended Sept. 29, 2001 Sept. 30, 2000 (unaudited) Operating activities: Earnings (loss) $ 9,771 $ (1,151) Adjustments to earnings (loss) to arrive at cash provided (used) by continuing operations: Depreciation 7,133 5,182 Amortization 827 1,039 Write-off of purchased in-process research and development -- 6,700 Bad debt expense 350 151 Gain on repurchase of debentures (171) (201) Gain on sale of property, plant and equipment (39) (7) Gain on sale of marketable securities (81) -- Deferred compensation expense 181 526 ESOP compensation expense 1,406 1,029 Non-cash compensation expense 278 -- Common shares issued for directors' fees 122 67 Real estate tax assessment adjustment 7,846 -- Changes in, excluding effects of acquisition: Accounts receivable (826) (1,496) Inventories (1,017) (1,513) Prepayments and other assets (3,677) (2,228) Accounts payable and accrued liabilities (227) (6,467) Contract advances and deposits (17,133) (4,130) -------- -------- Cash provided (used) by continuing operations 4,743 (2,499) Net cash provided by discontinued operations -- 8,641 Investing activities: Cash paid for acquisition of AIL -- (15,004) Payments received on notes receivable 259 7 Purchase of property, plant and equipment (11,101) (2,273) Proceeds from sale of property, plant and equipment 236 4,404 Purchase of marketable securities (58) (760) Sale or redemption of marketable securities 14,455 1,528 -------- -------- Cash provided (used) by investing activities 3,791 (12,098) Financing activities: Proceeds from exercise of stock options 2,518 63 Proceeds from management group receivables 375 -- Borrowings under revolver 6,000 7,000 Repayments of borrowings under revolver -- (5,000) Repayments of long-term debt (2,850) (2,620) Repurchase of debentures (3,184) (1,808) Purchase of treasury shares (1,021) -- Payment of EDO ESOP loan obligation (4,891) -- Payment of common share cash dividends (1,332) (1,019) Payment of preferred share cash dividends (194) (670) -------- -------- Cash used by financing activities (4,579) (4,054) Net increase (decrease) in cash and cash equivalents 3,955 (10,010) Cash and cash equivalents at beginning of year 2,208 13,799 -------- -------- Cash and cash equivalents at end of period $ 6,163 $ 3,789 ======== ======== Supplemental disclosures: Cash paid for: Interest $ 1,787 $ 2,204 Income taxes $ 4,770 $ 2,350
See accompanying Notes to Consolidated Financial Statements. 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:
Nine months ended Sept. 30, 2000 (in thousands) Net sales from continuing operations $ 188,832 Net loss from continuing operations available for common shares $ (7,120) Basic loss per share from continuing operations $ (0.63)
Page 8 Inventories Inventories are summarized by major classification as follows:
Sept. 29, 2001 Dec. 31, 2000 (in thousands) Raw materials and supplies $ 7,635 $ 7,431 Work-in-process 17,298 16,170 Finished goods 998 1,313 ------- ------- $ 25,931 $ 24,914 ======== ========
Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share.
Three months ended Nine months ended Sept. 29, Sept. 30, Sept. 29, Sept.30, 2001 2000 2001 2000 (in thousands) (in thousands) Numerator: Earnings (loss) available for common shares $ 3,833 $ (174) 9,577 (1,821) Impact of assumed conversion of preferred shares -- -- 6 -- Interest expense avoided related to assumed conversion of subordinated debentures 238 -- 822 -- -------- -------- -------- -------- Numerator for diluted calculation $ 4,071 $ (174) 10,405 (1,821) ======== ======== ======== ======== Denominator: Weighted average common shares outstanding 12,107 10,934 11,972 9,119 Dilutive effect of stock options 309 -- 249 -- Dilutive effect of conversion of preferred shares -- -- 206 -- Dilutive effect of conversion of subordinated debentures 1,015 -- 1,167 -- -------- -------- -------- -------- Denominator for diluted calculation 13,431 10,934 13,594 9,119 ======== ======== ======== ========
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 September 29, 2001, accumulated other comprehensive income (loss) included in the accompanying consolidated balance sheet represents unrealized holding gains (losses) on available-for-sale marketable securities. There was no comprehensive income for the three-month period ended September 29, 2001. Comprehensive income for the nine-month period ended September 29, 2001 was $9,863,000. Comprehensive income (loss) for the three- and nine-month periods ended September 30, 2000 was $168,000 and $(1,051,000), respectively. Business Segments EDO Corporation is a leading supplier of sophisticated, highly engineered products for defense, aerospace and industrial applications. The Company believes that its advanced electronic, electromechanical systems, information systems and engineered materials are mission-critical standard equipment on a wide range of military aircraft. The Company has three reporting segments: Defense, Communications and Space Products, and Engineered Materials. The Defense segment provides integrated defense systems and components including electronic warfare systems, subsystems and test equipment, aircraft stores suspension and release systems, airborne mine countermeasures systems, integrated combat systems and undersea warfare sonar systems for military forces and governments worldwide. The Communications and Space Products segment supplies antenna products and space sensor communications products for the remote sensing, communication, and navigation industries. The Engineered Materials segment supplies electro-ceramic products and advanced fiber composite and structural products for the communication, navigation, chemical, petrochemical, paper and oil industries for the commercial infrastructure and military markets.
Three months ended Nine months ended Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2001 2000 2001 2000 Net sales: Defense $44,146 $41,796 $137,912 $103,222 Communications and Space Products 7,097 9,230 22,160 16,854 Engineered Materials 9,110 8,953 27,208 25,498 ------- ------- -------- ------- $60,353 $59,979 $187,280 $145,574 ======= ======= ======== ========
Page 10 Operating earnings (loss): Defense $ 5,606 $ 4,592 $15,297 $10,504 Communications and Space Products 371 (1,778) (404) (9,255) Engineered Materials 1,181 659 2,839 1,653 ------- ------- ------- ------- 7,158 3,473 17,732 2,902 Net interest expense (788) (1,113) (1,828) (1,877) Other, net (82) 196 117 224 ------- ------- ------- ------- Earnings before income taxes $ 6,288 $ 2,556 $16,021 $ 1,249 ======= ======= ======= =======
Merger-related costs attributable to the EDO-AIL Merger are included in the segments as follows:
Nine months ended Nine months ended Sept. 29, 2001 Sept. 30, 2000 Defense $ 898 $ 2,194 Communications and Space Products 208 7,185 Engineered Materials 212 496 ------- -------- Total $ 1,318 $ 9,875 ======= ========
Subsequent Events On October 9, 2001, the Company acquired all of the outstanding stock of Dynamic Systems, Inc., a privately-held company based in Alexandria, Virginia, for $13.8 million in cash. This acquisition will expand the Company's range of professional and information technology services provided primarily to the Department of Defense and other government agencies. The acquisition will be accounted for as a purchase, and accordingly, the operating results of Dynamic Systems will be included in the Company's consolidated financial statements from the date of acquisition. On October 31, 2001, the Company sold 3,716,100 newly-issued common shares in a public offering for net proceeds of approximately $82.5 million, which will be used for retirement of debt, future acquisitions, and general corporate purposes. As part of the offering, the ESOP also sold 1,458,900 currently outstanding common shares. 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 September 29, 2001, which reflect the results of operations of the Company including the EDO-AIL merger, as described below, from April 28, 2000. The results of the Company's operations for the three- and nine- months ended September 29, 2001 and the Company's financial condition as of September 29, 2001 are significantly affected by this acquisition. Page 11 Merger with AIL Technologies, Inc. On April 28, 2000, the Company's wholly-owned subsidiary merged with AIL Technologies Inc., referred to as AIL. This merger, referred to as the EDO-AIL merger, was accounted for as a purchase and is included in the Company's results of operations from that date. The results of operations for the periods presented are materially affected by the timing of the EDO-AIL merger. Under the merger agreement and share purchase agreements with certain AIL shareholders, all of the outstanding shares of common stock and preferred stock of AIL were exchanged for 6,553,194 newly-issued EDO common shares valued at $39.4 million. In addition, the AIL stockholders received a cash payment totaling $13.3 million. The merged company also assumed AIL debt of $29.7 million. Of the newly-issued shares, 5.3 million were held in trust by AIL's Employee Stock Ownership Plan, referred to as the AIL ESOP. As of the closing of the EDO-AIL merger, the AIL ESOP was the Company's largest shareholder holding about 39% of the Company's outstanding common shares. As of January 1, 2001, the AIL ESOP and the existing EDO ESOP were merged into a single plan. As of March 8, 2001, the existing preferred shares in the EDO ESOP were converted into about 1.1 million common shares. As a result of the Company's October 2001 public offering and the sale in the offering of 1,458,900 common shares by the ESOP, at October 31, 2001, the ESOP held approximately 25% of the Company's outstanding common shares. Results of Operations Comparison of three months ended September 29, 2001 and September 30, 2000 Net sales for the three months ended September 29, 2001, increased to $60.4 million from $60.0 million for the comparable period of 2000. This increase comprised sales growth of $2.3 million for the Defense segment and $0.2 million for the Engineered Materials segment, offset by a decrease of $2.1 million for the Communications and Space Products segment. In the Defense segment, there were increases in sales of aircraft stores suspension and release equipment and integrated combat systems and sonar systems. In the Engineered Materials segment, there were increases in sales of electro-ceramic products, partially offset by decreases in sales of advanced fiber composite structural products. In the Communications and Space Products segment, there were decreases in sales of space products, partially offset by increases in sales of antenna products. Operating earnings in the three months ended September 29, 2001 (before considering one-time EDO-AIL merger-related costs of $0.9 million in the three months ended September 30, 2000) increased to $7.2 million or 11.8% of net sales from $4.4 million or 7.3% of net sales for the comparable period of 2000. The increase in operating earnings was attributable to increased sales, program mix and contract closeouts in the Defense segment, as well as increases in operating earnings in the Communications and Space Products segment which, for the three months ended September 29, 2001, had operating earnings of $0.4 million compared to an operating loss of $1.8 million in the comparable period of 2000. In addition, there were reductions in selling, general and administrative expenses, as discussed below. For the three months ended September 29, 2001, net earnings available for common shares increased to $3.8 million, or $0.30 per diluted common share, on 13.4 million diluted shares from a net Page 12 loss of $0.2 million, or $0.02 per diluted common share, on 10.9 million diluted shares in the comparable period of 2000. Selling, general and administrative expenses in the three months ended September 29, 2001 decreased to $7.8 million, or 12.9% of net sales, from $8.6 million, or 14.3% of net sales, for the comparable period of 2000. This decrease is due primarily to reductions in expenses at the Deer Park facility. Research and development expense in the three months ended September 29, 2001 increased slightly to $1.9 million, or 3.1% of net sales, from $1.8 million, or 2.9% of net sales, for the comparable period of 2000. Interest expense in the three months ended September 29, 2001 decreased to $0.9 million from $1.5 million for the comparable period of 2000. This decrease is attributable to lower average debt levels, partially due to the repurchase of debentures, as well as lower interest rates. Income tax expense for the three months ended September 29, 2001 reflected the Company's estimated effective rate of 39% for the year ending December 31, 2001. The third quarter of 2000 reflected a cumulative adjustment to the Company's estimated effective tax rate for the year ended December 31, 2000 resulting from a reduction in anticipated merger-related costs for the year. There were no dividends on preferred shares for the three months ended September 29, 2001, compared to $0.2 million for the same period of 2000, due to the conversion of all outstanding preferred shares into 1,067,281 common shares on March 8, 2001. No preferred shares are outstanding, and no preferred dividends were paid after March 8, 2001. Comparison of nine months ended September 29, 2001 and September 30, 2000 Net sales for the first nine months of 2001 increased $41.7 million to $187.3 million from $145.6 million for the comparable period of 2000. This increase comprised sales growth of $34.7 million for the Defense segment, $5.3 million for the Communications and Space Products segment, and $1.7 million for the Engineered Materials segment. The sales growth for the first nine months of 2001 over the first nine months of 2000 attributable to the EDO-AIL merger was $26.9 million in the Defense segment and $5.3 million in the Communication and Space Products segment. Since the EDO-AIL merger was completed at the end of April 2000, the first nine months of 2000 reflected five months of combined operations, while the first nine months of 2001 reflected a full nine months of combined operations. In addition, there were increases in sales of aircraft stores suspension and release equipment, integrated combat systems, technology services, electro-ceramic products and advanced fiber composite structural products in the first nine months of 2001 compared to the first nine months of 2000. Operating earnings in the first nine months of 2001 (before considering one-time EDO-AIL merger-related costs of $1.3 million) increased to $19.1 million or 10.2% of net sales from $12.8 million or 8.8% of net sales for the comparable period of 2000(before considering one-time EDO-AIL merger-related costs of $9.9 million). The increase in operating earnings was primarily attributable to additional business resulting from the EDO-AIL merger, and the other sales increases described above. For the nine months ended September 29, 2001, net earnings available for common shares increased to $9.6 million, or $0.77 per diluted common share, on 13.6 million diluted shares from a net loss of $1.8 million, or $0.20 per diluted common share, on 9.1 million diluted shares in the comparable period of 2000. Selling, general and administrative expenses in the first nine months of 2001 increased to $24.1 million, or 12.9% of net sales, from $18.6 million, or 12.8% of Page 13 net sales, for the comparable period of 2000. This increase was primarily attributable to the EDO-AIL merger. Research and development expense in the first nine months of 2001 increased to $5.9 million, or 3.1% of net sales, from $3.9 million, or 2.7% of net sales, for the same period of 2000. The increase was primarily attributable to expenditures in the Communications and Space Products segment, relating to fiber optics product development. Interest expense in the first nine months of 2001 decreased to $2.5 million from $3.2 million for the comparable period of 2000. This decrease is attributable to lower average debt levels, partially due to the repurchase of debentures, as well as lower interest rates. Income tax expense for the first nine months of 2001 reflected the Company's estimated effective rate of 39% for the year ending December 31, 2001. The higher effective rate for the first nine months of 2000 was principally attributable to a write-off in the second quarter of 2000 of $6.7 million of purchased in-process research and development and other expenses associated with the EDO-AIL merger that were not deductible for income tax purposes. Dividends on preferred shares in the first nine months of 2001 decreased to $0.2 million compared to $0.7 million for the same period of 2000, due to the conversion of all outstanding preferred shares into 1,067,281 common shares on March 8, 2001. Liquidity and Capital Resources Balance Sheet Cash, cash equivalents and marketable securities decreased to $6.4 million at September 29, 2001 from $16.6 million at December 31, 2000. This decrease was due to $11.1 million for purchases of capital equipment, $4.9 million for payment in full of the EDO ESOP loan obligation, $3.2 million for the repurchase of subordinated debentures, $2.8 million payment of long-term debt and $1.5 million for payment of common and preferred dividends. These decreases were partially offset by $4.7 million provided by operations, $6.0 million in borrowings under the revolving line of credit and $2.5 million of proceeds from exercises of stock options. Accounts receivable increased to $69.7 million at September 29, 2001 from $69.0 million at December 31, 2000. Inventories increased to $25.9 million at September 29, 2001 from $24.9 million at December 31, 2000 primarily due to increases in work-in-progress in the Communications and Space Products segment. The notes receivable of $3.4 million at September 29, 2001 (of which $0.3 million was in current assets) were comprised of the $1.1 million note related to the sale of property at Deer Park in June 2000 and $2.3 million in notes related to the sale of our former College Point facility in January 1996. The Deer Park facility note is due in monthly installments through July 2015 and bears interest at a rate of 7.5% per annum. The College Point notes are due in annual amounts through September 2004 with a final payment of $1.3 million due on December 31, 2004 and bear interest at 7.0% per annum. The latter notes receivable are secured by a mortgage on the facility. Page 14 Financing Activities As of September 29, 2001, the Company had 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 15. As of September 29, 2001, the Company had $3.9 million of these debentures in treasury to be used to satisfy our annual sinking fund requirements. 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 ESOT were converted into 1,067,281 shares of our common shares 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 the Company's common shares and cash contributions from the Company. As part of this restructuring, the EDO ESOP loan obligation with a balance 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 our accounts receivable, inventories and property, plant and equipment. Proceeds from the term debt were used to repay existing term debt acquired in the EDO-AIL merger. The current portion of the term debt of $3.8 million at September 29, 2001 reflects the amounts due in the next twelve months. At September 29, 2001, the Company was in compliance with its debt covenants. At September 29, 2001, there were $6.0 million of borrowings under the revolving credit facility of $50.0 million and there were outstanding letters of credit of $20.8 million, leaving available borrowing capacity of $23.2 million. In October 2001, the Company raised $82.5 million from the public offering of its common shares. Capital expenditures in the first nine months of 2001 increased to $11.1 million from $2.3 million for the same period of 2000. The increase was due primarily to expenditures at our owned 726,000 square foot facility located in Deer Park, NY, in anticipation of its potential sale and leaseback. 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 principal and interest payments. Backlog The backlog of unfilled orders at September 29, 2001, increased to $293.3 million from $265.5 million at September 30, 2000 and $252.9 million at December 31, 2000. Page 15 New Accounting Standards Accounting for Derivative Instruments and Hedging Activities Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards, or FASB, No. 133, "Accounting for Derivative Instruments and Hedging Activities" and Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an Amendment to FASB Statement No. 133." These statements require all derivatives to be recorded on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. The effect of the adoption of these statements on the Company's financial position and results of operations was immaterial. Business Combinations and Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. In addition, Statement 141 eliminates the pooling-of-interests method of accounting for business combinations. 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 Statement 142 is expected to result in a decrease in amortization expense in 2002 of approximately $0.7 million. In addition, goodwill recorded as a result of any acquisitions completed subsequent to the issuance of Statement 142 during 2001 would not be amortized. During 2002, 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 Company's earnings and financial position. "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 representatives 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. Page 16 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. 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 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10(l) Stock Purchase Agreement dated as of October 9, 2001 by and between EDO Acquisition II, Inc. and Dynamic Stystems, Inc. (b) Reports on Form 8(K) The Company did not file any reports on Form 8-K during the quarter ended September 29, 2001. The Company filed a current report on Form 8-K with a report date of October 9, 2001 to disclose under Item 5 the acquisition of Dynamic Systems, Inc. The Company furnished a current report on Form 8-K with a report date of October 22, 2001 to disclose under Item 9 the announcement of preliminary financial results for its quarter ended September 29, 2001. 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: November 9, 2001 EX-10.1 3 y54637ex10-1.txt STOCK PURCHASE AGREEMENT Exhibit 10 (l) STOCK PURCHASE AGREEMENT This Stock Purchase Agreement ("Agreement") is made as of October 9, 2001, (the "Effective Date"), by EDO ACQUISITION II, INC., a Delaware corporation ("Buyer"); and the individuals named on Exhibit A to this Agreement (collectively, the "Sellers" and each, individually, a "Seller"). RECITALS Dynamic Systems, Inc., a Maryland corporation (the "Company"), is a business engaging in engineering, management and information technology, all of the capital stock of which is owned by Sellers. Sellers desire to sell, and Buyer desires to purchase, all of the issued and outstanding shares (the "Shares") of capital stock of the Company for the consideration and on the terms set forth in this Agreement, and, in connection with the sale of the Shares, the Sellers shall enter into the Noncompetition Agreements. AGREEMENT The parties, intending to be legally bound, agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1: ADJUSTMENT AMOUNT - as defined in Section 2.5. BALANCE SHEET - as defined in Section 3.4. BEST EFFORTS - the efforts that a prudent Person desirous of achieving a result would use in similar circumstances to ensure that such result is achieved as expeditiously as possible; provided, however, that an obligation to use Best Efforts under this Agreement does not require the Person subject to that obligation to incur any material expense, to commence litigation, or to take actions that would result in a materially adverse change in the benefits to such Person of this Agreement and the transactions contemplated hereby. BREACH - a "Breach" of a representation, warranty, covenant, obligation, or other provision of this Agreement or any instrument delivered pursuant to this Agreement will be deemed to have occurred if there is or has been (a) any material inaccuracy in or breach of, or any material failure to perform or comply with, such representation, warranty, covenant, obligation, or other provision, or (b) any claim (by any Person) or other occurrence or circumstance that is or was materially inconsistent with such representation, warranty, covenant, obligation, or other provision, and the term "Breach" means any such inaccuracy, breach, failure, claim, occurrence, or circumstance. BUYER - as defined in the first paragraph of this Agreement. CLOSING - as defined in Section 2.3. COMPANY - as defined in the Recitals of this Agreement. COMPANY CONTRACT - any Contract (a) under which the Company has or may acquire any rights, (b) under which the Company has or may become subject to any obligation or liability, or (c) by which the Company or any of the assets owned or used by it is or may become bound. CONFIDENTIAL INFORMATION - any and all confidential business information and any and all information, however documented, that is a trade secret within the meaning of applicable statutory or case law concerning the business and affairs of the Company or the Buyer, whether or not marked as "secret" or "confidential," including (i) product specifications; data; know-how; formulas; compositions; processes; designs; sketches; photographs; graphs; drawings; samples; inventions and ideas; past, current and planned research and development; current and planned manufacturing and distribution methods and processes; customer lists; current and anticipated customer requirements; price lists; market studies; business plans; computer software and programs; database technologies; concepts, ideas and methods; (ii) to the extent such information is not publicly disclosed by the Company or the Buyer in filings with Governmental Bodies, in press releases or otherwise, all financial statements; financial projections and budgets; historical and projected sales; capital spending budgets and plans; the names and backgrounds of key personnel, personnel training techniques and personnel materials; and (iii) any and all notes, analysis, compilations, studies, summaries and other material prepared by or for the Company or the Buyer containing or based, in whole or in part, on any of the foregoing information. CONSENT - any approval, consent, ratification, waiver, or other authorization (including any Governmental Authorization). CONTRACT - any agreement, contract, obligation, promise, or undertaking (whether written or oral and whether express or implied) that is legally binding. CONVERTIBLE SECURITIES - any options, warrants, rights, convertible debt or equity securities or other agreement upon the exercise or conversion of which or pursuant to the terms of which additional shares of common stock of the Company may be issued. DAMAGES - as defined in Section 6.2. DISCLOSURE LETTER - the disclosure letter delivered by Original Shareholders to Buyer concurrently with the execution and delivery of this Agreement as provided in Section 7.9. DOD - the United States Department of Defense or any branch or agency thereof. EFFECTIVE DATE - as defined in the first paragraph of this Agreement. EMPLOYMENT AGREEMENT - as defined in Section 2.4(a)(iii). ENCUMBRANCE - any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership. ENVIRONMENT - soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), groundwaters, drinking water supply, stream sediments, ambient air (including indoor air), plant and animal life, and any other environmental medium or natural resource. ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES - any cost, damages, expense, liability, obligation, or other responsibility arising from or under Environmental Law or Occupational Safety and Health Law including fines, penalties, judgments, awards, settlements, investigative or inspection costs and financial responsibility for cleanup costs, corrective action, and other remedial or response action. ENVIRONMENTAL LAW - any Legal Requirement that requires or relates to: (a) advising appropriate authorities, employees, and the public of intended or actual releases of pollutants or hazardous substances or materials, violations of discharge limits, or other prohibitions and of the commencements of activities, such as resource extraction or construction, that could have significant impact on the Environment; (b) preventing or reducing to acceptable levels the release of pollutants or hazardous substances or materials into the Environment; (c) reducing the quantities, preventing the release, or minimizing the hazardous characteristics of wastes that are generated; (d) assuring that products are designed, formulated, packaged, and used so that they do not present unreasonable risks to human health or the Environment when used or disposed of; (e) protecting resources, species, or ecological amenities; (f) reducing to acceptable levels the risks inherent in the transportation of hazardous substances, pollutants, oil, or other potentially harmful substances; (g) cleaning up pollutants that have been released, preventing the threat of release, or paying the costs of such clean up or prevention; or (h) making responsible parties pay private parties, or groups of them, for damages done to their health or the Environment, or permitting self-appointed representatives of the public interest to recover for injuries done to public assets. ERISA - the Employee Retirement Income Security Act of 1974 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. ESCROW AGENT - as defined in the Escrow Agreement. ESCROW AGREEMENT - as defined in Section 2.4(a)(v). FACILITIES - any real property, leaseholds, or other interests currently or formerly owned or operated by the Company and any buildings, plants, structures, or equipment (including motor vehicles) currently or formerly owned or operated by the Company. FORMER SHAREHOLDERS - as defined in Section 3.30. FORMER SHAREHOLDERS' RELEASES - as defined in Section 2.4(a)(ii). GAAP - generally accepted United States accounting principles, applied on a basis consistent with the basis on which the Balance Sheet and the other financial statements referred to in Section 3.4(a) and (b) were prepared. GOVERNMENTAL AUTHORIZATION - any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement. GOVERNMENTAL BODY - any federal, state, local, municipal, foreign, or other governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); or any federal, state, local, municipal, or foreign body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature (including any court or administrative tribunal). GOVERNMENT CONTRACT - a Contract, bid or proposal between the Company and the DOD or any other Governmental Body, including any facilities contract for the use of government-owned facilities. GOVERNMENT SUBCONTRACT - a Contract, bid or proposal that is a subcontract between the Company and any third party relating to a prime contract with the DOD or any other Governmental Body. HAZARDOUS ACTIVITY - the distribution, generation, handling, importing, management, manufacturing, processing, production, refinement, Release, storage, transfer, transportation, treatment, or use (including any withdrawal or other use of groundwater) of Hazardous Materials in, on, under, about, or from the Facilities or any part thereof into the Environment, and any other act, business, operation, or thing that increases the danger, or risk of danger, or poses an unreasonable risk of harm to persons or property on or off the Facilities, or that may affect the value of the Facilities or the Company. HAZARDOUS MATERIALS - any waste or other substance that is listed, defined, designated, or classified as, or otherwise determined to be, hazardous, radioactive, or toxic or a pollutant or a contaminant under or pursuant to any Environmental Law, including any admixture or solution thereof, and specifically including petroleum and all derivatives thereof or synthetic substitutes therefore and asbestos or asbestos-containing materials. INTELLECTUAL PROPERTY ASSETS - as defined in Section 3.22(a). IRC - the Internal Revenue Code of 1986 or any successor law, and regulations issued by the IRS pursuant to the Internal Revenue Code or any successor law. IRS - the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury. KNOWLEDGE - an individual will be deemed to have "Knowledge" of a particular fact or other matter if: (a) such individual is actually aware of such fact or other matter; or (b) a prudent person having the information, position and responsibilities of such individual should be aware of such fact or other matter. A Person (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if (i) any individual who is serving as a director, officer, partner, executor, or trustee of such Person (or in any similar capacity) has, or at any time had, Knowledge of such fact or other matter; or (ii) any individual who has at any time served in any such capacity had Knowledge of such fact or other matter at the time he or she was serving. LEGAL REQUIREMENT - any federal, state, local, municipal, foreign, international, multinational, or other administrative order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty. MATERIAL ADVERSE CHANGE - with respect to any Person, any material adverse change in the business, operations, assets (including levels of working capital and components thereof), condition (financial or otherwise), operating results, liabilities, obligations, employee relations or prospects of such Person or any material casualty loss or damage to the assets of such Person, whether or not covered by insurance (it being understood, however, that if such loss is covered by insurance and as a result there is no adverse effect, then no Material Adverse Change has occurred). MATERIAL ADVERSE EFFECT - with respect to any Person, a material adverse effect on the business, operations, assets (including levels of working capital and components thereof), condition (financial or otherwise), operating results, liabilities, obligations, employee relations or prospects of the Company or which have a material adverse effect upon the ability of the Person to perform its obligations pursuant to this Agreement. NET BOOK VALUE - (i) total assets of the Company less good will and any other intangible assets, minus (ii) total liabilities of the Company exclusive of liabilities between or among the Company, Sellers and Related Persons of Seller which are to be cancelled at the Closing, all as determined in accordance with GAAP. NONCOMPETITION AGREEMENTS - as defined in Section 2.4(a)(iv). OCCUPATIONAL SAFETY AND HEALTH LAW - any Legal Requirement designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards, and any program, whether governmental or private (including those promulgated or sponsored by industry associations and insurance companies), designed to provide safe and healthful working conditions. ORDER - any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator. ORDINARY COURSE OF BUSINESS - an action taken by a Person will be deemed to have been taken in the "Ordinary Course of Business" only if: (a) such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person; and (b) such action is not required to be expressly authorized by the board of directors of such Person (or by any Person or group of Persons exercising similar authority). ORGANIZATIONAL DOCUMENTS - the articles or certificate of incorporation and the bylaws of a corporation, and any amendment to either of the foregoing. ORIGINAL SHAREHOLDERS--collectively, John Fleischmann, David Bennet, Robert Einzig and George W. Kenaston, and each, individually, an "Original Shareholder." PERSON - any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Body. PROCEEDING - any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator. RELATED PERSON - with respect to a particular individual: (a) each other member of such individual's Family; (b) any Person that is directly or indirectly controlled by such individual or one or more members of such individual's Family; (c) any Person in which such individual or any one or more members of such individual's Family hold (individually or in the aggregate) a Material Interest; and (d) any Person with respect to which such individual or one or more members of such individual's Family serves as a director, officer, partner, executor, or trustee (or in a similar capacity). With respect to a Person other than an individual: (a) any Person that directly or indirectly controls, is directly or indirectly controlled by, or is directly or indirectly under common control with such specified Person; (b) any Person that holds a Material Interest in such specified Person; (c) each Person that serves as a director, officer, partner, executor, or trustee of such specified Person (or in a similar capacity); (d) any Person in which such specified Person holds a Material Interest; (e) any Person with respect to which such specified Person serves as a general partner or a trustee (or in a similar capacity); and (f) any Related Person of any individual described in clause (b) or (c). For purposes of this definition, (a) the "Family" of an individual includes (i) the individual, (ii) the individual's spouse and former spouses, (iii) any other natural person who is related to the individual or the individual's spouse within the second degree, and (iv) any other natural person who resides with such individual, and (b) "Material Interest" means direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of voting securities or other voting interests representing at least ten percent (10%) of the outstanding voting power of a Person or equity securities or other equity interests representing at least ten percent (10%) of the outstanding equity securities or equity interests in a Person. RELEASE - any spilling, leaking, emitting, discharging, depositing, escaping, leaching, dumping, or other releasing into the Environment, whether intentional or unintentional. REPRESENTATIVE - with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors. SECURITIES ACT - the Securities Act of 1933 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. SELLERS - as defined in the first paragraph of this Agreement. SELLERS' RELEASES - as defined in Section 2.4(a)(ii). SELLERS' REPRESENTATIVE - as defined in Section 7.8. SHARES - as defined in the Recitals of this Agreement. TAX - any tax, levy, duty, assessment, deficiency or other fee and any related charge or amount (including any fine, penalty, interest or addition to tax) imposed, assessed or collected by or under the authority of any Governmental Body or payable to any tax-sharing agreement or other Contract relating thereto. TAX RETURN - any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax. THREAT OF RELEASE - a substantial likelihood of a Release that may require action in order to prevent or mitigate damage to the Environment that may result from such Release. THREATENED - a claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made (orally or in writing) or any notice has been given (orally or in writing), or if any other event has occurred or any other circumstances exist, that would lead a prudent Person to conclude that such a claim, Proceeding, dispute, action, or other matter is likely to be asserted, commenced, taken, or otherwise pursued in the future. 2. SALE AND TRANSFER OF SHARES; CLOSING. 2.1 SHARES. Subject to the terms and conditions of this Agreement, at the Closing, Sellers will sell and transfer the Shares to Buyer free and clear of all Encumbrances, and Buyer will purchase the Shares from Sellers. 2.2 PURCHASE PRICE. The purchase price (the "Purchase Price") for the Shares is Thirteen Million Six Hundred Thousand Dollars ($13,600,000) reduced or increased by the Adjustment Amount as set forth in Sections 2.5 and 2.6. 2.3 CLOSING. The purchase and sale (the "Closing") provided for in this Agreement will take place simultaneously with the execution and delivery of this Agreement. 2.4 CLOSING OBLIGATIONS. At the Closing: (a) Sellers will deliver to Buyer: (i) certificates representing the Shares, duly endorsed (or accompanied by duly executed stock powers) in form and substance satisfactory to Buyer, with signatures medallion guaranteed for transfer to Buyer; (ii) releases in the form of Exhibit 2.4(a)(ii)(1) executed by Sellers (collectively, "Sellers' Releases") and releases in the form of Exhibit 2.4(a)(ii)(2) executed by each of the Former Shareholders (collectively, "Former Shareholders' Releases"); (iii) employment agreements in form satisfactory to Buyer, executed by John Fleischmann, Gary Nelson and Roger Nicholas and a consulting agreement in form satisfactory to Buyer, executed by David Bennet (collectively, the "Employment Agreements"); (iv) noncompetition agreements executed by each Seller in the form of Exhibits 2.4(a)(iv)(1) through (5) (collectively, the "Noncompetition Agreements"); (v) an Escrow Agreement in the form of Exhibit 2.4(a) (v), executed by each Original Shareholder and the Escrow Agent; (vi) opinions of Galland, Kharasch, Greenberg, Fellman & Swirsky, P.C. and Bean, Kinney & Korman, P.C., dated the Effective Date, in the form of Exhibits 2.4(a)(vi) (1) and 2.4(a)(vi)(2); (vii) executed resignations, effective as of Closing, of each director and officer of the Company; (viii) the Disclosure Letter executed by Original Shareholders; (ix) copies of Company's Organizational Documents, certified by a Secretary or Assistant Secretary of the Company to be true, correct, complete and in full force and effect and unmodified as of the Effective Date; a complete list of the officers and directors of the Company, certified by a Secretary or Assistant Secretary of the Company to be true and correct as of the Effective Date; a long form certificate of good standing from the Secretary of State of Maryland showing all documents filed in such office with regard to the Company; and a copy, certified by the office of the Secretary of State of Maryland, of all documents filed in such office with respect to the Company. (x) copies of all Consents required pursuant to Section 3.2(b) of the Agreement; (xi) all books of account, minute books, stock record books, and other records of the Company then in the possession of Sellers or their Representatives; (xii) INTENTIONALLY OMITTED; and (xiii) such other certificates, agreements and other documents as are listed in the schedule of closing documents. (b) Buyer will deliver: (i) to Sellers, the sum of Eleven Million Four Hundred Fifty Thousand Dollars $11,450,000) by wire transfer to the Sellers' account specified below: (ii) to the Escrow Agent, subject to the requirements of the Escrow Agreement, the sum of Two Million One Hundred Fifty Thousand Dollars ($2,150,000), by wire transfer to the following account: (iii) to Sellers, the additional consideration specified in the Noncompetition Agreements in the aggregate amount of Two Hundred Thousand Dollars ($200,000) by wire transfer to the account specified in Section 2(b)(i); (iv) the Employment Agreements, executed by Company; (v) the Escrow Agreement, executed by Buyer; and (vi) opinion of Esanu Katsky Korins & Siger, LLP, dated as of the Effective Date, addressing the due authorization of the Agreement by, and the enforceability of the Agreement against, Buyer. (c) All of the transactions to be concluded at the Closing of this Agreement shall be deemed concluded simultaneously. Unless waived, no transaction or delivery shall be deemed finally concluded unless and until all such transactions are concluded. (d) Each Seller agrees that Sellers shall be solely responsible for distributing among themselves the amounts delivered jointly to Sellers by wire transfer to the account specified in Section 2(b)(i), and that amounts so delivered shall be deemed appropriately distributed to each Seller in accordance with this Agreement and the Noncompetition Agreement. 2.5 ADJUSTMENT AMOUNT The Adjustment Amount (which may be a positive or negative number) will be equal to (a) the Net Book Value as of the Effective Date determined in accordance with Section 2.6 and GAAP, minus (b) Net Book Value as shown on the February 28, 2001 Balance Sheet. 2.6 ADJUSTMENT PROCEDURE (a) Sellers will prepare or cause to be prepared consolidated financial statements ("Closing Financial Statements") of the Company as of the Effective Date in accordance with GAAP for the period from the date of the Balance Sheet through the close of business on the day before the Effective Date, including a computation of Net Book Value as of the Effective Date. The fees and expenses of Sellers (including the fees and expenses of Sellers' counsel, accountants, brokers, representatives and other agents), to the extent paid or to be paid by Company as permitted hereunder, shall be reflected either as a reduction in cash or as a liability in the Closing Financial Statements, and no fees or expenses of Sellers shall be paid by the Company after the Closing that are not reflected as liabilities on the Closing Financial Statements. Sellers will deliver the Closing Financial Statements to Buyer within 30 days after the Effective Date. If within 30 days following Buyer's receipt of the Closing Financial Statements, Buyer has not given Sellers' Representative notice of its objection to the Closing Financial Statements (such notice must contain a statement of the basis of Buyer's objection), then the Net Book Value reflected in the Closing Financial Statements will be used in computing the Adjustment Amount. If Buyer gives such notice of objection and Buyer and the Seller's Representative cannot agree with regard to such objection within 14 days thereafter, then the issues in dispute will be submitted to nationally recognized certified public accountants mutually agreed upon by the parties (which have not been engaged by either party or their Subsidiaries for at least two years prior to the date of delivery to Buyer of the Closing Financial Statements) (the "Accountants"), for resolution. If issues in dispute are submitted to the Accountants for resolution, (i) within fifteen (15) business days after request, each party will furnish to the Accountants such work papers and other documents and information relating to the disputed issues as the Accountants may request and are available to that party or its Subsidiaries (or its independent public accountants), and will be afforded the opportunity to present to and discuss with the Accountants any material relating to the dispute prior to the Accountants' determination; (ii) the determination by the Accountants, as set forth in a notice delivered to Buyer and the Seller's Representative by the Accountants, will be binding and conclusive on Buyer and all Sellers in the absence of manifest error; and (iii) Buyer and Sellers will each bear 50% of the fees of the Accountants for such determination unless all issues are resolved against either Buyer or Sellers, in which event the Accountants may, in their discretion, award arbitration expenses, including the Accountants' fees, and counsel fees to the prevailing party. (b) By the tenth business day following the final determination of the Adjustment Amount, if the Purchase Price (after consideration of the Adjustment Amount) is greater than the payment made pursuant to Section 2.4(b)(i) and 2.4(b)(ii), Buyer will pay the difference to Sellers, and if the Purchase Price (after consideration of the Adjustment Amount) is less than such amount, Sellers will pay the difference to Buyer. All payments will be made together with interest at the publicly announced prime rate charged by Fleet Bank beginning on the Effective Date and ending on the date of payment. Payments must be made in immediately available funds. The Purchase Price shall be the Purchase Price as adjusted by the Adjustment Amount. Payments to Sellers must be made in the manner set forth in Section 2.4(b)(i). Payments to Buyer must be made by wire transfer to such bank account as Buyer will specify. Any good faith dispute in the calculation of the Adjustment Amount will not constitute a breach of any of the representations or warranties of either Buyer or Sellers hereunder and will not give either party any right to indemnification hereunder. 3. REPRESENTATIONS AND WARRANTIES OF ORIGINAL SHAREHOLDERS. Original Shareholders jointly and severally represent and warrant to Buyer as follows: 3.1 ORGANIZATION AND GOOD STANDING. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Maryland, with full corporate power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, and to perform all its obligations under Company Contracts. The Company is duly qualified to do business as a foreign corporation and is in good standing under the laws of Virginia, California, and Florida. With the exception of the State of Rhode Island, there is no other state or other jurisdiction in which either the ownership or use of the properties owned or used by the Company, or the nature of the activities conducted by it, requires such qualification, except for those jurisdictions in which the failure to qualify will not have a Material Adverse Effect. 3.2 NO CONFLICT. Except as set forth in Part 3.2 of the Disclosure Letter, neither the execution and delivery of this Agreement nor the consummation or performance of any of the transactions contemplated hereby will, directly or indirectly (with or without notice or lapse of time): (a) contravene, conflict with, or result in a violation of (A) any provision of the Organizational Documents of the Company, or (B) any resolution adopted by the Board of Directors or the stockholders of the Company; (b) contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the transactions contemplated hereby or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which the Company, or any of the assets owned or used by the Company, or, to the Knowledge of the Company or Original Shareholders, any Seller, may be subject; (c) contravene, conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental Authorization that is held by the Company or that otherwise relates to the business of, or any of the assets owned or used by, the Company; (d) cause the Company to become subject to, or to become liable for the payment of, any Tax; (e) to the Knowledge of the Company or Original Shareholders, cause any of the assets owned by the Company to be reassessed or revalued by any taxing authority or other Governmental Body; (f) contravene, conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Company Contract; or (g) result in the imposition or creation of any Encumbrance upon or with respect to any of the assets owned or used by the Company. Neither the Sellers nor the Company is or will be required to give any notice to or obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the transactions contemplated hereby. 3.3 CAPITALIZATION. The authorized equity securities of the Company consist of 410,000 shares of Class A voting common stock, par value $.00108, and 41,000 shares of Class B non-voting stock, par value $.00108, of which a total of 43,426 shares of said Class A and 2,547 shares of Class B are issued and outstanding and constitute the Shares. Sellers are the record and beneficial owners and holders of the Shares, free and clear of all Encumbrances, the Shares constitute all of the issued and outstanding equity securities of the Company and each Seller is the sole record and beneficial owner of the Shares set forth after his name on Part 3.3 to the Disclosure Letter as evidenced by the share certificates identified by number as set forth in said Part 3.3. No legend or other reference to any purported Encumbrance appears upon any certificate representing equity securities of the Company other than an investment legend pursuant to the Securities Act. All of the outstanding equity securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. There are no options, warrants, Convertible Securities or other Contracts upon the exercise or conversion of which or pursuant to the terms of which any equity securities or other securities of the Company may be issued or transferred by the Company or any Seller. None of the outstanding equity securities or other securities of the Company was issued in violation of the Securities Act or any other Legal Requirement. The Company neither owns, nor has any Contract to acquire, any equity securities or other securities of any Person (other than the Company) or any direct or indirect equity or ownership interest in any other business. 3.4 FINANCIAL STATEMENTS. Sellers have delivered to Buyer: (a) audited consolidated balance sheets of the Company as at February 28 in each of the years 1999 and 2000, and the related audited statements of income, changes in stockholders' equity, and cash flows for each of the fiscal years then ended, together with the related notes and the unqualified report thereon of Buchbinder, Tunick & Company, L.L.P., independent certified public accountants; (b) an audited consolidated balance sheet of the Company as at February 28, 2001 (including the notes thereto, the "Balance Sheet"), and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the fiscal year then ended, together with the related notes and the unqualified report thereon of Buchbinder, Tunick & Company, L.L.P., independent certified public accountants, and (c) an unaudited balance sheet of the Company as at July 31, 2001, and the related unaudited consolidated statements of income, changes in stockholders' equity, and cash flow for the five (5) months then ended, including in each case the notes thereto. Such financial statements fairly present and reflect the consolidated financial condition and the results of operations, changes in stockholders' equity, and cash flows of the Company as at the respective balance sheet dates and for the periods then ended, all in accordance with GAAP. The audited and unaudited financial statements described in this Section 3.4 are collectively referred to as the Financial Statements. The unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's financial condition at July 31 and the results of its operations for the five (5) months then ended. No financial statements of any Person other than the Company are required by GAAP to be included in the consolidated financial statements of the Company. 3.5 BOOKS AND RECORDS. The books of account, minute books, stock record books, and other records of the Company, all of which have been made available to Buyer, are complete and correct and have been maintained in accordance with sound business practices except that minute books of the Company do not contain any minutes of meetings prior to 1989. The minute books of the Company contain accurate and complete records of all meetings held of, and corporate action taken by, the stockholders, the Boards of Directors, and committees of the Boards of Directors of the Company, including any actions taken by written consent in lieu of a meeting since 1989 and, except for minutes preceding 1989, no meeting of any such stockholders, Board of Directors, or committee has been held for which minutes have not been prepared and are not contained in such minute books. All of those books and records are now in the possession of the Company. Sellers have delivered to Buyer copies of the Organizational Documents of the Company as currently in effect. Records of meetings held of, and corporate action taken by, the stockholders, the Board of Directors, and committees of the Board of Directors of the Company preceding 1989 have been inadvertently lost and are no longer in the possession of, or available to, the Company or Original Shareholders. Nothing that would have been reflected in such records, if available, materially and adversely affects the assets, business, prospects, financial condition or results of operation of the Company as of the Effective Date. 3.6 TITLE TO PROPERTIES; ENCUMBRANCES. (a) The Company owns all of the properties and assets (whether real, personal, or mixed and whether tangible or intangible) as reflected as owned in the books and records of the Company (including all of the properties and assets reflected in the Financial Statements and all of the properties and assets purchased or otherwise acquired by the Company since the date of the Balance Sheet) except for (i) assets held under leases disclosed in Part 3.6 of the Disclosure Letter, which information identifies those leases which are operating leases and capital leases, and (ii) inventory and obsolete equipment sold since the date of the Balance Sheet in the Ordinary Course of Business and consistent with past practice. All such material properties and assets are free and clear of all Encumbrances except mortgages or security interests disclosed in the Financial Statements as securing specified liabilities or obligations with respect to which no default (or event that, with notice or lapse of time, or both, would constitute a default) exists, and liens for current taxes not yet due. (b) Part 3.6 of the Disclosure Letter sets forth a complete and correct description of all material property (personal, real or mixed) leased by the Company and a list of the leases covering such property. With respect to each real property lease so listed, Part 3.6 of the Disclosure Letter sets forth (i) the location of the premises covered by the lease; (ii) the date of and parties to each lease amendment or modification; (iii) the current lease termination date; (iv) the annual fixed rental for the current lease year; and (v) the number and period of any renewal options. The Company has a valid leasehold interest in all property so listed, binding on Company and, to the Knowledge of Company or Original Shareholders, on the Lessor of such property, free and clear of all Encumbrances. The Company enjoys peaceful and undisturbed possession under all of the leases covering such property, and all such leases are valid and subsisting, with no default thereunder. The Company owns good and marketable title to, or has a valid leasehold interest in, all of the real property used by the Company in its business as now conducted. (c) INTENTIONALLY OMITTED. 3.7 INTENTIONALLY OMITTED 3.8 ACCOUNTS RECEIVABLE. All accounts receivable of the Company that are reflected on the Financial Statements, on Part 3.8 of the Disclosure Letter, or on the accounting records of the Company as of the Effective Date (collectively, the "Accounts Receivable") represent valid obligations arising from sales actually made or services actually performed in the Ordinary Course of Business. The Accounts Receivable are current and collectible net of the respective reserves shown on the Financial Statements. Subject to such reserves, each of the Accounts Receivable either has been or will be collected in full, without any set-off, within one hundred eighty (180) days after the day on which it first becomes due and payable. There is no contest, claim, or right of set-off, other than returns in the Ordinary Course of Business which are reflected in the reserves, under any Contract with any obligor of an Accounts Receivable relating to the amount or validity of such Accounts Receivable. Part 3.8 of the Disclosure Letter contains a complete and accurate list of all Accounts Receivable as of a date not earlier than ten (10) days prior to the Effective Date, which list sets forth the aging of such Accounts Receivable. 3.9 INTENTIONALLY OMITTED 3.10 NO UNDISCLOSED LIABILITIES. Except as set forth in the Financial Statements and Part 3.10 of the Disclosure Letter, the Company has no liabilities or obligations of any nature (whether known or unknown and whether absolute, accrued, contingent, or otherwise) except for liabilities or obligations reflected or reserved against in the Balance Sheet and current liabilities incurred in the Ordinary Course of Business since the date thereof. 3.11 TAXES. (a) The Company has filed or caused to be filed (on a timely basis since 1995) all Tax Returns that are or were required to be filed by or with respect to it, either separately or as a member of a group of corporations, pursuant to applicable Legal Requirements. Sellers have delivered to Buyer copies of, and Part 3.11 of the Disclosure Letter contains a complete and accurate list of, all such Tax Returns relating to income or franchise taxes filed since 1995. The Company has paid all Taxes that have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment received by Sellers or the Company, except such Taxes, if any, as are listed in Part 3.11 of the Disclosure Letter and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the Financial Statements. (b) Part 3.11 of the Disclosure Letter contains a complete and accurate list of all audits of all Tax Returns of the Company, including a reasonably detailed description of the nature and outcome of each audit and a schedule of all pending audits. All deficiencies proposed as a result of such audits have been paid, reserved against, settled, or, as described in Part 3.11 of the Disclosure Letter, are being contested in good faith by appropriate proceedings. Part 3.11 of the Disclosure Letter describes all adjustments to the United States federal income Tax Returns filed by the Company or any group of corporations including the Company for all taxable years since 1995, and the resulting deficiencies proposed by the IRS. Except as described in Part 3.11 of the Disclosure Letter, none of Sellers nor the Company has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of Taxes of the Company or for which the Company may be liable. (c) The charges, accruals, and reserves with respect to Taxes on the books of the Company are adequate (determined in accordance with GAAP) and are at least equal to the Company's liability for Taxes. To the Knowledge of Company or Original Shareholders, there exists no proposed tax assessment against the Company except as disclosed in the Financial Statements or in Part 3.11 of the Disclosure Letter. No consent to the application of Section 341(f)(2) of the IRC has been filed with respect to any property or assets held, acquired, or to be acquired by the Company. All Taxes that the Company is or was required by Legal Requirements to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person. (d) All Tax Returns filed by (or that include on a consolidated basis) the Company are true, correct, and complete. Except as set forth in Part 3.11 of the Disclosure Letter, there is no tax sharing agreement that will require any payment by the Company after the date of this Agreement. The Company is not, and within the five-year period preceding the Effective Date has not been, an "S" corporation. 3.12 NO MATERIAL ADVERSE CHANGE. Since the date of the Balance Sheet, there has not been any Material Adverse Change affecting the Company, and no event has occurred or circumstance exists that may result in such a Material Adverse Change. 3.13 EMPLOYEE BENEFITS. (a) With respect to the Company and all employees heretofore employed by the Company: (i) Except as disclosed in Part 3.13 of the Disclosure Letter, the Company has not maintained, participated in, contributed to, or been required to contribute to any "employee welfare benefit plan" (as defined in Section 3(1) of ERISA), including any multi-employer plan. (ii) Except as disclosed in Part 3.13 of the Disclosure Letter, the Company has not maintained, participated in, contributed to, or been required to contribute to any "employee pension benefit plan" (as defined in Section 3(2) of ERISA), including any multi-employer plan. (iii) Part 3.13 of the Disclosure Letter lists each deferred compensation plan, pension plan, profit sharing plan, bonus plan, stock option plan, employee stock purchase plan, incentive plan, insurance plan, medical plan and any other employee benefit plan, agreement, arrangement or commitment (whether funded or unfunded, written or oral, qualified or nonqualified) which the Company has sponsored, established or maintained, in which the Company has otherwise participated or to which the Company has contributed (or to which the Company is or was required to contribute under any Legal Requirement) for the benefit of or in which any employee, terminated employee, director, or independent contractor participates. The plans, agreements, arrangements and commitments listed or required to be listed in Part 3.13 of the Disclosure Letter are referred to collectively as the "Company Plans." Part 3.13 of the Disclosure Letter lists (and Sellers have heretofore delivered to Buyer true and correct copies of) all employee manuals currently utilized by the Company with respect to the Company's employees. (b) Except as disclosed in Part 3.13 of the Disclosure Letter, (i) each of the Company Plans complies and has complied in form and operation in all respects to the applicable requirements of ERISA, the IRC, and other Legal Requirements applicable thereto; (ii) all required reports, returns and descriptions (including Form 5500 Annual Reports) have been filed or distributed appropriately with respect thereto; (iii) all required or discretionary (in accordance with historical practices) payments, premiums, contributions, reimbursements or accruals which are due with respect thereto have been paid or, if not due, have been properly accrued in accordance with GAAP on the Financial Statements; (iv) no audits, proceedings, claims or demands with respect thereto have been made by any Company Plan participant or any Governmental Authority, including, without limitation, the IRS and the Department of Labor; (v) no Company Plan has any unfunded liabilities which are not reflected on the Financial Statements; and (vi) with respect to each Company Plan intended to qualify under IRC Section 401(a) or 403(a), nothing has occurred which would cause the loss of such qualification or exemption or the imposition of any penalty or tax liability. (c) With respect to each Company Plan, Sellers have delivered to Buyer correct and complete copies of the plan documents and plan summary descriptions, the most recent determination letter received from the IRS, the most recent Form 5500 Annual Report, and all related agreements and contracts, including insurance policies, contracts with third-party administrators or consultants, and notifications to employees of their rights. In the case of any unwritten Company Plan, a written description of such Plan has been included in Part 3.13 of the Disclosure Letter. (d) Each Company Plan can be terminated within sixty (60) days, without payment of any additional contribution or amount and without the vesting or acceleration of any benefits promised by such Plan. (e) With the exception of an agreement, dated July 5, 2001, between the Company and Joan Bowles, no Company Plan obligates the Company to pay separation, severance, termination or similar benefits as a result of any transaction contemplated by this Agreement or solely as a result of a "change of control." No individual shall accrue or receive any additional benefits, service or accelerated rights to payments of benefits under any Company Plan as a result of the transactions contemplated hereby. 3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS. (a) Except as set forth in Part 3.14 of the Disclosure Letter: (i) The Company is, and at all times since January 1, 1998, has been, in full compliance with each Legal Requirement that is or was applicable to it or to the conduct or operation of its business or the ownership or use of any of its assets except where noncompliance will not have a Material Adverse Effect, and the Company is not subject to any liability or obligation as a result of the failure of the Company to comply with any Legal Requirements prior to January 1, 1998; (ii) No event has occurred or circumstance exists that (with or without notice or lapse of time) (A) may constitute or result in a violation by the Company of, or a failure on the part of the Company to comply with, any Legal Requirement, or (B) may give rise to any obligation on the part of the Company to undertake, or to bear all or any portion of the cost of, any remedial action of any nature except where such violation, failure or obligation will not have a Material Adverse Effect; and (iii) The Company has not received, at any time since January 1, 1998, any notice or other communication (whether oral or written) from any Governmental Body or any other Person regarding (A) any actual, alleged, possible, or potential violation of, or failure to comply with, any Legal Requirement, or (B) any actual, alleged, possible, or potential obligation on the part of the Company to undertake, or to bear all or any portion of the cost of, any remedial action of any nature and the Company is not subject to any liability or obligation with respect to any remedial action resulting from an event or notice which the Company received prior to January 1, 1998. (b) Part 3.14 of the Disclosure Letter contains a complete and accurate list of each Governmental Authorization that is held by the Company or that otherwise relates to the business of, or to any of the assets owned or used by, the Company. To the Knowledge of the Company or Original Shareholders, each Governmental Authorization listed or required to be listed in Part 3.14 of the Disclosure Letter is valid and in full force and effect. Except as set forth in Part 3.14 of the Disclosure Letter: (i) The Company is, and at all times since January 1, 1998 has been, in full compliance with all of the terms and requirements of each Governmental Authorization identified or required to be identified in Part 3.14 of the Disclosure Letter except where noncompliance will not result in a Material Adverse Effect, and the Company is not subject to any liability or obligation with respect to any failure of compliance with any Governmental Authorization prior to January 1, 1998; (ii) Except where the consequences of such event or circumstances do not result in a Material Adverse Effect, no event has occurred or circumstance exists that may (with or without notice or lapse of time) (A) constitute or result directly or indirectly in a violation of or a failure to comply with any term or requirement of any Governmental Authorization listed or required to be listed in Part 3.14 of the Disclosure Letter, or (B) result directly or indirectly in the revocation, withdrawal, suspension, cancellation, or termination of, or any modification to, any Governmental Authorization listed or required to be listed in Part 3.14 of the Disclosure Letter; (iii) The Company has not received, at any time since January 1, 1998, any notice or other communication (whether oral or written) from any Governmental Body or any other Person regarding (A) any actual, alleged, possible, or potential violation of or failure to comply with any term or requirement of any Governmental Authorization, or (B) any actual, proposed, possible, or potential revocation, withdrawal, suspension, cancellation, termination of, or modification to any Governmental Authorization; and (iv) All applications required to have been filed for the renewal of the Governmental Authorizations listed or required to be listed in Part 3.14 of the Disclosure Letter have been duly filed on a timely basis with the appropriate Governmental Bodies, and all other filings required to have been made with respect to such Governmental Authorizations have been duly made on a timely basis with the appropriate Governmental Bodies except where the failure to file will not result in a Material Adverse Effect. The Governmental Authorizations listed in Part 3.14 of the Disclosure Letter collectively constitute all of the Governmental Authorizations necessary to permit the Company to lawfully conduct and operate its businesses in the manner in which it currently conducts and operates such businesses and to permit the Company to own and use its assets in the manner in which it currently owns and uses such assets. 3.15 LEGAL PROCEEDINGS; ORDERS. Except as set forth in Part 3.15 of the Disclosure Letter, there is no pending or, to the Knowledge of the Company or Original Shareholders, Threatened Proceeding that has been commenced by or against the Company or that otherwise relates to or may affect the business of, or the assets owned or used by, the Company, or that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the transactions contemplated hereby. There is no Order to which the Company, or any of the assets owned or used by the Company, is subject, and to the Knowledge of the Company or Original Shareholders there is no Order to which any Seller is subject that relates to the business of, or any of the assets owned or used by, the Company. 3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in Part 3.16 of the Disclosure Letter, since the date of the Balance Sheet, the Company has conducted its business only in the Ordinary Course of Business and there has not been any: (a) change in the Company's authorized or issued capital stock; grant of any stock option or right to purchase shares of capital stock of the Company; grant of any phantom or similar rights which give any Person any interest in any portion of the revenue or earnings of the Company; issuance of any security convertible into such capital stock; grant of any registration rights; purchase, redemption, retirement, or other acquisition by the Company of any shares of any such capital stock; or declaration or payment of any dividend or other distribution or payment in respect of shares of capital stock; (b) amendment to the Organizational Documents of the Company; (c) payment or increase by the Company of any bonuses, salaries, or other compensation to any stockholder, director, officer, or employee or entry into any employment, severance, or similar Contract with any director, officer, or employee (except in the Ordinary Course of Business and in accordance with the policies set forth in Part 3.16 of the Disclosure Letter or as provided below) ; (d) retirement, resignation, or other termination of the employment of any key employee nor any notice or notification regarding any intended retirement, resignation, or other termination of the employment of any key employee. (e) adoption of, or increase in the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any employees of the Company or any announcements, whether formal or informal, as to any of the foregoing; (f) damage to or destruction or loss of any asset or property of the Company, whether or not covered by insurance, which has or may have a Material Adverse Effect on the Company; (g) entry into, termination of, or receipt of formal or informal notice or advice of termination of (i) any license, distributorship, dealer, sales representative, joint venture, credit, or similar agreement, or (ii) any Contract or transaction involving a total remaining commitment by or to the Company of at least $100,000; (h) sale (other than sales of inventory in the Ordinary Course of Business), lease, or other disposition of any asset or property of the Company or mortgage, pledge, or imposition of any lien or other encumbrance on any material asset or property of the Company, including the sale, lease, or other disposition of any of the Intellectual Property Assets; (i) cancellation or waiver of any claims or rights with a value to the Company in excess of $100,000; (j) material change in the accounting methods used by the Company from that reflected on the Financial Statements; or (k) agreement, whether oral or written and whether formal or informal, by the Company to do any of the foregoing. 3.17 CONTRACTS; NO DEFAULTS. (a) Part 3.17(a) of the Disclosure Letter contains a complete and accurate list, and Sellers have heretofore delivered or made available to Buyer true and complete copies, of: (i) each Company Contract that involves performance of services or delivery of goods or materials by the Company of an amount or value in excess of $100,000; (ii) each Company Contract that involves performance of services or delivery of goods or materials to the Company of an amount or value in excess of $100,000; (iii) each Company Contract that was not entered into in the Ordinary Course of Business and that involves expenditures or receipts of the Company in excess of $50,000; (iv) each lease, rental or occupancy agreement, license, installment and conditional sale agreement, and other Company Contract affecting the ownership of, leasing of, title to, use of, or any leasehold or other interest in, any real or personal property (except personal property leases and installment and conditional sales agreements having a value per item or aggregate payments of less than $50,000 and with terms of less than one year); (v) each licensing agreement or other Company Contract with respect to patents, trademarks, copyrights, or other intellectual property, including agreements with current or former employees, consultants, or contractors regarding the appropriation or the non-disclosure of any of the Intellectual Property Assets; (vi) each collective bargaining agreement and other Company Contract to or with any labor union or other employee representative of a group of employees; (vii) each joint venture, partnership, and other Company Contract (however named) involving a sharing of profits, losses, costs, or liabilities by the Company with any other Person; (viii) each Company Contract containing covenants that in any way purport to restrict the business activity of the Company or any Affiliate of the Company or limit the freedom of the Company or any Affiliate of the Company to engage in any line of business or to compete with any Person; (ix) each Company Contract providing for payments to or by any Person based on sales, purchases, or profits, other than direct payments for goods; (x) each power of attorney affecting the Company that is currently effective and outstanding; (xi) each Company Contract entered into other than in the Ordinary Course of Business that contains or provides for an express undertaking by the Company to be responsible for consequential damages; (xii) each Company Contract for capital expenditures in excess of $50,000; (xiii) each written warranty, guaranty, and or other similar undertaking with respect to contractual performance extended by the Company; and (xiv) each amendment, supplement, and modification (whether oral or written) in respect of any of the foregoing. Part 3.17(a) of the Disclosure Letter sets forth reasonably complete details concerning such Contracts (including the parties to the Contracts, the amount of the remaining commitment of the Company under the Contracts) and any oral modifications of the Contracts. (b) Except as set forth in Part 3.17(b) of the Disclosure Letter: (i) To the Knowledge of the Company or Original Shareholders, none of the Sellers (and no Related Person of any Seller) has or may acquire any rights under or has or may become subject to any obligation or liability under, any Contract that relates to the business of, or any of the assets owned or used by, the Company; and (ii) to the Knowledge of the Company or Original Shareholders, no officer, director, agent, employee, consultant, or contractor of the Company is bound by any Contract that purports to limit the ability of such officer, director, agent, employee, consultant, or contractor to (A) engage in or continue any conduct, activity, or practice relating to the business of the Company, or (B) assign to the Company or to any other Person any rights to any invention, improvement, or discovery. (c) Except as set forth in Part 3.17(c) of the Disclosure Letter, each Contract identified or required to be identified in Part 3.17(a) of the Disclosure Letter is in full force and effect and is valid and enforceable in accordance with its terms. (d) Except as set forth in Part 3.17(d) of the Disclosure Letter: (i) the Company is, and at all times since the date of the respective Contracts (including any Contracts which have been superseded by the present Contracts) has been, in full compliance with all applicable terms and requirements of each Contract under which the Company has or had any obligation or liability or by which the Company or any of the assets owned or used by the Company is or was bound except where noncompliance will not have a Material Adverse Effect; (ii) to the Knowledge of the Company or Original Shareholders, each other Person that has or had any obligation or liability under any Contract under which the Company has or had any rights is, and at all times since January 1, 1998, has been, in full compliance with all applicable terms and requirements of such Contract; (iii) no event has occurred or circumstance exists that (with or without notice or lapse of time) may contravene, conflict with, or result in a violation or breach of, or give the Company or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Company Contract except where the consequences of such event will not have a Material Adverse Effect; and (iv) the Company, since the date of the respective Contracts (including any Contracts which have been superseded by the present Contracts), has not given to nor received from any other Person any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation or breach of, or default under, any Contract. (e) There are no renegotiations of, attempts to renegotiate, or outstanding rights to renegotiate any material amounts paid or payable to the Company under current or completed Contracts with any Person and, to the Knowledge of the Company or Original Shareholders, no such Person has made written demand for such renegotiation. (f) The Contracts relating to the sale, design, manufacture, or provision of products or services by the Company have been entered into in the Ordinary Course of Business and have been entered into without the commission of any act alone or in concert with any other Person, or any consideration having been paid or promised, that is or would be in violation of any Legal Requirement. To the best of the Original Shareholders' and the Company's Knowledge, all such Contracts can be completed at a profit, within the time specified therein, utilizing only personnel now employed by and assets now owned by the Company. (g) Except as set forth in Part 3.17(g) of the Disclosure Letter: (i) (A) the Company has complied with all material terms and conditions of each Government Contract or Government Subcontract, (B) the Company has complied in all material respects with all requirements for all Legal Requirements or agreements pertaining to each Government Contract or Government Subcontract and (C) all representations and certifications executed, acknowledged or set forth in or pertaining to each Government Contract or Government Subcontract were complete and correct in all material respects as of their effective date and the Company has complied in all material respects with all such representations and certifications; (ii) (A) neither the U.S. Government nor any prime contractor, subcontractor or other Person has notified the Company, either in writing or orally, that the Company has breached or violated any Legal Requirement, certification, representation, clause, provision or other requirement pertaining to any Government Contract or Government Subcontract, (B) no termination for convenience, termination for default, cure notice or show cause notice is currently in effect pertaining to any Government Contract or Government Subcontract, (C) no material cost incurred by the Company pertaining to any Government Contract or Government Subcontract has been questioned or challenged by representatives of the Administrative Contracting Officer or the Defense Contract Audit Agency, has been disallowed by the U.S. Government, or has been or, to the Knowledge of the Company or Original Shareholders, now is, the subject of any investigation, and (D) no amount of money due to the Company, pertaining to any Government Contract or Government Subcontract has been withheld or set off nor has any claim been made to withhold or set off money, and the Company is entitled to all progress payments received with respect thereto; (iii) (A) to the Knowledge of Company or Original Shareholders, neither the Company nor any of its directors, officers, employees, consultants or agents is or during the past three years has been under administrative, civil or criminal investigation, indictment or information by any Governmental Body with respect to any alleged irregularity, misstatement or omission arising under or relating to any Government Contract or Government Subcontract, and (B) during the past five years, the Company has not conducted or initiated any internal investigation or made a voluntary disclosure to any Governmental Body with respect to any alleged irregularity, misstatement or omission arising under or relating to a Government Contract or Government Subcontract; (iv) there exist (A) no outstanding claims against the Company, either by any Governmental Body or by any prime contractor, subcontractor, vendor or other Person, arising under or relating to any Government Contract or Government Subcontract and (B) no material disputes between the Company and any Governmental Body under the Contract Disputes Act or any other federal statute or regulation or between the Company and any prime contractor, subcontractor or vendor arising under or relating to any Government Contract or Government Subcontract; (v) to the Knowledge of Company or Original Shareholders, the Company has no interest in any pending or potential claim against any Governmental Body or any prime contractor, subcontractor or vendor arising under or relating to any Government Contract or Government Subcontract, and Part 3.17(g) of the Disclosure Letter lists each Government Contract or Government Subcontract which is currently under audit by any Governmental Body or any other person that is a party to such Government Contract or Government Subcontract; (vi) the Company has not been debarred or suspended from participation in the award of contracts with the DOD or any other Governmental Body (excluding for this purpose ineligibility to bid on certain contracts due to generally applicable bidding requirements), there exist no facts or circumstances that would warrant suspension or debarment or the finding of non-responsibility or ineligibility on the part of the Company, no payment has been made by the Company or by any Person on behalf of the Company in connection with any Governmental Contract or Governmental Subcontract in violation of applicable procurement Legal Requirements or in violation of, or requiring disclosure pursuant to, the Foreign Corrupt Practices Act, and the Company's cost accounting and procurement systems and the associated entries reflected in the Company's financial records with respect to the Government Contracts and Government Subcontracts are in compliance in all material respects with all Legal Requirements. 3.18 INSURANCE. Sellers have heretofore delivered or made available to Buyer true and complete copies of all policies of insurance to which the Company is a party or under which the Company, or any director of the Company, is covered at the Effective Date. All such policies are in full force and effect; the Company has paid all premiums due thereon and otherwise performed all obligations under such policies; such policies, taken together, to the Knowledge of the Company or Original Shareholders, provide adequate insurance for all risks to which the Company is normally exposed; and such policies are sufficient for compliance with all Legal Requirements and Contracts to which the Company is a party or by which its assets are bound. The Company has given adequate notice of all claims under such policies to the issuers of such policies so as to preserve the Company's rights thereunder. 3.19 ENVIRONMENTAL MATTERS. Except as set forth in Part 3.19 of the disclosure letter: (a) The Company is, and at all times has been, in full compliance with, and has not been and is not in violation of or liable under, any Environmental Law except where any such noncompliance, violation or liability would not have a Material Adverse Effect. None of Original Shareholders and the Company has Knowledge of any basis to suspect, nor has any of them received any actual or, to the Knowledge of Original Shareholders and the Company, Threatened Order, notice, citation, inquiry, warning or other communication that relates to Hazardous Activity, Hazardous Materials, or any alleged, actual or potential violation or failure to comply with any Environmental Law or any alleged, actual or potential obligation to undertake or bear the cost of any Environmental, Health, or Safety Liabilities with respect to any of the Facilities or any other properties or assets (whether real, personal, or mixed) in which the Company has had an interest, or with respect to any property or facility to which Hazardous Materials generated, manufactured, refined, transferred, imported, used or processed by the Company or any other Person for whose conduct it is or may be held responsible, have been transported, treated, stored, handled, transferred, disposed, recycled or received. To the Knowledge of the Company or Original Shareholders, no other person for whose conduct the Company is or may be held responsible has received any such actual or Threatened Order, notice, citation, inquiry, warning or other communication. (b) There are no pending or, to the Knowledge of the Company or Original Shareholders, Threatened claims, Encumbrances, or other restrictions of any nature, resulting from any Environmental, Health, and Safety Liabilities or arising under or pursuant to any Environmental Law, with respect to or affecting any of the Facilities or any other properties and assets (whether real, personal, or mixed) in which the Company has or had an interest. (c) INTENTIONALLY OMITTED (d) None of Sellers and the Company, or any other Person for whose conduct they are or may be held responsible, has any Environmental, Health, and Safety Liabilities with respect to the Facilities or, to the Knowledge of Original Shareholders or the Company, with respect to any other properties and assets (whether real, personal, or mixed) in which the Company (or any predecessor), has or had an interest, or at any property geologically or hydrologically adjoining the Facilities or any such other property or assets except liabilities which will not result in a Material Adverse Effect. (e) There are no Hazardous Materials present on or in the Environment at the Facilities or at any geologically or hydrologically adjoining property, including any Hazardous Materials contained in barrels, above or underground storage tanks, landfills, land deposits, dumps, equipment (whether moveable or fixed) or other containers, either temporary or permanent, and deposited or located in land, water, sumps, or any other part of the Facilities or such adjoining property, or incorporated into any structure therein or thereon except such Hazardous Materials, if any, the presence of which will not have a Material Adverse Effect. To the Knowledge of the Company or Original Shareholders, none of Sellers and the Company, nor any other Person for whose conduct they are or may be held responsible, or any other Person, has permitted or conducted, or is aware of, any Hazardous Activity conducted with respect to the Facilities or any other properties or assets (whether real, personal, or mixed) in which the Company has or had an interest except in full compliance with all applicable Environmental Laws. (f) There has been no Release or, to the Knowledge of the Company or Original Shareholders, Threat of Release, of any Hazardous Materials at or from the Facilities or at any other locations where any Hazardous Materials were generated, manufactured, refined, transferred, produced, imported, used, or processed from or by the Facilities, or from or by any other properties and assets (whether real, personal, or mixed) in which the Company has or had an interest, or to the Knowledge of the Company or Original Shareholders, any geologically or hydrologically adjoining property, whether by Sellers, the Company, or any other Person. (g) Sellers have delivered to Buyer true and complete copies and results of any reports, studies, analyses, tests, or monitoring possessed or initiated by Sellers or the Company pertaining to Hazardous Materials or Hazardous Activities in, on, or under the Facilities, or concerning compliance by Sellers, the Company, or any other Person for whose conduct they are or may be held responsible, with Environmental Laws. 3.20 EMPLOYEES (a) Part 3.20 of the Disclosure Letter contains a complete and accurate list of the following information for each employee or director of the Company, including each employee on leave of absence or layoff status: name; job title; date hired, current compensation paid or payable and any change in compensation since January 1, 1999; vacation accrued; and service credited for purposes of vesting and eligibility to participate under the Company's pension, retirement, profit-sharing, thrift-savings, deferred compensation, stock bonus, stock option, cash bonus, employee stock ownership (including investment credit or payroll stock ownership), severance pay, insurance, medical, welfare, or vacation plan, other employee pension benefit plan or employee welfare benefit plan, or any other employee benefit plan. (b) To the Knowledge of the Company or Original Shareholders, no employee or director of the Company is a party to, or is otherwise bound by, any agreement or arrangement, including any confidentiality, noncompetition, or proprietary rights agreement, between such employee or director and any other Person ("Proprietary Rights Agreement") that in any way adversely affects or will affect (i) the performance of his duties as an employee or director of the Company, or (ii) the ability of the Company to conduct its business, including any Proprietary Rights Agreement with Sellers or the Company by any such employee or director. To Original Shareholders' or the Company's Knowledge, and with the exception of David Bennet, Robert Einzig and George W. Kenaston, no director, officer, or other key employee of the Company intends to terminate his employment with the Company. (c) Part 3.20 of the Disclosure Letter also contains a complete and accurate list of the following information for each retired employee or director of the Company, or their dependents, receiving benefits or scheduled to receive benefits in the future: name, pension benefit, pension option election, retiree medical insurance coverage, retiree life insurance coverage, and other benefits. (d) Except as set forth in Part 3.20(c) of the Disclosure Letter, all former and current employees of the Company have executed written confidentiality and noncompete Contracts with the Company. Except as set forth in Part 3.20(c) of the Disclosure Letter, each such Contract is in full force and effect and is valid and enforceable in accordance with its terms. The form or forms of such Contracts are included in Part 3.20(c) of the Disclosure Letter. 3.21 LABOR RELATIONS; COMPLIANCE. The Company has not been and is not a party to any collective bargaining or other labor Contract. There has not been, there is not presently pending or existing, and, to Original Shareholders' or the Company's Knowledge, there is not Threatened, (a) any strike, slowdown, picketing, work stoppage, or employee grievance process, (b) any Proceeding against or affecting the Company relating to the alleged violation of any Legal Requirement pertaining to labor relations or employment matters, including any charge or complaint filed by an employee or union with the National Labor Relations Board, the Equal Employment Opportunity Commission, or any comparable Governmental Body, organizational activity, or other labor or employment dispute against or affecting the Company or its premises, or (c) any application for certification of a collective bargaining agent. To Original Shareholders' or the Company's Knowledge, no event has occurred or circumstance exists that could provide the basis for any work stoppage or other labor dispute. There is no lockout of any employees by the Company, and no such action is contemplated by the Company. The Company has complied in all respects with all Legal Requirements relating to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining, the payment of social security and similar taxes, occupational safety and health, and plant closing. The Company is not liable for the payment of any compensation, damages, taxes, fines, penalties, or other amounts, however designated, for failure to comply with any of the foregoing Legal Requirements. 3.22 INTELLECTUAL PROPERTY. (a) Intellectual Property Assets - The term "Intellectual Property Assets" includes: (i) the Company's name, all fictional business names, trading names, registered and unregistered trademarks, service marks, trade names and applications (collectively, "Marks"); (ii) all patents, patent applications, and inventions and discoveries that may be patentable (collectively, "Patents"); (iii) all copyrights in both published works and unpublished works (collectively, "Copyrights"); (iv) all know-how, trade secrets, confidential information, customer lists, software, technical information, data, process technology, plans, designs, unpatentable inventions, drawings, and blue prints (collectively, "Trade Secrets"), owned or licensed by the Company as licensee or licensor or used by Company in the operation of Company's businesses as they are currently conducted. (b) Agreements - Part 3.22(b) of the Disclosure Letter contains a complete and accurate list and summary description, including any royalties paid or received by the Company, of all Contracts relating to the Intellectual Property Assets to which the Company is a party or by which the Company is bound, except for any license implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs with a value, in the aggregate, of less than $50,000 under which the Company is the licensee. There are no outstanding and, to Original Shareholders' or the Company's Knowledge, no Threatened disputes or disagreements with respect to any such agreement. The Company has fully complied with all license agreements or other Contracts relating to each software program used by the Company in connection with its business as currently conducted, and the Company has obtained the appropriate number of licenses for all computers and workstations on which such software is loaded or used. (c) Know-How Necessary for the Business (i) The Intellectual Property Assets are, to the Knowledge of the Company and Original Shareholders, all those necessary for the operation of the Company's businesses as they are currently conducted. The Company is the owner of all right, title, and interest in and to each of the Intellectual Property Assets, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims, and has the right to use without payment to a third party all of the Intellectual Property Assets. (ii) To the Knowledge of the Company or Original Shareholders, no employee of the Company has entered into any Contract that restricts or limits in any way the scope or type of work in which the employee may be engaged or requires the employee to transfer, assign, or disclose information concerning his work to anyone other than the Company. Part 3.22(c) of the Disclosure Letter contains a complete and accurate list of all former and current employees of the Company who have executed written contracts with the Company that assign to the Company or otherwise concern or are related to any inventions, improvements, discoveries, or other information related to the business of the Company. The form or forms of such Contracts are included in Part 3.22(c) of the Disclosure Letter. (d) Patents. The Company owns no patents or patent applications. Part 3.22(d) of the Disclosure Letter contains a complete and accurate list and summary description of all inventions and discoveries of the Company that, to the Knowledge of Original Shareholders or the Company, may be patentable. The Company is the owner of all right, title, and interest in and to each of such inventions and discoveries, free and clear of all liens, security interests, charges, encumbrances, equities and other adverse claims. None of the products manufactured or sold, nor any process or know-how used, nor any service rendered by the Company, infringes or, to the Knowledge of the Company or Original Shareholders, is alleged to infringe any patent or the proprietary right of any other person. (e) Trademarks. Part 3.22(e) of the Disclosure Letter contains a complete and accurate list and summary description of all Marks. None of the Marks has been registered with the United States Patent and Trademark office. The Company is the owner of all right, title, and interest in and to each of the Marks, free and clear of all liens, security interests, charges, encumbrances, equities and other adverse claims. None of the Marks used by the Company infringes or, to the Knowledge of the Company or Original Shareholders, is alleged to infringe any trade name, trademark or service mark of any third party, and to Original Shareholders' or the Company's Knowledge, no Mark is infringed or has been challenged or threatened in any way. (f) Copyrights. (i) Part 3.22(f) of the Disclosure Letter contains a complete and accurate list and summary description of all registered Copyrights. The Company is the owner of all right, title, and interest in and to each of the Copyrights, free and clear of all liens, security interests, charges, encumbrances, equities, and other adverse claims. (ii) To Original Shareholders' or the Company's Knowledge, all registered Copyrights are currently in compliance with formal legal requirements, are valid and enforceable, and are not subject to any maintenance fees or taxes or actions falling due within ninety days after the date of Closing. (iii) No Copyright is infringed or, to Original Shareholders' or the Company's Knowledge, has been challenged or threatened in any way. To Original Shareholders' or the Company's Knowledge, none of the subject matter of any of the Copyrights infringes or is alleged to infringe any copyright of any third party or is a derivative work based on the work of a third party. (iv) All works encompassed by the Copyrights have been marked with the proper copyright notice except in such cases where failure to mark the work would not result in a Material Adverse Effect. (g) Trade Secrets. (i) To Original Shareholders' or the Company's Knowledge, with respect to each Trade Secret, the documentation relating to such Trade Secret is current, accurate, and sufficient in detail and content to identify and explain it and to allow its full and proper use without reliance on the knowledge or memory of any individual. (ii) Sellers and the Company have taken all reasonable precautions to protect the secrecy, confidentiality, and value of their Trade Secrets. (iii) The Company has good title and an absolute (but not necessarily exclusive) right to use the Trade Secrets. To the Knowledge of the Company or Original Shareholders, the Trade Secrets are not part of the public knowledge or literature, and have not been used, divulged, or appropriated either for the benefit of any Person (other than the Company) or to the detriment of the Company. To the Knowledge of Company or Original Shareholders, no Trade Secret is subject to any adverse claim or has been challenged or threatened in any way. 3.23 CERTAIN PAYMENTS. Neither the Company nor any director, officer, agent, or employee of the Company, or, to Original Shareholders' or the Company's Knowledge, any other Person associated with or acting for or on behalf of the Company, has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, (iii) to obtain special concessions or for special concessions already obtained, for or in respect of the Company or any Affiliate of the Company, or (iv) in violation of any Legal Requirement, (b) established or maintained any fund or asset that has not been recorded in the books and records of the Company. 3.24 DISCLOSURE. (a) No representation or warranty of Original Shareholders in this Agreement, and no statement in the Disclosure Letter, omit to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. (b) There is no fact known to any Original Shareholder that has specific application to any Seller or the Company (other than general economic or industry conditions) and that materially adversely affects or, as far as such Original Shareholders can reasonably foresee, materially threatens, the assets, business, prospects, financial condition, or results of operations of the Company, that has not been set forth in this Agreement or the Disclosure Letter. 3.25 RELATIONSHIPS WITH RELATED PERSONS. Except as to the use of a portion of the IPT CD Rom by David Bennet as referenced in, and pursuant to, the Noncompetition Agreement between David Bennet and Buyer of even date, no Seller or any Related Person of any Seller or of the Company has, or since the first day of the next to last completed fiscal year of the Company has had, any interest in any property (whether real, personal, or mixed and whether tangible or intangible), used in or pertaining to the Company's businesses. No Seller or any Related Person of any Seller or of the Company is, or since the first day of the next to last completed fiscal year of the Company has owned (of record or as a beneficial owner) an equity interest or any other financial or profit interest in, a Person that has (i) had business dealings or a material financial interest in any transaction with the Company, or (ii) engaged in competition with the Company with respect to any line of the products or services of the Company (a "Competing Business") in any market presently served by the Company. To Original Shareholders' or the Company's Knowledge, except as set forth in Part 3.25 of the Disclosure Letter, no Seller or any Related Person of any Seller or of the Company is a party to any Contract with, or has any claim or right against, the Company. 3.26 BROKERS OR FINDERS. Sellers and their agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement other than professional fees of any nature paid to Galland, Kharasch, Greenberg, Fellman & Swirsky, P.C. which shall be paid immediately prior to Closing. 3.27 BUSINESS RELATIONSHIPS. Part 3.27 of the Disclosure Letter contains a complete and accurate list of each customer of the Company that accounted for more than three percent (3%) of the total revenues of the Company in each of the last three (3) fiscal years of the Company and in the last fiscal period included in the Financial Statements, and sets forth the total revenues derived from each such customer during each of such fiscal periods. To the Knowledge of the Company or Original Shareholders, since the date of the Balance Sheet, the Company has not suffered any loss of employees or suffered loss of good will or an adverse change in the relationship with any suppliers, customers, creditors, agents or others having business relationships with the Company that materially and adversely affects the business operations or prospects of the Company. Except as set forth in Part 3.27 of the Disclosure Letter, the Company has not been involved in any material controversy with any of its customers or suppliers. The Company has not been advised by any of its customers or suppliers that such customer or supplier was or is intending to terminate its relationship with the Company or would not continue to purchase supplies or services for future periods on account of any dissatisfaction with the Company's performance or due to the Contemplated Transactions. To the Knowledge of the Company or Original Shareholders, all business placed by all employees of the Company has been placed in the name of the Company, and all fees and compensation on such business have been paid to and are the property of the Company. 3.28 INDEBTEDNESS BY RELATED PERSONS. To Original Shareholders' or the Company's Knowledge, all indebtedness heretofore owed to the Company by any Seller or any Related Person of any Seller has been paid in full. All indebtedness by the Company to any Seller or Former Shareholder or any Related Person of any of them, (including any right to indemnification or reimbursement from the Company, whether pursuant to the Company's Organizational Documents, contract or otherwise and whether or not relating to claims pending on, or asserted after, the Effective Date) will be released at the Closing and the Company will not have any obligation with respect thereto. All such obligations of the Company are listed on Part 3.28 of the Disclosure Letter. 3.29 CERTAIN PROCEEDINGS. There is no Proceeding that has been commenced against any Seller or the Company that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To Original Shareholders' or the Company's Knowledge, no such Proceeding has been Threatened. 3.30 SHAREHOLDER AGREEMENTS; FORMER SHAREHOLDERS. Immediately preceding the Closing, Two Hundred Fourteen (214) shares of the issued and outstanding Class A voting common stock and Two Thousand Eighteen (2,018) shares of the issued and outstanding Class B non-voting common stock were owned, beneficially and of record, by the individuals (collectively, the "Former Shareholders" and each, a "Former Shareholder") and in the amounts set forth on Part 3.30 of the Disclosure Letter. Since the date of the Balance Sheet, no Person has owned or held any equity securities of the Company other than Sellers and the Former Shareholders. Pursuant to appropriate purchase agreements (the "Cross Purchase Agreements") and concurrently with the Closing, Original Shareholders have acquired all of the Shares previously owned by the Former Shareholders and at Closing will convey to Buyer all of the issued and outstanding Shares of the Company, free and clear of all Encumbrances, including any claim or interest of the Former Shareholders. With the exception of the Cross Purchase Agreement, all Stockholders' Buy-Sell Agreements, Stock Bonus Agreements, Stock Repurchase Agreements, or other Contracts which relate to the securities of the Company and to which the Company, the Sellers, and Former Shareholders or any one or more of them is a party, have been fully and finally terminated and are no longer of any force or effect. Each of the Former Shareholders has duly executed and delivered to Buyer a Former Shareholder's Release, and the Former Shareholder's Release executed by such Former Shareholder constitutes the legal, valid and binding obligation of such Former Shareholder, enforceable against such Former Shareholder in accordance with its terms. Except as set forth in Part 3.30 of the Disclosure Letter, no Former Shareholder and no Related Person of any Former Shareholder, is a party to any Contract with, or has any claim or right against, the Company or any of the Company's securities. 3A. REPRESENTATIONS AND WARRANTIES OF ALL SELLERS. Each of the Sellers, individually with respect to himself, herself or itself and not jointly and severally, represents and warrants to Buyer as follows: 3A.1 AUTHORITY; NO CONFLICT. (a) The Employment Agreement (if executed by such Seller), such Seller's Release, the Noncompetition Agreement, such Seller's endorsement of the certificates evidencing the Shares (or the executed stock power accompanying such certificates) and the Escrow Agreement (if executed by such Seller), and each other agreement, certificate or document executed by or on behalf of such Seller and delivered to Buyer pursuant to this Agreement (collectively, the "Seller's Closing Documents") and this Agreement constitute the legal, valid and binding obligations of such Seller, enforceable against such Seller (such Seller being hereinafter referred to as "the Seller" in this Section 3A) in accordance with their respective terms. The Seller has the absolute and unrestricted right, power, authority and capacity to execute and deliver this Agreement and the Seller's Closing Documents and to perform the Seller's obligations under this Agreement and the Seller's Closing Documents. (b) Neither the execution and delivery of this Agreement nor the consummation or performance of the transactions contemplated hereby will, directly or indirectly (with or without notice or lapse of time) contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the transactions contemplated hereby or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which the Seller may be subject. 3A.2 POWERS. Part 3A.2 of the Disclosure Letter contains a complete and accurate list, and the Seller has heretofore delivered or made available to Buyer a true and complete copy of, each power of attorney that is currently effective and outstanding granted by the Seller with respect to any of the Shares. 3A.3 RELATED PARTY TRANSACTIONS (a) Neither the Seller nor any Related Person of the Seller has or may acquire any rights under, or has or may become subject to any obligation or liability under, any Contract that relates to the business of, or any of the assets owned or used by, the Company. (b) Except as set forth in Part 3A.3 of the Disclosure Letter, neither the Seller nor any Related Person of the Seller is a party to any Contract with, or has any claim or right against, the Company. 3A.4 DISCLOSURE. There is no fact known to the Seller that has any specific application to the Seller or to the Company (other than general economic or industry conditions) and that materially and adversely affects or, as far as the Seller can reasonably foresee, materially threatens, the assets, business, prospects, financial condition or results of operations of the Company, that has not been set forth in this Agreement or the Disclosure Letter. 3A.5 INDEBTEDNESS BY RELATED PERSONS. All indebtedness heretofore owed to the Company by the Seller or any Related Person of the Seller has been paid in full, and all indebtedness by the Company to the Seller or any Related Person of the Seller will be released at the Closing and the Company will not have any obligation with respect thereto. All such obligations of the Company are listed on Part 3.28 of the Disclosure Letter. 3A.6 SHARES. The Seller is the sole record and beneficial owner of the Shares set forth after his or her name on Part 3.3 of the Disclosure Letter, free and clear of all Encumbrances. No legend or other reference to any purported Encumbrance appears on any certificate representing the Shares owned by the Seller other than an investment legend pursuant to the Securities Act. The Seller is not a party to any option, warrant, purchase right or other contract or commitment that would require the Seller to sell, transfer or otherwise dispose of any of the Shares other than this Agreement. The Seller is not a party to any voting trust, proxy or other agreement or understanding with respect to the voting of any of the Shares. All of the Shares heretofore owned by the Seller have been duly endorsed for transfer to Buyer or are accompanied by duly executed stock powers. 3A.7 BROKERS OR FINDERS. The Seller and his or her agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement other than professional fees of any nature paid to Galland, Kharasch, Greenberg, Fellman & Swirsky, P.C. which shall be paid immediately prior to Closing. 4. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants to Sellers as follows: 4.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. 4.2 AUTHORITY; NO CONFLICT. (a) This Agreement constitutes the legal, valid, and binding obligations of Buyer, enforceable against Buyer in accordance with its terms. Buyer has the absolute and unrestricted right, power, and authority to execute and deliver this Agreement and to perform its obligations hereunder. (b) Neither the execution and delivery of this Agreement by Buyer nor the consummation or performance of any of the Transactions contemplated hereby by Buyer will give any Person the right to prevent, delay, or otherwise interfere with any of the Transactions contemplated hereby. Buyer is not and will not be required to obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Transactions contemplated hereby. 4.3 INVESTMENT INTENT. Buyer is acquiring the Shares for its own account and not with a view to their distribution within the meaning of Section 2(11) of the Securities Act. 4.4 CERTAIN PROCEEDINGS. There is no pending Proceeding that has been commenced against Buyer and that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Transactions contemplated hereby. To Buyer's Knowledge, no such Proceeding has been Threatened. 4.5 BROKERS OR FINDERS. Buyer and its agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement. 5. COVENANTS. 5.1 PROTECTION OF RELATIONSHIPS. None of the Sellers will at any time hereinafter take, and they and each of them will cause the Company not to take, any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier or other business associate of the Company from establishing or maintaining business relationships with the Company. 5.2 FURTHER ASSURANCES. Sellers shall use Sellers' best efforts to implement the provisions of this Agreement, and for such purpose Sellers, at the request of Buyer and at no cost to Sellers, at or after the Closing, shall, without further consideration, promptly execute and deliver, or cause to be executed and delivered, to Buyer such documents and other instruments in addition to those required by this Agreement, in form and substance satisfactory to Buyer, and take all such other actions, as Buyer may reasonably deem necessary or desirable to implement any provision of this Agreement and/or to further the transactions contemplated by this Agreement and obtain the benefit thereof for Buyer. Sellers will take no action to terminate or limit existing or prior coverages as applicable to the pre-closing activities of the Company or the Company's ability to make claims under those coverages. 5.3 INTENTIONALLY OMITTED. 5.4 CONFIDENTIALITY AGREEMENT OF SELLERS. Each Seller acknowledges and agrees that all Confidential Information known or obtained by the Seller, whether before or after the date hereof, is the property, as appropriate, of the Company or the Buyer. Therefore, each Seller agrees that the Sellers will not, at any time, disclose to any unauthorized Persons or use for his own account or for the benefit of any third party any Confidential Information, whether Sellers have such information in Sellers' memories or embodied in writing or other physical form or any computer readable format, without Buyer's written consent, unless and to the extent that the Confidential Information (i) is or becomes generally known to and available for use by the public other than as a result of Sellers' fault or the fault of any other Person bound by a duty of confidentiality to Buyer or the Company or, (ii) becomes available to Seller on a non-confidential basis, from a source other than the Company or any of its employees who are entitled to disclose such information without breach of confidentiality to the Company; or (iii) to the extent that disclosure is required by law (in which event Sellers shall give Buyer as much notice of such disclosure as is practicable and permitted by law and shall cooperate with Buyer at Buyer's expense to obtain appropriate protective orders). Each Seller agrees to deliver to Buyer at the time of execution of this Agreement, and at any other time Buyer may request, all documents, memoranda, notes, plans, records, reports, and other documentation, models, components, devices, or computer software, whether embodied in a disk or in other form (and all copies of all of the foregoing), relating to the businesses, operations, or affairs of the Company and any other Confidential Information that Seller may then possess or have under Seller's control. If Seller breaches the covenants set forth in this Section 5.4, each of Buyer and the Company, in addition to the right to recover Damages as provided in Section 6 and any other rights it may have, shall have the right to obtain injunctive or other equitable relief to restrain any breach or threatened breach or otherwise to specifically enforce the provisions of this Section 5.4, it being agreed that money damages alone would be inadequate to compensate the Buyer and the Company and would be an inadequate remedy for such breach. 6. INDEMNIFICATION; REMEDIES. 6.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE. Subject to Section 6.5, below, all representations, warranties, covenants, and obligations in this Agreement, and any other certificate or document delivered pursuant to this Agreement, will survive the Closing. The right to indemnification, payment of Damages or other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any Knowledge acquired (or capable of being acquired) at any time, whether before or after the Effective Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty will not affect the right to indemnification, payment of Damages, or other remedy based on such representations and warranties. Any payment made by an Original Shareholder to Buyer pursuant to this Section 6 shall be deemed to be a reduction in the Purchase Price and shall not be deemed to be an item of income or expense, and all parties hereto agree to prepare their tax returns consistent therewith. 6.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY ORIGINAL SHAREHOLDERS. Original Shareholders, jointly and severally, will indemnify and hold harmless Buyer and the Company and their respective successors and assigns (collectively, the "Indemnified Persons") for, and will pay to the Indemnified Persons the amount of, any loss, liability, claim, damage (including incidental and consequential damages), expense (including costs of investigation and defense and reasonable attorneys' fees) or diminution of value, whether or not involving a third-party claim (collectively, "Damages"), arising, directly or indirectly, from or in connection with: (a) any Breach of any representation or warranty made by Original Shareholders in Section 3 of this Agreement; (b) any product shipped or manufactured by, or any services provided by, the Company prior to the Effective Date; (c) any claim by any Person for brokerage or finder's fees or commissions or similar payments based on any agreement or understanding alleged to have been made by any such Person with any Seller (or any Person acting on any Seller's behalf) in connection with the transactions contemplated hereby; (d) any Breach of any representation or warranty made by any Seller in this Agreement or any certificate or document delivered by any Seller pursuant to this Agreement, other than those contained in Section 3 or those referred to in Section 6.2(c); (e) any Breach by any Seller of any covenant or obligation of such Seller in this Agreement or any other agreement or document delivered by such Seller pursuant to this Agreement; (f) any claim or right of any Former Shareholder against the Company or Buyer or any of its securities or otherwise arising in connection with or related to the transactions or matters described in, or contemplated by, this Agreement or the Former Shareholder Releases; (g) any claim by, or related to, Janice or Janet Buxbaum; (h) any claim related to or arising in connection with the proceeding styled Cynthia A. Metzler, Acting Secretary of Labor v. David Bennet, et. al., Case No. L 97-1022 in the United States District Court for the District of Maryland, or the facts alleged therein or giving rise thereto, excluding, however, any claim caused by the failure of the Company timely to make the two remaining $75,000 payments specified in the Consent Judgment filed April 7, 1997; (i) the failure of Company to qualify to do business in Rhode Island before the Effective Date; or (j) any claim that, at the time of the consummation of the transactions contemplated by this Agreement, any Person other than Sellers owns or holds, or has any right, title or interest in or to, any equity securities of the Company. The remedies provided in this Section 6.2 will not be exclusive of or limit any other remedies that may be available to Buyer or the other Indemnified Persons. 6.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY ORIGINAL SHAREHOLDERS; ENVIRONMENTAL MATTERS. Consistent with the provisions of Section 6.2, Original Shareholders, jointly and severally, will indemnify and hold harmless Buyer and the other Indemnified Persons for, and will pay to Buyer, the Company, and the other Indemnified Persons the amount of, any Damages (including costs of cleanup, containment, or other remediation) arising, directly or indirectly, from or in connection with: (a) any Environmental, Health, and Safety Liabilities arising out of or relating to: (i) (A) the ownership, operation, or condition at any time on or prior to the Effective Date of the Facilities or any other properties and assets (whether real, personal, or mixed and whether tangible or intangible) in which Sellers or the Company has or had an interest, or (B) any Hazardous Materials or other contaminants that were present on the Facilities or such other properties and assets at any time on or prior to the Effective Date; or (ii) (A) any Hazardous Materials or other contaminants, wherever located, that were, or were allegedly, generated, transported, stored, treated, Released, or otherwise handled by Sellers or the Company or by any other Person for whose conduct they are or may be held responsible at any time on or prior to the Effective Date, or (B) any Hazardous Activities that were, or were allegedly, conducted by Sellers or the Company or by any other Person for whose conduct they are or may be held responsible; or (b) any bodily injury (including illness, disability, and death, and regardless of when any such bodily injury occurred, was incurred, or manifested itself), personal injury, property damage (including trespass, nuisance, wrongful eviction, and deprivation of the use of real property), or other damage of or to any Person, including any employee or former employee of Sellers or the Company or any other Person for whose conduct they are or may be held responsible, in any way arising from or allegedly arising from any Hazardous Activity conducted or allegedly conducted with respect to the Facilities or the operation of the Company prior to the Effective Date, or from Hazardous Material that was (i) present or suspected to be present on or before the Effective Date on or at the Facilities (or present or suspected to be present on any other property, if such Hazardous Material emanated or allegedly emanated from any of the Facilities and was present or suspected to be present on any of the Facilities on or prior to the Effective Date) or (ii) Released or allegedly Released by Sellers or the Company or any other Person for whose conduct they are or may be held responsible, at any time on or prior to the Effective Date. Buyer will be entitled to control any Cleanup, any related Proceeding, and, except as provided in the following sentence, any other Proceeding with respect to which indemnity may be sought under this Section 6.3. The procedure described in Section 6.8 will apply to any claim solely for monetary damages relating to a matter covered by this Section 6.3. 6.4 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER. Buyer will indemnify and hold harmless Sellers, and will pay to Sellers the amount of any Damages arising, directly or indirectly, from or in connection with (a) any Breach of any representation or warranty made by Buyer in this Agreement or in any certificate delivered by Buyer pursuant to this Agreement, (b) any Breach by Buyer of any covenant or obligation of Buyer in this Agreement, (c) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Buyer (or any Person acting on its behalf) in connection with any of the transactions contemplated hereby, or (d) the failure of Company timely to make the two remaining $75,000 payments under the Consent Judgment referred to in Section 6.2(h). Buyer agrees to notify Sellers' Representative when such payments have been made. 6.5 TIME LIMITATIONS. Original Shareholders will have no liability (for indemnification or otherwise) with respect to any representation or warranty, or covenant or obligation to be performed and complied with on or before the Effective Date, other than those in Sections 3.3, 3.6, 3.11, 3.13, 3.19, 3.21, 3.23 and 3.30 and those in Section 3A unless within twelve (12) months following the Effective Date Buyer notifies Original Shareholders of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Buyer; a claim with respect to Sections 3.3, 3.6, 3.11, 3.13, 3.19, 3.21, 3.23 or 3.30 or with respect to Section 3A or a claim for indemnification or reimbursement not based upon any representation or warranty or any covenant or obligation to be performed and complied with on or before the Effective Date (including claims for indemnification under clauses (f) through (j) of Section 6.2), may be made at any time. Buyer will have no liability (for indemnification or otherwise) with respect to any representation or warranty, or covenant or obligation to be performed and complied on or before the Effective Date, unless within twelve (12) months following the Effective Date Original Shareholders notify Buyer of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Original Shareholders. 6.6 BASKET LIMITATION AND CAP. (a) Original Shareholders will have no liability (for indemnification or otherwise) with respect to the matters described in clause (a) or clause (b) of Section 6.2 until the total of all Damages with respect to such matters exceeds One Hundred Thousand Dollars ($100,000) (the "Basket"), and then only for the amount by which such Damages exceed One Hundred Thousand Dollars ($100,000). Original Shareholders will have liability with respect to the matters described in clause (c), clause (d), clause (e), clause (f), clause (g), clause (h), clause (i), and clause (j) of Section 6.2 without benefit of the Basket or other threshold as to the amount thereof. (b) Each Seller shall have liability for Breach of the Employment Agreement, if any, and the Noncompetition Agreement executed by such Seller without benefit of the Basket or other threshold as to the amount thereof. The liability of each Seller under the Employment Agreement, if any, and, subject to the provisions of Section 6.6(d), the Noncompetition Agreement executed by such Seller, shall be several only and not joint and several. (c) Except as provided below, the liability of each Original Shareholder with respect the matters described in Section 6.2 and matters arising under the Employment Agreement, if any, and the Noncompetition Agreement executed by such Seller shall in no event exceed, in the aggregate, Three Million Four Hundred Fifty Thousand Dollars ($3,450,000), it being the intent of the parties that the aggregate liability of all Original Shareholders with regard to such matters shall not exceed Thirteen Million Eight Hundred Thousand Dollars ($13,800,000). Any payment made by the Original Shareholders to Buyer pursuant to this Section 6 shall be deemed a reduction in the Purchase Price and shall not be deemed to be an item of income or expense, and all parties hereto agree to prepare their tax returns consistent therewith. Notwithstanding anything contained in this Section 6.6 to the contrary, the limitations on liability contained in this Section 6.6(c) shall not be effective with regard to any willful misrepresentation herein or any intentional Breach of any covenant or obligation under the Noncompetition Agreement. (d) Nothing in Sections 6.6(b) or 6.6(c) of this Agreement shall be construed in any way to limit the right of Buyer to make a claim against, and seek indemnity from, the Escrow Fund, as defined in the Escrow Agreement, for the full amount of any Damages sustained by the Buyer and to which Buyer is entitled pursuant to this Article 6 to the extent that the Escrow Fund is sufficient to satisfy Buyer's claim. To the extent that Buyer has a claim for Damages in excess of the Escrow Fund, the provisions of Section 6.6(b) shall apply. In computing the maximum amount of Damages payable by any Seller pursuant to Section 6.6(c), any payments from the Escrow Fund shall be deemed to have been paid proportionately by the Original Shareholders, based on their respective ownership of the Shares. Notwithstanding the foregoing, Buyer shall not be entitled to make a claim against, or seek indemnity from, the Escrow Fund for Damages which arise solely in connection with (i) any Breach of the Employment Agreements or (ii) any Breach of the Noncompetition Agreement of Nelson; but Buyer shall be entitled to make a claim against, and seek indemnity from, the Escrow Fund for the full amount of any Damages sustained by Buyer in connection with any Breach of the Noncompetition Agreements of John Fleischmann, George W. Kenaston, David Bennet and Robert Einzig or any one or more of them. 6.7 BASKET LIMITATION FOR BUYER. Buyer will have no liability (for indemnification or otherwise) with respect to the matters described in clause (a) or (b) (except for payment of the Purchase Price) of Section 6.4 until the total of all Damages with respect to such matters exceeds One Hundred Thousand Dollars ($100,000), and then only for the amount by which such Damages exceed One Hundred Thousand Dollars ($100,000). Buyer will have liability with respect to matters described in clause (c) of Section 6.4 without threshold as to the amount thereof. 6.8 PROCEDURE FOR INDEMNIFICATION-THIRD PARTY CLAIMS. (a) Promptly after receipt by an indemnified party under Section 6.2, 6.4, or (to the extent provided in the last sentence of Section 6.3) Section 6.3 of notice of the commencement of any Proceeding against it, such indemnified party will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party pursuant to this Section 6.8, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnifying party's failure to give such notice. (b) If any Proceeding referred to in Section 6.8(a) is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will, unless the claim involves Taxes, be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Section 6 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the indemnified party in connection with the defense of such Proceeding, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a Proceeding, (i) it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification; (ii) no compromise or settlement of such claims may be effected by the indemnifying party without the indemnified party's consent unless (A) there is no finding or admission of any violation of Legal Requirements or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party; and (iii) the indemnified party will have no liability with respect to any compromise or settlement of such claims effected without its consent. If notice is given to an indemnifying party of the commencement of any Proceeding and the indemnifying party does not, within ten days after the indemnified party's notice is given, give notice to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the indemnified party. (c) Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right, at the indemnifying party's cost and expense, to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld). (d) Each Original Shareholder hereby consents to the non-exclusive jurisdiction of any court in which a Proceeding is brought against any Indemnified Person for purposes of any claim that an Indemnified Person may have under this Agreement with respect to such Proceeding or the matters alleged therein, and agree that process may be served on Original Shareholders with respect to such a claim anywhere in the world. 6.9 PROCEDURE FOR INDEMNIFICATION-OTHER CLAIMS. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought. 6.10 NOTICE TO ORIGINAL SHAREHOLDERS. Any notice to all Original Shareholders pursuant to this Section 6 shall be sent to the attention of the Sellers' Representative, and notice sent to the Sellers' Representative shall be deemed sufficient notice to all Original Shareholders under this Section 6. 6.11 ESCROW. Buyer may assert a claim for indemnification under the Escrow Agreement by notice to Sellers' Representative and the Escrow Agent specifying in reasonable detail the basis for such claim to the extent then known by Buyer and the amount to which Buyer is entitled under this Section 6, all as more fully provided in the Escrow Agreement. Except as provided in Section 6.6(d), Buyer is authorized to recover from the funds in escrow the entire amount of, or any portion of, any claim against any Seller without regard to the amount contributed or deemed to be contributed by such Seller. Sellers will settle among themselves any right to contribution or indemnity with regard to amounts paid to Buyer from the escrowed funds. The amount held in escrow, if and when disbursed to Sellers, shall be treated on an installment sale basis and shall be taken into income by Sellers in the year in which it is received. Subject to the provisions of Section 6.6(c), neither the giving of notice of a claim under the Escrow Agreement nor the failure to give such notice will constitute an election of remedies or limit Buyer in any manner in the enforcement of any other remedies that may be available to it. 6.12 TAX BENEFIT. In determining the amount of any Damages under this Section 6, such amount shall take into account any net tax benefit (federal, state, local or personal property) actually realized by the indemnified party from the incurrence or payment by the indemnified party of such Damages. In connection with the determination of such net tax benefit, (i) tax costs actually incurred, if any, included in the calculation of Damages or from the indemnification shall also be taken into account; (ii) the net tax benefit and the tax costs will be taken into account only to the extent actually realized with respect to the tax return prepared relative to the tax year in which the indemnification is due; and (iii) any reduction in the basis of the Shares or underlying assets as a result of the receipt of payment for Damages shall not be deemed to be a tax benefit or a tax cost to Buyer. The determination of any tax benefit or tax cost shall be made by the indemnified party's independent certified public accountants, whose determination shall be final, binding and conclusive on all parties. 7. GENERAL PROVISIONS. 7.1 EXPENSES. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of agents, representatives, counsel, and accountants. Subject to the provisions of Section 2.6(a), the Company may pay the Sellers' out-of-pocket expenses in connection with this Agreement. 7.2 PUBLIC ANNOUNCEMENTS. Any public announcement or similar publicity with respect to this Agreement or the transactions contemplated hereby will be issued, if at all, at such time and in such manner as Buyer determines. Sellers and Buyer will consult with each other concerning the means by which the Company's employees, customers, and suppliers and others having dealings with the Company will be informed of the transactions contemplated hereby, and Buyer will have the right to be present for any such communication. Notwithstanding the foregoing, Buyer shall have the right to make such disclosure as it deems necessary or advisable under the Federal securities laws, in which event Buyer shall provide Seller with a copy of such disclosure. 7.3 CONFIDENTIALITY. The Confidentiality Agreement dated April 17, 2001, by and between the parties, is hereby declared to be terminated and of no further force and effect. 7.4 NOTICES. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given (a) when delivered by hand (with written confirmation of receipt), (b) when sent by telecopier (upon written confirmation of receipt by the recipient), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee (or on the date on which delivery is refused if the addressee refuses delivery, or on the first date on which delivery is attempted if delivery is otherwise not possible at the address provided for notice), if sent by Express Mail or a nationally recognized overnight delivery service which provides evidence of delivery, in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties); provided, that any notice which is being given to all of the Sellers shall be sent to the attention of the Sellers' Representative, and any notice sent to the Sellers' Representative shall be deemed notice to all Sellers: BUYER: EDO ACQUISITION II, INC. I. Attn: Secretary 60 East 42nd Street, Suite 5010 New York, New York 10165 Facsimile No: 212-716-2050 SELLERS' REPRESENTATIVE: Attn: L. John Fleischmann 9492 Cresthill Road Marshall, Virginia 20115 Facsimile No.: 703-684-8121 OTHER SELLERS: As provided in Exhibit A. 7.5 FURTHER ASSURANCES. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement. 7.6 WAIVER. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 7.7 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. 7.8 SELLERS' REPRESENTATIVE. Each Seller irrevocably appoints John Fleischmann (the "Sellers' Representative") as his, her or its agent, proxy and attorney-in-fact for all purposes under this Agreement, and each Seller authorizes the Sellers' Representative to do any and all of the following for the Seller and in the Seller's name and stead: (i) to execute, acknowledge, as appropriate, and deliver to Buyer any certificate, document or agreement referred to herein or contemplated hereby, including this Agreement, the Shares, and the Seller's Closing Documents; (ii) to accept, receipt for and deposit any funds or other amounts owing to the Seller hereunder; (iii) to represent, negotiate on behalf of and bind the Seller in connection with the determination of the Adjustment Amount, any negotiations or agreements with Buyer with respect to the Adjustment Amount, and any presentation to or discussions with the Accountants with respect thereto; (iv) to execute, acknowledge, as appropriate, and deliver such modifications and amendments to this Agreement or Sellers' Closing Documents as the Sellers' Representative shall deem advisable in his discretion; and (v) to do any and all other acts and things in connection with this Agreement as Sellers' Representative shall deem advisable in his discretion. The agency created hereby shall be deemed irrevocable and coupled with an interest; Buyer shall be entitled to rely upon the powers granted herein with respect to any matter relating to this Agreement; and any question which may arise concerning the power or authority of the Sellers' Representative to act for each Seller shall be interpreted and construed in favor of the authority of the Sellers' Representative. 7.9 DISCLOSURE LETTER. (a) The disclosures in the Disclosure Letter, and those in any Supplement thereto, must relate only to the representations and warranties in the Section of the Agreement to which they expressly relate and not to any other representation or warranty in this Agreement. (b) In the event of any inconsistency between the statements in the body of this Agreement and those in the Disclosure Letter (other than an exception expressly set forth as such in the Disclosure Letter with respect to a specifically identified representation or warranty), the statements in the body of this Agreement will control. 7.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. Neither party may assign any of its rights under this Agreement without the prior consent of the other parties except that Buyer may assign any of its rights under this Agreement to any Related Person of Buyer and further except that any of the Sellers may sell or assign his rights to receive payment hereunder (but may not delegate or assign any obligations or liabilities hereunder) to another Seller. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the heirs, personal and legal representatives, successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their heirs, successors and permitted assigns. 7.11 SEVERABILITY. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 7.12 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 7.13 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by the laws of the State of New York, without regard to conflicts of laws principals. Buyer and each Seller submit to the jurisdiction of any state or federal court sitting in the State of New York in any action or proceeding arising out of or relating to this Agreement and agree that all claims in respect of the action or proceeding may be heard or determined in any such court. Buyer and each Seller also agree not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Buyer and each Seller waive any defense of inconvenient forum to the maintenance of any action or proceeding so brought. Each Seller appoints the Sellers' Representative as his or her agent to receive on his or her behalf service or copies of any Summons and Complaint and any other process that might be served in such action or proceeding. 7.14 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. BUYER: EDO ACQUISITION II, INC. By: Milo Hyde ----------------------------- Name: Milo Hyde --------------------- Title: Vice President ------------------- SELLERS: John Fleischmann David Bennet - ------------------------------------ ------------------------------------ JOHN FLEISCHMANN a/k/a DAVID BENNET a/k/a L. JOHN FLEISCHMANN DAVID H. BENNET Robert Einzig George W. Kenaston - ------------------------------------ ------------------------------------ ROBERT EINZIG a/k/a GEORGE W. KENASTON ROBERT E. EINZIG Gary Nelson - ------------------------------------ GARY NELSON -----END PRIVACY-ENHANCED MESSAGE-----