-----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, WAfbmATMGhk4SOzMjpXBZzCRV5BXfSTfgeFb4Ub49Q3VQpvCAascxinlf2SwKeWK RueF/dFq4M/SKhzctyoI2w== 0000950123-02-002592.txt : 20020415 0000950123-02-002592.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950123-02-002592 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDO CORP CENTRAL INDEX KEY: 0000031617 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 110707740 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03985 FILM NUMBER: 02577412 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-K405 1 y57015e10-k405.txt EDO CORPORATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NUMBER 1-3985
--------------------- EDO CORPORATION (Exact name of Registrant as specified in its charter) NEW YORK 11-0707740 (State of Incorporation) (IRS Employer Identification No.) 60 EAST 42ND STREET, SUITE 5010, 10165 NEW YORK, NEW YORK (Zip Code) (Address of principal executive offices)
TELEPHONE NO.: (212) 716-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED: -------------------- ------------------------------------------ Common Shares par value $1 per share New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 8, 2002...............................$526,479,940 Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of March 8, 2002...........................19,627,675 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2001 are incorporated by reference into Part I and Part II. Item 9 in Part II and Part III are incorporated by reference from the Registrant's definitive proxy statement in connection with its 2002 Annual Meeting of Shareholders. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EDO CORPORATION TABLE OF CONTENTS PART I ITEM 1. BUSINESS.................................................... 1 DEFENSE..................................................... 1 Electronic Warfare.......................................... 2 Aircraft Stores Suspension and Release Equipment............ 2 Airborne Mine Countermeasures Systems....................... 2 Integrated Combat Systems................................... 3 Undersea Systems............................................ 3 Technology Services......................................... 3 COMMUNICATIONS AND SPACE PRODUCTS........................... 4 Antenna Products............................................ 4 Space Sensor and Communication Products..................... 4 Interference Cancellation................................... 5 ENGINEERED MATERIALS........................................ 5 Electro-Ceramic Products.................................... 5 Advanced Fiber Composite Structural Products................ 5 DISCONTINUED OPERATIONS..................................... 6 RESEARCH AND DEVELOPMENT.................................... 6 MARKETING AND INTERNATIONAL SALES........................... 6 BACKLOG..................................................... 7 GOVERNMENT CONTRACTS........................................ 7 COMPETITION AND OTHER FACTORS............................... 7 ENVIRONMENTAL............................................... 8 EMPLOYEES................................................... 8 EXECUTIVE OFFICERS.......................................... 8 ITEM 2. PROPERTIES.................................................. 8 ITEM 3. LEGAL PROCEEDINGS........................................... 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 9 ITEM 6. SELECTED FINANCIAL DATA..................................... 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 9 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 10 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 10
i PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 10 ITEM 11. EXECUTIVE COMPENSATION...................................... 10 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 10 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................................... 10 (a) Financial Statements and Financial Statement Schedules and Exhibits................................................ 10 1. Financial Statements................................ 10 2. Financial Statement Schedules....................... 11 3. Exhibits............................................ 12 (b) Reports on Form 8-K..................................... 13 SIGNATURES.................................................. 14
ii PART I ITEM 1. BUSINESS In this Report, the term "Registrant" refers to EDO Corporation. The terms "EDO", "we", "us", "our" and "Company" as used in this Report, also refer to EDO Corporation and its subsidiaries, except where the context otherwise requires. EDO Corporation was incorporated in New York in 1925 by Earl Dodge Osborn, from whose initials "EDO" is derived. On April 28, 2000, we completed the merger of our wholly-owned subsidiary with AIL Technologies, Inc ("AIL"). In the transaction, each share of AIL common stock was exchanged for 1.3296 EDO common shares (equivalent to 6,553,194 EDO common shares valued at $39.4 million). In addition, AIL stockholders received a cash payment of $13.3 million. The merged company also assumed AIL debt of $29.7 million. AIL became our wholly-owned subsidiary effective upon the merger, and the transaction has been accounted for as a tax-free reorganization. In addition we have completed five other acquisitions since 1999. We are a leading supplier of sophisticated, highly engineered products and systems for defense, aerospace and industrial applications. We believe our advanced electronic, electromechanical systems, information systems and engineered materials are mission-critical, standard equipment on a wide range of military aircraft. We have three reporting segments, Defense, Communications and Space Products and Engineered Materials. Our Defense segment provides integrated defense systems and components including electronic warfare systems, subsystems and test equipment, aircraft stores suspension and release systems, airborne mine countermeasures systems, integrated combat systems, command, control and communications systems, undersea warfare sonar systems and technology services for military forces and governments worldwide. Our Communications and Space Products segment supplies antenna products, interference cancellation products and space sensor communication products for the remote sensing, communications and navigation industries and military markets. Our Engineered Materials segment supplies electro-ceramic products and advanced fiber composite and structural products for the communication, navigation, chemical, petrochemical, paper and oil industries for the commercial infrastructure and military markets. In October 2001, we acquired Dynamic Systems, Inc., a privately-held company based in Alexandria, Virginia. Dynamic Systems provides professional and information technology services primarily to the U.S. Department of Defense ("DoD") and other government agencies. We set forth certain business segment information on our continuing operations in Note 19 on pages 50 and 51 of our 2001 Annual Report which we incorporate by reference. A description of our principal products within the three segments is set forth below. DEFENSE Our Defense segment designs, develops and manufactures sophisticated electronic, mechanical, electro-mechanical, structural, pneumatic, hydrodynamic and aerodynamic systems for military use. Additionally, we provide logistics support for such products, including spare parts and repairs, hardware and software upgrades and modifications, training and technical services. The revenue from these support functions is a significant portion of our total sales. Our Defense segment, which accounted for 71% of consolidated net sales in 2001, 69% in 2000 and 68% in 1999, includes electronic warfare systems, aircraft stores suspension and release equipment, airborne mine countermeasures systems, integrated combat systems, command, control and communications systems, undersea warfare sonar systems and technology services. 1 ELECTRONIC WARFARE Our electronic warfare products include defensive electronic countermeasure systems for the U.S. Air Force and tactical support jamming exciter subsystems for the U.S. Navy. Electronic warfare products also include airborne, battle field and ground surveillance radars and monolithic microwave integrated circuit (MMIC) receiver downconverters for the airborne and shipboard electronic support measures market. Our AN/ALQ-161 is the defensive avionics system that protects the U.S. Air Force B-1B bomber from radar guided and infrared guided missile threats. Designed in the early 1980's specifically for the B-1B aircraft, we delivered the AN/ALQ-161 system and spares to all 100 aircraft in the B-1B fleet. Currently we provide logistic support and capability upgrades to the AN/ALQ-161 systems, including software upgrades that have occurred every 12-24 months, as well as hardware improvements to address both situation awareness and jamming effectiveness. The B-1B aircraft currently is expected by the DoD to be in operation through 2040. We were the original designer and integrator of the AN/ALQ-99 Tactical Support Jamming System for the EA-6B aircraft in the 1960s. We have been under contract for support and modifications for this aircraft's systems and subsystems since then. We are currently under contract with the U.S. Navy to upgrade the Universal Exciter on the EA-6B aircraft. The Universal Exciter is the electronics unit in the AN/ALQ-99 support jamming subsystem that provides the specific electronic jamming technique waveforms and modulations that defeat enemy air defense systems. In the 1980s, we produced and delivered 579 Universal Exciters to the U.S. Navy. Under the current upgrade program, we retrofit these units with modifications that improve reliability and maintainability, extend frequency range and provide advanced jamming techniques. The period of performance of the production contract is through August 2003. The EA-6B aircraft currently is expected by the DoD to be in operation through 2015. Net sales of electronic warfare products represented 24% of consolidated net sales in 2001 and 23% in 2000. AIRCRAFT STORES SUSPENSION AND RELEASE EQUIPMENT Over the last two decades, we have developed and manufactured bomb release units ("BRU") for the F-15 aircraft, ejection release units ("ERU") for the Tornado Multi-Role Combat Aircraft and jettison release mechanisms for the F-14 aircraft. In 2001: - we continued production of F-15 BRUs for the U.S. Air Force and international customers and provided spare parts support for Tornado ERUs. - we completed the customer sponsored development of the Advanced Medium Range Air to Air Missile launcher for the F-22 aircraft and we are now in initial production of this launcher. - we were awarded a contract by Lockheed Martin Aeronautics Company to develop and test a pneumatic suspension and release equipment system for the Joint Strike Fighter program. - we received a contract to initiate design of a demonstration carriage system from Lockheed Martin Missiles and Fire Control as part of the small diameter bomb development program. Net sales of aircraft stores suspension and release equipment represented 13% of consolidated net sales in 2001, 13% in 2000 and 21% in 1999. AIRBORNE MINE COUNTERMEASURES SYSTEMS We believe we are the only manufacturer of airborne naval minesweeping equipment in the world. The principal system of this type used by the U.S. Navy, the MK-105 helicopter towed system, was designed and developed by us starting in 1957. In the early 1990s, we developed a significant upgrade under contract, followed by an initial production contract in 1996. We continue to provide spares and logistics support for these systems to the U.S. Navy and an international customer and we continue to function as the U.S. Navy maintenance depot for the MK-105 systems. 2 In 1994, we began work under contract with the U.S. Navy to develop a lightweight helicopter towed mine sweeper for shallow water applications. We received a production contract for these systems in 1999 with delivery continuing through 2001. During 2001, we continued work under two U.S. Navy contracts which we received in 1998 and 1999 to enhance the acoustic influence of these minesweeping systems. In 2001, we submitted a proposal to the U.S. Navy for the next generation minesweeping system, Organic Airborne/ Surface Influence Sweep ("OASIS"), for which we expect a contract award early in 2002. Net sales of airborne mine countermeasures systems represented 8% of consolidated net sales in 2001, 11% in 2000 and 19% in 1999. INTEGRATED COMBAT SYSTEMS We act as a systems integrator for naval C(4)I systems. In this role, we integrate all of a ship's sensor systems, including radar, sonar, communications and Identification Friend or Foe, to provide situational awareness in a common data and display format for a ship's commander. Integration contracts typically provide for the development of integration software that allows the various subsystems to intercommunicate and produce common information displays. In 1998, we began integration of a combat system for the upgrade of a major class of ship for an international customer. The integrated system includes radars, sonars, internal and external communications and navigation subsystems, fire control subsystems, helicopter control subsystems, display equipment and integration software to produce common tactical displays. This program is expected to be completed in 2003. Command, control and communications systems include integrated command systems, tactical data links, display consoles and communication control and monitoring systems for domestic and international customers. In 2001, work continued on NATO Ship-Shore-Ship Buffer systems deliverable to several international customers. UNDERSEA SYSTEMS We have been a supplier of undersea systems including sonar sensors, underwater communication systems, and depth sounding and speed measuring equipment for over 40 years. During 2001, work continued on a contract for an international customer to deliver a major upgrade to the EDO Model 610E sonar system. Deliveries under this contract are expected to continue into 2003. In addition to the upgrade, we delivered a new Model 610E sonar system for a new class of ship in construction by the same international customer. We continue to provide logistics, maintenance and training support services for EDO sonar systems installed in former U.S. Navy FF-1052 class ships now in service in several international navies. In 2000, we were awarded a major contract from a new international customer to deliver the recently developed EDO Model 980 sonar system for installation in a new class of naval ship under construction by the customer. Development and delivery of the systems will extend into 2006. Additionally, in 2000, we received a contract from the Naval Undersea Warfare Center to develop and produce a new depth sounding system, AN/BQN-17, for U.S. Navy attack submarines. Deliveries of thirty AN/BQN-17 units will continue into 2002. Net sales of undersea systems represented 3% of consolidated net sales in 2001, 4% in 2000 and 10% in 1999. TECHNOLOGY SERVICES We are a supplier of technology services consisting of information technology, engineering, analytical, operation and program management services along with electronic warfare test and evaluation equipment to the U.S. defense and Federal services and information technology markets. In 2000, we were awarded follow-on orders for core services contracts in this business area that include: the U.S. Marine Corps Warfighting Lab, the Naval Surface Fire Support directorate of Naval Sea systems Command, the Strategic Sourcing initiatives of the Navy's Ashore Readiness, and the Acquisition Center for Excellence of the Acquisition Reform Office in the Office of the Assistant Secretary of the Navy for Research, Development and Acquisition. 3 In 2001, we continued to perform services under contracts for design, planning, execution, analysis and reporting for the AN/ALQ-161A preprocessor flight software for Warner Robins Air Logistics Center; navy threat validation support for China Lake Naval Air Warfare Center; and technical and engineering support to various Boeing Satellite Systems programs. In 2001, we also continued work on several software engineering and development contracts to provide state-of-the-art, web-enabled, data management software systems to the U.S. Air Force and Navy. We designed and produced a line of electronic test equipment for electronic warfare testing, data acquisition, and radar simulation. In 2001, we continued to receive orders for our Field Test Simulator product from the U.S. Air Force. In 2001, we acquired Dynamic Systems, Inc., a privately-held company based in Alexandria, Virginia, which also provides professional and information technology services primarily to U.S. Navy and other U.S. government agencies. Net sales of technology services represented 16% of consolidated net sales in 2001, 13% in 2000 and 9% in 1999. COMMUNICATIONS AND SPACE PRODUCTS Our Communications and Space Products segment, which accounted for 15% of consolidated net sales in 2001 and 14% in 2000, includes antenna products, space sensor and communication products and interference cancellation products. ANTENNA PRODUCTS We design and produce antenna systems for a wide variety of military and commercial applications including communications, electronic warfare, navigation, radar and wireless Local Area Networks, or LANs. Our antenna business is approximately 55% military and 45% commercial. Our military antennas are deployed on many different types of platforms and vehicles including fixed wing and rotary aircraft, UAVs, satellites, aircraft carriers and other surface ships, submarines, and ground vehicles. Our commercial antennas are used on commercial airliners as well as general aviation aircraft. We have a broad customer and product base in this business. In 2001, we sold more than 80,000 antennas of 200 different types to more than 350 different original equipment manufacturers and after-market customers. A large portion of our revenue results from spare part sales and repair services for an installed base of antennas in excess of 500,000 units. In 2001, we made substantial progress toward developing new antenna products via both internally funded and customer sponsored research and development. During this period, we entered into major contracts for development of low observable, anti-jam global positioning satellite ("GPS") and extremely wide bandwidth electronic warfare and communication antennas. SPACE SENSOR AND COMMUNICATION PRODUCTS We manufacture a wide array of products for space payloads that meet the high reliability standards required by the industry, including components, subassemblies and major subsystems that are sold directly to the government for military and civil systems, or to prime contractors for both government and commercial applications. Our sensors and subsystems include larger subsystems, up to full satellite payloads, for remote sensing instruments employing microwave measurements of the earth and its atmosphere, and classified government programs. Our commercial communication products include a line of OC-192 compatible microwave devices for the ultra long-haul fiber optic market. Our space products include numerous high-performance microwave subsystems for both civil and commercial communication satellite systems, including the Fixed Satellite Service market. We also participate in multiple aspects of the overall NASA communications network linking the space shuttle and geo-synchronous and low earth orbit satellites with ground stations. 4 INTERFERENCE CANCELLATION We produce interference cancellation systems for a variety of applications, including the U.S. Navy's special operations aircraft, ERGM missile, and SATCOM satellite receivers. Our Trailblazer Inter Server Correlation Systems are used in wireless telecommunications repeater systems. ENGINEERED MATERIALS Our Engineered Materials segment, which accounted for 14% of consolidated net sales in 2001, 17% in 2000 and 32% in 1999, includes electro-ceramic products and advanced fiber composite structural products. ELECTRO-CERAMIC PRODUCTS Piezoelectric ceramic elements convert acoustic energy to electrical energy and vice versa, and form the basis of many defense and commercial products ranging from military sonars to ink jet printers. We are one of North America's leading manufacturers of piezoelectric ceramic components for defense applications and we also provide material and related transducers to several commercial markets. While more than 50% of our piezoelectric ceramic sales are for defense applications, we are increasing our efforts to expand our industrial business, while maintaining our position in the defense market. Our business is vertically integrated with in-house manufacturing and development of piezoelectric, dielectric and ferrite ceramic materials, coupled with state-of-practice mixed analog and digital electronics and software engineering. We believe this combination of engineered active materials and electronics capabilities makes us competitive in several niche markets. Examples of our products include underwater acoustic transducers for use in all areas of undersea warfare, piezoelectric shapes for a variety of industries, as well as microwave ceramics for the wireless communication industry. Work continued in 2001 on a contract awarded from the U.S. Navy in 1999 for development and production of a new underwater communications transducer, called the TR232. Deliveries under this contract are expected to extend into 2004. Additionally, we were awarded a contract by the U.S. Navy for initial production of hydrophone stave assemblies used in the Wide Aperture Array sonar systems installed in Los Angeles and Seawolf class attack submarines. Initial deliveries under this contract commenced in 2001. Net sales of electro-ceramic products represented 8% of consolidated net sales in 2001, 9% in 2000 and 16% in 1999. ADVANCED FIBER COMPOSITE STRUCTURAL PRODUCTS Our fiber-reinforced advanced structural product capabilities include design, development, qualification, production and after-market support of advanced composite structures. Our primary focus includes commercial and military aviation, defense systems and offshore oil-drilling markets. We remain the exclusive supplier of vacuum waste tanks for all of Boeing's commercial aircraft. In 2001, we signed a five-year contract with Boeing, which extends production and delivery requirements until 2007. Early in 2001, we signed a long-term contract with Thales Air Defense to develop, qualify and produce VT-1 launch canisters in support of current NATO requirements. In the third quarter of 2001, we completed the fabrication and installation of topside piping systems for one Caribbean and three new Gulf of Mexico deep-water platforms. Also in the third quarter of 2001, we received an order from another major oil company to provide an updated design and delivery of a full-scale composite buoyancy module. Net sales of advanced fiber composite structural products represented 6% of consolidated net sales in 2001, 8% in 2000 and 16% in 1999. 5 DISCONTINUED OPERATIONS In January 2000, we sold our satellite orientation sensor products business, Barnes Engineering Company. See Note 3 on pages 42 and 43 of our 2001 Annual Report, which we incorporate by reference. RESEARCH AND DEVELOPMENT Research and development, performed both under development contracts with customers and at our expense, is an important element to the success of our business. Our research and development efforts involve about 135 employees in the fields of communications and space, antennas, electronic warfare, combat systems, and acoustic, electronic, hydrodynamic, aerodynamic, structural and material engineering. Research and development programs are intended to develop new products and assess their market potential, and to extend the capability of existing products. Customer-sponsored research and development programs are principally related to military programs. Major customer-sponsored research and development programs include: improvements to the MK-105 mine countermeasures system; development of OASIS; development of new aircraft weapons carriage technology; development in combat systems integration including command and control software development; development of a new shallow-water sonar; development of low observable anti-jam GPS antennas; and development of new underwater communications transducer products. Expenditures under development contracts with customers vary in amount from year to year because of the timing of contract funding and other factors. Principal current company-funded research and development includes: image and signal processing and other improvements for combat systems; improvements to minesweeping technology; new techniques for aircraft weapons carriage systems; application of composites for structural uses; development of communication equipment, including fiber optic equipment; electronic countermeasures and advanced GPS antennas; improvements to sonar systems, including processing and detection enhancements; improvements for noise reduction and interference cancellation; modifications to our base of combat systems software products to allow seamless migration of these products to the latest generation of computer hardware architectures; development of new piezoelectric and composite materials; and development of new capabilities for our Field Test Simulator product to increase the functionality and flexibility of operation. The following table sets forth research and development expenditures for the years presented.
YEARS ENDED DECEMBER 31, --------------------------- 2001 2000 1999 ------- ------- ------- (IN THOUSANDS) Customer-sponsored...................................... $35,700 $38,400 $18,900 Company-funded.......................................... 8,700 5,400 2,700 ------- ------- ------- Total......................................... $44,400 $43,800 $21,600 ======= ======= =======
MARKETING AND INTERNATIONAL SALES Sales of our defense products to both the U.S. and foreign governments are usually made under negotiated long-term contracts or subcontracts covering one or more years of production. We believe that our long history of association with our military customers is an important factor in our overall business, and that the experience gained through this history has enhanced our ability to anticipate our customers' needs. Our approach to our defense business is to anticipate specific customer needs and to develop systems to meet those needs either at our own expense or pursuant to research and development contracts. Many of our employees, including our Chief Executive Officer and our Vice President -- Washington Operations, are actively involved in the marketing of our defense products in the U.S. and abroad. We also have about 40 international sales representatives concentrating on the marketing of our defense products in foreign countries. 6 We sell defense products as a prime contractor and through subcontracts with other prime contractors. In addition to defense sales to the U.S. DoD, we also sell defense equipment to the U.S. Government on behalf of foreign governments under the Foreign Military Sales program and, subject to approval by the U.S. Department of State, directly to foreign governments. Commercial products are sold in industrial and commercial markets. In foreign markets, piezoelectrics, antennas and electronic products are generally sold commercially through a network of sales representatives. Fiber-reinforced composite products are sold directly and through sales representatives. It is generally our policy to denominate all foreign contracts in U.S. dollars and seek not to incur significant costs in connection with long-term foreign contracts until we have received advance payments or letters of credit on amounts due under the contracts. Export sales comprised 15% of consolidated net sales in 2001, 18% in 2000 and 34% in 1999. BACKLOG We define backlog as the value of contract awards and orders received from customers, which have not been recognized as sales. Backlog does not include contract awards received from the U.S. Government for which the U.S. Government has not appropriated funds, nor does it include unexercised options in any contract. A significant portion of our sales is to prime contractors, the U.S. DoD and foreign governments pursuant to long-term contracts. Accordingly, our backlog consists in large part of orders under these contracts. As of December 31, 2001 our total backlog was about $294.8 million as compared with $252.9 million as of December 31, 2000. Approximately 66% of the total backlog at December 31, 2001 is scheduled for delivery in 2002. GOVERNMENT CONTRACTS Net sales to the U.S. Government, as a prime contractor and through subcontracts with other prime contractors, accounted for 69% of our 2001 consolidated net sales compared with 63% in 2000 and 48% in 1999, and consisted primarily of sales to the DoD. Such sales do not include sales of military equipment to the U.S. Government for resale to foreign governments under the Foreign Military Sales program. Our defense business can be and has been significantly affected by changes in national defense policy and spending. Our U.S. Government contracts and subcontracts and certain foreign government contracts contain the usual required provisions permitting termination at any time for the convenience of the government with payment for work completed and committed along with associated profit at the time of termination. Our contracts with the U.S. DoD consist of fixed-price contracts, cost-reimbursable contracts and incentive contracts of both types. Fixed-price contracts provide fixed compensation for specified work. Cost-reimbursable contracts require us to perform specified work in return for reimbursement of costs (to the extent allowable under U.S. government regulations) and a specified fee. In general, while the risk of loss is greater under fixed-price contracts than under cost-reimbursable contracts, the potential for profit under such contracts is greater than under cost-reimbursable contracts. Under both fixed-price incentive contracts and cost-reimbursable incentive contracts, an incentive adjustment is made in our fee based on attainment of performance, scheduling, cost, quality or other goals. The distribution of our government contracts among the categories of contracts referred to above varies from time to time. COMPETITION AND OTHER FACTORS Some of our products are sold in markets containing a number of competitors substantially larger than us and with greater financial resources. Direct sales of military products to the U.S. Government and foreign governments are based principally on product performance, cost and reliability. Such products are generally sold in competition with products of other manufacturers that may fulfill an equivalent function, but which are not direct substitutes. 7 We purchase some materials and components used in our systems and equipment from independent suppliers. These materials and components are normally not purchased under long-term contracts unless a long-term sales contract with one of our customers requires them to be. We believe that most of the items we purchase are obtainable from a variety of suppliers. We normally seek to have alternative sources for major items, although we are sometimes dependent on a single supplier or a few suppliers for some items. It is difficult to state precisely our market position in all of our product lines because information as to the volume of sales of similar products by our competitors is not generally available and the relevant markets are often not precisely defined. However, we believe that we are a significant factor in the markets for stores release mechanisms for military aircraft, military sonar systems, military data links, helicopter-towed mine countermeasures systems, piezoelectric ceramics, electronic countermeasures systems and antennas. Although we own a significant number of patents and have filed applications for additional patents, we do not believe that our businesses depend heavily upon our patents. In addition, most of our U.S. Government contracts license us to use patents owned by others. Similar provisions in the U.S. Government contracts awarded to other companies make it impossible for us to prevent the use by other companies of our patents in most domestic defense work. ENVIRONMENTAL Refer to Note 18 on page 50 of our 2001 Annual Report to Shareholders, which is incorporated by reference, for information regarding the cost of compliance with environmental regulations. EMPLOYEES As of December 31, 2001, we employed 1,603 persons. EXECUTIVE OFFICERS
NAME AGE POSITION, TERM OF OFFICE AND PRIOR POSITIONS - ---- --- -------------------------------------------- James M. Smith............................... 60 President and Chief Executive Officer since 2000. Previously, he was President and CEO of AIL Systems, Inc. Director since 1999 Patricia D. Comiskey......................... 51 Vice President-Human Resources and Assistant Secretary since 2001. Previously she was Assistant Secretary of AIL Systems since 1997. William J. Frost............................. 60 Vice President-Administration since 1994, Secretary since 2001, prior to which he was Assistant Secretary since 1995. Harvey N. Kreisberg.......................... 65 Vice President-Corporate Development since 2001. Darrell L. Reed.............................. 57 Vice President-Finance, Treasurer, Assistant Secretary and Chief Financial Officer since 2000 prior to which he was Vice President and CFO of AIL Systems, Inc. since 1995.
Each executive officer is elected by the board of directors and holds office until the first meeting of the board following the next succeeding annual meeting of shareholders, and thereafter until a successor is appointed and qualified, unless the executive officer dies, is disqualified, resigns or is removed in accordance with our By-Laws. Additionally, the Chief Executive Officer, as provided in our By-Laws, appoints other officers as required. These other officers are not considered as executive officers. ITEM 2. PROPERTIES All of our facilities except for the Deer Park, NY facility are leased. We believe our facilities are adequate for our present purposes. All facilities in the following listing are suitable for expansion by using 8 available but unused space, leasing additional available space, or by physical expansion of leased buildings. We believe that, with respect to leases which expire during 2002 and 2003, we will be able to either extend the lease or lease other facilities on reasonable terms. Our obligations under the various leases are set forth in Note 17 on page 50 of our 2001 Annual Report, which is incorporated by reference. Set forth below is a listing of our principal plants and other materially important physical properties.
APPROXIMATE FLOOR AREA LOCATION (IN SQ. FT.) -------------------- ------------ Antenna Products and Technology and Defense Programs and Technologies............................................. Deer Park, NY 726,000 Electro-Ceramic Products................................... Salt Lake City, UT 117,000 Fiber Science.............................................. Salt Lake City, UT 105,000 Marine & Aircraft Systems.................................. North Amityville, NY 92,000 American Nucleonics Corporation............................ Westlake Village, CA 40,000 Combat Systems............................................. Chesapeake, VA 40,000 Technical Services Operations.............................. Lancaster, CA 33,000 Specialty Plastics......................................... Baton Rouge, LA 29,000 Dynamic Systems............................................ Alexandria, VA 24,000 M. Technologies............................................ Huntingdon, PA 14,000 Technology Services & Analysis............................. Falls Church, VA 13,000
We are currently marketing our Deer Park, NY facility as a sale and partial lease back. Upon successful completion of this effort, we will occupy approximately 370,000 square feet. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings pending against us. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information responsive to this item is set forth under the headings "Common Share Prices" on page 32 and "Dividends" on page 33, together with dividend information contained in the "Consolidated Statements of Shareholders' Equity" on pages 36 and 37 and Note 9 on pages 43 and 44 of the Company's 2001 Annual Report to Shareholders which is incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA The information responsive to this item is set forth under the heading "Selected Financial Data" on pages 25 and 26 of the Company's 2001 Annual Report to Shareholders which is incorporated by reference. ITEMS 7 AND 7A The information called for by Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) and Item 7A (Quantitative and Qualitative Disclosure About Market Risk) is set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 27 through 33 of the Company's 2001 Annual Report to Shareholders which is incorporated by reference. 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company, together with the Independent Auditors' Reports thereon and the unaudited "Quarterly Financial Information" are set forth on pages 34 through 53 of the Company's 2001 Annual Report to Shareholders which is incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information responsive to this item is incorporated herein by reference from the Company's definitive proxy statement for the 2002 Annual Meeting of Shareholders. PART III ITEMS 10, 11, 12 AND 13 The information called for by Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management), and Item 13 (Certain Relationships and Related Transactions) is incorporated herein by reference from our definitive proxy statement for the 2002 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules and Exhibits 1. FINANCIAL STATEMENTS. Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Earnings for the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Report of Ernst & Young LLP Report of KPMG LLP The foregoing items appear on pages 34 through 52 of the Company's 2001 Annual Report to Shareholders and are incorporated by reference. 10 2. FINANCIAL STATEMENT SCHEDULES. See Schedule II -- Valuation and Qualifying Accounts below. All other schedules have been omitted because they are not applicable. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO NET BALANCE AT BEGINNING OF COSTS AND OTHER WRITE-OFFS/ END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ----------- ------------ ---------- ---------- ----------- ---------- (IN THOUSANDS) Deducted from asset accounts: Year ended December 31, 2001: Allowance for doubtful accounts........ $981 220 63(a) (371) $893 Deducted from asset accounts: Year ended December 31, 2000: Allowance for doubtful accounts........ $232 287 600(b) (138) $981 Valuation allowance on net deferred tax assets............................... $976 -- -- (976) $ -- Deducted from asset accounts: Year ended December 31, 1999: Allowance for doubtful accounts........ $321 -- -- (89) $232 Valuation allowance on net deferred tax assets............................... $976 -- -- -- $976
- --------------- (a) Amount acquired as a result of purchase of Dynamic Systems, Inc. on October 9, 2001. (b) Amount acquired as a result of purchase of AIL Technologies, Inc. on April 28, 2000. 11 ERNST & YOUNG LLP We have audited the consolidated financial statements of EDO Corporation and subsidiaries as of December 31, 2001 and 2000, and for the years then ended, and have issued our report thereon dated February 15, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14(a) of this Annual Report (Form 10-K). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP New York, New York February 15, 2002 KPMG LLP Under date of February 15, 2000, we reported on the consolidated statements of earnings, shareholders' equity and cash flows of EDO Corporation and subsidiaries (the Company) for the year ended December 31, 1999 as contained in the 2001 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2001. In connection with our audit of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in item 14(a)2 for the year ended December 31, 1999. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Melville, New York February 15, 2000 3. EXHIBITS. 2(a) Agreement and Plan of Merger by and among EDO Corporation, EDO Acquisition III Corporation and AIL Technologies Inc. as amended and restated dated January 2, 2000. Incorporated by reference to Exhibit 2(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 2(b) Management Stock Purchase Agreement dated as of January 2, 2000 between EDO Corporation as Buyer and eleven individuals as Sellers, relating to the purchase and sale of shares of common stock of AIL Technologies Inc. incorporated by reference to Exhibit 2(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 2(c) Stock Purchase Agreement dated as of January 2, 2000 between EDO Corporation, as Buyer, and Defense Systems Holding Co., as Seller, relating to the purchase and sale of shares of common and preferred stock of AIL Technologies Inc. Incorporated by reference to Exhibit 2(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
12 2(d) Stock Purchase Agreement dated as of October 9, 2001, by EDO Acquisition II, Inc. and the former stockholders of Dynamic Systems, Inc., with a list of the schedules and exhibits. 3(a) Certificate of Incorporation of the Company and amendments thereto dated June 14, 1984, July 18, 1988 and July 22, 1988 (incorporated by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994), as further amended by amendment thereto dated July 29, 1998. Incorporated by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 3(b) By-Laws of the Company as amended through June 27, 2000. Incorporated by reference to Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 10(a) Credit Agreement, dated as of August 24, 2000, by and among EDO Corporation and AIL Systems Inc. with European American Bank and Mellon Bank, NA, et. al. Incorporated by reference to Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000. 10(b) EDO Corporation 1996 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10(c) Executive Life Insurance Plan Agreements, as amended through January 23, 1990, between the Company and 28 employees and retirees. Incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10(d) Form of Directors' and Officers' Indemnification Agreements between EDO Corporation and 14 current Company directors and officers. Incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10(e) Consent Decree, entered on November 25, 1992, amongst the United States, EDO Corporation, Plessey, Inc., Vernitron Corporation and Pitney Bowes, Inc. Incorporated by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10(f) EDO Corporation 1997 Non-Employee Director Stock Option Plan. Incorporated by reference to Appendix A to the Company's Definitive Proxy Statement dated March 21, 1997. 10(g) EDO Corporation Compensation Plan for Directors. Incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 10(h) Second Amended and Restated Employment Agreement, dated as of January 2, 2000, by and among AIL Systems, Inc., EDO and James M. Smith. Incorporated by reference to Exhibit 10(k) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 10(i) Supplemental Executive Retirement Plan, dated July 1, 2001 13 Pages 25 through 53 of the Registrant's Annual Report to Shareholders for the year ended December 31, 2001. 21 List of Subsidiaries. 23(a) Consent of Ernst & Young LLP 23(b) Consent of KPMG LLP 24 Powers of Attorney used in connection with the execution of this Annual Report on Form 10-K.
(b) Reports on Form 8-K No reports on Form 8-K were required to be filed during the three months ended December 31, 2001. 13 SIGNATURES 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, its chief financial and accounting officer, thereunto duly authorized. EDO CORPORATION (Registrant) By: /s/ DARRELL L. REED --------------------------------------------- Dated: March 18, 2002 Darrell L. Reed Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 18, 2002 by the following persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ DARRELL L. REED Vice President -- Finance, - --------------------------------- Treasurer, Chief Financial (Darrell L. Reed) Officer, and Principal Financial and Accounting Officer James M. Smith President, Chief Executive Officer, Director and Principal Executive Officer Robert E. Allen Director Robert Alvine Director By: /s/ DARRELL L. REED --------------------------------- Neil A. Armstrong Director Darrell L. Reed George M. Ball Director Attorney-in-Fact Robert M. Hanisee Director Michael J. Hegarty Director Ronald L. Leach Director James M. Smith Director George A. Strutz, Jr. Director
14 EX-2.D 3 y57015ex2-d.txt STOCK PURCHASE AGREEMENT Exhibit 2(d) 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 1 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 2 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 3 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. 4 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. 5 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. 6 " 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 7 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. 8 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; 9 (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: Lauren J. Fleischmann ABA: 256074974 Account Number: 0101517704 (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: CHEVY CHASE BANK ABA #255071981 CHEVY CHASE, MD CREDIT TO DDA #014381117 NOTIFICATION: TRUST OPERATIONS ADDITIONAL INFORMATION: FFC TO Dynamic Systems Escrow #CH200127 (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); 10 (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 2.4(b)(i), and that amounts so delivered shall be deemed appropriately distributed to each Seller in accordance with this Agreement and the Noncompetition Agreement. Sellers have directed that certain payments be delivered to the account of Lauren J. Fleischmann a/k/a John Fleischmann as nominee and agent for all Sellers, and each Seller agrees to look solely to John Fleischmann with regard to amounts delivered to such account and to bear any and all risk of loss associated with the use of such account. Buyer's delivery of funds via wire transfer in the amounts and to the accounts specified in Section 2.4(b) shall, to the extent of the funds so delivered and subject to the terms of the Escrow Agreement, fully and finally discharge the obligation of Buyer with regard to the payment to Sellers of the Purchase Price and the additional consideration specified in the Noncompetition Agreements. 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), 11 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 12 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 13 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, 14 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 15 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 16 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 17 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. 18 (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 19 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; 20 (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: 21 (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; 22 (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 23 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 24 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 25 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 26 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 27 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, 28 "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 29 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. 30 (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 31 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 32 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 33 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 34 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. 35 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, 36 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 37 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 38 (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 39 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 40 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 41 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 42 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 43 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. 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 44 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 45 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: __________________________________ Name: ________________________ Title: ______________________ SELLERS: 46 ________________________________ ________________________________ JOHN FLEISCHMANN a/k/a DAVID BENNET a/k/a L. JOHN FLEISCHMANN a/k/a DAVID H. BENNET LAUREN J. FLEISCHMANN ________________________________ ________________________________ ROBERT EINZIG a/k/a GEORGE W. KENASTON ROBERT E. EINZIG ________________________________ GARY NELSON LIST OF EXHIBITS A Sellers 2.4(a)(ii)(1) Sellers' Releases 2.4(a)(ii)(2) Former Shareholders' Release 2.4(a)(iv)(1)-(5) Noncompetition Agreements 2.4(a)(v) Escrow Agreement 2.4(a)(vi)(1) & (2) Opinions of Counsel for Sellers and Former Shareholders THE REGISTRANT WILL FURNISH SUPPLEMENTALLY TO THE COMMISSION ANY OMITTED SCHEDULE UPON REQUEST. 47 EXHIBIT A TO STOCK PURCHASE AGREEMENT L. John Fleischmann David Bennet 9492 Cresthill Road 10421 Lawyers Road Marshall, Virginia 20115 Vienna, Virginia 22180 Facsimile No. 703-684-8121 Facsimile No. 703-319-2153 Robert Einzig George W. Kenaston 8724 Eggert Drive 10604 Canterberry Road Bethesda, Maryland 20817 Fairfax Station, Virginia 22039-1919 Facsimile No. 801-459-2947 Facsimile No. 703-425-1152 Gary Nelson 635 Slaters Lane, Suite 100 Alexandria, Virginia 22314 Facsimile No. 703-684-4068 48 EX-10.I 4 y57015ex10-i.txt SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10(i) EDO CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EFFECTIVE JULY 1, 2001 TABLE OF CONTENTS
PAGE ---- Preamble.................................................... ii Article I -- Definitions.................................... 1 Article II -- Participation................................. 2 Article III -- Retirement Date.............................. 2 Article IV -- Retirement Income............................. 3 Article V -- Payment of Benefits............................ 4 Article VI -- Vesting and Forfeiture........................ 5 Article VII -- Plan Administration.......................... 5 Article VIII -- Amendment and Termination................... 5 Article IX -- Funding....................................... 6 Article X -- Miscellaneous.................................. 6
i PREAMBLE This instrument states the terms and conditions of the EDO Corporation Supplemental Executive Retirement Plan (the "Plan"), effective as of July 1, 2001. The purpose of this Plan is to provide eligible Senior Executives of the Employer with supplemental retirement income and survivor benefits in addition to the benefits payable from the EDO Corporation Employees Pension Plan. The Plan is intended to enable the Employer to attract and retain as Employees those Senior Executives eligible for the Plan. ii ARTICLE I DEFINITIONS Unless a different meaning is clearly required by the context: 1.1 "Affiliate" means any entity aggregated with the Company under Sections 414(b), (c), (m), or (o) of the Internal Revenue Code of 1986, but only for the period during which such entity is so aggregated with the Company or any other entity designated as such by the Compensation Committee, in its sole discretion. 1.2 "Beneficiary" means the person or persons entitled to receive a benefit under the Plan in the event of the death of a Participant. 1.3 "Board" means the Board of Directors of the Company. 1.4 "Cause" shall mean (i) the willful failure of an Employee to perform substantially the Employee's duties as an employee of the Employer (other than due to mental or physical illness), (ii) the Employee's engaging in serious misconduct that is injurious to the Employer or any Employee, (iii) the Employee's having being convicted of, or having entered a plea on Nolo Contendre to, a crime that constitutes a felony, or (iv) the breach by the Employee of any written covenant or agreement to compete with the Employer. 1.5 "Change in Control" shall have the same meaning as defined in a Participant's Change in Control Agreement. 1.6 "Change in Control Agreement" means the individual agreement, if any, between an Employee and the Employer which details the governing terms and conditions of the Employee's employment with the Employer in the event of the Employer undergoing a Change in Control. 1.7 "Code" means the Internal Revenue Code of 1986, as amended. 1.8 "Company" means EDO Corporation and any successor to such corporation which shall adopt the Plan. 1.9 "Compensation" means the regular rate of base salary or wages payable to an Employee by an Employer for the performance of duties, inclusive of Incentive Compensation, and of any contributions made by the Employee pursuant to Code Sections 402(g)(3), 125 or 457, determined without the application of any limitations on annual compensation as provided in Code Section 401(a)(17). In the case of a Participant who is Disabled, the Participant's Compensation for each calendar month during his period of Disability shall be deemed to be the Participant's monthly rate of pay in effect at the time the Participant was last actively employed by an Employer, and the monthly pro-rated five (5) year average Incentive Compensation paid to the Employee prior to their last day of work, before the commencement of such Disability. 1.10 "Compensation Committee" means the Compensation Committee of the Board of Directors. 1.11 "Disability" or "Disabled" means such terms as defined under the Qualified Plan. 1.12 "Early Retirement Age" means age 55 with the completion of ten (10) Years of Service. 1.13 "Early Retirement Date" means the date of a Participant's termination of employment on or after attainment of Early Retirement Age, but prior to Normal Retirement Age. 1.14 "Early Retirement Income" means the retirement benefits provided to Participants and their Beneficiaries reduced according to the applicable provisions of Article IV, Section 4.2. 1.15 "Effective Date" means July 1, 2001. 1.16 "Employee" means any individual who receives remuneration from an Employer in the form of salary or wages paid for personal services rendered to an Employer. 1.17 "Employer" means EDO Corporation, any other Affiliate, or any successor entity. 1.18 "Final Average Compensation" means the average obtained by dividing (i) the total Compensation of the Employee for service during the 60 consecutive calendar months (or his total employment if less than 60) in the last 120 calendar months (or his total employment if less than 120 months) of his 1 employment by an Employer, including the month in which his employment ceases but not including any prior month in which he was not employed for the full month, for which 60 (or such lesser number of months, if applicable) consecutive calendar months such Compensation is greatest, by (ii) the number of months and fraction, if any, equal to 60 months (or such lesser number of months, if applicable). 1.19 "Incentive Compensation" means the award payable to an Employee under the Employer's Incentive Compensation Plan. 1.20 "Normal Retirement Age" means age 65. 1.21 "Normal Retirement Date" means the date of a Participant's termination of employment on or after attainment of Normal Retirement Age. 1.22 "Participant" means a Senior Executive who has satisfied the eligibility requirements of Article II hereof, and whose participation has not ceased pursuant to any provision of this Plan. 1.23 "Pension Administration Committee" means the Pension Administration Committee appointed by the Board. 1.24 "Plan" means the EDO Corporation Supplemental Executive Retirement Plan as set forth herein and as amended from time to time. 1.25 "Plan Year" means the Company's fiscal year for federal income tax purposes. 1.26 "Qualified Plan" means the EDO Corporation Employees Pension Plan as in effect on the Effective Date and as amended from time to time. 1.27 "Retirement Date" means the effective date of a Participant's retirement determined in accordance with Article III hereof. 1.28 "Retirement Income" means the retirement benefits provided to Participants and their Beneficiaries in accordance with the applicable provisions of this Plan. 1.29 "Senior Executive" means an Employee who is designated as a Senior Executive of the Employer. 1.30 "Years of Service" means the number of years or partial years during which a Participant is employed as an Employee, determined by dividing the number of consecutive months of service by twelve (12). An authorized leave of absence shall not be considered a break in service provided the Participant returns from the leave of absence prior to termination of employment. In addition, a Participant shall be credited with service for any period of absence from employment or service during which such Participant is suffering from a Disability, but ending on the earlier of (i) the date the Participant returns to work with the Employer, (ii) the date the Participant begins receiving Retirement Income hereunder, (iii) the ten (10) year anniversary of the Participant's last day of work prior to Disability, or (v) the Participant's attainment of Normal Retirement Age. ARTICLE II PARTICIPATION 2.1 Eligibility. Each Senior Executive may be eligible to participate in the Plan, in the sole discretion of the Compensation Committee, as of the later of the Effective Date hereof or the date such Senior Executive is designated as eligible to participate in the Plan. 2.2 Enrollment and Participation. A Senior Executive who becomes a Participant shall remain a Participant as long as he is entitled to any benefits under the Plan. ARTICLE III RETIREMENT DATE 3.1 Normal/Early Retirement Date. A Participant's Retirement Date shall mean such Participant's Normal Retirement Date or Early Retirement Date, as the case may be, or such other date considered to be the Participant's deferred Retirement Date as defined in Section 3.2. 2 3.2 Postponed Retirement. If a Participant continues to perform services as an Employee beyond his Normal Retirement Date, such Participant's postponed Retirement Date shall be the date of the Participant's termination of employment with the Employer. ARTICLE IV RETIREMENT INCOME 4.1 Normal Retirement Income. A Participant's Retirement Income at Normal Retirement Age shall be calculated based on a single life annuity with 15 years certain and shall equal the excess, if any, of (A) minus (B) where: (A) Equals two percent (2%) times the Participant's Years of Service, to a maximum of 44 years, the product of which must be at least 50% if the Participant retires at or after age 65 with 10 Years of Service, multiplied by the Participant's Final Average Compensation, multiplied by twelve (12); and (B) Equals the amount of the annual retirement benefit which is payable to such Participant at the Participant's Normal Retirement Date under the Qualified Plan in the form of a single life annuity. 4.2 Early Retirement Income. (A)Election to Defer Retirement Income until Normal Retirement Age. Should a Participant who retires at or after Early Retirement Age, but prior to Normal Retirement Age, elect in accordance with the terms of Section 5.1(B) to defer the commencement of his Retirement Income until the first day of the month coinciding with or next following the month in which the Participant reaches Normal Retirement Age, the Participant's Retirement Income shall be determined in accordance with Section 4.1 of the Plan. In all other cases, a Participant's Early Retirement Income shall be determined in accordance with the terms of Section (B) or (C) hereof, as appropriate. (B)Retirement with at least 10 Years of Service, at or After Age 60 and Prior to Age 65. Early Retirement Income for a Participant with at least 10 Years of Service at retirement and who retires at or after age 60 and prior to age 65 shall be the amount (i) determined under Section 4.1 based upon Final Average Compensation and Years of Service at such Participant's Early Retirement Date reduced by (ii) three percent (3%) for each year (and interpolated to actual age using years and months at commencing) from and after the Participant's Retirement Date through the end of the month in which such Participant would reach the Normal Retirement Age. (C)Retirement with at least 10 Years of Service, at or After Age 55 and Prior to Age 60. Early Retirement Income for a Participant with at least 10 Years of Service at retirement and who retires at or after age 55 and prior to age 60 shall be the amount (i) determined under Section 4.1 based upon Final Average Compensation and Years of Service at such Participant's Early Retirement Date reduced by (ii) five percent (5%) for each year (and interpolated to actual age using years and months at commencing) from and after the Participant's Retirement Date through the end of the month in which such Participant would reach the Normal Retirement Age. 4.3 Postponed Retirement Income. Retirement Income for a Participant who postponed his Retirement Date under Section 3.2 shall be the amount (i) determined under Section 4.1(A) based upon Final Average Compensation and Years of Service at such Participant's deferred Retirement Date minus (ii) the amount calculated under Section 4.1(B) which would be payable at such Participant's deferred Retirement Date. 4.4 Death Benefit. (A)Commencement. A death benefit shall commence as of the first day of the month coinciding with or next following the month in which the death of a Participant occurs. 3 (B)Pre-Retirement Death Benefit. The death benefit for a Participant who dies while employed by an Employer after attaining age 50, with 10 Years of Service, shall be an amount determined under Section 4.1 as if the Participant had retired on the date such Participant's death occurs, and payable to the Participant's Beneficiary for 15 years certain. (C)Designation of Beneficiary. Upon enrollment in the Plan, the Participant will designate by written notice on a form prescribed by the Pension Administration Committee one or more Beneficiaries. A Participant may change his Beneficiary designation at any time by filing the prescribed form with the Pension Administration Committee. The consent of the Participant's Beneficiary is not required for a change of Beneficiary, and no Beneficiary has any rights under this Plan except as are provided by its terms. The rights of a Beneficiary who predeceases the Participant who designated him immediately terminates, unless the Participant has specified otherwise. (D)Beneficiary if no Designation is Made. Unless a different Beneficiary has been designated in accordance with Section 4.4(C), the Beneficiary of any Participant who is lawfully married on the date of his death is his surviving spouse. The Beneficiary of any other Participant who dies without having designated a Beneficiary is his estate. ARTICLE V PAYMENT OF BENEFITS 5.1 Timing of Payments. (A)General Rule. Subject to subsection (B) hereof, the payment of Retirement Income shall commence as of the first day of the month coinciding with or next following a Participant's Retirement Date. (B)Deferred Payment of Benefits. Notwithstanding the above, a Participant may elect in writing or in such other format prescribed by the Pension Administration Committee to have the commencement of payment of Retirement Income (but not payment of a Death Benefit under Section 4.4) deferred to the first day of any month following a Participant's Retirement Date up to and including, but no later than, the first day of the month following the month in which such Participant reaches Normal Retirement Age; provided, however, that any election to defer the payment of Retirement Income shall not be valid unless such election is made on or before six (6) months prior to the Participant's Retirement Date. The Pension Administration Committee, in its sole discretion and on such basis as it deems appropriate under the circumstances, has the authority to change any payment date otherwise selected under this section by the Participant. (C)Calculation of Deferred Payment. If a Participant elects deferred payment of Retirement Income, the Retirement Income for such Participant shall be calculated as if the Participant had retired on the payment date, but with the Participant's Final Average Compensation and Years of Service determined as of the Participant's Retirement Date. 5.2 Forms of Payment. (A)Normal Form of Payment. The normal form of payment of Retirement Income shall be a single life annuity based on the life of the Participant with a 15 years term certain. (B)Optional Forms of Payment. Notwithstanding Section 5.2(A), the Pension Administration Committee from time to time may make available to Participants or others entitled to receive payments of retirement or death benefits under the Plan such additional optional forms of payment of such benefits as such Pension Administration Committee shall deem appropriate, provided that any such forms for payment of benefits shall not increase the cost of such benefits to the Employer (cost being determined on such basis as the Compensation Committee shall deem appropriate). 4 ARTICLE VI VESTING AND FORFEITURE 6.1 Vesting. A Participant shall have a nonforfeitable right to receive his Retirement Income under this Plan upon attaining Early Retirement Age, unless such Retirement Income is a Death Benefit under Section 4.4, in which case vesting occurs upon the Participant's attainment of age 50 with 10 Years of Service. 6.2 Accelerated Vesting. Notwithstanding Section 6.1, the Compensation Committee may, in its sole discretion, accelerate the vesting terms in respect of a Participant. 6.3 Forfeiture. A Participant whose employment terminates with the Employer for Cause shall forfeit any and all entitlements to receive his Retirement Income under this Plan. ARTICLE VII PLAN ADMINISTRATION 7.1 Powers and Duties of the Compensation Committee. The Compensation Committee shall have absolute discretion with respect to the adoption, altering or amending of the Plan, and the designation of Participants of the Plan. 7.2 Powers and Duties of the Pension Administration Committee. The Pension Administration Committee's powers and duties shall include, but not be limited to: (A) Proposing, interpreting, altering, or revoking rules and regulations necessary to administer the Plan; (B) Delegating ministerial duties and employing outside professionals as may be required; and (C) Entering into agreements or taking such other actions on behalf of the Company as are necessary to implement the Plan. 7.3 Action by the Committees. The Compensation Committee and the Pension Administration Committee each act by a majority of its members at the time in office and may take action either by vote at a meeting or by written consent. The Chairman or Secretary of the Pension Administration Committee are authorized to represent the Company, including the signing of any certificate or other written direction. 7.4 Claims Procedure. In the event a claim by a Participant relating to the amount of any distribution is denied, such person will be given written notice by the Secretary of the Pension Administration Committee of such denial, which notice shall set forth the reason for denial. The Participant may, within sixty (60) days after receiving the notice, request a review of such denial by filing notice in writing with the Secretary of the Pension Administration Committee. The Pension Administration Committee, in its discretion, may request a meeting with the Participant to clarify any matters it deems pertinent. The Pension Administration Committee will render a written decision within such period of time after receipt of the request that such Committee in its discretion deems necessary to give a full and fair review of the Participant's claim, stating the reason for its decision. The determination of the Pension Administration Committee as to any disputed questions or issues arising under the Plan and all interpretations, determinations and decisions of the Pension Administration Committee with respect to any claim hereunder shall be final, conclusive and binding upon all persons. ARTICLE VIII AMENDMENT AND TERMINATION 8.1 Amendment. The Company, in its sole discretion, by action of its Board or its delegate, shall have the right to amend, terminate or suspend the Plan, in whole or in part, at any time. Each Participant shall be promptly notified of any amendments. Notwithstanding the above, no amendment shall reduce a 5 Participant's right to any benefits previously accrued under the Plan prior to such amendment or termination. 8.2 Change in Control. Notwithstanding any provision contained herein, if the Employer undergoes a Change in Control, the terms of a Participant's Change in Control Agreement with the Employer shall govern the determination of that Participant's entitlement to receive any or all of his Retirement Income under this Plan. ARTICLE IX FUNDING 9.1 Unfunded Plan. This Plan is intended to be unfunded and any distributions hereunder shall be made out of the general assets of the applicable Employer. No Participant or Beneficiary shall have any right, title, interest, or claim in or to any assets of any Employer other than as an unsecured creditor. The Plan constitutes only an unsecured commitment by the applicable Employer to make payments to the extent, and subject to the limitations, provided for herein. Although this Plan constitutes an "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), it is intended to cover only a select group of management or highly compensated employees pursuant to Sections 201, 301 and 401 of ERISA. 9.2 Trust or Other Fund. Notwithstanding the foregoing, any Employer may, but is not required to, contribute to a trust or other fund amounts equal to its obligations under the Plan. The assets of any trust or other fund so established shall be available to the creditors of such Employer in the event of its bankruptcy or insolvency. To the extent of the funds in such trust or other fund, distributions shall be payable to Participants first from such trust or other fund before any claim is made against the applicable Employer. The Pension Administration Committee may provide such direction to the trustee or custodian on behalf of the applicable Employer as it deems necessary to provide for the proper payment of distributions from the trust or other fund. 9.3 Payment from the Qualified Plan. To the extent permitted under the relevant Code rules and regulations, the Pension Administration Committee may seek whole or partial payment of any entitlement to Retirement Income due under this Plan to a Participant to be paid to such Participant under the Qualified Plan, reducing to the extent so paid the Retirement Income, if any, payable to such Participant under this Plan. ARTICLE X MISCELLANEOUS 10.1 Tax Withholding. Each Employer shall be entitled to withhold an amount sufficient in the opinion of such Employer to satisfy all federal, state and other governmental tax withholding requirements related to distributions pursuant to the Plan, including, but not limited to social security taxes. 10.2 Limitation of Rights. No Participant or Beneficiary shall acquire any legal or equitable rights against any Employer, except as expressly provided in the Plan. 10.3 Participant's Status. Each Participant in this Plan shall have the status of a general unsecured creditor of the applicable Employer and this Plan shall constitute a mere promise by such Employer to make future cash payments equivalent to the Participant's Retirement Income. 10.4 Offset to Distributions. Any distribution to a Participant under the Plan may be offset by any monetary claims any Employer has against the Participant. 10.5 Inalienability. Except as provided under Section 10.4, a Participant's rights to any distributions under the Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or the Participant's Beneficiary. 6 10.6 Indemnity of Committees. Each Employer shall jointly and severally indemnify the members of the Compensation Committee and the Pension Administration Committee and each of them individually, from the effects and consequences of their acts, omissions and conduct in their official capacity, except to the extent that such effects and consequences result from their own willful misconduct. 10.7 Pronouns. Wherever used herein, the masculine includes the feminine and the singular includes the plural, unless the context clearly provides otherwise. 10.8 Applicable Law. This Plan shall be governed by and construed in accordance with the laws of the State of New York. 7 IN WITNESS WHEREOF, EDO CORPORATION has caused this instrument to be executed by its duly authorized officer on this day of , 2002. By: -------------------------------------- Attest: - ------------------------ Its duly authorized - ------------------------------------ 8 EX-13 5 y57015ex13.txt PAGES 25 THROUGH 53 OF ANNUAL REPORT Exhibit 13 SELECTED FINANCIAL DATA EDO CORPORATION AND SUBSIDIARIES (NOT COVERED BY INDEPENDENT AUDITORS' REPORTS)
- ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF EARNINGS DATA: Net sales $ 259,961 $ 206,822 $ 97,936 $ 81,403 $ 73,708 Costs and expenses: Cost of sales 189,733 151,512 72,337 57,817 58,142 Selling, general and administrative 34,013 29,205 13,602 11,649 8,809 Research and development 8,750 5,371 2,748 2,382 1,688 Non-recurring expenses (income)(a) 389 11,495 -- (2,200) (2,900) - ------------------------------------------------------------------------------------------------------------------------------------ 232,885 197,583 88,687 69,648 65,739 - ------------------------------------------------------------------------------------------------------------------------------------ Operating earnings 27,076 9,239 9,249 11,755 7,969 Net interest expense (2,216) (2,438) (785) (428) (459) Other non-operating (expense) income, net (971) (216) 230 (100) (50) - ------------------------------------------------------------------------------------------------------------------------------------ (3,187) (2,654) (555) (528) (509) - ------------------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 23,889 6,585 8,694 11,227 7,460 Income tax expense 9,210 5,264 2,610 880 -- - ------------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) from: Continuing operations 14,679 1,321 6,084 10,347 7,460 Discontinued operations 273 -- (4,064) (2,116) (433) - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings 14,952 1,321 2,020 8,231 7,027 Dividends on preferred shares(b) 194 881 1,000 1,063 1,127 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings available for common shares $ 14,758 $ 440 $ 1,020 $ 7,168 $ 5,900 ==================================================================================================================================== PER COMMON SHARE DATA: Basic net earnings (loss): Continuing operations $ 1.14 $ 0.05 $ 0.76 $ 1.42 $ 1.01 Discontinued operations $ 0.02 $ -- $ (0.61) $ (0.33) $ (0.07) - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1.16 $ 0.05 $ 0.15 $ 1.09 $ 0.94 ==================================================================================================================================== Diluted net earnings (loss): Continuing operations $ 1.09 $ 0.05 $ 0.65 $ 1.21 $ 0.87 Discontinued operations 0.02 -- (0.50) (0.27) (0.06) - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1.11 $ 0.05 $ 0.15 $ 0.94 $ 0.81 ==================================================================================================================================== Cash dividends per common share $ 0.12 $ 0.12 $ 0.12 $ 0.115 $ 0.10 Weighted average common shares outstanding: Basic 12,776 9,601 6,701 6,549 6,261 Diluted 14,254 10,662 8,032 7,785 7,395 OTHER DATA: EBITDAP(c) $ 37,037 $ 27,307 $ 11,127 $ 9,598 $ 7,518 Depreciation and amortization 11,396 9,441 3,390 2,343 3,684 Capital expenditures 14,298 3,861 4,032 3,133 1,903 Backlog 294,812 252,888 133,880 130,151 93,028
25 SELECTED FINANCIAL DATA (CONTINUED) EDO CORPORATION AND SUBSIDIARIES (NOT COVERED BY INDEPENDENT AUDITORS' REPORTS)
- ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities $ 58,031 $ 16,621 $ 29,642 $ 33,510 $ 34,467 Working capital 105,177 37,552 35,110 32,674 31,599 Total assets 285,630 214,254 124,491 124,630 107,556 Total debt(d) 463 49,444 36,483 43,732 39,685 Shareholders' equity 174,498 65,818 40,241 38,051 28,135 - ------------------------------------------------------------------------------------------------------------------------------------
a. Reflects $929,000 in the year ended December 31, 2001 of post-retirement curtailment gain, $1,318,000 and $11,495,000, respectively, in the years ended December 31, 2001 and 2000 for the write-off of purchased in-process research and development and other EDO-AIL merger-related costs and $2,200,000 and $2,900,000, respectively, in the years ended December 31, 1998 and 1997 of litigation settlement income. b. ESOP Convertible Cumulative Preferred Shares, Series A. On March 8, 2001, all outstanding preferred shares were converted into common shares. No preferred dividends were paid after March 8, 2001. c. EBITDAP consists of earnings from continuing operations before interest, taxes, depreciation, amortization and non-cash pension and ESOP compensation expense, excluding post-retirement curtailment gain, the write-off of purchased in-process research and development, merger-related costs and litigation settlement income. Items excluded from EBITDAP are significant components in understanding and assessing financial performance. EBITDAP is a measure commonly used by financial analysts and investors to evaluate the financial results of companies in our industry, and we believe it therefore provides useful information to investors. EBITDAP should not be considered in isolation or as an alternative to net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because EBITDAP is not a measure of financial performance determined in accordance with generally accepted accounting principles and is susceptible to varying calculations, EBITDAP as presented may not be comparable to similarly titled measures of other companies. d. Includes ESOT loan obligation, note payable and current portion of long-term debt. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW EDO Corporation is a leading supplier of sophisticated, highly engineered products and systems for defense, aerospace and industrial applications. We believe our advanced electronic, electromechanical systems, information systems and engineered materials are mission-critical, standard equipment on a wide range of military aircraft. We have three reporting segments: Defense, Communications and Space Products and Engineered Materials, which represented 71%, 15% and 14%, respectively, of our net sales for the year ended December 31, 2001. Our Defense segment provides integrated defense systems and components including electronic warfare systems, subsystems and test equipment, aircraft stores suspension and release systems, airborne mine countermeasures systems, integrated combat systems, undersea warfare sonar systems, operational, technical and information technology services for military forces and governments worldwide. Our Communications and Space Products segment supplies antenna products and space sensor communications products for the remote sensing, communication and navigation industries. Our Engineered Materials segment supplies electro-ceramic products and advanced fiber composite and structural products for the communication, navigation, chemical, petrochemical, paper and oil industries for the commercial infrastructure and military markets. On October 30, 2001, we completed a public offering of 3,716,100 shares of our common stock resulting in net proceeds to us of about $81.5 million. Additionally, our Employee Stock Ownership Plan (ESOP), a qualified retirement plan, sold 1,458,900 shares of which we received none of the proceeds. On November 27, 2001, we completed the redemption of all of our outstanding 7% Convertible Subordinated Debentures due 2011. Outstanding face value of $22.0 million was converted into about 1.0 million common shares and face value of $0.2 million was redeemed for cash plus accrued interest. In January 2000, we sold our satellite orientation sensor products business, Barnes Engineering Company. Accordingly, our consolidated financial statements treat the satellite products business as a discontinued operation. Revenues, costs and expenses, assets and liabilities, cash flows and backlog associated with the satellite products business have been excluded from the respective captions in the consolidated financial statements and discussion below. MERGER WITH AIL TECHNOLOGIES, INC. On April 28, 2000, our wholly-owned subsidiary merged with AIL Technologies Inc. (AIL). This merger (the "EDO-AIL merger"), was accounted for as a purchase and is included in our results of operations from that date. The results of operations for the periods presented are materially affected by the timing of the EDO-AIL merger. Under the merger agreement and share purchase agreements with certain AIL shareholders, all of the outstanding shares of common stock and preferred stock of AIL were exchanged for 6,553,194 newly-issued EDO common shares valued at $39.4 million and cash payments aggregating $13.3 million. The merged company also assumed AIL debt of $29.7 million. Of the newly-issued shares, 5.3 million were held in trust by AIL's Employee Stock Ownership Plan, referred to as the AIL ESOP. As of January 1, 2001, the AIL ESOP and the existing EDO ESOP were merged into a single plan. As of March 8, 2001, the existing preferred shares in the EDO ESOP were converted into approximately 1.1 million common shares. In our public offering completed October 30, 2001, the ESOP sold 1,458,900 shares reducing its ownership of EDO to about 23% of outstanding common shares as of December 31, 2001. ACQUISITION HISTORY In October 2001, we acquired Dynamic Systems, Inc., a privately held company based in Alexandria, Virginia for $13.9 million in cash, including transaction costs. Dynamic Systems, Inc. became part of our Defense segment and provides professional and information technology services primarily to the Department of Defense and other government agencies. For the most recent 12-month period prior to the acquisition, Dynamic Systems Inc. had revenues of approximately $15 million. In November 1999, we acquired the outstanding stock of M. Technologies Inc., an integrator of aircraft weapons and avionics systems, for $3 million in cash paid at closing and $1.5 million to be paid in equal annual installments over three years. The first two payments of $0.5 million each were made in November 2000 and November 2001. Each of these acquisitions has been accounted for as a purchase business combination and is included in our results of operations from its respective acquisition date. The results of operations for the periods pre- 27 sented are not materially affected by the timing of these acquisitions. FINANCIAL HIGHLIGHTS For 2001 net earnings available for common shares were $14.8 million or $1.11 per diluted share. These results include pre-tax EDO-AIL merger related costs of $1.3 million and a pre-tax post-retirement benefits curtailment gain of $0.9 million. Excluding these items, net earnings available for common shares would have been $16.0 million or $1.12 per diluted share. Net sales for the year increased 26% to $260.0 million from $206.8 million for 2000, reflecting a full twelve months of the EDO-AIL merger compared to eight months in 2000, as well as increases in sales of aircraft stores suspension and release equipment, integrated combat systems, technology services, electroceramic products and fiber composite structural products. The Dynamic Systems, Inc. acquisition was included from its acquisition date of October 8, 2001, and accounted for net sales of about $3.0 million in 2001. RESULTS OF OPERATIONS COMPARISON OF 2001 TO 2000 Net sales from continuing operations for the year ended December 31, 2001 increased 26% compared to the year ended December 31, 2000. Net sales by segment were as follows:
================================================================================ TWELVE MONTHS ENDED DECEMBER 31, DECEMBER 31, INCREASE 2001 2000 FROM PRIOR (DOLLARS IN THOUSANDS) PERIOD - -------------------------------------------------------------------------------- Defense $183,454 $142,044 29% Communications and Space Products 39,998 30,027 33 Engineered Materials 36,509 34,751 5 - -------------------------------------------------------------------------------- Total $259,961 $206,822 26% ================================================================================
Net sales from continuing operations for the year ended December 31, 2001 increased to $260.0 million from $206.8 million for the year ended December 31, 2000. This increase comprised sales growth of $41.4 million for the Defense segment, $10.0 million for the Communications and Space Products segment, and $1.7 million for the Engineered Materials segment. Of this sales growth, $26.9 million in the Defense segment and $10.0 million in the Communications and Space Products segment was attributable to the EDO-AIL merger. Since the EDO-AIL merger was completed at the end of April 2000, the twelve months of 2000 reflected eight months of combined operations, while 2001 reflected a full twelve 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 for the year ended December 31, 2001 compared to the year ended December 31, 2000. Operating earnings from continuing operations for the year ended December 31, 2001 (before considering one-time EDO-AIL merger-related costs of $1.3 million in 2001 and $11.5 million in 2000 and before a post-retirement benefits curtailment gain of $0.9 million in 2001) increased to $27.5 million or 10.6% of net sales from $20.7 million or 10.0% of net sales for the year ended December 31, 2000. The increase in operating earnings was attributable to the EDO-AIL merger as well as earnings from completed mine countermeasures contracts and increased margins in electro-ceramic products. These increases were partially offset by losses in the Communications and Space Products segment on development programs. For the year ended December 31, 2001, net earnings available for common shares increased to $14.8 million or $1.11 per diluted common share on 14.3 million diluted shares from $0.4 million or $0.05 per diluted common share on 10.7 million diluted shares for the year ended December 31, 2000. Selling, general and administrative expenses for the year ended December 31, 2001 increased to $34.0 million or 13.1% of net sales from $29.2 million or 14.1% of net sales for the year ended December 31, 2000. This increase was primarily attributable to the EDO-AIL merger and increased bid and proposal costs. Research and development expense for the year ended December 31, 2001 increased to $8.8 million or 3.3% of net sales from $5.4 million or 2.6% of net sales for the year ended December 31, 2000. The increase was primarily attributable to expenditures in the Communications and Space Products segment relating to fiber optics product development. Interest expense, net of interest income, for the year ended December 31, 2001 decreased to $2.2 million from $2.4 million for the year ended December 31, 2000. Income tax expense reflected our effective rate of 38.6% for the year ending December 31, 2001. This compares to an income tax expense at an effective rate of 79.9% for the year ended December 31, 2000. The effective tax expense of 79.9% for the year ended December 31, 2000 was principally attributable to a write-off of $6.7 million of purchased in-process research and development and other expenses associated with the EDO-AIL merger that were not deductible for income tax purposes. 28 Dividends on preferred shares for the year ended December 31, 2001 decreased to $0.2 million from $0.9 million for the year ended December 31, 2000, due to the conversion of all outstanding preferred shares into 1,067,281 common shares on March 8, 2001. No preferred dividends were paid after March 8, 2001. COMPARISON OF 2000 TO 1999 Net sales for the year ended December 31, 2000 increased 111% compared to the year ended December 31, 1999. Sales by segment, were as follows:
================================================================================ TWELVE MONTHS ENDED DECEMBER 31, DECEMBER 31, INCREASE 2000 1999 FROM PRIOR (DOLLARS IN THOUSANDS) PERIOD - -------------------------------------------------------------------------------- Defense $142,044 $ 66,381 114% Communications and Space Products 30,027 -- -- Engineered Materials 34,751 31,555 10 - -------------------------------------------------------------------------------- Total $206,822 $ 97,936 111% ================================================================================
During 1999, we conducted our businesses in two segments: Defense and Aerospace Systems; and Engineered Materials. Net sales from continuing operations for the year ended December 31, 2000 increased to $206.8 million from $97.9 million for the year ended December 31, 1999. This increase comprised sales growth of $75.7 million for the Defense segment, $30.0 million for the Communications and Space Products segment, and $3.2 million for the Engineered Materials segment. The sales growth attributable to the EDO-AIL merger was $62.3 million in the Defense segment and $30.0 million in the Communications and Space Products segment. The sales growth attributable to the M. Technologies, Inc., acquisition was $5.4 million in the Defense segment. In addition, net sales increases were recorded in airborne mine countermeasure systems, aircraft stores suspension and release equipment, integrated combat systems, technology services, and electro-ceramic products. Operating earnings from continuing operations for the year ended December 31, 2000 (before considering one-time EDO-AIL merger related costs of $11.5 million) increased to $20.7 million or 10.0% of net sales from $9.2 million or 9.4% of net sales for the year ended December 31, 1999, of which $4.8 million resulted from the EDO-AIL merger. One-time costs related to the EDO-AIL merger included $6.7 million associated with the write-off of purchased in-process research and development and $4.8 million of other merger-related costs. Operating earnings in the Defense segment increased to $17.1 million in 2000 from $7.0 million in 1999. The growth is attributable to the EDO-AIL merger, $9.1 million, and increased earnings in airborne mine countermeasures systems. Operating loss in the Communications and Space Products segment was $11.2 million, all from the EDO-AIL merger, principally associated with research and development activity including the write-off of purchased in-process research and development described below. Operating earnings in the Engineered Materials segment increased to $3.3 million from $2.2 million in 1999 resulting from increased sales of electro-ceramics and advanced fiber composite structural products. For the year ended December 31, 2000, net earnings from continuing operations available for common shares decreased to $0.4 million or $0.05 per diluted common share from $5.1 million or $0.65 per diluted common share for the year ended December 31, 1999, reflecting the above changes and the differential in income taxes described below. Selling, general and administrative expenses for the year ended December 31, 2000 increased to $29.2 million or 14.1% of net sales from $13.6 million or 13.9% of net sales for the year ended December 31, 1999. The increase was attributable to the selling, general and administrative expenses of AIL. Research and development expenditures increased to $5.4 million, or 2.6% of net sales in 2000 from $2.7 million, or 2.8% of net sales in 1999. The increase was attributable to expenditures at AIL primarily associated with development of the Ku-Ku Band Down Converter discussed under "In-Process Research and Development" below. Interest expense net of interest income increased to $2.4 million or 1.2% of net sales for the year ended December 31, 2000 from $0.8 million or 0.8% of net sales for the year ended December 31, 1999 principally due to the borrowings made under the credit facility of AIL in existence at the time of the EDO-AIL merger. The income tax provision for the year ended December 31, 2000 reflects our effective income tax rate of 79.9% compared to 30% for the year ended December 31, 1999. The increased effective income tax rate was principally due to the write-off of $6.7 million of purchased in-process research and development in the quarter ended July 1, 2000, which was not deductible for income tax purposes, and other non-deductible items associated with the EDO-AIL merger. IN-PROCESS RESEARCH AND DEVELOPMENT The acquired in-process research and development, referred to as IPR&D, related to a project that had not reached technological feasibility and had no alternative future uses, and thus, the amounts allocated to 29 such project were expensed as of the date of the EDO-AIL merger. This development project related to a generic satellite subsystem called a Ku-Ku Band Down Converter for the fixed satellite service market. The converter represented a single channel providing signal conversion from uplink frequencies in the 14GHz range to the downlink frequencies in the 12GHz range. At the time of the EDO-AIL merger, it was estimated that 90% of the development effort had been completed and the remaining development effort would take about six months to complete. This project is now completed, resulting in sales in 2001 of Ku-Ku Band Converters. During 2000 and the first six months of 2001, the efforts required to develop the in-process technology of this project into commercially viable products principally related to the completion of planning, designing, prototyping and testing functions that were necessary to establish that the down converter produced would meet its design specifications, including technical performance features and functional requirements. Future results will also be subject to uncertain market events and risks that are beyond our control, such as trends in technology, government regulations, market size and growth and product introduction by competitors. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Our cash, cash equivalents and marketable securities increased to $58.0 million at December 31, 2001 from $16.6 million at December 31, 2000. This increase is due to the net proceeds of about $81.5 million from the sale of 3,716,100 common shares, $14.1 million provided by operations and $1.9 million from the exercises of stock options. These increases were partially offset by $13.9 million for the acquisition of Dynamic Systems, $14.3 million for purchases of capital equipment, $3.2 million for the repurchase of subordinated debentures, $4.9 million for the payment in full of the EDO ESOP loan obligation, and $2.1 million for payment of common and preferred dividends. Accounts receivable increased to $83.4 million at December 31, 2001 from $69.0 million at December 31, 2000 primarily due to increases in billed receivables resulting from an increase in net sales in the fourth quarter of 2001 compared to the fourth quarter of 2000. Inventories decreased to $22.9 million at December 31, 2001 from $24.9 million at December 31, 2000 primarily due to the aforementioned increase in net sales. The notes receivable of $3.3 million at December 31, 2001 (of which $0.4 million was in current assets) were comprised of a note related to the sale of property at Deer Park in June 2000, which had a balance of $1.1 million at December 31, 2001, and $2.2 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. Contract advances decreased to $16.7 million at December 31, 2001 from $31.7 million at December 31, 2000 due to expenditures on foreign contracts related to aircraft stores suspension and release equipment and integrated combat systems. FINANCING ACTIVITIES As of December 31, 2001 we had no outstanding balance on our 7% Convertible Subordinated Debentures due 2011 since they were fully redeemed on November 27, 2001. Outstanding face value of $22,021,000 was converted into 1,000,934 common shares under the conversion rights of the debentures and $200,000 face value was redeemed for cash plus accrued interest. Commencing in 1996 and until the retirement of these debentures, we made annual sinking fund payments of $1.8 million, which were due each December 15. During 2001, we purchased $3.4 million face value of these debentures for $3.2 million. At the time of redemption we had $2.2 million of these debentures in treasury. In July 2001, we paid in full our ESOT loan obligation with a balance of $4.9 million at an interest rate of 82% of the prime-lending rate. This obligation represented the bank borrowing by the EDO ESOT guaranteed by us. The EDO ESOT has serviced this obligation with the dividends received on our preferred shares and cash contributions from us. As described above under "Merger with AIL Technologies, Inc.," as of January 1, 2001, the AIL ESOP and the existing EDO ESOP were merged into a single plan, and the preferred shares issued by us and held by the EDO ESOT were converted into 1,067,281 shares of our common shares effective March 8, 2001. As of June 30, 2001, the merged ESOT restructured its indirect loan from us to extend the maturity date to December 31, 2017. As a result of the conversion of the preferred shares, debt service on the ESOP indirect loan will be funded by cash contributions from us. 30 During the third quarter of 2000, we completed negotiations for a $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. On October 31, 2001, all outstanding term debt of $14.2 million and all outstanding revolving debt of $20.8 million was paid in full with the proceeds of our public stock offering. At December 31, 2001 we were in compliance with our debt covenants. At December 31, 2001, there were no borrowings under the revolving credit facility of $50.0 million and there were outstanding letters of credit of $20.3 million, leaving available borrowing capacity of $29.7 million. Capital expenditures for the year ended December 31, 2001 increased to $14.3 million from $3.9 million for the year ended December 31, 2000. The increase was due primarily to expenditures at our owned 726,000 square foot facility located in Deer Park, NY, in anticipation of its potential sale and leaseback. We conduct a significant amount of our business with the United States Government. Domestic government sales, including sales to prime contractors of the government, accounted for approximately 69%, 63% and 48% of our total net sales for 2001, 2000 and 1999, respectively. In addition, sales from the Universal Exciter Upgrade program accounted for approximately 15% of our total net sales in 2001 and 2000. Although there are currently no indications of a significant change in the status of government funding of certain programs, should this occur, our results of operations, financial position and liquidity could be materially affected. Such a change could have a significant impact on our profitability and our stock price. This could affect our ability to acquire additional funds from our revolving credit facility due to covenant restrictions or from other sources. We believe that we have adequate liquidity and sufficient capital to fund our currently anticipated requirements for working capital, capital expenditures, research and development expenditures and principal and interest payments. We focused on positioning ourselves during 2001 to be a significant player in the consolidation of first-tier defense suppliers and, to that end, have actively sought candidates for strategic acquisitions. Future acquisitions may be funded from any of the following sources: cash on hand; borrowings under our credit agreement; issuance of our common stock or other equity securities; and/or convertible or other debt offerings. COMMITMENTS We have commitments under a note payable and facility and equipment operating leases that will be funded from operating sources. We also have commitments under letters of credit and advance payment and performance bonds related primarily to advances received on foreign contracts. We do not expect to have to make payments under these letters of credits or bonds since these obligations are removed as we perform under the related contracts. The payments due under the note payable and operating leases are summarized below.
Note Payable Operating Leases ----------------------------------------------- 2002 $463,000 $4,528,000 2003 -- $3,621,000 2004 -- $2,336,000 2005 -- $2,054,000 2006 -- $1,148,000 Thereafter -- $5,798,000
At December 31, 2001, there are outstanding commitments of $20,339,000 under letters of credit and $15,885,000 under advance payment and performance bonds. The amount of commitment expiration per period is summarized below.
Advance payment Standby letters and performance of credit bonds ------------------------------------------------ 2002 $ 2,661,000 $14,191,000 2003 $ 3,039,000 -- 2004 $ 640,000 -- 2005 $13,518,000 -- 2006 $ 64,000 -- Thereafter $ 417,000 $ 1,694,000
BACKLOG The funded backlog of unfilled orders at December 31, 2001 increased to $294.8 million from $252.9 million at December 31, 2000. CRITICAL ACCOUNTING POLICIES REVENUE RECOGNITION We record revenues and profits on substantially all of our contracts using percentage of completion methods of accounting. As a result, revisions made to our 31 estimates of total costs to complete our contracts are recorded in the period in which the conditions that dictate such revisions become known and can be estimated. We believe that our profits are fairly stated. Revisions to estimates do occur and at times are material to our results of operations and financial position. INVENTORY We manufacture certain products prior to receiving firm contracts in anticipation of future demand. These products often relate to a specific technology or application and may not have alternative uses. We believe that sufficient markets exist and that these products will ultimately be sold. NEW ACCOUNTING STANDARDS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001, we adopted Statement of Financial Accounting Standards, or FASB, No. 133, "Accounting for Derivative Instruments and Hedging Activities" and Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an Amendment to FASB Statement No. 133." These statements require all derivatives to be recorded on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. The effect of the adoption of these statements on our financial position and results of operations was immaterial. BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Statement 142 will be adopted by the Company effective January 1, 2002, however, the provisions that provide for the non-amortization of goodwill are effective for 2001 for acquisitions completed after the issuance of Statement 142. Accordingly, the goodwill acquired in connection with the purchase of Dynamic Systems, Inc., in October 2001 will not be amortized. Application of the nonamortization provisions of Statement 142 resulted in an increase in net income of $0.1 million in 2001. The Company will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a review for potential impairment, while the second step measures the amount of the impairment, if any. The Company expects to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the first quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. The Company has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company will adopt FAS 144 as of January 1, 2002 and it does not expect that the adoption of the Statement will have a significant impact on the Company's financial position or results of operations. COMMON SHARE PRICES EDO common shares are traded on the New York Stock Exchange. As of March 1, 2002, there were 2,174 shareholders of record (brokers and nominees counted as one each). The price range in 2001 and 2000 was as follows:
================================================================================ 2001 2000 HIGH LOW HIGH LOW - -------------------------------------------------------------------------------- 1st Quarter 15.1000 7.1875 6.9375 5.7500 2nd Quarter 22.9500 12.7500 7.0000 5.6250 3rd Quarter 28.7500 14.9100 9.1250 5.7500 4th Quarter 31.9000 22.4000 10.4375 7.3125 ================================================================================
32 DIVIDENDS During 2001 and 2000, the Board of Directors approved the payment of quarterly cash dividends of $0.03 per common share. The Company's revolving credit agreement places certain limits on the payment of cash dividends. See Note 9 to the Consolidated Financial Statements. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Annual Report 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 within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934. Forward-looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to the following for each of the types of information noted below. U.S. and international military program sales, follow-on procurement, contract continuance, and future program awards, upgrades and spares support are subject to: U.S. and international military budget constraints and determinations; U.S. congressional and international legislative body discretion; U.S. and international government administration policies and priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in U.S. and international government procurement timing, strategies and practices; and the general state of world military readiness and deployment. Commercial satellite programs and equipment sales, follow-on procurement, contract continuance and future program awards are subject to: establishment and continuance of various consortiums for satellite constellation programs; delay in launch dates due to equipment, weather or other factors beyond the control of the Company; and development of sufficient customer base to support a particular satellite constellation program. Commercial product sales are subject to: success of product development programs currently underway or planned; competitiveness of current and future product production costs and prices; and market and consumer base development for new product programs. Achievement of margins on sales, earnings and cash flow can be affected by: unanticipated technical problems; government termination of contracts for convenience; decline in expected levels of 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. 33 CONSOLIDATED STATEMENTS OF EARNINGS EDO CORPORATION AND SUBSIDIARIES
==================================================================================================================================== YEARS ENDED DECEMBER 31 2001 2000 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------------------------------ CONTINUING OPERATIONS: NET SALES $ 259,961 $ 206,822 $ 97,936 - ------------------------------------------------------------------------------------------------------------------------------------ COSTS AND EXPENSES Cost of sales 189,733 151,512 72,337 Selling, general and administrative 34,013 29,205 13,602 Research and development 8,750 5,371 2,748 Write-off of purchased in-process research and development and merger-related costs 1,318 11,495 -- Post-retirement curtailment gain (929) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 232,885 197,583 88,687 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING EARNINGS 27,076 9,239 9,249 NON-OPERATING INCOME (EXPENSE) Interest income 915 1,881 1,634 Interest expense (3,131) (4,319) (2,419) Other, net (971) (216) 230 - ------------------------------------------------------------------------------------------------------------------------------------ (3,187) (2,654) (555) - ------------------------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations before income taxes 23,889 6,585 8,694 Income tax expense 9,210 5,264 2,610 - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS FROM CONTINUING OPERATIONS 14,679 1,321 6,084 DISCONTINUED OPERATIONS: Earnings from discontinued satellite products business, net of income tax expense -- -- 609 Disposal of discontinued satellite products business (including provision of $530 in 1999 for operating losses during phase-out period), net of income tax expense (benefit) 273 -- (4,673) - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS 273 -- (4,064) - ------------------------------------------------------------------------------------------------------------------------------------ NET EARNINGS 14,952 1,321 2,020 Dividends on preferred shares 194 881 1,000 - ------------------------------------------------------------------------------------------------------------------------------------ NET EARNINGS AVAILABLE FOR COMMON SHARES $ 14,758 $ 440 $ 1,020 - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS (LOSS) PER COMMON SHARE: Basic: Continuing operations $ 1.14 $ 0.05 $ 0.76 Discontinued operations 0.02 -- (0.61) - ------------------------------------------------------------------------------------------------------------------------------------ NET EARNINGS PER COMMON SHARE $ 1.16 $ 0.05 $ 0.15 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted: Continuing operations $ 1.09 $ 0.05 $ 0.65 Discontinued operations 0.02 -- (0.50) - ------------------------------------------------------------------------------------------------------------------------------------ NET EARNINGS PER COMMON SHARE $ 1.11 $ 0.05 $ 0.15 ====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 34 CONSOLIDATED BALANCE SHEETS EDO CORPORATION AND SUBSIDIARIES
==================================================================================================================================== DECEMBER 31 2001 2000 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 57,841 $ 2,208 Marketable securities 190 14,413 Accounts receivable, less allowances of $893 in 2001 and $981 in 2000 83,407 69,023 Inventories 22,937 24,914 Deferred income tax asset, net 3,018 3,333 Prepayments and other 2,346 4,840 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 169,739 118,731 - ------------------------------------------------------------------------------------------------------------------------------------ Property, plant and equipment, net 62,255 57,485 Notes receivable 2,910 3,254 Cost in excess of fair value of net assets acquired, net 22,874 14,724 Deferred income tax asset, net 2,553 -- Other assets 25,299 20,060 - ------------------------------------------------------------------------------------------------------------------------------------ $ 285,630 $ 214,254 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 47,397 $ 44,060 Contract advances and deposits 16,702 31,719 Current portion of note payable 463 429 Current portion of long-term debt -- 4,971 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 64,562 81,179 - ------------------------------------------------------------------------------------------------------------------------------------ Note payable -- 463 Long-term debt -- 37,800 Deferred income tax liabilities, net -- 1,239 ESOT loan obligation -- 5,781 Postretirement benefits obligations 44,675 19,973 Environmental obligation 1,895 2,001 Shareholders' equity: Preferred shares, par value $1 per share, authorized 500,000 shares, none issued in 2001 and 49,229 issued in 2000 -- 49 Common shares, par value $1 per share, authorized 25,000,000 shares, 19,790,477 issued in 2001 and 15,007,096 issued in 2000 19,790 15,007 Additional paid-in capital 143,747 58,614 Retained earnings 47,744 34,803 Accumulated other comprehensive loss, net of income tax benefit (13,385) (61) - ------------------------------------------------------------------------------------------------------------------------------------ 197,896 108,412 Less: Treasury shares at cost (182,459 shares in 2001 and 1,370,222 shares in 2000) (2,461) (19,388) ESOT loan obligation -- (5,781) Unearned ESOP shares (19,792) (15,782) Deferred compensation under Long-Term Incentive Plan (300) (423) Management group receivables (845) (1,220) - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 174,498 65,818 - ------------------------------------------------------------------------------------------------------------------------------------ $ 285,630 $ 214,254 ====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 35 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY EDO CORPORATION AND SUBSIDIARIES
==================================================================================================================================== YEARS ENDED DECEMBER 31 2001 2000 1999 (IN THOUSANDS) AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES - ------------------------------------------------------------------------------------------------------------------------------------ PREFERRED SHARES Balance at beginning of year $ 49 49 $ 57 57 $ 61 61 Shares converted to common shares (49) (49) (8) (8) (4) (4) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year -- -- 49 49 57 57 - ------------------------------------------------------------------------------------------------------------------------------------ COMMON SHARES Balance at beginning of year 15,007 15,007 8,454 8,454 8,454 8,454 Shares issued for purchase of AIL Technologies, Inc. -- -- 6,553 6,553 -- -- Conversion of preferred shares to common shares 1,067 1,067 -- -- -- -- Sale of stock in public offering 3,716 3,716 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year 19,790 19,790 15,007 15,007 8,454 8,454 - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 58,614 28,483 30,142 Exercise of stock options (2,405) (183) (112) Income tax benefit related to stock options 1,118 42 -- Shares used for payment of directors' fees 35 (125) (132) Purchase of AIL Technologies, Inc. -- 33,733 -- Shares used for Long-Term Incentive Plan (73) (432) -- Conversion of preferred shares to common shares (1,018) (3,227) (1,415) Conversion of subordinated debentures 8,525 -- -- Sale of stock in public offering 77,775 -- -- Compensation expense on accelerated options 276 -- -- ESOP shares committed to be released 900 323 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year 143,747 58,614 28,483 - ------------------------------------------------------------------------------------------------------------------------------------ RETAINED EARNINGS Balance at beginning of year 34,803 35,667 35,294 Net earnings 14,952 1,321 2,020 Common share dividends (12 cents per share) (1,840) (1,428) (806) Dividends on preferred shares (194) (881) (1,000) Tax benefit of unallocated preferred share dividends 23 124 159 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year 47,744 34,803 35,667 - ------------------------------------------------------------------------------------------------------------------------------------ ACCUMULATED OTHER COMPREHENSIVE LOSS Balance at beginning of year (61) (255) -- Unrealized gain (loss) on marketable securities, net of income tax 61 194 (255) Additional minimum liability on benefit plans, net of income tax (13,385) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year (13,385) (61) (255) - ------------------------------------------------------------------------------------------------------------------------------------ TREASURY SHARES AT COST Balance at beginning of year (19,388) (1,370) (23,967) (1,694) (25,775) (1,822) Shares used for exercise of stock options 4,297 314 280 20 149 11 Shares used for payment of directors' fees 122 9 251 18 240 17 Shares (repurchased from) used for Long-Term Incentive Plan (63) (6) 813 57 -- -- Shares used for conversion of preferred shares -- -- 3,235 229 1,419 100 Shares used for conversion of subordinated debentures 13,591 1,005 -- -- -- -- Repurchase of ESOP shares (1,020) (134) -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year (2,461) (182) (19,388) (1,370) (23,967) (1,694) - ------------------------------------------------------------------------------------------------------------------------------------
36 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) EDO CORPORATION AND SUBSIDIARIES
==================================================================================================================================== YEARS ENDED DECEMBER 31 2001 2000 1999 (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------------ ESOT LOAN OBLIGATION Balance at beginning of year (5,781) (7,429) (8,955) Repayments made during year 890 1,648 1,526 Restructuring of EDO ESOP 4,891 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year -- (5,781) (7,429) - ------------------------------------------------------------------------------------------------------------------------------------ DEFERRED COMPENSATION UNDER LONG-TERM INCENTIVE PLAN Balance at beginning of year (423) (769) (1,170) Shares used for Long-Term Incentive Plan (148) (392) -- Amortization of Long-Term Incentive Plan deferred compensation expense 271 738 401 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year (300) (423) (769) - ------------------------------------------------------------------------------------------------------------------------------------ UNEARNED ESOP COMPENSATION Balance at beginning of year (15,782) -- -- Purchase of AIL Technologies, Inc. -- (17,302) -- Restructuring of EDO ESOP (4,891) -- -- ESOP shares committed to be released 881 1,520 -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year (19,792) (15,782) -- - ------------------------------------------------------------------------------------------------------------------------------------ MANAGEMENT GROUP RECEIVABLES Balance at beginning of year (1,220) -- -- Purchase of AIL Technologies, Inc. -- (1,220) -- Payments received on management loans 375 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of year (845) (1,220) -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY $ 174,498 $ 65,818 $ 40,241 ==================================================================================================================================== COMPREHENSIVE INCOME Net earnings $ 14,952 $ 1,321 $ 2,020 Additional minimum liability on benefit plans, net of income tax benefit of $9,302 (13,385) -- -- Unrealized gain (loss) on marketable securities, net of income tax expense of $100 in 2000 and benefit of $131 in 1999 -- 194 (255) - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income $ 1,567 $ 1,515 $ 1,765 ====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 37 CONSOLIDATED STATEMENTS OF CASH FLOWS EDO CORPORATION AND SUBSIDIARIES
==================================================================================================================================== YEARS ENDED DECEMBER 31 2001 2000 1999 (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Earnings from continuing operations $ 14,679 $ 1,321 $ 6,084 Adjustments to earnings to arrive at cash provided by continuing operations: Depreciation 9,686 7,740 2,572 Amortization 1,710 1,701 818 Deferred tax expense 5,941 1,292 740 Write-off of purchased in-process research and development -- 6,700 -- Real estate tax assessment adjustment 7,846 -- -- Bad debt expense 220 287 -- Gain on repurchase of debentures (171) (215) (147) Gain on sale of property, plant and equipment (76) (7) -- Gain on sale of marketable securities (81) -- -- Deferred compensation expense 271 738 401 Non-cash ESOP compensation expense 1,781 1,843 -- Dividends on unallocated ESOP shares 80 -- -- Non-cash compensation expense 276 -- -- Common shares issued for directors' fees 157 126 108 Income tax benefit from stock options 1,118 42 -- Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable (10,753) (4,388) (1,796) Inventories 2,033 (2,214) (2,938) Prepayments and other assets (629) (1,825) (5,050) Accounts payable, accrued liabilities and other (4,974) (11,923) (1,062) Contract advances and deposits (15,017) 8,116 5,564 - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by continuing operations 14,097 9,334 5,294 Net cash provided by discontinued operations -- -- 5,952 INVESTING ACTIVITIES: Purchase of plant and equipment (14,298) (3,861) (4,032) Payments received on notes receivable 347 168 575 Proceeds from sale of property, plant and equipment 280 4,569 -- Purchase of marketable securities (59) (818) (8,245) Sale or redemption of marketable securities 14,455 2,541 3,536 Proceeds from sale of discontinued operations -- 8,641 -- Cash paid for acquisitions, net of cash acquired (13,938) (15,004) (2,638) - ------------------------------------------------------------------------------------------------------------------------------------ Cash used by investing activities (13,213) (3,764) (10,804) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Proceeds from exercise of stock options 1,892 97 37 Proceeds from management group receivables 375 -- -- Proceeds from sale of stock in public offering, net of expenses 81,491 -- -- Borrowings under revolver 20,800 9,000 -- Repayments of borrowings under revolver (20,800) (18,000) -- Repayments of long-term debt (17,300) (3,570) -- Repurchase of debentures (3,184) (1,879) (1,405) Purchase of treasury shares (1,020) -- -- Payment of EDO ESOP loan obligation (4,891) -- -- Payment made on note payable (500) (500) (5,460) Payment of common share cash dividends (1,920) (1,428) (806) Payment of preferred share cash dividends (194) (881) (1,000) - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided (used) by financing activities 54,749 (17,161) (8,634) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 55,633 (11,591) (8,192) Cash and cash equivalents at beginning of year 2,208 13,799 21,991 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 57,841 $ 2,208 $ 13,799 - ------------------------------------------------------------------------------------------------------------------------------------ Supplemental disclosures: Cash paid for: Interest $ 2,166 $ 3,500 $ 2,002 Income taxes $ 5,913 $ 3,756 $ 2,126 ====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 EDO CORPORATION AND SUBSIDIARIES (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION AND BUSINESS The consolidated financial statements include the accounts of EDO Corporation and all wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates in three segments, Defense, Communications and Space Products and Engineered Materials (Note 19). The Company discontinued its former satellite products business (Barnes Engineering Company) in 1999 (Note 3). (b) CASH EQUIVALENTS The Company considers all securities with an original maturity of three months or less at the date of acquisition to be cash equivalents. (c) REVENUE RECOGNITION Sales under long-term, fixed-price contracts, including pro-rata profits, are generally recorded based on the relationship of costs incurred to date to total projected final costs or, alternatively, as deliveries are made or services are provided. These projections are revised throughout the lives of the contracts and adjustments to profits resulting from such revisions are made cumulative to the date of change, which may affect current period earnings. Estimated losses on long-term contracts are recorded when identified. Sales under cost reimbursement contracts are recorded as costs are incurred. Sales on other than long-term contract orders (principally commercial products) are recorded as shipments are made. (d) INVENTORIES Inventories under long-term contracts and programs reflect all accumulated production costs, including factory overhead, initial tooling and other related costs (including general and administrative expenses relating to certain of the Company's defense contracts), less the portion of such costs charged to cost of sales. Inventory costs in excess of amounts recoverable under contracts are charged to cost of sales when they are identified. All other inventories are stated at the lower of cost (principally first-in, first-out method) or market. Inventoried costs related to certain of the Company's product lines include quantities beyond what is required for orders under contracts. These costs are incurred to help maintain stable and efficient production schedules. The Company believes that sufficient markets exist for these product lines and that no loss will be incurred upon disposition. Under the contractual arrangements by which progress payments are received, the United States Government has a title to or a security interest in the inventories identified with related contracts. (e) DEPRECIATION AND AMORTIZATION Property, plant and equipment are stated at cost. Depreciation and amortization have been provided primarily using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease periods. Costs associated with the acquisition and development of software for internal use are recognized in accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." As such, the Company capitalized approximately $1,723,000 during 2001. No such costs were incurred in 2000. These costs are being amortized on a straight-line basis over a period of four years. Deferred financing costs are amortized on a straight-line basis over the life of the related financing. The unamortized balances of $532,000 and $1,066,000 are included in other assets at December 31, 2001 and 2000, respectively. (f) LONG-LIVED ASSETS Intangible assets are stated at cost. The excess of the total acquisition costs over the fair value of net assets acquired of approximately $24.9 million ($22.9 million, net of accumulated amortization at December 31, 2001) is being amortized on a straight-line basis over fifteen to twenty years. See Note 1(l) for information regarding the impact of recent accounting pronouncements on the amortization of intangibles in future periods. The carrying values of intangible and other long-lived assets are periodically reviewed to determine if any impairment indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not be recoverable, based on the undiscounted estimated cash flows over the remaining amortization and depreciation period, their 39 carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. No such impairment exists at December 31, 2001. (g) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) TREASURY SHARES Common shares held as treasury shares are recorded at cost, with issuances from treasury recorded at average cost. Treasury shares issued for directors' fees are recorded as an expense for an amount equal to the fair market value of the common shares on the issuance date (Note 12). (i) FINANCIAL INSTRUMENTS The net carrying value of notes receivable approximates fair value based on current rates for comparable commercial mortgages. The fair values of the environmental obligation (Note 18) and notes payable approximate their carrying values since they have been discounted. The fair values of all other financial instruments approximate book values because of the short-term maturities of these instruments. (j) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Among the more significant estimates included in these consolidated financial statements are the estimated costs to complete contracts in process, the estimated remediation costs related to the environmental matter discussed in Note 18 and the collectibility of receivables. Actual results could differ from these and other estimates. (k) STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Under APB No. 25, because the exercise price of the Company's stock options is set equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. (l) 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." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Statement 142 will be adopted by the Company effective January 1, 2002, however, the provisions that provide for the non-amortization of goodwill are effective for 2001 for acquisitions completed after the issuance of Statement 142. Accordingly, the goodwill acquired in connection with the purchase of Dynamic Systems, Inc. in October 2001 will not be amortized. Application of the nonamortization provisions of Statement 142 resulted in an increase in net income of $0.1 million in 2001. The Company will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a review for potential impairment, while the second step measures the amount of impairment, if any. The Company expects to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the first quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of change in accounting principle in the first quarter of 2002. The Company has not yet 40 determined what the effect of these tests will be on the earnings and financial position of the Company. (m) ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for impairment or disposal of long-lived assets and supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. Statement 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company will adopt Statement 144 as of January 1, 2002 and it does not expect that the adoption of the Statement will have a significant impact on the Company's financial position or results of operations. (n) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" and on June 15, 2000, issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment to FASB Statement No. 133." These statements establish methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. The Company adopted these statements in the first quarter of 2001. The effect of the adoption of these statements was not material to the Company's operating results or financial position. (o) RECLASSIFICATIONS Certain reclassifications have been made to prior year presentations to conform to current year presentations. (2) ACQUISITIONS In October 2001, the Company acquired all of the stock of Dynamic Systems, Inc., a privately-held company based in Alexandria, Virginia, which provides professional and information technology services primarily to the Department of Defense and other government agencies. The acquisition is expected to strengthen and expand the range of services the Company offers to both existing and new customers. The Company paid $13.9 million, including transaction costs, and accounted for the acquisition as a purchase. Accordingly, the operating results of Dynamic Systems have been included in the Company's consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair market value of net assets acquired was approximately $12.2 million, which is not deductible for income tax purposes. On a pro forma basis, had the acquisition taken place as of the beginning of each respective year, the results of operations would not have been materially affected for 2000 and 2001. The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisition.
================================================================================ AT OCTOBER 8, 2001 (IN THOUSANDS) - -------------------------------------------------------------------------------- Current assets $ 3,250 Property, plant and equipment 363 Goodwill 12,191 Intangible assets subject to amortization (two-year life) 200 Other assets 214 Current liabilities (2,515) - -------------------------------------------------------------------------------- Net assets acquired $ 13,703 ================================================================================
In April 2000, a wholly-owned subsidiary of the Company merged with AIL Technologies, Inc. (AIL) (the "EDO-AIL merger"). In connection with the EDO-AIL merger, the Company issued 6,553,194 of its common shares valued at $39.4 million, and made cash payments aggregating $13.3 million in exchange for all of the outstanding common and preferred shares of AIL. In addition, the Company incurred $2.7 million of transaction costs. The merger was accounted for using the purchase method and is included in the Company's results of operations since the date of acquisition. The transaction resulted in goodwill of $3.6 million (Note 1(l)). Associated with this merger and included in operating earnings in 2000 are a $6.7 million write-off of purchased in-process research and development, described more fully below, $1.5 million of severance costs, and $3.3 million of other merger-related costs. Such costs are included in write-off of purchased in process research and development and merger-related costs in the accompanying consolidated statements of earnings. The $1.5 million of severance costs pertain to an AIL employee group of approximately 200, all of which has been paid as of December 31, 2001. The IPR&D relates to a project that had not reached technological feasibility and had no alternative future uses, and thus, the amounts allocated to the project were expensed as of the date of acquisition. The development project related to a generic satellite sub- 41 system called a Ku-Ku Band Down Converter for a fixed satellite service market. The converter represents a single channel providing signal conversion from uplink frequencies in the 14GHz range to the downlink frequencies in the 12GHz range. The income approach was utilized for the valuation analysis of the IPR&D. This approach focused on the income-producing capability of the asset, which was based on relative market sizes, growth factors and expected trends in technology. This approach also included analysis of the stage of completion of the project, estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value using a rate commensurate with the relative risk levels. The rate used in discounting the net cash flows from the IPR&D was 25%. The efforts then required to develop the in-process technology of this project into commercially viable products principally related to the completion of planning, designing, prototyping, and testing functions that are necessary to establish that the down converter produced will meet its design specifications, including technical performance features and function requirements. At the time of the EDO-AIL merger, it was estimated that 90% of the development effort had been completed and the remaining development effort would take approximately six months to complete, with a cost of approximately $1.0 million. This project is now completed resulting in sales in 2001 of Ku-Ku Band Converters. Unaudited pro forma results of operations, assuming the EDO-AIL merger had been completed at the beginning of each period, which include adjustments to interest expense, amortization expense and income tax expense are as follows:
================================================================================ 2000 1999 (UNAUDITED) (IN THOUSANDS) - -------------------------------------------------------------------------------- Net sales from continuing operations $ 250,080 $ 244,008 Net loss from continuing operations available for common shares $ (1,961) $ (1,464) - -------------------------------------------------------------------------------- Basic loss per common share from continuing operations $ (0.18) $ (0.14) ================================================================================
The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had this merger been completed at the beginning of the periods, or of the results which may occur in the future. In November 1999, the Company acquired the outstanding stock of M.Technologies Inc., an integrator of aircraft weapons and avionics systems, for $3.0 million in cash paid at closing and $1.5 million to be paid over three years. The note payable ($463,000 at December 31, 2001) has been recorded at its present value in the accompanying consolidated balance sheet at an interest rate of 8%. The acquisition has been accounted for as a purchase, and accordingly, the operating results of M. Technologies have been included in the Company's consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair market value of net assets acquired of approximately $4.4 million is being amortized over fifteen years. On a pro forma basis, had the M.Technologies acquisition taken place as of the beginning of 1999, results of operations for that period would not have been materially affected. (3) DISCONTINUED OPERATIONS In November 1999, the Board of Directors of the Company approved the decision to sell its satellite products business (Barnes Engineering Company), which sale was completed on January 31, 2000. The sales price of $10.0 million was subject to adjustment relating to changes in net assets of the business from July 31, 1999 through the closing date, which resulted in a decrease of approximately $1.3 million. In addition, the Company has agreed to indemnify the buyer for certain contract-related costs aggregating an estimated $2.3 million. The estimated adjustment for the changes in net assets and the estimated indemnification costs were included in the loss on disposal of the satellite products business in 1999. Through December 31, 2001 approximately $1.8 million of costs were incurred, and in 2001 a change in the estimate of remaining costs to be incurred resulted in earnings from discontinued operations of $0.3 million, net of income taxes. The remaining liability at December 31, 2001 of $0.1 million is included in accounts payable and accrued liabilities (Note 8). The revenues, costs and expenses, assets and liabilities and cash flows associated with the satellite products business have been excluded from the respective captions in the accompanying consolidated financial statements. In 1999, the estimated loss on disposal is net of aggregate settlement and curtailment gains of $950,000 and $47,000 relating to the impact of the disposal on the Company's pension and postretirement benefit plans, respectively, which is included in discontinued operations. In addition, the net earnings from discontinued operations prior to the measurement date and the estimated loss on disposal are reflected in the accompanying consolidated statements of earnings net of the related income tax effect. In 1999, the earnings from discontinued operations 42 are net of a $261,000 tax expense, and the estimated loss on disposal is net of a $1,833,000 tax benefit. During 1999, the Company recorded net sales and net earnings related to discontinued operations of $14,123,000 and $609,000, respectively. (4) MARKETABLE SECURITIES The Company determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. All marketable securities are classified as available-for-sale securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. Realized gains and losses, interest and dividends and declines in value judged to be other-than-temporary are included in interest income (expense). The cost of securities sold is based on the specific identification method. During 2001, realized gains of approximately $81,000 resulting from sales of securities were recorded. The following is a summary of available-for-sale securities at December 31:
================================================================================ 2001 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- Corporate bonds $ -- $ 5,459 Obligations of U.S. Government agencies -- 4,484 Mutual funds 190 3,488 Mortgage-backed securities -- 982 - -------------------------------------------------------------------------------- Total $ 190 $ 14,413 ================================================================================
(5) ACCOUNTS AND NOTES RECEIVABLE Accounts receivable included $39,056,000 and $37,060,000 at December 31, 2001 and 2000, respectively, representing unbilled revenues. Substantially all of the unbilled balances at December 31, 2001 will be billed and are expected to be collected during 2002. Total billed receivables due from the United States government, either directly or as a subcontractor to a prime contractor with the government, were $26,246,000 and $22,364,000 at December 31, 2001 and 2000, respectively. Notes receivable at December 31, 2001 include $2,200,000 which relates to the sale of the Company's College Point facility in January 1996, of which $375,000 is included in current assets. The notes are due in equal quarterly amounts through September 2004 with a final payment of $1,300,000 due on December 31, 2004 and bear interest at 7%. The notes receivable are secured by a mortgage on the facility. Also included in notes receivable at December 31, 2001 is $1,135,000 related to the sale of certain parcels of land and a building at the Company's Deer Park facility in June 2000, of which $50,000 is included in current assets. The gain on the sale was not material as the carrying value approximated the sales value. (6) INVENTORIES Inventories are summarized by major classification as follows at December 31, 2001 and 2000:
================================================================================ 2001 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- Raw material and supplies $ 6,539 $ 7,431 Work-in-process 14,680 16,170 Finished goods 1,718 1,313 - -------------------------------------------------------------------------------- $ 22,937 $ 24,914 ================================================================================
(7) PROPERTY, PLANT AND EQUIPMENT, NET The Company's property, plant and equipment at December 31, 2001 and 2000, and their related useful lives are summarized as follows:
================================================================================ 2001 2000 (IN THOUSANDS) LIFE - -------------------------------------------------------------------------------- Land $ 18,080 $ 18,080 Buildings and improvements 26,297 26,244 10-30 years Machinery and equipment 45,271 39,859 3-19 years Software 1,723 -- 4 years Leasehold improvements 10,934 10,245 Lease terms - -------------------------------------------------------------------------------- 102,305 94,428 Less accumulated depreciation and amortization 40,050 36,943 - -------------------------------------------------------------------------------- $ 62,255 $ 57,485 ================================================================================
(8) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following at December 31, 2001 and 2000:
================================================================================ 2001 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- Trade payables $12,743 $ 5,463 Employee compensation and benefits 13,664 13,474 Income taxes payable 5,096 6,604 Current portion of environmental obligation 395 369 Indemnification liability 80 577 Other 15,419 17,573 - -------------------------------------------------------------------------------- $47,397 $44,060 ================================================================================
(9) LONG-TERM DEBT AND LINE OF CREDIT At December 31, 2001, there was no long-term debt outstanding. During the fourth quarter of 2001, the Company redeemed all of its outstanding 7% Convertible Subordinated Debentures. As a result of the redemption, $22,116,000 face value of the debentures were converted into 1,005,250 common shares and $200,000 face value were redeemed for cash. All outstanding term debt and revolving debt was paid 43 using proceeds from the public stock offering in the fourth quarter of 2001 (Note 12). At December 31, 2000 long-term debt consisted of the 7% Convertible Subordinated Debentures and term debt under the Company's credit facility. Debentures were redeemable at the option of the Company at par and at the option of the holder under certain circumstances involving a change in control of the Company. The Company was required to make sinking fund payments of $1,750,000 per year. During 2001 and 2000, the Company purchased $3.4 million and $2.1 million, respectively, of the debentures for $3.2 million and $1.9 million, respectively, and recognized a gain of $0.2 million and $0.2 million, respectively, which is included in other non-operating income in the accompanying consolidated statement of earnings. The Company has a $69.0 million long-term credit facility with a consortium of banks co-led by Mellon and EAB. The credit facility includes $19.0 million in five-year term debt, payable in quarterly installments of $950,000, and $50.0 million in revolving debt. Proceeds from the term debt were used to repay then existing term debt acquired as a result of the EDO-AIL merger. The agreement expires on June 30, 2005 and provides that the portion available for potential cash borrowings from revolving debt be reduced by the amount of outstanding letters of credit. As of December 31, 2001, the Company has outstanding approximately $20.3 million of letters of credit. Borrowings under the agreement bear interest based on LIBOR plus applicable margin of up to 2.00% depending on the consolidated leverage ratio as defined in the agreement. There are certain covenants placed on the Company that require that several predetermined ratios be maintained. At December 31, 2001, the Company was in compliance with such covenants. In addition, payments of quarterly common share dividends are limited to 50% of consolidated net income in the preceding calendar quarter. This obligation is secured by the Company's accounts receivable, inventory, machinery and equipment. (10) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST 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 ("merged ESOP"), and the preferred shares from the EDO ESOP were converted into 1,067,281 common shares as of March 8, 2001. The merged ESOP provides retirement benefits to substantially all employees. Prior to the EDO-AIL merger, the EDO ESOP was being accounted for under Statement of Position 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans" ("SOP 76-3") and the AIL ESOP was being accounted for under Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). The merged ESOP is being accounted for under SOP 93-6. Accordingly, under SOP 93-6, 328,993 unallocated shares of common stock related to the EDO ESOP and now held by the merged ESOP are not considered outstanding for the purposes of computing earnings per share in 2001. In prior years such shares were considered outstanding in accordance with SOP 76-3. As of June 30, 2001, the merged ESOP restructured its indirect loan from the Company to extend the maturity date to December 31, 2017. As part of this restructuring, the EDO ESOP bank loan obligation was paid in full on July 30, 2001. As quarterly payments are made under the indirect loan, unallocated common shares in the merged ESOP are committed-to-be-released. The allocation to participants is based on (i) a match of 50% of the first 6% of the employees' 401(k) contributions; (ii) $600 per employee; and (iii) any remaining distribution is based on employees' relative compensation. The cost basis of the unearned/unallocated shares is initially recorded as a reduction in shareholders' equity. Compensation expense is recorded based on the market value of the Company's common shares as they are committed-to-be-released. The difference between the market value and the cost basis of the shares is recorded as additional paid-in capital. Dividends on unallocated shares are recorded as compensation expense. In 2001, 2000, and 1999, respectively, non-cash compensation expense recorded by the Company amounted to $1,781,000, $1,843,000 and $0. At December 31, 2001, there are 2,669,692 unearned/unallocated shares which have an aggregate market value of $70.6 million and 1,800,746 allocated shares. Total principal and interest payments made in 2001 under the merged ESOP indirect loan amounted to $1,083,000. A discussion of each plan prior to the merger follows. EDO ESOP During 1988, the EDO Employee Stock Ownership Trust ("EDO ESOT") purchased 89,772 preferred shares from the Company for approximately $19,185,000. The preferred shares were being allocated to employees on the basis of compensation. The preferred shares provided for dividends of 8% per 44 annum, which were deductible by the Company for Federal and state income tax purposes. The tax benefit that was attributable to unallocated preferred shares was reflected as an increase to retained earnings. Each unallocated preferred share was convertible at its stated conversion rate into 10 common shares. Allocated preferred shares were convertible at the greater of the stated conversion rate or the fair value of each preferred share divided by the current market price of each common share. The EDO ESOT purchased the preferred shares from the Company using the proceeds of a bank borrowing guaranteed by the Company. The EDO ESOT serviced this obligation with the dividends received on the preferred shares and any additional contributions from the Company as required. Principal and interest payments on the note of the EDO ESOT were to be made in quarterly installments through 2003. Interest was charged at 82% of the prime lending rate. During 2001, 2000 and 1999, respectively, the Company's cash contributions and dividends on the preferred shares were used to repay principal of $890,000, $1,648,000 and $1,526,000 and pay interest of $204,000, $504,000 and $541,000. During 2001, 2000 and 1999, respectively, cash contributions of $687,000, $1,232,000 and$1,048,000 were made to the EDO ESOP and were recorded as compensation expense. The EDO ESOT's borrowing guaranteed by the Company was reflected as a liability on the accompanying consolidated balance sheets with an equal amount as a reduction of shareholders' equity, offsetting the increase in the capital stock accounts. As the principal portion of the note was repaid, the liability and the EDO ESOT loan obligation, included in shareholder's equity, was reduced concurrently. AIL ESOP The AIL ESOP held AIL common shares prior to the EDO-AIL merger which were converted to EDO common shares. The cost basis of the unearned AIL ESOP shares were recorded as a reduction to shareholders' equity, offsetting the increase in the capital stock accounts. As AIL ESOP shares were committed-to-be-released to plan participants, the earned AIL ESOP shares were released from the unearned AIL ESOP shares account based on the cost of the shares to the AIL ESOP. The allocation to participants was based on (i) $600 per employee at the market value of the common shares and (ii) pro rata based on compensation. Compensation expense was recorded based on the market value of the Company's common shares. The Company recorded the difference between the market value of the shares committed-to-be-released and the cost of these shares to the AIL ESOP to additional paid-in capital. In 2000, the Company recorded compensation expense of approximately $1.8 million subsequent to the EDO-AIL merger and contributed approximately $2.0 million to the AIL ESOP to cover the AIL ESOP's indirect loan service requirements. (11) INCOME TAXES The 2001, 2000 and 1999 significant components of the provision for income taxes attributable to continuing operations are as follows:
================================================================================ 2001 2000 1999 (IN THOUSANDS) - -------------------------------------------------------------------------------- Federal Current $2,345 $3,042 $1,870 Deferred 5,598 1,313 740 - -------------------------------------------------------------------------------- $7,943 $4,355 $2,610 - -------------------------------------------------------------------------------- State Current $1,097 $ 683 -- Deferred 170 226 -- - -------------------------------------------------------------------------------- $1,267 $ 909 -- - -------------------------------------------------------------------------------- Total $9,210 $5,264 $2,610 ================================================================================
For 1999, state franchise and alternative minimum taxes were recorded in selling, general and administrative expenses in the amount of $482,000. The reconciliation of income tax attributable to continuing operations computed at the U.S. Federal tax rate to income tax expense is:
================================================================================ PERCENT OF PRETAX EARNINGS 2001 2000 1999 - -------------------------------------------------------------------------------- Tax at statutory rate 35.0% 35.0% 35.0% State taxes, net of Federal benefit 3.0 3.6 -- Write-off of purchased in-process -- 35.6 -- research and development Non-deductible goodwill amortization 1.0 3.9 -- ESOP compensation expense 0.5 1.0 (2.2) (benefit) Foreign sales benefit (1.4) (2.1) (3.4) Other, net 0.5 2.9 0.6 - -------------------------------------------------------------------------------- Effective income tax rate 38.6% 79.9% 30.0% ================================================================================
45 The significant components of deferred tax assets and liabilities as of December 31, 2001 and 2000 are as follows:
================================================================================ 2001 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- DEFERRED TAX ASSETS Retirement plans additional minimum liability $ 9,302 -- Postretirement benefits obligation other than pensions 5,091 5,936 Federal tax credits related to R&D and alternative minimum tax -- 2,043 Executive compensation and other -- 902 Deferred revenue 873 1,815 Deferred compensation 2,612 2,021 Inventory valuation 1,777 1,979 Other 281 926 - -------------------------------------------------------------------------------- Total deferred tax assets 19,936 15,622 - -------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Depreciation and amortization 7,964 9,944 Prepaid pension asset 5,619 2,296 Identifiable intangible asset 782 828 Prepaid real estate taxes -- 460 - -------------------------------------------------------------------------------- Total deferred tax liabilities 14,365 13,528 - -------------------------------------------------------------------------------- Net deferred tax asset $ 5,571 $ 2,094 ================================================================================
(12) SHAREHOLDERS' EQUITY On October 31, 2001, the Company completed the public sale of 3,716,100 of its common shares and received net proceeds of approximately $81.5 million. At various times beginning in 1983, the Board of Directors has authorized and subsequently increased by amendments, a plan to purchase an aggregate amount of 4,190,000 common shares. As of December 31, 2001, the Company had acquired approximately 4,091,000 common shares in open market transactions at prevailing market prices. Approximately 3,909,000 of these shares have been used for various purposes, including: conversion of preferred shares; contributions of common shares to the EDO ESOP; grants pursuant to the Company's Long-Term Incentive Plans; payment of directors' fees; partial payment of a 50% stock dividend; and stock options exercised. As of December 31, 2001 and 2000, respectively, the Company held 182,459 and 1,370,222 common shares in its treasury for future use. At December 31, 2001, the Company had reserved 940,467, authorized and unissued common shares for stock option and long-term incentive plans. (13) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
================================================================================ 2001 2000 1999 (IN THOUSANDS) - -------------------------------------------------------------------------------- Numerator: Earnings from continuing operations available for common shares for basic calculation $14,485 $ 440 $ 5,084 Effect of dilutive securities: Convertible debentures 998 -- -- Convertible preferred shares 5 119 153 - -------------------------------------------------------------------------------- Numerator for diluted calculation $15,488 $ 559 $ 5,237 - -------------------------------------------------------------------------------- Denominator: Denominator for basic calculation 12,776 9,601 6,701 Effect of dilutive securities: Stock options 270 68 56 Convertible preferred shares 153 993 1,275 Convertible debentures 1,055 -- -- - -------------------------------------------------------------------------------- Denominator for diluted calculation 14,254 10,662 8,032 ================================================================================
The assumed conversion of the convertible debentures was anti-dilutive for 2000 and 1999. (14) STOCK PLANS The Company has granted nonqualified stock options to officers, directors and other key employees under plans approved by the shareholders in 1996 and 1997, which replaced all previous stock option and long-term incentive plans, for the purchase of its common shares at the fair market value of the common shares on the dates of grant. Options under the 1996 plan generally become exercisable on the third anniversary of the date of the grant and expire on the tenth anniversary of the date of the grant. The 1996 plan will expire in 2005. Options under the 1997 plan, which pertains only to non-employee directors, are immediately exercisable and expire on the tenth anniversary of the date of the grant. The 1997 plan will expire in 2006. Changes in options outstanding are as follows: 46
=============================================================================================================================== 2001 2000 1999 --------------------------- ----------------------------- ------------------------------- WEIGHTED SHARES WEIGHTED SHARES WEIGHTED SHARES AVERAGE SUBJECT AVERAGE SUBJECT AVERAGE SUBJECT EXERCISE PRICE TO OPTION EXERCISE PRICE TO OPTION EXERCISE PRICE TO OPTION - ------------------------------------------------------------------------------------------------------------------------------- Beginning of year $6.46 848,211 $6.61 612,350 $6.72 680,950 Options granted 9.76 275,350 6.58 428,121 8.42 21,000 Options exercised 6.02 (314,458) 4.87 (19,775) 3.42 (10,500) Options expired/cancelled 7.08 (3,227) 7.46 (172,485) 8.43 (79,100) - ------------------------------------------------------------------------------------------------------------------------------- End of year $7.75 805,876 $6.46 848,211 $6.61 612,350 - ------------------------------------------------------------------------------------------------------------------------------- Exercisable at year end $6.76 455,426 $6.03 517,795 $6.21 455,131 ===============================================================================================================================
The options outstanding as of December 31, 2001 are summarized as follows:
================================================================================ WEIGHTED NUMBER OF WEIGHTED RANGE OF AVERAGE OPTIONS AVERAGE EXERCISE PRICES EXERCISE PRICE OUTSTANDING REMAINING LIFE - -------------------------------------------------------------------------------- $ 3.07-5.69 $ 3.96 35,500 3 years 6.13-9.60 7.81 766,626 8 years 31.40 31.40 3,750 10 years - -------------------------------------------------------------------------------- 805,876 ================================================================================
The 1996 plan also provides for restricted common share long-term incentive awards as defined under the plan. All common shares authorized under the previous plans not yet awarded were canceled upon the approval of the 1996 plan. As of December 31, 2001 plan participants had been awarded 374,250 restricted common shares. Deferred compensation is recorded for the fair value of the restricted common share awards on the date of grant and is amortized over the five-year period the related services are provided. The amount charged to operations in 2001, 2000 and 1999 was $271,000, $738,000 and $401,000, respectively. As of December 31, 2001, 134,591 shares are available for additional awards. The per share weighted-average fair value of stock options granted was $4.88, $3.22 and $3.17 in 2001, 2000 and 1999, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2001 - expected dividend yield of 1%, risk free interest rate of 4.9%, expected stock volatility of 47%, and an expected option life of 71/2 years; 2000 - expected dividend yield of 1.3%, risk free interest rate of 6.5%, expected stock volatility of 42%, and an expected option life of 71/2 years; 1999 - expected dividend yield of 2.0%, risk free interest rate of 6.5%, expected stock volatility of 30%, and an expected option life of 71/2 years.The Company applies APB Opinion No. 25 in accounting for its stock option grants and, accordingly, no compensation cost has been recognized in the consolidated financial statements for its stock options which have exercise prices equal to or greater than the fair values of the common shares on the dates of the grant. Had the Company determined compensation cost based on the fair values at the grant dates for its stock options under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's earnings from continuing operations, and basic and diluted earnings from continuing operations per common share would have been reduced to the pro forma amounts indicated below:
================================================================================ 2001 2000 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- Earnings from continuing operations: As reported $ 14,679 $ 1,321 $ 6,084 Pro forma 14,376 1,139 5,778 Basic earnings per common share: As reported $ 1.14 $ 0.05 $ 0.76 Pro forma 1.11 0.03 0.71 Diluted earnings per common share: As reported $ 1.09 $ 0.05 $ 0.65 Pro forma 1.07 0.03 0.61 ================================================================================
47 (15) OTHER EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PLANS The Company maintains a noncontributory defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's highest five-year average base salary in the final ten years of employment. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined and tax deductible. The net pension income for 2001, 2000 and 1999 was $2,769,000, $4,620,000 and $2,233,000, respectively. The expected long-term rate of return on plan assets was 9.5% in 2001 and 9.0% in 2000 and 1999. The actuarial computations assumed a discount rate on benefit obligations at December 31, 2001 and 2000 of 7.25% and 7.5%, respectively. The assumed rate of compensation increase of 4.95% in 2001 and 2000 approximates the Company's previous experience. The assets of the pension plan consist primarily of equity and fixed income securities, which are readily marketable. A summary of the components of net periodic pension income follows:
================================================================================ 2001 2000 1999 (IN THOUSANDS) - -------------------------------------------------------------------------------- Service cost $ (3,693) $ (2,819) $ (1,544) Interest on projected benefit obligation (14,281) (11,361) (5,970) Expected return on plan assets 20,820 17,616 9,732 Amortization of transitional assets 8 8 8 Amortization of prior service cost (85) (101) (208) Recognized net actuarial gain -- 1,277 215 - -------------------------------------------------------------------------------- Net pension income $ 2,769 $ 4,620 $ 2,233 ================================================================================
In 1999, in connection with the sale of the Company's satellite products business (Note 3), the Company recognized an aggregate settlement/curtailment gain of $950,000. The following sets forth the funded status of the plan as of December 31:
================================================================================ 2001 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- Change in projected benefit obligation: Projected benefit obligation at beginning of year $ 196,700 $ 83,368 Service cost 3,693 2,819 Interest cost 14,281 11,361 Benefits paid (12,228) (11,556) Actuarial loss (gain) 11,827 (7,013) Projected benefit obligation acquired at April 30, 2000 (date of acquisition of AIL Technologies, Inc.) -- 117,721 - -------------------------------------------------------------------------------- Projected benefit obligation at end of year $ 214,273 $ 196,700 - -------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 214,418 230,479 Actual return on plan assets (14,840) (4,505) Benefits paid (12,228) (11,556) - -------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 187,350 $ 214,418 - -------------------------------------------------------------------------------- Funded status $ (26,923) $ 17,718 Unrecognized net loss (gain) 37,505 (8,144) Unrecognized prior service cost 2,259 506 Unrecognized net assets -- (8) - -------------------------------------------------------------------------------- Prepaid pension cost $ 12,841 $ 10,072 ================================================================================
Due to the lower discount rate and a decline in the fair market value of plan assets during 2001, the accumulated benefit obligation at December 31, 2001 exceeded the fair value of plan assets by $11,253,000. Consequently, a comprehensive loss of $12,883,000, net of tax, was charged against shareholders' equity. Amounts recognized in the balance sheet at December 31, 2001 consist of prepaid pension cost of $12,841,000 in other assets, an intangible asset of $2,259,000 in other assets, and an additional minimum liability of $(24,094,000) in post-retirement benefits obligations. NON QUALIFIED PLANS The Company has a supplemental defined benefit plan for substantially all employees under which employees may receive an amount by which benefits earned under the pension plan exceed the limitations imposed by the Internal Revenue Code. The Company also has a supplemental retirement plan for officers and certain employees. Benefits are based on years of service and certain compensation that is excluded under the qualified plan. Total expenses under the non-qualified plans in 2001, 2000 and 1999 were $748,000, $880,000 and $732,000, respectively. The supplemental plans of EDO and AIL were combined in 2001. 48 Summarized below is the funded status of the combined supplemental plans as of December 31, 2001:
======================================================================= (IN THOUSANDS) ----------------------------------------------------------------------- Change in projected benefit obligation: Projected benefit obligation at beginning of year $ 9,747 Service cost 84 Interest cost 700 Benefits paid (760) Actuarial gain 297 Plan amendments 1,470 ----------------------------------------------------------------------- Projected benefit obligation at end of year $ 11,538 ----------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of the year $ -- Employer contribution 760 Benefits paid (760) ----------------------------------------------------------------------- Fair value of plan assets at end of year $ -- ----------------------------------------------------------------------- Funded status $(11,538) Unrecognized net loss 3,525 Unrecognized prior service cost 1,377 Unrecognized net obligation 42 ----------------------------------------------------------------------- Accrued benefit cost $ (6,594) =======================================================================
Due to the lower discount rate and a decline in the fair market value of plan assets during 2001, the accumulated benefit obligation at December 31, 2001 exceeded the fair value of plan assets by $8,864,000. Consequently, a comprehensive loss of $502,000, net of tax, was charged against shareholders' equity. Amounts recognized in the balance sheet at December 31, 2001 consist of accrued benefit cost of $(6,594,000) in post retirement benefits obligations, an intangible asset of $1,419,000 in other assets, and an additional minimum liability of $(2,270,000) in post-retirement benefits obligations. 401(K) PLANS In 2000, there were four 401(k) plans sponsored by the Company covering substantially all employees. These plans were merged as of January 1, 2001. The current merged plan provides for matching by the Company of 50% of the first 6% of employee contributions. The match is provided in the Company's common stock under the ESOP plan (Note 10). In 2000 and 1999, matching contributions under the original plans were not material. (16) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Company provides certain health care and life insurance benefits to qualified retired employees and dependents at certain locations. These benefits are funded as benefits are provided, with the retiree paying a portion of the cost through contributions, deductibles and coinsurance provisions. The Company has always retained the right to modify or terminate the plans providing these benefits. In accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," the Company recognizes these benefit expenses on an accrual basis as the employees earn them during their employment rather than when they are actually paid. EDO POST-RETIREMENT BENEFIT PLAN Postretirement health care and life insurance (income) expense included the following components:
================================================================================ 2001 2000 1999 (IN THOUSANDS) - -------------------------------------------------------------------------------- Service cost $ 69 $ 57 $ 80 Interest cost 229 239 276 Recognized net actuarial loss -- -- 43 Curtailment gain (929) -- -- - -------------------------------------------------------------------------------- Total postretirement health care and life insurance (income) expense $(631) $ 296 $ 399 ================================================================================
In 2001, the Company recognized a curtailment gain as a result of a plan amendment whereby coverage will not be provided for future retirees. In 1999 in connection with the sale of the Company's satellite products business (Note 3), the Company recognized a curtailment gain of $47,000. The funded status and components of the postretirement health care and life insurance benefits are as follows as of December 31:
================================================================================ 2001 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- Change in accumulated postretirement benefit obligation: Accumulated benefit obligation at beginning of year $ 3,227 $ 3,402 Service cost 69 57 Interest cost 229 239 Benefits paid (354) (380) Participant contributions 32 33 Actuarial loss (gain) 43 (124) Effect of curtailment (929) -- - -------------------------------------------------------------------------------- Unfunded accumulated postretirement benefit obligation at end of year $ 2,317 $ 3,227 Unrecognized net gain 81 124 - -------------------------------------------------------------------------------- Accrued postretirement benefit cost $ 2,398 $ 3,351 ================================================================================
Actuarial assumptions used in determining the accumulated postretirement benefit obligation include a discount rate of 7.25% and 7.5% at December 31, 2001 and 2000, respectively, and estimated increases in health care costs. The Company has limited its 49 increase in health care costs to 5% per year by requiring the retirees to absorb any costs in excess of 5% and has used such rate to measure its obligation. AIL POST-RETIREMENT BENEFIT PLAN Post-retirement expense for the period subsequent to the EDO-AIL merger included in the consolidated financial statements comprised the following:
================================================================================ 2001 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- Service cost $ 86 $ 53 Interest cost 663 468 Recognized net actuarial gain (11) -- - -------------------------------------------------------------------------------- Total post-retirement expense $ 738 $ 521 ================================================================================
The funded status and components of the postretirement benefits are as follows as of December 31, 2001 and 2000:
================================================================================ 2001 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- Change in accumulated postretirement benefit obligation: Accumulated benefit obligation $ 8,876 $ 9,422 Service cost 86 53 Interest cost 663 468 Benefits paid (591) (70) Actuarial gain (297) (997) - -------------------------------------------------------------------------------- Unfunded accumulated postretirement benefit obligation at end of year $ 8,737 $ 8,876 Unrecognized gain 1,282 997 - -------------------------------------------------------------------------------- Accrued postretirement benefit cost $ 10,019 $ 9,873 ================================================================================
Actuarial assumptions used in determining the accumulated postretirement benefit obligation include a discount rate of 7.25% and 7.5% at December 31, 2001 and 2000, respectively. The accumulated benefit obligation would not be affected by increases in healthcare costs since such costs are funded by the participants. (17) COMMITMENTS AND CONTINGENCIES The Company is contingently liable under the terms of letters of credit (Note 9) aggregating approximately $20,339,000 at December 31, 2001, should it fail to perform in accordance with the terms of its contracts with foreign customers. At December 31, 2001, the Company and its subsidiaries were obligated under building and equipment leases expiring between 2002 and 2012. The aggregate future minimum lease commitments under those obligations with noncancellable terms in excess of one year are as follows: - 2002 - $4,528,000 - 2003 - $3,621,000 - 2004 - $2,336,000 - 2005 - $2,054,000 - 2006 - $1,148,000 - Thereafter - $5,798,000 Rental expense for continuing operations under such leases for the years ended December 31, 2001, 2000 and 1999 amounted to $4,670,000, $3,885,000 and $2,885,000, respectively. (18) LEGAL MATTERS The Company and three other companies entered into a consent decree in 1990 with the Federal government for the remediation of a Superfund site. The Superfund site has been divided into three operable units. The consent decree relates to two of the operable units. The third operable unit has not been formally studied and, accordingly, no liability has been recorded by the Company. The Company believes that the aggregate amount of the obligation and timing of cash payments associated with the two operable units subject to the consent decree are reasonably fixed and determinable. Accordingly, the environmental obligation has been discounted at five percent. Management estimates that as of December 31, 2001, the discounted liability over the remainder of the twenty-four years related to these two operable units is approximately $2.3 million of which approximately $0.4 million has been classified as current and is included in accounts payable and accrued liabilities. Approximately $0.7 million of the $2.3 million liability will be incurred over the next five years. The Company is also involved in other environmental cleanup efforts, none of which management believes is likely to have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. Additionally, the Company and its subsidiaries are subject to certain legal actions that arise out of the normal course of business. It is management's belief that the ultimate outcome of these actions will not have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity. (19) BUSINESS SEGMENTS The Company determines its operating segments based upon an analysis of its products and services, production processes, types of customers, economic characteristics, and the related regulatory environment. The Company's continuing operations are con- 50 ducted in three business segments: Defense, Communications and Space Products and Engineered Materials. The Defense segment provides integrated front-line warfighting systems, including radar countermeasures systems, aircraft weapons storage and release systems, airborne mine countermeasures systems and sonar systems. The Communications and Space Products segment addresses the needs of the remote sensing, communication, navigation and electronic warfare industries with ultra-miniature electronics and a broad line of antennas. The Engineered Materials segment supplies piezoelectric ceramics and advanced composites for the communication, navigation, chemical, petrochemical, paper and oil industries for civilian infrastructure and for the military. Domestic government sales, which include sales to prime contractors of the government, amounted to 69%, 63% and 48% of net sales, which were 77%, 69% and 58% of Defense's net sales, 55%, 66% and 0% of Communications and Space Products' net sales and 41%, 33% and 26% of Engineered Materials' net sales for 2001, 2000 and 1999, respectively. Export sales comprised 15%, 18% and 34% of net sales for 2001, 2000 and 1999, respectively. In addition, the Universal Exciter Upgrade program in the Defense segment comprised approximately 15% of net sales for 2001 and 2000. Principal products and services by segment are as follows: Defense Segment - Electronic Warfare - Environmental Products - Aircraft Stores Suspension and Release Equipment - Airborne Mine Countermeasures Systems - Integrated Combat Systems - Command, Control and Communications Systems - Undersea Systems - Technology Services - Interference Cancellation Communications and Space Products Segment - Antenna Products - Space Sensor and Communications Products Engineered Materials Segment - Electro-Ceramic Products - Advanced Fiber Composite Structural Products
================================================================================ 2001 2000 1999 (IN THOUSANDS) - -------------------------------------------------------------------------------- Net sales from continuing operations: Defense $ 183,454 $ 142,044 $ 66,381 Communications and Space Products 39,998 30,027 -- Engineered Materials 36,509 34,751 31,555 - -------------------------------------------------------------------------------- $ 259,961 $ 206,822 $ 97,936 - -------------------------------------------------------------------------------- Operating earnings from continuing operations: Defense $ 21,927 $ 17,117 $ 7,012 Communications and Space Products (383) (11,176) -- Engineered Materials 4,603 3,298 2,237 Curtailment gain 929 -- -- - -------------------------------------------------------------------------------- $ 27,076 $ 9,239 $ 9,249 Net interest expense (2,216) (2,438) (785) Other (expense) income, net (971) (216) 230 - -------------------------------------------------------------------------------- Earnings before income taxes $ 23,889 $ 6,585 $ 8,694 - -------------------------------------------------------------------------------- Identifiable assets: Defense $ 129,631 $ 106,958 $ 43,455 Communications and Space Products 49,769 37,576 -- Engineered Materials 27,690 29,139 26,522 Net assets of discontinued operations -- -- 8,139 Corporate 78,540 40,581 46,375 - -------------------------------------------------------------------------------- $ 285,630 $ 214,254 $ 124,491 - -------------------------------------------------------------------------------- Depreciation and amortization: Defense $ 6,081 $ 5,047 $ 1,331 Communications and Space Products 2,438 1,960 -- Engineered Materials 2,029 1,882 1,653 Corporate 848 552 406 - -------------------------------------------------------------------------------- $ 11,396 $ 9,441 $ 3,390 - -------------------------------------------------------------------------------- Capital Expenditures: Defense $ 7,896 $ 1,559 $ 1,114 Communications and Space Products 4,308 570 -- Engineered Materials 1,479 1,705 2,890 Corporate 615 27 28 - -------------------------------------------------------------------------------- $ 14,298 $ 3,861 $ 4,032 - --------------------------------------------------------------------------------
In 2001 and 2000, the costs related to the write-off of purchased in-process research and development and other merger-related costs attributable to the EDO-AIL merger are included in the segments as follows:
================================================================================ 2001 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- Defense $ 937 $ 3,342 Communications and Space Products 184 7,595 Engineered Materials 197 558 - -------------------------------------------------------------------------------- Total $1,318 $11,495 ================================================================================
51 ERNST & YOUNG LLP INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders EDO Corporation We have audited the accompanying consolidated balance sheets of EDO Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of earnings, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EDO Corporation and subsidiaries at December 31, 2001 and 2000 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. s/ Ernst & Young LLP New York, New York February 15, 2002 KPMG LLP INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders EDO Corporation: We have audited the accompanying consolidated statements of earnings, shareholders' equity and cash flows of EDO Corporation and subsidiaries for the year ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of EDO Corporation and subsidiaries for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. s/ KPMG LLP Melville, New York February 15, 2000 52 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth unaudited quarterly financial information for 2001 and 2000 (in thousands, except per share amounts).
=================================================================================================================================== FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER 2001 2000 2001 2000 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Net sales from continuing operations $60,151 $29,002 $66,776 $56,593 $60,353 $59,979 $72,681 $61,248 Net earnings (loss): Continuing operations 2,843(a) 2,130 3,095(b) (3,319)(c) 3,833 38(d) 4,908 2,472(e) Discontinued operations -- -- -- -- -- -- 273 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total 2,843 2,130 3,095 (3,319) 3,833 38 5,181 2,472 Earnings (loss) per share: Basic: Continuing operations 0.23 0.28 0.25 (0.37) 0.32 (0.02) 0.32 0.20 Discontinued operations -- -- -- -- -- -- 0.02 -- - ----------------------------------------------------------------------------------------------------------------------------------- Total 0.23 0.28 0.25 (0.37) 0.32 (0.02) 0.34 0.20 Diluted: Continuing operations 0.22 0.24 0.24 (0.37) 0.30 (0.02) 0.31 0.19 Discontinued operations -- -- -- -- -- -- 0.02 -- - ---------------------------------------------------------------------------------------------------------------------------------- Total 0.22 0.24 0.24 (0.37) 0.30 (0.02) 0.33 0.19 Preferred dividends paid 194 245 -- 213 -- 212 -- 211 ==================================================================================================================================
(a.) Includes merger-related costs of $546. (b.) Includes merger-related costs of $772. (c.) Includes write-off of purchased in-process research and development costs of $6,700 and merger-related costs of $2,243. (d.) Includes merger-related costs of $932. (e.) Includes merger-related costs of $1,620. 53 EX-21 6 y57015ex21.txt LIST OF SUBSIDIARIES EXHIBIT 21 LIST OF SUBSIDIARIES The following are subsidiaries of the Company, the respective jurisdictions of their incorporation and names (if any) under which they do business. The Company owns all of the voting securities (including directors' qualifying shares owned beneficially by the Company) of each such subsidiary except the Company owns only approximately 50% of EDO (Canada) Limited. The names of particular subsidiaries of the Company have been omitted. When considered in the aggregate as a single subsidiary, these omitted subsidiaries do not constitute a "significant subsidiary" as such term is defined in Rule 1-02(v) of Regulation S-X of the Securities Exchange Act of 1934, as amended.
Jurisdiction Name Under Which Of Subsidiary Name Incorporation Does Business - ---- ------------- ------------- EDO Western Corporation Utah EDO Electro-Ceramics EDO (Canada) Limited Canada EDO Foreign Sales Corporation U.S. Virgin Islands EDO Sports, Inc. Delaware EDO Western International Corp. Delaware EDO International Corporation Delaware EDO Energy Corporation Delaware EDO Automotive Natural Gas, Inc. Delaware Specialty Plastics, Inc. Louisiana EDO Specialty Plastics EDO Acquisition II, Inc. Delaware EDO Technology Services and Analysis AIL Technologies, Inc. Delaware M. Technologies Inc. Pennsylvania EDO M. Tech AIL Systems, Inc. Delaware American Nucleonics Inc. California Astro Optics Laboratories, Inc. California Dynamic Systems, Inc. Maryland
EX-23.A 7 y57015ex23-a.txt CONSENT OF ERNST & YOUNG LLP Exhibit 23(a) Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of EDO Corporation and in the Registration Statement (Form S-8 No. 2-69243) pertaining to the EDO Corporation 1996 Long-term Incentive Plan and the EDO Corporation 1980 Stock Option Plan, the Registration Statement (Form S-8 No. 33-1526) pertaining to the EDO Corporation 1996 Long-term Incentive Plan and the EDO Corporation 1985 Stock Option Plan, the Registration Statement (Form S-8 No. 33-28020) pertaining to the EDO Corporation 1983 Long-term Incentive Plan, the EDO Corporation 1988 Long-term Incentive Plan, the EDO Corporation 1988 Stock Option Plan and the EDO Corporation 1996 Long-term Incentive Plan, and the Registration Statement (Form S-8 No. 33-77865) pertaining to the EDO Corporation Compensation Plan for Directors, the EDO Corporation 1997 Non-employee Director Stock Option Plan and the EDO Corporation 1996 Long-term Incentive Plan, of our reports dated February 15, 2002, with respect to the consolidated financial statements of EDO Corporation incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 2001, and with respect to the financial statement schedule included in this Annual Report (Form 10-K). New York, New York /s/ Ernst & Young LLP March 18, 2002 EX-23.B 8 y57015ex23-b.txt CONSENT OF KPMG LLP Exhibit 23(b) Consent of KPMG LLP, Independent Auditors The Board of Directors EDO Corporation: We consent to incorporation by reference in Registration Statement Nos. 002-69243-99, 033-1526, 033-28020 and 333-77865 on Form S-8 of EDO Corporation of our reports dated February 15, 2000, relating to the consolidated statements of earnings, shareholders' equity and cash flows and the related financial statement schedule of EDO Corporation and subsidiaries for the year ended December 31, 1999, which reports appear in or are incorporated by reference into the December 31, 2001 annual report on Form 10-K of EDO Corporation. Melville, New York /s/ KPMG LLP March 15, 2002 EX-24 9 y57015ex24.txt POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Darrell L. Reed and William J. Frost, and each of them, with full power of substitution, the undersigned's true and lawful attorneys and agents to execute in his name and on his behalf, in any and all capabilities, the Annual Report on Form 10-K of EDO Corporation (the "Company"), a New York corporation, for the fiscal year ended December 31, 2001, and any and all other instruments which such attorneys and agents, or either of them, deem necessary or advisable to enable the Company to comply with the annual reporting requirements of the Securities Exchange Act of 1934, as amended, and the rules, regulations and requirements of the Securities and Exchange Commission; and the undersigned hereby ratifies and confirms as his own act and deed all that such attorneys and agents, and each of them, shall do or cause to be done by virtue hereof. Either of such attorneys and agents shall have, and may exercise, all of the powers hereby conferred. IN WITNESS WHEREOF, the undersigned has subscribed his signature this _______ day of March, 2002 -----END PRIVACY-ENHANCED MESSAGE-----