-----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, QJCFzeHIgKehBAXcR0jtyRcTqGgGO38foYpIYVFKGcY28YDw5w4mMpiosQD2nOeR 0XQU5I/MlxLJBgV5xwrjPA== 0000950123-03-002831.txt : 20030314 0000950123-03-002831.hdr.sgml : 20030314 20030314131823 ACCESSION NUMBER: 0000950123-03-002831 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030314 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03985 FILM NUMBER: 03603705 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-K 1 y83939e10vk.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2002 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)
(212) 716-2000 (Telephone No.) 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. [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ] State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 28, 2002...............................$414,963,677 Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of February 27, 2003.......................19,709,704 DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's definitive proxy statement (to be filed pursuant to Reg. 14A) relating to the Annual Meeting of Shareholders anticipated to be held on April 22, 2003 are incorporated herein by reference in Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EDO CORPORATION TABLE OF CONTENTS PART I ITEM 1 BUSINESS.................................................... 1 DEFENSE..................................................... 2 Electronic Warfare........................................ 2 Reconnaissance and Surveillance Systems................... 3 Aircraft Weapons Suspension and Release Systems........... 3 Airborne Mine Countermeasures Systems..................... 4 Integrated Combat Systems................................. 4 Undersea Systems.......................................... 4 Professional and Engineering Services..................... 5 COMMUNICATIONS AND SPACE PRODUCTS........................... 5 Antenna Products.......................................... 5 Communications and Countermeasures Products............... 6 Space Products............................................ 6 ENGINEERED MATERIALS........................................ 6 Electro-Ceramic Products.................................. 6 Advanced Fiber Composite Structural Products.............. 7 DISCONTINUED OPERATIONS..................................... 7 RESEARCH AND DEVELOPMENT.................................... 7 MARKETING AND INTERNATIONAL SALES........................... 8 BACKLOG..................................................... 8 GOVERNMENT CONTRACTS........................................ 9 COMPETITION AND OTHER FACTORS............................... 9 ENVIRONMENTAL............................................... 9 EMPLOYEES................................................... 10 ITEM 2 PROPERTIES.................................................. 10 ITEM 3 LEGAL PROCEEDINGS........................................... 10 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 11 ITEM 6 SELECTED FINANCIAL DATA..................................... 11 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 14 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 14 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 27 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 61
i PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 61 ITEM 11 EXECUTIVE COMPENSATION.......................................................... 62 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS............................................................. 62 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................. 62 ITEM 14 CONTROLS AND PROCEDURES......................................................... 62 PART IV ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................ 62 (a) Financial Statements and Financial Statement Schedules and Exhibits......... 62 1. Financial Statements.................................................... 62 2. Financial Statement Schedules........................................... 63 3. Exhibits................................................................ 64 (b) Reports on Form 8-K......................................................... 66 CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER............................................................... 67 CERTIFICATIONS OF THE CHIEF FINANCIAL OFFICER............................................................... 68 SIGNATURES.................................................................................................. 69
ii PART I ITEM 1. BUSINESS In this Annual Report on Form 10-K (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. 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 programs. In 2002, sales of defense-related products and services to the U.S. Government, including sales to prime contractors were 75% of total sales. Our Internet address is www.edocorp.com. We make available free of charge, on or through the investor relations section of our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. ACQUISITIONS 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 October 2001, we acquired Dynamic Systems, Inc., a privately-held company based in Alexandria, Virginia. Dynamic Systems, Inc. provides professional and information technology services primarily to the U.S. Department of Defense (DoD) and other government agencies. On July 26, 2002, we acquired substantially all of the assets of Condor Systems, Inc., a privately-held defense electronics company and its subsidiary (together, "Condor") based in Morgan Hill and Simi Valley, California for $61.9 million in cash (excluding transaction costs of $4.1 million) and the assumption of certain normal employee benefit obligations, certain trade and supplier payables and certain other accrued liabilities, primarily related to contract loss reserves. We also assumed $28.0 million in outstanding standby letters of credit. Condor had been operating under the protection of Chapter 11 of the U.S. Bankruptcy Code. We expect the acquisition of Condor's business to expand our electronic warfare business in the areas of reconnaissance and surveillance systems as well as our communications and countermeasures business. In February 2003, we acquired all of the stock of Advanced Engineering & Research Associates, Inc. (AERA), a privately-held company located in Alexandria, Virginia, which provides professional and information technology services primarily to the U.S. DoD and other government agencies. The acquisition is expected to strengthen and expand the range of such services the Company offers. The preliminary purchase price was $38.0 million and is subject to adjustment based on changes in AERA's balance sheet as of the closing date. The acquisition will be accounted for as a purchase, and the operating results of AERA will be included in our consolidated financial statements from the date of the acquisition. In March 2003, we acquired all of the stock of Darlington, Inc., a privately-held defense communications company based in Alexandria, Virginia, which designs, manufactures and supports military communications equipment and information networking systems. The acquisition is expected to enhance our existing positions on long-range platforms and programs across the U.S. military services and in particular the U.S. Marine 1 Corps. The preliminary purchase price was $28.5 million and is subject to adjustment based on changes in Darlington's balance sheet as of the closing date. The acquisition will be accounted for as a purchase, and the operating results of Darlington will be included in our consolidated financial statements from the date of the acquisition. In addition we have completed four other acquisitions since 1998 which have been disclosed in our prior Annual Reports on Form 10-K. SEGMENTS We have three reporting segments: Defense, Communications and Space Products, and Engineered Materials. Our Defense segment provides integrated front-line warfighting systems and components including electronic warfare systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems, airborne mine countermeasures systems, integrated combat systems, command, control and communications systems, undersea systems and professional, operational, technical and information technology services for military forces and governments worldwide. Our Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing, communications and electronic warfare industries. Our Engineered Materials segment supplies piezo-electric ceramic products for commercial and military markets and advanced fiber composite structural products for the aircraft, communication, navigation, chemical, petrochemical, paper and oil industries. We set forth certain business segment information in Note 19 on pages 55 through 58 of this Report. 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 74% of consolidated net sales in 2002, 71% in 2001 and 69% in 2000, includes electronic warfare systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems, airborne mine countermeasures systems, integrated combat systems, command, control and communications systems, undersea warfare sonar systems and professional and engineering services. 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 U.S. DoD currently expects B-1B aircraft 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 2 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 U.S. DoD currently expects EA-6B aircraft to be in operation through 2015. Net sales of electronic warfare products represented 23% of consolidated net sales in 2002, 24% in 2001 and 23% in 2000. RECONNAISSANCE AND SURVEILLANCE SYSTEMS Our reconnaissance and surveillance systems, acquired from Condor Systems, Inc. in July 2002, include the AN/USQ-149 Radar Narrow Band (RNB) Subsystem, the AN/ALR-95 automatic Electronic Support Measures (ESM) system and variants of the CS-3701 ESM system which intercept, analyze and identify radar emissions and provide situational awareness to military personnel. The U.S. Navy's AN/BLQ-10 Sea Sentry multi-channel Electronic Intelligence (ELINT) system is used aboard Virginia class submarines to provide improved intelligence collection and analysis capabilities. The AN/USQ-149 RNB Subsystem is part of the AN/BLQ-10 and is also used on airborne platforms. In 2002, we received an award from Lockheed Martin for three RNB systems plus spares. We received an additional contract in 2002 from the U.S. Navy for a submarine carry-on version of this system, potentially worth approximately $50 million in revenue over five years, and we received orders for more than $25 million for seventeen systems plus spares. Developed under the Antisurface Warfare Improvement Program (AIP), our AN/ALR-95 automatic ESM system provides threat warning and situational awareness, including signal exploitation through Specific Emitter Identification (SEI) technology, aboard U.S. Navy P-3 aircraft. The system is a hybrid ESM that combines a wide bandwidth (WB) high probability of intercept subsystem with a narrowband (NB) subsystem for manual analysis. We received awards from Lockheed Martin and the U.S. Navy totaling more than $8 million in 2002 for continued improvements to the system and for the production of eight additional AN/ALR-95 systems. The CS-3701 is a combined precision ESM system and radar warning receiver (RWR) system developed to provide an improved performance replacement for all of the lower performance, simple design amplitude monopulse systems currently used on ships and submarines. Unlike amplitude monopulse systems, the CS-3701 ESM system provides all of the capabilities required of a modern ESM system for operation in today's difficult electromagnetic environment against complex radar threats. It uses the latest phase measurement technology for high-precision, monopulse direction-finding, combined with a patented "autohet" receiver to achieve 100% probability of intercept. This system is currently in production and use with several international navies. In 2002, we delivered nine CS-3701 systems. AIRCRAFT WEAPONS SUSPENSION AND RELEASE SYSTEMS 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, jettison release mechanisms for the F-14 aircraft, pneumatic missile eject launchers for the F-22, and smart weapon multiple carriage systems for the F-16 and F-18. In 2002: - 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 continued production of the Advanced Medium Range Air to Air Missile launcher for the F-22 aircraft and we are now under contract to support long term depot services for this equipment. 3 - we continued the development and test of the pneumatic suspension and release equipment system for the F-35 Joint Strike Fighter program. - we continued the design of a demonstration carriage system for Lockheed Martin Missiles and Fire Control as part of the small diameter bomb development program. - we received additional production orders for the BRU-57 smart weapon carriage and electronics system as well as continued the integration of the BRU-55 onto the F-18 aircraft. Net sales of aircraft weapons suspension and release systems represented 13% of consolidated net sales in 2002, 13% in 2001 and 13% in 2000. 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 1967. 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. In 1994, we began work under contract with the U.S. Navy to develop a lightweight, helicopter-towed minesweeper for shallow water applications. We received a production contract for these systems in 1999 with delivery completed in 2002. In 2002, we won the competitive contract from the U.S. Navy for the next generation minesweeping system, the Organic Airborne/Surface Influence Sweep (OASIS). Development work will continue through 2005 followed by production for fleet systems. Net sales of airborne mine countermeasures systems represented 5% of consolidated net sales in 2002, 8% in 2001 and 11% in 2000. 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 and sonar, communications systems, navigation and integrated bridge systems, and aircraft control systems 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 the Norwegian Coast Guard. 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 2002, 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 2002, work continued on a contract for the Brazilian Navy 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 the Brazilian Navy's new Corvette class ship. Work continued in 2002 on a contract awarded in 2000 by 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. Work continued in 2002 on a contract awarded in 2000 by the 4 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 2003. In 2002, we were awarded a contract as part of a team headed by Ultra Electronics, the UK-based aerospace and defense electronics group, to provide bow-mounted Medium Frequency Sonar -- 7000 (MFS-7000) systems to the United Kingdom's Type 45 naval destroyer program. Our contract, valued at approximately $11 million, will provide systems for six ships. EDO Combat Systems in Chesapeake, VA will develop the systems and transfer the technology to Ultra Electronics for final assembly integration in the UK. EDO Electro-Ceramic Products in Salt Lake City, UT will provide ceramic and transducer elements. Deliveries under the contract will extend through 2006. PROFESSIONAL AND ENGINEERING SERVICES We are a supplier of professional 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 2002, we were awarded follow-on orders for core services contracts in this business area that include: the Naval Sea Systems Command, the U.S. Marine Corps Warfighting Lab, the Strategic Sourcing Initiatives of the Chief of Naval Operations Office for 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. In 2002, 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. We designed and produced a line of electronic test equipment for electronic warfare testing, data acquisition, and radar simulation. In 2002, we continued to receive orders for our AN/PLM-4 Radar Signal Simulators from the U.S. Air Force and international customers. Net sales of professional and engineering services represented 18% of consolidated net sales in 2002, 16% in 2001 and 13% in 2000. COMMUNICATIONS AND SPACE PRODUCTS Our Communications and Space Products segment, which accounted for 14% of consolidated net sales in 2002, 15% in 2001 and 14% in 2000, includes antenna products, communications products and space sensor products. ANTENNA PRODUCTS We design and produce antenna systems for a wide variety of military and commercial applications including communications, electronic warfare, navigation (including global positioning), radar and wireless Local Area Networks, or LANs. Our antenna business is approximately 60% military and 40% commercial. Our military antennas are deployed on many different types of platforms and vehicles including fixed wing and rotary aircraft, unmanned aerial vehicles (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 2002, we sold more than 50,000 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 2002, we made substantial progress toward developing new antenna products via internally funded and customer sponsored research and development. During this period, we entered into major contracts for 5 development of low observable, anti-jam global positioning satellite (GPS) and extremely wide bandwidth electronic warfare and communication antenna systems. COMMUNICATIONS AND COUNTERMEASURES PRODUCTS We design and manufacture interference cancellation and mitigation systems as well as a secure voice system for a variety of platforms. Both domestic and international customers use these products to enhance or protect the communications of their air, land, and sea forces from unintentional radio interference. This technology can also be applied to defend certain navigation systems from intentional interference or jamming. We also design and manufacture countermeasures systems to defend troops and high value assets from proximity fused munitions. This same jamming technology can be used against several new or existing communications media. This capability is being exploited for counter-terrorism and homeland defense purposes. SPACE 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. ENGINEERED MATERIALS Our Engineered Materials segment, which accounted for 12% of consolidated net sales in 2002, 14% in 2001 and 17% in 2000, 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 2002 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 and extend through 2004. 6 Additionally in 2002 we were awarded a contract to provide AN/SQS-53 C sonar arrays to the Naval Sea Systems Command for use by U.S. Navy warships, including the Arleigh Burke class guided missile destroyers. Our initial contract is valued at approximately $6.3 million. The SQS-53C sonar array is part of the AN/SQQ-89 undersea warfare combat system. We will provide the complete sonar array including piezoelectric ceramic materials, transducers, array frames and associated cable assemblies. Our high power transducers form the key active sensor used to detect, classify and localize underwater threats to U.S. naval forces. Initial deliveries are scheduled into 2005. If all options are exercised, deliveries will extend to approximately 2010. ADVANCED FIBER COMPOSITE STRUCTURAL PRODUCTS Our fiber-reinforced advanced structural product capabilities include design, development, qualification, production and after-market support. Our primary focus includes commercial and military aviation, defense systems, specialty medical products and offshore oil-drilling markets. We remain the exclusive supplier of vacuum waste tanks for all of Boeing Seattle's commercial aircraft. In 2002, we successfully transitioned medical tanks, which are part of portable dialysis filtration systems, from design and development to a production product. In 2002, we received contracts from Sikorsky Helicopter to produce composite structures for the new Comanche helicopter. Also in 2002, we completed the fabrication and installation of topside piping systems for one Korean and one Malaysian offshore oil platform. Production contracts for composite piping on three large Gulf of Mexico deep-water oil platforms also started in 2002. DISCONTINUED OPERATIONS In January 2000, we sold our satellite orientation sensor products business, Barnes Engineering Company. See Note 3 on pages 41 and 42 of this Report. RESEARCH AND DEVELOPMENT Research and development, performed under development contracts with customers and at our own expense, is an important element to the success of our business. Research and development programs are intended to develop new products and assess their market potential, and to extend the capability of existing products. Our research and development efforts involve about 139 employees in the fields of communications and space, antennas, electronic warfare, combat systems, and acoustic, electronic, hydrodynamic, aerodynamic, structural and material engineering. 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: digital signal processing technology suitable for improved performance and functionality for ELINT and ESM systems; 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 low observable and advanced antennas, including anti-jam GPS variants; 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 7 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, --------------------------- 2002 2001 2000 ------- ------- ------- (IN THOUSANDS) Customer-sponsored...................................... $38,300 $35,700 $38,400 Company-funded.......................................... 8,500 8,700 5,400 ------- ------- ------- Total................................................. $46,800 $44,400 $43,800 ======= ======= =======
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 50 international sales representatives concentrating on the marketing of our defense products in foreign countries. We sell defense products as a prime contractor and through subcontracts with other prime contractors. In addition to defense sales to the 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 2002, 15% in 2001 and 18% in 2000. BACKLOG We define backlog as the funded 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, 2002 our total backlog was about $375.0 million as compared with $294.8 million as of December 31, 2001. Approximately 71% of the total backlog at December 31, 2002 is scheduled for delivery in 2003. Our backlog consists primarily of current orders under long-lived, mission-critical programs of key defense platforms on which we have a strong strategic position. 8 GOVERNMENT CONTRACTS Net sales to the U.S. Government, as a prime contractor and through subcontracts with other prime contractors, accounted for 75% of our 2002 consolidated net sales compared with 69% in 2001 and 63% in 2000, and consisted primarily of sales to the U.S. 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. 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 so requires. 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 55 of this Report for information regarding the cost of compliance with environmental regulations. 9 EMPLOYEES As of December 31, 2002, we employed 1,931 persons. 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 available but unused space, leasing additional available space, or by physical expansion of leased buildings. However, in light of recent acquisitions, we are reviewing the status of all of our facilities. We believe that, with respect to leases which expire during 2003 and 2004, 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 55 of this Report. Set forth below is a listing of our principal plants and other materially important physical properties.
APPROXIMATE FLOOR AREA SEGMENT LOCATION (IN SQ. FT.) ------------------ -------------------- ------------ Antenna Products and Technology and Defense Programs and Technologies... Communications and Deer Park, NY 726,000 Space Products and Defense Reconnaissance and Surveillance Systems............................. Defense Morgan Hill, CA 160,000 Electro-Ceramic Products.............. Engineered Salt Lake City, UT 117,000 Materials Fiber Science......................... Engineered Salt Lake City, UT 105,000 Materials Marine & Aircraft Systems............. Defense North Amityville, NY 92,000 Communications and Countermeasures Systems............................. Communications and Simi Valley, CA 43,000 Space Products American Nucleonics Corporation....... Communications and Westlake Village, CA 40,000 Space Products Combat Systems........................ Defense Chesapeake, VA 37,000 Technical Services Operations......... Defense Lancaster, CA 33,000 Alexandria & Falls Professional Services................. Defense Church, VA 32,000 Specialty Plastics.................... Engineered Baton Rouge, LA 29,000 Materials M. Technologies....................... Defense Huntingdon, PA 14,000
ITEM 3. LEGAL PROCEEDINGS The Company and/or its subsidiaries are parties to various legal proceedings arising in the normal course of business, including various environmental actions described in Note 18 on page 55 of this Report. While litigation is subject to inherent uncertainties, management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company's consolidated financial position, cash flow or overall results of operations. The following is a description of certain proceedings: U.S. v. EDO Corporation et al.; EDO Corporation et al. v. Elinco Associates L.P. et al. (United States District Court, District of Connecticut). The Company and three other companies entered into a consent decree in 1990 with the Federal government for the remediation of a Superfund site in Norwalk, CT. The Superfund site has been divided into three operable units. The consent decree relates to two of the operable 10 units. The third operable unit has not been formally studied and the Company is unable to determine whether the EPA will address the third operable unit or, if it does, whether it will conclude that specific remedial response action will be required for it, and in such event, what the costs, if any, or the Company's degree of responsibility will be. As of December 31, 2002, the Company estimates that its discounted liability over the remainder of the twenty-three years related to the two operable units is approximately $2.3 million. See also Note 18 on page 55 of this Report. Technip Offshore Inc. v. EDO Fiber Science and EDO Corporation (U.S. District Court for the Southern District of Texas). Technip Offshore Inc. (Technip), a U.S. subsidiary of Technip-Coflexip, S.A., a French corporation, brought a declaratory judgment action seeking a declaration that Technip Offshore Inc. is the owner of a patent application jointly filed by Technip and the Company and that Technip has not breached an agreement with the Company by offering to sell products described in the patent application to certain third parties. The Company has denied the allegations and filed a counterclaim seeking damages pursuant to certain agreements between the Company and Technip. Technip does not seek damages. 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 25 and "Dividends" on page 25, together with dividend information contained in the "Consolidated Statements of Shareholders' Equity" on pages 29 through 31 and Note 9 on pages 43 and 44 of this Report. ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA EDO CORPORATION AND SUBSIDIARIES (NOT COVERED BY INDEPENDENT AUDITORS' REPORTS)
2002 2001 2000 1999 1998 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF EARNINGS DATA: Net sales................................. $328,876 $259,961 $206,822 $97,936 $81,403 Costs and expenses: Cost of sales........................... 240,850 189,733 151,512 72,337 57,817 Selling, general and administrative..... 47,584 34,013 29,205 13,602 11,649 Research and development................ 8,492 8,750 5,371 2,748 2,382 Unusual expenses (income)(a)............ 2,565 389 11,495 -- (2,200) -------- -------- -------- ------- ------- 299,491 232,885 197,583 88,687 69,648 -------- -------- -------- ------- ------- Operating earnings........................ 29,385 27,076 9,239 9,249 11,755 Net interest expense...................... (4,956) (2,216) (2,438) (785) (428) Other non-operating (expense) income, net..................................... (95) (971) (216) 230 (100) -------- -------- -------- ------- ------- (5,051) (3,187) (2,654) (555) (528) -------- -------- -------- ------- -------
11
2002 2001 2000 1999 1998 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings before income taxes and cumulative effect of a change in accounting principle.................... 24,334 23,889 6,585 8,694 11,227 Income tax expense........................ (10,342) (9,210) (5,264) (2,610) (880) -------- -------- -------- ------- ------- Earnings (loss) before cumulative effect of a change in accounting principle from: Continuing operations................... 13,992 14,679 1,321 6,084 10,347 Discontinued operations................. -- 273 -- (4,064) (2,116) -------- -------- -------- ------- ------- Earnings before cumulative effect of a change in accounting principle.......... 13,992 14,952 1,321 2,020 8,231 Cumulative effect of a change in accounting principle, net of tax of $790(b)................................. (3,363) -- -- -- -- Dividends on preferred shares(c).......... -- 194 881 1,000 1,063 -------- -------- -------- ------- ------- Net earnings available for common shares.................................. $ 10,629 $ 14,758 $ 440 $ 1,020 $ 7,168 ======== ======== ======== ======= ======= PER COMMON SHARE DATA: Basic net earnings (loss): Continuing operations................... $ 0.82 $ 1.14 $ 0.05 $ 0.76 $ 1.42 Discontinued operations................. -- 0.02 -- (0.61) (0.33) -------- -------- -------- ------- ------- Basic net earnings before cumulative effect of a change in accounting principle............................... 0.82 1.16 0.05 0.15 1.09 Cumulative effect of a change in accounting principle.................... (0.20) -- -- -- -- -------- -------- -------- ------- ------- Basic net earnings........................ $ 0.62 $ 1.16 $ 0.05 $ 0.15 $ 1.09 -------- -------- -------- ------- ------- Diluted net earnings (loss): Continuing operations................... $ 0.81 $ 1.09 $ 0.05 $ 0.65 $ 1.21 Discontinued operations................. -- 0.02 -- (0.50) (0.27) -------- -------- -------- ------- ------- Diluted net earnings before cumulative effect of a change in accounting principle............................... 0.81 1.11 0.05 0.15 0.94 Cumulative effect of a change in accounting principle.................... (0.20) -- -- -- -- -------- -------- -------- ------- ------- Diluted net earnings...................... $ 0.61 $ 1.11 $ 0.05 $ 0.15 $ 0.94 ======== ======== ======== ======= ======= Cash dividends per common share........... $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.115 Weighted-average common shares outstanding: Basic................................... 17,080 12,776 9,601 6,701 6,549 Diluted................................. 17,379 14,254 10,662 8,032 7,785 OTHER DATA: EBITDAP(d)................................ $ 51,184 $ 37,037 $ 27,307 $11,127 $ 9,606 Depreciation and amortization............. 11,321 11,396 9,441 3,390 2,343 Capital expenditures...................... 7,093 14,298 3,861 4,032 3,133 Backlog................................... 375,029 294,812 252,888 133,880 130,151 -------- -------- -------- ------- -------
12
2002 2001 2000 1999 1998 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents, marketable securities and restricted cash.......... $159,860 $ 58,031 $ 16,621 $29,642 $33,510 Working capital........................... 204,382 105,177 37,552 35,110 32,674 Total assets.............................. 481,574 285,630 214,254 124,491 124,630 Total debt(e)............................. 137,800 463 49,444 36,483 43,732 Shareholders' equity...................... 168,273 174,498 65,818 40,241 38,051 -------- -------- -------- ------- ------- RECONCILIATION OF GAAP EARNINGS TO EBITDAP: Earnings before income taxes and cumulative effect of a change in accounting principle.................... $ 24,334 $ 23,889 $ 6,585 $ 8,694 $11,227 Merger-related costs...................... 567 1,318 11,495 -- -- Defined benefit pension plan curtailment loss.................................... 1,998 -- -- -- -- Post-retirement curtailment gain.......... -- (929) -- -- -- Litigation settlement income.............. -- -- -- -- (2,200) Net interest expense...................... 4,956 2,216 2,438 785 428 Depreciation and amortization............. 11,321 11,396 9,441 3,390 2,343 -------- -------- -------- ------- ------- Subtotal -- EBITDA........................ 43,176 37,890 29,959 12,869 11,798 Pension expense (income).................. 3,965 (2,634) (4,495) (1,742) (2,192) Employee Stock Ownership Plan compensation expense................................. 4,043 1,781 1,843 -- -- -------- -------- -------- ------- ------- EBITDAP................................... $ 51,184 $ 37,037 $ 27,307 $11,127 $ 9,606 ======== ======== ======== ======= =======
- --------------- (a) Reflects $0.2 million and $0.4 million in 2002 for the write-off of purchased in-process research and development ("IPR&D") and other merger-related costs, respectively, associated with our acquisition of the assets of Condor Systems, Inc., as well as a $2.0 million curtailment loss associated with our defined benefit pension plan; a $0.9 million post-retirement curtailment gain in 2001; $1.3 million and $11.5 million in the years 2001 and 2000, respectively, for the write-off of IPR&D (in 2000); and other EDO-AIL merger-related costs (in 2001 and 2000); and $2.2 million in 1998 of litigation settlement income. (b) Upon adoption of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets," we recorded a cumulative effect of a change in accounting principle effective January 1, 2002. See Note 1(g) to the consolidated financial statements as of and for the year ended December 31, 2002. (c) 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. (d) EBITDAP consists of earnings from continuing operations before interest, taxes, depreciation, amortization and non-cash pension and non-cash employee stock ownership plan compensation expense, excluding a defined benefit pension plan curtailment loss in 2002, a post-retirement curtailment gain in 2001, the write-off of IPR&D in 2002 and 2001, merger-related costs in 2002, 2001 and 2000, and litigation settlement income in 1998. Items excluded from EBITDAP are significant components in understanding and assessing our financial performance. EBITDAP is a measure commonly used by financial analysts and investors to evaluate financial results of companies in our defense and aerospace industry and, therefore, we believe it 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 13 performance determined in accordance with accounting principles generally accepted in the United States and is susceptible to varying calculations among companies, EBITDAP as presented may not be comparable to similarly titled measures of other companies. (e) Includes note payable, Employee Stock Ownership Trust loan obligation and current portions of long-term debt. ITEMS 7. AND 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW EDO Corporation (the "Company") 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 programs. We have three reporting segments: Defense, Communications and Space Products, and Engineered Materials, which represented 74%, 14% and 12%, respectively, of our net sales for the year ended December 31, 2002. Our Defense segment provides integrated front-line warfighting systems and components including electronic warfare, radar countermeasures systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems, airborne mine countermeasures systems, integrated combat and sonar systems, command, control and communications systems and professional, operational, technical and information technology services for military forces and governments worldwide. Our Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing and electronic warfare industries. Our Engineered Materials segment supplies commercial and military piezo-electric ceramic products and advanced fiber composite structural products for the aircraft, communication, navigation, chemical, petrochemical, paper and oil industries. ACQUISITIONS AND DISPOSITION On July 26, 2002, we acquired substantially all of the assets of Condor Systems, Inc., a privately-held defense electronics company and its subsidiary (together, "Condor") based in Morgan Hill and Simi Valley, California for $61.9 million in cash, in addition to transaction costs of $4.1 million, and the assumption of certain normal employee benefit obligations, certain trade and supplier payables and certain other accrued liabilities, primarily related to contract loss reserves. We also assumed $28.0 million in outstanding standby letters of credit. Condor had been operating under the protection of Chapter 11 of the U.S. Bankruptcy Code. We expect the acquisition of Condor to expand our electronic warfare business in the areas of reconnaissance and surveillance systems and communications and countermeasures systems. Condor became part of our Defense and Communications and Space Products segments and was accretive to earnings in 2002. 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 12-month period prior to the acquisition, Dynamic Systems Inc. had revenues of approximately $15.0 million. On April 28, 2000, one of our wholly-owned subsidiaries merged with AIL Technologies Inc. ("AIL"). 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 assumed AIL debt of $29.7 million. Of the newly-issued shares, 5,270,540 were held in trust by AIL's Employee Stock Ownership Plan (the "AIL ESOP"). As of January 1, 2001, the AIL ESOP and the 14 existing EDO Employee Stock Ownership Plan ("EDO ESOP") were merged into a single plan (the "ESOP"). As of March 8, 2001, the existing preferred shares in the EDO ESOP were converted into approximately 1,067,281 of our 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. As of December 31, 2002, the ESOP owns approximately 22% of outstanding common shares. Each of the above acquisitions has been accounted for as a purchase business combination and is included in our results of operations from its acquisition date. The results of operations for the periods presented are affected by the timing of these acquisitions. 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, and cash flows associated with the satellite products business have been excluded from the respective captions in the consolidated financial statements and discussion below. DISCUSSION OF CRITICAL ACCOUNTING POLICIES We make estimates and assumptions in the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our consolidated financial condition and results of operations and which require our most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following is a brief discussion of the critical accounting policies employed by us: 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 and other milestones are achieved or services are provided. These projections are revised throughout the lives of the contracts. Adjustments to profits resulting from such revisions are made cumulative to the date of change and may affect current period earnings. Our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, price competition and general economic conditions. 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. 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 our defense contracts), less the portion of such costs charged to cost of sales. Inventory costs in excess of amounts recoverable under contracts and which relate to a specific technology or application and which may not have alternative uses are charged to cost of sales when such circumstances are identified. All other inventories are stated at the lower of cost (principally first-in, first-out method) or market. From time to time, we manufacture certain products prior to receiving firm contracts in anticipation of future demand. Such costs are inventoried and are incurred to help maintain stable and efficient production schedules. Several factors may influence the sale and use of our inventories, including our decision to exit a product line, technological change, new product development and/or revised estimates of future product demand. If 15 inventory is determined to be overvalued due to one or more of the above factors, we would be required to recognize such loss in value at the time of such determination. 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. PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease periods. In those cases where we determine that the useful life of property, plant and equipment should be shortened, we would depreciate the net book value in excess of the salvage value over its revised remaining useful life thereby increasing depreciation expense. Factors such as technological advances, changes to our business model, changes in our capital strategy, changes in the planned use of equipment, fixtures, software or changes in the planned use of facilities could result in shortened useful lives. Long-lived assets, other than goodwill, are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to factors such as technological changes, economic conditions, changes to our business model or changes in our operating performance. If the sum of the undiscounted cash flows, excluding interest, is less than the carrying value, we would recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets," goodwill must be tested at least annually for impairment at the reporting unit level. If an indication of impairment exists, we are required to determine if such goodwill's implied fair value is less than its carrying value in order to determine the amount, if any, of the impairment loss required to be recorded. 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. PENSION AND POST-RETIREMENT BENEFIT OBLIGATIONS We sponsor defined benefit pension and other retirement plans in various forms covering all eligible employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by us, within certain guidelines and in conjunction with our actuarial consultants. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate the expense and liability related to these plans. The actuarial assumptions used by us may differ significantly, either favorably or unfavorably, from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. FINANCIAL HIGHLIGHTS For 2002, earnings before cumulative effect of a change in accounting principle available for common shares were $14.0 million or $0.81 per diluted share. In 2002, we recorded a $3.4 million net of tax charge ($0.20 per diluted share) to account for the cumulative effect of a change in accounting principle upon our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." This charge occurred in the Engineered Materials segment and is comprised of $2.3 million and $1.9 million of impaired goodwill and trademark, respectively, offset by a tax benefit of $0.8 million. Including the cumulative effect, net earnings available for common shares were $10.6 million or $0.61 per diluted share. The 2002 results include pretax merger-related 16 costs of $0.6 million associated with our acquisition of Condor in July 2002 and a pretax defined benefit pension plan curtailment loss of $2.0 million. Net sales for 2002 increased 26.5% to $328.9 million from $260.0 million for 2001, reflecting five months of Condor's net sales in 2002, as well as increases in sales of technology services attributable to twelve months of Dynamic Systems' net sales in 2002 as compared to approximately three months in 2001 due to its acquisition in October 2001. In addition, there were increases in sales of electronic warfare equipment, aircraft weapons suspension and release systems, sonar systems, antenna products, electro-ceramic products and advanced fiber composite structural products, partially offset by a net decrease in our remaining product lines. Results of the former Condor business were included from the acquisition date of July 26, 2002 and accounted for approximately $36.3 million or 11.1% of 2002 net sales. On April 2, 2002, we completed our offering of $137.8 million of 5.25% Convertible Subordinated Notes due 2007 (the "Notes") and received $133.7 million, net of commissions paid. On November 8, 2002, we negotiated with a consortium of banks to increase our credit facility's borrowing capacity from $69.0 million to $140.0 million and again, on December 20, 2002, from $140.0 million to its current limit of $200.0 million. 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 approximately $81.5 million. On November 27, 2001, we completed the redemption of all of our outstanding 7% Convertible Subordinated Debentures due 2011 (the "Debentures"). Debentures with an aggregate outstanding face value of $22.1 million were converted into 1,005,250 common shares and Debentures with an aggregate face value of $0.2 million were redeemed for cash plus accrued interest. RESULTS OF OPERATIONS COMPARISON OF 2002 TO 2001 Net sales by segment were as follows:
TWELVE MONTHS ENDED DECEMBER 31, --------------------- INCREASE FROM SEGMENT 2002 2001 PRIOR PERIOD - ------- -------- -------- ------------- (DOLLARS IN MILLIONS) Defense.............................................. $243.5 $183.5 32.7% Communications and Space Products.................... 47.3 40.0 18.3% Engineered Materials................................. 38.1 36.5 4.5% ------ ------ ---- Total................................................ $328.9 $260.0 26.5% ====== ====== ====
Net sales for the year ended December 31, 2002 increased 26.5% to $328.9 million from $260.0 million of net sales from continuing operations for the year ended December 31, 2001. This increase comprised sales growth of $60.0 million for the Defense segment, $7.3 million for the Communications and Space Products segment and $1.6 million for the Engineered Materials segment. In the Defense segment, $28.7 million or 47.8% of the net increase was attributable to five months of sales of Condor since its acquisition on July 26, 2002. Additionally in the Defense segment, there were increases in sales of technology services attributable to twelve months of Dynamic Systems' net sales in 2002 as compared to approximately three months in 2001 due to its acquisition in October 2001, electronic warfare equipment attributable in part to the Universal Exciter Upgrade program, aircraft weapons suspension and release systems due in part to efforts on the production phase of the AMRAAM Vertical Eject Launcher program for the F-22, efforts on the production lots of the BRU-57 Multiple-Carriage Smart Bomb Rack platform with the U.S. Air Force, efforts on the Joint Strike Fighter's suspension and release subsystem and weapons release units programs and development efforts associated with the Small Diameter Bomb program. There was also an increase in our sales of undersea sonar systems. These increases in the Defense segment were partially offset most notably by the decreases in sales of mine countermeasures systems as well as integrated combat systems, 17 the latter of which was due primarily to the delay in orders anticipated to be awarded to us in 2002 from international customers. In the Communications and Space Products segment, $7.6 million of the net increase in sales was attributable to sales of electronic protection systems from the aforementioned acquisition of Condor. Additionally, sales increases in our antenna product line were more than offset by decreases in sales of our space sensor communication products. In the Engineered Materials segment, there were increases in sales of electro-ceramic products, attributable to transducers and sonar arrays, and advanced fiber composite structural products. Operating earnings for the year ended December 31, 2002 were $32.0 million or 9.7% of net sales, before the write-off of $0.2 million of purchased in-process research and development ("IPR&D") and $0.4 million of other merger-related costs associated with our acquisition of the assets of Condor, as well as a $2.0 million defined benefit pension plan curtailment loss. This compares to operating earnings for the year ended December 31, 2001 of $27.5 million or 10.6% of net sales, before EDO-AIL merger-related costs of $1.3 million and a post-retirement benefits curtailment gain of $0.9 million. Including the respective aforementioned charges or gain in each year, operating earnings for the year ended December 31, 2002 were $29.4 million or 8.9% of net sales compared to $27.1 million or 10.4% of net sales for the year ended December 31, 2001. The decrease in operating margin for the year ended December 31, 2002 compared to the year ended December 31, 2001 was due primarily to the recording of $6.0 million of defined benefit pension plan expense, which includes $2.0 million of a curtailment loss, and ESOP compensation expense of $4.0 million in 2002 compared to $2.6 million of pension income and $1.8 million of ESOP compensation expense in 2001. The change to pension expense in 2002 from pension income in 2001 was due primarily to continued poor performance of plan assets invested in the stock market and the lowering of the discount rate in 2002 reflecting the general decline in interest rates. Additionally, pension expense in 2002 included a $2.0 million curtailment loss upon an amendment to the pension plan whereby benefits accrued were frozen as of December 31, 2002. The increase in ESOP compensation expense is attributable in part to our higher average stock price in 2002 compared to 2001. Pension and ESOP compensation expense or income is allocated between cost of sales and selling, general and administrative expense. The Defense segment's operating earnings for the year ended December 31, 2002 were $28.7 million or 11.8% of this segment's net sales compared to operating earnings for the year ended December 31, 2001 of $21.9 million or 11.9% of this segment's net sales. The increase in operating earnings in the Defense segment is due primarily to the completion of some MK-105 Mod 4 mine countermeasures systems in 2002 and final deliveries of Lots 4 and 5 of the Universal Exciter Upgrade program resulting in additional profit based on final costs at completion compared to prior estimates. These increases were offset in part by a decrease in aircraft weapons suspension and release systems resulting from a shift from primarily production efforts last year to lower-margin non-recurring development efforts on recently awarded long-term programs. The Communications and Space Products segment's operating loss for the year ended December 31, 2002 was $0.4 million or 0.9% of this segment's net sales compared to a loss of $0.4 million or 1.0% of this segment's net sales in 2001. Included in the 2002 operating loss was a $1.5 million charge taken in the first quarter to provide for manufacturing inefficiencies resulting from lowering our production levels of the Ku-Band down converter. Such production level decrease was prompted primarily by one of our primary customer's decrease in its forecasted demand for our Ku-Band down converters. The Engineered Materials segment's operating earnings for the year ended December 31, 2002 were $3.2 million or 8.3% of this segment's net sales compared to operating earnings for the year ended December 31, 2001 of $4.6 million or 12.6% of this segment's net sales. The net decrease in the Engineered Materials segment's operating earnings was due primarily to the aforementioned pension expense in 2002 compared to pension income in 2001, as well as a decrease in contribution from fiber composite waste tanks, due primarily to the commercial aviation industry's decreased demand for such tanks in 2002. Selling, general and administrative expenses for the year ended December 31, 2002 increased to $47.6 million or 14.5% of net sales from $34.0 million or 13.1% of net sales for the year ended December 31, 2001. This increase was primarily attributable to the acquisition of Condor in July 2002, twelve months of 18 Dynamic Systems' expenses in 2002, and the aforementioned change to pension expense in 2002 compared to pension income in 2001 and increased ESOP compensation expense. Research and development expense for the year ended December 31, 2002 decreased to $8.5 million or 2.6% of net sales from $8.8 million or 3.4% of net sales for the year ended December 31, 2001. The decrease was primarily attributable to higher expenditures in the Communications and Space Products segment in 2001 relating to fiber optics product development. Interest expense, net of interest income, for the year ended December 31, 2002 increased 123.6% to $5.0 million from $2.2 million for the year ended December 31, 2001, due primarily to interest expense associated with our $137.8 million principal amount Notes, increased amortization expense of deferred debt issuance costs associated with the offering of the Notes and increased amortization of deferred financing costs associated with our credit facility amended in November 2002, partially offset by an $0.8 million increase in interest income due primarily to a higher average cash and cash equivalent balance resulting from our offering of the Notes in April 2002 and stock offering in 2001. Interest expense for the year ended December 31, 2001 consisted primarily of interest expense on our Debentures, which were fully converted into common shares or redeemed in the fourth quarter of 2001. Income tax expense reflects our effective rate of 42.5% for the year ended December 31, 2002 compared to 38.6% for the year ended December 31, 2001. The increase in the effective tax rate was principally attributable to the increased amount of nondeductible, non-cash ESOP compensation expense and increase in state taxes in 2002. For the year ended December 31, 2002, earnings available for common shares before cumulative effect of a change in accounting principle decreased to $14.0 million or $0.81 per diluted common share on 17.4 million diluted shares from $14.8 million or $1.11 per diluted common share on 14.3 million diluted shares for the year ended December 31, 2001. For the year ended December 31, 2002, net earnings available for common shares after the cumulative effect of a change in accounting principle decreased to $10.6 million or $0.61 per diluted common share on 17.4 million diluted shares from $14.8 million or $1.11 per diluted common share on 14.3 million diluted shares for the year ended December 31, 2001. The cumulative effect of a change in accounting principle for the year ended December 31, 2002 was recorded as of January 1, 2002 and is shown net of a tax benefit of $0.8 million on the consolidated statement of earnings. This charge pertained to the impairment of goodwill and a trademark resulting from impairment tests performed in 2002, as required by SFAS No. 142. The impairment occurred in the Engineered Materials segment and is comprised of the following: $2.2 million and $1.9 million of goodwill and a trademark, respectively, related to our acquisition of Specialty Plastics and $0.1 million of goodwill related to our acquisition of Zenix. Dividends on preferred shares for the year ended December 31, 2001 were $0.2 million. On March 8, 2001, we converted all of our outstanding preferred shares into 1,067,281 common shares. No preferred dividends were paid after March 8, 2001. COMPARISON OF 2001 TO 2000 Net sales by segment were as follows:
TWELVE MONTHS ENDED DECEMBER 31, INCREASE ---------------------- FROM PRIOR SEGMENT 2001 2000 PERIOD - ------- --------- --------- ---------- (DOLLARS IN MILLIONS) Defense................................................ $183.5 $142.0 29.0% Communications and Space Products...................... 40.0 30.0 33.0% Engineered Materials................................... 36.5 34.8 5.0% ------ ------ ---- Total.................................................. $260.0 $206.8 26.0% ====== ====== ====
Net sales for the year ended December 31, 2001 increased 26.0% to $260.0 million from $206.8 million for the year ended December 31, 2000. This increase comprised sales growth of $41.5 million for the Defense 19 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 weapons suspension and release systems, integrated combat systems, technology services, electroceramic 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 3.4% 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. 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. IN-PROCESS RESEARCH AND DEVELOPMENT For the year ended December 31, 2002, IPR&D of $0.2 million related to a Condor project that had not reached technological feasibility and that had no alternative future uses. The amount allocated to such project was expensed as of the date of the acquisition. For the year ended December 31, 2001, IPR&D of $6.7 million related to an AIL project that had not reached technological feasibility and that had no alternative future uses. The amount allocated to such project was 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 was completed, resulting in sales of Ku-Ku Band Converters in 2001. During 2000 and the first six months of 2001, the efforts required to develop the in-process technology of this project 20 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. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Our cash, cash equivalents and marketable securities increased 128.3% to $132.5 million at December 31, 2002 from $58.0 million at December 31, 2001. This increase was due primarily to the aforementioned issuance of the Notes in April 2002, which resulted in gross cash proceeds of $137.8 million before commissions of $4.1 million, and cash provided by operations of $31.9 million. The increase in cash and cash equivalents was offset by $59.0 million paid for the acquisition of Condor in July 2002, net of cash acquired, $4.1 million paid for transaction costs related to the Condor acquisition, $27.3 million of cash restricted to collateralize outstanding letters of credit, $7.1 million for the purchase of capital equipment and $2.4 million for the payment of common share dividends. During 2001, cash, cash equivalents and marketable securities increased to $58.0 million from $16.6 million, primarily due to the receipt of net proceeds of approximately $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 uses of $13.9 million for the acquisition of Dynamic Systems, $14.3 million for purchases of capital equipment, $3.2 million for the repurchase of 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. Restricted cash of $27.3 million at December 31, 2002 represents collateral backing 105% of outstanding letters of credit assumed in connection with the acquisition of Condor. As the letters of credit expire or are cancelled, the collateral will be released. In the fourth quarter of 2002, we increased our credit facility to $200.0 million, which will allow for issuance of letters of credit under the amended facility and the release of restricted cash. Accounts receivable increased 20.6% to $100.6 million at December 31, 2002 from $83.4 million at December 31, 2001 due primarily to the acquisition of Condor. Excluding the effects of Condor, accounts receivable increased $2.5 million from December 31, 2001. Inventories increased 41.3% to $32.4 million at December 31, 2002 from $22.9 million at December 31, 2001 due primarily to the acquisition of Condor. Excluding the effects of Condor, inventories increased $2.9 million from December 31, 2001. The notes receivable of $3.0 million at December 31, 2002 (of which $0.4 million is included in current assets at December 31, 2002) are comprised of a note related to the sale of property in Deer Park in June 2000, which had a balance of $1.1 million at December 31, 2002, and $1.9 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 facility 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 increased 21.4% to $20.3 million at December 31, 2002 from $16.7 million at December 31, 2001 due to receipts of advances by Condor subsequent to its acquisition date, offset by the use of previously received advances for costs incurred on foreign contracts. In 2002, capital expenditures of $7.1 million, excluding the effects of the Condor acquisition, have decreased from the prior year as we incurred significant capital expenditures in 2001 at the Deer Park facility in anticipation of a potential sale leaseback, which did not occur in 2002. We are currently reviewing the status of Deer Park and all of our facilities in light of recent acquisitions. 21 FINANCING ACTIVITIES Credit Facility At December 31, 2002, we have a $200.0 million credit facility with a consortium of banks, led by Citibank, N.A. as the administrative agent, Fleet National Bank as the syndication agent and Wachovia Bank, N.A. as the documentation agent. The facility expires in November 2005 and amended the $69.0 million credit facility in place at December 31, 2001. The credit facility provides us with sub-limits of borrowing up to $125.0 million for acquisition-related financing and up to $125.0 million in standby letters of credit financing. The potential cash borrowing under the facility is reduced by the amount of outstanding letters of credit. Borrowings under the facility will be priced initially at LIBOR plus a predetermined amount, ranging from 1.25% to 1.75%, depending on our consolidated leverage ratio at the time of the borrowing. At December 31, 2002, LIBOR was approximately 1.4% and the applicable adjustment to LIBOR was 1.25%. The facility requires us to pay each lender in the consortium a commitment fee on the average daily unused portion of their respective commitment at a rate equal to 0.25%. There were no direct borrowings outstanding under the credit facility at December 31, 2002 or 2001. Letters of credit outstanding at December 31, 2002 pertaining to the credit facility were $31.5 million, resulting in $93.5 million available at year end for standby letters of credit, if needed. In connection with the credit facility, we are required to maintain both financial and non-financial covenants and ratios, including but not limited to minimum tangible net worth plus subordinated debt, leverage ratio, fixed charge coverage ratio, earnings before interest and taxes to interest expense ratio, total unsubordinated debt to tangible net worth, net income and dividends. As of December 31, 2002, we were in compliance with our covenants. The credit facility is secured by our accounts receivable, inventory and machinery and equipment. As of December 31, 2001, we had a $69.0 million long-term credit facility with a consortium of banks co-led by Mellon and EAB. This was the facility amended in 2002. The credit facility included $19.0 million in five-year term debt, payable in quarterly installments of $1.0 million, and $50.0 million in revolving debt. Borrowings under the agreement bore interest based on LIBOR plus an applicable margin of up to 2.00%, depending on the consolidated leverage ratio as defined in the agreement. Borrowings were 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 were paid in full with the proceeds of our public stock offering. At December 31, 2001, there were no borrowings under the $50.0 million revolving credit facility. 5.25% Convertible Subordinated Notes due 2007 In April 2002, we completed the offering of the Notes and received proceeds of $133.7 million, net of $4.1 million of commissions paid. Interest payments on the Notes are due April 15 and October 15 of each year, commencing on October 15, 2002. Accrued interest payable, included in accrued expenses on our consolidated balance sheet, at December 31, 2002 was $1.5 million. The Notes are convertible, unless previously redeemed or repurchased by us, at the option of the holder at any time prior to maturity, into our common shares at an initial conversion price of $31.26 per share, subject to adjustment in certain events. As of December 31, 2002, there had been no conversions. 7% Convertible Subordinated Debentures due 2011 During the fourth quarter of 2001, the Company redeemed all of its outstanding Debentures. Debentures with an outstanding face value of $22.1 million were converted into 1,005,250 common shares under the conversion rights of the Debentures and $0.2 million face value was redeemed for cash plus accrued interest. 22 Employee Stock Ownership Trust ("ESOT") Loan In July 2001, we paid in full our direct 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 "Acquisitions and Disposition," 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 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. We believe that, for the foreseeable future, we have adequate liquidity and sufficient capital to fund our currently anticipated requirements for working capital, capital expenditures, including acquisitions, research and development expenditures, interest payments and servicing of the ESOP indirect loan. We continue to focus on positioning ourselves 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 facility; issuance of our common stock or other equity securities; and/or convertible or other debt offerings. COMMITMENTS AND CONTINGENCIES In order to aggregate all commitments and contractual obligations as of December 31, 2002, we have included the following table. Our commitments under letters of credit and advance payment and performance bonds relate 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 amounts for letters of credit and performance bonds represent the amount of commitment expiration per period.
PAYMENTS DUE IN (IN MILLIONS): ----------------------------------------------- 2007 AND TOTAL 2003 2004 2005 2006 BEYOND ------ ----- ---- ----- ---- -------- 5.25% Convertible Subordinated Notes due 2007......................................... $137.8 $ -- $ -- $ -- $ -- $137.8 Operating leases............................... 47.2 8.0 6.4 5.5 4.4 22.9 Letters of credit.............................. 86.9 21.4 2.0 62.9 0.2 0.4 Advance payment and performance bonds.......... 2.3 0.6 -- -- -- 1.7 ------ ----- ---- ----- ---- ------ Total.......................................... $274.2 $30.0 $8.4 $68.4 $4.6 $162.8 ====== ===== ==== ===== ==== ======
Additionally, we are subject to certain legal actions that arise out of the normal course of business. It is our belief that the ultimate outcome of these actions will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. CONCENTRATION OF SALES We conduct a significant amount of our business with the United States Government. Domestic U.S. Government sales, including sales to prime contractors of the U.S. Government, accounted for approximately 75%, 69% and 63% of our total net sales for 2002, 2001 and 2000, respectively. In addition, sales from the Universal Exciter Upgrade program accounted for approximately 14%, 15% and 15% of our total net sales in 2002, 2001 and 2000, respectively. 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 also affect our ability to acquire funds from our credit facility due to covenant restrictions or from other sources. As of December 31, 2002, one customer, a prime contractor, in addition to the U.S. Government accounted for more than 10% of our consolidated accounts receivable. 23 BACKLOG The funded backlog of unfilled orders at December 31, 2002 increased to $375.0 million from $294.8 million at December 31, 2001. Our backlog consists primarily of current orders under long-lived, mission-critical programs of key defense platforms. NEW ACCOUNTING STANDARDS BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 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. SFAS No. 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 definite lives will continue to be amortized over their estimated useful lives. We adopted SFAS No. 142 effective January 1, 2002; however, the provisions that provide for the non-amortization of goodwill were effective July 1, 2001 for acquisitions completed after the issuance of SFAS No. 141. Accordingly, the goodwill acquired in connection with the purchase of Dynamic Systems in October 2001 and Condor in July 2002 is not being amortized. We performed the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 using the two-step process prescribed in SFAS No. 142. The first step was a review for potential impairment, while the second step measured the amount of the impairment. The impairment charge resulting from these transitional impairment tests was reflected as a cumulative effect of a change in accounting principle as of January 1, 2002. The $3.4 million charge, net of an $0.8 million tax benefit, occurred in the Engineered Materials segment and is comprised of $2.2 million and $1.9 million of impaired goodwill and trademark, respectively, related to the acquisition of Specialty Plastics and $0.1 million of impaired goodwill related to the acquisition of Zenix. IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets," 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 Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations," for a disposal of a segment of a business. We adopted SFAS No. 144 as of January 1, 2002. The effect of the adoption of this SFAS was not material to our operating results or financial position. EXIT OR DISPOSAL ACTIVITIES On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability be recognized for costs associated with an exit or disposal activity only when the liability is incurred. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146, effective January 1, 2003, did not have a material effect on our consolidated financial statements. ACCOUNTING FOR STOCK-BASED COMPENSATION In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure -- an Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires more prominent and 24 more frequent disclosures in both annual and interim financial statements about the method of accounting used for stock-based compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are effective for years ending after December 15, 2002 and have been reflected in Note 14 to the consolidated financial statements. We do not plan to voluntarily change our method of accounting for stock-based compensation. However, should we change our method of accounting for stock-based compensation in the future, that change would fall under the provisions of SFAS Nos. 123 and 148. COMMON SHARE PRICES EDO common shares are traded on the New York Stock Exchange. As of February 26, 2003, there were 1,964 shareholders of record (brokers and nominees counted as one each). The price range in 2002 and 2001 was as follows:
2002 2001 ----------------- ----------------- HIGH LOW HIGH LOW ------- ------- ------- ------- 1st Quarter.................................... 31.1500 21.9900 15.1000 7.1875 2nd Quarter.................................... 32.9000 25.9000 22.9500 12.7500 3rd Quarter.................................... 28.4900 17.5000 28.7500 14.9100 4th Quarter.................................... 22.6500 15.5000 31.9000 22.4000
DIVIDENDS During 2002 and 2001, the Board of Directors approved the payment of quarterly cash dividends of $0.03 per common share. The Company's credit facility places certain limits on the payment of cash dividends. "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, upgrades and spares support 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 our control; 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 production costs and prices and market and consumer base development of new product programs. Achievement of margins on sales, earnings and cash flow can be affected by: unanticipated technical problems; government termination of contracts for convenience; decline in expected levels of sales; underesti- 25 mation of anticipated costs on specific programs; the ability to effect acquisitions; and risks inherent in integrating recent acquisitions into our overall structure. Expectations of future income tax rates can be affected by a variety of factors, including statutory changes in Federal and state tax rates, nondeductibility of goodwill amortization and IPR&D acquired in a stock purchase business combination and the nondeductibility of our noncash ESOP compensation expense. The Company has no obligation to update any forward-looking statements. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF EARNINGS EDO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONTINUING OPERATIONS: NET SALES................................................. $328,876 $259,961 $206,822 -------- -------- -------- COSTS AND EXPENSES Cost of sales........................................... 240,850 189,733 151,512 Selling, general and administrative..................... 47,584 34,013 29,205 Research and development................................ 8,492 8,750 5,371 Write-off of purchased in-process research and development and merger-related costs................. 567 1,318 11,495 Defined benefit pension plan curtailment loss........... 1,998 -- -- Post-retirement curtailment gain........................ -- (929) -- -------- -------- -------- 299,491 232,885 197,583 -------- -------- -------- OPERATING EARNINGS........................................ 29,385 27,076 9,239 NON-OPERATING INCOME (EXPENSE) Interest income......................................... 1,729 915 1,881 Interest expense........................................ (6,685) (3,131) (4,319) Other, net.............................................. (95) (971) (216) -------- -------- -------- (5,051) (3,187) (2,654) -------- -------- -------- Earnings from continuing operations before income taxes and cumulative effect of a change in accounting principle............................................ 24,334 23,889 6,585 Income tax expense...................................... (10,342) (9,210) (5,264) -------- -------- -------- EARNINGS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.............. 13,992 14,679 1,321 DISCONTINUED OPERATIONS: Gain from discontinued satellite products business, net of tax............................................... -- 273 -- -------- -------- -------- EARNINGS FROM DISCONTINUED OPERATIONS..................... -- 273 -- -------- -------- -------- EARNINGS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE................................................. 13,992 14,952 1,321 Cumulative effect of a change in accounting principle, net of tax of $790............................................ (3,363) -- -- Dividends on preferred shares............................... -- 194 881 -------- -------- -------- NET EARNINGS AVAILABLE FOR COMMON SHARES.................... $ 10,629 $ 14,758 $ 440 -------- -------- -------- EARNINGS (LOSS) PER COMMON SHARE: Basic: Continuing operations................................... $ 0.82 $ 1.14 $ 0.05 Discontinued operations................................. -- 0.02 -- -------- -------- -------- Earnings per Common Share before Cumulative Effect of a Change in Accounting Principle............................ $ 0.82 $ 1.16 $ 0.05 Cumulative effect of a change in accounting principle, net of tax.................................................... (0.20) -- -- -------- -------- -------- NET EARNINGS PER COMMON SHARE-BASIC......................... $ 0.62 $ 1.16 $ 0.05 -------- -------- -------- Diluted: Continuing operations................................... $ 0.81 $ 1.09 $ 0.05 Discontinued operations................................. -- 0.02 -- -------- -------- -------- Earnings per Common Share before Cumulative Effect of a Change in Accounting Principle............................ $ 0.81 $ 1.11 $ 0.05 Cumulative effect of a change in accounting principle, net of tax.................................................... (0.20) -- -- -------- -------- -------- NET EARNINGS PER COMMON SHARE-DILUTED....................... $ 0.61 $ 1.11 $ 0.05 ======== ======== ======== UNAUDITED PRO FORMA AMOUNTS ASSUMING RETROACTIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE: Net Earnings Available for Common Shares.................. -- $ 15,329 $ 933 Basic Net Earnings per Common Share....................... -- $ 1.18 $ 0.10 Diluted Net Earnings per Common Share..................... -- $ 1.13 $ 0.10 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 27 CONSOLIDATED BALANCE SHEETS EDO CORPORATION AND SUBSIDIARIES
DECEMBER 31, ---------------------- 2002 2001 --------- --------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $132,320 $ 57,841 Restricted cash........................................... 27,347 -- Marketable securities..................................... 193 190 Accounts receivable, net.................................. 100,594 83,407 Inventories............................................... 32,406 22,937 Deferred income tax asset, net............................ 3,222 3,018 Prepayments and other..................................... 3,133 2,346 -------- -------- Total current assets................................... 299,215 169,739 -------- -------- Property, plant and equipment, net.......................... 64,472 62,255 Notes receivable............................................ 2,556 2,910 Goodwill.................................................... 61,352 22,874 Other intangible assets..................................... 11,867 325 Deferred income tax asset, net.............................. 20,439 2,553 Other assets................................................ 21,673 24,974 -------- -------- $481,574 $285,630 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 19,108 $ 12,743 Accrued liabilities....................................... 55,448 34,654 Contract advances and deposits............................ 20,277 16,702 Current portion of note payable........................... -- 463 -------- -------- Total current liabilities.............................. 94,833 64,562 -------- -------- Long-term debt.............................................. 137,800 -- Post-retirement benefits obligations........................ 78,643 44,675 Environmental obligation.................................... 2,025 1,895 Shareholders' equity: Preferred shares, par value $1 per share, authorized 500,000 shares......................................... -- -- Common shares, par value $1 per share, authorized 50,000,000 shares in 2002; 19,790,477 issued in 2002 and 2001............................................... 19,790 19,790 Additional paid-in capital................................ 147,091 143,747 Retained earnings......................................... 56,325 47,744 Accumulated other comprehensive loss, net of income tax benefit................................................ (33,899) (13,385) Treasury shares at cost (94,322 shares in 2002 and 182,459 shares in 2001)........................................ (1,321) (2,461) Unearned Employee Stock Ownership Plan shares............. (18,541) (19,792) Deferred compensation under Long-Term Incentive Plan...... (579) (300) Management group receivables.............................. (593) (845) -------- -------- Total shareholders' equity............................. 168,273 174,498 -------- -------- $481,574 $285,630 ======== ========
See accompanying Notes to Consolidated Financial Statements. 28 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY EDO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 2002 2001 2000 ----------------- ----------------- ----------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ -------- ------ -------- ------ (IN THOUSANDS) PREFERRED SHARES Balance at beginning of year...... $ -- -- $ 49 49 $ 57 57 Shares converted to common shares......................... -- -- (49) (49) (8) (8) -------- ------ -------- ------ -------- ------ Balance at end of year............ -- -- -- -- 49 49 -------- ------ -------- ------ -------- ------ COMMON SHARES Balance at beginning of year...... 19,790 19,790 15,007 15,007 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 19,790 19,790 15,007 15,007 -------- ------ -------- ------ -------- ------ ADDITIONAL PAID-IN CAPITAL Balance at beginning of year...... 143,747 58,614 28,483 Exercise of stock options......... (466) (2,405) (183) Income tax benefit related to stock options and Long-Term Incentive Plan................. 713 1,118 42 Shares used for payment of directors' fees................ 64 35 (125) Purchase of AIL Technologies, Inc............................ -- -- 33,733 Shares used for Long-Term Incentive Plan................. 241 (73) (432) Conversion of preferred shares to common shares.................. -- (1,018) (3,227) Conversion of subordinated debentures..................... -- 8,525 -- Sale of stock in public offering....................... -- 77,775 -- Compensation expense on accelerated options............ -- 276 -- Employee Stock Ownership Plan shares committed-to-be-released....... 2,792 900 323 -------- -------- -------- Balance at end of year............ 147,091 143,747 58,614 -------- -------- --------
29 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED) EDO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 2002 2001 2000 ----------------- ----------------- ----------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ -------- ------ -------- ------ (IN THOUSANDS) RETAINED EARNINGS Balance at beginning of year...... 47,744 34,803 35,667 Net earnings...................... 10,629 14,952 1,321 Common share dividends (12 cents per share)..................... (2,048) (1,840) (1,428) Dividends on preferred shares..... -- (194) (881) Tax benefit on unallocated preferred share dividends...... -- 23 124 -------- -------- -------- Balance at end of year............ 56,325 47,744 34,803 -------- -------- -------- ACCUMULATED OTHER COMPREHENSIVE LOSS Balance at beginning of year...... (13,385) (61) (255) Unrealized gain on marketable securities, net of tax......... -- 61 194 Unrealized gain on foreign currency....................... 86 -- -- Additional minimum pension liability, net of tax.......... (20,600) (13,385) -- -------- -------- -------- Balance at end of year............ (33,899) (13,385) (61) -------- -------- -------- TREASURY SHARES AT COST Balance at beginning of year...... (2,461) (182) (19,388) (1,370) (23,967) (1,694) Shares used for exercise of stock options........................ 952 69 4,297 314 280 20 Shares used for payment of directors' fees................ 78 6 122 9 251 18 Shares used for (repurchased from) Long-Term Incentive Plan....... 110 13 (63) (6) 813 57 Shares used for conversion of preferred shares............... -- -- -- -- 3,235 229 Shares used for conversion of subordinated debentures........ -- -- 13,591 1,005 -- -- Repurchase of Employee Stock Ownership Plan shares.......... -- -- (1,020) (134) -- -- -------- ------ -------- ------ -------- ------ Balance at end of year............ (1,321) (94) (2,461) (182) (19,388) (1,370) -------- ------ -------- ------ -------- ------ EMPLOYEE STOCK OWNERSHIP TRUST LOAN OBLIGATION Balance at beginning of year...... -- (5,781) (7,429) Repayments made during year....... -- 890 1,648 Restructuring of EDO Employee Stock Ownership Plan........... -- 4,891 -- -------- -------- -------- Balance at end of year............ -- -- (5,781) -------- -------- --------
30 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- (CONTINUED) EDO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 2002 2001 2000 ----------------- ----------------- ----------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ -------- ------ -------- ------ (IN THOUSANDS) DEFERRED COMPENSATION UNDER LONG- TERM INCENTIVE PLAN Balance at beginning of year...... (300) (423) (769) Shares used for Long-Term Incentive Plan................. (480) (148) (392) Amortization of Long-Term Incentive Plan deferred compensation expense........... 201 271 738 -------- -------- -------- Balance at end of year............ (579) (300) (423) -------- -------- -------- UNEARNED EMPLOYEE STOCK OWNERSHIP PLAN COMPENSATION Balance at beginning of year...... (19,792) (15,782) -- Purchase of AIL Technologies, Inc............................ -- -- (17,302) Restructuring of EDO Employee Stock Ownership Plan........... -- (4,891) -- Employee Stock Ownership Plan shares committed-to-be-released....... 1,251 881 1,520 -------- -------- -------- Balance at end of year............ (18,541) (19,792) (15,782) -------- -------- -------- MANAGEMENT GROUP RECEIVABLES Balance at beginning of year...... (845) (1,220) -- Purchase of AIL Technologies, Inc............................ -- -- (1,220) Payments received on management loans.......................... 252 375 -- -------- -------- -------- Balance at end of year............ (593) (845) (1,220) -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY.......... $168,273 $174,498 $ 65,818 ======== ======== ======== COMPREHENSIVE (LOSS) INCOME Net earnings...................... $ 10,629 $ 14,952 $ 1,321 Additional minimum pension liability, net of income tax benefit of $14,316 in 2002 and $9,302 in 2001................. (20,600) (13,385) -- Unrealized gain on marketable securities, net of income tax expense of $31 in 2001 and $100 in 2000........................ -- 61 194 Unrealized gain on foreign currency....................... 86 -- -- -------- -------- -------- Comprehensive (loss) income....... $ (9,885) $ 1,628 $ 1,515 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 31 CONSOLIDATED STATEMENTS OF CASH FLOWS EDO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES: Earnings from operations.................................. $ 10,629 $ 14,679 $ 1,321 Adjustments to earnings to arrive at cash provided by operations: Depreciation........................................... 10,365 9,686 7,740 Amortization........................................... 956 1,710 1,701 Deferred tax (benefit) expense......................... (2,984) 5,941 1,292 Write-off of purchased in-process research and development.......................................... 150 -- 6,700 Real estate tax assessment adjustment.................. -- 7,846 -- Bad debt expense....................................... 407 220 287 Gain on repurchase of debentures....................... -- (171) (215) Loss (gain) on sale of property, plant and equipment... 53 (76) (7) Gain on sale of marketable securities.................. -- (81) -- Deferred compensation expense.......................... 201 271 738 Non-cash Employee Stock Ownership Plan compensation expense.............................................. 4,043 1,781 1,843 Dividends on unallocated Employee Stock Ownership Plan shares............................................... 312 80 -- Non-cash compensation expense.......................... -- 276 -- Common shares issued for directors' fees............... 142 157 126 Income tax benefit from stock options and Long-Term Incentive Plan....................................... 713 1,118 42 Cumulative effect of a change in accounting principle............................................ 3,363 -- -- Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable.................................. (2,519) (10,753) (4,388) Inventories.......................................... (2,926) 2,033 (2,214) Prepayments and other assets......................... 220 (629) (1,825) Accounts payable, accrued liabilities and other...... 5,217 (4,974) (11,923) Contract advances and deposits....................... 3,575 (15,017) 8,116 -------- -------- -------- Cash provided by operations................................. 31,917 14,097 9,334 INVESTING ACTIVITIES: Purchase of plant and equipment........................... (7,093) (14,298) (3,861) Payments received on notes receivable..................... 350 347 168 Proceeds from sale of property, plant and equipment....... 1 280 4,569 Purchase of marketable securities......................... (3) (59) (818) Sale or redemption of marketable securities............... -- 14,455 2,541 Proceeds from sale of discontinued operations............. -- -- 8,641 Restricted cash........................................... (27,347) -- -- Cash paid for acquisitions, net of cash acquired.......... (59,024) (13,938) (15,004) -------- -------- -------- Cash used by investing activities........................... (93,116) (13,213) (3,764)
32 CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) EDO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (IN THOUSANDS) FINANCING ACTIVITIES: Issuance of convertible subordinated notes................ 137,800 -- -- Proceeds from exercise of stock options................... 486 1,892 97 Proceeds from management group receivables................ 252 375 -- 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) Purchase of treasury shares............................... -- (1,020) -- Payment of EDO ESOP loan obligation....................... -- (4,891) -- Payment made on note payable.............................. (500) (500) (500) Payment of common share cash dividends.................... (2,360) (1,920) (1,428) Payment of preferred share cash dividends................. -- (194) (881) -------- -------- -------- Cash provided (used) by financing activities................ 135,678 54,749 (17,161) -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 74,479 55,633 (11,591) Cash and cash equivalents at beginning of year.............. 57,841 2,208 13,799 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $132,320 $ 57,841 $ 2,208 ======== ======== ======== Supplemental disclosures: Cash paid for: Interest............................................... $ 3,878 $ 2,166 $ 3,500 Income taxes........................................... $ 14,063 $ 5,913 $ 3,756 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 33 CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) EDO CORPORATION AND SUBSIDIARIES EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION AND BUSINESS The consolidated financial statements include the accounts of EDO Corporation and all wholly-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates in three segments: Defense, Communications and Space Products, and Engineered Materials. The Company discontinued its former satellite products business (Barnes Engineering Company) in 1999. (b) RESTRICTED CASH At December 31, 2002, there is restricted cash of $27.3 million, which relates to amounts collateralizing the outstanding letters of credit assumed as part of the acquisition of Condor Systems, Inc. (Note 2). As the letters of credit expire or are cancelled, collateral is released. On November 8, 2002, the Company increased its credit facility from $69.0 million to $140.0 million and again, on December 20, 2002, from $140.0 million to $200.0 million, which will allow the Company to replace the letters of credit under the amended facility and release the restricted cash. (c) 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. (d) 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 and other milestones are achieved or services are provided. These projections are revised throughout the lives of the contracts. Adjustments to profits resulting from such revisions are made cumulative to the date of change and may affect current period earnings. Gross profit is affected by a variety of factors, including the mix of products, systems and services sold or provided, production efficiencies, price competition and general economic conditions. 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. (e) 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 and which relate to a specific technology or application and which may not have alternative uses are charged to cost of sales when such circumstances are identified. All other inventories are stated at the lower of cost (principally first-in, first-out method) or market. From time to time, the Company manufactures certain products prior to receiving firm contracts in anticipation of future demand. Such costs are inventoried and are incurred to help maintain stable and efficient production schedules. 34 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 Several factors may influence the sale and use of the Company's inventories, including the decision to exit a product line, technological change, new product development and/or revised estimates of future product demand. If inventory is determined to be overvalued due to one or more of the above factors, the Company would recognize such loss in value at the time of such determination. 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. (f) LONG-LIVED ASSETS, OTHER THAN GOODWILL AND OTHER INTANGIBLES 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. In those cases where the Company determines that the useful life should be shortened, the Company would depreciate the net book value in excess of salvage value over its revised remaining useful life thereby increasing depreciation expense. Factors such as technological advances, changes to the Company's business model, changes in the Company's capital strategy, changes in the planned use of equipment, fixtures, software or changes in the planned use of facilities could result in shortened useful lives. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the undiscounted cash flows, excluding interest, is less than the asset's carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. The Company's estimates of undiscounted cash flow may differ from actual cash flow due to such factors as those listed above. Costs associated with the acquisition and development of software for internal use are recognized in accordance with Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In 2002 and 2001, the Company capitalized approximately $0.3 million and $1.7 million, respectively, of such costs. 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 $5.5 million and $0.5 million are included in other assets at December 31, 2002 and 2001, respectively. (g) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") Nos. 141, "Business Combinations," and 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 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. SFAS No. 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 definite lives will continue to be amortized over their estimated useful lives. SFAS No. 142 was adopted by the Company effective January 1, 2002; however, the provisions that provide for the non-amortization of goodwill were effective July 1, 2001 for acquisitions completed after the issuance of SFAS No. 141. Accordingly, the 35 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 goodwill acquired in connection with the purchase of Dynamic Systems, Inc. in October 2001 and Condor Systems, Inc. in July 2002 is not being amortized. 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. The Company performed the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002, using the two-step process prescribed in SFAS No. 142. The first step was a review for potential impairment, while the second step measured the amount of the impairment. The impairment charge resulting from these transitional impairment tests was reflected as a cumulative effect of a change in accounting principle as of January 1, 2002. The $3.4 million charge, net of a tax benefit of $0.8 million, occurred in the Engineered Materials segment and is comprised of $2.2 million and $1.9 million of impaired goodwill and trademark, respectively, related to the acquisition of Specialty Plastics and $0.1 million of impaired goodwill related to the acquisition of Zenix. In the case of Zenix, the trend in sales and earnings performance has been lower than expected resulting in the impairment of the entire goodwill carrying value. In the case of Specialty Plastics, the fair value of this reporting unit was estimated using a discounted cash flow analysis, also resulting in an impairment loss of the entire goodwill carrying value. The changes in the carrying amount of goodwill by segment for the year ended December 31, 2002 are as follows:
COMMUNI- CATIONS AND SPACE ENGINEERED DEFENSE PRODUCTS MATERIALS TOTAL ------- --------- ---------- ------- (IN THOUSANDS) Balance as of January 1, 2002................ $20,600 $ -- $ 2,274 $22,874 Impairment loss.............................. -- -- (2,274) (2,274) Acquisition of Condor Systems, Inc........... 37,060 3,692 -- 40,752 ------- ------ ------- ------- Balance as of December 31, 2002.............. $57,660 $3,692 $ -- $61,352 ======= ====== ======= =======
Summarized below are intangible assets subject to amortization as of December 31:
2002 2001 ------- ----- (IN THOUSANDS) Capitalized non-compete agreements related to the acquisition of Dynamic Systems, Inc. ..................... $ 200 $ 200 Capitalized technical rights related to the acquisition of Zenix..................................................... -- 300 Purchased technologies related to the acquisition of Condor Systems, Inc. ............................................ 11,648 -- Other intangible assets related to the acquisition of Condor Systems, Inc. ............................................ 916 -- ------- ----- 12,764 500 Less accumulated amortization............................... (897) (175) ------- ----- $11,867 $ 325 ======= =====
The non-compete agreements and the other intangible assets are being amortized on a straight-line basis over a two-year period. The purchased technologies are being amortized on a straight-line basis over an eight-year period. The amortization expense for the years ended December 31, 2002, 2001 and 2000 amounted to $0.9 million, $0.1 million and $0.1 million, respectively. Amortization expense for 2003, 2004, 2005, 2006, 36 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 2007 and thereafter related to these intangible assets are estimated to be $2.0 milion, $1.7 million, $1.5 million, $1.5 million, $1.5 million and $3.7 million, respectively. Since the total trademark carrying amount of $1.9 million was written off in 2002 as part of the cumulative effect of a change in accounting principle, there are no intangible assets other than goodwill not subject to amortization as of December 31, 2002. Net earnings for the year ended December 31, 2001 included goodwill and trademark amortization expense of approximately $0.9 million before tax. Excluding this amount net of tax would have resulted in basic net earnings per common share and diluted net earnings per common share of $1.18 and $1.13, respectively, for the year ended December 31, 2001. Net earnings for the year ended December 31, 2000 included goodwill and trademark amortization expense of $1.0 million before tax. Excluding this amount net of tax would have resulted in basic net earnings per common share and diluted net earnings per common share of $0.10 and $0.10, respectively, for the year ended December 31, 2000. (h) 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. (i) 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. (j) FINANCIAL INSTRUMENTS The net carrying value of notes receivable approximates fair value based on current rates for comparable commercial mortgages. The fair value of the Company's 5.25% Convertible Subordinated Notes due 2007 (the "Notes") at December 31, 2002 approximates its carrying value based on recent market transactions. The fair value of the environmental obligation approximates its carrying value since it has been discounted. The fair values of all other financial instruments approximate book values because of the short-term maturities of these instruments. (k) 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 accounting principles generally accepted in the United States. Actual results could differ from these and other estimates. (l) 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. 37 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 (m) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and on June 15, 2000, issued SFAS 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. (n) RECLASSIFICATIONS Certain reclassifications have been made to prior year presentations to conform to current year presentations. (o) NEW ACCOUNTING STANDARDS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," 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. The Company adopted SFAS No. 144 as of January 1, 2002. The effect of the adoption of this SFAS was not material to the Company's operating results or financial position. On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability be recognized for costs associated with an exit or disposal activity only when the liability is incurred. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146, effective January 1, 2003, did not have a material effect on the Company's operating results or financial position. In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires more prominent and more frequent disclosures in both annual and interim financial statements about the method of accounting used for stock-based compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are effective for years ending after December 15, 2002 and accordingly are reflected in Note 14. Presently, the Company does not plan to voluntarily change its method of accounting for stock-based compensation. However, should the Company change its method of accounting for stock-based compensation in the future, that change would fall under the provisions of SFAS Nos. 123 and 148. (2) ACQUISITIONS On July 26, 2002, the Company acquired substantially all of the assets of Condor Systems, Inc., a privately-held defense electronics company and its domestic subsidiary (together, "Condor") for $61.9 million in cash, in addition to transaction costs of $4.1 million, and the assumption of certain normal employee benefit obligations, certain trade and supplier payables and certain other accrued liabilities primarily related to contract loss reserves. In addition, the Company assumed approximately $28.0 million of outstanding letters of credit and deposited $5.0 million into an escrow account to be released upon settlement of the closing Condor 38 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 balance sheet. Condor had been operating under protection of Chapter 11 of the U.S. Bankruptcy Code. The acquisition is expected to expand the Company's electronic warfare business in the areas of reconnaissance and surveillance systems. The acquisition was accounted for as a purchase and, accordingly, Condor's operating results are included in the Company's consolidated financial statements since the acquisition date. Condor became part of the Company's Defense and Communications and Space Products segments. Associated with the acquisition and included in operating earnings for 2002 is $0.6 million of merger-related costs, of which $0.2 million represents the write-off of purchased in-process research and development ("IPR&D"). This IPR&D was determined by an independent third party appraiser to not have reached technological feasibility and to not have alternative future use. The development project related to detecting and locating weak modulated continuous wave signals. Unaudited pro forma results of operations, assuming the acquisition of Condor had been completed at the beginning of each period, which include adjustments to net sales, cost of sales, interest income and expense, amortization expense, purchased IPR&D and other merger-related costs, income tax expense and assuming a retroactive effect of a change in accounting principle upon adoption of SFAS No. 142 are as follows:
2002 2001 ----------- ----------- (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales................................................... $383,057 $337,048 Net earnings (loss) before cumulative effect of a change in accounting principle...................................... $ 11,360 $(25,794) Net earnings (loss) available for common shares............. $ 7,997 $(29,569) Diluted earnings (loss) per common share.................... $ 0.46 $ (2.31) ======== ========
The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had this acquisition been completed at the beginning of the periods, or of the results which may occur in the future. The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisition. The excess of the purchase price over the net assets acquired recorded as goodwill, IPR&D and other intangible assets is deductible for tax purposes over 15 years.
AT JULY 26, 2002 ---------------- (IN THOUSANDS) Current assets.............................................. $ 29,964 Property, plant and equipment............................... 5,543 Goodwill.................................................... 40,752 Purchased in-process research and development............... 150 Purchased technologies (eight-year life).................... 11,648 Other intangible assets subject to amortization (two-year life)..................................................... 916 Other assets................................................ 76 Current liabilities......................................... (22,907) -------- Net assets acquired......................................... $ 66,142 ========
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 39 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 Company paid $13.7 million, including transaction costs and subsequent to a $0.2 million reduction in the purchase price, and accounted for the acquisition as a purchase. Accordingly, the operating results of Dynamic Systems, Inc. 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 2001 and 2000. The following table summarizes the 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 Other 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 as a purchase and is included in the Company's results of operations since the date of acquisition. The transaction resulted in goodwill of $3.6 million. Associated with this merger and included in operating earnings in 2000 are a $6.7 million write-off of purchased IPR&D, described more fully below, $1.5 million of severance costs and $3.3 million of other merger-related costs. Such costs are included in write-off of purchased in-process research and development and merger-related costs in the accompanying consolidated statements of earnings. The $1.5 million of severance costs pertain to an AIL employee group of approximately 200, all of which was paid as of December 31, 2001. The IPR&D related to a project that had not reached technological feasibility and that had no alternative future uses. The amount allocated to the project was expensed as of the date of acquisition. The development project related to a generic satellite subsystem 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 40 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 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 2000, which include adjustments to interest expense, amortization expense and income tax expense are as follows:
2000 ------------------------- (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales from continuing operations........................ $250,080 Net loss from continuing operations available for common shares.................................................... $ (1,961) Basic loss per common share from continuing operations...... $ (0.18) ========
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 period, 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 a $1.5 million note to be paid over three years. The note payable (fully paid as of December 31, 2002 and $0.5 million 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 was approximately $4.4 million. SUBSEQUENT EVENTS (UNAUDITED) In February 2003, a wholly-owned subsidiary of the Company acquired all of the stock of Advanced Engineering & Research Associates, Inc. ("AERA"), a privately-held company located 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 such services the Company offers. The preliminary purchase price was $38.0 million, which included an amount placed in escrow. The acquisition will be accounted for as a purchase, and the operating results of AERA will be included in the Company's consolidated financial statements from the date of the acquisition. In March 2003, a wholly-owned subsidiary of the Company acquired all of the stock of Darlington, Inc., a privately-held defense communications company based in Alexandria, Virginia, which designs, manufactures and supports military communications equipment and information networking systems. The acquisition is expected to enhance the Company's existing positions on long-range platforms and programs across the U.S. military services and in particular the U.S. Marine Corps. The preliminary purchase price was $28.5 million, which included an amount placed in escrow. The acquisition will be accounted for as a purchase, and the operating results of Darlington, Inc. will be included in the Company's consolidated financial statements from the date of the acquisition. 41 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 (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 in January 2000. The Company agreed to indemnify the buyer for certain contract-related costs originally estimated at $2.3 million. 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 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. (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 declines are included in interest income (expense). The cost of securities sold is based on the specific identification method. At December 31, 2002 and 2001, the marketable securities balance represents amounts in mutual funds. (5) ACCOUNTS AND NOTES RECEIVABLE Accounts receivable included $43.0 million and $39.1 million at December 31, 2002 and 2001, respectively, of unbilled revenues. Substantially all of the unbilled balances at December 31, 2002 will be billed and are expected to be collected during 2003. Total billed receivables due from the United States Government, either directly or as a subcontractor to a prime contractor with the Government, were $31.0 million and $26.2 million at December 31, 2002 and 2001, respectively. Notes receivable at December 31, 2002 include $1.9 million which relates to the sale of the Company's College Point facility in January 1996, of which $0.4 million is included in current assets. The notes are due in equal quarterly amounts through September 2004 with a final payment of $1.3 million due on December 31, 2004 and bear interest at 7% per annum. The notes receivable are secured by a mortgage on the facility. Also included in notes receivable at December 31, 2002 is $1.1 million related to the sale in June 2000 of certain parcels of land and a building at the Company's Deer Park facility, of which $0.1 million 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:
2002 2001 ------- ------- (IN THOUSANDS) Raw material and supplies................................... $ 7,804 $ 6,539 Work-in-process............................................. 22,561 14,680 Finished goods.............................................. 2,041 1,718 ------- ------- $32,406 $22,937 ======= =======
42 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 (7) PROPERTY, PLANT AND EQUIPMENT, NET The Company's property, plant and equipment at December 31 and their related useful lives are summarized as follows:
2002 2001 LIFE -------- -------- ----------- (IN THOUSANDS) Land.............................................. $ 18,080 $ 18,080 Buildings and improvements........................ 33,842 26,297 10-30 years Machinery and equipment........................... 44,585 45,271 3-19 years Software.......................................... 2,031 1,723 4 years Leasehold improvements............................ 13,150 10,934 Lease terms -------- -------- 111,688 102,305 Less accumulated depreciation and amortization.... (47,216) (40,050) -------- -------- $ 64,472 $ 62,255 ======== ========
(8) ACCRUED LIABILITIES Accrued liabilities consisted of the following at December 31:
2002 2001 ------- ------- (IN THOUSANDS) Employee compensation and benefits.......................... $16,744 $13,664 Deferred revenue and accrual for future costs related to acquired contracts........................................ 11,562 -- Income taxes payable........................................ 3,991 5,096 Accrued interest............................................ 1,782 -- Warranty.................................................... 1,622 803 Current portion of environmental obligation................. 250 395 Indemnification liability................................... -- 80 Other....................................................... 19,497 14,616 ------- ------- $55,448 $34,654 ======= =======
(9) LONG-TERM DEBT AND CREDIT FACILITY CREDIT FACILITY At December 31, 2002, the Company has a $200.0 million credit facility with a consortium of banks, led by Citibank, N.A. as the administrative agent, Fleet National Bank as the syndication agent and Wachovia Bank, N.A. as the documentation agent. The facility expires in November 2005 and amended the $69.0 million credit facility in place at December 31, 2001. In connection with the amended facility, $1.2 million of deferred finance costs are included in other assets on the accompanying consolidated balance sheet and are being amortized using the straight-line method over the term of the agreement. The credit facility provides sub-limits of borrowing up to $125.0 million for acquisition-related financing and up to $125.0 million in standby letters of credit financing. The potential cash borrowing under the facility is reduced by the amount of outstanding letters of credit. Borrowings under the facility will be priced initially at LIBOR plus a predetermined amount, ranging from 1.25% to 1.75%, depending on the Company's consolidated leverage ratio at the time of the borrowing. At December 31, 2002, LIBOR was approximately 43 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 1.4% and the applicable adjustment to LIBOR was 1.25%. The facility requires the Company to pay each lender in the consortium a commitment fee on the average daily unused portion of their respective commitment at a rate equal to 0.25%. There were no direct borrowings outstanding under the credit facility at December 31, 2002 or 2001. Letters of credit outstanding at December 31, 2002 pertaining to the credit facility were $31.5 million, resulting in $93.5 million available for additional letters of credit, if needed. In connection with the credit facility, the Company is required to maintain both financial and non-financial covenants and ratios, including but not limited to minimum tangible net worth plus subordinated debt, leverage ratio, fixed charge coverage ratio, earnings before interest and taxes to interest expense ratio, total unsubordinated debt to tangible net worth, net income and dividends. As of December 31, 2002, the Company was in compliance with its covenants. The credit facility is secured by the Company's accounts receivables, inventory and machinery and equipment. 5.25% CONVERTIBLE SUBORDINATED NOTES DUE 2007 In April 2002, the Company completed its offering of $137.8 million of 5.25% Convertible Subordinated Notes due 2007 and received $133.7 million, net of commissions paid. Interest payments on the Notes are due April 15 and October 15 of each year, commencing on October 15, 2002. Accrued interest payable, included in accrued liabilities on the accompanying consolidated balance sheet, at December 31, 2002 was $1.5 million. In connection with the offering of the Notes, there are $4.1 million of unamortized debt issuance costs at December 31, 2002, which are included in other assets on the accompanying consolidated balance sheet and are being amortized using the straight-line method through April 2007. The Notes are convertible, unless previously redeemed or repurchased by the Company, at the option of the holder at any time prior to maturity, into the Company's common stock at an initial conversion price of $31.26 per share, subject to adjustment in certain events. As of December 31, 2002, there had been no such conversions. 7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011 During the fourth quarter of 2001, the Company redeemed all of its outstanding 7% Convertible Subordinated Debentures due 2011 (the "Debentures"). As a result of the redemption, $22.1 million face value of the Debentures were converted into 1,005,250 common shares and $0.2 million face value were redeemed for cash. During 2001, the Company also purchased $3.4 million of the Debentures for $3.2 million and recognized a gain of $0.2 million, which is included in other non-operating income in the accompanying consolidated statement of earnings. (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 ("SOP") No. 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans" and the AIL ESOP was being accounted for under SOP No. 93-6, "Employers' Accounting for Employee Stock 44 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 Ownership Plans." The merged ESOP is being accounted for under SOP No. 93-6. Accordingly, 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 2002 and 2001, respectively. In prior years, such shares were considered outstanding in accordance with SOP No. 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 participants' 401(k) contributions; (ii) $600 per participant; and (iii) any remaining distribution is based on participants' relative compensation. The cost basis of the unearned/unallocated shares is initially recorded as a reduction to 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 2002, 2001 and 2000, respectively, non-cash ESOP compensation expense recorded by the Company amounted to $4.0 million, $1.8 million and $1.8 million. At December 31, 2002, there are 2,500,188 unearned/unallocated shares which have an aggregate market value of $52.0 million and 1,751,605 allocated shares. Total principal and interest payments made in 2002 and 2001 under the merged ESOP indirect loan amounted to $1.7 million and $1.1 million, respectively. 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 $19.2 million. The preferred shares were being allocated to employees on the basis of compensation. The preferred shares provided for dividends of 8% per 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 and 2000, respectively, the Company's cash contributions and dividends on the preferred shares were used to repay principal of $0.9 million and $1.6 million and pay interest of $0.2 million and $0.5 million. During 2001 and 2000, respectively, cash contributions of $0.7 million and $1.2 million 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 consolidated balance sheets with an equal amount as a reduction to 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, were reduced concurrently. 45 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 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 2002, 2001 and 2000 significant components of the provision for income taxes attributable to continuing operations are as follows:
2002 2001 2000 ------- ------ ------ (IN THOUSANDS) Federal Current................................................. $10,659 $2,345 $3,042 Deferred................................................ (2,503) 5,598 1,313 ------- ------ ------ $ 8,156 $7,943 $4,355 ------- ------ ------ State Current................................................. $ 2,667 $1,097 $ 683 Deferred................................................ (481) 170 226 ------- ------ ------ $ 2,186 $1,267 $ 909 ------- ------ ------ Total..................................................... $10,342 $9,210 $5,264 ======= ====== ======
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 ------------------ 2002 2001 2000 ---- ---- ---- Tax at statutory rate....................................... 35.0% 35.0% 35.0% State taxes, net of Federal benefit......................... 5.0 3.0 3.6 Write-off of purchased in-process research and development............................................... -- -- 35.6 Non-deductible goodwill amortization........................ -- 1.0 3.9 Non-cash ESOP compensation expense.......................... 3.0 0.5 1.0 Foreign sales benefit....................................... (1.4) (1.4) (2.1) Other, net.................................................. 0.9 0.5 2.9 ---- ---- ---- Effective income tax rate................................... 42.5% 38.6% 79.9% ==== ==== ====
46 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 The significant components of deferred tax assets and liabilities as of December 31 are as follows:
2002 2001 ------- ------- (IN THOUSANDS) DEFERRED TAX ASSETS Retirement plans' additional minimum liability.............. $23,617 $ 9,302 Post-retirement benefits obligation other than pensions..... 5,001 5,091 Deferred revenue............................................ 980 873 Deferred compensation....................................... 2,843 2,612 Inventory valuation......................................... 2,242 1,777 Other....................................................... 99 281 ------- ------- Total deferred tax assets................................... 34,782 19,936 ======= ======= DEFERRED TAX LIABILITIES Depreciation and amortization............................... 7,946 7,964 Prepaid pension asset....................................... 3,175 5,619 Identifiable intangible asset............................... -- 782 ------- ------- Total deferred tax liabilities.............................. 11,121 14,365 ------- ------- Net deferred tax asset...................................... $23,661 $ 5,571 ======= =======
(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, 2002, the Company had acquired approximately 4,091,000 common shares in open market transactions at prevailing market prices. Approximately 4,026,000 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, 2002 and 2001, respectively, the Company held 94,322 and 182,459 common shares in its treasury for future use. At December 31, 2002, the Company had reserved 6,161,473 authorized and unissued common shares for stock option and long-term incentive plans and conversion of the Notes. 47 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 (13) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
2002 2001 2000 ------- ------- ------- (IN THOUSANDS) Numerator: Earnings from continuing operations available for common shares for basic calculation................ $10,629 $14,485 $ 440 Effect of dilutive securities: Convertible debentures............................. -- 998 -- Convertible preferred shares....................... -- 5 119 ------- ------- ------- Numerator for diluted calculation..................... $10,629 $15,488 $ 559 ======= ======= ======= Denominator: Denominator for basic calculation..................... 17,080 12,776 9,601 Effect of dilutive securities: Stock options...................................... 299 270 68 Convertible preferred shares....................... -- 153 993 Convertible debentures............................. -- 1,055 -- ------- ------- ------- Denominator for diluted calculation................... 17,379 14,254 10,662 ======= ======= =======
The assumed conversion of the Notes was anti-dilutive for 2002. The assumed conversion of the Debentures was anti-dilutive for 2000. (14) STOCK PLANS The Company has granted nonqualified stock options to officers, directors and other key employees under plans approved by the shareholders in 2002 for the purchase of its common shares at the fair market value of the common shares on the dates of grant. Options under the 2002 Long-Term Incentive Plan ("LTIP") 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 2002 LTIP will expire in 2012. Options under the 2002 Non-Employee Director Stock Option Plan ("NEDSOP"), which pertains only to non-employee directors, are immediately exercisable and expire on the tenth anniversary of the date of the grant. The 2002 NEDSOP will also expire in 2012. Changes in options outstanding are as follows:
2002 2001 2000 -------------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE SHARES AVERAGE SHARES AVERAGE SHARES EXERCISE SUBJECT EXERCISE SUBJECT EXERCISE SUBJECT PRICE TO OPTION PRICE TO OPTION PRICE TO OPTION --------- -------------- --------- --------- --------- --------- Beginning of year....................... $ 7.75 805,876 $6.46 848,211 $6.61 612,350 Options granted......................... 26.72 327,850 9.76 275,350 6.58 428,121 Options exercised....................... 6.98 (69,433) 6.02 (314,458) 4.87 (19,775) Options expired/cancelled............... 22.02 (7,150) 7.08 (3,227) 7.46 (172,485) ------ --------- ----- -------- ----- -------- End of year............................. $13.59 1,057,143 $7.75 805,876 $6.46 848,211 ------ --------- ----- -------- ----- -------- Exercisable at year end................. $10.70 490,243 $6.76 455,426 $6.03 517,795 ====== ========= ===== ======== ===== ========
48 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 The options outstanding as of December 31, 2002 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 2 years 6.13-9.60.................................... 7.89 694,668 7 years 17.10-31.40................................... 26.74 326,975 9 years --------- 1,057,143 =========
The 2002 plan also provides for restricted common share long-term incentive awards as defined under the plan. As of December 31, 2002 plan participants had been awarded 392,000 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 2002, 2001 and 2000 was $0.2 million, $0.3 million and $0.7 million, respectively. As of December 31, 2002, 696,141 shares are available for additional awards. The per share weighted-average fair value of stock options granted was $15.28, $4.88 and $3.22 in 2002, 2001 and 2000, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2002 -- expected dividend yield of 1%, risk free interest rate of 4.8%, expected stock volatility of 51%, and an expected option life of 7 1/2 years; 2001 -- expected dividend yield of 1%, risk free interest rate of 4.9%, expected stock volatility of 47%, and an expected option life of 7 1/2 years; and 2000 -- expected dividend yield of 1.3%, risk free interest rate of 6.5%, expected stock volatility of 42%, and an expected option life of 7 1/2 years. 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:
2002 2001 2000 ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings: As reported............................................ $10,629 $14,679 $1,321 Stock option compensation expense based on fair value method, net of tax.................................. (1,155) (475) (186) ------- ------- ------ Pro forma.............................................. $ 9,474 $14,204 $1,135 Basic earnings per common share: As reported............................................ $ 0.62 $ 1.14 $ 0.05 Pro forma.............................................. 0.55 1.10 0.03 Diluted earnings per common share: As reported............................................ $ 0.61 $ 1.09 $ 0.05 Pro forma.............................................. 0.55 1.05 0.03 ======= ======= ======
49 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 (15) OTHER EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PLANS The Company maintains a noncontributory defined benefit pension plan covering substantially all of its employees. In November 2002, the plan was amended whereby benefits accrued under the plan were frozen as of December 31, 2002. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined and tax deductible. In 2002, the Company recorded pension expense of $6.0 million, which includes a curtailment loss of $2.0 million resulting from the aforementioned amendment to the plan. In 2001 and 2000, the Company recorded pension income of $2.8 million and $4.6 million, respectively. The expected long-term rate of return on plan assets was 9.5% in 2002 and 2001 and 9% in 2000. For 2003 pension expense, the expected return on plan assets has been reduced to 8.75%. The actuarial computations assumed a discount rate on benefit obligations at December 31, 2002 and 2001 of 6.75% and 7.25%, respectively. The assumed rate of compensation increase of 4.95% for 2002 and 2001 approximated the Company's previous experience. No compensation increase will be assumed after 2002 due to the aforementioned freezing of the plan. 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 (expense) income follows:
2002 2001 2000 -------- -------- -------- (IN THOUSANDS) Service cost......................................... $ (4,353) $ (3,693) $ (2,819) Interest on projected benefit obligation............. (15,091) (14,281) (11,361) Expected return on plan assets....................... 17,217 20,820 17,616 Amortization of transitional assets.................. -- 8 8 Amortization of prior service cost................... (261) (85) (101) Recognized net actuarial (loss) gain................. (1,476) -- 1,277 Curtailment loss..................................... (1,998) -- -- -------- -------- -------- Net pension (expense) income......................... $ (5,962) $ 2,769 $ 4,620 ======== ======== ========
The following sets forth the funded status of the plan as of December 31:
2002 2001 -------- -------- (IN THOUSANDS) Change in projected benefit obligation: Projected benefit obligation at beginning of year........... $214,273 $196,700 Service cost................................................ 4,353 3,693 Interest cost............................................... 15,091 14,281 Benefits paid............................................... (17,279) (12,228) Actuarial loss.............................................. 12 11,827 Effect of curtailment....................................... (19,262) -- -------- -------- Projected benefit obligation at end of year................. $197,188 $214,273 -------- --------
50 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000
2002 2001 -------- -------- (IN THOUSANDS) Change in plan assets: Fair value of plan assets at beginning of year.............. $187,350 $214,418 Actual loss on plan assets.................................. (21,436) (14,840) Benefits paid............................................... (17,279) (12,228) -------- -------- Fair value of plan assets at end of year.................... $148,635 $187,350 -------- -------- Funded status............................................... $(48,553) $(26,923) Unrecognized net loss....................................... 55,432 37,505 Unrecognized prior service cost............................. -- 2,259 -------- -------- Prepaid pension cost........................................ $ 6,879 $ 12,841 ======== ========
In accordance with the provisions of SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits," since the curtailment of $19.3 million did not exceed the previous unrecognized net loss, no portion of the $19.3 million curtailment was recognized in earnings for 2002. Accordingly, the remaining unrecognized net loss will be accounted for in future pension plan expense consistent with SFAS No. 87, "Employers' Accounting for Pensions." Due to the lower discount rate and a decline in the fair market value of plan assets during 2002 and 2001, the accumulated benefit obligation at December 31, 2002 and 2001 exceeded the fair value of plan assets by $48.6 million and $11.3 million, respectively. Consequently, a net of tax comprehensive loss of $19.8 million and $12.9 million was charged against shareholders' equity in 2002 and 2001, respectively. Amounts recognized in the consolidated balance sheets at December 31 are as follows:
2002 2001 -------- -------- (IN THOUSANDS) Prepaid pension cost (included in other assets)............. $ 6,879 $ 12,841 Intangible asset (included in other assets)................. $ -- $ 2,259 Additional minimum liability (included in post-retirement benefits obligations)..................................... $(55,432) $(24,094) Accumulated other comprehensive loss (included in shareholders' equity)..................................... $ 55,432 $ 21,835 -------- --------
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 2002, 2001 and 2000 were $1.4 million, $0.7 million and $0.9 million, respectively. The supplemental plans of EDO and AIL were combined in 2001. 51 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 A summary of the components of net periodic pension expense follows:
2002 -------------- (IN THOUSANDS) Service cost................................................ $ 190 Interest on projected benefit obligation.................... 815 Amortization of transitional assets......................... 32 Amortization of prior service cost.......................... 141 Recognized net actuarial loss............................... 225 ------ Net pension expense......................................... $1,403 ======
Summarized below is the funded status of the combined supplemental plans as of December 31:
2002 2001 -------- -------- (IN THOUSANDS) Change in projected benefit obligation: Projected benefit obligation at beginning of year........... $ 11,538 $ 9,747 Service cost................................................ 190 84 Interest cost............................................... 815 700 Benefits paid............................................... (847) (760) Actuarial loss.............................................. 951 297 Plan amendments............................................. 400 1,470 -------- -------- Projected benefit obligation at end of year................. $ 13,047 $ 11,538 -------- -------- Change in plan assets: Fair value of plan assets at beginning of the year.......... $ -- $ -- Employer contribution....................................... 847 760 Benefits paid............................................... (847) (760) -------- -------- Fair value of plan assets at end of year.................... $ -- $ -- -------- -------- Funded status............................................... $(13,047) $(11,538) Unrecognized net loss....................................... 4,204 3,525 Unrecognized prior service cost............................. 1,684 1,377 Unrecognized net obligation................................. 10 42 -------- -------- Accrued benefit cost........................................ $ (7,149) $ (6,594) ======== ========
Due to the lower discount rate during 2002 and 2001, the accumulated benefit obligation at December 31, 2002 and 2001 exceeded the fair value of plan assets by $11.0 million and $8.9 million, respectively. Consequently, a net of tax comprehensive loss of $0.8 million and $0.5 million was charged against 52 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 shareholders' equity in 2002 and 2001, respectively. Amounts recognized in the consolidated balance sheets at December 31 are as follows:
2002 2001 ------- ------- (IN THOUSANDS) Accrued benefit cost (included in post-retirement benefits obligation)............................................... $(7,149) $(6,594) Intangible asset (included in other assets)................. $ 1,694 $ 1,419 Additional minimum liability (included in post-retirement benefits obligations)..................................... $(3,864) $(2,270) Accumulated other comprehensive loss (included in shareholders' equity)..................................... $ 2,170 $ 851 ======= =======
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. In 2000, matching contributions under the original plans were not material. (16) POST-RETIREMENT 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 Post-Retirement 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 Post-retirement health care and life insurance expense (income) included the following components:
2002 2001 2000 ---- ----- ---- (IN THOUSANDS) Service cost................................................ $ -- $ 69 $ 57 Interest cost............................................... 171 229 239 Curtailment gain............................................ -- (929) -- ---- ----- ---- Total post-retirement health care and life insurance expense (income).................................................. $171 $(631) $296 ==== ===== ====
In 2001, the Company recognized a curtailment gain as a result of a plan amendment whereby coverage will not be provided for future retirees. 53 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 The funded status of the EDO post-retirement health care and life insurance benefits plan is as follows as of December 31:
2002 2001 ------ ------ (IN THOUSANDS) Change in accumulated post-retirement benefit obligation: Accumulated benefit obligation at beginning of year....... $2,317 $3,227 Service cost.............................................. -- 69 Interest cost............................................. 171 229 Benefits paid............................................. (448) (354) Participant contributions................................. 31 32 Actuarial loss............................................ 42 43 Effect of curtailment..................................... -- (929) ------ ------ Unfunded accumulated post-retirement benefit obligation at end of year............................................... $2,113 $2,317 Unrecognized net gain....................................... 39 81 ------ ------ Accrued post-retirement benefit cost........................ $2,152 $2,398 ====== ======
Actuarial assumptions used in determining the accumulated post-retirement benefit obligation include a discount rate of 6.75% and 7.25% at December 31, 2002 and 2001, respectively, and estimated increases in health care costs. The Company has limited its increase in health care costs to 5% per year by requiring the retirees to absorb any costs in excess of 5% and has used such rate to measure its obligation. AIL POST-RETIREMENT BENEFIT PLAN Post-retirement expense included in the consolidated financial statements comprised the following:
2002 2001 2000 ----- ---- ---- (IN THOUSANDS) Service cost................................................ $ 313 $ 86 $ 53 Interest cost............................................... 431 663 468 Recognized net actuarial gain............................... (269) (11) -- ----- ---- ---- Total post-retirement expense............................... $ 475 $738 $521 ===== ==== ====
The funded status of the AIL post-retirement benefit plan is as follows as of December 31:
2002 2001 ------- ------- (IN THOUSANDS) Change in accumulated post-retirement benefit obligation: Accumulated benefit obligation.............................. $ 8,737 $ 8,876 Service cost................................................ 313 86 Interest cost............................................... 431 663 Benefits paid............................................... (449) (591) Actuarial loss (gain)....................................... 2,739 (297) ------- ------- Unfunded accumulated post-retirement benefit obligation at end of year............................................... $11,771 $ 8,737 Unrecognized (loss) gain.................................... (1,725) 1,282 ------- ------- Accrued post-retirement benefit cost........................ $10,046 $10,019 ======= =======
54 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 Actuarial assumptions used in determining the accumulated post-retirement benefit obligation include a discount rate of 6.75% and 7.25% at December 31, 2002 and 2001, 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 aggregating approximately $86.9 million at December 31, 2002, should it fail to perform in accordance with the terms of its contracts with foreign customers. At December 31, 2002, the Company and its subsidiaries were obligated under building and equipment leases expiring between 2003 and 2012. The aggregate future minimum lease commitments under those obligations with noncancellable terms in excess of one year are as follows: - 2003 - $7,995 - 2004 - $6,432 - 2005 - $5,467 - 2006 - $4,448 - 2007 - $4,011 - Thereafter - $18,919 Rental expense for continuing operations under such leases for the years ended December 31, 2002, 2001 and 2000 amounted to $5.2 million, $4.7 million and $3.9 million, 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, 2002, the discounted liability over the remainder of the twenty three years related to these two operable units is approximately $2.3 million of which approximately $0.3 million has been classified as current and is included in accrued liabilities. Approximately $0.6 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, 55 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 which is consistent with how management operates the Company. The Company's continuing operations are conducted in three business segments: Defense, Communications and Space Products, and Engineered Materials. Our Defense segment provides integrated front-line warfighting systems and components including electronic warfare, radar countermeasures systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems, airborne mine countermeasures systems, integrated combat and sonar systems, command, control and communications systems and professional, operational, technical and information technology services for military forces and governments worldwide. Our Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing and electronic warfare industries. Our Engineered Materials segment supplies commercial and military piezo-electric ceramic products and advanced fiber composite structural products for the aircraft, communication, navigation, chemical, petrochemical, paper and oil industries. Domestic U.S. Government sales, which include sales to prime contractors of the U.S. Government, amounted to 75%, 69% and 63% of net sales, which were 82%, 77% and 69% of Defense's net sales, 62%, 55% and 66% of Communications and Space Products' net sales and 42%, 41% and 33% of Engineered Materials' net sales for 2002, 2001 and 2000, respectively. Export sales comprised 15%, 15% and 18% of net sales for 2002, 2001 and 2000, respectively. In addition, the Universal Exciter Upgrade program in the Defense segment comprised approximately 14%, 15% and 15% of net sales for 2002, 2001 and 2000, respectively. Principal products and services by segment are as follows: Defense Segment - Electronic Warfare - Radar Countermeasures Systems - Reconnaissance and Surveillance Systems - Aircraft Weapons Suspension and Release Systems - Airborne Mine Countermeasures Systems - Integrated Combat Systems - Command, Control and Communications Systems - Undersea Systems - Professional, Operational, Technical and Information Technology Services Communications and Space Products Segment - Antenna Products - Communications and Countermeasures Systems - Space Products Engineered Materials Segment - Electro-Ceramic Products - Advanced Fiber Composite Structural Products 56 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 Information by segment on sales, operating earnings, identifiable assets, depreciation and amortization, and capital expenditures is as follows for each of the three years ended December 31:
2002 2001 2000 -------- -------- -------- (IN THOUSANDS) Net sales: Defense............................................ $243,447 $183,454 $142,044 Communications and Space Products.................. 47,262 39,998 30,027 Engineered Materials............................... 38,167 36,509 34,751 -------- -------- -------- $328,876 $259,961 $206,822 -------- -------- -------- Operating earnings: Defense............................................ $ 28,674 $ 21,927 $ 17,117 Communications and Space Products.................. (441) (383) (11,176) Engineered Materials............................... 3,150 4,603 3,298 Curtailment (loss) gain............................ (1,998) 929 -- -------- -------- -------- $ 29,385 $ 27,076 $ 9,239 Net interest expense................................. (4,956) (2,216) (2,438) Other expense, net................................... (95) (971) (216) -------- -------- -------- Earnings before income taxes and cumulative effect of a change in accounting principle................... $ 24,334 $ 23,889 $ 6,585 -------- -------- -------- Identifiable assets: Defense............................................ $224,017 $129,631 $106,958 Communications and Space Products.................. 40,001 49,769 37,576 Engineered Materials............................... 28,496 27,690 29,139 Corporate.......................................... 189,060 78,540 40,581 -------- -------- -------- $481,574 $285,630 $214,254 -------- -------- -------- Depreciation and amortization: Defense............................................ $ 7,440 $ 6,081 $ 5,047 Communications and Space Products.................. 1,895 2,438 1,960 Engineered Materials............................... 1,800 2,029 1,882 Corporate.......................................... 186 848 552 -------- -------- -------- $ 11,321 $ 11,396 $ 9,441 -------- -------- -------- Capital expenditures: Defense............................................ $ 3,587 $ 7,896 $ 1,559 Communications and Space Products.................. 816 4,308 570 Engineered Materials............................... 1,819 1,479 1,705 Corporate.......................................... 871 615 27 -------- -------- -------- $ 7,093 $ 14,298 $ 3,861 ======== ======== ========
57 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 2002, 2001 AND 2000 Merger-related costs, including IPR&D, attributable to the Condor acquisition and the EDO-AIL merger are included in the segments as follows:
2002 2001 2000 ---- ------ ------- (IN THOUSANDS) Defense..................................................... $567 $ 937 $ 3,342 Communications and Space Products........................... -- 184 7,595 Engineered Materials........................................ -- 197 558 ---- ------ ------- Total....................................................... $567 $1,318 $11,495 ==== ====== =======
58 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth unaudited quarterly financial information for 2002 and 2001 (in thousands, except per share amounts).
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER -------------------- ----------------- ------------------- -------------------- 2002 2001 2002 2001 2002 2001 2002 2001 ------- ------- ------- ------- ------- ------- -------- ------- Net sales from continuing operations............... $66,909 $60,151 $73,719 $66,776 $85,104 $60,353 $103,144 $72,681 Net earnings before cumulative effect of a change in accounting principle: Continuing operations.... 2,810 2,843(a) 3,074 3,095(b) 3,371(c) 3,833 4,737(d) 4,908(e) Discontinued operations............. -- -- -- -- -- -- -- 273 ------- ------- ------- ------- ------- ------- -------- ------- 2,810 2,843 3,074 3,095 3,371 3,833 4,737 5,181 Cumulative effect of a change in accounting principle, net of tax.... (3,363)(f) -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- -------- ------- (Loss) earnings............ (553) 2,843 3,074 3,095 3,371 3,833 4,737 5,181 Earnings per share before cumulative effect of a change in accounting principle: Basic: Continuing operations........... 0.17 0.23 0.18 0.25 0.20 0.32 0.28 0.32 Discontinued operations........... -- -- -- -- -- -- -- 0.02 ------- ------- ------- ------- ------- ------- -------- ------- 0.17 0.23 0.18 0.25 0.20 0.32 0.28 0.34 Cumulative effect of a change in accounting principle, net of tax.................... (0.20) -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- -------- ------- (Loss) earnings -- Basic...... (0.03) 0.23 0.18 0.25 0.20 0.32 0.28 0.34 Diluted: Continuing operations........... 0.16 0.22 0.18 0.24 0.19 0.30 0.26 0.31 Discontinued operations........... -- -- -- -- -- -- -- 0.02 ------- ------- ------- ------- ------- ------- -------- ------- 0.16 0.22 0.18 0.24 0.19 0.30 0.26 0.33 Cumulative effect of a change in accounting principle, net of tax:................... (0.20) -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- -------- ------- (Loss) earnings -- Diluted.... (0.04) 0.22 0.18 0.24 0.19 0.30 0.26 0.33 ------- ------- ------- ------- ------- ------- -------- ------- Preferred dividends paid... -- 194 -- -- -- -- -- -- ======= ======= ======= ======= ======= ======= ======== =======
- --------------- (a) Includes merger-related costs of $0.5 million (b) Includes merger-related costs of $0.8 million. (c) Includes write-off of purchased in-process research and development costs of $0.2 million and merger-related costs of $0.2 million. (d) Includes merger-related costs of $0.2 million and a $2.0 million defined benefit pension plan curtailment loss. (e) Includes a $0.9 million post-retirement curtailment gain. (f) Upon adoption of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets," the Company recorded a cumulative effect of a change in accounting principle effective January 1, 2002. See Note 1(g) to the consolidated financial statements as of and for the year ended December 31, 2002. 59 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 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, 2002 and 2001, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15(a). 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, 2002 and 2001 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 1(g) to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill to conform with Statement of Financial Accounting Standard No. 142,"Goodwill and Other Intangible Assets." /s/ Ernst & Young LLP New York, New York February 11, 2003 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information called for by Item 10 (except to the extent set forth in this Item) is incorporated in this Report by reference to the Company's definitive proxy statement relating to the Annual Meeting of Shareholders anticipated to be held on April 22, 2003. EXECUTIVE OFFICERS
NAME AGE POSITION, TERM OF OFFICE AND PRIOR POSITIONS - ---- --- -------------------------------------------- James M. Smith............................... 61 Chairman of the Board (since May 2002) President and Chief Executive Officer (since 2000). Previously, he was President and CEO of AIL Systems, Inc. Frederic B. Bassett.......................... 56 Vice President (since September 2002), Chief Financial Officer and Treasurer (since January 2003). Prior thereto, he was Vice President, Treasurer and Chief Financial Officer of Condor Systems, Inc. (December 2000-July 2002). Prior thereto, he was U.S. Operations Controller for the Howmet Division of Alcoa. Patricia D. Comiskey......................... 52 Vice President-Human Resources since June 2001 and Assistant Secretary since September 2000. Previously, she was Director -- Corporate Human Resources since September 2000. Prior thereto she was Director -- Human Resources and Assistant Secretary of AIL Systems, Inc. George Fox................................... 60 Vice President-Electronic Systems Group since May 2000. Previously, he was Director of Operations of AIL Systems, Inc. since 1998. Prior thereto he was Director of Programs of AIL Systems, Inc. since 1997. William J. Frost............................. 61 Vice President-Administration and (since 2002) Investor Relations and (since 2001) Secretary. Milo Hyde.................................... 49 Vice President -- Systems & Analysis Group since 2000 and Group General Manager since 1998. Prior thereto, he was General Manager of the Combat Systems Division. Harvey N. Kreisberg.......................... 66 Vice President-Corporate Development since January 2001. Prior thereto, he was Director -- Diversified Products Group of AIL Systems, Inc. Frank Otto................................... 53 Executive Vice President (since September 2002) and Vice President -- Integrated Systems and Structures Group (since January 2001). Prior thereto, he was General Manager of the Marine and Aircraft Systems Division. Lisa M. Palumbo.............................. 44 Vice President, General Counsel and Assistant Secretary since April 2002. Previously, she was Senior Vice President, General Counsel and Secretary of Moore Corporation Ltd. (from March to September 2001), and prior thereto, Vice President and General Counsel of Rayonier, Inc.
61 Each officer is either elected by the board of directors or, as provided in our By-Laws, appointed by the Chief Executive Officer 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. ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is incorporated in this Report by reference to the Company's definitive proxy statement relating to the Annual Meeting of Shareholders anticipated to be held on April 22, 2003. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information called for by Item 12 is incorporated in this Report by reference to the Company's definitive proxy statement relating to the Annual Meeting of Shareholders anticipated to be held on April 22, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Item 13 is incorporated in this Report by reference to the Company's definitive proxy statement relating to the Annual Meeting of Shareholders anticipated to be held on April 22, 2003. ITEM 14. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures Within the 90 day period prior to filing this Report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Changes in internal controls There were no significant changes in EDO's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART IV ITEM 15. 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, 2002 and 2001 Consolidated Statements of Earnings for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements Report of Ernst & Young LLP 62 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, 2002: Allowance for doubtful accounts........ $893 407 44(a) (321) $1,023 Deducted from asset accounts: Year ended December 31, 2001: Allowance for doubtful accounts........ $981 220 63(b) (371) $ 893 Deducted from asset accounts: Year ended December 31, 2000: Allowance for doubtful accounts........ $232 287 600(c) (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 Condor Systems, Inc. on July 26, 2002. (b) Amount acquired as a result of purchase of Dynamic Systems, Inc. on October 9, 2001. (c) Amount acquired as a result of purchase of AIL Technologies, Inc. on April 28, 2000. 63 3. EXHIBITS. 2(a) Agreement and Plan of Merger by and among the Company, EDO Acquisition III Inc. and AIL Technologies Inc. as amended and restated dated January 2, 2000 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, Exhibit 2(a)). 2(b) Management Stock Purchase Agreement dated as of January 2, 2000 between the Company as Buyer and eleven individuals as Sellers, relating to the purchase and sale of shares of common stock of AIL Technologies Inc. (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, Exhibit 2(b)). 2(c) Stock Purchase Agreement dated as of January 2, 2000 between the Company, 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 herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, Exhibit 2(c)). 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 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, Exhibit 2(d)). 2(e) Amended and Restated Asset Purchase Agreement and Amendment 1 thereto, dated as of May 31, 2002, between EDO Acquisition IV Inc., a wholly-owned subsidiary of the Company, as Buyer, and Condor Systems, Inc. and CEI Systems, Inc. as Sellers (incorporated herein by reference to the Company's Current Report on Form 8-K dated July 26, 2002, Exhibits 2.1 and 2.2). 2(f) Stock Purchase Agreement, dated as of February 5, 2003, between EDO Professional Services Inc, a wholly-owned subsidiary of the Company, as Buyer and four individuals as Sellers (incorporated herein by reference to the Company's Current Report on Form 8-K dated February 5, 2003, Exhibit 2.1). 3(a)(1) Certificate of Incorporation of the Company and amendments thereto dated June 14, 1984, July 18, 1988 and July 22, 1988 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Exhibit 3(i)). 3(a)(2) Amendment to the Certificate of Incorporation of the Company dated July 29, 1998 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Exhibit 3(i)). 3(a)(3)* Amendment to the Certificate of Incorporation of the Company dated May 17, 2002. 3(b) By-Laws of the Company effective October 1, 2002 (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 28, 2002, Exhibit 3(ii)). 4(a) Indenture, dated as of April 2, 2002, by and between the Company and HSBC Bank, USA, as trustee (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2002, Exhibit 4(a)). 4(b) Registration Rights Agreement, dated as of April 2, 2002, by and among the Company and Salomon Smith Barney, Inc., SG Cowen Securities Corporation and Robertson Stephens, Inc., as representatives of the initial purchasers (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2002, Exhibit 4(b)).
64 10(a)(1)* Credit Agreement, dated as of November 8, 2002, by and among the Company and AIL Systems Inc., with Citibank N.A., Fleet National Bank, Wachovia Bank, N.A., et al. 10(a)(2)* Amendment No. 1, dated December 20, 2002, to the Credit Agreement dated as of November 8, 2002 described above. 10(a)(3)* Amendment No. 2, dated February 4, 2003, to the Credit Agreement dated as of November 8, 2002 described above. 10(a)(4)* Amendment No. 3, dated February 28, 2003, to the Credit Agreement dated as of November 8, 2002 described above. 10(b) EDO Corporation 1996 Long-Term Incentive Plan (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Exhibit 10(a)). 10(c)* EDO Corporation 2002 Long-Term Incentive Plan. 10(d) Executive Life Insurance Plan Agreements, as amended through January 23, 1990, between the Company and 28 employees and retirees (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Exhibit 10(g)). 10(e) Form of Directors' and Officers' Indemnity Agreements between the Company and 23 current Company directors and officers (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Exhibit 10(d)). 10(f) Consent Decree, entered on November 25, 1992, amongst the United States, the Company, 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(g) EDO Corporation 1997 Non-Employee Director Stock Option Plan (incorporated herein by reference to the Company's Registration Statement on Form S-8, File No. 333-77865, dated May 6, 1999). 10(h)* EDO Corporation 2002 Non-Employee Director Stock Option Plan. 10(i) EDO Corporation Compensation Plan for Directors (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Exhibit 10(g)). 10(j) Supplemental Executive Retirement Plan, dated July 1, 2001 (incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, Exhibit 10(i)). 10(k)* Employment Agreement, dated as of February 1, 2003, by and between EDO Corporation and James M. Smith. 10(l)* Change in Control Agreement dated March 3, 2003 between the Company and Frederic B. Bassett. 10(m)* Change in Control Agreement dated March 21, 2002, between the Company and Patricia D. Comiskey. 10(n)* Change in Control Agreement dated March 25, 2002 between the Company and George P. Fox, Jr. 10(o)* Change in Control Agreement dated March 21, 2002 between the Company and William J. Frost. 10(p)* Change in Control Agreement dated March 22, 2002 between the Company and Milo Hyde.
65 10(q)* Change in Control Agreement dated March 21, 2002 between the Company and Harvey N. Kreisberg. 10(r)* Change in Control Agreement dated March 26, 2002 between the Company and Frank W. Otto. 10(s)* Change in Control Agreement dated May 1, 2002 between the Company and Lisa M. Palumbo. 21* List of Subsidiaries. 23* Consent of Independent Auditors
- --------------- * Filed herewith. (b) Reports on Form 8-K The following reports on Form 8-K were filed during the three months ended December 31, 2002:
DATE OF REPORT ITEMS REPORTED - --------------------- ------------------------------------------------------------ November 12, 2002 Furnishing the 18 U.S.C. Section 1350 certifications of James M. Smith, Chairman, President and Chief Executive Officer and Darrell L. Reed, Vice President -- Finance, Treasurer and Chief Financial Officer relating to the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 28, 2002.
66 CERTIFICATIONS I, James M. Smith, certify that: 1. I have reviewed this annual report on Form 10-K of EDO Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 13, 2003 /s/ JAMES M. SMITH -------------------------------------- James M. Smith Chairman, President and Chief Executive Officer 67 CERTIFICATIONS I, Frederic B. Bassett, certify that: 1. I have reviewed this annual report on Form 10-K of EDO Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 13, 2003 /s/ FREDERIC B. BASSETT -------------------------------------- Frederic B. Bassett Vice President-Finance, Treasurer and Chief Financial Officer 68 EX-3.A.3 3 y83939exv3waw3.txt AMENDMENT TO CERTIFICATE OF INCORPORATION Exhibit 3(a)(3) CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF EDO CORPORATION Under Section 805 of the Business Corporation Law The undersigned, being Secretary and Vice-President, Administration, of EDO Corporation, hereby certifies: 1. The name of the Corporation is EDO Corporation. The name under which the Corporation was originally incorporated was Edo Aircraft Corporation. 2. The Corporation's Certificate of Incorporation was filed by the Department of State on October 16, 1925. 3. A Restatement of the Certificate of Incorporation was filed by the Department of State on November 23, 1983. 4. The Restated Certificate of Incorporation, as now in effect, is further amended as set forth below, as authorized by Section 801 of the Business Corporation Law, to increase the aggregate number of Common Shares, par value $1 per share, which the Corporation shall have the authority to issue from 25,000,000 to 50,000,000. 5. In order to accomplish the foregoing, the Restated Certificate of Incorporation is amended to read as follows: The first sentence of Article THIRD of the Restated Certificate of Incorporation is amended to read as follows: The aggregate number of shares which the Corporation shall have authority to issue is 50,500,000 shares, of which 50,000,000 shares shall be designated as Common Shares, par value $1 per share, and 500,000 shall be designated as Preferred Shares, par value $1 per share. 6. The foregoing Amendment of the Restated Certificate of Incorporation was authorized by the affirmative vote of the majority of holders of outstanding shares of the Corporation entitled to vote thereon at a meeting of the shareholders held on May 7, 2002. IN WITNESS WHEREOF, the undersigned has made and subscribed this Certificate of Amendment of the Certificate of Incorporation and affirmed it as true under penalties of perjury, this 17th Day of May, 2002. /s/ William J. Frost --------------------------------------------- William J. Frost Secretary and Vice-President, Administration 2 EX-10.A.1 4 y83939exv10waw1.txt CREDIT AGREEMENT Exhibit 10(a)(1) CREDIT AGREEMENT DATED AS OF NOVEMBER 8, 2002 BY AND AMONG EDO CORPORATION AND AIL SYSTEMS INC. WITH CITIBANK, N.A. AS ADMINISTRATIVE AGENT AND FLEET NATIONAL BANK AS SYNDICATION AGENT AND WACHOVIA BANK, N.A. AS DOCUMENTATION AGENT AND THE LENDERS PARTY HERETO TABLE OF CONTENTS ARTICLE I DEFINITIONS AND ACCOUNTING TERMS - 1 - SECTION 1.01. Definitions - 1 - SECTION 1.02. Terms Generally - 15 - ARTICLE II LOANS - 16 - SECTION 2.01. Revolving Credit Loans - 16 - SECTION 2.02. Revolving Credit Note - 17 - SECTION 2.03. Increase in Maximum Amount - 17 - SECTION 2.04. Letters of Credit. - 19 - SECTION 2.05. Maximum Lender Commitment - 23 - ARTICLE III PROVISIONS RELATING TO ALL EXTENSIONS OF CREDIT; FEES AND PAYMENTS - 23 - SECTION 3.01. Interest Rate; Continuation and Conversion of Loans - 23 - SECTION 3.02. Use of Proceeds. - 25 - SECTION 3.03. Prepayments - 25 - SECTION 3.04. Fees. - 26 - SECTION 3.05. Inability to Determine Interest Rate. - 26 - SECTION 3.06. Illegality. - 27 - SECTION 3.07. Increased Costs - 27 - SECTION 3.08. Indemnity. - 29 - SECTION 3.09. Taxes - 29 - SECTION 3.10. Pro Rata Treatment and Payments - 30 - SECTION 3.11. Funding and Disbursement of Loans - 31 - SECTION 3.12. Change of Lending Office - 32 - ARTICLE IV REPRESENTATIONS AND WARRANTIES - 32 - SECTION 4.01. Organization Powers. - 32 - SECTION 4.02. Authorization of Borrowing, Enforceable Obligations - 32 - SECTION 4.03. Financial Condition. - 33 - SECTION 4.04. Taxes. - 33 - SECTION 4.05. Title to Properties - 33 - SECTION 4.06. Litigation - 34 - SECTION 4.07. Agreements. - 34 - SECTION 4.08. Compliance with ERISA. - 34 - SECTION 4.09. Federal Reserve Regulations; Use of Proceeds - 34 - SECTION 4.10. Approval - 35 - SECTION 4.11. Subsidiaries. - 35 - SECTION 4.12. Hazardous Materials - 35 - SECTION 4.13. Investment Company Act - 35 - SECTION 4.14. Security Documents. - 35 - SECTION 4.15. No Default. - 36 - SECTION 4.16. Permits and Licenses. - 36 - SECTION 4.17. No Other Ventures - 36 -
iii SECTION 4.18. Compliance with Law. - 36 - SECTION 4.19. Certain Subsidiaries - 36 - SECTION 4.20. Subordinated Debentures. - 36 - SECTION 4.21. Full Disclosure - 36 - ARTICLE V CONDITIONS OF LENDING - 37 - SECTION 5.01. Conditions to Initial Extension of Credit - 37 - SECTION 5.02. Conditions to All Extensions of Credit - 39 - ARTICLE VI AFFIRMATIVE COVENANTS - 40 - SECTION 6.01. Existence, Properties, Insurance - 40 - SECTION 6.02. Payment of Obligations and Taxes. - 41 - SECTION 6.03. Financial Statements, Reports, etc. - 41 - SECTION 6.04. Books and Records; Access to Premises - 42 - SECTION 6.05. Notice of Adverse Change - 42 - SECTION 6.06. Notice of Default - 43 - SECTION 6.07. Notice of Litigation - 43 - SECTION 6.08. Notice of Default in Other Agreements. - 43 - SECTION 6.09. Notice of ERISA Event - 43 - SECTION 6.10. Notice of Environmental Law Violations. - 44 - SECTION 6.11. Compliance with Applicable Laws - 44 - SECTION 6.12. Subsidiaries - 44 - SECTION 6.13. Environmental Laws. - 44 - SECTION 6.14 Certain Letters of Credit - 45 - ARTICLE VII NEGATIVE COVENANTS - 45 - SECTION 7.01. Liens - 45 - SECTION 7.02. Indebtedness - 47 - SECTION 7.03. Guaranties - 48 - SECTION 7.04. Sale of Assets - 49 - SECTION 7.05. Sales of Receivables. - 49 - SECTION 7.06. Loans and Investments. - 49 - SECTION 7.07. Nature of Business. - 50 - SECTION 7.08. Sale and Leaseback. - 50 - SECTION 7.09. Federal Reserve Regulations - 50 - SECTION 7.10. Accounting Policies and Procedures - 50 - SECTION 7.11. Limitations on Fundamental Changes - 50 - SECTION 7.12. Financial Covenants. - 50 - SECTION 7.13. Subordinated Debt. - 51 - SECTION 7.14. Dividends - 51 - SECTION 7.15. Transactions with Affiliates - 52 - SECTION 7.16. Impairment of Security Interest. - 52 - SECTION 7.17. Borrowing Base - 52 - SECTION 7.18. No Amendments - 52 - SECTION 7.19. Extended Mellon L/Cs - 53 -
iv ARTICLE VIII EVENTS OF DEFAULT - 53 - SECTION 8.01. Events of Default - 53 - ARTICLE IX THE AGENTS - 55 - SECTION 9.01. Appointment, Powers and Immunities - 55 - SECTION 9.02. Reliance by Agents - 56 - SECTION 9.03. Events of Default - 56 - SECTION 9.04. Rights as a Lender - 57 - SECTION 9.05. Indemnification - 57 - SECTION 9.06. Non-Reliance on Agents and Other Lenders - 57 - SECTION 9.07. Failure to Act - 58 - SECTION 9.08. Resignation of Agents - 58 - SECTION 9.09. Sharing of Collateral and Payments - 58 - ARTICLE X MISCELLANEOUS - 59 - SECTION 10.01. Notices - 59 - SECTION 10.02. Effectiveness; Survival - 60 - SECTION 10.03. Indemnity and Expenses - 60 - SECTION 10.04. Amendments and Waivers - 61 - SECTION 10.05. Successors and Assigns; Participations - 62 - SECTION 10.06. No Waiver; Cumulative Remedies - 65 - SECTION 10.07. APPLICABLE LAW - 65 - SECTION 10.08. SUBMISSION TO JURISDICTION - 65 - SECTION 10.09. Severability - 66 - SECTION 10.10. Right of Setoff - 66 - SECTION 10.11. Confidentiality. - 66 - SECTION 10.12. Headings - 67 - SECTION 10.13. Construction - 67 - SECTION 10.14. Counterparts - 67 - SECTION 10.15. Documentation Agent and Syndication Agent - 67 - SECTION 10.16. JOINT AND SEVERAL OBLIGATIONS. - 67 - SECTION 10.17. Entire Agreement - 69 -
v SCHEDULES Schedule I - Subsidiaries Schedule II - Existing Liens Schedule III - Existing Indebtedness Schedule IV - Existing Guarantees Schedule V - Non-Operating Subsidiaries Schedule VI - Existing Letters of Credit Schedule VII - B of A L/Cs Schedule VIII - Mellon L/Cs
EXHIBITS Exhibit A - Form of Revolving Credit Note Exhibit B - Form of Security Agreement Exhibit C - Form of Guaranty Exhibit D - Form of Borrowing Base Certificate Exhibit E - Form of Opinion of Counsel Exhibit F - Form of Pledge Agreement Exhibit G - Form of Assignment and Acceptance Agreement Exhibit H - Form of Patent and Trademark Security Agreement
iv CREDIT AGREEMENT dated as of November 8, 2002, by and among EDO CORPORATION, a New York corporation ("EDO"), AIL SYSTEMS INC., a Delaware corporation ("AIL"), jointly and severally, (EDO and AIL, each a "Company" and collectively the "Companies"), the LENDERS which from time to time are parties to this Agreement (individually, a "Lender" and, collectively, the "Lenders") and CITIBANK, N.A., a national banking association, as Administrative Agent for the Lenders, FLEET NATIONAL BANK, as Syndication Agent and WACHOVIA BANK, N.A., as Documentation Agent. RECITALS The Companies have requested the Lenders to extend credit from time to time and the Lenders are willing to extend such credit to the Companies, subject to the terms and conditions hereinafter set forth. Accordingly, the parties hereto agree as follows: ARTICLE IDEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. DEFINITIONS . As used herein, the following words and terms shall have the following meanings: "Adjusted Libor Loans" shall mean Loans at such time as they are made and/or being maintained at a rate of interest based upon Reserve Adjusted Libor. "Administrative Agent" shall mean Citibank, N.A. in its capacity as administrative agent for the Lenders under this Agreement or its successor Administrative Agent permitted pursuant to Section 9.08. "Affiliate" shall mean with respect to a specified Person, another Person which, directly or indirectly, controls or is controlled by or is under common control with such specified Person. For the purpose of this definition, "control" of a Person shall mean the power, direct or indirect, to direct or cause the direction of the management or policies of such Person whether through the ownership of voting securities, by contract or otherwise; provided that, in any event, any Person who owns directly or indirectly 15% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation or 15% or more of the partnership or other ownership interest of any Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person. "Agents" shall mean, collectively, the Administrative Agent, the Syndication Agent and the Documentation Agent, and each, individually, an "Agent". "Aggregate Letters of Credit Outstandings" shall mean, at a particular time, the sum of (a) the aggregate maximum stated amount at such time which is available or available in the future to be drawn under all outstanding Letters of Credit and (b) the aggregate amount of LC Disbursements that have not been reimbursed by the Companies. 1 "Aggregate Outstandings" shall mean, at a particular time, the sum of (a) the Aggregate Letters of Credit Outstandings and (b) the aggregate outstanding principal amount of all Revolving Credit Loans at such time. "Aggregate Senior Indebtedness Outstandings" shall mean, at a particular time, the sum of (x) all Indebtedness of EDO and its Subsidiaries, including, without limitation, the Revolving Credit Loans and excluding Subordinated Indebtedness, and (y) the Aggregate Letters of Credit Outstandings. "Agreement" shall mean this Credit Agreement dated as of November 8, 2002 by and among EDO Corporation, AIL Systems, Inc., Citibank, N.A., as Administrative Agent and Wachovia Bank, N.A., as Documentation Agent, and the lenders party hereto, as amended, restated, supplemented or otherwise modified from time to time. "AIL" shall mean AIL Systems Inc., a Delaware corporation. "Applicable Margin" shall mean (a) with respect to Revolving Credit Loans, the percentage set forth below under the heading "Revolving Credit Loans" opposite the applicable ratio, and (b) with respect to calculation of the Letter of Credit and indemnification letter fees payable pursuant to Section 3.04(b), the percentage set forth below under the heading "Letter of Credit".
Consolidated Revolving Credit Loans Letters of Credit Leverage Ratio (360 day basis) (360 day basis) ----------------- ---------------------- ----------------- Greater than or equal to 1.75% 1.50% 2:00:1.00 Less than 2.00:1.00 but 1.50% 1.25% greater than or equal to 1:00:1.00 Less than 1.00:1.00 1.25% 1.00%
Notwithstanding the foregoing, during the period commencing on the Closing Date and ending on the date of reset of the Applicable Margin in accordance with this paragraph the Applicable Margin shall be based on a Consolidated Leverage Ratio of less than 1.00:1.00. The Applicable Margin will be set or reset with respect to each Loan on the date which is fifteen (15) days following the date of receipt by the Administrative Agent of the financial statements referred to in Section 6.03(a) and Section 6.03(c) together with a certificate of the Chief Financial Officer of each Company certifying the Consolidated Leverage Ratio and setting forth the calculation thereof in detail; provided, however, (a) the Applicable Margin will first be reset based on the financial statements for the fiscal quarter ending September 30, 2002, and (b) if any such financial statement and certificate are not received by the Administrative Agent within the time 2 period required pursuant to Section 6.03(a) or Section 6.03(b), as the case may be, the Applicable Margin will be set or reset, based on a Consolidated Leverage Ratio of greater than 2.00:1.00 from the date such financial statements and certificate were due until the date which is fifteen (15) days following the receipt by the Administrative Agent of such financial statements and certificate. The Lenders shall not in any way be deemed to have waived any Default or Event of Default, including without limitation, an Event of Default resulting from the failure of the Companies to comply with Section 7.13 of this Agreement, or any rights or remedies hereunder or under any other Loan Document in connection with the foregoing proviso. During the occurrence and continuance of an Event of Default, no downward adjustment, and only upward adjustments, shall be made to the Applicable Margin. "Assignment and Acceptance Agreement" shall mean the Assignment and Acceptance Agreement in the form attached hereto as Exhibit G. "B of A L/Cs" shall mean those letters of credit issued by Bank of America, N.A. and identified on Schedule VII. "Borrowing Base" shall mean an amount equal to (I) the sum of (a) the consolidated inventory of EDO and its Subsidiaries as reflected on the books and records of EDO and its Subsidiaries, net of reserves and net of obsolete or unmerchantable inventory, (b) the consolidated receivables of EDO and its Subsidiaries with respect to goods shipped or work performed, which has not been and is not required to be charged off or written off as uncollectible in accordance with Generally Accepted Accounting Principles or with the customary business practices of the Companies, and (c) the aggregate unencumbered cash and Eligible Investments of EDO and its Subsidiaries, less (II) the net liabilities of EDO and its Subsidiaries under Hedging Agreements permitted pursuant to Section 7.02(i), as calculated on a basis satisfactory to the Administrative Agent and in accordance with Generally Accepted Accounting Principles. "Borrowing Base Certificate" shall mean the Borrowing Base Certificate in the form set forth as Exhibit D attached hereto. "Borrowing Date" shall mean, with respect to any Loan, the date on which such Loan is disbursed to the applicable Company. "Business Day" shall mean (a) any day not a Saturday, Sunday or legal holiday, on which banks in New York City are open for business and (b) as it relates to any payment, determination, funding or notice to be made or given in connection with any Adjusted Libor Loan, any day specified in clause (a) on which trading is carried on by and between banks in Dollar deposits in the London interbank eurodollar market. "Capital Expenditures" shall mean additions to property and equipment of EDO and its Subsidiaries which, in conformity with Generally Accepted Accounting Principles, are included as "additions to property, plant or equipment" or similar items which would be reflected in the Consolidated statement of cash flow of EDO and its Subsidiaries, including without limitation, property and equipment which are the subject of Capital Leases. 3 "Capital Lease" shall mean any lease the obligations of which are required to be capitalized on the balance sheet of EDO and its Subsidiaries in accordance with Generally Accepted Accounting Principles. "Cash Collateral" shall mean the pledge and deposit with the Administrative Agent for the benefit of the Agents and the Lenders, as collateral for the Obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Administrative Agent. "Chief Financial Officer" shall mean the Chief Financial Officer of EDO. "Closing Date" shall mean November 8, 2002. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Commitment Proportion" shall mean, with respect to each Lender at the time of determination thereof the ratio, expressed as a percentage, which such Lender's Commitments bear to the Total Commitment or if the Commitments have expired or have been terminated, the ratio, expressed as a percentage, which the aggregate principal amount of the Loans outstanding of such Lender plus the aggregate of such Lender's participations in Letters of Credit bears to the Aggregate Outstandings. "Commitments" shall mean, collectively, the Revolving Credit Commitment and Letter of Credit Commitment. "Company" and "Companies" shall have the meaning set forth in the preamble hereto. "Consolidated" or "Consolidating" shall mean, as applied to any financial or accounting term, such term determined on a consolidated basis, or consolidating basis, in accordance with Generally Accepted Accounting Principles applied on a consistent basis for EDO and its Subsidiaries required to be consolidated with EDO. "Consolidated EBIT" shall mean for any period, Consolidated Net Income (or net loss) for such period, plus to the extent deducted in determining Consolidated Net Income, the sum of (a) Consolidated Interest Expense, (b) all income taxes to any government or governmental instrumentality (whether paid or accrued), (c) non-cash restructuring charges incurred in EDO's fiscal years ending December 31, 2001 and December 31, 2002 and (d) non-cash expenses pertaining to the ESOP and pension plans maintained by EDO, in each case, determined on a Consolidated basis for EDO and its Subsidiaries in accordance with Generally Accepted Accounting Principles applied on a consistent basis. All of the foregoing categories shall be calculated (without duplication) over the four fiscal quarters next preceding the date of calculation thereof. "Consolidated EBITDA" shall mean for any period, Consolidated Net Income (or net loss) for such period, plus to the extent deducted in determining Consolidated Net Income, the 4 sum of (a) Consolidated Interest Expense, (b) depreciation and amortization expenses and charges and (c) all income taxes to any government or governmental instrumentality (whether paid or accrued), (d) non-cash restructuring charges incurred in EDO's fiscal year ending December 31, 2001 and December 31, 2002 and (e) non-cash expenses pertaining to the ESOP and pension plans maintained by EDO, in each case, determined on a Consolidated basis for EDO and its Subsidiaries in accordance with Generally Accepted Accounting Principles applied on a consistent basis. All of the foregoing categories shall be calculated (without duplication) over the four fiscal quarters next preceding the date of calculation thereof. "Consolidated Fixed Charge Coverage Ratio" shall mean for any period (a) Consolidated EBITDA less Capital Expenditures not financed with insurance proceeds received with respect to damage or destruction to any fixed or capital asset, divided by (b) the sum of (i) the current portion of long term indebtedness (including obligations under Capital Leases), (ii) Consolidated Interest Expense, (iii) all income taxes to any government or governmental instrumentality paid and (iv) all dividends and distributions made with respect to outstanding stock of EDO, in each case determined on a consolidated basis for EDO and its Subsidiaries in accordance with Generally Accepted Accounting Principles applied on a consistent basis. All the foregoing categories shall be calculated (without duplication) over the four fiscal quarters next preceding the date of calculation thereof. "Consolidated Interest Expense" shall mean the consolidated gross interest expense of EDO and its Subsidiaries determined in accordance with Generally Accepted Accounting Principles, applied on a consistent basis and shall be calculated over the four fiscal quarters next preceding the date of calculation thereof. "Consolidated Leverage Ratio" shall mean the ratio of (a) the total Consolidated Indebtedness less the sum of (i) Subordinated Debt and (ii) the portion of Aggregate Letters of Credit Outstanding attributable to "Performance-Based Letters of Credit" (within the meaning of 12 C.F.R. Part III Appendix A) to (b) Consolidated EBITDA. "Consolidated Net Income" shall mean, for any period, the consolidated net income (or net loss) of EDO and its Subsidiaries for such period determined in accordance with Generally Accepted Accounting Principles applied on a consistent basis. "Consolidated Tangible Net Worth" shall mean (i) total consolidated assets of EDO and its Subsidiaries determined in accordance with Generally Accepted Accounting Principles applied on a consistent basis, except that there shall be excluded therefrom all intangible assets, including, without limitation, customer lists, organizational expenses, patents, trademarks, copyrights goodwill, covenants not to compete, research and development costs, training costs, and all unamortized debt discount, prepaid expenses and deferred charges, less (ii) the total consolidated liabilities of EDO and its Subsidiaries determined in accordance with Generally Accepted Accounting Principles applied on a consistent basis. "Consolidated Total Unsubordinated Liabilities" shall mean all items which, in accordance with Generally Accepted Accounting Principles applied on a consistent basis, would properly be included on the liabilities side of the balance sheet other than Subordinated Debt 5 (excluding the current portion thereof to the extent permitted to be paid hereunder), capital stock, capital surplus and retained earnings, as of the date on which the amount of Consolidated Total Unsubordinated Liabilities is to be determined, of EDO and its Subsidiaries. "Default" shall mean any condition or event which upon notice, lapse of time or both would constitute an Event of Default. "Documentation Agent" shall mean Wachovia Bank, N.A. in its capacity as Documentation Agent or its successor Documentation Agent permitted pursuant to Section 9.08. "Dollar" and the symbol "$" shall mean lawful money of the United States of America. "Domestic Subsidiary" shall mean any Subsidiary of EDO which is organized under the laws of any state or territory of the United States of America. "EDO" shall mean EDO Corporation, a New York corporation. "Eligible Investments" shall mean (a) direct obligations of the United States of America or any governmental agency thereof which are fully guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; or (b) dollar denominated certificates of time deposit maturing within one year issued by any Lender or by any commercial bank organized and existing under the laws of the United States or any state thereof and having aggregate capital and surplus in excess of $1,000,000,000 or issued by any Lender; or (c) money market mutual funds having assets in excess of $2,500,000,000; or (d) commercial paper rated not less than P-1 or A-1 or their equivalent by Moody's Investor Services, Inc. or Standard & Poor's Ratings Group, respectively; or (e) tax exempt securities of a U.S. issuer rated A or better by Standard and Poor's Ratings Group or Moody's Investor Services, Inc. "Environmental Law" shall mean any law, ordinance, rule, regulation, or policy having the force of law of any Governmental Authority relating to pollution or protection of the environment or to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.) the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901, et seq.) and the rules and regulations promulgated pursuant thereto. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with any Company or any Subsidiary of EDO would be deemed to be a member of the same "controlled group" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "ESOP" shall mean the EDO Corporation Employee Stock Ownership Plan. 6 "ESOP Loan" shall mean the loan made by EDO to the ESOP on July 17, 2001 in the original principal amount of $15,839,400. "ESOP Loan Agreement" shall mean the Loan Agreement dated as of July 17, 2001 between EDO and GreatBanc Trust Company as successor trustee to HSBC Bank USA, as amended, and each of the notes, guaranties and other documents executed in connection therewith. "ESOT" shall mean the trust established under the ESOP. "Eurocurrency Reserve Requirement" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate (without duplication) of the rates (expressed as a decimal) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves, under any regulations of the Board of Governors of the Federal Reserve System or any other governmental authority having jurisdiction with respect thereto) as from time to time in effect, dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "eurocurrency liabilities" in Regulation D) maintained by any bank. "Event of Default" shall have the meaning set forth in Article VIII. "Executive Officer" shall mean any of the President, the Chief Financial Officer or the Secretary of any Company, or any Guarantor, as applicable and their respective successors, if any, designated by the board of directors. "Existing Letters of Credit" shall mean the Standby Letters of Credit issued prior to the date hereof as set forth on Schedule VI. "Existing Loans" shall mean the loans outstanding pursuant to the Prior Agreement as of the Closing Date. "Federal Funds Effective Rate"shall mean, for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or if such rate is not so announced or published for any day which is a Business Day, the Federal Funds Rate for the last day on which such rate was announced or published. "Foreign Subsidiary" shall mean any Subsidiary of EDO other than a "Domestic Subsidiary". "Generally Accepted Accounting Principles" shall mean those generally accepted accounting principles in the United States of America, as in effect from time to time. "Governmental Authority" shall mean any nation or government, any state, province, city or municipal entity or other political subdivision thereof, and any governmental, executive, 7 legislative, judicial, administrative or regulatory agency, department, authority, instrumentality, commission, board or similar body, whether federal, state, provincial, territorial, local or foreign. "Guarantor" shall mean AIL Technologies Inc., a Delaware corporation, American Nucleonics Corporation, a California corporation, Dynamic Systems, Inc., a Maryland corporation, EDO Western Corporation, a Utah corporation, EDO Sports Inc., a Delaware corporation, Astro Optics Laboratory, Inc., a California corporation, EDO International Corporation, a Delaware corporation, EDO Energy Corporation, a Delaware corporation, EDO Automotive Natural Gas Inc., a Delaware corporation, Specialty Plastics, Inc., a Louisiana corporation, EDO Acquisition II, Inc., a Delaware corporation, EDO Reconnaissance and Surveillance Systems, Inc., a Delaware corporation, M. Technologies, Inc., a Pennsylvania corporation, EDO Foreign Sales Corporation, a U.S. Virgin Islands corporation, each other Subsidiary of EDO existing on the Closing Date (other than EDO Canada, Ltd. and Condor Systems GmbH) and each Person required to execute a Guaranty in accordance with Section 6.12. "Guaranty" shall mean the Guaranty substantially in the form of Exhibit C attached hereto to be executed and delivered on the Closing Date by each Guarantor and, thereafter, by any Person who may be required to execute the same pursuant to Section 6.13, as the same may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Hazardous Materials" shall mean any explosives, radioactive materials, or other materials, wastes, substances, or chemicals regulated as toxic, hazardous or as a pollutant, contaminant or waste under any applicable Environmental Law. "Hedging Agreement" shall mean any interest rate swap, collar, cap, floor or forward rate agreement or other agreement regarding the hedging of interest rate risk exposure executed in connection with hedging the interest rate exposure of a Person, and any confirming letter executed pursuant to such agreement, all as amended, supplemented, restated or otherwise modified from time to time. "Indebtedness" shall mean, without duplication, as to any Person or Persons (a) indebtedness for borrowed money; (b) indebtedness for the deferred purchase price of property or services (other than current trade payables incurred in the ordinary course of business and payable in accordance with customary practices; (c) indebtedness evidenced by bonds, debentures, notes or other similar instruments; (d) obligations and liabilities secured by a Lien upon property owned by such Person, whether or not owing by such Person and even though such Person has not assumed or become liable for the payment thereof; (e) obligations and liabilities directly or indirectly guaranteed by such Person; (f) obligations or liabilities created or arising under any conditional sales contract or other title retention agreement with respect to property used and/or acquired by such Person; (g) obligations of such Person as lessee under Capital Leases; (h) net liabilities of such Person under Hedging Agreements and foreign currency exchange agreements, as calculated on a basis satisfactory to the Administrative Agent and in accordance with accepted practice; (i) all obligations, contingent or otherwise of such Person as an account party or applicant in respect of letters of credit; and (j) all obligations of such Person in respect of bankers' acceptances. 8 "Interest Payment Date" shall mean as to any Loan, the last Business Day of each September, December, March and June, and the date such Loan is paid in full or in part. "Interest Period" shall mean with respect to any Adjusted Libor Loan: (a) initially, the period commencing on the date such Adjusted Libor Loan is made and ending one, two or three months thereafter, as selected by the Companies in their joint notice of borrowing or in their notice of conversion from a Prime Rate Loan provided, in each case, in accordance with the terms of Articles II and III hereof; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Adjusted Libor Loan and ending one, two or three months thereafter, as selected by the Companies by irrevocable written notice to the Administrative Agent not later than 11:00 a.m. New York, New York time three Business Days prior to the last day of the then current Interest Period with respect to such Adjusted Libor Loan; provided, however, that all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) if the Companies shall fail to give notice as provided in clause (b) above, the Companies shall be deemed to have requested conversion of the affected Adjusted Libor Loan to a Prime Rate Loan on the last day of the then current Interest Period with respect thereto; (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; (iv) the Companies shall select Interest Periods so as not to require a payment or prepayment of any Adjusted Libor Loan during an Interest Period for such Adjusted Libor Loan; and (v) no more than six (6) Interest Periods with respect to the Loans may exist at any one time. "Issuance Date" shall have the meaning set forth in Section 2.04(a). "Issuing Lender" shall mean Fleet National Bank, in its capacity as the issuer of Letters of Credit hereunder or its successor Issuing Lender permitted pursuant to Section 2.04(e). 9 "LC Disbursement" shall mean a payment made by the Issuing Lender pursuant to a Letter of Credit. "LC Exposure" shall mean, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time, plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Companies at such time. "Lenders" shall have the meaning set forth in the preamble hereto. "Lending Office" shall mean for each Lender, the office specified under such Lender's name on the signature pages hereof with respect to each Type of Loan, or such other office as such Lender may designate in writing from time to time to the Companies and the Administrative Agent with respect to such Type of Loan. "Letter of Credit" shall mean any Standby Letter of Credit issued by the Issuing Bank for the account of the Companies pursuant to the terms of this Agreement or deemed a "Letter of Credit" hereunder pursuant to Section 2.04(f) of this Agreement. "Letter of Credit Commitment" shall mean, with respect to each Lender, the obligation of such Lender to acquire participations in Letters of Credit in an aggregate amount not to exceed the amount set forth opposite such Lender's name on the signature pages hereof under the caption "Letter of Credit Commitment" as such amounts may be adjusted in accordance with the terms of this Agreement. "Lien" shall mean any lien (statutory or otherwise), security interest, mortgage, deed of trust, pledge, charge, conditional sale, title retention agreement, Capital Lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. "Loan Documents" shall mean, collectively, this Agreement, the Notes, the Security Documents, the Guaranties, the Intercreditor Agreement, the Pledge Agreement and each other agreement executed in connection with the transactions contemplated hereby or thereby, as each of the same may hereafter be amended, restated, supplemented or otherwise modified from time to time. "Loans" shall mean the Revolving Credit Loans. "Material Adverse Effect" shall mean a material adverse effect upon (a) the business, operations, prospects, assets or condition, financial or otherwise, of the Companies and the Guarantors taken as a whole or (b) the ability of any Company or any Guarantor to perform in any material respect its obligations under any Loan Document to which it is a party. "Maximum Amount" shall mean $140,000,000, as such amount may be increased pursuant to Section 2.03 hereof. 10 "Maximum Lender Commitment" shall mean with respect to each Lender the amount set forth opposite such Lender's name on the signature pages hereof, as the same may be increased with respect to an Increasing Lender (as defined in Section 2.03(a)) pursuant to Section 2.03(d). "Mellon L/Cs" shall mean those letters of credit issued by Mellon Bank, N.A. which are identified on Schedule VIII hereto. "Multi-Employer Plan" means a Multi-Employer Pension Plan as defined by ERISA Section 3(37) with respect to its Company, any Guarantor, or any ERISA Affiliate has an obligation to contribute on account of their employees or has any present or contingent withdrawing liability on account of any such employees. "Non-Operating Subsidiaries" shall mean those Subsidiaries of EDO identified on Schedule V attached hereto. "Notes" shall mean the Revolving Credit Notes. "Obligations" shall mean all obligations, liabilities and indebtedness of each Company to the Lenders and the Agents, whether now existing or hereafter created, absolute or contingent, direct or indirect, due or not, whether created directly or acquired by assignment or otherwise, arising under or relating to this Agreement, the Notes or any other Loan Document including, without limitation, all obligations, liabilities and indebtedness of the Companies with respect to the principal of and interest on the Loans, with respect to reimbursement of drawings under Letters of Credit and all fees, costs, expenses and indemnity obligations of the Companies and the Agents hereunder, or under any other Loan Document, and including all interest at the rate set forth in Section 3.01(c) accruing after an order of relief under Title 11 of the United States Code. The Obligations of the Companies shall be joint and several. "Participant" shall have the meaning set forth in Section 10.05. "Participation" shall have the meaning set forth in Section 10.05. "Patent and Trademark Security Agreement" shall mean the Patent and Trademark Security Agreement substantially in the form attached hereto as Schedule H to be executed and delivered on the Closing Date by each Company and the Guarantors party thereto, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Payment Office" shall mean, with respect to the Administrative Agent, its office located at EAB Plaza, Uniondale, New York 11555 or such other office as the Administrative Agent may designate from time to time and, with respect to the Issuing Lender, its office located at 1 Fleet Way, Scranton, Pennsylvania 18507-1999 or such other office as the Issuing Lender may designate from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. 11 "Permitted Acquisition" shall mean the acquisition by a Company or any Guarantor of all or substantially all of the assets or stock of any Person, or part thereof, whose principal businesses are substantially similar to the principal businesses of such Company or such Guarantor, provided (i) each Lender shall have received notice of the proposed acquisition which notice shall contain a detailed description of the proposed transaction, including the target's name, structure of the transaction and the purchase price and all other consideration payable in connection therewith, (ii) such acquisition has either been approved by the Board of Directors of the corporation which is the subject of the acquisition or recommended for approval by such board to the shareholders of such corporation and subsequently approved by the shareholders of such corporation as required under applicable law or the by-laws and certificate of incorporation of such corporation, (iii) no Default or Event of Default shall have occurred and be continuing or would occur immediately after giving effect to the proposed acquisition, (iv) each Lender shall have received unaudited pro forma consolidated financial statements of EDO and its subsidiaries for the then most recent twelve month period ended after giving effect to the acquisition and such other information with respect to the proposed acquisition as the Lender may reasonably request, (v) the entity which is the subject of the acquisition shall have a net worth calculated in accordance with Generally Accepted Accounting Principles as determined by the then most recent financial statements of such entity in excess of zero, (vi) Lenders having not less than sixty-six and two-thirds (66 2/3%) percent of the Total Commitments shall have approved each proposed acquisition where the purchase price shall exceed $40,000,000 prior to consummation thereof, which approval may be withheld despite compliance with the other conditions set forth in Section 5.02 and (vii) after giving effect to such acquisition, the aggregate portion of the purchase price and consideration for all Permitted Acquisitions shall not exceed $60,000,000 in any consecutive twelve-month period. "Permitted Liens" shall mean the Liens specified in clauses (a) through (n) of Section 7.01. "Person" shall mean any natural person, corporation, limited liability company, limited liability partnership, business trust, joint venture, association, company, partnership or Governmental Authority. "Plan" shall mean any single-employer plan defined in Section 4001 of ERISA, which covers, or at any time during the five calendar years preceding the date of this Agreement covered, employees of any Company, any Guarantor or an ERISA Affiliate on account of such employees' employment by such Company, such Guarantor or an ERISA Affiliate. "Pledge Agreement" shall mean the Pledge Agreement substantially in the form attached hereto as Exhibit F to be executed by EDO, each Subsidiary of EDO which owns shares or interests in any other Subsidiary of EDO, respectively, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Prime Rate" shall mean the rate per annum announced by the Administrative Agent from time to time as its prime rate in effect at its principal office. Each change in the Prime Rate shall be effective on the date such change is announced to become effective. 12 "Prime Rate Loans" shall mean Loans at such times as they are being made and/or maintained at a rate of interest based on the Prime Rate. "Prior Agreement" shall mean the Credit Agreement dated August 24, 2000 by and among EDO, AIL, Citibank, N.A., as successor to European American Bank, as Administrative Agent and Mellon Bank, N.A., as Documentation Agent and the Lenders party thereto, as amended prior to the date hereof. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as the same may be amended or supplemented from time to time. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan as to which the 30 day notice requirement has not been waived by the PBGC. "Required Lenders" shall mean Lenders owed at least 66 2/3% of the sum of the Aggregate Outstandings or, if no Revolving Credit Loans are outstanding, Lenders having at least 66 2/3% of the Total Commitments; provided, however, in the event the Maximum Amount is increased to $200,000,000 pursuant to Section 2.03, the foregoing percentages shall be 51% effective upon the date of such increase. "Reserve Adjusted Libor" shall mean, with respect to the Interest Period pertaining to an Adjusted Libor Loan, the rate per annum equal to the product (rounded upwards to the next higher 1/16 of one percent) of (a) the annual rate of the interest for Dollar deposits of an amount comparable to the amount of such Loan and for a period equal to the Interest Period applicable thereto which appears on Telerate Page 3750 as of 11:00 A.M. (London time) on the second Business Day prior to the commencement of such Interest Period, multiplied by (b) the Eurocurrency Reserve Requirement. "Revolving Credit Commitment" shall mean, with respect to each Lender, the obligation of such Lender to make Revolving Credit Loans to the Companies in an aggregate amount not to exceed the amount set forth opposite such Lender's name on the signature pages hereof under the caption "Revolving Credit Commitment," as such amounts may be adjusted in accordance with the terms of this Agreement. "Revolving Credit Commitment Period" shall mean the period from and including the Closing Date to, but not including, the Revolving Credit Commitment Termination Date or such earlier date as the Revolving Credit Commitment shall terminate as provided herein. "Revolving Credit Commitment Termination Date" shall mean the third anniversary of the Closing Date. "Revolving Credit Loans" shall have the meaning set forth in Section 2.01(a). "Revolving Credit Notes" shall have the meaning set forth in Section 2.02. 13 "Security Agreement" shall mean the Security Agreement in the form attached as Exhibit B to be executed and delivered on the Closing Date by each Company and the Guarantors, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Security Documents" shall mean, collectively, the Security Agreement, the Patent and Trademark Security Agreement, the Pledge Agreement and each other collateral security document delivered to the Administrative Agent hereunder. "Solvent" shall mean with respect to any Person as of the date of determination thereof that (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise," as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the probable liabilities of such Person on its debts as such debts become absolute and matured, (c) such Person will not have as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For such purposes, any contingent liability is valued at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Standby Letter of Credit" shall mean a letter of credit issued to support an obligation of a Person and which may be drawn on only upon the failure of such Person to perform such obligation or other contingency. "Subordinated Debentures" shall mean the 5.25% Convertible Subordinated Debentures due April 1, 2007 issued pursuant to an indenture dated March 26, 2002, between EDO and HSBC Bank USA, as Trustee in the original principal amount of $137,800,000. "Subordinated Debt" or "Subordinated Indebtedness" shall mean all debt which is subordinated in right of payment to the prior final and indefeasible payment in full of the obligations of the Companies and the Guarantors to the Lenders hereunder and under any other Loan Document on terms satisfactory to and approved in writing by the Required Lenders. "Subsidiaries" shall mean, with respect to any Person, any corporation, association or other business entity more than 50% of the voting stock or other ownership interests (including, without limitation, membership interests in a limited liability company) of which is at the time owned or controlled, directly or indirectly, by such Person or one or more of its Subsidiaries or a combination thereof. "Taxes" shall have the meaning set forth in Section 3.09. "Telerate Page 3750" shall mean the display designated as "Page 3750" on the Associated Press-Dow Jones Telerate Service (or such other page as may replace Page 3750 on the Associated Press-Dow Jones Telerate Service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British 14 Bankers' Association interest settlement rates for Dollar deposits). Each Reserve Adjusted Libor rate determined on the rate displayed on Telerate Page 3750 shall be subject to corrections, if any, made in such rate and displayed by the Associated Press-Dow Jones Telerate Service within one hour of the time when such rate is first displayed by such service. "Total Commitments" shall mean the aggregate of the Total Revolving Credit Commitment and the Total Letter of Credit Commitment. "Total Revolving Credit Commitment" shall mean, at any time, the aggregate of the Revolving Credit Commitments in effect at such time which, initially, shall be $125,000,000. "Total Letter of Credit Commitment" shall mean, at any time, the aggregate of the Letter of Credit Commitments in effect at such time, which, initially, shall be $125,000,000. "Type" shall mean as to any Loan its status as a Prime Rate Loan or an Adjusted Libor Loan. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the present value of the accrued benefits under the Plan as of the close of its most recent plan year exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. SECTION 1.02. TERMS GENERALLY . The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and the neuter. Except as otherwise herein specifically provided, each accounting term used herein shall have the meaning given to it under Generally Accepted Accounting Principles. The term "including" shall not be limited or exclusive, unless specifically indicated to the contrary. The word "will" shall be construed to have the same meaning in effect as the word "shall". The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole, including the exhibits and schedules hereto, all of which are by this reference incorporated into this Agreement. ARTICLE IILOANS SECTION 2.01. REVOLVING CREDIT LOANS . (a) Subject to the terms and conditions, and relying upon the representations and warranties, set forth herein, each Lender severally agrees to make loans (individually a "Revolving Credit Loan" and, collectively, the "Revolving Credit Loans") to the Companies from time to time during the Revolving Credit Commitment Period, up to but not exceeding at any one time outstanding the amount of its Revolving Credit Commitment; provided, however, that no Revolving Credit Loan shall be made if, after giving effect to such Revolving Credit Loan, (i) the aggregate outstanding principal amount of all Revolving Credit Loans would exceed the Total Revolving Credit Commitment in effect at such time, (ii) the Aggregate Outstandings would exceed the Maximum Amount or (iii) the Aggregate Senior Indebtedness Outstandings would exceed the Borrowing Base. During the Revolving Credit Commitment Period, the Companies may from time to time borrow, repay and re-borrow hereunder on or after the date hereof and prior to the Revolving Credit Commitment Termination 15 Date, subject to the terms, provisions and limitations set forth herein. The Revolving Credit Loans may be (i) Adjusted Libor Loans, (ii) Prime Rate Loans or (iii) a combination thereof. (b) The Companies shall give the Administrative Agent irrevocable written notice (or telephonic notice promptly confirmed in writing) not later than 11:00 a.m., New York, New York time, three Business Days prior to the date of each proposed Adjusted Libor Loan under this Section 2.01 or prior to 11:00 a.m. New York, New York time on the date of each proposed Prime Rate Loan under this Section 2.01. Such notice shall be irrevocable and shall specify (i) the amount and Type of the proposed borrowing, (ii) the initial Interest Period if an Adjusted Libor Loan, and (iii) the proposed Borrowing Date. Upon receipt of such notice from the Companies, the Administrative Agent shall promptly notify each Lender thereof. Except for borrowings which utilize the full remaining amount of the Total Revolving Credit Commitment, each borrowing of a Prime Rate Loan shall be in an amount not less than $250,000 or, if greater, whole multiples of $100,000 in excess thereof. Each borrowing of an Adjusted Libor Loan shall be in an amount not less than $1,000,000 or whole multiples of $500,000 in excess thereof. (c) The Companies shall have the right, upon not less than three Business Days' prior written notice to the Administrative Agent to terminate the Total Revolving Credit Commitment or from time to time to permanently reduce the amount of the Total Revolving Credit Commitment; provided, however, that no such termination or reduction shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Credit Loans made on the effective date thereof, the aggregate principal amount of all Revolving Credit Loans outstanding would exceed the Total Revolving Credit Commitment then reduced; provided, further, that any such termination or reduction requiring prepayment of any Adjusted Libor Loan shall be made only on the last day of the Interest Period with respect thereto or on the date of payment in full of all amounts owing pursuant to Section 3.08 as a result of such termination or reduction. Any such reduction shall be in the amount of $1,000,000 or whole multiples of $250,000 in excess thereof, and shall reduce permanently the amount of the Total Revolving Credit Commitment then in effect. (d) The several agreements of the Lenders to make Revolving Credit Loans pursuant to this Section 2.01 shall automatically terminate on the Revolving Credit Commitment Termination Date. Upon such termination, the Companies shall immediately repay in full the principal amount of the Revolving Credit Loans then outstanding, together with all accrued interest thereon and all other amounts due and payable hereunder. SECTION 2.02. REVOLVING CREDIT NOTE . The Revolving Credit Loans made by each Lender shall be evidenced by a promissory note of the Companies, (individually the "Revolving Credit Note" and collectively the "Revolving Credit Notes"), substantially in the form attached hereto as Exhibit A, each appropriately completed, duly executed and delivered on behalf of the Companies and payable to the order of such Lender in a principal amount equal to the Revolving Credit Commitment of such Lender. Each Revolving Credit Note shall (a) be dated the Closing Date, (b) be stated to mature on the Revolving Credit Commitment Termination Date, and (c) bear interest from the date thereof until paid in full on the unpaid principal amount thereof from time to time outstanding as provided in Section 3.01. Each Lender is authorized to record the date, Type and amount of each Revolving Credit Loan and the 16 date and amount of each payment or prepayment of principal of each Revolving Credit Loan in such Lender's records or on the grid schedule annexed to the Revolving Credit Note; provided, however, that the failure of a Lender to set forth each such Revolving Credit Loan, payment and other information shall not in any manner affect the obligation of the Companies to repay each Revolving Credit Loan made by such Lender in accordance with the terms of its Revolving Credit Note and this Agreement. The Revolving Credit Note, the grid schedule and the books and records of each Lender shall constitute presumptive evidence of the information so recorded absent manifest error. SECTION 2.03. INCREASE IN MAXIMUM AMOUNT . (a) Requests for Increase by the Company. The Company may at any time and from time to time (but in no event more frequently than three times) propose that the Maximum Amount be increased by an amount equal to $60,000,000 in the aggregate (any such proposed increase being an "Increase"), by notice to the Administrative Agent specifying the existing Lender(s) (the "Increasing Lender(s)") and up to five (5) additional lenders in the aggregate (the "Assuming Lender(s)") that will be providing Commitments, and the date on which such Increase is to be effective (an "Increase Date"), which shall be a Business Day at least 10 Business Days after delivery of such notice and prior to the Commitment Termination Date; provided that: (i) each Increase shall not in be in an amount less than $15,000,000 and in no event shall all such Increases be in an amount in excess of $60,000,000; (ii) an increase in the Maximum Amount shall not result in an increase or decrease in the Total Revolving Credit Commitment or the Total Letter of Credit Commitment; (iii) no Default or Event of Default shall have occurred and be continuing on such Increase Date or shall result from the proposed Increase; (iv) the representations and warranties contained in Article IV shall be true and correct in all material respects on and as of the Increase Date as if made on and as of such date except to the extent such representations and warranties relate to an earlier date in which case they shall be true and correct in all material respects as of such earlier date; (v) the Administrative Agent shall have consented to any Assuming Lender in accordance with Section 10.05 (c) hereof; and (vi) the Assuming Lender or Increasing Lender shall assume or increase, as applicable, a Letter of Credit Commitment and a Revolving Credit Commitment in equal amounts. (b) Effectiveness of Increase by Borrower. Any Assuming Lender shall become a Lender hereunder as of such Increase Date and the Commitment of any Increasing 17 Lender and any such Assuming Lender shall be increased as of such Increase Date; provided that: (i) the Administrative Agent shall have received on or prior to 9:00 a.m., New York City time, on such Increase Date a certificate of a duly authorized officer of the Company stating that each of the applicable conditions to such Increase set forth in clause (a) of this Section has been satisfied; (ii) with respect to each Assuming Lender, the Administrative Agent shall have received, on or prior to 9:00 a.m., New York City time, on such Increase Date, an appropriate Assignment and Acceptance Agreement in substantially the form of Exhibit G, duly executed by such Assuming Lender and the Company and acknowledged by the Administrative Agent; and (iii) each Increasing Lender shall have delivered to the Administrative Agent, on or prior to 9:00 a.m., New York City time, on such Commitment Increase Date, confirmation in writing satisfactory to the Administrative Agent as to its increased Commitment, with a copy of such confirmation to the Borrower. (c) Recordation into Register. Upon its receipt of confirmation from a Lender that it is increasing its Commitment hereunder, together with the certificate referred to in clause (b)(i) above, the Administrative Agent shall (a) record the information contained therein in the Register and (b) give prompt notice thereof to the Borrower. Upon its receipt of an Assignment and Acceptance Agreement executed by an Assuming Lender, together with the certificate referred to in clause (b)(i) above, the Administrative Agent shall, if such Assignment and Acceptance Agreement has been completed and is in substantially the form of Exhibit G, (x) accept such Assignment and Acceptance Agreement, (y) record the information contained therein in the Register and (z) give prompt notice thereof to the Company. (d) Adjustments of Borrowings upon Effectiveness of Increase. In the event that the Administrative Agent shall have received notice from the Company as to any agreement with respect to an Increase on or prior to the relevant Increase Date and the actions provided for in clause (b) above shall have occurred by 9:00 a.m., New York City time, on such Increase Date, the Administrative Agent shall notify the Lenders (including any Assuming Lenders) of the occurrence of such Increase Date promptly on such date by facsimile transmission or electronic messaging system. On the date of such Increase, (i) the Borrower shall (x) prepay the outstanding Revolving Credit Loans (if any) in full, (y) simultaneously borrow new Revolving Credit Loans hereunder in an amount equal to such prepayment, so that, after giving effect thereto, the Revolving Credit Loans are held ratably by the Lenders in accordance with the respective Commitments of such Lenders (after giving effect to the Increase) and (z) pay to the Lenders the amounts, if any, payable under Section 3.08 (ii) the Letter of Credit Commitment and the Revolving Credit Commitment of each Lender (including an Increasing Lender and an Assuming Lender) shall be equal to (x) such Lender's Maximum Lender Commitment divided by the Maximum Amount after giving effect to the Increase, multiplied by (y) the Total Letter of Credit Commitment and Total Revolving Credit Commitment, respectively, and (iii) the 18 Maximum Lender Commitment of any Increasing Lender shall be increased by its portion of the Increase. SECTION 2.04. LETTERS OF CREDIT. (a) Generally. Subject to the terms and conditions set forth in this Agreement, upon the written request of the Companies in accordance herewith, the Issuing Lender shall issue Letters of Credit at any time during the Revolving Credit Commitment Period with pro rata participation by all of the Lenders in accordance with their respective Commitment Proportions. Notwithstanding the foregoing, no Letter of Credit shall be issued, renewed or extended if (I) the Issuing Lender has received notice of a Default or Event of Default and such Default or Event of Default shall be continuing or (II) after giving effect to the same, (i) the Aggregate Letter of Credit Outstandings would exceed the Total Letter of Credit Commitment in effect at such time (ii) the Aggregate Outstandings would exceed the Maximum Amount or (iii) the Aggregate Senior Indebtedness Outstandings would exceed the Borrowing Base. Each request for issuance of a Letter of Credit shall be in writing and shall be received by the Issuing Lender by no later than 11:00 a.m., New York, New York time, on the day which is at least two Business Days prior to the proposed date of issuance. Such issuance shall occur by no later than 5:00 p.m. on the proposed date of issuance (assuming proper prior notice as aforesaid) (the "Issuance Date"). Subject to the terms and conditions contained herein, the expiry date, and the amount and beneficiary of the Letters of Credit will be as designated by the Companies. The Issuing Lender shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify the Lenders, of the amounts of all Letters of Credit issued hereunder and of any extension, reduction, termination or amendment of any Letter of Credit. Each Letter of Credit issued by the Issuing Lender hereunder shall identify: (i) the dates of issuance and expiry of such Letter of Credit, (ii) the amount of such Letter of Credit (which shall be a sum certain), (iii) the beneficiary of such Letter of Credit, and (iv) the drafts and other documents necessary to be presented to the Issuing Lender upon drawing thereunder. In no event shall any Letter of Credit expire (or by its terms be required to be borrowed), after the Business Day which is three Business Days immediately prior to the Revolving Credit Commitment Termination Date other than with respect to Letters of Credit issued to Mellon Bank, N.A. to back those Mellon L/Cs having an expiry after such date (the "Extended Mellon L/Cs"). The Companies agree to execute and deliver to the Issuing Lender such further documents and instruments in connection with any Letter of Credit issued hereunder (including without limitation, applications therefor) as the Issuing Lender in accordance with its customary practices may request. (b) Drawings Under Letters of Credit. The Companies hereby absolutely and unconditionally promise to pay the Issuing Lender not later than 12:00 noon (New York, New York time) the amount of each drawing under a Letter of Credit if the Companies receive notice of such drawing or payment prior to 10:00 a.m., New York, New York time, on the date of such drawing or payment, or if such notice has not been received by the Companies prior to such time on such date, then not later than 12:00 noon, New York, New York time, on the Business Day immediately following the day that the Companies receive such notice; provided, however, if any drawing or payment was in an amount not less than $500,000, the Companies may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.01 that such payment be financed with a Revolving Credit Loan which is Prime Rate Loan in an equivalent amount, and, to the extent so financed, the Companies' obligations to make such payment shall 19 be discharged and replaced by such a Prime Rate Loan. Such request shall be made by the Companies on the date of receipt of notice from the Issuing Lender of a drawing under a Letter of Credit. The Issuing Lender shall notify the Administrative Agent, and the Administrative Agent shall notify each Lender, of such request in accordance with Section 2.01. If the Companies fail to make such payment when due, the Issuing Lender shall notify each Lender of the amount of the drawing under the applicable Letter of Credit. Each Lender agrees that on the first Business Day after receipt of such notice, it will immediately make available by no later than 12:00 noon New York, New York time, to the Issuing Lender at its office located at the Payment Office in immediately available funds, its Commitment Proportion of such drawing or payment, provided (i) each Lender's obligation shall be reduced by its Commitment Proportion of any reimbursement by the Companies in respect of any such drawing or payment pursuant to this Section 2.04 and (ii) no Lender shall be required to make payments to the Issuing Lender with respect to a drawing or payment which the Companies reimbursed with the proceeds of a Revolving Credit Loan, as contemplated above, if such Lender fully funded its Commitment Proportion of such Revolving Credit Loan in accordance with Section 3.11. Any payment made by a Lender pursuant to this Section 2.04(b) to reimburse the Issuing Lender for any drawing under a Letter of Credit (other than a Prime Rate Loan as contemplated above) shall not constitute a Revolving Credit Loan and shall not relieve the Companies of their obligation to reimburse the Issuing Lender for such drawing or payment. Each drawing under a Letter of Credit which is not paid on the date such drawing or payment is made shall accrue interest, for each day from and including the date of such drawing or payment to but excluding the date that the Companies reimburse the Issuing Lender in full for such drawing or payment, at the rate per annum then applicable to Revolving Credit Loans which are Prime Rate Loans; provided, however, that if the Companies fail to reimburse such drawing or payment when due pursuant to this paragraph (b), then the Companies shall pay to the Issuing Lender interest on the amount of such drawing or payment at the rate per annum set forth in Section 3.01(c). Interest accruing pursuant to the preceding sentence shall be for the account of the Issuing Lender, except that interest accrued on and after the date of payment by any Lender pursuant to this Section 2.04(b) to reimburse the Issuing Lender shall be for the account of such Lender to the extent of such payment. The Issuing Lender shall promptly notify the Administrative Agent of each drawing under a Letter of Credit. (c) Letter of Credit Obligations Absolute. (i) The obligation of the Companies to reimburse the Issuing Lender as provided hereunder in respect of drawings under Letters of Credit shall rank pari passu with the obligation of the Companies to repay the Revolving Credit Loans hereunder, and shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, the obligation of the Companies to reimburse the Issuing Lender in respect of drawings under Letters of Credit shall not be subject to any defense based on the non-application or misapplication by the beneficiary of the proceeds of any such drawing or the legality, validity, regularity or enforceability of the Letters of Credit or any related document, even though such document shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among any Company, the beneficiary of any Letter of Credit, or any financial institution or other party to which any Letter of Credit may be transferred. The Issuing Lender may accept or pay any draft presented to it under any Letter of Credit regardless of when drawn or made and whether or not negotiated, if such draft, accompanying certificate or documents and any transmittal advice are presented or negotiated on or before the expiry date of 20 such Letter of Credit or any renewal or extension thereof then in effect, and is in substantial compliance with the terms and conditions of such Letter of Credit. Furthermore, neither the Issuing Lender nor any of its correspondents nor any Lender shall be responsible, as to any document presented under a Letter of Credit which appears to be regular on its face, and appears on its face to be in substantial compliance with the terms of the Letter of Credit, for the validity or sufficiency of any signature or endorsement, for delay in giving any notice or failure of any instrument to bear adequate reference to the Letter of Credit, or for failure of any Person to note the amount of any draft on the reverse of the Letter of Credit. The Issuing Lender shall have the right, in its sole discretion, to decline to accept any documents and to decline to making payment under any Letter of Credit if the documents presented are not in strict compliance with the terms of such Letter of Credit. (ii) Any action, inaction or omission on the part of the Issuing Lender or any of its correspondents under or in connection with any Letter of Credit or the related instruments, documents or property, if in good faith and in conformity with such laws, regulations or customs as are applicable, shall be binding upon the Companies and shall not place the Issuing Lender or any of its correspondents or any Lender under any liability to any Company in the absence of (x) gross negligence or willful misconduct by the Issuing Lender or its correspondents or (y) the failure by the Issuing Lender to pay under a Letter of Credit after presentation of a draft and documents strictly complying with such Letter of Credit unless the Issuing Lender is prohibited from making such payment pursuant to a court order. The Issuing Lender's rights, powers, privileges and immunities specified in or arising under this Agreement are in addition to any heretofore or at any time hereafter otherwise created or arising, whether by statute or rule of law or contract. All Letters of Credit issued hereunder will, except to the extent otherwise expressly provided hereunder, be governed by International Standby Practices 1998, and any subsequent revisions thereof. (d) Obligations of Lenders in Respect of Letters of Credit. Each Lender acknowledges that each Letter of Credit issued by the Issuing Lender pursuant to this Agreement is issued or created by the Issuing Lender on behalf of and with the ratable participation of all of the Lenders (i.e., in accordance with their respective Commitment Proportions), and each Lender agrees to make the payments required by subsection (b) above and agrees to be responsible for its pro rata share of all liabilities incurred by the Issuing Lender with respect to each Letter of Credit issued, established, opened or extended by the Issuing Lender pursuant to this Agreement for the account of the Companies. Each Lender agrees with the Issuing Lender and the other Lenders that its obligation to make the payments required by subsection (b) above shall not be affected in any way by any circumstances (other than the gross negligence or willful misconduct of the Issuing Lender) occurring before or after the making of any payment by the Issuing Lender pursuant to any Letter of Credit, including, without limitation: (i) any modification or amendment of, or any consent, waiver, release or forbearance with respect to, any of the terms of this Agreement or any other instrument or document referred to herein; (ii) the existence of any Default or Event of Default; or (iii) any change of any kind whatsoever in the financial position or credit worthiness of any Company. (e) Replacement of the Issuing Lender. The Issuing Lender may be replaced at any time by written agreement among the Companies, the Administrative Agent, the replaced Issuing 21 Lender and the successor Issuing Lender. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Lender. At the time any such replacement shall become effective, the Companies shall pay all unpaid fees accrued for the account of the replaced Issuing Lender pursuant to Section 3.04. From and after the effective date of any such replacement, (i) the successor Issuing Lender shall have all the rights and obligations of the Issuing Lender under this Agreement with respect to Letters of Credit to be issued thereafter, and (ii) references herein to the term "Issuing Lender" shall be deemed to refer to such successor or to any previous Issuing Lender, or to such successor and all previous Issuing Lenders, as the context shall require. After the replacement of an Issuing Lender hereunder, the replaced Issuing Lender shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Lender under this Agreement with respect to Letters of Credit issued prior to such replacement, but shall not be required to issue additional Letters of Credit. (f) Existing Letters of Credit. The Companies and the Lenders agree that from and after the Closing Date, subject to the satisfaction of the conditions precedent to the initial Loans hereunder as set forth in Article V, the Existing Letters of Credit, shall be Letters of Credit for all purposes of this Agreement (other than with respect to opening or transaction fees and the payment commission made or accrued prior to the date hereof, which fees and commissions shall be for the sole account of the financial institution issuing the same). The Lenders hereby affirm their pro rata participation, in accordance with their respective Commitment Proportions in the Existing Letters of Credit. (g) Reduction of Letter of Credit Commitments. The Company shall have the right, upon not less than three (3) Business Days prior written notice to the Administrative Agent, to terminate the Total Letter of Credit Commitment or from time to time to permanently reduce the Total Letter of Credit Commitment; provided, however, that no such termination or reduction shall be permitted if, after giving effect thereto, the Aggregate Letter of Credit Outstandings would exceed the Total Letter of Credit Commitment as then reduced. Any such reduction shall be in the amount of $1,000,000 or whole multiples of $250,000 in excess thereof, and shall permanently reduce the amount of the Total Letter of Credit Commitment then in effect. (h) Extended Mellon L/Cs. In the event any Letters of Credit issued to back Extended Mellon L/Cs (as defined in clause (a) above) shall remain outstanding on the Revolving Credit Commitment Termination Date, the Companies shall provide the Administrative Agent with Cash Collateral in an amount equal to the aggregate undrawn amount of all such Extended Mellon L/Cs. Such Cash Collateral shall be applied by the Administrative Agent to reimburse the Issuing Lender for drawings under such Extended Mellon L/Cs for which the Issuing Lender has not been reimbursed. SECTION 2.05. MAXIMUM LENDER COMMITMENT . No Lender shall be required to make Revolving Credit Loans and participate in Letters of Credit in an aggregate amount in excess of such Lender's Maximum Lender Commitment. ARTICLE IIIPROVISIONS RELATING TO ALL EXTENSIONS OF CREDIT;FEES AND PAYMENTS 22 SECTION 3.01. INTEREST RATE; CONTINUATION AND CONVERSION OF LOANS . (a) Each Prime Rate Loan shall bear interest for the period from the date thereof on the unpaid principal amount thereof at a fluctuating rate per annum equal to the Prime Rate. (b) Each Adjusted Libor Loan shall bear interest for the Interest Period applicable thereto on the unpaid principal amount thereof at a rate per annum equal to the Reserve Adjusted Libor determined for each Interest Period thereof in accordance with the terms hereof plus the Applicable Margin. (c) If the Companies shall default in the payment of the principal of or interest on any portion of any Loan or any other amount becoming due hereunder, whether with respect to reimbursement of drawings under any Letter of Credit, interest, fees, expenses or otherwise, the Companies shall on demand from time to time pay interest on such defaulted amount accruing from the date of such default (without reference to any period of grace) up to and including the date of actual payment (after as well as before judgment) at a rate of 2% per annum in excess of the rate otherwise in effect or, if no rate is in effect, 2% per annum in excess of the Prime Rate. (d) The Companies may elect from time to time to convert outstanding Loans from Adjusted Libor Loans to Prime Rate Loans by giving the Administrative Agent at least one Business Day's prior irrevocable written notice of such election, provided that any such conversion of Adjusted Libor Loans shall only be made on the last day of an Interest Period with respect thereto or upon the date of payment in full of any amounts owing pursuant to Section 3.08 as a result of such conversion. Upon receipt of such notice, the Administrative Agent shall promptly notify each Lender thereof. The Companies may elect from time to time to convert outstanding Loans from Prime Rate Loans to Adjusted Libor Loans by giving the Administrative Agent irrevocable written notice of such election not later than 11:00 a.m. New York, New York time, three Business Days prior to the date of the proposed conversion. Upon receipt of such notice the Administrative Agent shall promptly notify each Lender thereof. All or any part of outstanding Prime Rate Loans may be converted as provided herein, provided that each conversion shall be in the principal amount of $1,000,000 or whole multiples of $100,000 in excess thereof, and further provided that no Default or Event of Default shall have occurred and be continuing. Any conversion to or from Adjusted Libor Loans hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of all Adjusted Libor Loans having the same Interest Period shall not be less than $1,000,000. (e) Any Adjusted Libor Loan in a minimum principal amount of $1,000,000 may be continued as such upon the expiration of an Interest Period with respect thereto by compliance by the Companies with the notice provisions contained in the definition of Interest Period; provided, that no Adjusted Libor Loan may be continued as such when any Default or Event of Default has occurred and is continuing, but shall be automatically converted to a Prime 23 Rate Loan on the last day of the Interest Period in effect when the Administrative Agent is notified, or otherwise has actual knowledge, of such Default or Event of Default. (f) If the Companies shall fail to select the duration of any Interest Period for any Adjusted Libor Loan in accordance with the definition of "Interest Period" set forth in Section 1.01, the Companies shall be deemed to have selected an Interest Period of one month. (g) No Loan may be funded as an Adjusted Libor Loan or converted to or continued as an Adjusted Libor Loan with an Interest Period that extends beyond the Revolving Credit Commitment Termination Date, with respect to Revolving Credit Loans. (h) Interest on each Loan shall be payable in arrears on each Interest Payment Date and shall be calculated on the basis year of 360 days and shall be payable for the actual days elapsed. Each determination by the Administrative Agent of an interest rate or fee hereunder shall, absent manifest error, be conclusive and binding for all purposes. (i) Anything in this Agreement or in any Note to the contrary notwithstanding, the obligation of the Companies to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be paid to a Lender to the extent that the charging or receipt thereof would not be permissible under the law or laws applicable to such Lender limiting the rates of interest that may be charged or collected by such Lender. In each such event payments of interest required to be paid to such Lender shall be calculated at the highest rate permitted by applicable law until such time as the rates of interest required hereunder may lawfully be charged and collected by such Lender. SECTION 3.02. USE OF PROCEEDS. The proceeds of the Revolving Credit Loans shall be used solely to (a) to repay on the Closing Date in full the Existing Loans, (b) for general corporate purposes, including the financing of the ongoing working capital requirements of the Companies and the Guarantors and (c) to finance the purchase price of Permitted Acquisitions. Initial Letters of Credit shall be issued to Mellon Bank, N.A. to secure the reimbursement obligations under the Mellon L/Cs. All other Letters of Credit shall be issued by the Issuing Lender for the account of the Companies and shall be issued for purposes in connection with, and in the ordinary course of, business of the Companies consistent with historical purposes of standby letters of credit issued for the Companies prior to the date hereof. SECTION 3.03. PREPAYMENTS . (a) The Company may on the last day of an Interest Period if the Loans to be repaid are Adjusted Libor Loans, or at any time and from time to time if the Loans to be repaid are Prime Rate Loans, repay the then outstanding Loans, in whole or in part, without premium or penalty, except as provided in Section 3.08, upon written notice to the Administrative Agent (or telephonic notice promptly confirmed in writing) not later than 11:00 a.m. New York, New York time, three Business Days before the date of prepayment with respect to prepayments of Adjusted Libor Loans, or 11:00 a.m. New York, New York time one Business Day before the date of prepayment with respect to Prime Rate Loans. Each notice shall be irrevocable and shall specify the date and amount of repayment and whether such repayment is of Adjusted Libor 24 Loans or Prime Rate Loans or a combination thereof, and if a combination thereof, the amount of repayment allocable to each. Upon receipt of such notice, the Administrative Agent shall promptly notify each Lender thereof. If such notice is given, the Companies shall make such repayment, and the payment amount specified in such notice shall be due and payable, on the date specified therein. Each partial prepayment pursuant to this Section 3.03 of (x) Prime Rate Loans shall be in a principal amount of $500,000 or whole multiples of $100,000 in excess thereof and (y) of Adjusted LIBOR Loans shall be in a principal amount of $1,000,000 or whole multiples of $100,000 in excess thereof. (b) Each prepayment of principal of a Loan pursuant to this Section 3.03 shall be accompanied by accrued interest to the date prepaid on the amount prepaid. Unless directed by the Companies pursuant to Section 3.03(a) partial prepayments of any Loan shall be applied first to outstanding Prime Rate Loans and then to Adjusted Libor Loans having the shortest remaining Interest Periods. SECTION 3.04. FEES. (a) The Companies agree to pay to the Administrative Agent for the account of, and pro rata distribution to, each Lender a commitment fee on the average daily unused portion of the Applicable Commitment from the Closing Date until the Revolving Credit Commitment Termination Date at a rate per annum equal to .25%, based on a year of 360 days, payable in arrears on the last Business Day of each calendar quarter commencing December 31, 2002, on the Revolving Credit Commitment Termination Date, and on each date the Commitments are permanently reduced in whole or in part. As used herein, "Applicable Commitment" shall mean the lesser of the Maximum Amount and the Total Commitments. (b) The Companies shall pay to the Administrative Agent for the account of, and pro rata distribution to, the Lenders a commission with respect to the Lenders' participation in Letters of Credit equal to the Applicable Margin on the average daily amount of the LC Exposure during the period from and including the Closing Date but excluding the later of the date on which such Lenders' Letter of Credit Commitment terminates and the date on which such Lender ceases to have any LC Exposure. Such commissions shall be payable in arrears on the last Business Day of March, June, September and December of each year, commencing December 31, 2002; provided that all such fees shall be payable on the date on which the Total Letter of Credit Commitment terminates and any such fees accruing after the date on which the Total Letter of Credit Commitment terminates shall be payable on demand. All commissions and fees shall be computed on the basis of a year of three hundred sixty (360) days and shall be payable for the actual number of days elapsed. In addition, the Companies shall pay to the Issuing Lender, upon its demand and for its account, the Issuing Lender's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. (c) The Companies agree to pay each Agent for such Agent's own account, such agency, syndication and other fees as separately agreed between each Agent and the Companies. 25 (d) The Companies shall pay to the Issuing Lender for its own account a fronting fee for each Letter of Credit issued by the Issuing Lender equal to 0.125% of the face amount of (or increase in the face amount, as the case may be) of such Letter of Credit. Such fronting fee shall be due and payable on each date of issuance of a Letter of Credit or on the date of an increase in the amount of a Letter of Credit) as the case may be. SECTION 3.05. INABILITY TO DETERMINE INTEREST RATE. In the event that the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Companies) that, by reason of circumstances affecting the London interbank market, adequate and reasonable means do not exist for ascertaining the Reserve Adjusted Libor applicable pursuant to Section 3.01(b) for any requested Interest Period with respect to (a) the making of an Adjusted Libor Loan, (b) an Adjusted Libor Loan that will result from the requested conversion of a Prime Rate Loan into an Adjusted Libor Loan, or (c) the continuation of an Adjusted Libor Loan beyond the expiration of the then current Interest Period with respect thereto, the Administrative Agent shall forthwith give notice by telephone of such determination, promptly confirmed in writing, to the Companies of such determination. Until the Administrative Agent notifies the Companies that the circumstances giving rise to the suspension described herein no longer exist (which the Administrative Agent shall do forthwith), the Companies shall not have the right to request or continue an Adjusted Libor Loan or to convert a Prime Rate Loan to an Adjusted Libor Loan. SECTION 3.06. ILLEGALITY. NOTWITHSTANDING ANY OTHER PROVISIONS HEREIN, IF ANY INTRODUCTION OF OR CHANGE IN ANY LAW, REGULATION, TREATY OR DIRECTIVE OR IN THE INTERPRETATION OR APPLICATION THEREOF SHALL MAKE IT UNLAWFUL FOR ANY LENDER TO MAKE OR MAINTAIN ADJUSTED LIBOR LOANS AS CONTEMPLATED BY THIS AGREEMENT, SUCH LENDER SHALL FORTHWITH GIVE NOTICE BY TELEPHONE OF SUCH CIRCUMSTANCES, PROMPTLY CONFIRMED IN WRITING, TO THE ADMINISTRATIVE AGENT, WHICH NOTICE THE ADMINISTRATIVE AGENT SHALL PROMPTLY TRANSMIT TO THE COMPANIES AND THE OTHER LENDERS WHEREUPON UNTIL SUCH LENDER NOTIFIES THE COMPANIES AND THE ADMINISTRATIVE AGENT THAT THE CIRCUMSTANCES GIVING RISE TO SUCH SUSPENSION NO LONGER EXIST (WHICH SUCH LENDER SHALL DO FORTHWITH), AND (A) THE COMMITMENT OF SUCH LENDER TO MAKE AND TO ALLOW CONVERSION TO OR CONTINUATIONS OF ADJUSTED LIBOR LOANS SHALL FORTHWITH BE SUSPENDED FOR THE DURATION OF SUCH ILLEGALITY AND (B) THE LOANS THEN OUTSTANDING AS ADJUSTED LIBOR LOANS, IF ANY, SHALL BE CONVERTED AUTOMATICALLY TO PRIME RATE LOANS ON THE NEXT SUCCEEDING LAST DAY OF EACH INTEREST PERIOD APPLICABLE TO SUCH ADJUSTED LIBOR LOANS OR, WITHIN SUCH EARLIER PERIOD AS MAY BE REQUIRED BY LAW. THE COMPANIES SHALL PAY TO SUCH LENDER, UPON DEMAND, ANY ADDITIONAL AMOUNTS REQUIRED TO BE PAID PURSUANT TO SECTION 3.08 HEREOF. SECTION 3.07. INCREASED COSTS . (a) In the event that any introduction of or change, on or after the date hereof, in any applicable law, regulation, treaty, order, directive or in the interpretation or application thereof (including, without limitation, any request, guideline or policy, whether or not having the force of law, of or from any central bank or other governmental authority, agency or instrumentality and including, without limitation, Regulation D), by any authority charged with the administration or interpretation thereof shall occur, which: 26 (i) shall subject any Lender or the Issuing Lender to any tax of any kind whatsoever with respect to this Agreement, any Note, any Letter of Credit, or any Loan, or change the basis of taxation of payments to such Lender or the Issuing Lender of principal, interest, fees or any other amount payable hereunder (other than any tax that is measured with respect to the overall net income of such Lender or the Issuing Lender or Lending Office of such Lender and that is imposed by the United States of America, or any political subdivision or taxing authority thereof or therein, or by any jurisdiction in which such Lender's Lending Office is located, or by any jurisdiction in which such Lender or the Issuing Lender is organized, has its principal office or is managed and controlled); or (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement (whether or not having the force of law) against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of any Lender or the Issuing Lender; or (iii) shall impose on any Lender or the Issuing Lender any other condition, or change therein; and the result of any of the foregoing is to increase the cost to such Lender or the Issuing Lender of making, renewing or maintaining advances or extensions of credit hereunder or to reduce any amount receivable hereunder, in each case by an amount which such Lender or the Issuing Lender deems material, then, in any such case, the Companies shall pay such Lender or the Issuing Lender, such additional amount or amounts as such Lender or the Issuing Lender shall have determined will compensate such Lender or the Issuing Lender for such increased costs or reduction. (b) If any Lender or the Issuing Lender shall have determined that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or the Issuing Lender (or any Lending Office of any Lender or the Issuing Lender) or any Lender's or the Issuing Lender's holding company, with any request or directive regarding capital adequacy (whether or not having the force of the law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's or the Issuing Lender's capital or on the capital of such Lender's or the Issuing Lender's holding company as a consequence of its obligations hereunder to a level below that which such Lender or the Issuing Lender could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or the Issuing Lender's policies and the policies of such Lender's or the Issuing Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender or the Issuing Lender to be material, then from time to time, the Companies shall pay to such Lender or the Issuing Lender, the additional amount or amounts as such Lender or the Issuing Lender shall have determined will compensate such Lender or the Issuing Lender or such Lender's holding company for such reduction. Such Lender's or the Issuing Lender's determination of such amounts shall be conclusive and binding on the Companies absent manifest error. 27 (c) A certificate of a Lender or the Issuing Lender setting forth in reasonable detail the amount or amounts payable pursuant to Sections 3.07(a) and 3.07(b) above shall be conclusive absent manifest error. The Companies shall pay any Lender the amount shown as due on any such certificate within ten days after receipt thereof. (d) In the event any Lender or the Issuing Lender shall be entitled to compensation pursuant to Section 3.07(a) or Section 3.07(b), it shall promptly notify the Administrative Agent and Companies of the event by reason of which it has become so entitled; provided, however, no failure on the part of any Lender or the Issuing Lender to demand compensation under clause (a) or clause (b) above on one occasion shall constitute a waiver of its right to demand compensation on any other occasion. In the event the Company is required to make a payment pursuant to clause (a) or clause (b) above, then the Company may, with the prior written consent of the Required Lenders (which consent shall not be unreasonably withheld) and upon not less than thirty (30) Business Days' prior notice to the Agent, immediately terminate the Commitments of any Lender in respect of which such amount was or may be payable and prepay such Lender's Loans together with accrued interest thereon and all other amounts payable with respect thereto. The Required Lenders shall not be required to grant consent to any such termination if the Required Lenders have located a Lending institution satisfactory to the Required Lenders which shall have agreed to be substituted for such Lender on the terms and conditions satisfactory to the Required Lenders. SECTION 3.08. INDEMNITY. THE COMPANIES AGREE TO INDEMNIFY EACH LENDER AND TO HOLD EACH LENDER HARMLESS FROM ANY LOSS, COST OR EXPENSE WHICH SUCH LENDER MAY SUSTAIN OR INCUR, INCLUDING, WITHOUT LIMITATION, INTEREST OR FEES PAYABLE BY SUCH LENDER TO LENDERS OF FUNDS OBTAINED BY IT IN ORDER TO MAINTAIN ADJUSTED LIBOR LOANS HEREUNDER, AS A CONSEQUENCE OF (A) DEFAULT BY THE COMPANIES IN PAYMENT OF THE PRINCIPAL AMOUNT OF OR INTEREST ON ANY ADJUSTED LIBOR LOAN, (B) DEFAULT BY THE COMPANIES IN ACCEPTANCE OR MAKING OF A BORROWING OF AN ADJUSTED LIBOR LOAN OR A CONVERSION INTO OR CONTINUATION OF AN ADJUSTED LIBOR LOAN AFTER THE COMPANIES HAVE REQUESTED SUCH BORROWING, CONVERSION OR CONTINUATION, (C) DEFAULT BY THE COMPANIES IN MAKING ANY PREPAYMENT OF ANY ADJUSTED LIBOR LOAN AFTER THE COMPANIES GIVE NOTICE IN ACCORDANCE WITH SECTION 3.03 OF THIS AGREEMENT AND/OR (D) THE MAKING OF ANY PAYMENT OR PREPAYMENT (WHETHER MANDATORY OR OPTIONAL) OF AN ADJUSTED LIBOR LOAN OR THE MAKING OF ANY CONVERSION OF AN ADJUSTED LIBOR LOAN TO A PRIME RATE LOAN ON A DAY WHICH IS NOT THE LAST DAY OF THE APPLICABLE INTEREST PERIOD WITH RESPECT THERETO. A CERTIFICATE OF A LENDER SETTING FORTH IN REASONABLE DETAIL SUCH AMOUNTS SHALL BE CONCLUSIVE ABSENT MANIFEST ERROR. THE COMPANIES SHALL PAY SUCH LENDER THE AMOUNT SHOWN AS DUE ON ANY CERTIFICATE WITHIN TEN DAYS AFTER RECEIPT THEREOF. SECTION 3.09. TAXES . (a) All payments made by the Companies under this Agreement shall be made free and clear of, and without reduction for or on account of, any present or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding income and franchise taxes imposed on any Agent, the Issuing Lender or a Lender by (i) the United States of America or any political subdivision or taxing authority thereof or therein, (ii) the jurisdiction under the laws of which such Agent, the Issuing Lender or such Lender is organized or in which it has its principal office or is managed and controlled or any 28 political subdivision or taxing authority thereof or therein, or (iii) any jurisdiction in which such Agent, the Issuing Lender or Lender's Lending Office is located or any political subdivision or taxing authority thereof or therein (such non-excluded taxes being called "Taxes"). If any Taxes are required to be withheld from any amounts payable to any Agent, the Issuing Lender or any Lender hereunder, or under the Notes, the amount so payable to such Agent, the Issuing Lender or such Lender shall be increased to the extent necessary to yield to such Agent, the Issuing Lender or such Lender (after payment of all Taxes and free and clear of all liability in respect of such Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes. Whenever any Taxes are payable by any Company, such Company shall promptly send to the Administrative Agent for its own account or for the account of the Issuing Lender or such Lender, as the case may be, a certified copy of an original official receipt showing payment thereof. If any Company fails to pay Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Companies shall indemnify the Agents, the Issuing Lender and the Lenders for any incremental taxes, interest or penalties that may become payable by any Agent, the Issuing Lender or any Lender as a result of any such failure together with any expenses payable by any Agent, the Issuing Lender or any Lender in connection therewith. (b) Prior to the first Interest Payment Date, each Lender that is not organized under the laws of the United States or a state thereof agrees that it will deliver to the Administrative Agent (i) two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI or successor applicable form, as the case may be, certifying in each case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the case may be, to establish an exemption from United States back-up withholding tax. Each Lender which delivers to the Company and the Administrative Agent a Form W-8BEN or W-8ECI and Form W-8 or W-9 pursuant to the preceding sentence further undertakes to deliver to Administrative Agent two further copies of the said statement and Form W-8BEN or W-8ECI and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such letter or form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent letter and form previously delivered by it to the Administrative Agent, and such extensions or renewals thereof as may reasonably be requested by the Administrative Agent, certifying in the case of a Form W-8BEN or W-8ECI that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. (c) The Companies shall not be required to pay any increased amount on account of Taxes pursuant to this Section 3.10 to any Lenders or to the Agents to the extent such Taxes would not have been payable if the Lenders had furnished a form which it was required to furnish in accordance with clause (b) of this Section 3.10, and such Taxes shall be borne solely by such Agents or Lenders. SECTION 3.10. PRO RATA TREATMENT AND PAYMENTS . Each borrowing by the Companies from the Lenders, each conversion of a Loan pursuant to Section 3.01(d) or continuation of a Loan pursuant to Section 3.01(e), each payment by the Companies on account 29 of any fee (other than with respect to fees which are expressly payable to an Agent or the Issuing Lender for its own account, and reimbursements by the Company to the Issuing Lender with respect to drawings under Letters of Credit) and any reduction of the Commitments of the Lenders hereunder shall be made pro rata according to the respective relevant Commitment Proportions of the Lenders. Each payment (including each prepayment) by the Companies on account of principal of and interest on each Loan shall be made pro rata according to the respective outstanding principal amounts of such Loans held by each Lender. Reimbursements made by the Companies to the Issuing Lender with respect to drawings under Letters of Credit for which a Lender has made payment pursuant to Section 2.04(b) to reimburse the Issuing Lender shall be made pro rata according to the amounts paid by each Lender with respect to each such drawing. All payments (including prepayments) to be made by the Companies on account of principal, interest and fees shall be made without set-off or counterclaim and shall be made to the Administrative Agent, for the account of the Lenders (except as specified in Section 3.04), at the Payment Office of the Administrative Agent in Dollars in immediately available funds. The Administrative Agent may, in its sole discretion, directly charge interest payments due in respect of the Loans to the Companies' accounts at the Payment Office or other office of the Administrative Agent. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds by wire transfer of such Lender's portion of such payment to such Lender for the account of its Lending Office. All payments to be made by the Companies in respect of reimbursement obligations under Letters of Credit shall be made without set-off or counterclaim and shall be made to the Issuing Lender at the Payment Office of the Issuing Lender in Dollars in immediately available funds. The Issuing Lender may, in its sole discretion, directly change reimbursement obligations with respect to Letters of Credit to the Companies' accounts at any office of the Issuing Lender. If any payment hereunder becomes due and payable on a day other than a Business Day, then such payment shall be made on the next succeeding Business Day (and any interest payable thereon shall be payable at the then applicable rate during such extension) unless the result thereof would be to make a payment in the next calendar month, in which event such payment shall be made on the immediately preceding Business Day. SECTION 3.11. FUNDING AND DISBURSEMENT OF LOANS . (a) Each Lender shall make each Loan to be made by it hereunder available to the Administrative Agent at the Payment Office for the account of such office and the Administrative Agent by 1:00 p.m. New York, New York time on the Borrowing Date in Dollars in immediately available funds. Unless any applicable condition specified in Article V has not been satisfied, the amount so received by Administrative Agent will be made available to the Companies at the Payment Office by crediting the account of the Companies with such amount and in like funds as received by the Administrative Agent; provided, however, that if the proceeds of any Loan or any portion thereof are to be used to prepay outstanding Loans, then the Administrative Agent shall apply such proceeds for such purpose to the extent necessary and credit the balance, if any, to the Companies' account. (b) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a proposed Borrowing Date that such Lender will not make the amount which would constitute its Commitment Proportion of the borrowing on such Borrowing Date available to the Administrative Agent, the Administrative Agent may assume that such Lender has made 30 such amount available to the Administrative Agent on such Borrowing Date, and the Administrative Agent may, in reliance upon such assumption, make available to the Companies a corresponding amount. If such amount is not made available to the Administrative Agent until a date after such Borrowing Date, such Lender shall pay to the Administrative Agent on demand interest on such Lender's Commitment Proportion of such borrowing at a rate equal to the greater of (i) the daily average Federal Funds Rate and (ii) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation during such period, from and including such Borrowing Date to the date on which such Lender's Commitment Proportion of such borrowing shall have become immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts due pursuant to this Section 3.11(b) shall be conclusive absent manifest error. Nothing herein shall be deemed to relieve any Lender from its obligations to fulfill its commitment hereunder or to prejudice any right which the Companies may have against any Lender as a result of any default by such Lender hereunder. SECTION 3.12. CHANGE OF LENDING OFFICE . Each Lender agrees to use reasonable efforts to designate an alternate Lending Office with respect to its Adjusted Libor Loans affected by the events or circumstances described in Section 3.05, Section 3.06 or Section 3.07 to avoid or minimize the Companies' liability thereunder; provided, however, that such efforts shall not cause the imposition on such Lender of any additional cost or legal, regulatory or administrative burdens deemed by such Lender, in its sole discretion, to be material. ARTICLE IVREPRESENTATIONS AND WARRANTIES In order to induce the Lenders to enter into this Agreement and to extend the credit herein provided for, the Companies, jointly and severally, represent and warrant to each Agent and each Lender that: SECTION 4.01. ORGANIZATION POWERS. Each Company and each Guarantor (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; provided, however, no representation is made with respect to the good standing of EDO Foreign Sales Corporation, (b) has the power and authority to own its properties and to carry on its business as now being conducted, (c) is duly qualified to do business in every jurisdiction wherein the conduct of its business or the ownership of its properties are such as to require such qualification except those jurisdictions in which the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect, and (d) has the power to execute, deliver and perform each of the Loan Documents to which it is a party, including, without limitation, with respect to the Companies, the power to obtain extensions of credit hereunder and to execute and deliver the Notes. SECTION 4.02. AUTHORIZATION OF BORROWING, ENFORCEABLE OBLIGATIONS . The execution, delivery and performance by each Company of this Agreement, and the other Loan Documents to which it is a party, the borrowings hereunder, and the execution and delivery by each of the Guarantors of the Loan Documents to which such Guarantor is a party, (a) have been duly authorized by all requisite corporate action, (b) will not violate (i) any provision of law 31 applicable to any Company or any Guarantor, any rule or regulation of any Governmental Authority applicable to any Company or any Guarantor or (ii) the certificate of incorporation, by-laws, or other organizational documents, as applicable of any Company or of any Guarantor or (iii) any order of any court or other Governmental Authority binding on any Company or any Guarantor or any indenture, agreement or other instrument to which any Company or any Guarantor is a party, or by which any Company or any Guarantor or any of their respective properties are bound, and (c) will not be in conflict with, result in a breach of or constitute (with due notice and/or lapse of time) a default under, any such indenture, agreement or other instrument, or result in the creation or imposition of any Lien, of any nature whatsoever upon any of the property or assets of any Company or any Guarantor other than as contemplated by this Agreement or the other Loan Documents, except for any such violation, conflict, breach or default or Lien provided in clauses (b)(i), (b)(iii) or (c) which could not, individually, or in the aggregate, reasonably be expected to have a Material Adverse Effect. This Agreement and each other Loan Document to which each Company or any Guarantor is a party constitutes a legal, valid and binding obligation of such Company and such Guarantor enforceable, as the case may be, against such Company and such Guarantor, as the case may be, in accordance with its terms except to the extent that enforcement may be limited by applicable bankruptcy, reorganization, moratorium, insolvency and similar laws affecting creditors' rights generally or by equitable principles of general application, regardless of whether considered in a proceeding in equity or at law. SECTION 4.03. FINANCIAL CONDITION. (a) The Companies have heretofore furnished to the Administrative Agent and each Lender (i) the audited consolidated balance sheet of EDO and its Subsidiaries and the related audited consolidated statements of income, retained earnings and cash flow of EDO and its Subsidiaries audited by Ernst & Young, LLP, independent certified public accountants, for the fiscal year ended December 31, 2001, (ii) the unaudited consolidated balance sheet of EDO and its Subsidiaries and the related consolidated statements of income, retained earnings and cash flow of EDO and its Subsidiaries for the six month period ended June 30, 2002. Such financial statements were prepared in conformity with Generally Accepted Accounting Principles, applied on a consistent basis, and fairly present the financial condition and results of operations of EDO and its Subsidiaries as of the date of such financial statements and for the periods to which they relate and, since June 30, 2002, no event or condition has occurred which could reasonably be expected to have a Material Adverse Effect. The Companies shall deliver to the Administrative Agent, with a copy for each Lender, a certificate of the Chief Financial Officer of EDO to that effect on the Closing Date. Other than obligations and liabilities arising in the ordinary course of business or that could not individually or in the aggregate reasonably be expected to have a Material Adverse Effect, since June 30, 2002, there are no obligations or liabilities contingent or otherwise, of EDO or its Subsidiaries which are not reflected or disclosed on such unaudited statements. (b) Each Company and each Guarantor is Solvent. SECTION 4.04. TAXES. All assessed deficiencies resulting from Internal Revenue Service examinations of the federal income tax returns of each Company and each Guarantor have been discharged or reserved against in accordance with Generally Accepted Accounting Principles. Each Company and each Guarantor has filed or caused to be filed all federal, state and local tax returns which are required to be filed and has paid or has caused to be paid all taxes 32 as shown on said returns or on any assessment received by them, to the extent that such taxes have become due, except taxes which are being contested in good faith and which are reserved against in accordance with Generally Accepted Accounting Principles. SECTION 4.05. TITLE TO PROPERTIES . The Companies and each Guarantor has good title to their respective properties and assets reflected on the financial statements referred to in Section 4.03 hereof, except for such properties and assets as have been disposed of since the date of such financial statements as no longer used or useful in the conduct of their respective businesses or as have been disposed of in the ordinary course of business, and all such properties and assets are free and clear of all Liens other than Permitted Liens. SECTION 4.06. LITIGATION . (a) There are no actions, suits or proceedings (whether or not purportedly on behalf of any Company or any Guarantor) pending or, to the knowledge of each Company, threatened against any Company or any Guarantor at law or in equity or before or by any Governmental Authority, which involve any of the transactions contemplated herein or which, if adversely determined against such Company or such Guarantor, could reasonably be expected to have a Material Adverse Effect; and (b) neither any Company nor any Guarantor is in default with respect to any judgment, writ, injunction, decree, rule or regulation of any Governmental Authority which could reasonably be expected to have a Material Adverse Effect. SECTION 4.07. AGREEMENTS. Neither any Company nor any Guarantor is a party to any agreement or instrument or, with respect to such Company, subject to any charter or other corporate restriction or any judgment, order, writ, injunction, decree or regulation the violation of which could reasonably be expected to have a Material Adverse Effect. Neither any Company nor any Guarantor is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. SECTION 4.08. COMPLIANCE WITH ERISA. Except as individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect, each Plan is in compliance with ERISA; no Multi-Employer Plan is insolvent or in reorganization, no Plan or Plans have an Unfunded Current Liability, and no Plan has an accumulated or waived funding deficiency; neither any Company, any Guarantor, nor any ERISA Affiliate has incurred any material liability to or on account of a Plan or Multi-Employer Plan pursuant to Section 515, 4062, 4063, 4064, 4201 or 4204 of ERISA or expects to incur any liability under any of the foregoing sections on account of the prior termination of participation in, or contributions to, any such Plan or Multi-Employer Plan; no proceedings have been instituted to terminate any Plan; no condition exists which presents a risk to any Company, any Guarantor or any ERISA Affiliate of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA; no lien imposed under the Code or ERISA on the assets of any Company, any Guarantor or any of its ERISA Affiliates exists or is likely to arise on account of any Plan and each Company and each Guarantor may terminate contributions to any other employee benefit plans maintained by it without incurring any material liability to any Person interested therein. 33 SECTION 4.09. FEDERAL RESERVE REGULATIONS; USE OF PROCEEDS . (a) Neither any Company nor any Guarantor is engaged principally in, nor has as one of its important activities, the business of extending credit for the purpose of purchasing or carrying any "margin stock" (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System of the United States, as amended from time to time). (b) No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or to carry margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock, or to refund indebtedness originally incurred for such purposes, or (ii) for any purpose which violates or is inconsistent with the provisions of Regulation T, U, or X of the Board of Governors of The Federal Reserve System. (c) The proceeds of each Loan shall be used solely for the purposes permitted under Section 3.02. SECTION 4.10. APPROVAL S. No registration with or consent or approval of, or other action by, any Governmental Authority is required in connection with the execution, delivery and performance of this Agreement by the Companies or any Guarantor, or with the execution and delivery of other Loan Documents to which it is a party or with respect to the Companies, the borrowings hereunder, other than (a) registration, consents and approvals received prior to the date hereof and disclosed to the Lenders and which are in full force and effect and (b) filings to be made in connection with the Liens contemplated by this Agreement or the Loan Documents. SECTION 4.11. SUBSIDIARIES. Attached hereto as Schedule I is a correct and complete list of all Subsidiaries of EDO as of the date hereof, showing as to each such Subsidiary, its name, the jurisdiction of its incorporation or formation and the ownership of each such Subsidiary (including the percentage of the ownership interest held by each such entity). SECTION 4.12. HAZARDOUS MATERIALS . Each Company and each Guarantor is in compliance with all applicable Environmental Laws except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect and neither any Company nor any Guarantor has used Hazardous Materials on, from, or affecting any property now owned or occupied or previously owned or occupied by any Company or any Guarantor, in any manner, which violates any applicable Environmental Law except where any violations, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. To the knowledge of the Company, no prior owner of any such property or any tenant, subtenant, prior tenant or prior subtenant have used Hazardous Materials on, from, or affecting such property in any manner which violates any applicable Environmental Law except where any violations, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. SECTION 4.13. INVESTMENT COMPANY ACT . Neither the Company nor any Guarantor is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 34 SECTION 4.14. SECURITY DOCUMENTS. Each Security Document executed by each Company shall constitute a valid and continuing lien on and security interest in the collateral referred to in such Security Document in favor of the Administrative Agent for the ratable benefit of the Lenders and, upon completion of filing and recording of financing statements in the offices in the applicable jurisdictions (to the extent filing of financing statements under the Uniform Commercial Code are permissible methods of perfection) or otherwise upon taking all necessary action to perfect such Lien and security interest in the collateral referred to in the Security Document, shall be prior to all other Liens, claims and right of all other Persons, other than Permitted Liens, and shall be enforceable as such against all other Persons. SECTION 4.15. NO DEFAULT. No Default or Event of Default has occurred and is continuing. SECTION 4.16. PERMITS AND LICENSES. Each Company and each Guarantor has all permits, licenses, certifications, authorizations and approvals required for it lawfully to own and operate their respective businesses except those the failure of which to have could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION 4.17. NO OTHER VENTURES . Neither any Company nor any Guarantor is a party to any joint venture or partnership with any Person. SECTION 4.18. COMPLIANCE WITH LAW. Each Company and each Guarantor is in compliance, with all laws, rules, regulations, orders and decrees which are applicable to such Company or such Guarantor, or to any of their respective properties, which the failure to comply with could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION 4.19. CERTAIN SUBSIDIARIES . Each Non-Operating Subsidiary conducts no operations or business and has assets, the fair market value of which do not exceed $10,000 in the aggregate. Condor Systems GmbH has no assets other than payments to be received pursuant to contracts with Bundesamt fur Wehrtechnik und Beschaffung which payments shall not exceed $1,500,000 in the aggregate, and it conducts no business other than as is necessary to fulfil its obligations under such contracts. SECTION 4.20. SUBORDINATED DEBENTURES. The Obligations shall constitute, and will constitute, Senior Indebtedness within the meaning ascribed to such terms in the indenture pursuant to which the Subordinated Debentures were issued. The subordination provisions therein are enforceable against the issuers thereunder and the holders, from time to time, of the Subordinated Debentures. The issuers are not in default under any such indenture and there does not exist, and the execution, delivery or performance of the Loan Documents will not result in, an "Event of Default" or "Redemption Event" as those terms are defined in such indenture. SECTION 4.21. FULL DISCLOSURE . No representation and warranty by any Company, in this Agreement or any other Loan Document as of the date such representations and warranties are made or deemed made, and no information in any statement, certificate, schedule, 35 or other document furnished or to be furnished pursuant hereto or thereto, or in connection with the transactions contemplated hereby or thereby, contains any untrue statement of a material fact or be misleading in any material respect. Except as disclosed in this Agreement, there is no fact known to any Company which such Company has not disclosed to the Lenders in writing which could reasonably be expected to have a Material Adverse Effect. It is understood that no representation or warranty is made concerning the forecasts, estimates, pro forma information, projections and statements as to anticipated future performance or conditions, and the assumptions on which they were based, contained in any such statement, certificate, schedule or other document, except that as of the date such forecasts, estimates, pro forma information, projections and statements were generated, (A) such forecasts, estimates, pro forma information, projections and statements were based on the good faith assumptions of the management of the Companies and (B) such assumptions were reasonably believed by such management to be reasonable. Such forecasts, estimates pro forma information and statements, and the assumptions on which they were based, may or may not prove to be correct. ARTICLE VCONDITIONS OF LENDING SECTION 5.01. CONDITIONS TO INITIAL EXTENSION OF CREDIT . The obligation of each Lender to make the initial Loans hereunder and the obligation of the Issuing Lender to issue the initial Letter of Credit, are subject to the following conditions precedent: (a) NOTES. On or prior to the Closing Date, the Administrative Agent shall have received, for the account of each Lender, a Revolving Credit Note duly executed by the Companies. (b) GUARANTIES. On or prior to the Closing Date, the Administrative Agent shall have received, with a counterpart for each Lender, a Guaranty duly executed by each Guarantor. (c) SECURITY DOCUMENTS. On or prior to the Closing Date, the Administrative Agent shall have received, with a counterpart for each Lender, the Security Documents, each duly executed by each Company and each Guarantor party thereto and, to the extent required therein, (i) with financing statements on form UCC-1 describing the collateral covered by the Security Documents and (ii) stock certificates evidencing the stock pledge pursuant to the Pledge Agreement which shall consist of in the aggregate, 100% of the issued and outstanding capital stock of AIL and each other Subsidiary of EDO (other than any Foreign Subsidiary with respect to which only 65% of the issued and outstanding capital stock shall be pledged and excluding interests in EDO Canada Ltd. and Condor Systems GmbH) together with undated stock powers for each certificate representing such stock in blank duly executed by the Pledgor. (d) OPINION OF COUNSEL. On or prior to the Closing Date, the Administrative Agent shall have received a written opinion of counsel for the Companies and the Guarantors dated the Closing Date and addressed to each Agent and each Lender, substantially in the form of Exhibit E attached hereto. 36 (e) SUPPORTING DOCUMENTS. On or prior to the Closing Date, the Administrative Agent shall have received, with a copy for each Lender, (i) a certificate of good standing for each Company and each Guarantor (other than EDO Foreign Sales Corporation) from the secretary of state of the state of its organizational jurisdiction dated as of a recent date; (ii) certified copies of the charter documents of each Company and Guarantor (other than EDO Foreign Sales Corporation); (iii) a certificate of an authorized officer or member of each Company and each Guarantor dated the Closing Date and certifying: (x) that the charter documents of such Person (other than EDO Foreign Sales Corporation) have not been amended since the date of their certification (or if there has been any such amendment, attaching a certified copy thereof); (y) that attached thereto is a true and complete copy of resolutions adopted by the board of directors or members, as applicable, of such Person authorizing the execution, delivery and performance of each Loan Document to which it is a party; and (z) the incumbency and specimen signature of each officer or member of such Person executing each Loan Document to which it is a party and any certificates or instruments furnished pursuant hereto or thereto, and a certification by another officer or member of such Person as to the incumbency and signature of the Person executing such certificate; and (iv) such other documents as the Administrative Agent may reasonably request. (f) OFFICER'S CERTIFICATE. On the Closing Date, the Administrative Agent shall have received a certificate dated the Closing Date, executed by an Executive Officer confirming compliance with the conditions set forth and clauses (a) and (b) of Section 5.02. (g) INSURANCE. On or prior to the Closing Date, the Administrative Agent shall have received a certificate or certificates of insurance from an independent insurance broker or brokers confirming the insurance required to be maintained pursuant to Section 6.01 hereof and evidence that the Administrative Agent has been named loss payee and additional insured with respect to each policy of such insurance. (h) ASSETS FREE FROM LIENS. Prior to the Closing Date, the Administrative Agent shall have received UCC-1 financing statement, tax and judgment lien searches evidencing that each Company's and each Guarantor's assets are free and clear of all Liens except Permitted Liens. (i) PAYMENT OF EXISTING INDEBTEDNESS. The Administrative Agent shall have received a payoff letter from Citibank, N.A., as administrative agent with respect to all amounts due and owing under the Prior Agreement, together with UCC-3 termination statements or statements of assignment with respect to all filings against the Companies and the Guarantors, which payoff letter shall include a statement that upon payment in full of the amounts set forth therein, the commitments under the Prior Agreement are terminated. (j) FEES AND EXPENSES. On or prior to the Closing Date, the Agents shall have received (i) the origination fee payable by the Companies to the Administrative Agent pursuant to a letter agreement dated November 8, 2002 among the Companies and the Administrative Agent, and each Lender shall have received its portion of such fee as agreed in writing between the Agents and each Lender, and (ii) for itself all fees payable pursuant to Section 3.04(c) and reimbursement of expenses in accordance with Section 10.03(b). 37 (k) SUBORDINATED DEBENTURES. The Administrative Agent shall have received, with a copy for each Lender, a certificate of an Executive Officer of EDO certifying that attached thereto is (i) a true, correct and complete copy of the indenture pursuant to which the Subordinated Debentures were issued, as in effect on the date hereof and (ii) a true, correct and complete copy of ESOP Loan Agreement as in effect on the date hereof. (l) MANAGEMENT LOANS. On the Closing Date the Administrative Agent shall have received a collateral assignment pursuant to the Security Agreement executed by each Company of each promissory note evidencing a loan from EDO or AIL to its management as permitted pursuant to Section 7.06(e). (m) OTHER INFORMATION, DOCUMENTATION. The Lenders shall have received such other and further information and documentation as they may require, including, but not limited to, any information or documentation relating to compliance by the Companies and each Guarantor with the requirements of all Environmental Laws. (n) COMPLETION OF PROCEEDINGS. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by the Loan Documents, shall be satisfactory in form and substance to the Agents, and their respective counsel. SECTION 5.02. CONDITIONS TO ALL EXTENSIONS OF CREDIT . The obligation of each Lender to make each Loan hereunder, including, without limitation, the initial Loan and the obligation of the Issuing Lender to issue each Letter of Credit, including, without limitation, the initial Letter of Credit, are subject to the conditions precedent set forth in Section 5.01 and the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties by the Companies pursuant to this Agreement and the other Loan Documents to which each is a party shall be true and correct in all material respects on and as of the Borrowing Date or Issuance Date, as applicable, with the same effect as though such representations and warranties had been made on and as of such date except to the extent such representations and warranties expressly relate to an earlier date in which case they shall be true and correct in all material respects as of such earlier date. (b) NO DEFAULT. No Default or Event of Default shall have occurred and be continuing on the Borrowing Date or Issuance Date, as applicable, or will result after giving effect to the Loan or Letter of Credit requested. (c) AVAILABILITY. After giving effect to any requested Revolving Credit Loan, (i) the aggregate principal amount of the Revolving Credit Loans outstanding shall not exceed the Total Revolving Credit Commitment and (ii) the Aggregate Outstandings shall not exceed the lesser of (x) the Total Commitments and (y) the Maximum Amount. After giving effect to the issuance of any requested Letter of Credit, (i) the Aggregate Letters of Credit Outstandings 38 shall not exceed the Total Letter of Credit Commitment and (ii) the Aggregate Outstandings shall not exceed the lesser of (x) the Total Commitments and (y) the Maximum Amount. Each borrowing hereunder shall constitute a representation and warranty of each Company that the statements contained in clauses (a), (b), and (c) of Section 5.02 are true and correct on and as of the Borrowing Date except to the extent such representations and warranties expressly relate to an earlier date in which case they shall be true and correct in all material respects as of such earlier date. ARTICLE VIAFFIRMATIVE COVENANTS Each Company, jointly and severally, covenants and agrees with the Lenders that so long as the Commitments remain in effect, any Letter of Credit remains outstanding, or any of the principal of or interest on the Notes or any other Obligations hereunder shall be unpaid it will, and will cause each Guarantor to: SECTION 6.01. EXISTENCE, PROPERTIES, INSURANCE . Do or cause to be done all things necessary to preserve and keep in full force and effect its corporate or limited liability existence as applicable, rights and franchises and comply with all laws applicable to it, except to the extent any failure to so comply could not reasonably be expected to have a Material Adverse Effect; at all times maintain, preserve and protect all franchises, except as otherwise permitted pursuant to Section 7.12, and trade names material to its business and preserve all of its property used or useful in and material to the conduct of its business, and keep the same in good repair, working order and condition, normal wear and tear excepted, and from time to time make, or cause to be made, all needful and proper repairs, renewals, replacements, betterments and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted in the ordinary course at all times; and at all times maintain insurance covering its assets and its businesses with financially sound and reputable insurance companies or associations in such amounts and against such risks (including, without limitation, hazard, business interruption, public liability and product liability) as are usually carried by companies engaged in the same or similar business. Each such policy of insurance of the Companies shall name the Administrative Agent as loss payee and additional insured and shall provide for at least thirty (30) days' prior written notice to the Administrative Agent of any modification or cancellation of such policies. Each Company shall provide to the Administrative Agent promptly upon receipt thereof evidence of the annual renewal of each such policy. The Companies shall deliver to the Administration Agent evidence of the good standing of EDO Foreign Sales Corporation in the jurisdiction of its incorporation and the charter documents of EDO Foreign Sales Corporation on or prior to December 31, 2002. SECTION 6.02. PAYMENT OF OBLIGATIONS AND TAXES. Pay all obligations, now existing or hereafter arising, as and when due and payable, and pay and discharge or cause to be paid and discharged promptly all taxes, assessments and government charges or levies imposed upon it or upon its income and profits, or upon any of its property, real, personal or mixed, or upon any part thereof, before the same shall become in default, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a lien or charge upon 39 such properties or any part thereof; provided, however, that neither any Company nor any Guarantor shall be required to pay and discharge or cause to be paid and discharged any such obligations, tax, assessment, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings, and such Company or such Guarantor, as the case may be, shall have set aside on its books adequate reserves determined in accordance with Generally Accepted Accounting Principles with respect to any such obligations, tax, assessment, charge, levy or claim so contested; further, provided that, subject to the foregoing proviso, each Company and each Guarantor shall pay or cause to be paid all such obligations, taxes, assessments, charges, levies or claims upon the commencement of proceedings to foreclose any lien which has attached as security therefor. SECTION 6.03. FINANCIAL STATEMENTS, REPORTS, ETC. Furnish to the Administrative Agents with sufficient copies for each Lender, (a) as soon as available, but in any event within 105 days after the end of each fiscal year of EDO, the audited consolidated balance sheet of EDO and its Subsidiaries as of the end of such year and the related audited consolidated statements of income, shareholders equity and cash flow for such year, setting forth in comparative form the respective figures as of the end of and for the previous fiscal year, and accompanied by a report thereon of independent certified public accountants of recognized standing selected by EDO and reasonably satisfactory to the Required Lenders (the "Auditor"), which report shall be unqualified and prepared in accordance with Generally Accepted Accounting Principles, applied on a consistent basis; (b) (i) as soon as available, but in any event not later than 60 days after the end of the first, second and third fiscal quarters of EDO, the consolidated interim balance sheet of EDO and its Subsidiaries as of the end of each such quarter and the related interim statements of income, shareholders equity and cash flow for such quarter and the portion of the fiscal year through such date and setting forth in each case in comparative form the respective figures for the corresponding date and period in the previous fiscal year, prepared by EDO in accordance with Generally Accepted Accounting Principles, applied on a consistent basis, and accompanied by a certificate to that effect executed by the Chief Financial Officer of EDO: (c) a certificate prepared and signed by the Chief Financial Officer with each delivery required by clauses (a) and (b) as to whether or not, as of the close of such preceding period and all times during such preceding period, the Companies and the Guarantors were in compliance with all the provisions in this Agreement, showing computation of financial covenants and quantitative negative covenants, and if the Chief Financial Officer shall have obtained knowledge of any Default or Event of Default, it shall disclose in such certificate such Default or Event of Default and the nature thereof; (d) at all times indicated in clauses (a) above a copy of the management letter, if any, prepared by the Auditor; (e) on or prior to the twentieth day of each calendar quarter a "job status report" substantially in the form previously provided to the Lenders certified by the Chief Financial Officer and current as of the last Business Day of the preceding calendar quarter; 40 (f) promptly after filing thereof, copies of all regular and periodic financial information, proxy materials and other information and reports which any Company or any Guarantor shall file with the Securities and Exchange Commission; (g) promptly after submission to any government or regulatory agency, all documents and information furnished to such government or regulatory agency other than such documents and information prepared in the normal course of business and which could not result in any adverse action to be taken by such agency which action could reasonably be expected to have a Material Adverse Effect; (h) within ten (10) days after the end of each calendar quarter commencing with the quarter ending December 31, 2002 a completed Borrowing Base Certificate; and (i) promptly, from time to time, such other information regarding the operations, business affairs and condition (financial or otherwise) of the Companies or the Guarantors as any Lender may reasonably request. SECTION 6.04. BOOKS AND RECORDS; ACCESS TO PREMISES . Maintain financial records in accordance with Generally Accepted Accounting Principles and permit representatives of any Lender, in coordination with the Administrative Agent, to have access during normal business hours to the premises of each Company and the Guarantors upon prior written request, and to examine and make excerpts from the minute books, books of accounts, reports and other records and to discuss the affairs, finances and accounts of each Company and the Guarantors with their respective principal officers or with their respective independent accountants, permit representatives of the Administrative Agent to conduct such audits (including, without limitation, field audits of each Company and each Guarantor's accounts receivable and inventory) as the Administrative Agent reasonably deems necessary. The costs and expenses of one field audit during each fiscal year and all field audits performed after the occurrence of an Event of Default shall be for the account of each Company and the Guarantors and shall be payable upon demand of the Administrative Agent. SECTION 6.05. NOTICE OF ADVERSE CHANGE . Promptly notify the Administrative Agent in writing of (a) any change in the business or the operations of any Company or any Guarantor which could have a Material Adverse Effect, and (b) any information which indicates that any financial statements which are the subject of any representation contained in this Agreement, or which are furnished to the Agents or the Lenders pursuant to this Agreement, fail, in any material respect, to present fairly, the financial condition and results of operations purported to be presented therein, disclosing the nature thereof. SECTION 6.06. NOTICE OF DEFAULT . Promptly notify the Administrative Agent of any Default or Event of Default which shall have occurred, which notice shall include a written statement as to such occurrence, specifying the nature thereof and the action, if any, which is proposed to be taken with respect thereto. SECTION 6.07. NOTICE OF LITIGATION . Promptly notify the Administrative Agent of any action, suit or proceeding at law or in equity or by or before any governmental 41 instrumentality or other agency which, if adversely determined against any Company or any Guarantor on the basis of the allegations and information set forth in the complaint or other notice of such action, suit or proceeding, or in the amendments thereof, if any, could reasonably be expected to have a Material Adverse Effect. SECTION 6.08. NOTICE OF DEFAULT IN OTHER AGREEMENTS. Promptly notify the Administrative Agent of any default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which any Company or any Guarantor is a party which default could reasonably be expected to have a Material Adverse Effect. SECTION 6.09. NOTICE OF ERISA EVENT . Promptly deliver to the Administrative Agent a certificate of the Chief Financial Officer of each Company setting forth details as to such occurrence and such action, if any, which a Company, a Guarantor or an ERISA Affiliate is required or proposes to take, together with any notices received from any Governmental Authority or required or proposed to be given to or filed with or by such Company, such Guarantor, such ERISA Affiliate, the PBGC, a Plan participant or the Plan administrator, with respect thereto: that a Reportable Event has occurred with respect to a Plan, that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code with respect to a Plan, that a Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, that one or more Plans have an Unfunded Current Liability giving rise to a Lien under ERISA, that proceedings may be or have been instituted to terminate a Multi-Employer Plan, that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan, or that any Company, any Guarantor or any ERISA Affiliate will or may incur any liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, or to a Multi-Employer Plan under Section 4201 or 4204 of ERISA. Each Company will deliver to the Administrative Agent a complete copy of the annual report (Form 5500) of each Plan required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Administrative Agent pursuant to the first sentence hereof, copies of annual reports and any other notices received by each Company or such Guarantor required to be delivered to the Administrative Agent hereunder shall be delivered to the Administrative Agent no later than ten days after the later of the date such report or notice has been filed with the Internal Revenue Service or the PBGC, given to Plan participants or received by any Company or any Guarantor. SECTION 6.10. NOTICE OF ENVIRONMENTAL LAW VIOLATIONS. Promptly notify the Administrative Agent of the receipt of any notice of an action, suit, and proceeding before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, pending against any Company or any Guarantor relating to any alleged violation of any Environmental Law which, if adversely determined against such Company or such Guarantor (a) could reasonably be expected to result in a fine or judgment against such Company or Guarantor of more than $250,000 or (b) could reasonably be expected to have a Material Adverse Effect. 42 SECTION 6.11. COMPLIANCE WITH APPLICABLE LAWS . Comply with the requirements of all applicable laws, rules, regulations and orders of any Governmental Authority, the breach of which could reasonably be expected to have a Material Adverse Effect. SECTION 6.12. SUBSIDIARIES . Give the Administrative Agent prompt written notice of the creation, establishment or acquisition, in any manner, of any direct or indirect subsidiary of the Company not existing on the date hereof. EDO, or its Subsidiary as appropriate, shall (x) execute a Pledge Agreement with respect to (i) all the shares of capital stock or other ownership interest of each such Subsidiary which is a Domestic Subsidiary, and (ii) 65% of the outstanding shares of capital stock or other ownership interest of each such Subsidiary which is a Foreign Subsidiary, in each case, together with certificates and powers with respect to such interest duly endorsed in blank, and in the event of uncertificated interests, UCC financing statements identifying such interest) and (y) cause each Domestic Subsidiary to execute a Guaranty and Security Agreement in favor of the Administrative Agent within five days of the creation, establishment or acquisition of such Subsidiary and in connection therewith shall provide to the Administrative Agent, with a copy for each Lender, the supporting documents identified in clauses (i), (ii) and (iii) of Section 5.01(e), in each case with respect to such Subsidiary, together with, if required by the Agent, a favorable written opinion of counsel to such Subsidiary and the pledgor of the interests in such Subsidiary, which opinion shall be consistent in substance and as to the matters opined as the opinion delivered pursuant to Section 5.01(d) on the Closing Date. SECTION 6.13. ENVIRONMENTAL LAWS. Comply and use its best efforts to ensure compliance by all tenants and subtenants of their respective properties with the requirements of all Environmental Laws, except where the failure to so comply could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; provide to the Lenders all documentation in connection with such compliance that the Lenders may reasonably request, and defend, indemnify, and hold harmless each Agent and each Lender and their respective employees, agents, officers, and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs, or expenses of whatever kind or nature, known or unknown, contingent or otherwise (collectively "Losses"), arising out of, or in any way related to, (a) the presence, disposal, or release of any Hazardous Materials on any property at any time owned or occupied by the Companies or any Guarantor; (b) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials; (c) any lawsuit brought or threatened, settlement reached, or government order relating to such Hazardous Materials, and/or (d) any violation of applicable Environmental Laws, including, without limitation, reasonable attorney and consultant fees, investigation and laboratory fees, court costs, and litigation expenses except to the extent the Losses are caused by the gross negligence or willful misconduct of a Lender or an Agent or their respective employees, agents, officers and directors. SECTION 6.14 CERTAIN LETTERS OF CREDIT . Use reasonable best efforts to cause the beneficiary of each Mellon L/C and each B of A L/C to accept on or prior to April 1, 2003 a Letter of Credit in substitution therefor issued by the Issuing Lender hereunder. 43 ARTICLE VIINEGATIVE COVENANTS Each Company, jointly and severally, covenants and agrees that so long as the Commitments remain in effect, any Letter of Credit remains outstanding, or any of the principal of or interest on any Note or any other Obligations hereunder shall be unpaid, it will not, and will not cause or permit any Guarantor, directly or indirectly, to: SECTION 7.01. LIENS .Incur, create, assume or suffer to exist any Lien on any of their respective assets now or hereafter owned, other than: (a) Liens existing on the date hereof as set forth on Schedule II attached hereto including any renewals or extensions thereof; provided that no such Lien is extended to cover any additional property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (b) Liens for taxes, assessments or other governmental charges or levies not yet delinquent or which are being contested in good faith by appropriate proceedings, provided, however, that adequate reserves with respect thereto are maintained on the books of the Companies or the Guarantors in accordance with Generally Accepted Accounting Principles; (c) carriers', warehousemens', mechanics', suppliers' or other like Liens arising in the ordinary course of business and not overdue for a period of more than 30 days or which are being contested in good faith by appropriate proceedings in a manner which will not jeopardize or diminish the interest of the Administrative Agent in any of the collateral subject to the Security Documents; (d) Liens incurred or deposits to secure the performance of tenders, bids, trade contracts, leases, statutory obligations, surety, performance and appeal bonds, and other obligations of similar nature incurred in the ordinary course of business including liens on works in progress, inventory and unfinished goods securing progress payments received under contracts with third parties; (e) any attachment, judgment or similar Lien arising in connection with any court or governmental proceeding provided that the execution or other enforcement of such Lien is effectively stayed; (f) easements, rights of way, restrictions and other similar charges or encumbrances which in the aggregate do not interfere in any material respect with the occupation, use and enjoyment by any Company or any Guarantor of the property or assets encumbered thereby in the normal course of their respective business or materially impair the value of the property subject thereto; (g) deposits under workmen's compensation, unemployment insurance and social security laws; 44 (h) liens granted to the Lenders or the Administrative Agent, for the ratable benefit of the Lenders, under this Agreement or any other Loan Document; (i) purchase money liens for fixed or capital assets acquired in the ordinary course of business, including obligations with respect to Capital Leases; provided in each case such purchase money lien does not exceed 100% of the purchase price of, and encumbers only, the property acquired; (j) liens granted to financial institutions party to Hedging Agreements permitted pursuant to Section 7.02(i) to secure EDO's or its Subsidiary's obligations under such Hedging Agreements provided the priority of such liens are pari passu with the priority of the liens referred to in clause (h) above and are governed by an intercreditor agreement between the Administrative Agent, for the ratable benefit of the Lenders and each such financial institution in form and substance satisfactory to the Required Lenders; (k) liens consisting of precautionary Uniform Commercial Code financing statements regarding operating leases of any Company or any Guarantor; (l) licenses, leases or subleases granted to third Persons in the ordinary course of business not interfering in any material respect with the business of any Company or any Guarantor; (m) any lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness of any Company or any Guarantor secured by any Lien permitted by clause (i) of this Section; provided that such Indebtedness is not increased and is not secured by any additional assets; and (n) cash pledged to Bank of America, N.A. to secure reimbursement obligations under the B of A L/Cs. SECTION 7.02. INDEBTEDNESS . Incur, create, assume or suffer to exist or otherwise become liable in respect of any Indebtedness, other than: (a) Indebtedness incurred prior to the date hereof as described in Schedule III attached hereto including any renewals, refinancings or extensions thereof; provided such renewals, refinancings or extensions do not result in an increase in the aggregate principal amount of such Indebtedness; (b) Indebtedness to the Agents and the Lenders under this Agreement, the Notes or any other Loan Document; (c) Indebtedness for trade payables incurred in the ordinary course of business which are not overdue; (d) Indebtedness consisting of guarantees permitted pursuant to Section 7.03; 45 (e) Subordinated Indebtedness approved in writing by the Required Lenders; provided, however, that no Default or Event of Default shall have occurred and be continuing or would occur after giving effect to the incurrence of such Subordinated Indebtedness; (f) Indebtedness secured by purchase money liens as permitted under Section 7.01(i); provided, however, the aggregate amount of all such Indebtedness outstanding at any one time shall not exceed $10,000,000. (g) Indebtedness owing by a Company to any Guarantor or other Company or by any Guarantor to a Company or the Company to any other Guarantor; (h) Indebtedness arising from the election of a participant in an ESOP to receive an installment payment of benefits accrued to such participant under such ESOP; (i) Hedging Agreements entered into to hedge against existing business risks in the ordinary course of business and not for the purpose of speculation; provided (i) the aggregate amount subject to Hedging Agreements to which EDO or its Subsidiaries are a party shall not exceed $150,000,000 and (ii) the termination of each Hedging Agreement shall not be later than April 1, 2007; (j) Indebtedness of any Company or any Guarantor representing the obligation of the Company or any Guarantor to make payments with respect to the cancellation or repurchase of certain stock of officers, employees or directors (or their estates) of any Company or any Guarantor, to the extent permitted by Section 7.06(f); (k) Indebtedness for the deferred purchase price of stock, assets or other property owing to a seller pursuant to a Permitted Acquisition; provided, however, that (i) such indebtedness constitutes all or a portion of the consideration payable with respect to such acquisition, (ii) such indebtedness does not exceed more than 100% of the original purchase price of such acquisition, and (iii) such indebtedness shall constitute Subordinated Indebtedness; (l) Other Indebtedness, excluding indebtedness for borrowed money, the aggregate amount of which shall not exceed $500,000 at any time; and (m) the Existing Letters of Credit, the Mellon L/Cs and the B of A L/Cs. SECTION 7.03. GUARANTIES . Guarantee, endorse, become surety for, or otherwise in any way become or be responsible for the Indebtedness or obligations of any Person, whether by agreement to maintain working capital or equity capital or otherwise maintain the net worth or solvency of any Person or by agreement to purchase the Indebtedness of any other Person, or agreement for the furnishing of funds, directly or indirectly, through the purchase of goods, supplies or services for the purpose of discharging the Indebtedness of any other Person or otherwise, or enter into or be a party to any contract for the purchase of merchandise, materials, supplies or other property if such contract provides that payment for such merchandise, materials, supplies or other property shall be made regardless of whether delivery of such merchandise, supplies or other property is ever made or tendered except: 46 (a) guaranties executed on or prior to the date hereof as described on Schedule IV attached hereto including any renewals or extension thereof; provided the contingent obligation thereunder after giving effect to such extension or renewal is not greater than such contingent obligation immediately prior to such extension or renewal; (b) endorsements of negotiable instruments for collection or deposit in the ordinary course of business; (c) guaranties of any Indebtedness under this Agreement or any other Indebtedness permitted under Section 7.02; (d) guaranties by any Company of the Indebtedness of any other Company or any Guarantor permitted to be incurred hereunder, or by any Guarantor of the Indebtedness of any Company or any other Guarantor permitted to be incurred hereunder; and (e) guaranties by a Company or any Guarantor of operating leases of any Company or any Guarantor. SECTION 7.04. SALE OF ASSETS . Sell, assign, lease, transfer or otherwise dispose of any of their respective properties and assets, except as permitted under Section 7.11 and except for (a) the sale of inventory disposed of in the ordinary course of business, (b) the sale or other disposition of properties or assets no longer used or useful in the conduct of their respective businesses, (c) the sale or other disposition of AIL's Deer Park, New York facility; provided that no Default or Event of Default shall have occurred and be continuing immediately before and immediately after giving effect to such sale or other disposition, and (d) any other asset disposition provided (i) the consideration therefore is not less than the fair market value of the related asset (as determined in good faith by the Chief Financial Officer) and (ii) after giving effect thereto, the aggregate fair market value of the assets disposed of in all asset dispositions in any fiscal year of EDO does not exceed $250,000. SECTION 7.05. SALES OF RECEIVABLES. Sell, transfer, discount or otherwise dispose of notes, accounts receivable or other obligations owing to any Company or any Guarantor, with or without recourse, except for collection in the ordinary course of business. SECTION 7.06. LOANS AND INVESTMENTS. Make or commit to make any advance, loan, extension of credit, or capital contribution to, or purchase or hold beneficially any stock or other securities, or evidence of Indebtedness of, purchase or, except as permitted pursuant to Section 7.11, acquire all or a substantial part of the assets of, make or permit to exist any interest whatsoever in, any other Person except (a) for the ownership of stock of any Subsidiaries existing as of the Closing Date or of any Subsidiary created, or acquired pursuant to a Permitted Acquisition, after the Closing Date provided the Companies have complied with their obligations under Section 6.13 with respect to such Subsidiary; and further provided all of the outstanding equity interests of such Subsidiary are owned by the Companies and/or the Guarantors; (b) the ESOP Loan; (c) Eligible Investments; (d) loans and investments made by any Company in any Guarantor or in any other Company or by any Guarantor in any Company or any other Guarantor; (e) extension of trade credit to customers of the Companies and the Guarantors in the 47 ordinary course of business; (f) loans and advances from AIL and EDO to their respective management in an aggregate principal amount not to exceed $1,500,000; (g) mandatory repurchases of common stock required pursuant to the terms of the ESOP; provided, however, no Default or Event of Default shall have occurred and be continuing or would occur after giving effect thereto; (h) any Company or any Guarantor may acquire and own investments (including, Indebtedness obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of the delinquent obligations of, or other disputes with, customers and suppliers arising in the ordinary course of business; (i) deposits made in the ordinary course of business consistent with past practices to secure the performance of leases entered into in the ordinary course of business and deposits described in Section 7.01(d); and (j) any Company may make contributions or loans to the ESOP to permit the ESOP to immediately purchase capital stock of the Company, in an aggregate purchase price equal to the amount of such loan or contribution and (k) guarantees permitted pursuant to Section 7.03(d). SECTION 7.07. NATURE OF BUSINESS. Change or alter, in any material respect, the nature of its business from the nature of the business engaged in by it on the date hereof. SECTION 7.08. SALE AND LEASEBACK. Enter into any arrangement, directly or indirectly, with any Person whereby it shall sell or transfer any property, whether real or personal, used or useful in its business, whether now owned or hereafter acquired, of it, if at the time of such sale or disposition it intends to lease or otherwise acquire the right to use or possess (except by purchase) such property or like property for a substantially similar purpose. SECTION 7.09. FEDERAL RESERVE REGULATIONS . Permit any Loan or the proceeds of any Loan to be used for any purpose which violates or is inconsistent with the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System. SECTION 7.10. ACCOUNTING POLICIES AND PROCEDURES . Permit any change in the accounting policies and procedures of the Companies or any Guarantor, including a change in fiscal year, provided, however, that any policy or procedure required to be changed by the Financial Accounting Standards Board (or other board or committee thereof) in order to comply with Generally Accepted Accounting Principles may be so changed. SECTION 7.11. LIMITATIONS ON FUNDAMENTAL CHANGES . Merge or consolidate with, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now or hereafter acquired) to, any Person, or, acquire more than 50% of the outstanding stock or all or substantially all of the assets or the business of any Person or liquidate, wind up or dissolve or suffer any liquidation or dissolution; provided, however, (a) any Company or Guarantor may acquire the stock or assets or business of a Person pursuant to a Permitted Acquisition, (b) any Subsidiary of EDO may merge with (x) any Company provided that such Company shall be the continuing or surviving entity, or (y) with any one or more Subsidiaries of EDO, and (c) any Company may sell, lease, or otherwise transfer its assets to any other Company or any Guarantor and any Guarantor may sell, lease, or otherwise transfer its assets to the Company or any other Guarantor so long as the security interest granted to the Administrative Agent for the benefit of the Lenders pursuant to 48 the Security Documents in such assets shall remain in full force and effect and perfected, to at least the same extent as in effect immediately prior to such sale, lease or other transfer. SECTION 7.12. FINANCIAL COVENANTS. (a) Consolidated Tangible Net Worth plus Subordinated Debt. Permit Consolidated Tangible Net Worth plus Consolidated Subordinated Debt at the last day of any fiscal quarter to be less than the amount set forth below opposite the applicable period in which the fiscal quarter occurs.
Period Amount ------ ------ Closing Date through December 30, 2002 $200,000,000 December 31, 2002 through December 30, 2003 $225,000,000 December 31, 2003 through December 30, 2004 $250,000,000 December 31, 2004 and thereafter $275,000,000
(b) Consolidated Leverage Ratio. Permit the Consolidated Leverage Ratio as of the end of any fiscal quarter to be greater than 2.50:1.00. (c) Consolidated Fixed Charge Coverage Ratio. Permit the Consolidated Fixed Charge Coverage Ratio as of the end of any fiscal quarter to be less than the ratio set forth below opposite the applicable period in which the fiscal quarter occurs:
Period Ratio ------ ----- Closing Date through December 30, 2004 1.10:1.00 December 31, 2004 and thereafter 1.20:1.00
(d) Consolidated EBIT to Consolidated Interest Expense. Permit Consolidated EBIT to Consolidated Interest Expense as of the end of any fiscal quarter to be less than 3.00:1.00. (e) Consolidated Total Unsubordinated Liabilities to Consolidated Tangible Net Worth plus Subordinated Debt. Permit the ratio of Consolidated Total Unsubordinated Liabilities to Consolidated Tangible Net Worth plus Subordinated Debt as of the end of any fiscal quarter to be greater than 1.00:1.00. (f) No Net Loss. Incur a Consolidated net loss (calculated exclusive of extraordinary gains) for any period consisting of four consecutive fiscal quarters. 49 SECTION 7.13. SUBORDINATED DEBT. Directly or indirectly prepay, defease, purchase, redeem, or otherwise acquire any Subordinated Debt or amend, supplement or otherwise modify any of the terms thereof without the prior written consent of the Required Lenders. SECTION 7.14. DIVIDENDS . Declare any dividend on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of stock of any Company or any Guarantor, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash, securities or property or in obligations of the Companies or any Guarantor or in any combination thereof, or permit any Subsidiary of EDO to make any payment on account of, or purchase or otherwise acquire, any shares of any class of the stock of any Company or any Guarantor from any Person; provided, however, (a) EDO may declare and pay dividends on its outstanding common stock for each calendar quarter commencing with the quarter ending September 30, 2002 in an amount not to exceed fifty (50%) percent of Consolidated Net Income for the immediately preceding fiscal quarter (b) each wholly-owned subsidiary of EDO may declare and pay dividends ratably with respect to its capital stock, (c) EDO may make contributions to the ESOP from time to time not to exceed an amount equal to the next scheduled payment of principal and interest then due pursuant to the ESOP Loan Agreement, and (d) the Companies may redeem or repurchase shares of their respective common stock (or options to purchase such common stock) from officers, employees and directors of the Companies or any of their Subsidiaries (or their estates) upon the death, permanent disability, retirement or termination of employment of any such Person or otherwise in accordance with any stock option plan or any employee stock ownership plan maintained by the Companies or any of their Subsidiaries, provided the aggregate purchase price paid with respect to all repurchases of common stock in any fiscal year of EDO shall not exceed $150,000; provided, however, with respect to each dividend distribution, redemption and repurchase permitted hereunder no such dividend, distribution, redemption or repurchase shall be made if a Default or an Event of Default shall have occurred and be continuing or would occur after giving effect to the same. SECTION 7.15. TRANSACTIONS WITH AFFILIATES . Enter into any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of any Company's or Guarantor's business and upon fair and reasonable terms no less favorable to such Company or Guarantor than they would obtain in a comparable arms-length transaction with a Person not an Affiliate. The provisions of this Section 7.15 shall not apply to the transactions contemplated by the ESOP which are consummated in accordance with the terms of the ESOP. SECTION 7.16. IMPAIRMENT OF SECURITY INTEREST. Take or omit to take any action which could reasonably be expected to have the result of impairing the security interest in any property subject to a security interest in favor of the Administrative Agent. SECTION 7.17. BORROWING BASE . Permit, at any time, the Aggregate Senior Indebtedness Outstandings to exceed the Borrowing Base. 50 SECTION 7.18. NO AMENDMENTS . Without the prior written consent of the Required Lenders, amend, supplement or otherwise modify (i) the certificate of incorporation of EDO with respect to its preferred stock or (ii) any material term of the ESOP Loan (without limitation, the interest rate thereon, and the schedule and amount of principal payments required thereunder) or (iii) the Subordinated Debentures or the indenture pursuant to which the Subordinated Debentures were issued. SECTION 7.19. EXTENDED MELLON L/CS . Without the prior written consent of the Required Lenders, renew any Extended Mellon L/C (as defined in Section 2.04(a)) or agree to any amendment or modification extending the expiry date or increasing the stated amount of any Extended Mellon L/C. ARTICLE VIIIEVENTS OF DEFAULT SECTION 8.01. EVENTS OF DEFAULT . In the case of the happening of any of the following events (each an "Event of Default"): (a) failure to pay (i) the principal of any Loan or any reimbursement obligation with respect to a drawing under any Letter of Credit, in each case, as and when due and payable or (ii) within five days after the same becomes due and payable, any interest on any Loan or any fee or other amount due under this Agreement or any other Loan Document; (b) default shall be made in the due observance or performance of (i) any covenant, condition or agreement set forth in Article VI (other than Section 6.03(a), Section 6.03(b) and Sections 6.05 through 6.11) and such default, shall continue unremedied for a period of 15 consecutive days or (ii) any other covenant, conditions or agreement of the Company or any Guarantor to be performed pursuant to this Agreement or any other Loan Document (other than those specified in clause (a) of this Section 8.01); (c) any representation or warranty made or deemed made in this Agreement or any other Loan Document shall prove to be false or misleading in any material respect when made or given or when deemed made or given; (d) any report, certificate, financial statement (excluding financial projections provided the same were prepared in good faith and upon reasonable assumptions) or other instrument furnished in connection with this Agreement or any other Loan Document or the borrowings hereunder, shall prove to be false or misleading in any material respect when made or given or when deemed made or given; (e) default in the performance or compliance in respect of any agreement or condition relating to any Indebtedness of any Company or any Guarantor in excess of $500,000 individually or in the aggregate (other than the Notes) if the effect of such default is to accelerate the maturity of such Indebtedness or to permit the holder or obligee thereof (or a trustee on 51 behalf of such holder or obligee) to cause such Indebtedness to become due prior to the stated maturity thereof, or, any such Indebtedness shall not be paid when due; (f) any Company shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code or any other federal or state bankruptcy, insolvency or similar law, (ii) consent to the institution of, or fail to controvert in a timely and appropriate manner, any such proceeding or the filing of any such petition, (iii) apply for or consent to the employment of a receiver, trustee, custodian, sequestrator or similar official for such Company or for a substantial part of its property; (iv) file an answer admitting the material allegations of a petition filed against it in such proceeding, (v) make a general assignment for the benefit of creditors, (vi) take corporate action for the purpose of effecting any of the foregoing; or (vii) become unable or admit in writing its inability or fail generally to pay its debts as they become due; or any of the actions identified in the preceding clauses (i) through (vii) shall have occurred with respect to any Guarantor. (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of any Company or of a substantial part of their respective property, under Title 11 of the United States Code or any other federal or state bankruptcy insolvency or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator or similar official for such Company or for a substantial part of their property, or (iii) the winding-up or liquidation of any Company and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall continue unstayed and in effect for 60 days; or any of the actions identified in the preceding clauses (i), (ii) or (iii) shall have occurred with respect to any Guarantor; (h) One or more orders, judgments or decrees for the payment of money in excess of $500,000 in the aggregate shall be rendered against any Company or any Guarantor and the same shall not have been paid in accordance with such judgment, order or decree and either (i) an enforcement proceeding shall have been commenced by any creditor upon such judgment, order or decree, or (ii) there shall have been a period of thirty (30) days during which a stay of enforcement of such judgment, order or decree, by reason of pending appeal or otherwise, was not in effect; (i) any Plan shall fail to maintain the minimum funding standard required for any Plan year or part thereof or a waiver of such standard or extension of any amortization period is applied for or granted under Section 412 of the Code, any Plan is terminated by any Company, any Guarantor or any ERISA Affiliate or is the subject of termination proceedings under ERISA, any Plan shall have an Unfunded Current Liability, a Reportable Event shall have occurred with respect to a Plan or any Company, any Guarantor, or any ERISA Affiliate shall have incurred a liability to or on account of a Plan under Section 515, 4062, 4063, or a Multi-Employer Plan under Section 4201 or 4204 of ERISA, and there shall result from any such event or events the imposition of a lien upon the assets of any Company or any Guarantor or the granting of a security interest on such assets, or a liability to the PBGC or a Plan or a Multi-Employer Plan or a trustee appointed under ERISA or a penalty under Section 4971 of the Code in an aggregate amount in excess of $500,000; 52 (j) any material provision of any Loan Document shall for any reason cease to be in full force and effect in accordance with its terms or any Company or any Guarantor shall so assert in writing; (k) any of the Liens purported to be granted pursuant to any Security Document shall fail or cease for any reason to be legal, valid and enforceable liens on the collateral purported to be covered thereby or shall fail or cease to have the priority purported to be created thereby; (l) EDO shall cease for any reason to be required to file periodic reports under Section 13 of the Securities Exchange Act of 1934, as amended and the regulations of the Securities Exchange Commission promulgated thereunder; then, at any time thereafter during the continuance of any such event, the Administrative Agent may, and, upon the request of the Required Lenders, shall by written or telephonic notice to the Company, take any or all of the following actions, at the same or different times, (a) terminate the Commitments, (b) declare (i) the Notes, both as to principal and interest, (ii) an amount equal to the Aggregate Letters of Credit outstanding and (iii) all other Obligations, to be forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Notes to the contrary notwithstanding, and (c) exercise all rights and remedies available to it and the Lenders under the Loan Documents or applicable law; provided, however, that if an event specified in Section 8.01(f) or (g) shall have occurred, the Commitments shall automatically terminate and interest, principal and amounts referred to in the preceding clauses (i), (ii) and (iii) shall be immediately due and payable without presentment, demand, protest, or other notice of any kind, all of which are expressly waived, anything contained herein or in the Notes to the contrary notwithstanding. With respect to all Letters of Credit that shall not have matured or presentment for honor shall not have occurred, the Companies shall provide the Administrative Agent with Cash Collateral in an amount equal to the aggregate undrawn amount of such Letters of Credit. Such Cash Collateral shall be applied by the Administrative Agent to reimburse the Issuing Lender for drawings under Letters of Credit for which the Issuing Lender has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Companies at such time or, if the maturity of the Loans has been accelerated, be applied to satisfy other Obligations with any amount remaining after such satisfactions to be returned to the Companies or paid to such other party as may legally be entitled to the same. ARTICLE IXTHE AGENTS SECTION 9.01. APPOINTMENT, POWERS AND IMMUNITIES . Each Lender hereby irrevocably appoints and authorizes each Agent to act as its Agent hereunder, under the Security Documents and the other Loan Documents with such powers as are specifically delegated to such Agent by the terms of this Agreement, the Security Documents and the other Loan Documents together with such other powers as are reasonably incidental thereto. No Agent shall have any duties or responsibilities except those expressly set forth in this Agreement, the Security Documents and the other Loan Documents and shall not be a trustee for any Lender, nor is any Agent acting in a fiduciary capacity of any kind under this Agreement, the 53 Security Documents or the other Loan Documents or in respect thereof or in respect of any Lender. No Agent shall be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement, the Security Documents, or the other Loan Documents, in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement, the Security Documents or the other Loan Documents, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the Security Documents or the other Loan Documents or any other document referred to or provided for herein or therein or for the collectability of the Loans or for the validity, effectiveness or value of any interest or security covered by the Security Documents or for the value of any collateral or for the validity or effectiveness of any assignment, mortgage, pledge, security agreement, financing statement, document or instrument, or for the filing, recording, re-filing, continuing or re-recording of any thereof or for any failure by any Company, or any of their respective Subsidiaries to perform any of its obligations hereunder or under the other Loan Documents. Each Agent may take all actions by itself and/or it may employ agents and attorneys-in-fact, and shall not be responsible, except as to money or the securities received by it or its authorized agents, for the negligence or misconduct of itself or its employees or of any such agents or attorneys-in-fact, if such agents or attorneys-in-fact are selected by it with reasonable care. No Agent nor any of its directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder, under the Security Documents or the other Loan Documents or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. SECTION 9.02. RELIANCE BY AGENTS . Each Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by such Agent. As to any matters not expressly provided for by this Agreement, the Security Documents or the other Loan Documents, each Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder, under the Security Documents or the other Loan Documents in accordance with instructions signed by the Required Lenders, or such other number of Lenders as is specified in Section 10.04 hereof, and such instructions of the Required Lenders or other number of Lenders as aforesaid and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. SECTION 9.03. EVENTS OF DEFAULT . No Agent shall be deemed to have knowledge of the occurrence of a Default (other than the non-payment of principal of, or interest on, the Loans to the extent the same is required to be paid to the Administrative Agent for the account of the Lenders) unless such Agent has received notice from a Lender or a Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Administrative Agent shall give prompt notice thereof to the Lenders (and shall give each Lender notice of each such non-payment). The Administrative Agent shall (subject to Section 9.07 hereof) take such action with respect to such Default as shall be directed by the 54 Required Lenders, except as otherwise provided in Section 10.04 hereof; provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may take such action, or refrain from taking such action, with respect to such Default or an Event of Default as it shall deem advisable in the best interest of the Lenders. SECTION 9.04. RIGHTS AS A LENDER . With respect to its Commitment and the Loans made by it, each Agent in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as an Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. Each Agent and its Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with any Company, any Guarantor or any of their respective Affiliates, if it were not acting as an Agent, and each Agent may accept fees and other consideration from any Company, any Guarantor or any of their respective Affiliates, for services in connection with this Agreement, the Security Documents or any of the other Loan Documents or otherwise without having to account for the same to the Lenders. SECTION 9.05. INDEMNIFICATION . The Lenders shall indemnify each Agent (to the extent not reimbursed by the Companies under Section 10.03 hereof), ratably in accordance with the aggregate principal amount of the Loans made by the Lenders (or, if no Loans are at the time outstanding, ratably in accordance with their respective Commitments), for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against such Agent in any way relating to or arising out of this Agreement, the Security Documents or any of the other Loan Documents or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby and thereby (including, without limitation, the costs and expenses which the Companies are obligated to pay under Section 10.03 hereof or under the applicable provisions of any other Loan Document) or the enforcement of any of the terms hereof or of the Security Documents, or of any other Loan Document, provided that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of such Agent. SECTION 9.06. NON-RELIANCE ON AGENTS AND OTHER LENDERS . Each Lender agrees that it has, independently and without reliance on any Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Companies and the Guarantors and decision to enter into this Agreement and that it will, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement, the Security Documents or the other Loan Documents. No Agent shall be required to keep itself informed as to the performance or observance by the Companies and the 55 Guarantors of this Agreement, the Security Documents or the other Loan Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of any Company or any Guarantor. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Administrative Agent hereunder or under the Security Documents, or the other Loan Documents (which shall include the statements and reports delivered to the Administrative Agent pursuant to Sections 6.03, 6.05, 6.06, 6.07, 6.08, 6.09 and 6.10), no Agent shall have any duty or ability to provide any Lender with any credit or other information concerning the affairs, financial condition or business of any Company, which may come into the possession of such Agent or any of its Affiliates. SECTION 9.07. FAILURE TO ACT . Except for action expressly required of an Agent hereunder, or under the Security Documents, each Agent shall in all cases be fully justified in failing or refusing to act hereunder or thereunder unless it shall be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. SECTION 9.08. RESIGNATION OF AGENTS . Subject to the appointment and acceptance of a successor Agent as provided in this Section 9.08, the Administrative Agent, the Syndication Agent or the Documentation Agent may resign at any time by notifying the Lenders and the Companies. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Companies, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the resigning Agent gives notice of its resignation, then the resigning Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent, and the resigning Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Companies to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Companies and such successor. After an Agent's resignation hereunder, the provisions of this Article and Section 10.03 shall continue in effect for the benefit of such resigning Agent in respect of any actions taken or omitted to be taken by it while it was acting as an Agent. SECTION 9.09. SHARING OF COLLATERAL AND PAYMENTS . In the event that at any time any Lender shall obtain payment in respect of a Note or interest thereon, or a participation in any Letter of Credit, or receive any collateral in respect thereof, whether voluntarily or involuntarily, through the exercise of a right of banker's lien, set-off or counterclaim against any Company or otherwise, in a greater proportion than the proportion received by any other Lender in respect of the corresponding Note held by it or interest thereon, or its participation in any Letter of Credit, then the Lender so receiving such greater proportionate payment shall purchase for cash from the other Lender or Lenders such 56 portion of each such other Lender's or Lenders' Loan, or participation in any Letter of Credit, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Lender receiving the proportionate over-payment to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders each of which shall have a lien on its ratable portion of the amount described hereinafter obtained from the Companies; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from the Lender which received the proportionate over-payment, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Companies agree, to the extent they may do so under applicable law, that each Lender so purchasing a portion of another Lender's Loan, or participation in any Letter of Credit, may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion. ARTICLE XMISCELLANEOUS SECTION 10.01. NOTICES . All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including telecopy), and unless otherwise expressly provided herein, shall be conclusively deemed to have been received by a party hereto and to be effective on the day on which delivered by hand to such party or one Business Day after being sent by overnight mail to the address set forth below, or, in the case of telecopy notice, when acknowledged as received, or if sent by registered or certified mail, three (3) Business Days after the day on which mailed in the United States, addressed to such party at such address: (a) if to the Administrative Agent, at Citibank, N.A. 730 Veterans Memorial Highway Hauppauge, New York 11788 Attention: Mr. Jason A. Quinn, Vice President Telecopy: (631) 265-4888 (b) if to any Company, at EDO Corporation 60 East 42nd St. Suite 5010 New York, New York 10165 Attention: Chief Financial Officer Telecopy: (212) 716-2051 with copies to: EDO Corporation 57 60 East 42nd St. Suite 5010 New York, New York 10165 Attention: Law Department Telecopy: (212) 716-2051 Dechert 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103 Attention: Sarah B. Gelb, Esq. Telecopy: (215) 994-2222 (c) if to any Lender, to its address set forth in the signature page of this Agreement and to the person so designated; - and - (d) as to each such party at such other address as such party shall have designated to the other in a written notice complying as to delivery with the provisions of this Section 10.01. SECTION 10.02. EFFECTIVENESS; SURVIVAL . This Agreement shall become effective on the date on which all parties hereto shall have signed a counterpart copy hereof and shall have delivered the same to the Administrative Agent. All representations and warranties made herein and in the other Loan Documents and in the certificates delivered pursuant hereto or thereto shall survive the making by the Lenders of the Loans, in each case, as herein contemplated and the execution and delivery to the Lenders of the Notes evidencing the Loans and shall continue in full force and effect so long as the Obligations hereunder are outstanding and unpaid and the Commitments are in effect. The obligations of the Companies pursuant to Section 3.07, Section 3.08, Section 3.09 and Section 10.03 shall survive termination of this Agreement and payment of the Obligations. SECTION 10.03. INDEMNITY AND EXPENSES . Each Company, jointly and severally, agrees (a) to indemnify, defend and hold harmless the Administrative Agent, each Lender and their respective officers, directors, employees, and affiliates (each, an "indemnified person") from and against any and all losses, claims, damages, liabilities or judgments to which any such indemnified person may be subject and arising out of or in connection with the Loan Documents, the financings contemplated hereby, the use of any proceeds of such financings or any related transaction or any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any of such indemnified persons is a party thereto, and to reimburse each of such indemnified persons upon demand for any reasonable legal or other expenses incurred in connection with the investigation or defending any of the foregoing; provided that the foregoing indemnity will not, as to any indemnified person, apply to losses, claims, damages, liabilities, judgments or related expenses to the extent arising from the wilful misconduct or gross negligence of such indemnified person, (b) to pay or reimburse the Administrative Agent for all 58 its reasonable out-of-pocket costs and expenses incurred in connection with the preparation and execution of and any amendment, supplement or modification to this Agreement, the Notes any other Loan Documents, and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including without limitation, the reasonable fees and disbursements of Farrell Fritz, P.C., counsel to the Administrative Agent, and (c) to pay or reimburse each Lender and the Administrative Agent for all their costs and expenses incurred in connection with the enforcement and preservation of any rights under this Agreement, the Notes, the other Loan Documents, and any other documents prepared in connection herewith or therewith, including, without limitation, the reasonable fees and disbursements of counsel (including, without limitation, in-house counsel) to the Agents and to the several Lenders, including all such out-of-pocket expenses incurred during any work-out, restructuring or negotiations in respect of the Obligations. SECTION 10.04. AMENDMENTS AND WAIVERS . With the written consent of the Required Lenders, the Administrative Agent and the Companies may, from time to time, enter into written amendments, supplements or modifications hereto for the purpose of adding any provisions to this Agreement or the Notes or any of the other Loan Documents or changing in any manner the rights of the Lenders or of the Companies hereunder or thereunder, and with the written consent of the Required Lenders, the Administrative Agent on behalf of the Lenders may execute and deliver to the Companies a written instrument waiving, on such terms and conditions as the Administrative Agent may specify in such instrument, any of the requirements of this Agreement or the Notes or any of the other Loan Documents or any Event of Default; provided, however, that no such waiver and no such amendment, or supplement or modification shall (a) extend the maturity of any Note or change the amortization schedule of any Term Note, or any installment thereof, (b) reduce the rate or extend the time of payment of interest on any Note or the amount of any reimbursement due in respect of any Letter of Credit, or any fees payable to the Lenders hereunder, (c) reduce the principal amount of any Note, (d) amend, modify or waive any provision of this Section 10.04 or clause (vi) of the definition of "Permitted Acquisition", (e) amend or modify any provision hereof specifying that all of the Lenders are required to waive, amend or modify any rights hereunder or make any determination granting consent hereunder, (f) consent to the assignment or transfer by any Company or any Guarantor of any of its rights or obligations under this Agreement or any other Loan Document, (g) except as expressly permitted pursuant to this Agreement or any other Loan Document release any collateral security granted to the Administrative Agent under the Security Documents or (h) release any Guarantor from its Guaranty, in each case specified in clauses (a) through (h) above without the written consent of all the Lenders; and provided, further, that no such waiver and no such amendment, supplement or modification shall (I) amend, modify, supplement or waive any provision of Section IX with respect to any Agent without the written consent of such Agent or (II) increase the amount of any Lenders' Commitment without the written consent of such Lender. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Companies, the Lenders, the Agents and all future holders of the Notes. SECTION 10.05. SUCCESSORS AND ASSIGNS; PARTICIPATIONS . 59 (a) This Agreement shall be binding upon and inure to the benefit of the Companies, the Lenders, the Administrative Agent, all future holders of the Notes and their respective successors and assigns, except that the Companies may not assign or transfer any of their rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other financial institutions ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender hereunder. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under this Agreement to the other parties under this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note for all purposes under this Agreement, and the Companies and the Agents shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. The Companies agree that if amounts outstanding under this Agreement or the Notes are due or unpaid or shall have been declared or shall become due and payable on the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement or any Note to the same extent as if the amount of its participating interests were owing directly to it as a Lender under this Agreement or any Note; provided, however, that such right of set-off shall be subject to the obligation of such Participant to share with the Lenders and the Lenders agree to share with such Participant, as provided in Section 9.09. The Companies agree that each Participant shall be entitled to the benefits of Sections 3.07, 3.08 and 3.09 with respect to its participation in the Commitments and in the Loans and Letters of Credit outstanding from time to time; provided, however, that no Participant shall be entitled to receive any greater amount pursuant to such sections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. No Participant shall have the right to consent to any amendment to, or waiver of, any provision of this Agreement, except the transferor Lender may provide in its agreement with the Participant that such Lender will not, without the consent of the Participant, agree to any amendment or waiver described in clause (a) through clause (h) of Section 10.04. (c) Any Lender may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to any Lender or any domestic banking affiliate thereof, and, with the consent of the Administrative Agent, and, provided no Event of Default has occurred and is continuing, the consent of the Companies, such consent not to be unreasonably withheld or delayed, to one or more additional banks or financial institutions ("Purchasing Lenders") all or any part of its rights and obligations under this Agreement and the Notes pursuant to an Assignment and Acceptance Agreement, executed by such Purchasing Lender, such transferor Lender and the Administrative Agent, and delivered to the Administrative Agent for its acceptance. Upon such execution, delivery and acceptance from and after the effective date specified in such Assignment and Acceptance Agreement, (i) the Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance Agreement, have the rights and obligations of a Lender hereunder with Commitments as set forth therein and (ii) the transferor Lender thereunder shall, to the 60 extent provided in such Assignment and Acceptance Agreement, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance Agreement covering all or the remaining portion of a transferor Lender's rights and obligations under this Agreement, such transferor Lender shall cease to be a party hereto). Such Assignment and Acceptance Agreement shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of Commitment Proportions arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under or in respect of this Agreement and the Notes. On or prior to the effective date specified in such Assignment and Acceptance Agreement, the Company, shall execute and deliver to the Administrative Agent, in exchange for the surrendered Note, a new Note to the order of such Purchasing Lender in an amount equal to the Commitments assumed by it pursuant to such Assignment and Acceptance Agreement and, if the transferor Lender has retained any Commitment hereunder, a new Note to the order of the transferor Lender in an amount equal to such Commitment retained by it hereunder. Such new Notes shall be in a principal amount equal to the principal amount of such surrendered Note, shall be dated the date of the Note they replace and shall otherwise be in the form of the Note replaced thereby. The Note surrendered by the transferor Lender shall be returned by the Administrative Agent to the Companies marked "cancelled". Anything in this Section 10.05 to the contrary notwithstanding, no transfer to a Purchasing Lender shall be made pursuant to this paragraph (c) if such transfer by any one transferor Lender to any one Purchasing Lender (other than a Purchasing Lender which is a Lender hereunder prior to such transfer) (x) is less than $10,000,000 of the Commitments of such transferor Lender or (y) if less than all of the Commitment of such transferor Lender is transferred, after giving effect to such transfer the amount held by any transferor Lender would be less than $10,000,000. Each transfer to a Purchasing Lender shall be made in the same pro rata portion with respect to the Revolving Credit Commitment and the Letter of Credit Commitments or, if all or any portion of the Commitments shall have expired, the Revolving Credit Loans or L/C Exposure, as applicable. (d) The Administrative Agent shall maintain at its address referred to in Section 10.01 a copy of each Assignment and Acceptance Agreement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the commitments of, and principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error and the Companies, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as the owner of the Loan recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Companies or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance Agreement executed by a transferor Lender and a Purchasing Lender, together with payment by the Purchasing Lender to the Administrative Agent of a registration and processing fee of $3,500 if the Purchasing Lender is not a Lender prior to the execution of an Assignment and Acceptance Agreement and $2,500 if the Purchasing Lender is a Lender prior to the execution of an Assignment and Acceptance Agreement, the Administrative Agent shall (i) accept such Assignment and Acceptance Agreement, (ii) record the information contained therein in the Register, and (iii) give prompt notice of such acceptance and recordation to the Lenders and the Company. 61 (f) Each Company authorizes each Lender (subject to Section 10.11) to disclose to any Participant or Purchasing Lender (each, a "Transferee") and any prospective Transferee any and all financial information in such Lender's possession concerning the Companies and the Guarantors which has been delivered to such Lender by or on behalf of any Company or any Guarantor pursuant to this Agreement or which has been delivered to such Lender by the Companies in connection with such Lender's credit evaluation of the Companies and the Guarantors prior to entering into this Agreement. (g) If, pursuant to this Section 10.05, any interest in this Agreement, a participation agreement, or any Note is transferred to any transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, (i) to represent to the transferor Lender (for the benefit of the transferor Lender, the Administrative Agent and the Companies) that under applicable law and treaties no taxes will be required to be withheld by the Administrative Agent, the Companies, or the transferor Lender with respect to any payments to be made to such Transferee in respect of the Loans, (ii) to furnish to the Administrative Agent, the transferor Lender and each Company either U.S. Internal Revenue Service Form W-8ECI or U.S. Internal Revenue Service Form W-8BEN (wherein such Transferee claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder) and (iii) to agree (for the benefit of the Administrative Agent, the transferor Lender and each Company) to provide the Administrative Agent, the transferor Lender and the Company, a new Form W-8ECI or Form W-8BEN upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with applicable U.S. laws and regulations and amendments duly executed and completed by such Transferee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. (h) Any Lender may at any time pledge or assign or grant a security interest in all or any part of its rights under this Agreement and its Notes to a Federal Reserve Bank, provided that no such assignment shall release the transferor Lender from its Commitment or its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party to this Agreement. SECTION 10.06. NO WAIVER; CUMULATIVE REMEDIES . Neither any failure nor any delay on the part of any Lender or the Administrative Agent in exercising any right, power or privilege hereunder or under any Note or any other Loan Document shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. The rights, remedies, powers and privileges herein provided or provided in the other Loan Documents are cumulative and not exclusive of any rights, remedies powers and privileges provided by law. SECTION 10.07. APPLICABLE LAW . THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OR CHOICE OF LAW. 62 SECTION 10.08. SUBMISSION TO JURISDICTION ; JURY WAIVER; WAIVER. EACH COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY FEDERAL OR STATE COURT IN THE STATE OF NEW YORK, COUNTY OF NEW YORK OR COUNTY OF NASSAU IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND RELATED TO OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, AND TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH COMPANY HEREBY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH FEDERAL OR STATE COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO HEREIN OR THEREIN OR THE SUBJECT MATTER HEREOF THEREOF MAY NOT BE LITIGATED IN OR BY SUCH FEDERAL OR STATE COURTS. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH COMPANY AGREES NOT TO ASSERT ANY COUNTERCLAIM IN ANY SUCH SUIT, ACTION OR PROCEEDING UNLESS SUCH COUNTERCLAIM CONSTITUTES A COMPULSORY OR MANDATORY COUNTERCLAIM UNDER APPLICABLE LAW OF CIVIL PROCEDURE. EACH COMPANY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN THIS AGREEMENT OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW YORK. EACH PARTY HERETO WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENT. EXCEPT AS PROHIBITED BY LAW, EACH COMPANY HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH COMPANY CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY AGENT, THE ISSUING LENDER OR ANY LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THEY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE LENDERS, THE AGENTS AND THE ISSUING LENDER TO ENTER INTO THIS AGREEMENT AND TO MAKE THE LOANS AND OTHER EXTENSIONS OF CREDIT. SECTION 10.09. SEVERABILITY . In case any one or more of the provisions contained in this Agreement, any Note or any other Loan Document should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. 63 SECTION 10.10. RIGHT OF SETOFF . If an Event of Default shall have occurred and be continuing, the Administrative Agent, the Issuing Lender and each Lender and their respective Affiliates are each hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Administrative Agent, the Issuing Lender or any Lender to or for the credit or the account of any Company against any and all of the Obligations of any Company now and hereafter existing under this Agreement and the Notes held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or any Note and although such obligations may be unmatured. The rights of the Administrative Agent, the Issuing Lender and each Lender under this Section 10.10 are in addition to other rights and remedies (including, without limitation, other rights of setoff) which they may have. SECTION 10.11. CONFIDENTIALITY. Each of the Lenders agrees that it will use reasonable efforts not to disclose without the prior consent of the Company (other than to affiliates of such Lenders and their respective directors, employees, auditors, counsel or other professional advisors) any confidential information with respect to any Company or any Guarantor which is furnished by the Companies or any Guarantor; provided that any Lender may disclose any such information (a) that is or has become generally available to the public other than as a result of disclosure by such Lender in violation of this Section 10.11; (b) as may be required or appropriate (x) in any report, statement or testimony submitted to any municipal, state or federal or other governmental regulatory body having or claiming to have jurisdiction over such Lender or to the Federal Reserve Board or the Federal Deposit Insurance Corporation or similar organizations (whether in the United States or elsewhere) or their successors or (y) in connection with any request or requirement of any such regulatory body; (c) as may be required in response to any summons or subpoena or in connection with any litigation; (d) to the extent required to comply with any law, order, regulation or ruling applicable to such Lender; and (e) to any prospective Transferee in connection with any contemplated transfer of any of the Notes or any interest therein by such Lender; provided that such prospective Transferee agrees to be bound by this Section 10.11 to the same extent as such Lender. Each Lender agrees, to the extent practical, to provide the Companies with prior notice of any disclosure of confidential information required pursuant to clause (c) or (d) above so that the Companies may seek to prevent or limit the disclosure of such information. SECTION 10.12. HEADINGS . Section headings used herein are for convenience of reference only and are not to affect the construction of or be taken into consideration in interpreting this Agreement. SECTION 10.13. CONSTRUCTION . This Agreement is the result of negotiations between, and has been reviewed by, each Company, the Administrative Agent, the Lenders and their respective counsel. Accordingly, this Agreement shall be deemed to be the product of each party hereto, and no ambiguity shall be construed in favor of or against either any Company or the Administrative Agent, or any Lender. 64 SECTION 10.14. COUNTERPARTS . This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, taken together, shall constitute one and the same instrument. SECTION 10.15. DOCUMENTATION AGENT AND SYNDICATION AGENT . Wachovia Bank, N.A., in its capacity as Documentation Agent, and Fleet National Bank in its capacity as Syndication Agent shall have no responsibilities or obligations hereunder or under any other Loan Document, provided that the provisions of this Section 10.15 shall not affect or limit its responsibilities, rights or obligations as a Lender hereunder. SECTION 10.16. JOINT AND SEVERAL OBLIGATIONS. (A) BENEFITS. THE LOANS WILL DIRECTLY OR INDIRECTLY BENEFIT EACH COMPANY HEREUNDER SEVERALLY, AND ALL OF THEM JOINTLY, REGARDLESS OF THE FACT NO COMPANY RECEIVES ALL OR PART OF THE PROCEEDS OF ANY OF THE LOANS. (B) ACCEPTANCE OF JOINT AND SEVERAL LIABILITY. EACH OF THE COMPANIES IS ACCEPTING JOINT AND SEVERAL LIABILITY HEREUNDER AND UNDER THE OTHER LOAN DOCUMENTS IN CONSIDERATION OF THE FINANCIAL ACCOMMODATIONS TO BE PROVIDED BY THE LENDERS UNDER THIS AGREEMENT, FOR THE MUTUAL BENEFIT, DIRECTLY AND INDIRECTLY, OF EACH OF THE COMPANIES AND IN CONSIDERATION OF THE UNDERTAKINGS OF EACH OTHER COMPANY TO ACCEPT JOINT AND SEVERAL LIABILITY FOR THE OBLIGATIONS. (C) PAYMENT AND PERFORMANCE. EACH OF THE COMPANIES, JOINTLY AND SEVERALLY, HEREBY IRREVOCABLY AND UNCONDITIONALLY ACCEPTS, NOT MERELY AS A SURETY BUT ALSO AS A CO-DEBTOR, JOINT AND SEVERAL LIABILITY WITH THE OTHER COMPANY, WITH RESPECT TO THE PAYMENT AND PERFORMANCE OF ALL OF THE OBLIGATIONS, IT BEING THE INTENTION OF THE PARTIES HERETO THAT ALL THE OBLIGATIONS SHALL BE THE JOINT AND SEVERAL OBLIGATIONS OF EACH OF THE COMPANIES WITHOUT PREFERENCE OR DISTINCTION AMONG THEM. (D) FAILURE TO PERFORM. IF AND TO THE EXTENT THAT ANY OF THE COMPANIES SHALL FAIL TO MAKE ANY PAYMENT WITH RESPECT TO ANY OF THE OBLIGATIONS AS AND WHEN DUE OR TO PERFORM ANY OF THE OBLIGATIONS IN ACCORDANCE WITH THE TERMS THEREOF, THEN IN EACH SUCH EVENT THE OTHER COMPANY WILL MAKE SUCH PAYMENT WITH RESPECT TO, OR PERFORM, SUCH OBLIGATION. (E) WAIVER OF NOTICE; ASSENT TO ACTIONS; ETC. THE OBLIGATIONS OF EACH OF THE COMPANIES UNDER THE PROVISIONS OF THIS SECTION 10.15 CONSTITUTE FULL RECOURSE OBLIGATIONS OF EACH OF THE COMPANIES ENFORCEABLE AGAINST EACH SUCH COMPANY, IRRESPECTIVE OF THE VALIDITY, REGULARITY OR ENFORCEABILITY OF 65 THIS AGREEMENT AS AGAINST ANY PARTICULAR COMPANY. EACH AND EVERY REPRESENTATION, WARRANTY, COVENANT AND AGREEMENT MADE BY THE COMPANIES, OR ANY OF THEM, HEREUNDER AND UNDER THE OTHER LOAN DOCUMENTS SHALL BE JOINT AND SEVERAL, WHETHER OR NOT SO EXPRESSED, AND SUCH OBLIGATIONS OF ANY COMPANY SHALL NOT BE SUBJECT TO ANY COUNTERCLAIM, SETOFF, RECOUPMENT OR DEFENSE BASED UPON ANY CLAIM ANY COMPANY MAY HAVE AGAINST ANY OTHER COMPANY OR ANY LENDER OR AGENT, AND SHALL REMAIN IN FULL FORCE AND EFFECT WITHOUT REGARD TO, AND SHALL NOT BE RELEASED, DISCHARGED OR IN ANY WAY AFFECTED BY, ANY CIRCUMSTANCES OR CONDITION AFFECTING ANY OTHER COMPANY, INCLUDING WITHOUT LIMITATION (A) ANY WAIVER, CONSENT, EXTENSION, RENEWAL, INDULGENCE OR OTHER ACTION OR INACTION UNDER OR IN RESPECT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY AGREEMENT OR OTHER DOCUMENT RELATED THERETO WITH RESPECT TO ANY OTHER COMPANY, OR ANY EXERCISE OR NONEXERCISE OF ANY RIGHT, REMEDY, POWER OR PRIVILEGE UNDER OR IN RESPECT OF ANY SUCH AGREEMENT OR INSTRUMENT WITH RESPECT TO ANY OTHER COMPANY, OR THE FAILURE TO GIVE NOTICE OF ANY OF THE FOREGOING TO ANY OTHER COMPANY, (B) ANY INVALIDITY OR UNENFORCEABILITY, IN WHOLE OR IN PART, OF ANY SUCH AGREEMENT OR INSTRUMENT WITH RESPECT TO ANY OTHER COMPANY; (C) ANY FAILURE ON THE PART OF ANY OTHER COMPANY FOR ANY REASON TO PERFORM OR COMPLY WITH ANY TERM OF ANY SUCH AGREEMENT OR INSTRUMENT; (D) ANY BANKRUPTCY, INSOLVENCY, REORGANIZATION, ARRANGEMENT, READJUSTMENT, COMPOSITION, LIQUIDATION OR SIMILAR PROCEEDING WITH RESPECT TO ANY OTHER COMPANY OR ITS PROPERTIES OR CREDITORS; OR (E) ANY OTHER OCCURRENCE WHATSOEVER, WITHER SIMILAR OR DISSIMILAR TO THE FOREGOING, WITH RESPECT TO ANY OTHER COMPANY. EACH COMPANY HEREBY WAIVES ANY REQUIREMENT OF DILIGENCE OR PROMPTNESS ON THE PART OF THE LENDERS AND THE AGENT IN THE ENFORCEMENT OF THEIR RIGHTS HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT WITH RESPECT TO THE OBLIGATIONS OF ITSELF OR OF ANY OTHER COMPANY. WITHOUT LIMITING THE FOREGOING ANY FAILURE TO MAKE ANY DEMAND UPON, TO PURSUE OR EXHAUST ANY RIGHTS OR REMEDIES AGAINST A COMPANY, OR ANY DELAY WITH RESPECT THERETO, SHALL NOT AFFECT THE OBLIGATIONS OF ANY OTHER COMPANY HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT. SECTION 10.17. ENTIRE AGREEMENT . This Agreement, each of the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent and the Lenders, constitute the entire agreement among the parties relating to the subject matter hereof, and supercede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. 66 IN WITNESS WHEREOF, the Companies, the Agents and the Lenders have caused this Agreement to be duly executed by their duly authorized officers, as of the day and year first above written. EDO CORPORATION By: /s/ DARRELL L. REED ----------------------- Name: Darrell L. Reed Title: Chief Financial Officer and Treasurer AIL SYSTEMS INC. By: /s/ DARRELL L. REED ------------------------ Name: Darrell L. Reed Title: Treasurer 67
Revolving Credit CITIBANK, N.A. Commitment: $35,714,250 AS ADMINISTRATIVE AGENT AND AS A LENDER Letter of Credit By: /s/ RICHARD ROMANO ----------------------------------------- Commitment: $35,714,250 Name: Richard Romano ---- -------- Title: GVP Maximum Lender Commitment: $40,000,000 Lending Office for Prime Rate Loans: 730 Veterans Memorial Highway Hauppauge, New York 11788 Lending Office for Adjusted Libor Loans: 730 Veterans Memorial Highway Hauppauge, New York 11788 Address for Notices: 730 Veterans Memorial Highway Hauppauge, New York 11788 Attention: Mr. Jason A. Quinn, Vice President Telecopy: (631) 265-4888
68 Revolving Credit FLEET NATIONAL BANK Commitment: $26,785,740 Letter of Credit By: /s/ THEODORE W. JANECZKO --------------------------------- Commitment: $26,785,740 Name: Theodore W. Janeczko ---- -------- Title: Vice President Maximum Lender Commitment: $30,000,000 Lending Office for Prime Rate Loans: 300 Broad Hollow Road Melville, New York 11747 Lending Office for Adjusted Libor Loans: 300 Broad Hollow Road Melville, New York 11747 Address for Notices: 300 Broad Hollow Road Melville, New York 11747 Attention: Account Officer - EDO Corporation Telecopy: (631) 547-7701
69 Revolving Credit WACHOVIA BANK, N.A. Commitment: $22,321,365 Letter of Credit By: /s/ BARBARA VAN MEERTEN --------------------------------- Commitment: $22,321,365 Name: Barbara Van Meerten ---- -------- Title: Director Maximum Lender Commitment: $25,000,000 Lending Office for Prime Rate Loans: 301 South College Street Charlotte, NC 28288 Lending Office for Adjusted Libor Loans: 301 South College Street Charlotte, NC 28288 Address for Notices: 301 South College Street Charlotte, NC 28288 Attention: Account Officer - EDO Corporation Telecopy: (704) 374-4793
70 Revolving Credit SOCIETE GENERALE Commitment: $17,857,115 Letter of Credit By: /s/ JOSE A. MORENO --------------------------------- Commitment: $17,857,115 Name: Jose A. Moreno ---- -------- Title: Managing Director Maximum Lender Commitment: $20,000,000 Lending Office for Prime Rate Loans: 2001 Ross Ave. Dallas, Texas 75201 Lending Office for Adjusted Libor Loans: 2001 Ross Ave. Dallas, Texas 75201 Address for Notices: 181 West Madison Street Chicago, IL 60602 Attention: Account Officer - EDO Corporation Telecopy: (312) 578-5099 with a copy to: 2001 Ross Ave. Dallas, Texas 75201 Attention: Account Officer - EDO Corporation Telecopy: (214) 979-1104
71 Revolving Credit NATIONAL CITY BANK Commitment: $13,392,865 Letter of Credit By: /s/ TARA M. HANDFORTH --------------------------------- Commitment: $13,392,865 Name: Tara M. Handforth ----- ------- Title: Vice President Maximum Lender Commitment: $15,000,000 Lending Office for Prime Rate Loans: One South Broad, 13th Floor Philadelphia, PA 19107 Lending Office for Adjusted Libor Loans: One South Broad, 13th Floor Philadelphia, PA 19107 Address for Notices: One South Broad, 13th Floor Philadelphia, PA 19107 Attention: Account Officer - EDO Corporation Telecopy: (267) 256-4001
72 Revolving Credit BANK LEUMI USA Commitment: $8,928,665 Letter of Credit By: /s/ PAUL TINE --------------------------------- Commitment: $8,928,665 Name: Paul Tine ----- --------- Title: Vice President Maximum Lender Commitment: $10,000,000 By: /s/ GLENN D. KREUTZER --------------------------------- Name: Glenn D. Kreutzer Title: Banking Officer Lending Office for Prime Rate Loans: 562 Fifth Avenue New York, New York 10036 Lending Office for Adjusted Libor Loans: 562 Fifth Avenue New York, New York 10036 Address for Notices: 562 Fifth Avenue New York, New York 10036 Attention: Account Officer - EDO Corporation Telecopy: (212) 626-1311
73 EX-10.A.2 5 y83939exv10waw2.txt AMENDMENT NO. 1 TO CREDIT AGREEMENT Exhibit 10(a)(2) AMENDMENT NO. 1 AND ACCEPTANCE AGREEMENT TO CREDIT AGREEMENT THIS AMENDMENT NO. 1 AND ACCEPTANCE AGREEMENT, dated as of December 20, 2002 (this "Amendment"), is by and among EDO CORPORATION, a New York corporation ("EDO"), AIL SYSTEMS INC., a Delaware corporation ("AIL"), jointly and severally, (EDO and AIL, each a "Company" and collectively the "Companies"), CITIBANK, N.A. ("Citibank"), FLEET NATIONAL BANK ("Fleet"), WACHOVIA BANK, N.A. ("Wachovia"), SOCIETE GENERALE ("SocGen"), NATIONAL CITY BANK ("NatCity"), BANK LEUMI USA ("Bank Leumi" and, together with Citibank, Fleet, Wachovia, SocGen and NatCity, the "Current Lenders"), MANUFACTURERS AND TRADERS TRUST COMPANY ("M&T"), KEYBANK, NATIONAL ASSOCIATION ("Keybank"), PNC BANK, N.A. ("PNC"), CITIZENS BANK OF PENNSYLVANIA ("Citizens" and, together with M&T, Keybank and PNC, the "New Lenders") (the Current Lenders and the New Lenders are collectively referred to herein as the "Lenders") and Citibank, as Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"). RECITALS: A. The Companies, the Current Lenders and the Administrative Agent have entered into a Credit Agreement, dated as of November 8, 2002 (as it may be amended, restated, modified or otherwise supplemented, from time to time, the "Credit Agreement"). B. Each New Lender wishes to become a party to, and make Loans to the Companies under, the Credit Agreement as a Lender and the Companies and the Current Lenders have consented to each New Lender becoming a Lender. C. The Companies, the Current Lenders and the Administrative Agent wish to amend the Loan Agreement to permit an increase to the Maximum Amount, to add the New Lenders as Lender parties to the Credit Agreement and to otherwise amend the Credit Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration whose receipt and sufficiency are hereby acknowledged, the Companies, the Lenders and the Administrative Agent agree as follows: Section 1. Definitions. Each capitalized term used but not defined in this Amendment shall have the meaning ascribed to such term in the Credit Agreement. Section 2. Amendments of Credit Agreement. (a) A new definition for "Amendment No. 1 and Acceptance Agreement" shall be added to Section 1.01 of the Credit Agreement in its correct alphabetical order to read in its entirety as follows: "Amendment No. 1 and Acceptance Agreement" shall mean that certain Amendment No. 1 and Acceptance Agreement to this Agreement dated as of December 20, 2002 among the parties thereto. (b) The definition of the term "Lending Office" contained in Section 1.01 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Lending Office" shall mean for each Lender, the office specified under such Lender's name on the signature pages to Amendment No.1 and Acceptance Agreement with respect to each Type of Loan, or such other office as such Lender may designate in writing from time to time to the Companies and the Administrative Agent with respect to such Type of Loan. (c) The definition of "Letter of Credit Commitment" contained in Section 1.01 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Letter of Credit Commitment" shall mean, with respect to each Lender, the obligation of such Lender to acquire participations in Letters of Credit in an aggregate amount not to exceed the amount set forth opposite such Lender's name on the signature pages to Amendment No. 1 and Acceptance Agreement under the caption "Letter of Credit Commitment" as such amounts may be adjusted in accordance with the terms of this Agreement. (d) The definition of "Maximum Lender Commitment" contained in Section 1.01 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Maximum Lender Commitment" shall mean with respect to each Lender the amount set forth opposite such Lender's name on the signature pages to Amendment No. 1 and Acceptance Agreement. (e) The definition of "Required Lenders" contained in Section 1.01 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: 2 "Required Lenders" shall mean Lenders owed at least 51% of the sum of the Aggregate Outstandings or, if no Revolving a Credit Loans are outstanding, Lenders having at least 51% of the Total Commitments. (f) The definition of "Revolving Credit Commitment" contained in Section 1.01 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Revolving Credit Commitment" shall mean, with respect to each Lender, the obligation of such Lender to make Revolving Credit Loans to the Companies in an aggregate amount not to exceed the amount set forth opposite such Lender's name on the signature pages to Amendment No. 1 and Acceptance Agreement under the caption "Revolving Credit Commitment," as such amounts may be adjusted in accordance with the terms of this Agreement. (g) Section 2.03 of the Credit Agreement is hereby amended to replace the words "Borrower" and "Company" in each place where they occur, with the words "the Companies". (h) Section 3.04(b) of the Credit Agreement is hereby amended and restated to read in its entirety as follows: (b) The Companies shall pay to the Issuing Lender for the account of, and pro rata distribution to, the Lenders a commission with respect to the Lenders' participation in Letters of Credit equal to the Applicable Margin on the average daily amount of the LC Exposure during the period from and including the Closing Date but excluding the later of the date on which such Lenders' Letter of Credit Commitment terminates and the date on which such Lender ceases to have any LC Exposure. Following such payment to the Issuing Lender, the Issuing Lender shall promptly remit the commissions (less its proportionate share) to the Administrative Agent for the pro rata distribution to the Lenders, other than the Issuing Lender. Such commissions shall be payable in arrears on the last Business Day of March, June, September and December of each year, commencing December 31, 2002; provided that all such fees shall be payable on the date on which the Total Letter of Credit Commitment terminates and any such fees accruing after the date on which the Total Letter of Credit Commitment terminates shall be payable on demand. All commissions and fees shall be computed on the basis of a year of 3 three hundred sixty (360) days and shall be payable for the actual number of days elapsed. In addition, the Companies shall pay to the Issuing Lender, upon its demand and for its account, the Issuing Lender's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. (i) Section 6.03(a) of the Credit Agreement is hereby amended to add the word "nationally" immediately preceding the words "recognized standing" in the fifth line thereof. (j) Section 6.10 of the Credit Agreement is hereby amended to add the words "individually or in the aggregate" immediately after "$250,000" in the sixth line thereof. (k) Section 10.01(c) of the Credit Agreement is hereby amended and restated to read in its entirety as follows: (c) if to any Lender, to its address set forth in the signature page to Amendment No. 1 and Acceptance Agreement and to the person so designated; Section 3. Addition of New Lenders; Reallocation of Commitments; Prepayment of Loans. (a) On the Effective Date (as hereinafter defined), each New Lender (i) shall be deemed for all purposes a Lender under the Credit Agreement and the other Loan Documents and shall be entitled to all of the rights and benefits, and shall have all the obligations, of a Lender thereunder, and (ii) agrees to be bound as a Lender by the terms and conditions of the Credit Agreement and the other Loan Documents and agrees to make Loans to the Companies in accordance with the terms of the Credit Agreement. (b) On the Effective Date, (i) the total amount of each Lender's Revolving Credit Commitment pursuant to the Credit Agreement shall be the amount set forth opposite such Lender's name on its signature page to this Amendment under the caption "Revolving Credit Commitment", (ii) the total amount of each Lender's Letter of Credit Commitment pursuant to the Credit Agreement shall be the amount set forth opposite such Lender's name on its signature page to this Amendment under the caption "Letter of Credit Commitment" and (iii) the total amount of each Lender's Maximum Lender Commitment pursuant to the Credit Agreement shall be the amount set forth opposite such Lender's name on its signature page to this Amendment under the caption "Maximum Lender Commitment". (c) On the Effective Date, all Loans of each Lender to the Companies shall be evidenced by a Revolving Credit Note of the Companies substantially in the form of Exhibit A to the Credit Agreement (the "Note"). 4 (d) Each Lender's address for all notices, requests, consents, demands or other communications provided for in the Credit Agreement shall be as set forth on the signature pages to this Amendment. (e) The Companies, the Administrative Agent and each of the Current Lenders hereby consents to the addition of each New Lender as a Lender under the Credit Agreement with a Revolving Credit Commitment and Letter of Credit Commitment as set forth on the signature pages to this Amendment. (f) On the Effective Date, the Companies shall (i) prepay the outstanding Revolving Credit Loans (if any) in full, (ii) simultaneously borrow new Revolving Credit Loans hereunder in an amount equal to such prepayment, so that, after giving effect thereto, the Revolving Credit Loans are held ratably by the Lenders in accordance with the respective Commitments of such Lenders (after giving effect to this Amendment) and (iii) pay to the Lenders the amounts, if any, payable under Section 3.08 of the Credit Agreement. Section 4. Further Agreements of each New Lender. Each New Lender hereby confirms to and agrees with the Companies, the Administrative Agent and the Current Lenders as follows: (a) The Administrative Agent and the Current Lenders have made no representation or warranty and shall have no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency, collectibility or value of the Credit Agreement, the other Loan Documents, or any other instrument or document furnished pursuant to the Credit Agreement. (b) The Administrative Agent and the Current Lenders have made no representation or warranty and shall have no responsibility with respect to the financial condition of the Companies and their respective Subsidiaries or any other Person primarily or secondarily liable in respect of any of their Obligations under the Credit Agreement or any of the other Loan Documents, or the performance or observance by the Companies and their respective Subsidiaries or any other Person primarily or secondarily liable in respect of their Obligations under the Credit Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant thereto. (c) Each New Lender confirms that it has received a copy of the Credit Agreement and the other Loan Documents, together with copies of the most recent financial statements referred to in the Credit Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Amendment and the documents, instruments and agreements executed pursuant hereto or in connection herewith. 5 (d) Each New Lender will, independently and without reliance upon the other Lenders or the Administrative Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement. (e) Each New Lender appoints and authorizes the Administrative Agent to take such action as its agent on its behalf and to exercise such powers under the Credit Agreement and the other Loan Documents as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto. (f) Each New Lender agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender. (g) Each New Lender represents and warrants that it is legally authorized to enter into this Amendment and the documents, instruments and agreements executed pursuant hereto or in connection herewith. Section 5. Conforming Amendments. The Credit Agreement, the Loan Documents and all agreements, instruments and documents executed and delivered in connection with any of the foregoing, shall each be deemed to be amended and supplemented hereby to the extent necessary, if any, to give effect to the provisions of this Amendment, and each Lender is authorized to annex a copy of this Amendment to its respective Note. Except as so amended hereby, the Credit Agreement and the other Loan Documents shall remain in full force and effect in accordance with their respective terms. Section 6. Acknowledgments, Confirmations and Consent. The Companies acknowledge and confirm that the Liens granted pursuant to each of the Security Documents to which it is a party secure the indebtedness, liabilities and obligations of the Companies to the Lenders and the Administrative Agent under the Notes and under the Credit Agreement as amended by this Amendment, whether or not so stated in each of such Security Documents, and that the term "Obligations" as used in the Credit Agreement (or any other terms used in the Credit Agreement to describe or refer to the indebtedness liabilities and obligations of the Companies to the Lenders and the Administrative Agent) includes all other indebtedness, liabilities and obligations of the Companies under the Credit Agreement as amended by this Amendment and under the Notes. The Companies acknowledge that after giving effect to this Amendment, the Maximum Amount under the Credit Agreement shall be $200,000,000 and agrees that no further Increases shall be permitted under Section 2.03(a) of the Credit Agreement. Section 7. Representations and Warranties. The Companies hereby, jointly and severally, represent and warrant to the Lenders and the Administrative Agent as follows: 6 (a) After giving effect to this Amendment (i) each of the representations and warranties set forth in Article IV of the Credit Agreement is true and correct in all material respects on and as of the date hereof as if made on and as of the date of this Amendment except to the extent such representations or warranties relate to an earlier date in which case they shall be true and correct in all material respects as of such earlier date, and (ii) no Default or Event of Default has occurred and is continuing as of the date hereof or shall result from this proposed Amendment. (b) Each Company has the power to execute, deliver and perform this Amendment and each of the other agreements, instruments and documents to be executed by it in connection with this Amendment. No registration with or consent or approval of, or other action by, any Governmental Authority is required in connection with the execution, delivery and performance of this Amendment and the other agreements, instruments and documents executed in connection with this Amendment by the Companies, other than registration, consents and approvals received prior to the date hereof and disclosed to the Lenders and which are in full force and effect. (c) The execution, delivery and performance by each Company of this Amendment and each of the other agreements, instruments, and documents to be executed by it in connection with this Amendment, and the execution and delivery by each of the Guarantors of the Consent to this Amendment, (i) have been duly authorized by all requisite corporate action, (ii) will not violate (A) any provision of law applicable to any Company or any Guarantor, any rule or regulation of any Governmental Authority applicable to any Company or any Guarantor or (B) the certificate of incorporation, by-laws, or other organizational documents, as applicable of any Company or of any Guarantor or (C) any order of any court or other Governmental Authority binding on any Company or any Guarantor or any indenture, agreement or other instrument to which any Company or any Guarantor is a party, or by which any Company or any Guarantor or any of their respective properties are bound, and (iii) will not be in conflict with, result in a breach of or constitute (with due notice and/or lapse of time) a default under, any such indenture, agreement or other instrument, or result in the creation or imposition of any Lien, of any nature whatsoever upon any of the property or assets of any Company or any Guarantor other than as contemplated by the Credit Agreement, except for any such violation, conflict, breach or default or Lien provided in clauses (ii)(A), (ii)(B) or (ii)(C) which could not, individually, or in the aggregate, reasonably be expected to have a Material Adverse Effect. (d) This Amendment and each of the other agreements, instruments and documents executed in connection with this Amendment to which the Companies or the Guarantors are a party has been duly executed and delivered by the Companies and each Guarantor, as the case may be, and constitutes a legal, valid and binding obligation of such Company and such Guarantor enforceable, as the case may be, in accordance with its terms, except to the extent that enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws, now or hereafter in effect, relating to or affecting the enforcement of creditors' rights generally and by equitable principles of general application, regardless of whether considered in a proceeding in equity or at law. 7 Section 8. Effectiveness of Amendment. This Amendment shall become effective (the "Effective Date") upon the later to occur of: (i) receipt by the Administrative Agent, for the account of each Lender, of a Note in the face amount equal to such Lender's Revolving Credit Commitment duly executed by the Companies; (ii) receipt by the Administrative Agent of this Amendment, duly executed by the Companies, each of the Lenders, the Administrative Agent and consented to by each Guarantor; and (iii) receipt by the Administrative Agent of an origination fee in the amount of $200,000 payable by the Companies to the Administrative Agent for distribution to each of the New Lenders of the portion of such fee as agreed in writing between the Administrative Agent and each New Lender. Section 9. Miscellaneous. (a) Except as specifically amended by this Amendment, the Credit Agreement and each of the other agreements, instruments an documents executed in connection with the Credit Agreement shall remain in full force and effect in accordance with their respective terms. (b) THIS AMENDMENT AND ALL OTHER AGREEMENTS, DOCUMENTS AND INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED IN AND TO BE PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK BY RESIDENTS OF SUCH STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. (c) The provisions of this Amendment are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause, provision or part in such jurisdiction and shall not in any manner affect such clause, provision or part in any other jurisdiction or any other clause or provision in this Amendment in any jurisdiction. (d) This Amendment may be signed in any number of counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one Amendment. (e) This Amendment shall be binding upon and inure to the benefit of each of the Companies and each Guarantor and their respective successors and to the benefit of the Administrative Agent and the Lenders and their respective successors and assigns. The rights 8 and obligations of each of the Companies under this Amendment shall not be assigned or delegated without the prior written consent of the Lenders, and any purported assignment or delegation without such consent shall be void. (f) The Companies agree to pay the Administrative Agent upon demand all expenses, including reasonable fees and expenses of attorneys for the Administrative Agent, incurred by the Administrative Agent in connection with the preparation, negotiation and execution of this Amendment and any agreements, instruments and documents executed or furnished in connection with this Amendment. [THE NEXT PAGE IS THE SIGNATURE PAGE] 9 IN WITNESS WHEREOF, the Companies, the Lenders and the Administrative Agent have signed and delivered this Amendment as of the date first written above. EDO CORPORATION By: /s/ DARRELL L. REED ------------------------ Name: Darrell L. Reed Title: CFO AIL SYSTEMS INC. By: /s/ Darrell L. Reed ------------------------ Name: Darrell L. Reed Title: CFO CITIBANK, N.A., AS ADMINISTRATIVE AGENT By: /s/ Jason Quinn -------------------------------------- Name: Jason Quinn Title: Vice President 10 Revolving Credit CITIBANK, N.A. Commitment: $25,000,000 Letter of Credit By: /s/ JASON QUINN --------------------- Commitment: $25,000,000 Name: Jason Quinn Title: Vice President Maximum Lender Commitment: $40,000,000 Lending Office for Prime Rate Loans: 730 Veterans Memorial Highway Hauppauge, New York 11788 Lending Office for Adjusted Libor Loans: 730 Veterans Memorial Highway Hauppauge, New York 11788 Address for Notices: 730 Veterans Memorial Highway Hauppauge, New York 11788 Attention: Mr. Jason A. Quinn, Vice President Telecopy: (631) 265-4888
11 Revolving Credit FLEET NATIONAL BANK Commitment: $18,750,000 Letter of Credit By: /s/ THEODORE JANECZKO Commitment: $18,750,000 ------------------------- Name: Theodore Janeczko Title: Vice President Maximum Lender Commitment: $30,000,000 Lending Office for Prime Rate Loans: 300 Broad Hollow Road Melville, New York 11747 Lending Office for Adjusted Libor Loans: 300 Broad Hollow Road Melville, New York 11747 Address for Notices: 300 Broad Hollow Road Melville, New York 11747 Attention: Christopher Mendelsohn Account Officer - EDO Corporation Telecopy: (631) 547-7701
12 Revolving Credit WACHOVIA BANK, N.A. Commitment: $15,625,000 Letter of Credit By: /s/ SCOTT SANTA CRUZ Commitment: $15,625,000 ------------------------ Name: Scott Santa Cruz Title: Director Maximum Lender Commitment: $25,000,000 Lending Office for Prime Rate Loans: 301 South College Street Charlotte, NC 28288 Lending Office for Adjusted Libor Loans: 301 South College Street Charlotte, NC 28288 Address for Notices: 301 South College Street Charlotte, NC 28288 Attention: Account Officer - EDO Corporation Telecopy: (704) 374-4793
13 Revolving Credit SOCIETE GENERALE Commitment: $12,500,000 Letter of Credit By: /s/ JOSE A. MORENO Commitment: $12,500,000 ---------------------- Name: Jose A. Moreno Title: Managing Director Maximum Lender Commitment: $20,000,000 Lending Office for Prime Rate Loans: 2001 Ross Ave. Dallas, Texas 75201 Lending Office for Adjusted Libor Loans: 2001 Ross Ave. Dallas, Texas 75201 Address for Notices: 181 West Madison Street Chicago, IL 60602 Attention: Account Officer - EDO Corporation Telecopy: (312) 578-5099 with a copy to: 2001 Ross Ave. Dallas, Texas 75201 Attention: Account Officer - EDO Corporation Telecopy: (214) 979-1104
14 Revolving Credit NATIONAL CITY BANK Commitment: $9,375,000 Letter of Credit By: /s/ TARA M. HANDFORTH Commitment: $9,375,000 ------------------------- Name: Tara M. Handforth Title: Vice President Maximum Lender Commitment: $15,000,000 Lending Office for Prime Rate Loans: One South Broad, 13th Floor Philadelphia, PA 19107 Lending Office for Adjusted Libor Loans: One South Broad, 13th Floor Philadelphia, PA 19107 Address for Notices: One South Broad, 13th Floor Philadelphia, PA 19107 Attention: Account Officer - EDO Corporation Telecopy: (267) 256-4001
15 Revolving Credit BANK LEUMI USA Commitment: $6,250,000 Letter of Credit By: /s/ PAUL TINE /s/ GLENN D. KREUTZER Commitment: $6,250,000 ----------------- ----------------- Name: Paul Tine Glenn D. Kreutzer Title: Vice President Banking Officer Maximum Lender Commitment: $10,000,000 Lending Office for Prime Rate Loans: 562 Fifth Avenue New York, New York 10036 Lending Office for Adjusted Libor Loans: 562 Fifth Avenue New York, New York 10036 Address for Notices: 562 Fifth Avenue New York, New York 10036 Attention: Account Officer - EDO Corporation Telecopy: (212) 626-1311
16 Revolving Credit KEYBANK, NATIONAL ASSOCIATION Commitment: $12,500,000 Letter of Credit By: /s/ JOSEPH F. MARKEY Commitment: $12,500,000 ------------------------ Name: Joseph F. Markey Title: Senior Vice President Maximum Lender Commitment: $20,000,000 Lending Office for Prime Rate Loans: 4910 Tiederman Road, 4th Floor Brooklyn, OH 44144 Lending Office for Adjusted Libor Loans: 4910 Tiederman Road, 4th Floor Brooklyn, OH 44144 Address for Notices: 4910 Tiederman Road, 4th Floor Brooklyn, OH 44144 Attention: Specialty Group - EDO Corporation Telecopy: (216) 813-7393
17 Revolving Credit PNC BANK, N.A. Commitment: $9,375,000 Letter of Credit By: /s/ George W.D. Barrow Commitment: $9,375,000 -------------------------- Name: George W.D. Barrow Title: Vice President Maximum Lender Commitment: $15,000,000 Lending Office for Prime Rate Loans: One PNC Plaza - 249 Fifth Avenue Pittsburgh, Pennsylvania 15222 Lending Office for Adjusted Libor Loans: One PNC Plaza - 249 Fifth Avenue Pittsburgh, Pennsylvania 15222 Address for Notices: One Garret Mountain Plaza West Paterson, New Jersey 07424 Attention: Mr. Anthony Carpenelli Account Officer - EDO Corporation Telecopy: (973) 881-5288
18 Revolving Credit CITIZENS BANK OF PENNSYLVANIA Commitment: $9,375,000 Letter of Credit By: /s/ CRISSOLA KENNEDY ------------------------- Commitment: $9,375,000 Name: Crissola Kennedy Title: Vice President Maximum Lender Commitment: $15,000,000 Lending Office for Prime Rate Loans: One Citizens Drive Riverside, Rhode Island 02915 Lending Office for Adjusted Libor Loans: One Citizens Drive Riverside, Rhode Island 02915 Address for Notices: One Citizens Drive Riverside, Rhode Island 02915 Attention: Account Officer - EDO Corporation Telecopy: (401) 734-5385
19 Revolving Credit MANUFACTURERS AND TRADERS TRUST Commitment: $6,250,000 COMPANY Letter of Credit By: /s/ ROBERT T. STRATFORD, JR. Commitment: $6,250,000 ------------------------------ Name: Robert T. Stratford, Jr. Title: Vice President Maximum Lender Commitment: $10,000,000 Lending Office for Prime Rate Loans: 401 Broad Hollow Road Melville, New York 11747 Lending Office for Adjusted Libor Loans: 401 Broad Hollow Road Melville, New York 11747 Address for Notices: 401 Broad Hollow Road Melville, New York 11747 Attention: Robert T. Stratford, Jr. Re: EDO Corporation Telecopy: 631) 501-9851
20 CONSENT Each of the undersigned, not parties to the Credit Agreement but each a Guarantor under a Guaranty dated as of November 8, 2002 hereby consents to and acknowledges the terms of the Amendment contained herein and confirms that its Guaranty is in full force and effect and reaffirms its continuing liability under its Guaranty in respect of the Credit Agreement as amended hereby and all the documents, instruments and agreements executed pursuant thereto or in connection therewith, without offset, defense or counterclaim (any such offset, defense or counterclaim as may exist being hereby irrevocably waived by such guarantor). AIL TECHNOLOGIES INC. AMERICAN NUCLEONICS CORPORATION DYNAMIC SYSTEMS, INC. EDO WESTERN CORPORATION EDO SPORTS INC. ASTRO OPTICS LABORATORY, INC. EDO INTERNATIONAL CORPORATION EDO ENERGY CORPORATION EDO AUTOMOTIVE NATURAL GAS INC. SPECIALTY PLASTICS, INC. EDO ACQUISITION II, INC. EDO RECONNAISSANCE AND SURVEILLANCE SYSTEMS, INC. M. TECHNOLOGIES, INC. EDO FOREIGN SALES CORPORATION By: /s/ DARRELL L. REED ------------------------- Name: Darrell L. Reed Title: Vice President & CFO 21 EX-10.A.3 6 y83939exv10waw3.txt AMENDMENT NO. 2 TO CREDIT AGREEMENT Exhibit 10(a)(3) AMENDMENT NO. 2 TO CREDIT AGREEMENT AMENDMENT NO. 2, dated as of February 4, 2003 (this "Amendment"), to the Credit Agreement dated as of November 8, 2002 (as amended, restated, modified or otherwise supplemented, from time to time, the "Credit Agreement") by and among EDO CORPORATION, a New York corporation ("EDO"), AIL SYSTEMS INC., a Delaware corporation ("AIL"), jointly and severally, (EDO and AIL, each a "Company" and collectively the "Companies"), CITIBANK, N.A., as Administrative Agent and as a Lender, FLEET NATIONAL BANK, as Syndication Agent and as a Lender, WACHOVIA BANK, N.A., as Documentation Agent and as a Lender, and the other Lenders party thereto. WHEREAS, the Companies, the Administrative Agent and the Required Lenders have agreed, subject to the terms and conditions of this Amendment, to amend a certain provision of the Credit Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: 1. Amendment. --------- (a) Section 7.12(a) of the Credit Agreement is hereby amended and restated in its entirety to be and read as follows: (a) Consolidated Tangible Net Worth plus Subordinated Debt. Permit Consolidated Tangible Net Worth plus Consolidated Subordinated Debt at the last day of any fiscal quarter to be less than the amount set forth below opposite the applicable period in which the fiscal quarter occurs. Period Amount ------ ------ Closing Date through December 30, 2002 $200,000,000 December 31, 2002 through December 30, 2003 $175,000,000 December 31, 2003 through December 30, 2004 $200,000,000 December 31, 2004 and thereafter $225,000,000 2. Miscellaneous. ------------- Capitalized terms used herein and not otherwise defined herein shall have the same meanings as defined in the Credit Agreement. Except as expressly amended hereby, or as may have been previously amended, the Credit Agreement shall remain in full force and effect in accordance with the original terms thereof. The amendments herein contained are limited specifically to the matters set forth above and do not constitute directly or by implication an amendment or waiver of any other provision of Credit Agreement or any default which may occur or may have occurred under the Credit Agreement. The Companies, jointly and severally, hereby represent and warrant that (a) after giving effect to this Amendment, each of the representations and warranties of the Companies set forth in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if made on and as of the date of this Amendment except to the extent such representations or warranties relate to an earlier date in which case they shall be true and correct in all material respects as of such earlier date, and (b) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one Amendment. This Amendment shall become effective when duly executed counterparts hereof which, when taken together, bear the signatures of each of the parties hereto shall have been delivered to the Administrative Agent. This Amendment shall constitute a Loan Document. THIS AMENDMENT SHALL GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. [the next page is the signature page] IN WITNESS WHEREOF, the Companies and the Administrative Agent, as authorized on behalf of the Required Lenders, have signed and delivered this Amendment as of the date first written above. EDO CORPORATION By: /s/ F B BASSETT ---------------------------------- Name: F.B. Bassett Title: CFO AIL SYSTEMS INC. By: /s/ F B BASSETT ---------------------------------- Name: F.B. Bassett Title: CFO CITIBANK, N.A., as Administrative Agent By: /s/ JASON QUINN ------------------------------------ Name: Jason Quinn Title: Vice President CONSENT Each of the undersigned, not parties to the Credit Agreement but each a Guarantor under a Guaranty dated as of November 8, 2002 hereby consents to and acknowledges the terms of the Amendment contained herein and confirms that its Guaranty is in full force and effect and reaffirms its continuing liability under its Guaranty in respect of the Credit Agreement as amended hereby and all the documents, instruments and agreements executed pursuant thereto or in connection therewith, without offset, defense or counterclaim (any such offset, defense or counterclaim as may exist being hereby irrevocably waived by such guarantor). AIL TECHNOLOGIES INC. AMERICAN NUCLEONICS CORPORATION DYNAMIC SYSTEMS, INC. EDO WESTERN CORPORATION EDO SPORTS INC. ASTRO OPTICS LABORATORY, INC. EDO INTERNATIONAL CORPORATION EDO ENERGY CORPORATION EDO AUTOMOTIVE NATURAL GAS INC. SPECIALTY PLASTICS, INC. EDO ACQUISITION II, INC. EDO RECONNAISSANCE AND SURVEILLANCE SYSTEMS, INC. M. TECHNOLOGIES, INC. EDO FOREIGN SALES CORPORATION By: /s/ F B BASSETT ---------------------------------- Name: F.B. Bassett Title: CFO EX-10.A.4 7 y83939exv10waw4.txt AMENDMENT NO. 3 TO CREDIT AGREEMENT Exhibit 10(a)(4) AMENDMENT NO. 3 TO CREDIT AGREEMENT AMENDMENT NO. 3, dated as of February 28, 2003 (this "Amendment"), to the Credit Agreement dated as of November 8, 2002 (as amended, restated, modified or otherwise supplemented, from time to time, the "Credit Agreement") by and among EDO CORPORATION, a New York corporation ("EDO"), AIL SYSTEMS INC., a Delaware corporation ("AIL"), jointly and severally, (EDO and AIL, each a "Company" and collectively the "Companies"), CITIBANK, N.A., as Administrative Agent and as a Lender, FLEET NATIONAL BANK, as Syndication Agent and as a Lender, WACHOVIA BANK, N.A., as Documentation Agent and as a Lender, and the other Lenders party thereto. WHEREAS, the Companies, the Administrative Agent and the Required Lenders have agreed, subject to the terms and conditions of this Amendment, to amend a certain provision of the Credit Agreement as set forth herein; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereto agree as follows: 1. Amendment. --------- (a) The definition of the term "Consolidated Total Unsubordinated Liabilities" contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Consolidated Total Unsubordinated Liabilities" shall mean all items which, in accordance with Generally Accepted Accounting Principles applied on a consistent basis, would properly be classified as liabilities on the balance sheet of EDO and its Subsidiaries, other than Subordinated Debt (excluding the current portion thereof to the extent permitted to be paid hereunder), as of the date on which the amount of Consolidated Total Unsubordinated Liabilities is to be determined. (b) Subsection (vii) of the definition of the term "Permitted Acquisition" contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (vii) after giving affect to such acquisition, the aggregate purchase price and consideration for all Permitted Acquisitions during any consecutive twelve-month period that includes the month of February 2003 shall not exceed $101,300,000 and the aggregate purchase price and consideration for all Permitted Acquisitions during any other consecutive twelve-month period shall not exceed $60,000,000. (c) Section 7.12(a) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (a) Consolidated Tangible Net Worth plus Subordinated Debt. Permit Consolidated Tangible Net Worth plus Consolidated Subordinated Debt at the last day of any fiscal quarter to be less than the amount set forth below opposite the applicable period in which the fiscal quarter occurs. Period Amount ------ ------ Closing Date through December 30, 2002 $200,000,000 December 31, 2002 through December 30, 2003 $175,000,000 December 31, 2003 through December 30, 2004 $175,000,000 December 31, 2004 and thereafter $185,000,000 (d) Section 7.12(e) of the Credit Agreement is hereby amended to delete the ratio of "1.00:1.00" stated therein and to insert the ratio "1.25:1.00" in place thereof. 2. Miscellaneous. ------------- Capitalized terms used herein and not otherwise defined herein shall have the same meanings as defined in the Credit Agreement. Except as expressly amended hereby, or as may have been previously amended, the Credit Agreement shall remain in full force and effect in accordance with the original terms thereof. The amendments herein contained are limited specifically to the matters set forth above and do not constitute directly or by implication an amendment or waiver of any other provision of Credit Agreement or any default which may occur or may have occurred under the Credit Agreement. The Companies, jointly and severally, hereby represent and warrant that (a) after giving effect to this Amendment, each of the representations and warranties of the Companies set forth in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if made on and as of the date of this Amendment except to the extent such representations or warranties relate to an earlier date in which case they shall be true and correct in all material respects as of such earlier date, and (b) after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one Amendment. This Amendment shall become effective when duly executed counterparts hereof which, when taken together, bear the signatures of each of the parties hereto shall have been delivered to the Administrative Agent. This Amendment shall constitute a Loan Document. THIS AMENDMENT SHALL GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. [the next page is the signature page] IN WITNESS WHEREOF, the Companies and the Administrative Agent, as authorized on behalf of the Required Lenders, have signed and delivered this Amendment as of the date first written above. EDO CORPORATION By: /s/ F.B. BASSETT ------------------------------- Name: F.B. Bassett Title: CFO AIL SYSTEMS INC. By: /s/ F.B. BASSETT ------------------------------- Name: F.B. Bassett Title: CFO CITIBANK, N.A., as Administrative Agent By: /S/ JASON QUINN ------------------------------- Name: Jason Quinn Title: Vice President ACKNOWLEDGMENT Each of the undersigned, not parties to the Credit Agreement but each a Guarantor under a Guaranty dated as of November 8, 2002 hereby acknowledges and agrees to the terms of the Amendment contained herein and confirms that its Guaranty is in full force and effect. AIL TECHNOLOGIES INC. AMERICAN NUCLEONICS CORPORATION DYNAMIC SYSTEMS, INC. EDO WESTERN CORPORATION EDO SPORTS INC. ASTRO OPTICS LABORATORY, INC. EDO INTERNATIONAL CORPORATION EDO ENERGY CORPORATION EDO AUTOMOTIVE NATURAL GAS INC. SPECIALTY PLASTICS, INC. EDO ACQUISITION II, INC. EDO RECONNAISSANCE AND SURVEILLANCE SYSTEMS, INC. M. TECHNOLOGIES, INC. EDO FOREIGN SALES CORPORATION By: /s/ F.B. BASSETT ------------------------------------------- Name: F.B. Bassett Title: CFO, of each of the above-referenced companies EX-10.C 8 y83939exv10wc.txt 2002 LONG-TERM INCENTIVE PLAN Exhibit 10(c) EDO CORPORATION 2002 Long-Term Incentive Plan 1. PURPOSE. The purpose of the Plan is to foster and promote the long-term financial success of the Company and materially increase shareholder value by motivating superior performance by means of performance-related incentives, encouraging and providing for the acquisition of an ownership interest in the Company by Eligible Employees, and enabling the Company to attract and retain the services of an outstanding management team upon whose judgment, interest and special effort the successful conduct of its operations is largely dependent. 2. DEFINITIONS. "Award" shall mean any grant or award under the Plan, as evidenced in a written document delivered to a Participant as provided in Section 11(b). "Board" shall mean the Board of Directors of the Company. "Cause" shall have the meaning set forth in the Award to a Participant, or in the absence of any definition in such Award, "Cause" shall mean (i) the willful failure by the Participant to perform substantially the Participant's duties as an employee of the Company (other than due to physical or mental illness) (ii) the Participant's engaging in serious misconduct that is injurious to the Company or any Subsidiary or any employee of either (iii) the Participant's having been convicted of, or entered a plea of nolo contendere to, a crime that constitutes a felony, or (iv) the breach by the Participant of any written covenant or agreement not to compete with the Company or any Subsidiary. "Change in Control" shall mean the occurrence of any of the following events: (i) a majority of the members of the Board at any time cease for any reason other than due to death or disability to be persons who were members of the Board twenty-four months prior to such time (the "Incumbent Directors"); provided that any director whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the members of the Board then still in office who are Incumbent Directors shall be treated as an Incumbent Director; or (ii) any "person," including a "group" (as such terms are used in Sections 13(d) and 14(d)(2) of the Exchange Act, but excluding the Company, its Subsidiaries, any employee benefit plan of the Company or any Subsidiary, all employees of the Company or any Subsidiary or any group of which any of the foregoing is a member) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange Act), directly or indirectly, including, without limitation, by means of a tender or exchange offer, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (iii) the shareholders of the Company shall approve a definitive agreement (x) for the merger or other business combination of the Company with or into another corporation immediately following which merger or combination (A) the stock of the surviving entity is not readily tradeable on an established securities market, (B) a majority of the directors of the surviving entity are persons who (1) were not directors of the Company immediately prior to the merger and (2) are not nominees or representatives of the Company or (C) any "person," including a "group" (as such terms are used in Sections 13(d) and 14(d)(2) of the Exchange Act, but excluding the Company, its Subsidiaries, any employee benefit plan of the Company or any Subsidiary, employees of the Company or any Subsidiary or any group of which any of the foregoing is a member) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange Act), directly or indirectly, of 30% or more of the securities of the surviving entity or (y) for the direct or indirect sale or other disposition of all or substantially all of the assets of the Company, or (iv) any other event or transaction that is declared by resolution of the Board to constitute a Change in Control for purposes of the Plan. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to occur in the event the Company files for bankruptcy, liquidation or reorganization under the United States Bankruptcy Code. "Change in Control Price" shall mean the highest price per share paid or offered in any bona fide transaction related to a Change in Control, as determined by the Committee, except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be the Fair Market Value on the date on which the cash out described in Section 10(a) occurs. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Committee" shall mean the Compensation Committee of the Board, or such other Board committee as may be designated by the Board to administer the Plan. "Common Shares" shall mean the Common Shares, par value $1.00 per share, of the Company. "Company" shall mean EDO Corporation and any successor thereto. "Disability" shall mean long-term disability as defined under the terms of the Company's applicable long-term disability plans or policies. "Eligible Employee" shall mean each Executive Officer and each other key employee of the Company or its Subsidiaries, but shall not include directors who are not employees of any such entity. 2 "Employment" shall mean, for purposes of Sections 5(d), 7(b) and 8(b), continuous and regular salaried employment with the Company or a Subsidiary, which shall include (unless the Committee shall otherwise determine) any period of vacation, any approved leave of absence or any salary continuation or severance pay period and, at the discretion of the Committee, may include service with any former Subsidiary of the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Executive Officer" shall mean those persons who are officers of the Company within the meaning of Rule 16a-1(f) of the Exchange Act. "Fair Market Value" shall mean, on any date, the closing price of a Common Share, as reported for such day on a national exchange, or the mean between the closing bid and asked prices for a Common Share on such date, as reported on a nationally recognized system of price quotation. In the event that there are no Common Share transactions reported on such exchange or system on such date, Fair Market Value shall mean the closing price on the immediately preceding date on which Common Share transactions were so reported. "Incentive Stock Option" shall mean an Option which is intended to meet the requirements of Section 422 of the Code. "Nonstatutory Stock Option" shall mean an Option which is not intended to be an Incentive Stock Option. "Normal Retirement" shall mean retirement at or after age 65, or such other age as may hereafter be established by the Board (by resolution) from time to time. "Option" shall mean the right to purchase the number of Common Shares specified by the Committee, at a price and for the term fixed by the Committee in accordance with the Plan and subject to any other limitations and restrictions as this Plan and the Committee shall impose. "Participant" shall mean an Eligible Employee who is selected by the Committee to receive an Award under the Plan. "Performance Period" shall mean the period during which performance measures are established for Performance Shares or Performance Units as determined by the Committee. "Performance Share" shall mean any contingent right granted under Section 8 to receive a Common Share, which right becomes vested and nonforfeitable upon the attainment, in whole or in part, of performance objectives determined by the Committee. "Performance Unit" shall mean any contingent right granted under Section 8 to receive cash (or, at the discretion of the Committee, Common Shares), which right becomes vested and nonforfeitable upon the attainment, in whole or in part, of performance objectives determined by the Committee. 3 "Plan" shall mean the EDO Corporation 2002 Long-Term Incentive Plan, described herein, and as may be amended from time to time. "Predecessor Plans" means the Company's 1996 Long-Term Incentive Plans. "Reload Option" shall have the meaning ascribed thereto in Section 5(e). "Restricted Period" shall mean the period during which a grant of Restricted Shares is subject to forfeiture. "Restricted Share" shall mean a Common Share granted under Section 7 which becomes vested and non-forfeitable, in whole or in part, upon the completion of such period of service or performance objectives as shall be determined by the Committee. "Stock Appreciation Right" shall mean a contractual right granted under Section 6 to receive cash, Common Shares or a combination thereof. "Subsidiary" shall mean any corporation of which the Company possesses directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of stock of such corporation and any other business organization, regardless of form, in which the Company possesses directly or indirectly fifty percent (50%) or more of the total combined equity interests in such organization. 3. ADMINISTRATION. The Plan shall be administered by the Committee which shall consist of at least two directors of the Company chosen by the Board, each of whom is both a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act and an "outside director" within the meaning of Section 162(m) of the Code. The Committee shall have the responsibility of construing and interpreting the Plan and of establishing and amending such rules and regulations as it deems necessary or desirable for the proper administration of the Plan. Any decision or action taken or to be taken by the Committee, arising out of or in connection with the construction, administration, interpretation and effect of the Plan and of its rules and regulations, shall, to the maximum extent permitted by applicable law, be within its absolute discretion (except as otherwise specifically provided herein) and shall be conclusive and binding upon all Participants and any person claiming under or through any Participant. 4. MAXIMUM AMOUNT OF SHARES AVAILABLE FOR AWARDS. (a) Maximum Number of Shares. The maximum number of Common Shares in respect of which Awards may be made under the Plan shall be a total of 650,000 Common Shares. The maximum number of Common Shares in respect of which Awards may be granted to a Participant under this Plan in any 12 month period shall not exceed 200,000 shares, as each such number may be adjusted pursuant to 4 Section 4(c). Without limiting the generality of the foregoing, whenever shares are received by the Company in connection with the exercise of or payment for any Award granted under the Plan, only the net number of shares actually issued shall be counted against the foregoing limits of 650,000 Common Shares and 200,000 Common Shares, respectively, except that the aggregate number of Common Shares which may be issued upon exercise of Incentive Stock Options shall in no event exceed 650,000 shares (as such number may be adjusted pursuant to Section 4(c) hereof). (b) Shares Available for Issuance. Common Shares may be made available from the authorized but unissued shares of the Company or from shares held in the Company's treasury and not reserved for some other purpose. In the event that any Award is payable solely in cash, no shares shall be deducted from the number of shares available for issuance under Section 4(a) by reason of such Award. In addition, if any Award under this Plan in respect of shares is canceled or forfeited for any reason without delivery of Common Shares, the shares subject to such Award shall thereafter again be available for award pursuant to this Plan. (c) Adjustment for Corporate Transactions. In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Shares, or other similar event affects the Common Shares such that an adjustment is required to preserve, or to prevent enlargement of, the benefits or potential benefits made available under this Plan, then the Committee may, in such manner as the Committee may deem equitable, (A) adjust any or all of (i) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Stock Appreciation Rights under the Plan, (ii) the number and kinds of shares subject to outstanding Options and other Awards and (iii) the grant, exercise or conversion price with respect to any of the foregoing, or (B) with respect to a person who has an outstanding Option, make provisions for a cash payment of any extraordinary cash dividend or as an alternative means (in whole or in part) of affecting any adjustment deemed required by the Committee to preserve, or to prevent enlargement of, the benefits or potential benefits made available under this Plan with respect to such Option. However, the number of shares subject to any Option or other Award shall always be a whole number. 5. STOCK OPTIONS. (a) Grant. Subject to the provisions of the Plan, the Committee shall have the authority to grant Options to an Eligible Employee and to determine (i) the number of shares to be covered by each Option, (ii) the exercise price therefor and (iii) the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options or Nonstatutory Stock Options; provided that Incentive Stock Options may not be granted to any Participant who is not an employee of the Company or one of its Subsidiaries at the time of 5 grant. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with Section 422 of the Code. (b) Option Price. The Committee shall establish the exercise price at the time each Option is granted, which price shall not be less than 100% of the Fair Market Value of the Common Shares at the date of grant, except that, for purposes of satisfying the foregoing requirement with respect to a Nonstatutory Stock Option, the Committee may elect to credit against the exercise price payable by a Participant the value of any compensation otherwise payable to the Participant under the terms of the Company's compensation practices and programs which is surrendered, foregone or exchanged pursuant to such rules or procedures as the Committee shall establish from time to time. (c) Exercise. Each Option shall be exercised at such times and subject to such terms and conditions as the Committee may specify in the applicable Award or thereafter; provided, however, that if the Committee does not establish a different exercise schedule at or after the date of grant of an Option, such Option shall become exercisable in full on the third anniversary of the date the Option is granted. The Committee may impose such conditions with respect to the exercise of Options as it shall deem appropriate, including, without limitation, any conditions relating to the application of federal or state securities laws. No shares shall be delivered pursuant to any exercise of an Option unless arrangements satisfactory to the Committee have been made to assure full payment of the option price therefor. Without limiting the generality of the foregoing, payment of the option price may be made in cash or its equivalent or, if and to the extent permitted by the Committee, by exchanging Common Shares owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Shares so tendered to the Company, valued as of the date of such tender, is at least equal to such option price. In the case of an Incentive Stock Option, the method of payment shall be determined at the time of grant. (d) Termination of Employment. Unless the Committee shall otherwise determine at or after grant, an Option shall be exercisable following the termination of a Participant's Employment only to the extent provided in this Section 5(d). If a Participant's Employment terminates due to the Participant's (i) death, (ii) Disability, or (iii) Normal Retirement, the Participant (or, in the event of the Participant's death or Disability during Employment or during the period during which an Option is exercisable under this sentence, the Participant's beneficiary or legal representative) may exercise any Option held by the Participant at the time of such termination, regardless of whether then exercisable, for a period of three years (or such greater or lesser period as the Committee shall determine at or after grant), but in no event after the date the Option otherwise expires. If a Participant's Employment is terminated for Cause (or, if after the Participant's termination of Employment, the Committee determines that the Participant's Employment could have been 6 terminated for Cause had the Participant still been employed or has otherwise engaged in conduct that is detrimental to the interests of the Company, as determined by the Committee in its sole discretion), all Options held by the Participant shall immediately terminate, regardless of whether then exercisable. In the event of a Participant's termination of Employment for any reason not described in the preceding two sentences, the Participant (or, in the event of the Participant's death or Disability during the period during which an Option is exercisable under this sentence, the Participant's beneficiary, estate or legal representative) may exercise any Option which was exercisable at the time of such termination for 90 days (or such greater or lesser period as the Committee shall specify at or after the grant of such Option) following the date of such termination, but in no event after the date the Option otherwise expires. (e) Reload Options. The Committee may provide that a Participant (or, if applicable, the Participant's permitted transferee) who delivers Common Shares that have been owned by such Participant (or permitted transferee) for any minimum period of time specified by the Committee to exercise an Option or an option granted under the Predecessor Plans, will automatically (to the extent Common Shares are available for Awards under the Plan) be granted new Options ("Reload Options") for a number of Common Shares equal to the number of shares so delivered. Unless the Committee determines otherwise, such Reload Options will be subject to the same terms and conditions (including the same expiration date) as the related Option except (i) that the exercise price shall be equal to the Fair Market Value of a Common Share on the date such Reload Option is granted and (ii) such Reload Option shall not be exercisable prior to the six month anniversary of the date of grant and, thereafter, shall be exercisable in full. 6. STOCK APPRECIATION RIGHTS. (a) Grant of SARs. The Committee shall have the authority to grant Stock Appreciation Rights in tandem with an Option, in addition to an Option, or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem or in addition to an Option may be granted either at the same time as the Option or at a later time. Stock Appreciation Rights shall not be exercisable after the expiration of ten years from the date of grant and shall have an exercise price determined in the same manner as, and subject to the same conditions as apply with respect to, a Nonstatutory Stock Option under Section 5(b). (b) Exercise of SARs. A Stock Appreciation Right shall entitle the Participant to receive from the Company an amount equal to the excess of the Fair Market Value of a Common Share on the date of exercise of the Stock Appreciation Right over the exercise price thereof. The Committee shall determine the time or times at which or the event or events (including, without limitation, a Change of Control) upon which a Stock Appreciation Right may be exercised in whole or in part, the method of exercise and whether such Stock Appreciation Right shall be settled in cash, Common Shares or a combination of cash and Common Shares; provided, however, that unless 7 otherwise specified by the Committee at or after grant, a Stock Appreciation Right granted in tandem with an Option shall be exercisable only at the same time or times as the related Option is exercisable. 7. RESTRICTED SHARES. (a) Grant of Restricted Shares. The Committee may grant Awards of Restricted Shares with or without performance criteria to Eligible Employees at such times and in such amounts, and subject to such other terms and conditions not inconsistent with the Plan, as it shall determine. Each grant of Restricted Shares shall be evidenced by an Award agreement. Unless the Committee provides otherwise at or after the date of grant, stock certificates evidencing any Restricted Shares so granted shall be held in the custody of the Secretary of the Company until the Restricted Period lapses, and, as a condition to the grant of any Award of Restricted Shares, the Participant shall have delivered to the Secretary of the Company a certificate, endorsed in blank, relating to the Common Shares covered by such Award. (b) Termination of Employment. Unless the Committee otherwise determines at or after grant, the rights of a Participant with respect to an Award of Restricted Shares outstanding at the time of the Participant's termination of Employment shall be determined under this Section 7(b). In the event that a Participant's Employment terminates due to the Participant's (i) death, (ii) Disability, or (iii) Normal Retirement, any Award of Restricted Shares shall become vested and nonforfeitable as to that number of shares which is equal to the number of Common Shares subject to such Award times a fraction, the numerator of which is the number of days actually worked during the Restricted Period (or, in the case of an Award which has previously vested in part (an "Installment Award"), the number of days worked since the last vesting date) and the denominator of which is the total number of days during the Restricted Period (or, in the case of an Installment Award, the number of days between the last vesting date and the end of the Restricted Period). Unless the Committee otherwise determines, any portion of any Restricted Shares Award that has not become nonforfeitable at the date of a Participant's termination of Employment shall be forfeited as of such date. (c) Restricted Period; Restrictions on Transferability during Restricted Period. Unless otherwise determined by the Committee at or after the date of grant, the Restricted Period applicable to any Award of Restricted Shares shall lapse, and the shares related to such Award of Restricted Shares shall become freely transferable, at such time as may be determined by the Committee. Restricted Shares may not be sold, assigned, pledged or otherwise encumbered, except as herein provided, during the Restricted Period. Any certificates issued in respect of Restricted Shares shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. 8 (d) Delivery of Shares. Upon the expiration or termination of the Restricted Period and the satisfaction (as determined by the Committee) of any other conditions determined by the Committee, the restrictions applicable to the Restricted Shares shall lapse and a stock certificate for the number of Common Shares with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, except any that may be imposed by law, to the Participant or the Participant's beneficiary, estate or legal representative, as the case may be. No payment will be required to be made by the Participant upon the delivery of such Common Shares and/or cash, except as otherwise provided in Section 11(a) of the Plan. At or after the date of grant, the Committee may accelerate the vesting of any Award of Restricted Shares or waive any conditions to the vesting of any such Award. (e) Rights as a Shareholder; Dividends. Unless otherwise determined by the Committee at or after the date of grant, Participants granted Restricted Shares shall be entitled to vote the shares and to receive, either currently or at a future date, as specified by the Committee, all dividends and other distributions paid with respect to those shares, provided that if any such dividends or distributions are paid in Common Shares or other property (other than cash), such shares and other property shall be subject to the same forfeiture restrictions and restrictions on transferability as apply to the Restricted Shares with respect to which they were paid. The Committee will determine whether and to what extent to credit to the account of, or to pay currently to, each recipient of Restricted Shares, an amount equal to any dividends paid by the Company during the Restricted Period with respect to the corresponding number of Common Shares. To the extent provided by the Committee at or after the date of grant, any dividends with respect to cash dividends on the Common Shares credited to a Participant's account shall be deemed to have been invested in Common Shares on the record date established for the related dividend and, accordingly, a number of additional Restricted Shares shall be credited to such Participant's account equal to the greatest whole number which may be obtained by dividing (x) the value of such dividend on the record date by (y) the Fair Market Value of a Common Share on such date. 8. PERFORMANCE AWARDS. (a) Performance Shares and Performance Units. Subject to the provisions of the Plan, the Committee shall have the authority to grant Performance Shares and Performance Units to any Eligible Employee and to determine (i) the number of Performance Shares and the number of Performance Units to be granted to each Participant and (ii) the other terms and conditions of such Awards. The Performance Period related to Performance Shares or Performance Units shall lapse upon the determination by the Committee that the performance objectives established by the Committee have been attained, in whole or in part on the date established by the Committee. Such performance objectives may be related to the performance of (i) the Company, (ii) a Subsidiary, (iii) a division or unit of the Company or any Subsidiary, (v) the Participant or (vi) any combination of the foregoing, over a measurement period or periods established by the Committee. Unless the Committee otherwise 9 determines at the time of grant of Performance Shares or Performance Units to an Executive Officer, the performance objectives with respect to such Award shall include at least one of the following criteria, which may be determined solely by reference to the performance of the Company or a Subsidiary or based on comparative performance relative to other companies: (i) total return to shareholders, (ii) return on equity, (iii) operating income or net income, (iv) return on capital, (v) economic value added, (vi) earnings per Common Share, or (vii) market price of the Common Shares. Except to the extent otherwise expressly provided herein, the Committee may, at any time and from time to time, change the performance objectives applicable with respect to any Performance Shares or Performance Units to reflect such factors, including, without limitation, changes in a Participant's duties or responsibilities or changes in business objectives (e.g., from corporate to Subsidiary or business unit performance or vice versa), as the Committee shall deem necessary or appropriate. Payment for Performance Shares or Performance Units shall be made by the Company in Common Shares, cash or in any combination thereof, as determined by the Committee. (b) Termination of Employment. Unless the Committee otherwise determines at or after grant, the rights of a Participant with respect to an Award of Performance Shares or Performance Units outstanding at the time of the Participant's termination of Employment shall be determined under this Section 8(b). In the event that a Participant's Employment terminates due to the Participant's (i) death, (ii) Disability, or (iii) Normal Retirement, any Award of Performance Shares or Performance Units shall become vested and nonforfeitable at the end of the measurement period as to that number of shares or units which is equal to that percentage, if any, of such award that would have been earned based on the attainment or partial attainment of such performance objectives. In all other cases, any portion of any Award of Performance Shares or Performance Units that has not become nonforfeitable at the date of a Participant's termination of Employment shall be forfeited as of such date. (c) Awards Nontransferable. Performance Shares or Performance Units may not be sold, assigned, pledged or otherwise encumbered, except as herein provided, during the Performance Period. (d) Award of Dividend Equivalents. Unless otherwise determined by the Committee at or after the date of grant, Participants granted Performance Shares or Performance Units shall be entitled to receive, either currently or at a future date, as specified by the Committee, all dividends and other distributions paid with respect to those shares and units, provided that if any such dividends or distributions are paid in Common Shares or other property (other than cash), such shares and units and other property shall be subject to the same forfeiture restrictions and restrictions on transferability as apply to the Performance Shares and Performance Units with respect to which they were paid. The Committee will determine whether and to what extent to credit to the account of, or to pay currently to, each recipient of Performance Shares or Performance Units, an amount equal to any dividends paid by the Company during the period of deferral with respect to the corresponding 10 number of Common Shares ("Dividend Equivalents"). To the extent provided by the Committee at or after the date of grant, any Dividend Equivalents with respect to cash dividends on the Common Shares credited to a Participant's account shall be deemed to have been invested in Common Shares on the record date established for the related dividend and, accordingly, a number of additional Performance Shares or Performance Units shall be credited to such Participant's account equal to the greatest whole number which may be obtained by dividing (x) the value of such Dividend Equivalent on the record date by (y) the Fair Market Value of a Common Share on such date. (e) Interpretation. Notwithstanding anything else contained in this Section 8 to the contrary, if any Award of Performance Shares or Performance Units is intended, at the time of grant, to be other performance based compensation within the meaning of Section 162(m)(4)(C) of the Code, to the extent required to so qualify any Award hereunder, the Committee shall not be entitled to exercise any discretion otherwise authorized under this Section 8 with respect to such Award if the ability to exercise such discretion (as opposed to the exercise of such discretion) would cause such Award to fail to qualify as other performance based compensation. 9. STOCK IN LIEU OF CASH. The Committee may grant Awards or Common Shares in lieu of all or a portion of an award otherwise payable in cash to an Executive Officer pursuant to any bonus or incentive compensation plan of the Company. If shares are issued in lieu of cash, the number of Common Shares to be issued shall be the greatest number of whole shares which has an aggregate Fair Market Value on the date the cash would otherwise have been payable pursuant to the terms of such other plan equal to or less than the amount of such cash. 10. CHANGE IN CONTROL. (a) Accelerated Vesting and Payment. Subject to the provisions of Section 10(b) below, in the event of a Change in Control, each Option and Stock Appreciation Right shall promptly be canceled in exchange for a payment in cash of an amount equal to the excess of the Change in Control Price over the exercise price for such Option or the exercise price for such Stock Appreciation Right, whichever is applicable, the Restricted Period applicable to all Restricted Shares, and the Performance Period applicable to Performance Shares and Performance Units shall expire and all such shares shall become nonforfeitable and immediately transferable and the Common Shares with respect thereto shall be immediately payable. (b) Alternative Awards. Notwithstanding Section 10(a), no cancellation, acceleration of exercisability, vesting, cash settlement or other payment shall occur with respect to any Award or any class of Awards if the Committee reasonably determines in good faith prior to the occurrence of a Change in 11 Control that such Award or class of Awards shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted award hereinafter called an "Alternative Award") by a Participant's new employer (or the parent or a subsidiary of such employer) immediately following the Change in Control, provided that any such Alternative Award must: (i) be based on stock which is traded on an established securities market, or which will be so traded within 60 days following the Change in Control; (ii) provide such Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights and entitlements applicable under any such Award or class of Awards, including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment; (iii) have substantially equivalent economic value to such Award or class of Awards (determined by the Committee as constituted immediately prior to the Change in Control, in its sole discretion, promptly after the Change in Control); and (iv) have terms and conditions which provide that in the event that the Participant's Employment is involuntarily terminated or constructively terminated (other than for Cause) upon or following such Change in Control, any conditions on a Participant's rights under, or any restrictions on transfer or exercisability applicable to, each such Alternative Award shall be waived or shall lapse, as the case may be. For this purpose, a constructive termination shall mean a termination by a Participant following a material reduction in the Participant's compensation, a material reduction in the Participant's responsibilities or the relocation of the Participant's principal place of Employment to another location a material distance farther away from the Participant's home, in each case, without the Participant's prior written consent. 11. GENERAL PROVISIONS. (a) Withholding. The Company shall have the right to deduct from all amounts paid to a Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. In the case of any Award satisfied in the form of Common Shares, no Common Shares shall be issued unless and until arrangements satisfactory to the Committee shall have been made to satisfy any withholding tax obligations applicable with respect to such Award. Without limiting the generality of the foregoing and subject to such terms and conditions as the Committee may impose, the Company shall have the right to retain, or the Committee may, subject to such terms and conditions as it may establish from time to time, permit Participants to elect to tender, Common Shares (including Common Shares issuable in respect of an Award) to satisfy, in whole or in part, the amount required to be withheld. 12 (b) Awards. Each Award hereunder shall be evidenced in writing. The written agreement shall be delivered to the Participant and shall incorporate the terms of the Plan by reference and specify the terms and conditions thereof and any rules applicable thereto. (c) Nontransferability. Unless the Committee shall permit (on such terms and conditions as it shall establish) an Award to be transferred to a member of the Participant's immediate family or to a trust or similar vehicle for the benefit of such immediate family members (collectively, the "Permitted Transferees"), no Award shall be assignable or transferable except by will or the laws of descent and distribution, and except to the extent required by law, no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant. Except as otherwise expressly provided in this Plan, all rights with respect to Awards granted to a Participant under the Plan shall be exercisable during the Participant's lifetime only by such Participant or, if applicable, the Permitted Transferees. (d) No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to Employment. Further, the Company and each Subsidiary expressly reserves the right at any time to terminate the Employment of a Participant free from any liability or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (e) No Rights to Awards; No Shareholder Rights. No Participant or Eligible Employee shall have any claim to be granted any Award under the Plan, and there is no obligation of uniformity of treatment of Participants and Eligible Employees. Subject to the provisions of the Plan and the applicable Award, no person shall have any rights as a shareholder with respect to any Common Shares to be issued under the Plan prior to the issuance thereof. (f) Construction of the Plan. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of the State of New York. (g) Legend. To the extent any stock certificate is issued to a Participant in respect of an Award of Restricted Shares under the Plan prior to the expiration of the applicable Restricted Period, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend. Upon the lapse of the Restricted Period with respect to any such Restricted Shares, the Company 13 shall issue or have issued new share certificates without a legend in exchange for those previously issued. (h) Effective Date. The effective date of this Plan is May 7, 2002. The Plan will become effective as of that date provided that the Plan receives the approval, within 12 months of its approval by the Board, of the holders of a majority of the outstanding Common Shares entitled to vote. If such approval is not forthcoming, the Plan and all Awards shall be null and void. No Awards may be granted under the Plan after May 6, 2012. Subject to shareholder approval of the Plan, if the Committee so determines and the holder thereof shall consent to any amendment to any outstanding award that has an adverse affect on such holder's rights thereunder, the provisions of the Plan shall apply to, and govern, existing awards under the Predecessor Plans and, such awards shall be amended to provide such holder with any additional benefits available hereunder. (i) Amendment of Plan. The Board or the Committee may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without shareholder approval if such amendment would: increase the number of Common Shares subject to the Plan, except pursuant to Section 4(c); change the price at which Options may be granted; or remove the administration of the Plan from the Committee. Without the written consent of an affected Participant, no termination, suspension or modification of the Plan shall adversely affect any right of such Participant under the terms of an Award granted before the date of such termination, suspension or modification. (j) Application of Proceeds. The proceeds received by the Company from the sale of its shares under the Plan will be used for general corporate purposes. (k) Compliance with Legal and Exchange Requirements. The Plan, the granting and exercising of Awards thereunder, and the other obligations of the Company under the Plan, shall be subject to all applicable federal and state laws, rules, and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the granting and exercising of Awards, the issuance or delivery of Common Shares under any Award or any other action permitted under the Plan to permit the Company, with reasonable diligence, to complete such stock exchange listing or registration or qualification of such Common Shares or other required action under any federal or state law, rule, or regulation and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Common Shares in compliance with applicable laws, rules, and regulations. The Company shall not be obligated by virtue of any provision of the Plan to recognize the exercise of any Award or to otherwise sell or issue Common Shares in violation of any such laws, rules, or regulations; and any postponement of the exercise or settlement of any 14 Award under this provision shall not extend the term of such Awards, and neither the Company nor its directors or officers shall have any obligation or liability to the Participant with respect to any Award (or Common Shares issuable thereunder) that shall lapse because of such postponement. (l) Deferrals. The Committee may postpone the exercising of Awards, the issuance or delivery of Common Shares under any Award or any action permitted under the Plan to prevent the Company or any of its Subsidiaries from being denied a federal income tax deduction with respect to any Award other than an Incentive Stock Option. (m) Number. Except when otherwise indicated by the context, words in the singular shall include the plural, and the plural shall include the singular. 15 EX-10.H 9 y83939exv10wh.txt 2002 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Exhibit 10(h) EDO CORPORATION 2002 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1. PURPOSE The Purpose of the EDO Corporation 2002 Non-Employee Director Stock Option Plan is to increase director share ownership to further align director interests with those of the Company's shareholders. 2. DEFINITIONS "Annual Grant" shall mean an annual Stock Option grant for 5,000 Common Shares to an Eligible Director as provided in Section 5(b) "Award" shall mean an Initial Grant and/or Annual Grant under Section 5 of the Plan. "Board" shall mean the Board of Directors of the Company. "Cause" shall mean (i) the willful failure by an Eligible Director to perform substantially Board or committee duties (other than due to physical or mental illness), (ii) the Eligible Director engaging in serious misconduct that is injurious to the Company, or (iii) the Eligible Director having been convicted of, or entered a plea of nolo contendre, a crime that constitutes a felony. "Change in Control" shall mean the occurrence of any of the following events. (i) A majority of the members of the Board at any time cease for any reason other than due to death or disability to be persons who were members of the Board twenty-four months prior to such time (the "Incumbent Directors"); provided that any director whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the members of the Broad then still in office who are Incumbent Directors shall be treated as an Incumbent Director; or (ii) Any "person" including a "group" as such terms are used in Sections 13(d) and 14 (d)(2) of the Exchange Act, but excluding the Company, any employee benefit plan of the Company, any employee of the Company or any group of which any of the foregoing is a member) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) of the Exchange Act), directly or indirectly, including without limitation, by means of a tender or exchange offer, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (iii) The shareholders of the Company shall approve a definitive agreement(s) for the merger or other business combination of the Company with or into another corporation immediately following which merger or combination (A) the stock of the surviving entity is not readily tradable on an established securities market, (B) a majority of the directors of the surviving entity are persons who (1) were not directors of the Company immediately prior to the merger and (2) are not nominees or representatives of the Company, or (C) any "person" including a "group" (as such terms are used in Section 13(d) and 14(d)(2) of the Exchange Act, but excluding the Company, any employee benefit plan of the Company, any employee of the Company or any group of which any of the foregoing is a member) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) of the Exchange Act), directly or indirectly of 30% or more of the securities of the surviving entity or (y) for the direct or indirect sale or other disposition of all or substantially all of the assets of the Company; or (iv) any other event or transaction that is declared by resolutions of the Board to constitute a Change in Control for purposes of the Plan. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to occur in the event the Company files for bankruptcy, liquidation or reorganization under the United States Bankruptcy Code. "Change in Control Price" shall mean the highest price per share paid or offered in any bona fide transaction related to a Change in Control, as determined by the Committee. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the regulations there under. "Committee" shall mean the Compensation Committee of the Board, or such other Board committee as may be designed by the Board to administer the plan. "Common Shares" shall mean the Common Shares, par value $1.00 per share, of the Company. "Company" shall mean EDO Corporation, including any Subsidiary, and any successor thereto. "Disability" shall mean if the Committee determines, based on medical evidence, that the Eligible Director is disabled, mentally or physically, and is therefore, unable to continue his or her services to the Company. "Eligible Director" shall mean a person who is serving as a member of the Board and who is not an employee of the Company. "Fair Market Value" shall mean, on any date, the closing sales price of a Common Share, as reported for such day on the New York Stock Exchange (consolidated trading). "Initial Grant" shall mean of one-time Stock Option Grant for 10,000 Common Shares to an Eligible Director as provided in Section 5(a). 2 "Plan" shall mean the EDO Corporation 2002 Non-Employee Director Stock Option Plan, as amended from time to time. "Retirement" shall mean an Eligible Director's retirement from service from the Board. "Stock Option" shall mean a stock option which is not qualified under Section 422 of the Code and that is granted to each Eligible Director pursuant to Section 5. "Subsidiary" shall mean any corporation of which the Company owns directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of stock of such corporation and any other business organization, regardless of form, in which the Company possesses directly or indirectly fifty percent (50%) of more of the total combined equity interests in such organization. 3. ADMINISTRATION The Plan shall be administered by the Committee, which shall consist of at least two directors of the Company chosen by the Board, each of whom is a "non-employee director" within the meaning of Rule 16(b)-3 of the Exchange Act. The Committee shall have the responsibility of construing and interpreting the Plan and of establishing and amending such rules and regulations, as it deems necessary or desirable for the proper administration of the Plan. Any decision or action taken or to be taken by the Committee, arising out of or in connection with the construction, administration, interpretation and effect of the Plan and of its rules and regulations, shall to the maximum extent permitted by applicable law, be within its absolute discretion (except as otherwise specifically provided herein) and shall be conclusive and binding upon all directors participating in the Plan and their successors in interest. Notwithstanding the foregoing, neither the Committee nor the Board shall have any discretion regarding whether an Eligible Director receives a Stock Option under Section 5, or except as expressly provided in this Plan, regarding the terms of any such Stock Option, including, without limitation, the timing of grant and the number of Common Shares subject to any such Stock Option. 4. MAXIMUM AMOUNT OF SHARES AVAILABLE FOR AWARDS (a) Shares Available for Issuance The maximum number of Common Shares in respect of which Awards may be made under the Plan shall be a total of 250,000 Common Shares. Common Shares may be made available from the authorized but unissued shares of the Company or from shares held in the Company's treasury and not reserved for some other purpose. Common Shares subject to any Award, which are cancelled or forfeited for any reasons without delivery of such Common Shares, shall again be available for award under this Plan. 3 (b) Adjustment for Corporate Transactions In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Shares, or other similar event affects the Common Shares such that an adjustment is required to preserve, or to prevent enlargement of, the benefits or potential benefits made available under this Plan, then the Committee may, in such manner as the Committee may deem equitable, (A) adjust any or all of (i) the number and kind of shares which thereafter may be awarded or optioned and sold under the Plan, (ii) the number and kind of Common Shares subject to outstanding Stock Options, and (iii) the grant, exercise or conversion price with respect to any of the foregoing, or (B) with respect to a person who has an outstanding Stock Option, make provisions for a cash payment of any extraordinary cash dividend or as an alternative means (in whole or in part) of affecting any adjustment deemed required by the Committee to preserve, or to prevent enlargement of, the benefits or potential benefits made available under this Plan with respect to such Option. However, in connection with any adjustment made hereunder, the number of shares subject to any Stock Option shall always be rounded to the nearest whole number. 5. TERMS OF STOCK OPTIONS GRANTS (a) Initial Grant An Initial Grant shall be made to (i) each Eligible Director as of the Effective Date of the Plan, and (ii) each Eligible Director who is first elected to the Board after the Effective Date of the Plan on the date of such first election (but not upon any subsequent elections of such Eligible Director). The exercise price per share of at the Initial Grant shall equal the Fair Market Value on the date of the grant. (b) Annual Grant An Annual Grant shall be made to each Eligible Director serving on the Board during the term of the Plan on the first business day of January of each year following the year in which such Eligible Director received an Initial Grant. The exercise price per share of the Annual Grant shall equal the Fair Market Value on the date of grant. (c) Exercise Each Stock Option shall become exercisable immediately upon grant and shall remain exercisable until the earlier to occur (i) the tenth anniversary date of grant or (ii) a time provided in Section 5(d) after the date the Eligible Director ceases to be a member of the Board. The Committee may impose such conditions with respect to the exercise of Stock Options, as it shall deem appropriate, including, without limitation, any conditions relating to the application of Federal or state securities laws. No shares shall be delivered pursuant to any exercise of Stock Option unless arrangements satisfactory to the Committee have been made to assure full payment of the option price therefore. Without 4 limiting the generality of the foregoing, payment of the option price may be made in cash or its equivalent or, if and to the extent permitted by the Committee, by exchanging Common Shares owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Shares to the Company, values as of the date of such tender, is at least equal to such option price. (d) Termination of Service A Stock Option shall be exercisable following the termination of an Eligible Director's participation on the Board only to the extent provided in this Section 5(d). If an eligible Director's participation on the Board terminates due to such director's death, disability, or Retirement with the consent of the Committee, all stock options shall be exercisable by such director or, in the case of death or disability, such director's estate or legal guardian, for the earlier of three years from the date of such termination or the expiration of the Stock Option term(s). 6. CHANGE IN CONTROL In the event of a Change in Control, each Stock Option shall promptly be cancelled in exchange for a payment in cash of an amount equal to the excess of the Change in Control Price over the exercise price for such Stock Option. 7 GENERAL PROVISIONS (a) Withholding Should an amount realized or recognized by an Eligible Director in connection with the exercise of a Stock Option subject the Company to tax withholding requirements under Federal, state, local or foreign law, such Eligible Director shall be required to make the necessary arrangements to satisfy the Company's obligations, if any, to withhold any tax with respect to such amount. (b) Awards Each Award hereunder shall be evidenced in writing. The written agreement shall be delivered to the Eligible Director and shall incorporate the terms of the Plan by reference and specify the terms and conditions thereof and any rules applicable thereto. (c) Nontransferability No Award shall be assignable or transferable except by will or the laws of descent and distribution, and except to the extent required by law, no right or interest of any Eligible Director shall be subject to any lien, obligation or liability of the Eligible Director; provided, however, Awards may be transferred to a member of the Eligible Director's 5 immediate family or to a trust or similar vehicle for the benefit of such immediate family members (collectively, the "Permitted Transferees"). Except as otherwise expressly provided in this Plan, all rights with respect to Awards granted to an Eligible Director's lifetime only by such eligible Director or, if applicable, the Permitted Transferees. (d) Construction of the Plan The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of the State of New York without reference to its conflict of law rules. (e) Effective Date The Effective Date of this Plan is May 7, 2002. The Plan will become effective as of that date provided that the Plan receives the approval, within 12 months of its approval by the board, of the holders of a majority of the outstanding Common Shares entitled to vote, if required. If such approval is required, and is not forthcoming, the Plan and all Awards shall be null and void. No Awards may be granted under the Plan after May 6, 2012. 6 EX-10.K 10 y83939exv10wk.txt EMPLOYMENT AGREEMENT Exhibit 10(k) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement"), dated as of February 1, 2003, by and between EDO Corporation, a New York corporation, and James M. Smith. WHEREAS, EDO Corporation (the "Company"), AIL Systems Inc. a wholly - - owned subsidiary of the Company ("AIL") and James M. Smith ("you") entered into an amended and restated employment agreement, dated as of January 2, 2000, which otherwise expires by its terms on May 1, 2003 (the "Expiring Agreement"); WHEREAS, the Company desires that you continue in the positions of Chairman, Chief Executive Officer and President and you are willing to continue in such positions, all on the terms and conditions set forth in this new Agreement; NOW, THEREFORE, the parties hereto agree as follows: 1. Effective Date. This Agreement shall become effective as of the date first above written (the "Effective Date"), at which time the Expiring Agreement shall terminate and rendered void and without further effect. 2. Employment Duties. (a) Position and Duties. Subject to the terms and conditions of this Agreement, the Company shall continue to employ you as its Chairman, Chief Executive Officer and President from and after the Effective Date until the expiration of the Term (as defined in Section 3) of this Agreement. In such position, you shall continue to be responsible for the day-to-day operation and management of the Company and have such powers, duties, responsibilities and indemnification commensurate with your experience and your position as Chief Executive Officer and President as are set forth in the Company's By-Laws and as may be assigned to you from time to time by the Company's Board of Directors. You shall also continue to serve, without additional compensation, in such other position or positions with the Company and/or its majority-owned subsidiaries commensurate with your experience and position as Chief Executive Officer as the Board of Directors shall assign to you at any time and from time to time. It is understood that among your duties during the term shall be to recommend to the Board of Directors a mutually agreeable succession and transition plan and the timely implementation of such plan. (b) Report to the Board. You shall continue to report directly to the Company's Board of Directors. You shall continue to serve as a member of the Board of Directors of the Company and the Company will take such steps as may be necessary and appropriate to have you nominated for reelection for additional terms as a director during the term of this Agreement. (c) Working Time. You shall devote all of your working time, on an exclusive basis, and except for vacations, periods of illness, injury or other disability, to the business and affairs of the Company. (d) Location. Your principal place of employment shall be at the Company's headquarters in New York City. 3. Term. The term of this Agreement shall be the period from the Effective Date through May 31, 2006 (the "Term"). 4. Compensation and Benefits. During the Term, the Company shall pay to you, and you shall accept from the Company, as full compensation for all of your services hereunder, the amounts indicated in this Section 4: (a) Base Salary. The Company shall pay to you an annual base salary ("Base Salary") during the Term as followings: - $600,000 per annum during the first 12 month period of the Term; - $625,000 per annum during the second 12 month period of the Term, and - $650,000 per annum thereafter. (b) Annual Bonus. During each year of the Term you will be eligible to receive an annual bonus in an amount determined in the sole discretion of the Compensation Committee of the Board of Directors (the "Committee"). Your bonus target shall be 75% of your Base Salary in respect of the year in which the bonus is to be paid. The Committee shall determine the time and manner of payment. (c) Other Compensation and Benefits. Except as otherwise provided herein, you shall be eligible to participate in, on a basis commensurate with your position with the Company, all of the Company's employee compensation and benefit plans and arrangements in effect at any time or from time to time during the Term. You shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement made available by the Company to its executives and key management employees, subject to and on a basis consistent with the terms and conditions thereof. Notwithstanding the foregoing, should their be a downward adjustment in the benefits provided executive employees under the EDO Corporation Supplemental Executive Retirement Plan (the "SERP"), the Company shall provide you a benefit substantially equivalent any shortfall resulting from such change, payable on substantially the same basis and at substantially the same time you would have received such payments under the SERP had there been no downward adjustment. (d) Company Grant of Restricted Shares. You shall be granted 15,000 shares of the Company's common stock annually in respect of each whole year in the Term, subject to your execution of a restricted share agreement in a form mutually agreed with the Company. The restricted shares shall not be transferable and shall remain subject to forfeiture until vested in accordance with the terms of the grant, as reflected in the -2- restricted share agreement. It is not anticipated that you will participate in any stock option program of the Company during the term. (e) Car Allowance. For your use during the Term, you will be provided a new automobile every three years. (f) Vacation. You shall be eligible for vacation benefits in accordance with the Company's vacation policy. In no event, however, shall you be provided less than four weeks of vacation during any calendar year. (g) Business Expenses. The Company shall reimburse you for reasonable and necessary business expenses in accordance with the Company's policies as the same may be amended from time to time, and upon presentation of appropriate documentation reasonably satisfactory to the Company. (h) Legal Expenses. Upon your submission of receipts reasonably acceptable to the Company and in accordance with the Company's reimbursement policies, the Company shall pay an additional amount during the Term in respect of tax and estate planning not to exceed $15,000 in the aggregate. 5. Termination of Employment. Your employment with the Company may terminate upon the occurrence of the following circumstances: (a) Death and Disability. Your death or your inability to perform your duties hereunder by reason of disability, due to physical or mental illness, after reasonable accommodation, for a period in excess of one hundred and eighty (180) consecutive business days. Your employment may be terminated by the Company by reason of your disability, pursuant to this subsection (a) only if you do not return to work within thirty (30) days after a notice of termination has been provided to you in writing by the Company. (b) Cause. Termination of your employment by the Company for "Cause", which for purposes of this Agreement shall mean: (i) the willful and continued failure by you to substantially perform your duties hereunder (other than any such failure resulting from your disability due to physical or mental illness), after you have received from the Board of Directors of the Company a written demand for substantial performance that specifically identifies the manner in which the Board of Directors believes you have not substantially performed your duties and a reasonable opportunity under the circumstances to cure any such failure; (ii) the willful engaging by you in gross misconduct materially and demonstrably injurious to the Company; (iii) your having engaged in any conduct or failed to take any action, with respect to the Company, any of its employees, any of its affiliates or any of its -3- shareholders, which act or failure to act constitutes a crime under federal or state law; or (iv) your having been convicted of or pleaded no contest to any crime involving moral turpitude or any crime that could carry a jail sentence as a penalty. For purposes of this subsection (b), no act, or failure to act, shall be considered "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your act or omission was in the best interest of the Company. Notwithstanding the foregoing, your employment shall not be deemed to have terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the membership of the Board of Directors of the Company (excluding you) at a meeting of the Board of Directors called and held for such a purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors you were guilty of the conduct set forth in this subparagraph (b) and specifying the particular details thereof in detail. Such finding by the Board of Directors shall be conclusive and binding upon all parties, and the Board of Directors is hereby granted discretionary authority to make such determination. (c) Retirement. Termination of your employment by you due to your retirement in accordance with the terms of any Company retirement plan in which you participate. (d) Good Reason. Termination of your employment at any time by you for "Good Reason." For the purpose of this Agreement, Good Reason shall mean: (i) the assignment to you of any material duties inconsistent with your position, duties, responsibilities and status at the Company, as provided herein, without your express written consent; (ii) a change inconsistent with the provisions of this Agreement in your title as President and/or Chief Executive Officer, or substitution of a successor as President and/or Chief Executive Officer, or in your reporting responsibilities, except (A) during the final eighteen months of the Term with respect to a President and (B) during the final twelve months of the Term with respect to a Chief Executive Officer; (iii) a reduction in your Base Salary (as defined in Section 4(a)); (iv) failure to allow you to participate in the any material employee benefit and executive compensation plans and arrangements available to senior executives in accordance with the provisions of Section 4(c) except as herein provided; (v) a requirement that you be based anywhere other than the Company's principal executive offices in the greater New York metropolitan area or, in the event you consent to any such relocation of the Company's principal executive offices, the failure by the Company to pay (or reimburse you for) all -4- reasonable moving expenses incurred by you relating to a change of your principal residence in connection with such relocation and/or to indemnify you against any "loss" realized in the sale of your principal residence in connection with any such change of residence, where "loss" is defined as the amount by which the higher of (a) your aggregate investment in such residence and (b) the fair market value of such residence as determined by any real estate appraiser designated by you and reasonably satisfactory to the Company, exceeds the actual sale price of such residence; or (vi) if not automatic by operation of law, the failure of the Company to obtain the assumption of, and agreement to perform, this Agreement by any successor (whether direct or indirect, by purchase, consolidation or otherwise) to all or substantially all of the assets of the Company, by agreement in form and substance reasonably satisfactory to you. 6. Compensation Upon Termination. (a) Death or Disability. If your employment is terminated by reason of your death or disability pursuant to Section 5(a), you or your estate, as the case may be, shall receive your Base Salary through the date of your termination and such other compensation and benefits to which you are entitled in accordance with the terms and conditions of the compensation and benefit plans and arrangements in which you are then a participant. (b) Cause. If your employment is terminated for Cause pursuant to Section 5(b), you shall not be entitled to any compensation for any period after termination, but you shall receive such compensation and benefits for time worked prior to such termination and to which you are entitled in accordance with the terms of the compensation and benefit plans in which you are then a participant. (c) Post-Retirement Consulting/Non-competition Payments. If your employment is terminated by you due to your retirement at the end of the Term pursuant to Section 5(c), you shall be provided the opportunity to provide consulting services (the "Consulting Services"), for a period of up to 2 years following such retirement (the "Consulting Period"). As total consideration for the Consulting Services, and in consideration of the provisions of post-termination non-competition provisions of Section 9(b) below, the Company will pay you $300,000 during each year of the Consulting Period. In the event of your demise during the Consulting Period, the payment shall be made to your estate. In accordance with the terms of the Company's health insurance policy then in effect, you will be entitled to participate in the Company's paid health insurance during the Consulting Period. You shall not be eligible to participate in any other plan or program of the Company. (d) Good Reason; Without Cause. Subject to the provisions of Section 6(e), if your employment is terminated by you for Good Reason pursuant to Section 5(d), or is terminated by the Company for any reason other than death, disability, Cause, -5- retirement, expiration of the Term or mutual written agreement, the Company will pay to you the following amounts ((collectively, the "Termination Payments"): (i) An amount equal to the product of (x) the number three multiplied by (y) the sum of (A) your annual Base Salary as defined in Section 4(a), plus (B) the average annual Company incentive bonus amount awarded to you for the three years preceding the termination of your employment, or the previous year's incentive bonus if higher. The Termination Payment will be paid in cash in a single sum promptly following the date of termination. (ii) If a payment is made under (i) above, in addition: (A) for the three-year period following your termination of employment, you (and to the extent covered at the date of your termination of employment, your spouse and your eligible dependents) shall be entitled to continued coverage under the Company's medical, life and disability plans for employees, as the same may be modified from time to time for employees generally, on the same terms and conditions as though you had continued in the Company's employ (or, at the Company's election, coverage equivalent thereto); and (B) during the same period you shall be entitled to five years (or up to age 65 whichever is earlier) of continued participation service accrual under each employee retirement plan in which you are then participating, whether or not qualified (the "Pension Plans"), to a period not to exceed the granting of credited service to all Plan participants; and (C) upon the completion of the period set forth in (A) above, you will be entitled to those benefits (or their equivalent) to which retirees of the Company may be entitled in accordance with the terms and conditions of the Pension Plans and the medical and life insurance plans for retirees, as those plans may be modified from time to time for employees generally. (D) Notwithstanding the provisions of (b)(ii)(B) above, in the event that the granting of vested service accrual credit to you under the Pension Plan could, in the reasonable opinion of the Company, adversely affect the tax-qualified status of the Pension Plan, such service credit shall not be granted and in lieu thereof, the Company shall pay you, upon the expiration of the period set forth in (A) above, a single cash payment equal to the actuarial equivalent of the increase in your retirement benefit that would have resulted if the service credit had been granted, as determined by the enrolled actuary regularly consulted by the Company for the Pension Plan, and shall be paid in accordance with the terms of the Pension Plan in effect at that time, -6- with the determination of such actuary being final and binding upon all parties. (E) All of the shares of Company restricted stock granted, whether pursuant to Section 4(d) or otherwise, shall fully and immediately vested on the date your employment terminates under the Section 6(d) and upon any termination described in Section 6(d) any options to purchase Company stock not otherwise vested for any reason shall be deemed to be and shall become fully vested and nonforfeitable and immediately exercisable, and remain exercisable in accordance with the terms of the stock option plan. (e) Release and Full Satisfaction. The Termination Payments under Section 6(d) shall be in lieu of any other severance or termination benefits to which you may be entitled under the Company's plans, policies, programs or agreements and shall be subject to your execution of a release and separation agreement in form and substance satisfactory to the Company and its counsel. Payment of any amounts under Section 6(d) shall be in full and complete satisfaction of any claims that you may have under this Agreement or otherwise arising in connection with your employment with or termination of employment by the Company and/or any of its subsidiaries; provided that, nothing contained in this clause shall be construed to limit your right to any vested benefits accrued or payable under the terms of any employee benefit plan (other than any severance plan) established and maintained by the Company, any vested rights under any equity based incentive award, whether granted to you under the terms of this Agreement or otherwise, or any of its subsidiaries or your right to indemnification with respect to his service as an employee, officer or director of the Company or any of its subsidiaries. 7. Gross-up Payment Upon a Change in Control. (a) Imposition of Excise Tax. In the event that any amount or benefit paid or distributed to you pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to you by the Company, any subsidiary or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and would thereby subject you to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the Company shall pay to you following your termination of your employment an additional amount (the "Tax Adjustment") such that the net amount retained by you with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any Federal, state and local income tax, employment tax and Excise Tax (including any interest and penalties) on the Tax Adjustment provided for by this Section 7, but before deduction for any Federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of the Covered Payments. The Tax Adjustment shall be paid at the same time the payment is due to the Internal Revenue Service in respect of the Covered Payments. -7- (b) Calculation Assumptions. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the good faith judgment of the Company's independent certified public accountants or tax counsel of national reputation selected by the Company (the "Tax Advisors"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for personal services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such `parachute payments" are otherwise not subject to such Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Tax Advisors in accordance with the principles of Section 280G of the Code. (c) Overpayment Adjustment. In the event that the Excise Tax is subsequently determined by the Tax Advisors or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less than the amount taken into account hereunder in calculating the Tax Adjustment made, you shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any Federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to you, and interest payable to the Company shall not exceed interest received or credited to you by such tax authority for the period it held such portion. You and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if your good faith claim for refund or credit is denied. (d) Underpayment Adjustment. In the event that the Excise Tax is later determined by the Tax Advisors or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. -8- (e) Timing of Payment. Any Tax Adjustment (or portion thereof) shall be paid to you not by wire transfer or certified check not later than the day the applicable tax payment is due in respect of the applicable Covered Payment to which it relates; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to you by such date an amount estimated in good faith by the Tax Advisors to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(IB) of the Code) as soon as the amount thereof can be determined, but in no event later than the due date pursuant to any demand therefor by the Internal Revenue Service. (f) Impact of Section 7. Notwithstanding anything else to the contrary contained in this Section 7, you shall not be required to take any actions or pay any amounts under this Section that will in the aggregate, cause you to receive less compensation (on a net-after tax basis) than if this Section 7 was omitted from this Agreement in its entirety. 8. Successors. As used in this Agreement, "the Company" shall mean the Company as hereinbefore defined and any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the assets of the Company. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 9. Covenants. Confidential Information. You acknowledge and agree that you have and will come into contact with, have access to and learn various technical and non-technical trade secrets and other Confidential Information, which are the property of the Company. Such Confidential Information includes but is not limited to methods, procedures, devices and other means used by the Company in the conduct of its business, marketing plans and strategies, pricing plans and strategies, data processing programs, databases, formulae, secret processes, machines and adaptations thereto, inventions, research projects, and all other matters of a technical nature, all of which Confidential Information is not publicly available, but has been developed by the Company at its great effort and expense; names and addresses of the Company's customers and their representatives responsible for entering into contracts for the Company's services, customer leads or referrals, specific customer needs and requirements and the manner in which they have been met by the Company, information with respect to pricing, costs, profits, sales, markets, plans for future business and other development, all of which Confidential Information is not available from directories or other public sources; and information with respect to the Company's employees, their names and addresses, compensation, experience, qualifications, abilities, job performance and similar information. All of the Confidential Information has been developed, acquired or compiled by the Company at its great effort and expense. (a) Non-Disclosure of Confidential Information. Except as may be required in the proper performance of your duties hereunder or as may be compelled by administrative or judicial subpoena or other process, you acknowledge and agree that any disclosure, divulging, revealing or other use of any of the aforesaid Confidential Information by you, other than in connection with the Company's business will be highly detrimental -9- to the business of the Company and serious loss of business and pecuniary damage may result therefrom. Accordingly, you specifically covenant and agree to hold all such Confidential Information and any documents containing or reflecting the same in the strictest confidence, and you will not, both during employment with the Company or at any time thereafter, without the Company's prior written consent, disclose, divulge or reveal to any person whomsoever, or use for any purpose other than the exclusive benefit of the Company, any Confidential Information whatsoever, whether contained in your memory or embodied in writing or other physical form. (b) Covenant Not to Compete. You acknowledge and agree that the Company is engaged in a highly competitive business, and by virtue of your position and responsibilities with the Company, and your access to the Confidential Information, engaging in any business which is directly or indirectly competitive with the Company will cause it great and irreparable harm. Consequently, you covenant and agree that during the Term, and, in consideration of the payments for the Consulting Services provided for in Section 6(c) above, for the two-year period following your termination of employment hereunder, you shall not directly or indirectly own, manage, operate, control, be employed by, participate in, or be connected with, in any manner (other than as a shareholder of less than 2% of the outstanding equity of any publicly traded company), any business engaged in whole or in part in any of the businesses conducted by the Company now or at the time of the termination of your employment, or that the Company has made substantial designs to pursue now or at such time, in the United States, the same being the same geographic area in which the Company's business is conducted, without the prior written specific consent of the Company. If requested, this consent shall not be unreasonably withheld where the elements of competition are not direct, or specific, to the Company's business. (c) Non-Solicitation of Customers. You acknowledge and agree that during the course and solely as a result of your employment with the Company, you have and will become aware of some, most or all of the Company's customers and clients, their names and addresses, their representatives responsible for engaging the Company's services, their specific needs and requirements, and lead and referrals to prospective customers and clients. You further acknowledge and agree that the loss of such customers and clients would cause the Company great and irreparable harm. Consequently, you covenant and agree that in the event of the termination of your employment with the Company, whether voluntarily or involuntarily, you will not, for the two year period following your termination of employment hereunder, directly or indirectly solicit to do business of a nature that is directly or indirectly competitive with the business of the Company or any of its subsidiaries with any customer or client, former customer or client or prospective customer or client of the Company with whom you came into contact while employed by the Company or who was known to you to be a current, former or prospective customer or client of the Company. For purposes of the immediately preceding sentence, a person or entity shall be treated as a prospective customer only if and to the extent that the Company has undertaken a deliberate effort to obtain the business of such person or entity and has a reasonable expectation of obtaining such business. -10- (d) Non-Solicitation of Employees. You acknowledge and agree that during the course of employment by the Company, you have and may hereafter come into contact with some, most or all of the Company's employees, their knowledge, skills, abilities, salaries, commissions, benefits and other matters with respect to such employees not generally known to the public. You further acknowledge and agree that any solicitation, luring away or hiring of such employees of the Company will be highly detrimental to the business of the Company and will cause the Company serious loss of business and great and irreparable harm. Consequently, you covenant and agree that during the course of employment by the Company and for the two year period following the termination of your employment hereunder, you shall not directly or indirectly, on behalf of yourself or another, solicit, lure or hire any employees of the Company of whom you became aware while employed by the Company, or assist or aid in any such activity. (e) Enforcement of Covenants. You acknowledge and agree that compliance with the covenants set forth in this Section 9 is necessary to protect the business and goodwill of the Company and that any breach of this Section 9 or any subparagraph hereof will result in irreparable and continuing harm to the Company, for which money damages may not provide adequate relief Accordingly, in the event of any breach or anticipatory breach of Section 9 by you, the Company and you agree that the Company shall be entitled to the following particular forms of relief as a result of such breach, in addition to any remedies otherwise available to it at law or equity: (a) injunctions, both preliminary and permanent, enjoining or restraining such breach or anticipatory breach, and you hereby consent to the issuance thereof forthwith and without bond by any court of competent jurisdiction; and (b) recovery of all reasonable sums and costs, including attorneys' fees, incurred by the Company to enforce the provisions of Section 9. (f) Prior Commitments. The covenants set forth in this Section 9 supplement, and do not supersede, the covenants contained in any other agreement between you and the Company. (g) Interpretation. Nothing in Section 9(c) or (d) shall be construed to prevent any entity to which you provide services from independently engaging in conduct of a nature and type that you would be prohibited from undertaking by reason of such Sections so long as you do not, directly or indirectly, assist such entity in such conduct. 10. Arbitration of Disputes and Jury Waivers. Except as set forth in Section 9 of this Agreement, the parties hereto agree to arbitrate any dispute, claim, or controversy (claim) against each other arising out of the cessation of your employment, any claim of unlawful discrimination or harassment that might or did arise during or as a result of your employment which could have been brought before an appropriate government administrative agency or in an appropriate court, including but not limited to claims of age discrimination under the Age Discrimination in Employment Act of 1967, as amended, as well as any claim or controversy under this Agreement. -11- The arbitration shall be arbitrated by one arbitrator in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. The parties hereto agree that the arbitration shall take place in New York County, New York. The arbitrator's fees will be shared equally by the parties. The decision or award of the arbitration shall be final and binding upon the parties. Any arbitral award may be entered as a judgment or order in any court of competent jurisdiction. Any Claims under Section 9 of this Agreement shall not be subject to arbitration, but shall be subject to the remedies set forth therein. (a) Jury Trial. If for any reason this Arbitration provision is declared unenforceable, you agree to waive any right you may have to a jury trial with respect to any dispute or claim against the Company relating to this Agreement, your employment, and the termination or modification of any terms and conditions of employment, including but not limited to claims of age discrimination under the Age Discrimination in Employment Act of 1967, as amended. (b) Venue. In the event this Arbitration provision is declared unenforceable for any reason, or in the event of any litigation arising pursuant to Section 9 of this Employment Agreement, the parties agree that, with respect to any litigation arising pursuant to this Agreement, New York County, New York shall be the only proper county for purposes of venue. The parties further agree that they will submit to the personal jurisdiction of any Court (Federal or State) located within New York State. 11. Miscellaneous. (a) Waiver. No waiver or modification of the Agreement, nor any portion hereof, shall be valid unless in writing and signed by you and such officers as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Any Notice of Termination by you must be given not later than forty-five (45) days after the occurrence of the event which you claim to constitute Good Reason and any Notice of Termination by the Company must be given not later than forty-five (45) days after the Company becomes aware of the occurrence of the event claimed by the Company to constitute Cause or Disability. Subject to the preceding sentence, any failure by the Company to claim promptly that any event constitutes Cause, or failure by you to claim promptly that any event constitutes Good Reason, shall not preclude either the Company or you from claiming subsequently that such event or any earlier or later event constitutes Cause or Good Reason. No agreements or representation, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by any party which are not set forth expressly in this Agreement. -12- (b) Notices. All notices required or permitted to be given under the terms of the Agreement, or which any of the parties desires to give hereunder, shall be in writing and delivered personally or be sent by registered mail or certified mail, postage prepaid, return receipt requested, or by reputable private courier addressed as follows: If to the Company: EDO Corporation 60 E. 42nd St New York, New York Attn: Corporate Secretary If to you: Mr. James M. Smith 35 Arrowhead Court Manhassett, NY 11030 With copy to: Gavin McElroy, Esq. Frankfurt Kurnit Klein & Selz, PC 488 Madison Avenue New York, NY 10022 Any party may change the address to which notice is to be sent to it or to him by notice in writing to the other party as provided above. (c) Governing Law. This Agreement shall be subject to and governed by the laws of the State of New York without regard to its conflict of laws provisions. (d) Severability. If any provision(s) of this Agreement shall be found invalid or unenforceable, in whole or in part, then such provision(s) shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same value and enforceable, or shall be deemed excised from the Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision(s) had been originally incorporated herein as so modified or restricted or as if such provision(s) had not been originally incorporated herein as the case may be. (e) Legal Fees and Expenses. If, following any final adjudication of any proceeding, you shall have prevailed as to at least one material issue presented in any arbitration or other contest regarding your rights or obligations under this Agreement or regarding the validity or enforceability of any provision of this Agreement, the Company shall pay the reasonable amount of the legal fees and expenses you incurred as a result of such arbitration or contest. (f) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original. -13- EDO CORPORATION By: /s/ Patricia D. Comiskey ------------------------ Name: PATRICIA D. COMISKEY Title: Vice President, Human Resources /s/ James M. Smith ------------------------ JAMES M. SMITH -14- EX-10.L 11 y83939exv10wl.txt CHANGE IN CONTROL AGREEMENT Exhibit 10(l) AGREEMENT made this 3rd day of March 2003 by and between EDO Corporation, a New York Corporation having its office and principal place of business at 60 East 42nd Street, Suite 5010, New York, NY 10165 (the "Company") and Frederic B. Bassett, residing at 205 Weston Road, Weston, CT 06883 ("Executive"). W I T N E S E TH: WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2). WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions, which either event may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change In Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall expire as of December 31, 2003; provided however, in the event there is an intervening Change in Control, such expiration shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then expire automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. 3. This Agreement may be renewed each year by mutual consent of the Company and Executive by the issuance of a letter of notification and agreement to that effect. ARTICLE 1 PRINCIPAL UNDERTAKING 1.1 If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article 11), then Executive shall be paid by the Company subject to Article 6, the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4) - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2 The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination " (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed an 18 month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 2 1.3 The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against such amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 CURRENT SALARY AND OTHER COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs, plus - The full amount, if any, of any incentive or special award, which Executive earned but which, has not yet been paid. ARTICLE 3 OTHER SALARY AND INCENTIVE COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to one and one-half (1-1/2) times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) and amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. 3 ARTICLE 4 PENSION ADJUSTMENT PAYMENT Payment of this portion of Special Severance Pay Benefits shall consist of the following: - An amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been entitled if the one and one-half (1-1/2) years after the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 STOCK OPTION ADJUSTMENT The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 or 2002 Long-Term Incentive Plan or any predecessor or successor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 TAXES 6.1 In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2 Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 4 6.3 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced but not below zero, the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. 6.4 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of Covered Payments. 6.5 For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax, and the amount of such Excise Tax, (a) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for person services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (b) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6 For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: 5 (a) Federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (b) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7 If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith or Executive and the Company in applying the terms of this Agreement, the aggregate of the "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject to an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after-tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net-after-tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8 In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less that the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment 6 at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses therof) if Executive's good faith claim for refund or credit is denied. 6.9 In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10 Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the arte provided in Section (1274(b)(2)(B) of the Code.) ARTICLE 7 BENEFIT PLAN If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change In Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for good Reason, except for death, voluntary retirement or for cause, then, for one and one-half (1-1/2) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life , health and accident and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an 7 applicable plan, program or arrangement is discontinued or the benefits there under are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock ownership Plan nor the EDO Corporation Employee Investment Plan (401(k)). ARTICLE 8 NO MITIGATION REQUIRED Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 DEFINITION OF "CHANGE IN CONTROL" AND "POTENTIAL CHANGE IN CONTROL" 9.1 "Change in Control" shall mean an occurrence in which: (i) a "person" including a "group," other than the Company's Employees Stock Ownership Trust (a "person"), becomes the "beneficial owner" ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of directors of the Company (as the term "persons", "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transaction not involving Executive in an interest other than in his capacity as Executive. 8 9.2 "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which, if obtained, would result in a Change in Control occurring, or (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 TERMINATION FOR CAUSE 10.1 If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2 The following are the only reasons for which the Company may terminate Executive's service for Cause without further obligations under this Agreement: - for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; - for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; - for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; - for misconduct causing a serious violation by the Company of state or federal laws; - for theft of Company funds or corporate assets; or 9 - for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 DEFINITION OF "TERMINATION FOR GOOD REASON" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or (ii) during the one and one-half (1-1/2) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation targets (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executives responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. ARTICLE 12 SUCCESSORS, BINDING AGREEMENT 12.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner 10 and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause after a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2 As used in this Agreement, "Company" shall include any successor to this business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12.3 This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If Executive should die while any amounts would still be payable if he had continues to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 13.2 Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3 Notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the corporate counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4 No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 11 13.5 All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of Section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6 Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7 No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 13.9 The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13.10 In the event of any action or proceeding between the parties arising out of this agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to continue such action or proceeding. EDO Corporation By: /s/ JAMES M. SMITH -------------------- President Executive: /s/ FREDERIC B. BASSETT --------------------------- Frederic B. Bassett 12 EX-10.M 12 y83939exv10wm.txt CHANGE IN CONTROL AGREEMENT Exhibit 10(m) AGREEMENT made this 21st day of March 2002 by and between EDO Corporation, a New York Corporation having its office and principal place of business at 60 East 42nd Street, Suite 5010, New York, NY 10165 (the "Company") and Patricia D. Comiskey, residing at 5 New Street, Great River, NY 11739 ("Executive"). WITNESETH: WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2). WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions, which either event may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change In Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall expire as of December 31, 2003; provided however, in the event there is an intervening Change in Control, such expiration shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then expire automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. 3. This Agreement may be renewed each year by mutual consent of the Company and Executive by the issuance of a letter of notification and agreement to that effect. ARTICLE 1 PRINCIPAL UNDERTAKING 1.1 If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article 11), then Executive shall be paid by the Company subject to Article 6, the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4) - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2 The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination " (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed an 18 month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 2 1.3 The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against such amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 CURRENT SALARY AND OTHER COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs, plus - The full amount, if any, of any incentive or special award, which Executive earned but which, has not yet been paid. ARTICLE 3 OTHER SALARY AND INCENTIVE COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to one and one-half (1-1/2) times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) and amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. 3 ARTICLE 4 PENSION ADJUSTMENT PAYMENT Payment of this portion of Special Severance Pay Benefits shall consist of the following: - An amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been entitled if the one and one-half (1-1/2) years after the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 STOCK OPTION ADJUSTMENT The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 or 2002 Long-Term Incentive Plan or any predecessor or successor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 TAXES 6.1 In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2 Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 4 6.3 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced but not below zero, the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. 6.4 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of Covered Payments. 6.5 For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax, and the amount of such Excise Tax, (a) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for person services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (b) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6 For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: 5 (a) Federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (b) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7 If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith or Executive and the Company in applying the terms of this Agreement, the aggregate of the "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject to an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after-tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net-after-tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8 In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less that the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment 6 at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses therof) if Executive's good faith claim for refund or credit is denied. 6.9 In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10 Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the arte provided in Section (1274(b)(2)(B) of the Code.) ARTICLE 7 BENEFIT PLAN If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change In Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for good Reason, except for death, voluntary retirement or for cause, then, for one and one-half (1-1/2) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life , health and accident and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an 7 applicable plan, program or arrangement is discontinued or the benefits there under are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock ownership Plan nor the EDO Corporation Employee Investment Plan (401(k)). ARTICLE 8 NO MITIGATION REQUIRED Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 DEFINITION OF "CHANGE IN CONTROL" AND "POTENTIAL CHANGE IN CONTROL" 9.1 "Change in Control" shall mean an occurrence in which: (i) a "person" including a "group," other than the Company's Employees Stock Ownership Trust (a "person"), becomes the "beneficial owner" ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of directors of the Company (as the term "persons", "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transaction not involving Executive in an interest other than in his capacity as Executive. 8 9.2 "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which, if obtained, would result in a Change in Control occurring, or (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 TERMINATION FOR CAUSE 10.1 If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2 The following are the only reasons for which the Company may terminate Executive's service for Cause without further obligations under this Agreement: - for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; - for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; - for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; - for misconduct causing a serious violation by the Company of state or federal laws; - for theft of Company funds or corporate assets; or 9 - for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 DEFINITION OF "TERMINATION FOR GOOD REASON" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or (ii) during the one and one-half (1-1/2) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation targets (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executives responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. ARTICLE 12 SUCCESSORS, BINDING AGREEMENT 12.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner 10 and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause after a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2 As used in this Agreement, "Company" shall include any successor to this business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12.3 This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If Executive should die while any amounts would still be payable if he had continues to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 13.2 Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3 Notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the corporate counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4 No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 11 13.5 All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of Section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6 Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7 No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 13.9 The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13.10 In the event of any action or proceeding between the parties arising out of this agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to continue such action or proceeding. EDO Corporation By: /s/ JAMES M. SMITH --------------------- President Executive: /s/ PATRICIA D. COMISKEY -------------------------- Patricia D. Comiskey 12 EX-10.N 13 y83939exv10wn.txt CHANGE IN CONTROL AGREEMENT Exhibit 10(n) AGREEMENT made this 25th day of March 2002 by and between EDO Corporation, a New York Corporation having its office and principal place of business at 60 East 42nd Street, Suite 5010, New York, NY 10165 (the "Company") and George P. Fox, Jr., residing at 8 East Gate Lane, Old Field, NY 11733 ("Executive"). W I T N E S E TH: WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2). WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions, which either event may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change In Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall expire as of December 31, 2003; provided however, in the event there is an intervening Change in Control, such expiration shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then expire automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. 3. This Agreement may be renewed each year by mutual consent of the Company and Executive by the issuance of a letter of notification and agreement to that effect. ARTICLE 1 PRINCIPAL UNDERTAKING 1.1 If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article 11), then Executive shall be paid by the Company subject to Article 6, the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4) - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2 The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination " (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed an 18 month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 2 1.3 The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against such amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 CURRENT SALARY AND OTHER COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs, plus - The full amount, if any, of any incentive or special award, which Executive earned but which, has not yet been paid. ARTICLE 3 OTHER SALARY AND INCENTIVE COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to one and one-half (1-1/2) times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) and amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. 3 ARTICLE 4 PENSION ADJUSTMENT PAYMENT Payment of this portion of Special Severance Pay Benefits shall consist of the following: - An amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been entitled if the one and one-half (1-1/2) years after the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 STOCK OPTION ADJUSTMENT The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 or 2002 Long-Term Incentive Plan or any predecessor or successor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 TAXES 6.1 In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2 Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 4 6.3 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced but not below zero, the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. 6.4 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of Covered Payments. 6.5 For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax, and the amount of such Excise Tax, (a) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for person services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (b) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6 For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: 5 (a) Federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (b) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7 If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith or Executive and the Company in applying the terms of this Agreement, the aggregate of the "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject to an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after-tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net-after-tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8 In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less that the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment 6 at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses therof) if Executive's good faith claim for refund or credit is denied. 6.9 In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10 Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the arte provided in Section (1274(b)(2)(B) of the Code.) ARTICLE 7 BENEFIT PLAN If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change In Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for good Reason, except for death, voluntary retirement or for cause, then, for one and one-half (1-1/2) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life , health and accident and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an 7 applicable plan, program or arrangement is discontinued or the benefits there under are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock ownership Plan nor the EDO Corporation Employee Investment Plan (401(k)). ARTICLE 8 NO MITIGATION REQUIRED Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 DEFINITION OF "CHANGE IN CONTROL" AND "POTENTIAL CHANGE IN CONTROL" 9.1 "Change in Control" shall mean an occurrence in which: (i) a "person" including a "group," other than the Company's Employees Stock Ownership Trust (a "person"), becomes the "beneficial owner" ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of directors of the Company (as the term "persons", "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transaction not involving Executive in an interest other than in his capacity as Executive. 8 9.2 "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which, if obtained, would result in a Change in Control occurring, or (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 TERMINATION FOR CAUSE 10.1 If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2 The following are the only reasons for which the Company may terminate Executive's service for Cause without further obligations under this Agreement: [ ] for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; [ ] for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; [ ] for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; [ ] for misconduct causing a serious violation by the Company of state or federal laws; [ ] for theft of Company funds or corporate assets; or 9 [ ] for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 DEFINITION OF "TERMINATION FOR GOOD REASON" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or (ii) during the one and one-half (1-1/2) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation targets (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executives responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. ARTICLE 12 SUCCESSORS, BINDING AGREEMENT 12.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner 10 and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause after a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2 As used in this Agreement, "Company" shall include any successor to this business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12.3 This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If Executive should die while any amounts would still be payable if he had continues to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 13.2 Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3 Notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the corporate counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4 No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 11 13.5 All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of Section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6 Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7 No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 13.9 The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13.10 In the event of any action or proceeding between the parties arising out of this agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to continue such action or proceeding. EDO Corporation By: /s/ JAMES M. SMITH -------------------- President Executive: /s/ GEORGE P. FOX, JR. ----------------------- George P. Fox, Jr. 12 EX-10.O 14 y83939exv10wo.txt CHANGE IN CONTROL AGREEMENT Exhibit 10(o) AGREEMENT made this 21st day of March 2002 by and between EDO Corporation, a New York Corporation having its office and principal place of business at 60 East 42nd Street, Suite 5010, New York, NY 10165 (the "Company") and William J. Frost, residing at 27 Manchester Road, Huntington, NY 11743 ("Executive"). W I T N E S E TH: WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2). WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions, which either event may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change In Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall expire as of December 31, 2003; provided however, in the event there is an intervening Change in Control, such expiration shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then expire automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. 3. This Agreement may be renewed each year by mutual consent of the Company and Executive by the issuance of a letter of notification and agreement to that effect. ARTICLE 1 PRINCIPAL UNDERTAKING 1.1 If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article 11), then Executive shall be paid by the Company subject to Article 6, the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4) - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2 The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination " (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed an 18 month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 2 1.3 The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against such amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 CURRENT SALARY AND OTHER COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs, plus - The full amount, if any, of any incentive or special award, which Executive earned but which, has not yet been paid. ARTICLE 3 OTHER SALARY AND INCENTIVE COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to one and one-half (1-1/2) times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) and amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. 3 ARTICLE 4 PENSION ADJUSTMENT PAYMENT Payment of this portion of Special Severance Pay Benefits shall consist of the following: - An amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been entitled if the one and one-half (1-1/2) years after the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 STOCK OPTION ADJUSTMENT The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 or 2002 Long-Term Incentive Plan or any predecessor or successor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 TAXES 6.1 In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2 Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 4 6.3 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced but not below zero, the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. 6.4 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of Covered Payments. 6.5 For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax, and the amount of such Excise Tax, (a) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for person services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (b) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6 For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: 5 (a) Federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (b) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7 If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith or Executive and the Company in applying the terms of this Agreement, the aggregate of the "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject to an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after-tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net-after-tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8 In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less that the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment 6 at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses therof) if Executive's good faith claim for refund or credit is denied. 6.9 In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10 Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the arte provided in Section (1274(b)(2)(B) of the Code.) ARTICLE 7 BENEFIT PLAN If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change In Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for good Reason, except for death, voluntary retirement or for cause, then, for one and one-half (1-1/2) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life , health and accident and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an 7 applicable plan, program or arrangement is discontinued or the benefits there under are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock ownership Plan nor the EDO Corporation Employee Investment Plan (401(k)). ARTICLE 8 NO MITIGATION REQUIRED Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 DEFINITION OF "CHANGE IN CONTROL" AND "POTENTIAL CHANGE IN CONTROL" 9.1 "Change in Control" shall mean an occurrence in which: (i) a "person" including a "group," other than the Company's Employees Stock Ownership Trust (a "person"), becomes the "beneficial owner" ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of directors of the Company (as the term "persons", "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transaction not involving Executive in an interest other than in his capacity as Executive. 8 9.2 "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which, if obtained, would result in a Change in Control occurring, or (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 TERMINATION FOR CAUSE 10.1 If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2 The following are the only reasons for which the Company may terminate Executive's service for Cause without further obligations under this Agreement: [ ] for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; [ ] for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; [ ] for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; [ ] for misconduct causing a serious violation by the Company of state or federal laws; [ ] for theft of Company funds or corporate assets; or 9 [ ] for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 DEFINITION OF "TERMINATION FOR GOOD REASON" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or (ii) during the one and one-half (1-1/2) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation targets (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executives responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. ARTICLE 12 SUCCESSORS, BINDING AGREEMENT 12.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner 10 and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause after a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2 As used in this Agreement, "Company" shall include any successor to this business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12.3 This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If Executive should die while any amounts would still be payable if he had continues to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 13.2 Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3 Notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the corporate counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4 No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 11 13.5 All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of Section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6 Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7 No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 13.9 The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13.10 In the event of any action or proceeding between the parties arising out of this agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to continue such action or proceeding. EDO Corporation By: /s/ JAMES M. SMITH -------------------- President Executive: /s/ WILLIAM J. FROST -------------------- William J. Frost 12 EX-10.P 15 y83939exv10wp.txt CHANGE IN CONTROL AGREEMENT Exhibit 10(p) AGREEMENT made this 22nd day of March 2002 by and between EDO Corporation, a New York Corporation having its office and principal place of business at 60 East 42nd Street, Suite 5010, New York, NY 10165 (the "Company") and Milo W. Hyde III, residing at 713 Donnington Drive, Chesapeake, VA 23322 ("Executive"). W I T N E S E TH: WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2). WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions, which either event may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change In Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall expire as of December 31, 2003; provided however, in the event there is an intervening Change in Control, such expiration shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then expire automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. 3. This Agreement may be renewed each year by mutual consent of the Company and Executive by the issuance of a letter of notification and agreement to that effect. ARTICLE 1 PRINCIPAL UNDERTAKING 1.1 If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article 11), then Executive shall be paid by the Company subject to Article 6, the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4) - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2 The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination " (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed an 18 month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 2 1.3 The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against such amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 CURRENT SALARY AND OTHER COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs, plus - The full amount, if any, of any incentive or special award, which Executive earned but which, has not yet been paid. ARTICLE 3 OTHER SALARY AND INCENTIVE COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to one and one-half (1-1/2) times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) and amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. 3 ARTICLE 4 PENSION ADJUSTMENT PAYMENT Payment of this portion of Special Severance Pay Benefits shall consist of the following: - An amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been entitled if the one and one-half (1-1/2) years after the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 STOCK OPTION ADJUSTMENT The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 or 2002 Long-Term Incentive Plan or any predecessor or successor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 TAXES 6.1 In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2 Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 4 6.3 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced but not below zero, the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. 6.4 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of Covered Payments. 6.5 For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax, and the amount of such Excise Tax, (a) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for person services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (b) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6 For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: 5 (a) Federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (b) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7 If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith or Executive and the Company in applying the terms of this Agreement, the aggregate of the "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject to an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after-tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net-after-tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8 In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less that the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment 6 at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses therof) if Executive's good faith claim for refund or credit is denied. 6.9 In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10 Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the arte provided in Section (1274(b)(2)(B) of the Code.) ARTICLE 7 BENEFIT PLAN If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change In Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for good Reason, except for death, voluntary retirement or for cause, then, for one and one-half (1-1/2) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life , health and accident and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an 7 applicable plan, program or arrangement is discontinued or the benefits there under are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock ownership Plan nor the EDO Corporation Employee Investment Plan (401(k)). ARTICLE 8 NO MITIGATION REQUIRED Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 DEFINITION OF "CHANGE IN CONTROL" AND "POTENTIAL CHANGE IN CONTROL" 9.1 "Change in Control" shall mean an occurrence in which: (i) a "person" including a "group," other than the Company's Employees Stock Ownership Trust (a "person"), becomes the "beneficial owner" ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of directors of the Company (as the term "persons", "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transaction not involving Executive in an interest other than in his capacity as Executive. 8 9.2 "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which, if obtained, would result in a Change in Control occurring, or (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 TERMINATION FOR CAUSE 10.1 If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2 The following are the only reasons for which the Company may terminate Executive's service for Cause without further obligations under this Agreement: - for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; - for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; - for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; - for misconduct causing a serious violation by the Company of state or federal laws; - for theft of Company funds or corporate assets; or 9 - for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 DEFINITION OF "TERMINATION FOR GOOD REASON" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or (ii) during the one and one-half (1-1/2) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation targets (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executives responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. ARTICLE 12 SUCCESSORS, BINDING AGREEMENT 12.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner 10 and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause after a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2 As used in this Agreement, "Company" shall include any successor to this business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12.3 This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If Executive should die while any amounts would still be payable if he had continues to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 13.2 Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3 Notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the corporate counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4 No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 11 13.5 All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of Section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6 Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7 No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 13.9 The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13.10 In the event of any action or proceeding between the parties arising out of this agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to continue such action or proceeding. EDO Corporation By: /s/ JAMES M. SMITH -------------------- President Executive: /s/ MILO W. HYDE III --------------------- Milo W. Hyde III 12 EX-10.Q 16 y83939exv10wq.txt CHANGE IN CONTROL AGREEMENT Exhibit 10(q) AGREEMENT made this 21st day of March 2002 by and between EDO Corporation, a New York Corporation having its office and principal place of business at 60 East 42nd Street, Suite 5010, New York, NY 10165 (the "Company") and Harvey Kreisberg, residing at 93 Tahlulah Lane, West Islip, NY 11795 ("Executive"). W I T N E S E T H: WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2). WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions, which either event may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change In Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall expire as of December 31, 2003; provided however, in the event there is an intervening Change in Control, such expiration shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then expire automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. 3. This Agreement may be renewed each year by mutual consent of the Company and Executive by the issuance of a letter of notification and agreement to that effect. ARTICLE 1 PRINCIPAL UNDERTAKING 1.1 If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article 11), then Executive shall be paid by the Company subject to Article 6, the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4) - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2 The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination " (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed an 18 month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 2 1.3 The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against such amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 CURRENT SALARY AND OTHER COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs, plus - The full amount, if any, of any incentive or special award, which Executive earned but which, has not yet been paid. ARTICLE 3 OTHER SALARY AND INCENTIVE COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to one and one-half (1-1/2) times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) and amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. 3 ARTICLE 4 PENSION ADJUSTMENT PAYMENT Payment of this portion of Special Severance Pay Benefits shall consist of the following: - An amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been entitled if the one and one-half (1-1/2) years after the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 STOCK OPTION ADJUSTMENT The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 or 2002 Long-Term Incentive Plan or any predecessor or successor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 TAXES 6.1 In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2 Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 4 6.3 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced but not below zero, the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. 6.4 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of Covered Payments. 6.5 For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax, and the amount of such Excise Tax, (a) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for person services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (b) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6 For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: 5 (a) Federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (b) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7 If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith or Executive and the Company in applying the terms of this Agreement, the aggregate of the "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject to an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after-tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net-after-tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8 In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less that the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment 6 at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses therof) if Executive's good faith claim for refund or credit is denied. 6.9 In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10 Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the arte provided in Section (1274(b)(2)(B) of the Code.) ARTICLE 7 BENEFIT PLAN If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change In Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for good Reason, except for death, voluntary retirement or for cause, then, for one and one-half (1-1/2) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life , health and accident and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an 7 applicable plan, program or arrangement is discontinued or the benefits there under are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock ownership Plan nor the EDO Corporation Employee Investment Plan (401(k)). ARTICLE 8 NO MITIGATION REQUIRED Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 DEFINITION OF "CHANGE IN CONTROL" AND "POTENTIAL CHANGE IN CONTROL" 9.1 "Change in Control" shall mean an occurrence in which: (i) a "person" including a "group," other than the Company's Employees Stock Ownership Trust (a "person"), becomes the "beneficial owner" ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of directors of the Company (as the term "persons", "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transaction not involving Executive in an interest other than in his capacity as Executive. 8 9.2 "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which, if obtained, would result in a Change in Control occurring, or (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 TERMINATION FOR CAUSE 10.1 If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2 The following are the only reasons for which the Company may terminate Executive's service for Cause without further obligations under this Agreement: - for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; - for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; - for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; - for misconduct causing a serious violation by the Company of state or federal laws; - for theft of Company funds or corporate assets; or 9 - for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 DEFINITION OF "TERMINATION FOR GOOD REASON" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or (ii) during the one and one-half (1-1/2) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation targets (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executives responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. ARTICLE 12 SUCCESSORS, BINDING AGREEMENT 12.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner 10 and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause after a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2 As used in this Agreement, "Company" shall include any successor to this business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12.3 This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If Executive should die while any amounts would still be payable if he had continues to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 13.2 Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3 Notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the corporate counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4 No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 11 13.5 All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of Section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6 Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7 No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 13.9 The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13.10 In the event of any action or proceeding between the parties arising out of this agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to continue such action or proceeding. EDO Corporation By: /s/ JAMES M. SMITH ------------------- President Executive: /s/ HARVEY KREISBERG --------------------- Harvey Kreisberg 12 EX-10.R 17 y83939exv10wr.txt CHANGE IN CONTROL AGREEMENT Exhibit 10(r) AGREEMENT made this 26th day of March 2002 by and between EDO Corporation, a New York Corporation having its office and principal place of business at 60 East 42nd Street, Suite 5010, New York, NY 10165 (the "Company") and Frank W. Otto, residing at 21 Farm Road, Wading River, NY 11792 ("Executive"). W I T N E S S E T H: WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2). WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions, which either event may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change In Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall expire as of December 31, 2003; provided however, in the event there is an intervening Change in Control, such expiration shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then expire automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. 3. This Agreement may be renewed each year by mutual consent of the Company and Executive by the issuance of a letter of notification and agreement to that effect. ARTICLE 1 PRINCIPAL UNDERTAKING 1.1 If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article 11), then Executive shall be paid by the Company subject to Article 6, the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4) - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2 The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination " (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed an 18 month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 2 1.3 The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against such amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 CURRENT SALARY AND OTHER COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs, plus - The full amount, if any, of any incentive or special award, which Executive earned but which, has not yet been paid. ARTICLE 3 OTHER SALARY AND INCENTIVE COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to one and one-half (1-1/2) times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) and amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. 3 ARTICLE 4 PENSION ADJUSTMENT PAYMENT Payment of this portion of Special Severance Pay Benefits shall consist of the following: - An amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been entitled if the one and one-half (1-1/2) years after the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 STOCK OPTION ADJUSTMENT The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 or 2002 Long-Term Incentive Plan or any predecessor or successor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 TAXES 6.1 In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2 Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 4 6.3 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced but not below zero, the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. 6.4 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of Covered Payments. 6.5 For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax, and the amount of such Excise Tax, (a) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for person services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (b) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6 For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: 5 (a) Federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (b) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7 If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith or Executive and the Company in applying the terms of this Agreement, the aggregate of the "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject to an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after-tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net-after-tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8 In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less that the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment 6 at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses therof) if Executive's good faith claim for refund or credit is denied. 6.9 In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10 Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the arte provided in Section (1274(b)(2)(B) of the Code.) ARTICLE 7 BENEFIT PLAN If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change In Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for good Reason, except for death, voluntary retirement or for cause, then, for one and one-half (1-1/2) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life , health and accident and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an 7 applicable plan, program or arrangement is discontinued or the benefits there under are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock ownership Plan nor the EDO Corporation Employee Investment Plan (401(k)). ARTICLE 8 NO MITIGATION REQUIRED Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 DEFINITION OF "CHANGE IN CONTROL" AND "POTENTIAL CHANGE IN CONTROL" 9.1 "Change in Control" shall mean an occurrence in which: (i) a "person" including a "group," other than the Company's Employees Stock Ownership Trust (a "person"), becomes the "beneficial owner" ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of directors of the Company (as the term "persons", "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transaction not involving Executive in an interest other than in his capacity as Executive. 8 9.2 "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which, if obtained, would result in a Change in Control occurring, or (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 TERMINATION FOR CAUSE 10.1 If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2 The following are the only reasons for which the Company may terminate Executive's service for Cause without further obligations under this Agreement: - for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; - for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; - for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; - for misconduct causing a serious violation by the Company of state or federal laws; - for theft of Company funds or corporate assets; or 9 - for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 DEFINITION OF "TERMINATION FOR GOOD REASON" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or (ii) during the one and one-half (1-1/2) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation targets (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executives responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. ARTICLE 12 SUCCESSORS, BINDING AGREEMENT 12.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner 10 and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause after a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2 As used in this Agreement, "Company" shall include any successor to this business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12.3 This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If Executive should die while any amounts would still be payable if he had continues to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 13 MISCELLANEOUS PROVISIONS 13.1 The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 13.2 Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3 Notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the corporate counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4 No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 11 13.5 All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of Section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6 Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7 No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 13.9 The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13.10 In the event of any action or proceeding between the parties arising out of this agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to continue such action or proceeding. EDO Corporation By: /s/ JAMES M. SMITH ------------------ President Executive: /s/ FRANK W. OTTO ----------------- Frank W. Otto 12 EX-10.S 18 y83939exv10ws.txt CHANGE IN CONTROL AGREEMENT Exhibit 10(s) AGREEMENT made this 1st day of May 2002 by and between EDO Corporation, a New York Corporation having its office and principal place of business at 60 East 42nd Street, Suite 5010, New York, NY 10165 (the "Company") and Lisa M. Palumbo, who resides at 10 Kenilworth Road, Rye, NY 10580 ("Executive"). W I T N E S E T H: WHEREAS, the Company considers it essential to the best interests of the Company and its stockholders that its management (including Executive) be encouraged to remain with the Company and to continue to devote full attention to the Company's business in the event of a "Change in Control" (paragraph 9.1) or a "Potential Change in Control" (paragraph 9.2). WHEREAS, the Company recognizes that the possibility of a Change in Control or a Potential Change in Control and the uncertainty and questions, which either event may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; WHEREAS, the Company's Board of Directors (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from a Change in Control or a Potential Change in Control; WHEREAS, the Company believes Executive has made valuable contributions to the productivity and profitability of the Company; WHEREAS, should a Potential Change in Control occur, the Board believes it imperative that the Company and the Board be able to rely upon the Executive to continue in his position, and that the Company be able to receive and rely upon his advice as to the best interests of the Company and its stockholders without concern that he might be distracted by the personal uncertainties and risks created by such event; and WHEREAS, should a Potential Change in Control occur, in addition to the Executive's regular duties, he may be called upon to assist in the assessment of any proposals of any person concerning the possible business combination of the Company or acquisition of equity securities of the Company, advise management and the Board as to whether such proposals would be in the best interests of the Company and its stockholders, and to take such other actions as the Board might determine to be appropriate; NOW, THEREFORE, to induce the Executive to remain in the employ of the Company so that the Company will have the continued undivided attention and services of the Executive and the availability of his advice and counsel during the period of a Change in Control or a Potential Change in Control, and for other good and valuable consideration, the Company and Executive agree as follows: GENERAL 1. The purpose of this Agreement is to provide Executive with "Special Severance Pay Benefits" in the event of, or following, a Change In Control. The term Change in Control is defined in paragraph 9.1 of this Agreement. The benefits available to Executive in the event of, or following, a Change in Control are provided for in Articles 2 through 7 of this Agreement. 2. This Agreement shall expire as of December 31, 2003; provided however, in the event there is an intervening Change in Control, such expiration shall become void and of no effect whatsoever. In the event there is an intervening Potential Change in Control, this Agreement shall remain in full force and effect following such Potential Change in Control; provided, however, this Agreement shall then expire automatically as of the date which is eighteen months following the commencement of such Potential Change in Control in the event no Change in Control occurs within such eighteen month period. 3. This Agreement may be renewed each year by mutual consent of the Company and Executive by the issuance of a letter of notification and agreement to that effect. ARTICLE 1 PRINCIPAL UNDERTAKING 1.1 If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change in Control shall have occurred, Executive's employment shall have been terminated by the Company without "Cause" (paragraph 10.2) or by Executive in a "Termination for Good Reason" (Article 11), then Executive shall be paid by the Company subject to Article 6, the following "Special Severance Pay Benefits": - Current Salary and Other Compensation Benefits (Article 2); - Other Salary and Incentive Compensation Benefits (Article 3); - Pension Benefit Adjustment (Article 4) - Stock Option Adjustment (Article 5); and - Tax Adjustment (Article 6). 1.2 The total of the amounts to be paid under Articles 3 through 6, subject to any taxes required to be withheld, shall be paid to Executive as follows: (A) in a lump sum, on or before the fifth day following "Date of Employment Termination" (paragraph 13.2); or (B) at Executive's option, in monthly installments not to exceed an 18 month period, commencing the fifth day of the month following the Date of Employment Termination, if written notification by the Executive is received by the Company within three days following the Date of Employment Termination. 2 1.3 The amount of any loan or advance to Executive shall be due and payable as of the Date of Employment Termination. The Company shall have no right of setoff against any amount due Executive under this Agreement, except that the Company may set off against such amount the balance of any loan or advance which remains unpaid after the third day following the Date of Employment Termination. ARTICLE 2 CURRENT SALARY AND OTHER COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of the following: - Executive's full base salary through the Date of Employment Termination, at the rate in effect ten (10) days prior to the Date of Employment Termination; plus - Executive's full base salary earned from the beginning of the calendar year in which the Date of Employment Termination occurs through the Date of Employment Termination multiplied by the greater of (a) twenty percent (20%) or (b) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs, in either case, reduced by any installment of cash bonus previously paid by the Company to Executive for the calendar year in which the Date of Employment Termination occurs, plus - The full amount, if any, of any incentive or special award, which Executive earned but which, has not yet been paid. ARTICLE 3 OTHER SALARY AND INCENTIVE COMPENSATION BENEFITS Payment of this portion of Special Severance Pay Benefits shall consist of an amount equal to one and one-half (1-1/2) times the sum of (a) Executive's annual base salary, at the highest rate in effect at any time up to Date of Employment Termination (the "Highest Base Salary") and (b) and amount equal to the Highest Base Salary multiplied by the greater of (i) twenty percent (20%) or (ii) the percentage which is equal to the highest percentage of base salary paid as a bonus to Executive for any of the three calendar years preceding the calendar year in which the Date of Employment Termination occurs. ARTICLE 4 PENSION ADJUSTMENT PAYMENT Payment of this portion of Special Severance Pay Benefits shall consist of the following: - An amount which, as of the Date of Employment Termination, is equal to the present value (calculated at the GATT discount rate in effect as of the Date of Employment Termination) of (x) the Lump Sum Value of the Retirement Pension (paragraph 13.1) to which Executive would have been entitled if the one and one-half (1-1/2) years after 3 the Date of Employment Termination were added to his Credited Service under the EDO Corporation Employees Pension Plan, reduced by (y) the Lump Sum Value of the Retirement Pension to which Executive will be entitled under the terms of such plan based upon termination of employment as of the Date of Employment Termination and assuming commencement of payment of Executive's pension benefits at age 65. ARTICLE 5 STOCK OPTION ADJUSTMENT The "Stock Option Adjustment" portion of Special Severance Pay Benefits shall be payable if, after a Change in Control, Executive elects, pursuant to options issued to him under the 1996 or 2002 Long-Term Incentive Plan or any predecessor or successor plans, to elect stock appreciation rights and shall consist of an amount equal to (a) the number of common shares as to which Executive shall have made such election, multiplied by (b) the excess, if any, of (x) the highest price per share actually paid in connection with any Change in Control, over (y) the fair market value of a common share on the date of such election. ARTICLE 6 TAXES 6.1 In the event that any amount or benefit paid or distributed to Executive pursuant to this Agreement, taken together with any amounts or benefits otherwise paid or distributed to Executive by the Company or any affiliated company (collectively, the "Covered Payments"), would be an "excess parachute payment" as defined in Section 280G of the Code and would thereby subject Executive to the tax (the "Excise Tax") imposed under Section 4999 of the Code (or any similar tax that may hereafter be imposed), the provisions of this Article 6 shall apply to determine the amounts payable to Executive pursuant to this Agreement. 6.2 Immediately following Date of Employment Termination, the Company shall notify Executive of the aggregate present value of all termination benefits to which he would be entitled under this Agreement and any other plan, program or arrangement as of the projected date of termination, together with the projected maximum payments, determined as of such projected date of termination that could be paid without Executive being subject to the Excise Tax. 6.3 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with the Company is less than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, then the amounts payable to Executive under this Agreement may, in the discretion of the Company, be reduced but not below zero, the maximum amount which may be paid hereunder without Executive becoming subject to such an Excise Tax (such reduced payments to be referred to as the "Payment Cap"). In the event that Executive receives reduced payments and benefits hereunder, Executive shall have the right to designate which of the payments and benefits otherwise provided for in this Agreement that he will receive in connection with the application of the Payment Cap. 6.4 If the aggregate value of all compensation payments or benefits to be paid or provided to Executive under this Agreement and any other plan, agreement or arrangement with 4 the Company is greater than 105% of the amount which can be paid to Executive without Executive incurring an Excise Tax, the Company shall pay to Executive immediately following Executive's termination of employment an additional amount (the "Tax Adjustment") such that the net amount retained by Executive with respect to such Covered Payments, after deduction of any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Adjustment provided for by this Article 6, but before deduction for any federal, state or local income or employment tax withholding on such Covered Payments, shall be equal to the amount of Covered Payments. 6.5 For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax, and the amount of such Excise Tax, (a) Such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the good faith judgment of the Company's independent certified public accountants appointed prior to the Effective Date or tax counsel selected by such Accountants (the "Accountants"), the Company has a reasonable basis to conclude that such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for person services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Excise Tax, and (b) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. 6.6 For purposes of determining whether Executive would receive a greater net after-tax benefit were the amounts payable under this Agreement reduced in accordance with Paragraph 6.3, Executive shall be deemed to pay: (a) Federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the first amounts are to be paid hereunder, and (b) Any applicable state and local income taxes at the highest applicable marginal rate of taxation for such calendar year, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year. 6.7 If Executive receives reduced payments and benefits under this Article 6, or this Article 6 is determined not to be applicable to Executive because the Accountants conclude that Executive is not subject to any Excise Tax, and in either case it is thereafter established pursuant to a final determination of a court or an Internal Revenue Service proceeding (a "Final Determination") that, notwithstanding the good faith or Executive and the Company in applying the terms of this Agreement, the aggregate of the "parachute payments" within the meaning of Section 280G of the Code paid to Executive or for his benefit are in an amount that would result in Executive being subject to an Excise Tax, then the amount equal to such excess parachute payments shall be deemed for all purposes to be a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in 5 Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by Executive. If this Article 6 is not applied to reduce Executive's entitlements because the Accountants determine that Executive would not receive a greater net-after-tax benefit by applying this Article 6 and it is established pursuant to a Final Determination that, notwithstanding the good faith of Executive and the Company in applying the terms of this Agreement, Executive would have received a greater net-after-tax benefit by subjecting his payments and benefits hereunder to the Payment Cap, then the aggregate "parachute payments" paid to Executive or for his benefit in excess of the Payment Cap shall be deemed for all purposes a loan to Executive made on the date of receipt of such excess payments, which Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the date of the payment hereunder to the date of repayment by the Executive. If Executive receives reduced payments and benefits by reason of this Article 6 and it is established pursuant to a Final Determination that Executive could have received a greater amount without exceeding the Payment Cap, then the Company shall promptly thereafter pay Executive the aggregate additional amount which could have been paid without exceeding the Payment Cap, together with interest on such amount at the applicable federal rate (as defined in Section 1274(d) of the Code) from the original payment due date to the date of actual payment by the Company. 6.8 In the event that the Excise Tax is subsequently determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to be less that the amount taken into account hereunder in calculating the Tax Adjustment made, Executive shall repay to the Company, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Adjustment that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Adjustment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Adjustment to be refunded to the Company has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed interest received or credited to Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses therof) if Executive's good faith claim for refund or credit is denied. 6.9 In the event that the Excise Tax is later determined by the Accountants or pursuant to any proceeding or negotiations with the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Adjustment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Adjustment), the Company shall make an additional Tax Adjustment in respect of such excess (plus any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. 6.10 Timing of Payment. Any Tax Adjustment (or portion thereof) provided for in paragraph 6.4 above shall be paid to Executive not later than 10 business days following the payment of the Covered Payments; provided, however, that if the amount of such Tax Adjustment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Company shall pay to Executive by such date an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Adjustment and shall pay the 6 remainder of such Tax Adjustment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than 45 calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Adjustment exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth business day after written demand by the Company for payment (together with interest at the arte provided in Section (1274(b)(2)(B) of the Code.) ARTICLE 7 BENEFIT PLAN If (a) following a Potential Change in Control (provided a Change in Control occurs within eighteen months thereafter) or (b) within a one and one-half (1-1/2) year period after a Change In Control shall have occurred, Executive's employment shall have terminated for any reason, including, but not limited to, Termination for good Reason, except for death, voluntary retirement or for cause, then, for one and one-half (1-1/2) years after the Date of Employment Termination, the Company shall maintain in full force and effect and Executive shall continue to participate in all group life, health and accident and disability insurance, and other employee benefit plans, programs and arrangements in which Executive was entitled to participate immediately prior to the Date of Employment Termination, provided that continued participation is possible under the general terms and provisions of such plans, programs and arrangements. If participation is barred, or an applicable plan, program or arrangement is discontinued or the benefits there under are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which he was entitled to receive immediately prior to the Date of Employment Termination. At the end of the period of coverage above provided for, Executive shall have the option to have assigned to him, at no cost and with no apportionment of prepaid premiums, any assignable insurance owned by the Company and relating specifically to him. The foregoing shall not be deemed to apply to the EDO Corporation Employees Pension Plan, the EDO Corporation Employee Stock ownership Plan nor the EDO Corporation Employee Investment Plan (401(k)). ARTICLE 8 NO MITIGATION REQUIRED Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit so provided for be reduced by any compensation earned by him as the result of employment by another employer after the Date of Employment Termination, or otherwise. ARTICLE 9 DEFINITION OF "CHANGE IN CONTROL" AND "POTENTIAL CHANGE IN CONTROL" 9.1 "Change in Control" shall mean an occurrence in which: (i) a "person" including a "group," other than the Company's Employees Stock Ownership Trust (a "person"), becomes the "beneficial owner" 7 ("Beneficial Owner"), directly or indirectly, of securities of the Company having 25% or more of the total number of votes which may be cast for the election of directors of the Company (as the term "persons", "group" and "beneficial owner" are used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934), or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period, or (iii) the shareholders of the Company approve any merger or other business combination, sale of assets or combination of the foregoing transaction not involving Executive in an interest other than in his capacity as Executive. 9.2 "Potential Change in Control" shall mean an occurrence in which: (i) a Person hereafter becomes the Beneficial Owner of securities of the Company having at least 5% of the total number of votes that may be cast for the election of Directors of the Company, or (ii) any Person holds a 5% Beneficial ownership interest on the date hereof and there occurs an increase in such Person's Beneficial Ownership of such number of securities of the Company as shall increase the Beneficial ownership by such Person by an additional 1% of the total number of votes that may be cast for the election of directors of the Company, or (iii) a Person commences a tender offer for at least 25% of the outstanding shares of the Company's common stock, or (iv) approval of any corporate transaction is requested of shareholders, which, if obtained, would result in a Change in Control occurring, or (v) any Person solicits proxies for the election of Directors of the Company, or (vi) the Board of Directors of the Company deems any other event or occurrence to be a Potential Change in Control. ARTICLE 10 TERMINATION FOR CAUSE 10.1 If the Executive's employment is terminated by the Company for Cause, the Company shall pay the Executive his full base salary through the Date of Termination (at the rate in effect as of the Date of Termination), and the Company shall have no further obligations to the Executive under this Agreement. 10.2 The following are the only reasons for which the Company may terminate Executive's service for Cause without further obligations under this Agreement: - for providing the Company with materially false reports concerning Executive's business interests or employment-related activities; 8 - for making materially false representations relied upon by the Company in furnishing information to shareholders, a stock exchange, or the Securities and Exchange Commission; - for maintaining an undisclosed, unauthorized and material conflict of interest in the discharge of duties owed by Executive to the Company; - for misconduct causing a serious violation by the Company of state or federal laws; - for theft of Company funds or corporate assets; or - for conviction of a crime (excluding traffic violations or similar misdemeanors). ARTICLE 11 DEFINITION OF "TERMINATION FOR GOOD REASON" "Termination for Good Reason" shall mean termination of Executive's employment by Executive following or in connection with: (i) without the express advance written consent of Executive, (a) the assignment to Executive of any duties inconsistent in any substantial respect with the position, authority or responsibilities of Executive immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control or (b) any other substantial change in such position, including titles, authority or responsibilities, or (ii) during the one and one-half (1-1/2) year period following a Change in Control or during a period of Potential Change in Control, any reduction in Executive's salary or any reduction in bonus or incentive compensation targets (based upon the highest dollar amount or other rate of salary, bonus and incentive compensation in effect at any time up to Date of Employment Termination), a termination, reduction or alteration of disability policies or life or disability insurance benefits maintained for Executive, any alteration or reduction of expense allowances or reimbursement policies or a significant reduction in scope or value of the aggregate other benefits to which Executive was entitled immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, or (iii) the Company's requiring Executive to be based at any office or location more than 50 miles from the one where he worked immediately prior to the earlier to occur of a Potential Change in Control or a Change in Control, except for travel reasonably required in the performance of Executives responsibilities, or (iv) any purported termination by the Company of Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement, or (v) any failure by the Company to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by paragraph 12.1. 9 ARTICLE 12 SPECIAL CORPORATE RELOCATION PROVISION 12.1 In event that the Company should relocate its principal Corporate office to a location more than 100 miles outside of the current New York City (Manhattan) location, and the Executive is either not offered relocation to the location or elects of her own accord to not relocate to the new location, Executive shall be entitled to elect "Termination for Good Reason" and receive separation pay equal to 36 months of salary in effect at the time of separation, as well as the other benefits as stated specifically in this agreement. This relocation provision does not require a Change-in-Control, nor potential Change-in-Control to have occurred. It remains in effect in the event of a change-in-control, however, the 36-month benefit is in place of the 18-month provision, not in addition to. All other benefits would remain in place as stated. ARTICLE 13 SUCCESSORS, BINDING AGREEMENT 12.1 The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if the Company had terminated Executive's employment other than for Cause after a Change in Control occurring at the time of succession, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Employment Termination. 12.2 As used in this Agreement, "Company" shall include any successor to this business and/or assets as aforesaid which executes and delivers the agreement provided for in paragraph 12.1 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 12.3 This Agreement shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If Executive should die while any amounts would still be payable if he had continues to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if there be no such designee, to his estate. ARTICLE 14 MISCELLANEOUS PROVISIONS 13.1 The Lump Sum Value of the Retirement Pension shall be determined as of Executive's retirement at age 65, using the same methods and assumptions used at the Date of Employment Termination for purposes of the EDO Corporation Employees Pension Plan. 10 13.2 Date of Employment Termination is the earlier of the date on which Executive or the Company gives written notice of termination of Executive's employment to the other party after the earlier to occur of a Potential Change in Control or a Change in Control. 13.3 Notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the corporate counsel, or to such other address as either party may have furnished to the other in writing in accordance herewith. Notices of change of address shall be effective only upon receipt. 13.4 No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and, on behalf of the Company, by such officer as may be specifically designated by the Board. 13.5 All benefits provided for in this Agreement are provided on an unfunded basis and are not intended to meet the qualification requirements of Section 401 of the Code. The Company shall not be deemed to be a trustee of any amounts to be paid under this Agreement and shall not be required to segregate any assets with respect to benefits under this Agreement. Such benefits shall be payable solely from the general assets of the Company. 13.6 Any failure at any time of either party to enforce any provision of this Agreement shall not constitute a waiver of such provision, or prejudice the right of either party to enforce such provision at any subsequent time. 13.7 No agreements or representations, oral or otherwise, expressed or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 13.8 The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York. 13.9 The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11 13.10 In the event of any action or proceeding between the parties arising out of this agreement, the Company will pay the costs of any such legal proceedings including, but not limited to, the costs of Executive for all expenses, including attorneys' fees, incurred in such action or proceeding. Such costs and expenses shall be advanced to Executive currently as reasonably required to continue such action or proceeding. EDO Corporation By: /s/ JAMES M. SMITH -------------------- President Executive: /s/ LISA M. PALUMBO -------------------- Lisa M. Palumbo 12 EX-21 19 y83939exv21.txt LIST OF SUBSIDIARIES . . . Exhibit 21 EDO CORPORATION'S SUBSIDIARIES ACTIVE SUBSIDARIES
NAMES UNDER WHICH SUBSIDIARY STATE OF INCORPORATION SUBSIDIARY DOES BUSINESS Advanced Engineering and Research, Virginia AERA Incorporated Inc. AERA Inc. Virginia AERA, Inc. AIL Technologies Inc. Delaware EDO Technical Services Operations AIL Systems Inc. (owned by AIL Delaware Technologies Inc.) Darlington Inc. Delaware Darlington Incorporated. Darlington Inc. Darlington of Virginia Inc. EDO Communications and California Countermeasures Systems Inc. EDO Professional Services Inc. Delaware EDO Western Corporation Utah EDO Electro-Ceramic Products M. Technologies Inc. Pennsylvania EDO M. Tech Specialty Plastics, Inc. Louisiana EDO Specialty Plastics EDO Reconnaissance and Surveillance Delaware EDO Communications, Systems Inc. Countermeasures Systems
EX-23 20 y83939exv23.txt CONSENT OF ERNST & YOUNG LLP Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference 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. 33-01526) 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 11, 2003, with respect to the consolidated financial statements and schedule of EDO Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2002. New York, New York March 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----