-----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, BnQ6+sFO2LmZC8eLS7Q59scXGOCBC1rqZAPE72xsABlfLD2AtOZWgLQOy4WRWTIW xSAUwySMLQA4kI/Ei0ILmg== 0000950123-04-002887.txt : 20040305 0000950123-04-002887.hdr.sgml : 20040305 20040305114910 ACCESSION NUMBER: 0000950123-04-002887 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040305 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: 04650958 BUSINESS ADDRESS: STREET 1: 60 EAST 42ND STREET STREET 2: 42ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10165 BUSINESS PHONE: 2127162000 MAIL ADDRESS: STREET 1: 60 EAST 42ND STREET STREET 2: 42ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10165 10-K 1 y94563e10vk.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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, 42ND FLOOR 10165 NEW YORK, NEW YORK (Zip Code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 716-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED: -------------------- ------------------------------------------ Common Shares, par value $1 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 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 checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of the registrant's common stock held by non-affiliates was $259,747,032 based on the reported last sale price of common stock on June 28, 2003, which is the last business day of the registrant's most recently completed second fiscal quarter. The number of shares of EDO common stock outstanding as of February 20, 2004 was 19,898,145 shares. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Registrant's definitive proxy statement (filed pursuant to Reg. 14A) relating to its 2004 Annual Meeting of Shareholders are incorporated by reference in Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EDO CORPORATION TABLE OF CONTENTS
PART I Item 1 Business.................................................... 2 Introduction................................................ 2 Acquisitions................................................ 2 Segments.................................................... 3 Defense Segment........................................... 3 Communications and Space Products Segment................. 7 Engineered Materials Segment.............................. 9 Research and Development.................................... 10 Marketing and International Sales........................... 10 Backlog..................................................... 11 Government Contracts........................................ 11 Competition and Other Factors............................... 12 Environmental............................................... 12 Employees................................................... 12 Risk Factors................................................ 12 Item 2 Properties.................................................. 18 Item 3 Legal Proceedings........................................... 18 Item 4 Submission of Matters to a Vote of Security Holders......... 19 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters......................................... 19 Item 6 Selected Financial Data..................................... 20 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 21 Item 7A Quantitative and Qualitative Disclosure About Market Risk... 21 Item 8 Financial Statements and Supplementary Data................. 34 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 75 Item 9A Controls and Procedures..................................... 75 PART III Item 10 Directors and Executive Officers of the Registrant.......... 76 Item 11 Executive Compensation...................................... 77 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 77 Item 13 Certain Relationships and Related Transactions.............. 77 Item 14 Principal Accountant Fees and Services...................... 77 PART IV Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 77 (a) Financial Statements and Financial Statement Schedules and Exhibits................................................ 77 1. Financial Statements..................................... 77 2. Financial Statement Schedules............................ 78 3. Exhibits................................................. 78 (b) Reports on Form 8-K..................................... 81 Signatures............................................................ 82
1 PART I ITEM 1. BUSINESS INTRODUCTION EDO Corporation was incorporated in New York in 1925 by Earl Dodge Osborn, from whose initials "EDO" is derived. EDO Corporation provides military and commercial products and professional services, with core competencies in a wide range of critical defense areas, including: - Defense Electronics - Aircraft Armament - Undersea Warfare - Professional Services - C4I -- Command, Control, Communications, Computers, and Intelligence - Integrated Composite Structures A disciplined acquisition program is diversifying the base of major platforms and customers. The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for its Annual Meeting of Shareholders are made available, free of charge, on its Web site www.edocorp.com, as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission ("SEC"). ACQUISITIONS Acquisitions have been the primary driver of our growth in recent years. Since 1999, we have completed the following acquisitions: In April 2000, we acquired AIL Technologies, Inc. (AIL), a privately-held defense electronics company based in Deer Park, New York. In the transaction, a merger of AIL with a wholly-owned EDO subsidiary accounted for as a tax-free reorganization, 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 added extensive capabilities in defense electronics, such as aircraft electronic warfare systems in use on the B-1B bomber and the EA-6B Prowler radar-jamming aircraft. In October 2001, we acquired Dynamic Systems, Inc., a privately-held company based in Alexandria, Virginia, for $13.6 million in cash. Dynamic Systems added to our range of professional and information technology services that are provided primarily to the U.S. Department of Defense (DoD) and other government agencies. In July 2002, we acquired, in an auction under section 363 of the U.S. Bankruptcy Code, 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 $62.5 million in cash, plus transaction costs of $5.0 million. We also assumed $28.0 million in outstanding standby letters of credit. The acquisition of Condor's business has significantly expanded our defense-electronics capabilities in the areas of reconnaissance and surveillance systems and communications and countermeasures. In February 2003, we acquired all of the stock of Advanced Engineering & Research Associates, Inc. (AERA), a privately-held company located in Alexandria, Virginia, for $38.1 million in cash, plus transaction costs of $0.3 million. In addition, we acquired and immediately paid off debt of $3.8 million. AERA strengthened and expanded our range of professional services. AERA was merged with our Professional Services business unit. In March 2003, we acquired all of the stock of Darlington, Inc., a privately-held defense-communications company based in Alexandria, Virginia, for $25.6 million in cash, plus transaction costs of approximately $0.3 million. In addition, we acquired and immediately paid off debt of $4.9 million. The Darlington acquisition expanded our capabilities in the areas of C4I (Command, Control, Communications, Computers, 2 and Intelligence) and communications-related professional services. Darlington operates with our Combat Systems business unit. In June 2003, we acquired all of the stock of Emblem Group Ltd. ("Emblem"), a privately-held company based in Brighton, England, for $27.3 million plus transaction costs of approximately $1.9 million. Emblem operated through its MBM Technology unit in England and Artisan Technologies Inc. subsidiary in the United States. Emblem, which has been renamed EDO (UK) Ltd, reinforces our position as a global leader in aircraft armament-release systems and broadens our customer base in Europe. The acquisition also added capabilities in C4I, with a product line of rugged computers and related devices. In addition, we have completed four other acquisitions since 1998, all of which have been disclosed in our prior Annual Reports on Form 10-K. SEGMENTS We have historically reported our results in three reporting segments: Defense, Communications and Space Products, and Engineered Materials. Because the company continues to grow and evolve through acquisitions primarily related to defense products, the Defense segment has become the dominant segment of our business. Operations associated with the three acquisitions completed in 2003 were added to the Defense Segment. Management is currently evaluating other possible reporting segments and organizational structures in view of the expected continuation of our acquisition strategy. Our reporting segments currently consist of the following business units:
DEFENSE COMMUNICATIONS AND SPACE PRODUCTS ENGINEERED MATERIALS ------- --------------------------------- ------------------------ Marine and Aircraft Systems Antenna Products and Technologies Electro-Ceramic Products MTech Communications and Fiber Science Countermeasures Systems Defense Programs and Technologies Space Products portion of DPT Specialty Plastics (DPT) Combat Systems Technical Services Operations Professional Services Reconnaissance and Surveillance Systems EDO (UK) Ltd.
We set forth certain business segment information including information on revenues from external customers, operating earnings, assets and capital expenditures in Note 19 on pages 62 through 65 of this Report. DEFENSE SEGMENT The Defense segment, which accounted for 78% of consolidated net sales in 2003, 74% in 2002, and 71% in 2001, includes electronic warfare systems, reconnaissance and surveillance systems, aircraft weapons-suspension and release systems, integrated combat systems, C4I products and systems, undersea-warfare systems and professional and engineering services. ELECTRONIC WARFARE SYSTEMS Electronic warfare systems sales accounted for 12% of consolidated net sales in 2003, 24% in 2002, and 25% in 2001. 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 3 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. In 2003, the Air Force decided to extend the life of AN/ALQ-161 defensive suite until at least 2015, and has begun a significant upgrade program. EDO's first award in the upgrade program was made in mid-2003, to modernize the digital radio-frequency memory. This will provide advanced technique waveforms to counter known threats. The memory upgrade begins an expected modernization of the entire B-1B fleet. We have also received a contract to continue development on the next generation of AN/ALQ-161 preprocessor flight software. The 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. In 2003, we completed a substantial contract with the U.S. Navy to upgrade the Universal Exciter on the EA-6B aircraft. The Universal Exciter is the unit in the AN/ALQ-99 that provides the specific electronic-jamming-technique waveforms and modulations that defeat enemy air- defense systems. As a result of this contract completion, revenues related to the Universal Exciter Upgrade program declined from 14 percent of total revenues in 2002 to two percent of total revenues in 2003. We continue to maintain and support the AN/ALQ-99 system. The DoD currently expects EA-6B aircraft to be in operation through 2015. We design and produce a line of test equipment for electronic-warfare testing, data acquisition, and radar simulation. In 2003, we received orders for 238 AN/PLM-4 radar signal simulators from the U.S. Air Force and international customers. This brought the total number of systems ordered to 485, of which more than 360 have been delivered to customers. RECONNAISSANCE AND SURVEILLANCE SYSTEMS Our reconnaissance and surveillance systems include the AN/USQ-149 Radar Narrow Band (RNB) Subsystem, the AN/ALR-95 automatic Electronic Support Measures (ESM) system and variants of the ES-3701 ESM system which intercept, analyze and identify radar emissions and provide situational awareness to military personnel. Sales of reconnaissance and surveillance systems accounted for 17% of consolidated net sales in 2003, 8% in 2002, and 0% in 2001. The ES-3701 is a leading international electronic-support system for naval applications. More than 50 systems have been sold, many of which are already in operation providing effective at-sea performance. A key feature is the system's precision direction-finding at long range, even in difficult electromagnetic environments. It can be integrated into any type of combat-system multi-function console and enables the interception of radar threats. INTEGRATED COMBAT SYSTEMS We act as a systems integrator for naval C4I systems. In this role, we integrate 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. In 2003, we completed live-fire sea-acceptance trials of our Command, Control and Information System (CCIS) on board three vessels. A fourth Norwegian Coast Guard vessel under contract for CCIS installation is scheduled to begin modernization in 2004. CCIS is an open-architecture system that enhances maritime operations in both the littoral and open-ocean environments. It includes modules for surface-search radar, electro-optic fire-control system, hull-mounted sonar, integrated-bridge system, navigation system and helicopter-control system, all fully integrated with EDO's Piranha I Command Management System (CMS). CMS is designed for modular integration of 4 sensor and weapons systems and complies with U.S. Navy Open Architecture Computing Environment (NOACE) standards. It also provides automated decision aids for on-scene command, real-time tactical display management, aircraft control, search and rescue, and weapon engagement. In 2003, through successful international competition, we won a contract from the Royal Norwegian Navy to upgrade the communications and data-link systems on ULA-class submarines. Under the contract, EDO will provide engineering, manufacturing, and integration services to deliver open-systems-architecture, tactical-data-link systems. EDO will also upgrade the existing submarine communications systems to provide new line-of-sight, over-the-horizon, and satellite-data-communications capabilities, allowing interoperability with all NATO forces. Information from EDO's data-link system will be fully integrated with the submarine's on-board command and control system to give the crew a common operational picture that will be distributed throughout the submarine. MOBILE COMMUNICATION SYSTEMS With the acquisition of Darlington in 2003, we added the AN/TSQ-231 Joint Enhanced Core Communication System (JECCS) product line. JECCS provides the Marine Corps with a mobile, first-in system for network management, data and voice transmission, and switching services. RUGGED COMPUTERS AND ELECTRONICS We also added to our C4I capabilities with our acquisition of Emblem in 2003. Emblem, which has been renamed EDO (UK) Ltd., added a new product line of rugged computers and related electronic devices. This product line is the result of significant investment by Emblem prior to the acquisition. It has been designed to balance exceptional performance with user friendliness and the rugged protection to withstand rough treatment on the battlefield. It has passed the highest standards (Land Class A) for resistance to electro-magnetic interference and low signal emission, allowing it to perform safely alongside other electronic systems. The flagship "Termite" product is the only UK-designed and developed rugged, handheld computer. AIRCRAFT ARMAMENT Aircraft armament includes a broad range of sophisticated devices that allow for the storage and release of the bombs and missiles carried on military aircraft. This includes electronic interfaces between the weapon and the aircraft that allow for targeting and release. Aircraft armament equipment sales accounted for 12% of consolidated net sales in 2003, 13% in 2002, and 13% in 2001. EDO continues to make significant investments in technologies to meet the worldwide demand for smart, lightweight, high-performance weapons-interface 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, pneumatic missile-eject launchers for the F/A-22, and smart-weapon, multiple-carriage systems for the F-16 and F-18. In 2003, we: - continued production of F-15 BRUs for the U.S. Air Force and international customers and provided spare-parts support for Tornado ERUs and F-15 BRUs worldwide. - received production orders for 258 additional LAU-142/A missile launchers for the F/A-22 aircraft. Known as AVEL, for AMRAAM (Advanced Medium Range Air to Air Missile) Vertical Ejection Launcher, the LAU-142/A carries and ejects missiles from internal bays. During in-flight launch, the AVEL system ejects missiles through the jet fighter's air-flow-boundary layer very rapidly, assuring safe aircraft separation at supersonic speeds. The AVEL employs a highly reliable pneumatic-ejection system controlled by the aircraft's stores-management system. We have also received our first depot-support contract, and anticipate providing depot support through the life of the F/A-22. - continued development and testing of the pneumatic suspension-and-release system for the F-35 Joint Strike Fighter program. 5 - began development and testing of a new electronic assembly for the LAU-117 Maverick launcher for Raytheon Missile Systems. This assembly will allow the analog-controlled Maverick missile to be carried on the F-16, F-35 and other digital-control aircraft. - 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. 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 MK105 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 Navy and an international customer, and we continue to function as the Navy maintenance depot for the MK105 systems. In 1994, we began work under contract with the 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 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. In 2003, EDO was awarded a contract from the Navy to demonstrate the feasibility of unmanned-surface-vessel mine-warfare technology and the application of this technology for fleet integration. This technology will be directly applicable to mine-warfare mission modules slated for use on the Littoral Combat Ship. SONAR SYSTEMS We have been a supplier of undersea systems including sonar sensors, underwater-communication systems, and depth-sounding and speed-measuring equipment for more than 40 years. During 2003, work continued on a contract for the Brazilian Navy to deliver a major upgrade to the EDO Model 610E sonar system. Work also continued on a contract with Singapore to deliver the recently developed EDO Model 980 sonar system for installation in their new class of naval ship. Development and delivery of the systems will extend into 2006. We continued our work with 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 destroyer program. Under our contract, we will provide systems for six ships. Deliveries under the contract will extend through 2006. PROFESSIONAL SERVICES We are a supplier of professional services consisting of acquisition and logistics management, training and performance support systems, information technology services, systems engineering, operation analysis, and program management. We provide these services to the U.S. defense, federal-services, and information-technology markets. Our professional-services capabilities increased significantly in 2003 with the acquisitions of AERA and Darlington. Professional Services accounted for 22% of consolidated net sales in 2003, 13% in 2002, and 13% in 2001. - Acquisition Logistics and Management We support several of the Navy's program executive offices by providing logisticians, acquisition specialists, engineers and financial analysts. These professionals perform functions such as configuration management, budget analysis, analysis of ship casualty reports, ship-manning assessments, and review of training requirements. We also provide acquisition and logistics support to the Marine Corps, including several 6 logistic bases and systems-command centers. We have provided acquisition support to the Coast Guard's Deepwater program office as they faced the challenges of creating a transformational fleet of vessels. In 2003, we assisted the Navy in reviewing approaches to the management of shore-infrastructure. - Training & Performance Systems With the acquisition of AERA, we added capabilities in interactive, multimedia instruction and computer-based training. This includes the development of training courseware for the Virginia-class submarine platforms. We are a prime contractor on the Naval Air Systems Command "Training Systems Contract II" that will be the source of courseware development for many of the Navy and Marine Corps air platforms over the next eight years. We are applying this competency internally to develop automated training and interactive technical manuals for new EDO platforms, such as the OASIS mine-sweeping system. Our logisticians and engineers support the Marine Corps' Warfighting Laboratory, with concept-based experimentation and design, technology evaluation, and identification of improved procedures. Similar support is also provided to the Joint Forces Command's "Joint Concept Development and Experimentation Process." - Systems Engineering In 2003, 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. In addition, we perform engineering services under contracts to the Navy for threat-simulator-validation support at China Lake Naval Air Warfare Center, to the Air Force EW Directorate at Edwards AFB for F/A-22 and various other aircraft platforms, and provide technical and engineering support to various Boeing Satellite Systems programs. We also provide marine, propulsion, and systems engineering services in areas such as test and evaluation, systems integration, performance modeling and computer-aided design to a number of Navy, Coast Guard, and waterfront clients. - Information Technology Services The military continues to outsource a significant amount of IT-related professional services. With our AERA and Darlington acquisitions, we added support contracts in key programs with the Navy, Army and civilian agencies. In 2003, we were competitively awarded a contract from the Navy to provide fleet support worldwide for existing and planned C4I systems, both afloat and ashore. This contract is a large expansion of the previous $55 million Darlington contract and has a contract ceiling of $107.7 million (base year plus four option years). Deployed carriers and large-deck ships have an EDO Fleet Systems Engineering Team (FSET) onboard. The FSETs include highly-skilled engineers and technicians with IT and communication system expertise who serve at US Navy shore stations as well as aboard active-duty ships. In addition to operations, maintenance, and training support, the contract also requires support for the rapid injection of new C4I technologies into Navy ships. - Operation Analysis and Program Management In 2003, we were awarded a contract from the Department of the Navy to continue support for the Explosive Ordnance Disposal Program Management Office (PMS-EOD). The task-order contract has a base year plus four option years, and a contract ceiling of $17.5 million. We have successfully maintained this contract since 1984. COMMUNICATIONS AND SPACE PRODUCTS SEGMENT The Communications and Space Products segment, which accounted for 12% of consolidated net sales in 2003, 14% in 2002, and 15% in 2001, includes antenna product and ultra-miniature electronics and systems. 7 ANTENNA PRODUCTS We design and produce antenna systems for a wide variety of military and commercial applications including communications, electronic warfare, navigation, radar and wireless Local Area Networks. 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, 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 2003, we sold more than 35,000 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. We continually work on the development of new antenna products via internally funded and customer-sponsored research and development. For example, in 2003 we were awarded a $1.1 million contract by Boeing Integrated Defense Systems for a specialized, multi-function antenna for use on the F/A-18 E/F Super Hornet strike fighter. The antenna operates over a very wide bandwidth in a low radar-cross-section configuration. We also received two multi-million dollar awards from Northrop Grumman for antennas pertaining to the instrument landing sensors for the F-35 aircraft, and ground mobile communications for the new Joint Tactical Radio System. We anticipate many years of production for all three of these major platforms. We also provide critical aerospace antennas for the Ground-Based Midcourse Defense System. These antenna types have passed rugged electrical and environmental missile-qualification requirements. Other leading technologies include direction-finding antenna systems and microwave antennas. INTERFERENCE CANCELLATION EDO has been a world leader in interference cancellation technology for more than 25 years. Our technology is used to eliminate interference in dense electromagnetic environments that can degrade the effectiveness of radios and other electronic equipment. Our systems allow full operational capability, mitigating both friendly and intentional sources of interference. Most recently, this technology has given EDO a significant role in both of the Coast Guard's two major modernization projects, known as Rescue 21 and Deepwater. EDO is also developing a subsystem for the CV-22 Osprey tiltrotor aircraft that will mitigate interference between onboard radios, allowing unimpeded communications. FORCE PROTECTION TECHNOLOGY EDO is the world's only supplier of the Shortstop Electronic Protection System (SEPS), life-saving technology that protects people and equipment from proximity-fused weapons such as mortar rounds, rockets, and artillery shells. Shortstop works automatically and silently. It acts as an "electronic umbrella" that can protect military forces, equipment, personnel and high-value assets. The Shortstop program was initiated in 1990 by the US Central Command as a quick-reaction response capability for Operation Desert Storm. Our Shortstop product line includes modified versions that provide protection in various military situations. SPACE PRODUCTS We manufacture 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. 8 ENGINEERED MATERIALS SEGMENT The Engineered Materials segment, which accounted for 10% of consolidated net sales in 2003, 12% in 2002, and 12% in 2001, 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 sonar 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 commercial business, while maintaining our position in the defense market. Our business is vertically integrated with in-house manufacturing and development of piezoelectric and dielectric 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 and piezoelectric shapes for a variety of industries. In 2003, the Naval Sea System Command (NAVSEA) awarded us contract options worth $7.6 million for additional production of SQS-53C sonar arrays for the Arleigh Burke Class of guided-missile destroyer and for foreign military sales. The sonar is used for detection, classification, and localization of submarines. This latest order covers production of four shipments of sonar arrays. These arrays include piezoelectric-ceramic rings incorporated into high-power transducers, and associated array framework and cable assemblies. The transducers and other hardware will be integrated by EDO into the cylindrical arrays that are mounted in the bow of the ships. The SQS-53C sonar arrays are a major component of the SQQ-89 combat system, which integrates detection, classification, and engagement subsystems for control of the undersea battlespace. If all options are exercised, deliveries will extend to approximately 2010. In 2003, EDO won a competitively awarded contract to develop new passive-sonar technology on U.S. Navy submarines. The IDIQ, indefinite-delivery/indefinite-quantity, contract has a base year plus four option years, and a ceiling of $7.7 million. The contract includes the design, development, and multi-year production of wide-band multi-mode and radius-of-curvature sensors with associated electronics and electro-optics. These are critical components of new hydrophone-array technology being developed to improve detection of threats and counteract increasingly quieter submarines. Wide-band multi-mode sensors allow identification of specific sounds made by submarines and weapons. Radius-of-curvature sensors will improve the ability to compute the distance to various threat emissions, a limitation of current passive-sonar systems. INTEGRATED COMPOSITE STRUCTURES Our capabilities in the area of fiber-reinforced advanced composite structures include product and system design, engineering analysis, process development, tooling design and fabrication, qualification testing and validation, production, and after-market support. The primary focus of our business-development effort is advanced composite structures for all types of platforms including manned and unmanned aircraft, missiles, ships and ground vehicles. In 2003, we secured a number of development contracts for the next generation Boeing X-45 UCAV (Unmanned Combat Air Vehicle). Our success on these development contracts led to a production contract, near the end of 2003, for composite structures for two proof-of-concept aircraft, with options for 12 additional aircraft. These structures will elevate our production expertise by using the latest in technology and materials used in the fabrication of modern military aircraft. In 2003, we delivered the first production filament-wound launch canisters for the new Thales VT-1 missile program. This contract extends out into 2005. We also continued production of composite tanks for the 9 Boeing C-17 aircraft. We have been the sole supplier of these tanks since production began, more than 10 years ago. In commercial markets, 2003 marked the 36th year in which we have been a provider to Boeing for composite tanks on commercial airliners. In the medical device market, we supply special water/chemical dilution tanks for use in the Aksys Personal Hemo-Dialysis Plus (PHD+) system. We also produce similar tanks for Teijin Pharma, an Aksys licensee in Japan. For the offshore oil industry, we produce the "Fiberbond" line of composite piping. In 2003, we initiated the fabrication and installation of topside piping systems for offshore oil platforms in Malaysia, Brazil and the UK. We also won production contracts for composite piping on four large Gulf of Mexico deep-water oil platforms. RESEARCH AND DEVELOPMENT Research and development is important to the success of our business, because we focus on niche markets where we have leading-edge technology. In 2003, our research and development efforts involved about 130 employees. Most of our research and development is funded by long-term development contracts with customers, with the remainder funded at our own expense. Customer-funded research and development is principally related to military programs. Major customer-sponsored programs include the development of: mine-countermeasures systems; aircraft weapons-carriage technology; command-and-control software for combat-systems integration; shallow-water sonar; low-observable, anti-jam, GPS antennas; mobile-communications and data systems; and 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. Company-funded research and development is intended primarily to develop new products and extend the capabilities of existing products. Principal current company-funded research and development includes: digital signal-processing technology for electronic intelligence and support systems; image and signal processing, computer software, and other improvements for combat systems; minesweeping technology; aircraft weapons-carriage systems; application of composites for structural uses; various types of communication equipment; electronic countermeasures; advanced antennas; sonar systems, including processing and detection enhancements; noise reduction and interference cancellation; piezoelectric and composite materials; and new capabilities for our radar-signal simulator products. The following table sets forth research and development expenditures for the years presented.
YEARS ENDED DECEMBER 31, --------------------------- 2003 2002 2001 ------- ------- ------- (IN THOUSANDS) Customer-sponsored...................................... $48,800 $38,300 $35,700 Company-funded.......................................... 8,600 8,500 8,700 ------- ------- ------- Total................................................. $57,400 $46,800 $44,400 ======= ======= =======
MARKETING AND INTERNATIONAL SALES 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. Subject to approval by the U.S. Department of State, we sell to foreign governments both directly and through Foreign Military Funded programs and commercial sales. Sales of our defense products are usually made under long-term contracts or subcontracts covering one or more years of production. These contracts are obtained either through competitive bidding or contract negotiation. We believe that our long history of association with our military customers is an important factor 10 in our overall business, and that the experience gained through this history has enhanced our ability to anticipate our customers' needs. Our approach to 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 of Washington operations, are actively involved in the marketing of our defense products in the U.S. and abroad. We also have about 50 independent international sales representatives concentrating on the marketing of our defense products in foreign countries. 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 the policy of our U.S. business units 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. EDO (UK) Ltd generally denominates its contracts in British pounds. International sales comprised 18% of consolidated net sales in 2003, 15% in 2002, and 15% in 2001. BACKLOG We define backlog as the funded value of contracts and orders that has not been recognized as sales. As of December 31, 2003 our total backlog was $462.3 million compared with $375.0 million as of December 31, 2002. Approximately 75% of the total backlog at December 31, 2003 is scheduled for delivery in 2004. 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. 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. Backlog does not include portions of contracts for which the U.S. Government has not appropriated funds, nor does it include unexercised options in any contract. There is about $520 million in unfunded contracts and unexercised options at the end of 2003. GOVERNMENT CONTRACTS Net sales to the U.S. Government, as a prime contractor and through subcontracts with other prime contractors, accounted for 76% of our 2003 consolidated net sales compared with 75% in 2002 and 69% in 2001, and consisted primarily of sales to the DoD. Such sales include sales of military equipment to the U.S. Government for resale to foreign governments under the Foreign Military Sales program. Our business is not substantially dependent on any contract. 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 DoD are made on either a fixed-price or cost-reimbursable basis. Both types may include incentive provisions. 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) plus a specified fee. Under both contract types, an incentive adjustment may be made to our fee based on attainment of performance, scheduling, cost, quality or other goals. In general, with fixed-price contracts we assume a greater risk of loss, but also have the potential for higher profit margins, compared to cost-reimbursable contracts. The distribution of our government contracts between fixed-price and cost-reimbursable contracts varies from time to time. 11 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. 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 62 of this Report for information regarding the cost of compliance with environmental regulations. EMPLOYEES As of December 31, 2003, we employed 2,640 persons. RISK FACTORS REDUCTIONS IN GOVERNMENT SPENDING WOULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. A reduction in purchases of our products by domestic and foreign government agencies would have a material adverse effect on our business because a significant portion of our net sales are derived from contracts directly or indirectly with government agencies. In 2003, 2002 and 2001, we derived about 76%, 75% and 69%, respectively, of net sales from direct and indirect contracts with the U.S. Government and derived about 18%, 15% and 15%, respectively, of net sales from international sales to foreign governments. The development of our business will depend upon the continued willingness of the U.S. and foreign governments to fund existing and new defense programs and, in particular, to continue to purchase our products and services. Although defense spending in the United States has recently increased, further increases may not continue and any proposed budget or supplemental budget request may not be approved. In addition, the U.S. Department of Defense may not continue to focus its spending on technologies that we incorporate in our products. THE U.S. GOVERNMENT MAY TERMINATE OR MODIFY OUR EXISTING CONTRACTS OR ITS CONTRACTS WITH THE PRIME CONTRACTORS FOR WHICH WE ARE A SUBCONTRACTOR, WHICH WOULD ADVERSELY AFFECT OUR REVENUE. A significant portion of our revenues are derived from U.S. Government contracts, directly or indirectly. There are inherent risks in contracting with the U.S. Government, including risks peculiar to the defense 12 industry, which could have a material adverse effect on our business, financial condition or results of operations. Laws and regulations permit the U.S. Government to: - terminate contracts for its convenience; - reduce or modify contracts or subcontracts if its requirements or budgetary constraints change; - cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; - adjust contract costs and fees on the basis of audits done by its agencies; and - control or prohibit the export of our products. If the U.S. Government terminates our contracts for convenience, we may only recover our costs incurred or committed for settlement expenses and profit on work completed before the termination. Additionally, most of our backlog could be adversely affected by any modification or termination of contracts with the U.S. Government or contracts the prime contractors have with the U.S. Government. The U.S. Government regularly reviews our costs and performance on its contracts, as well as our accounting and general business practices. The U.S. Government may reduce the reimbursement for our fees and contract-related costs as a result of an audit. OUR BUSINESS IS SUBJECT TO VARIOUS RESTRICTIVE LAWS AND REGULATIONS BECAUSE WE ARE A CONTRACTOR AND SUBCONTRACTOR TO THE U.S. GOVERNMENT AND BECAUSE WE PROVIDE MILITARY PRODUCTS TO FOREIGN GOVERNMENTS. As a contractor and subcontractor to the U.S. Government, we are subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. We are required to obtain and maintain material governmental authorizations and approvals to run our business as it is currently conducted. For example, we need a license to operate an FAA repair station. In addition, because we provide defense equipment and related services to foreign governments, we must obtain licenses from the U.S. State Department for our foreign exports. Our failure or inability to obtain these licenses could have a material adverse effect on our business. New or more stringent laws or government regulations concerning government contracts and defense exports, if adopted and enacted, could have a material adverse effect on our business. Responding to governmental audits, inquiries or investigations may involve significant expense and divert management attention from regular operations. Also, an adverse finding in any such audit, inquiry or investigation could involve debarment, fines, injunctions or other sanctions. IF WE FAIL TO WIN COMPETITIVELY AWARDED CONTRACTS IN THE FUTURE, WE MAY EXPERIENCE A REDUCTION IN OUR SALES, WHICH COULD NEGATIVELY AFFECT OUR PROFITABILITY. We obtain many of our U.S. Government contracts through a competitive bidding process. We cannot assure you that we will continue to win competitively awarded contracts or that awarded contracts will generate sales sufficient to result in our profitability. We are also subject to risks associated with the following: - the frequent need to bid on programs in advance of the completion of their design (which may result in unforeseen technological difficulties and cost overruns); - the substantial time and effort, including the relatively unproductive design and development required to prepare bids and proposals, spent for competitively awarded contracts that may not be awarded to us; - design complexity and rapid technological obsolescence; and - the constant need for design improvement. Our government contracts may be subject to protest or challenge by unsuccessful bidders or to termination, reduction or modification in the event of changes in government requirements, reductions in federal spending or other factors. In addition, failure to obtain a renewal or follow-on contract with respect to any significant contract or a number of lesser contracts with the U.S. Government or foreign governments 13 would result in a loss of revenues. If revenues from the award of new contracts fail to offset this loss, it could have a material adverse effect on our results of operations and financial position. A LARGE MAJORITY OF OUR CONTRACTS ARE FIXED-PRICE, AND WE MAY FACE INCREASED RISKS OF COST OVERRUNS OR LOSSES ON OUR CONTRACTS. The majority of our government contracts and subcontracts are firm, fixed-price contracts providing for a predetermined fixed price for the products we make regardless of the costs we incur. At times, we must therefore make pricing commitments to our customers based on our expectation that we will achieve more cost-effective product designs and automate more of our manufacturing operations. The manufacture of our products requires a complex integration of demanding processes involving unique technical skill sets. In addition, the expense of producing products can rise due to increased costs of materials, components, labor, capital equipment or other factors. As a result, we face risks of cost overruns or order cancellations if we fail to achieve forecasted product design and manufacturing efficiencies or if products cost more to produce than expected. WE MAY BE REQUIRED TO REDUCE OUR PROFIT MARGINS ON CONTRACTS ON WHICH WE USE THE PERCENTAGE-OF-COMPLETION ACCOUNTING METHOD. We record sales and profits on many of our contracts using percentage-of-completion methods of accounting. As a result, revisions made to our estimates of sales and profits are recorded in the period in which the conditions that require such revisions become known and can be estimated. Although we believe that our profit margins are fairly stated and that adequate provisions for losses for our fixed price contracts are recorded in our financial statements, as required under U.S. generally accepted accounting principles, we cannot assure you that our contract profit margins will not decrease or our loss provisions will not increase materially in the future. OUR PRODUCTS AND SYSTEMS MAY BE RENDERED OBSOLETE BY OUR INABILITY TO ADAPT TO TECHNOLOGICAL CHANGE. The rapid change of technology continually affects our product applications and may directly impact the performance of our products. For our electronic warfare products, we are required to improve reliability and maintainability, extend frequency ranges and provide advanced jamming techniques. We can give you no assurances that we will successfully maintain or improve the effectiveness of our existing products, nor can we assure you that we will successfully identify new opportunities and continue to have the needed financial resources to develop new products in a timely or cost-effective manner. In addition, products manufactured by others may render our products and systems obsolete or non-competitive. If any of these events occur, our results of operations would be adversely affected. THE UNSUCCESSFUL INTEGRATION OF A BUSINESS OR BUSINESS SEGMENT WE ACQUIRE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS. One of our key operating strategies is to pursue selective acquisitions. We review and actively pursue possible acquisitions on a continuous basis. Except as previously disclosed in our public filings, we do not currently have any commitments, agreements or understandings to acquire any specific businesses or other material assets. Our acquisition strategy may require additional debt or equity financing, resulting in additional leverage or dilution of ownership. We cannot assure you that any future acquisition will be consummated, or that if consummated, we will be able to integrate such acquisition successfully without a material adverse effect on our financial condition or results of operations. Moreover, any acquisition could involve other risks, including: - diversion of management's attention from existing operations; - potential loss of key employees or customers of acquired companies; and - exposure to unforeseen liabilities of acquired companies. 14 WE ARE DEPENDENT IN PART UPON OUR RELATIONSHIPS AND ALLIANCES WITH INDUSTRY PARTICIPANTS IN ORDER TO GENERATE REVENUE. We rely on the strength of our relationships with other contractors to form strategic alliances. Some of our partners assist us in the development of some of our products through teaming arrangements. Under these teaming arrangements, our partners usually have borne a portion of the expenses associated with our research and development of new and existing products that are the subject of such agreements. We cannot assure you that our partners will continue to bear these expenses in the future. If any of our existing relationships with our partners were impaired or terminated, we could experience significant delays in the development of our new products ourselves, and we would incur additional development costs. We would need to fund these costs internally or identify new partners. Some of our partners are also potential competitors, which may impair the viability of new strategic relationships. While we must compete effectively in the marketplace, our future alliances may depend on our partners' perception of us. Our ability to win new and/or follow-on contracts may be dependent upon our relationships within the military industry. WE HAVE DEVELOPED OUTSOURCING ARRANGEMENTS FOR THE MANUFACTURE OF MANY OF THE COMPONENTS AND SUB-ASSEMBLIES OF OUR PRODUCTS. IF THIRD PARTIES FAIL TO DELIVER QUALITY PRODUCTS AND COMPONENTS AT REASONABLE PRICES ON A TIMELY BASIS, WE MAY ALIENATE SOME OF OUR CUSTOMERS AND OUR REVENUES, PROFITABILITY AND CASH FLOW MAY DECLINE. We use contract manufacturers as an alternative to our own manufacture of the components and sub-assemblies of our products. If these contract manufacturers are not willing to contract with us on competitive terms or devote adequate resources to fulfill their obligations to us, or we do not properly manage these relationships, our existing customer relationships may suffer. In addition, by undertaking these activities, we run the risks that - the reputation and competitiveness of our products and services may deteriorate as a result of the reduction of our control and quality and delivery schedules and the consequent risk that we will experience supply interruptions and be subject to escalating costs; and - our competitiveness may be harmed by the failure of our contract manufacturers to develop, implement or maintain manufacturing methods appropriate for our products and customers. WE MAY BE REQUIRED TO DEFEND LAWSUITS OR PAY DAMAGES IN CONNECTION WITH THE ALLEGED OR ACTUAL HARM CAUSED BY OUR PRODUCTS. We face an inherent business risk of exposure to product liability claims in the event that the use of some of our products is alleged to have resulted in unintended harm to others or to property. Although we maintain general liability and product liability insurance, we may incur significant liability if product liability lawsuits against us are successful. We cannot assure you that such coverage will be adequate to cover all claims that may arise or that it will continue to be available to us on acceptable terms. WE MAY INCUR SUBSTANTIAL ENVIRONMENTAL LIABILITY ARISING FROM OUR ACTIVITIES INVOLVING THE USE OF HAZARDOUS MATERIALS. Our business is subject to federal, state, local and foreign laws, regulations and ordinances governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. From time to time, our operations have resulted or may result in noncompliance with environmental laws or liability for the costs of investigating and cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous materials. In addition, we have been identified as a potentially responsible party pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or corresponding state environmental laws, for the cleanup of contamination resulting from past disposals of hazardous materials at some sites where we, along with others, sent waste in the past. We are a party to consent decrees as a result of our potential responsibility for contamination caused by the disposal of 15 hazardous materials. We cannot assure you that such matters, or any similar liabilities that arise in the future, will not exceed our resources, nor can we completely eliminate the risk of accidental contamination or injury from these materials. POLITICAL AND ECONOMIC INSTABILITY IN FOREIGN MARKETS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS. Foreign sales represented about 18% of our total sales in 2003, and we intend to increase the amount of foreign sales we make in the future. Foreign sales are subject to numerous risks, including political and economic instability in foreign markets, restrictive trade policies of foreign governments, economic conditions in local markets, inconsistent product regulation by foreign agencies or governments, the imposition of product tariffs and the burdens of complying with a wide variety of international and U.S. export laws and differing regulatory requirements. If we fail to increase our foreign sales it could have a material adverse effect on our results of operations. CONCENTRATION OF VOTING POWER AND CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS COULD MAKE A MERGER, TENDER OFFER OR PROXY CONTEST DIFFICULT AND MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON SHARES. At December 31, 2003, the EDO Employee Stock Ownership Trust, or ESOT, owned 4,099,033 common shares (or about 21% of the outstanding common shares). The trustee of the plan has obligations under the trust agreement and its fiduciary duties when voting allocated shares under the plan. The procedure the trustee generally follows is to receive direction from each of the plan participants with respect to his or her allocated shares, and then to vote all shares in accordance with the direction received. The market may perceive that the concentration of voting power in the hands of a single employee stock ownership plan creates a potential barrier against another party acquiring us. This perception could result in lower market prices for our common shares. In addition, our Certificate of Incorporation and By-Laws provide for a classified board of directors and restrict the ability of shareholders to call special meetings. These provisions could delay or impede the removal of incumbent directors and could make it more difficult to effect a merger, tender offer or proxy contest, even if such events might be favorable to our shareholders. Moreover, certain agreements to which we are a party, including loan and executive officer agreements, contain provisions that impose increased costs in the event of a change of control. Our Board of Directors and management are recommending that our shareholders agree to amend our certificate of incorporation to eliminate the classified board. If the holders of 80% of EDO's outstanding common shares vote in favor of this amendment at our annual meeting of shareholders to be held on April 27, 2004, then the risk of delay or impediment to a merger, tender offer or proxy contest will be significantly lessened. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY, THE VALUE OF OUR COMMERCIAL PRODUCTS COULD BE DIMINISHED. The value of our commercial products is increased, in part, by obtaining, maintaining and enforcing our patents and other proprietary rights. While we take precautionary steps to protect our technological advantages and intellectual property and rely in part on patent, trademark, trade secret and copyright laws, we cannot assure you that the precautionary steps we have taken will completely protect our intellectual property rights. In the event a competitor successfully challenges our patents or licenses, we could incur substantial litigation costs that could have a material adverse effect on our operating results and financial condition. THE U.S. GOVERNMENT'S RIGHT TO USE TECHNOLOGY DEVELOPED BY US LIMITS OUR INTELLECTUAL PROPERTY RIGHTS. We seek to protect the competitive benefits we derive from our patents, proprietary information and other intellectual property. However, we do not have the right to prohibit the U.S. Government from using certain technologies developed or acquired by us or to prohibit third party companies, including our competitors, from using those technologies in providing products and services to the U.S. Government. The U.S. Government has the right to royalty-free use of technologies that we have developed under U.S. Government contracts. We 16 are free to commercially exploit those government-funded technologies and may assert our intellectual property rights to seek to block other non-government users thereof, but we cannot assure you we could successfully do so. A FAILURE TO ATTRACT AND RETAIN TECHNICAL PERSONNEL COULD REDUCE OUR REVENUES AND OUR OPERATIONAL EFFECTIVENESS. There is a continuing demand for qualified technical personnel, and we believe that our future growth and success will depend upon our ability to attract, train and retain such personnel. Competition for personnel in the military industry is intense, and there is a limited number of persons with knowledge of, and experience in, this industry. Although we currently experience relatively low rates of turnover for our technical personnel, the rate of turnover may increase in the future. An inability to attract or maintain a sufficient number of technical personnel could have a material adverse effect on our contract performance or on our ability to capitalize on market opportunities. INCREASED SCRUTINY OF FINANCIAL DISCLOSURE COULD ADVERSELY AFFECT INVESTOR CONFIDENCE, AND ANY RESTATEMENT OF EARNINGS COULD INCREASE LITIGATION RISKS AND LIMIT OUR ABILITY TO ACCESS THE CAPITAL MARKETS. Congress, the SEC, other regulatory authorities and the media are intensely scrutinizing a number of financial reporting issues and practices. Although all businesses face uncertainty with respect to how the U.S. financial disclosure regime may be affected by this process, particular attention has been focused recently on companies' interpretations of generally accepted accounting principles. If we are required to restate our financial statements as a result of a determination that we had incorrectly applied generally accepted accounting principles, that restatement could adversely affect our ability to access the capital markets or the trading price of our securities. The recent scrutiny regarding financial reporting may also result in an increase in litigation involving companies with publicly traded securities, such as us. There can be no assurance that any such litigation against us would not materially adversely affect our business or the trading price of our securities. IF WE ARE UNABLE TO COMPLY WITH THE RESTRICTIONS AND COVENANTS IN OUR DEBT AGREEMENTS, THERE WOULD BE A DEFAULT UNDER THE TERMS OF THOSE AGREEMENTS, AND THIS COULD RESULT IN AN ACCELERATION OF PAYMENT OF FUNDS THAT HAVE BEEN BORROWED. If we are unable to comply with the restrictions and covenants in our debt agreements, there would be a default under the terms of these agreements. Some of the debt agreements also require us to maintain specified financial ratios and satisfy financial tests. Our ability to meet these financial ratios and tests may be affected by events beyond our control, including, without limitation, sales levels, contract terminations and potential acquisitions. As a result, there can be no assurance that we will be able to meet these tests. In the event of a default under these agreements, the lenders could terminate their commitments to lend or accelerate the loans and declare all amounts borrowed due and payable. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable. If any of these events occur, there can be no assurance that we would be able to make necessary payments to the lenders or that we would be able to find alternative financing. Even if we are able to obtain alternative financing, it may not be on terms that are acceptable to us. RESTRICTIONS AND COVENANTS IN OUR DEBT AGREEMENTS LIMIT OUR ABILITY TO CONDUCT OUR BUSINESS AND COULD PREVENT US FROM OBTAINING NEEDED FUNDS IN THE FUTURE. Our debt and financing arrangements contain a number of significant limitations that restrict our ability to, among other things: - borrow additional money or issue guarantees; - pay dividends or other distributions to shareholders; - make investments; 17 - create liens on assets; - sell assets; - enter into transactions with affiliates; and - engage in mergers or consolidations. These restrictions may limit our ability to obtain future financing, fund needed capital expenditures or withstand a future downturn in business or the economy. ITEM 2. PROPERTIES All of our operating facilities are leased except a Charleston, SC facility obtained in the Darlington acquisition. In 2003, we sold our facility in Deer Park, NY. As part of the sale agreement, we are leasing the facility for a period not to exceed two years. 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 2004 and 2005, 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 62 of this Report. Set forth below is a listing of our principal plants and other materially important physical properties.
APPROXIMATE FLOOR AREA BUSINESS UNIT SEGMENT LOCATION (IN SQ. FT.) - ------------- ------- -------- ------------ EDO Antenna Products and Technology and EDO Defense Programs and Technologies..... Communications and Space Products and Defense Deer Park, NY 726,000 EDO Reconnaissance and Surveillance Systems.......... Defense Morgan Hill, CA 160,000 EDO Electro-Ceramic Products.... Engineered Materials Salt Lake City, UT 117,000 EDO Fiber Science............... Engineered Materials Salt Lake City, UT 105,000 EDO Marine & Aircraft Systems... Defense North Amityville, NY 92,000 EDO Communications and Countermeasures Systems....... Communications and Space Products Simi Valley & Westlake Village, CA 83,000 EDO Professional Services....... Defense Alexandria, VA 118,000 EDO (UK) Ltd.................... Defense Brighton, UK 43,000 EDO Combat Systems.............. Defense Chesapeake, VA 37,000 EDO Technical Services Operations.................... Defense Lancaster, CA 33,000 EDO Specialty Plastics.......... Engineered Materials Baton Rouge, LA 29,000 EDO Darlington.................. Defense Alexandria, VA & Charleston, SC 43,000 EDO Artisan..................... Defense Parsippany, NJ 25,000 EDO MTech....................... 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 62 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 18 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 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, 2003, the Company estimates that its discounted liability over the remainder of the twenty-two years related to the two operable units is approximately $2.0 million. See also Note 18 on page 62 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 32 and "Dividends" on page 32, together with dividend information contained in the "Consolidated Statements of Shareholders' Equity" on pages 36 and 37 and Note 9 on pages 50 and 51 of this Report. The information regarding equity compensation plans can be found in Notes 1(l) on page 45 and 14 on pages 54 and 55 of this Report. 19 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA EDO CORPORATION AND SUBSIDIARIES (NOT COVERED BY INDEPENDENT AUDITORS' REPORTS)
2003 2002 2001 2000 1999 -------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF EARNINGS DATA: Net sales.............................................. $460,667 $328,876 $259,961 $206,822 $97,936 Costs and expenses: Cost of sales........................................ 338,259 240,850 189,733 151,512 72,337 Selling, general and administrative.................. 71,855 47,584 34,013 29,205 13,602 Research and development............................. 8,594 8,492 8,750 5,371 2,748 Other expenses (income)(a)........................... 1,871 2,565 389 11,495 -- Impairment loss on Deer Park facility................ 9,160 -- -- -- -- -------- -------- -------- -------- ------- 429,739 299,491 232,885 197,583 88,687 -------- -------- -------- -------- ------- Operating earnings..................................... 30,928 29,385 27,076 9,239 9,249 Net interest expense................................... (8,152) (4,956) (2,216) (2,438) (785) Other non-operating income (expense), net.............. 279 (95) (971) (216) 230 -------- -------- -------- -------- ------- (7,873) (5,051) (3,187) (2,654) (555) -------- -------- -------- -------- ------- Earnings before income taxes and cumulative effect of a change in accounting principle....................... 23,055 24,334 23,889 6,585 8,694 Income tax expense..................................... (9,644) (10,342) (9,210) (5,264) (2,610) -------- -------- -------- -------- ------- Earnings before cumulative effect of a change in accounting principle from: Continuing operations................................ 13,411 13,992 14,679 1,321 6,084 Discontinued operations.............................. 1,398 -- 273 -- (4,064) -------- -------- -------- -------- ------- Earnings before cumulative effect of a change in accounting principle................................. 14,809 13,992 14,952 1,321 2,020 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) -------- -------- -------- -------- ------- Net earnings available for common shares............... $ 14,809 $ 10,629 $ 14,758 $ 440 $ 1,020 ======== ======== ======== ======== ======= PER COMMON SHARE DATA: Basic net earnings (loss): Continuing operations................................ $ 0.78 $ 0.82 $ 1.14 $ 0.05 $ 0.76 Discontinued operations.............................. 0.08 -- 0.02 -- (0.61) -------- -------- -------- -------- ------- Basic net earnings before cumulative effect of a change in accounting principle.............................. 0.86 0.82 1.16 0.05 0.15 Cumulative effect of a change in accounting principle............................................ -- (0.20) -- -- -- -------- -------- -------- -------- ------- Basic net earnings..................................... $ 0.86 $ 0.62 $ 1.16 $ 0.05 $ 0.15 -------- -------- -------- -------- ------- Diluted net earnings (loss): Continuing operations................................ $ 0.76 $ 0.81 $ 1.09 $ 0.05 $ 0.65 Discontinued operations.............................. 0.08 -- 0.02 -- (0.50) -------- -------- -------- -------- ------- Diluted net earnings before cumulative effect of a change in accounting principle....................... 0.84 0.81 1.11 0.05 0.15 Cumulative effect of a change in accounting principle............................................ -- (0.20) -- -- -- -------- -------- -------- -------- ------- Diluted net earnings................................... $ 0.84 $ 0.61 $ 1.11 $ 0.05 $ 0.15 ======== ======== ======== ======== ======= Cash dividends per common share........................ $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 Weighted-average common shares outstanding: Basic................................................ 17,308 17,080 12,776 9,601 6,701 Diluted.............................................. 17,561 17,379 14,254 10,662 8,032
20
2003 2002 2001 2000 1999 -------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OTHER DATA: Depreciation and amortization.......................... $ 17,065 $ 11,321 $ 11,396 $ 9,441 $ 3,390 Capital expenditures................................... 8,865 7,093 14,298 3,861 4,032 Backlog................................................ 462,327 375,029 294,812 252,888 133,880 -------- -------- -------- -------- ------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents, marketable securities and restricted cash...................................... $ 86,632 $159,860 $ 58,031 $ 16,621 $29,642 Working capital........................................ 172,278 204,382 105,177 37,552 35,110 Total assets........................................... 494,696 481,574 285,630 214,254 124,491 Total debt(d).......................................... 137,800 137,800 463 49,444 36,483 Shareholders' equity................................... 190,332 168,273 174,498 65,818 40,241 -------- -------- -------- -------- -------
- --------------- (a) Reflects $0.9 million in 2003 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 $0.9 million curtailment loss in 2003 and a $2.0 million curtailment loss in 2002 associated with our benefit plans; 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). (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. (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) 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 on a wide range of military programs. We have three reporting segments: Defense, Communications and Space Products, and Engineered Materials, which represented 78%, 12% and 10%, respectively, of our net sales for the year ended December 31, 2003. 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, integrated combat systems, command, control, communications, computers, and intelligence (C4I) products and systems, undersea-warfare systems and professional and engineering services for military forces and friendly 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 integrated composite structures for the aircraft and oil industries. ACQUISITIONS Acquisitions of businesses that we believe will enhance our position in the markets that we serve have been an important factor in our growth. 21 On June 16, 2003, we acquired for cash all of the stock of Emblem Group Ltd. ("Emblem"), a privately-held company based in Brighton, England. Emblem, now known as EDO (UK) Ltd., is a supplier of aerospace and defense products and services, primarily through its MBM Technology unit in England and Artisan Technologies, Inc., a subsidiary in the United States. Emblem has a core competency in aircraft weapons-carriage and interfacing systems that will reinforce our position as a global leader in aircraft armament release systems. Emblem is expected to broaden our customer base in Europe. The purchase price was L16.3 million ($27.3 million), excluding transaction costs of approximately $1.9 million. Emblem became part of our Defense segment. On March 10, 2003, we acquired for cash all of the stock of Darlington, Inc. ("Darlington"), a privately-held defense communications company based in Alexandria, Virginia. Darlington 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 Corps. The purchase price was $25.6 million, excluding transaction costs of approximately $0.3 million. In addition, we acquired and immediately paid off debt of $4.9 million. Darlington became part of our Defense segment. On February 5, 2003, a wholly-owned subsidiary of the Company acquired for cash all of the stock of Advanced Engineering & Research Associates, Inc. ("AERA"), a privately-held company located in Alexandria, Virginia. AERA, which was merged with another EDO subsidiary in 2004 and is now known as EDO Professional Services Inc., 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 that we offer. The purchase price was $38.1 million, excluding transaction costs of $0.3 million. In addition, we acquired and immediately paid off debt of $3.8 million. AERA became part of our Defense segment. On July 26, 2002, a wholly-owned subsidiary of the Company acquired substantially all of the assets and assumed certain liabilities of Condor Systems, Inc., a privately-held defense electronics company and its domestic subsidiary (together, "Condor") for $62.5 million in cash, in addition to transaction costs of $5.0 million. The acquisition expanded our electronic warfare business in the areas of reconnaissance and surveillance systems. The assets became part of our Defense and Communications and Space Products segments. In October 2001, we acquired all of the stock of Dynamic Systems, Inc., a privately-held company based in Alexandria, Virginia, for $13.6 million in cash, excluding transaction costs of approximately $0.1 million. The acquisition strengthened and expanded the range of professional and information technology services we offered to both existing and new customers in the Defense segment. These acquisitions were accounted for as purchases and, accordingly, their operating results are included in our consolidated financial statements since their respective acquisition dates. SALE OF PROPERTY On June 24, 2003, the Board of Directors of the Company approved the decision to sell our 726,000 square foot facility in Deer Park, NY. This decision was based on a company-wide facility plan that evaluated potential uses for the property. We concluded that the Deer Park facility would not meet future requirements, and thus an outright sale was completed, freeing assets for more productive use, including acquisitions. A pre-tax impairment loss of $9.2 million was recorded in the second quarter of 2003, as the net book value of the assets exceeded the fair value less the costs to sell. The fair value was based on a $29.0 million sales price per the sales agreement entered into in July 2003. This impairment charge represents the entire loss we expect to incur. Of the $29.0 million sales price, $22.0 million is in cash and $7.0 million is in the form of a purchase money mortgage and note. We closed on the sale in October 2003 and received the cash less closing payments. The note receivable is due when we vacate the facility. As part of the agreement, we will lease the facility for a period not to exceed two years. The lease agreement does not have any renewal or buyout options. 22 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. Sales on other than long-term contract orders (principally commercial products) are recorded as shipments are made. 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. 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. All other inventories are stated at the lower of cost (principally first-in, first-out method) or market. 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. 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 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 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 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 23 of any such asset may not be recoverable. The estimate of cash flow, which is used to determine recoverability, is based upon, among other things, certain assumptions about future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to such factors including technological advances, changes to the our business model, or changes in our capital strategy or planned use of long-lived assets. 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 SFAS No. 142, 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 the unit 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 profits, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and/or 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 and expected return on plan assets 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, economic or regulatory conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. In 2003, 2002 and 2001 we used the building block approach to the estimation of the long-term rate of return on assets. Under this approach, we reviewed the publicly available common source data for the range of returns on basic types of equity and fixed income instruments and the differential to those rates provided by active investment management. In consultation with our actuarial and active asset management consultants and taking into account the funds' actual performance and expected asset allocation going forward, we selected an overall return rate within the resulting range. The expected long-term rate of return on plan assets to be used for 2004 expense is 8.25%. This rate of return was determined by application of a statistical forecast modeling algorithm which, using the pension investment mix and pension demographic data, simulates the long term performance of the plan over a series of 2000 trials of variable economic conditions, rounded to the nearest quarter-percent. The resulting rate is a 50 basis-point reduction in the forecast from that used in 2003. The discount rate also reflects a similar 50 basis-point reduction from that used in 2003. The discount rate is selected based on review of selected widely available index information for high quality corporate bonds such as Factiva, adjusted for term. FINANCIAL HIGHLIGHTS Net sales for 2003 increased 40.1% to $460.7 million from $328.9 million for 2002. These results included sales of three acquisitions made in 2003. Also included in 2003 are a full year's sales from the acquisition of substantially all of the assets of the former Condor business compared to five months' worth in 2002. For 2003, net earnings were $14.8 million or $0.84 per diluted share. These results include a pre-tax impairment loss on the sale of the Deer Park facility of $9.2 million, pre-tax acquisition-related costs of $0.9 million associated with our acquisition of substantially all of the assets of Condor in July 2002, and a pre-tax curtailment loss of $0.9 million on the non-qualified pension plan. Also included in 2003 is $1.4 million net of tax earnings from discontinued operations. 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 was comprised of $2.3 million and $1.9 million of impaired goodwill and trademark, respectively, offset by a tax 24 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. Also, in 2002, there was a pre-tax defined benefit pension plan curtailment charge of $2.0 million and pre-tax acquisition related costs of $0.6 million associated with Condor. RESULTS OF OPERATIONS COMPARISON OF 2003 TO 2002 Net sales by segment were as follows:
TWELVE MONTHS ENDED DECEMBER 31, INCREASE ---------------------- FROM SEGMENT 2003 2002 PRIOR PERIOD - ------- --------- --------- ------------ (DOLLARS IN MILLIONS) Defense............................................... $360.0 $243.5 47.8% Communications and Space Products..................... 55.5 47.3 17.3% Engineered Materials.................................. 45.2 38.1 18.4% ------ ------ Total................................................. $460.7 $328.9 40.1% ====== ======
Net sales for the year ended December 31, 2003 increased 40.1% to $460.7 million from $328.9 million for the year ended December 31, 2002. This increase comprised sales growth of $116.5 million for the Defense segment, $8.2 million for the Communications and Space Products segment and $7.1 million for the Engineered Materials segment. In the Defense segment, $91.3 million of the net increase was attributable to sales of Emblem Group Ltd. ("Emblem"), Darlington, Inc. ("Darlington"), and Advanced Engineering & Research Associates, Inc. ("AERA") since their acquisition dates of June 16, March 10, and February 5, 2003, respectively. In addition, $48.4 million of the increase is attributable to a full year's worth of sales of reconnaissance and surveillance systems associated with the acquisition of substantially all of the assets of Condor Systems, Inc. ("Condor"), compared to only five months in 2002. In addition, there were increases in sales of aircraft weapons suspension and release systems due in part to the F/A-22 AMRAAM Vertical Eject Launcher program, the BRU-57 Multiple Carriage Smart Bomb Rack program, and development efforts on the Joint Strike Fighter weapons suspension and release units programs. Sales of undersea sonar systems and aircraft radar signal simulator units also increased in 2003 compared to 2002. These increases were offset by decreases in sales of electronic warfare equipment as well as integrated combat systems. The decrease in sales of electronic warfare equipment was due to the completion of the Universal Exciter Upgrade ("UEU") production program in the third quarter of 2003. The decrease in integrated combat systems was due primarily to delays in receipt of orders from foreign customers. In the Communications and Space Products segment, most of the net increase in sales was attributable to a full year's worth of sales of electronic protection systems from the aforementioned acquisition of Condor compared to only five months in 2002. 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. There were also increases in sales of integrated composite structures including work associated with the Sikorsky Comanche program as well as production and installation of our composite pipe on offshore oil rig projects resulting from increased activity in the Gulf of Mexico. Operating earnings for the year ended December 31, 2003 were $30.9 million or 6.7% of net sales. This compares to operating earnings for the year ended December 31, 2002 of $29.4 million or 8.9% of net sales. The 2003 results were negatively impacted by a $9.2 million loss on the sale of our facility in Deer Park, a $0.9 million curtailment loss associated with our non-qualified pension plan, and $0.9 million of costs associated with the acquisition of the former Condor business. In 2002, operating earnings included a 25 $2.0 million curtailment loss associated with our defined benefit pension plan and $0.6 million of costs associated with the acquisition of substantially all of the assets of the former Condor business. In addition, 2003 operating earnings include $4.9 million of intangible asset amortization expense associated with the Condor, AERA, Darlington and Emblem acquisitions. This compares to total amortization expense of approximately $1.0 million for 2002. Also included in operating earnings for the year ended December 31, 2003 is pension expense of $3.9 million and ESOP compensation expense of $3.3 million. Included in operating earnings for the year ended December 31, 2002 is pension expense of $4.0 million and ESOP compensation expense of $4.0 million. The lower ESOP compensation expense for 2003 is attributable to our lower average stock price in 2003 compared to 2002. Pension and ESOP compensation expense are allocated between cost of sales and selling, general and administrative expense. The Defense segment's operating earnings for the year ended December 31, 2003 were $35.1 million or 9.7% of this segment's net sales compared to $28.7 million or 11.8% of this segment's net sales for the year ended December 31, 2002. In 2003, operating earnings were positively affected by higher-margin sales of reconnaissance and surveillance systems from the acquisition of substantially all of the assets of Condor, efficiencies achieved on higher production volume associated with our radar signal simulator, and higher margin sales of aircraft weapons suspension and release systems. The completion of production activities on certain long-term programs, including the UEU, also resulted in earnings at relatively high margins. In addition, there were high margins recognized on various B-1B spares and repairs contracts. These increases were offset in part by a shift in the margins of mine countermeasure systems from higher-margin production on the MK105 program last year to lower-margin, non-recurring development efforts this year associated with OASIS, as well as by the aforementioned lower sales of combat systems. Operating earnings for 2003 were also negatively impacted by amortization expense pertaining to intangible assets associated with acquisitions. The Communications and Space Products segment's operating earnings for the year ended December 31, 2003 were $3.6 million or 6.5% of this segment's net sales compared to an operating loss of $0.4 million or 0.9% of this segment's net sales in 2002. In 2003, operating earnings in this segment were negatively impacted by a $1.1 million pre-tax charge to write down satellite-related inventory to net realizable value. This reduction was caused by competitive price pressure from our major customer as well as some obsolescence. This charge was more than offset by the receipt of an award fee on a classified program as well as the contribution from the higher sales of communications systems from the acquisition of substantially all of the assets of Condor. Included in the 2002 operating loss was a $1.5 million charge to provide for manufacturing inefficiencies resulting from our primary customer's decrease in its forecasted purchases of our satellite down converters. The Engineered Materials segment's operating earnings for the year ended December 31, 2003 were $2.4 million or 5.3% of this segment's net sales compared to operating earnings of $3.2 million or 8.3% of this segment's net sales in 2002. During the year ended December 31, 2003, we incurred a pre-tax charge of $0.7 million to write down inventory and receivables related to the microwave product line that services the telecommunications industry. As sales from such product line were not materializing to expected levels set forth in the business plan for this line, we conducted an analysis of market potential. Such analysis was completed in the second quarter of 2003 and indicated that approximately $0.1 million of unbilled receivables were unrecoverable and that the net realizable value of the related inventory was $0.6 million lower than its book value. In addition, the decrease in this segment's operating earnings as a percentage of net sales was due to a decrease in contribution from composite structural products resulting from a shift in sales to lower-margin, non-recurring engineering efforts associated with the Sikorsky Comanche program. Selling, general and administrative expenses for the year ended December 31, 2003 increased to $71.9 million or 15.6% of net sales from $47.6 million or 14.5% of net sales for the year ended December 31, 2002. This increase was primarily attributable to three acquisitions made in 2003. Research and development expense for the year ended December 31, 2003 increased slightly to $8.6 million or 1.9% of net sales from $8.5 million or 2.6% of net sales for the year ended December 31, 2002. As a percent of sales, the decrease is attributable to the absence of such expenditures in the services businesses. 26 Interest expense, net of interest income, for the year ended December 31, 2003 increased 64.5% to $8.2 million from $5.0 million for the year ended December 31, 2002, due primarily to interest expense associated with our $137.8 million principal amount Notes issued in April 2002, 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. Income tax expense reflects an effective rate of 41.8% for the year ended December 31, 2003 compared to 42.5% for the year ended December 31, 2002. The decrease in the effective tax rate was principally attributable to the decreased amount of non-deductible, non-cash ESOP compensation expense in 2003. For the year ended December 31, 2003, earnings available for common shares were $14.8 million or $0.84 per diluted common share on 17.6 million diluted shares compared to earnings before cumulative effect of change in accounting principle of $14.0 million or $0.81 per diluted common share on 17.4 million diluted shares for the year ended December 31, 2002. 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. 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/A-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, 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. 27 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 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 28 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 an 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. 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. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Our cash, cash equivalents and marketable securities decreased 34.6% to $86.6 million at December 31, 2003 from $132.5 million at December 31, 2002. This decrease was due primarily to the cash outlays related to the three acquisitions made in 2003. Also, $8.9 million was used for the purchase of capital equipment and $2.4 million for the payment of common share dividends. Partially offsetting these decreases were the net proceeds of $21.3 million received from the sale of the Deer Park facility and the release of $27.3 million of restricted cash. Cash provided by operations was $17.6 million. Restricted cash of $27.3 million at December 31, 2002 represented collateral backing 105% of outstanding letters of credit assumed in connection with the acquisition of substantially all of the assets of Condor. As the letters of credit expired or were cancelled, the collateral was released. At December 31, 2003 there was no restricted cash. 29 Accounts receivable increased 33.5% to $134.3 million at December 31, 2003 from $100.6 million at December 31, 2002 due primarily to the acquisitions of AERA, Darlington and Emblem. Excluding the effects of these acquisitions and adjustments finalizing the purchase price allocation of Condor, accounts receivable increased $3.2 million from December 31, 2002. Inventories increased 7.2% to $34.7 million at December 31, 2003 from $32.4 million at December 31, 2002 due primarily to the Emblem acquisition. Excluding the effect of the acquisition, inventories decreased by $1.4 million. In 2003, satellite-related inventory was written down by $1.1 million to net realizable value due to competitive price pressures from a major customer as well as some obsolescence. Also in 2003, inventory in the microwave product line in the Engineered Materials segment was written down by $0.6 million to net realizable value as sales in this product line were not materializing to expected levels. The note receivable of $6.5 million at December 31, 2003 represents the note receivable from the sale of our facility in Deer Park in 2003. Included in other current assets is $1.6 million in notes related to the sale of our former College Point facility in January 1996. 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. A note receivable related to the sale of property in Deer Park in June 2000, which had a balance of $1.1 million at December 31, 2002, was collected in 2003. Contract advances decreased 59.6% to $8.2 million at December 31, 2003 from $20.3 million at December 31, 2002 due to the use of previously received advances for costs incurred on foreign contracts. In 2003, capital expenditures of $8.9 million increased 25% compared to 2002. Increases were in accordance with planned expenditures and partially attributable to leasehold improvements at the Company's headquarters as well as purchases of machinery and equipment. FINANCING ACTIVITIES Credit Facility At December 31, 2003 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. 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, 2003, LIBOR was approximately 1.15% 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, 2003 or 2002. Letters of credit outstanding at December 31, 2003 pertaining to the credit facility were $52.3 million, resulting in $72.7 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. Also, the Company cannot declare or pay any dividend on its outstanding common stock in an amount that exceeds fifty percent of its consolidated net income for the immediately preceding quarter. As of December 31, 2003, we were in compliance with our covenants. The credit facility is secured by our accounts receivable, inventory and machinery and equipment. 30 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, 2003 and 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, 2003, there had been no conversions. Shelf Registration On December 23, 2003, we filed a shelf registration statement to potentially offer for sale common shares, preferred shares, debt securities and warrants. We may sell any combination of the foregoing securities in one or more offerings up to an aggregate initial offering price of $500,000,000. 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 funding of our pension and post-retirement benefit obligations. 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, 2003, we have included the following table. We are obligated under building and equipment leases expiring between 2004 and 2012. The aggregate future minimum lease commitments under those obligations with noncancellable terms in excess of one year are shown below. Our commitments under letters of credit and advance payment and performance bonds relate primarily to advances received on foreign contracts should we fail to perform in accordance with the contract terms. 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: -------------------------------------------------------- 2009 AND TOTAL 2004 2005 2006 2007 2008 BEYOND ------ ----- ----- ---- ------ ---- -------- (IN MILLIONS) 5.25% Convertible Subordinated Notes due 2007.............. $137.8 $ -- $ -- $ -- $137.8 $ -- $ -- Operating leases.............. 72.1 13.6 11.0 7.8 6.8 6.3 26.6 Letters of credit............. 53.7 26.0 27.4 -- -- 0.3 -- Advance payment and performance bonds........... 1.9 0.2 -- -- -- -- 1.7 ------ ----- ----- ---- ------ ---- ----- Total......................... $265.5 $39.8 $38.4 $7.8 $144.6 $6.6 $28.3 ====== ===== ===== ==== ====== ==== =====
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 31 approximately 76%, 75% and 69% of our total net sales for 2003, 2002 and 2001, respectively. In addition, sales from the Universal Exciter Upgrade program accounted for approximately 2%, 14% and 15% of our total net sales in 2003, 2002 and 2001, 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, 2003, one customer, a prime contractor, in addition to the U.S. Government accounted for more than 10% of our consolidated accounts receivable. BACKLOG The funded backlog of unfilled orders at December 31, 2003 increased to $462.3 million from $375.0 million at December 31, 2002. Our backlog consists primarily of current orders under long-lived, mission-critical programs of key defense platforms. COMMON SHARE PRICES EDO common shares are traded on the New York Stock Exchange. As of February 25, 2004, there were 1,904 shareholders of record (brokers and nominees counted as one each). The price range in 2003 and 2002 was as follows:
2003 2002 ----------------- ----------------- HIGH LOW HIGH LOW ------- ------- ------- ------- 1st Quarter.................................... 21.6000 14.7500 31.1500 21.9900 2nd Quarter.................................... 20.3100 14.9700 32.9000 25.9000 3rd Quarter.................................... 23.5900 17.0900 28.4900 17.5000 4th Quarter.................................... 25.9500 19.7000 22.6500 15.5000
DIVIDENDS During 2003 and 2002, 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, the general state of world military readiness and deployment; and the ability to obtain export licenses. 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 32 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; underestimation 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. 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF EARNINGS EDO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONTINUING OPERATIONS: NET SALES................................................. $460,667 $328,876 $259,961 -------- -------- -------- COSTS AND EXPENSES Cost of sales........................................... 338,259 240,850 189,733 Selling, general and administrative..................... 71,855 47,584 34,013 Research and development................................ 8,594 8,492 8,750 Write-off of purchased in-process research and development and merger-related costs................. 929 567 1,318 Benefit plan curtailment loss (gain).................... 942 1,998 (929) Impairment loss on Deer Park facility................... 9,160 -- -- -------- -------- -------- 429,739 299,491 232,885 -------- -------- -------- OPERATING EARNINGS........................................ 30,928 29,385 27,076 NON-OPERATING INCOME (EXPENSE) Interest income......................................... 941 1,729 915 Interest expense........................................ (9,093) (6,685) (3,131) Other, net.............................................. 279 (95) (971) -------- -------- -------- (7,873) (5,051) (3,187) -------- -------- -------- Earnings from continuing operations before income taxes and cumulative effect of a change in accounting principle............................................ 23,055 24,334 23,889 Income tax expense...................................... (9,644) (10,342) (9,210) -------- -------- -------- EARNINGS FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.............. 13,411 13,992 14,679 DISCONTINUED OPERATIONS: Gain from discontinued operations, net of tax............. 1,398 -- 273 -------- -------- -------- EARNINGS FROM DISCONTINUED OPERATIONS..................... 1,398 -- 273 -------- -------- -------- EARNINGS BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE................................................. 14,809 13,992 14,952 -------- -------- -------- Cumulative effect of a change in accounting principle, net of tax of $790............................................ -- (3,363) -- Dividends on preferred shares............................... -- -- 194 -------- -------- -------- NET EARNINGS AVAILABLE FOR COMMON SHARES.................... $ 14,809 $ 10,629 $ 14,758 ======== ======== ======== EARNINGS PER COMMON SHARE: Basic: Continuing operations................................... $ 0.78 $ 0.62 $ 1.14 Discontinued operations................................. 0.08 -- 0.02 -------- -------- -------- NET EARNINGS PER COMMON SHARE -- BASIC...................... $ 0.86 $ 0.62 $ 1.16 ======== ======== ======== Diluted: Continuing operations................................... $ 0.76 $ 0.61 $ 1.09 Discontinued operations................................. 0.08 -- 0.02 -------- -------- -------- NET EARNINGS PER COMMON SHARE -- DILUTED.................... $ 0.84 $ 0.61 $ 1.11 ======== ======== ======== UNAUDITED PRO FORMA AMOUNTS ASSUMING RETROACTIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE: Net Earnings Available for Common Shares.................. $ 15,329 Basic Net Earnings per Common Share....................... $ 1.18 Diluted Net Earnings per Common Share..................... $ 1.13 ========
See accompanying Notes to Consolidated Financial Statements. 34 CONSOLIDATED BALANCE SHEETS EDO CORPORATION AND SUBSIDIARIES
DECEMBER 31, --------------------- 2003 2002 --------- --------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $ 86,416 $132,320 Restricted cash........................................... -- 27,347 Marketable securities..................................... 216 193 Accounts receivable, net.................................. 134,303 100,594 Inventories............................................... 34,733 32,406 Deferred income tax asset, net............................ 3,594 3,222 Prepayments and other..................................... 5,954 3,133 -------- -------- Total current assets................................... 265,216 299,215 -------- -------- Property, plant and equipment, net.......................... 31,355 64,472 Notes receivable............................................ 6,538 2,556 Goodwill.................................................... 92,527 61,352 Other intangible assets..................................... 55,898 11,867 Deferred income tax asset, net.............................. 21,774 20,439 Other assets................................................ 21,388 21,673 -------- -------- $494,696 $481,574 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 22,801 $ 19,108 Accrued liabilities....................................... 61,942 55,448 Contract advances and deposits............................ 8,195 20,277 -------- -------- Total current liabilities.............................. 92,938 94,833 -------- -------- Long-term debt.............................................. 137,800 137,800 Post-retirement benefits obligations........................ 71,898 78,643 Environmental obligation.................................... 1,728 2,025 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, 19,832,108 issued in 2003 and 19,790,477 issued in 2002.............................. 19,832 19,790 Additional paid-in capital................................ 150,097 147,091 Retained earnings......................................... 69,059 56,325 Accumulated other comprehensive loss, net of income tax benefit................................................ (29,281) (33,899) Treasury shares at cost (88,128 shares in 2003 and 94,322 shares in 2002)........................................ (1,255) (1,321) Unearned Employee Stock Ownership Plan shares............. (17,290) (18,541) Deferred compensation under Long-Term Incentive Plan...... (479) (579) Management group receivables.............................. (351) (593) -------- -------- Total shareholders' equity............................. 190,332 168,273 -------- -------- $494,696 $481,574 ======== ========
See accompanying Notes to Consolidated Financial Statements. 35 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY EDO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 2003 2002 2001 ----------------- ----------------- ----------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ -------- ------ -------- ------ (IN THOUSANDS) PREFERRED SHARES Balance at beginning of year............................ $ -- -- $ -- -- $ 49 49 Shares converted to common shares....................... -- -- -- -- (49) (49) -------- ------ -------- ------ -------- ------ Balance at end of year.................................. -- -- -- -- -- -- -------- ------ -------- ------ -------- ------ COMMON SHARES Balance at beginning of year............................ 19,790 19,790 19,790 19,790 15,007 15,007 Exercise of stock options............................... 31 31 -- -- -- -- Shares used for Long-Term Incentive Plan................ 11 11 -- -- -- -- 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.................................. 19,832 19,832 19,790 19,790 19,790 19,790 -------- ------ -------- ------ -------- ------ ADDITIONAL PAID-IN CAPITAL Balance at beginning of year............................ 147,091 143,747 58,614 Exercise of stock options............................... 150 (466) (2,405) Income tax benefit related to stock options and Long-Term Incentive Plan.............................. 328 713 1,118 Shares used for payment of directors' fees.............. 28 64 35 Shares used for Long-Term Incentive Plan................ 178 241 (73) Conversion of preferred shares to common shares......... -- -- (1,018) Conversion of subordinated debentures................... -- -- 8,525 Sale of stock in public offering........................ -- -- 77,775 Compensation expense on accelerated options............. 292 -- 276 Employee Stock Ownership Plan shares committed-to-be- released.............................................. 2,030 2,792 900 -------- -------- -------- Balance at end of year.................................. 150,097 147,091 143,747 -------- -------- -------- RETAINED EARNINGS Balance at beginning of year............................ 56,325 47,744 34,803 Net earnings............................................ 14,809 10,629 14,952 Common share dividends (12 cents per share)............. (2,075) (2,048) (1,840) Dividends on preferred shares........................... -- -- (194) Tax benefit on unallocated preferred share dividends.... -- -- 23 -------- -------- -------- Balance at end of year.................................. 69,059 56,325 47,744 -------- -------- -------- ACCUMULATED OTHER COMPREHENSIVE LOSS Balance at beginning of year............................ (33,899) (13,385) (61) Unrealized gain on marketable securities, net of tax.... -- -- 61 Unrealized gain on foreign currency, net of tax......... 50 86 -- Additional minimum pension liability, net of tax........ 4,568 (20,600) (13,385) -------- -------- -------- Balance at end of year.................................. (29,281) (33,899) (13,385) -------- -------- -------- TREASURY SHARES AT COST Balance at beginning of year............................ (1,321) (94) (2,461) (182) (19,388) (1,370) Shares used for exercise of stock options............... 87 6 952 69 4,297 314 Shares used for payment of directors' fees.............. 80 6 78 6 122 9 Shares used for (repurchased from) Long-Term Incentive Plan.................................................. (101) (6) 110 13 (63) (6) 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.................................. (1,255) (88) (1,321) (94) (2,461) (182) -------- ------ -------- ------ -------- ------
36
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 2003 2002 2001 ----------------- ----------------- ----------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ -------- ------ -------- ------ (IN THOUSANDS) EMPLOYEE STOCK OWNERSHIP TRUST LOAN OBLIGATION Balance at beginning of year............................ -- -- (5,781) Repayments made during year............................. -- -- 890 Restructuring of EDO Employee Stock Ownership Plan...... -- -- 4,891 -------- -------- -------- Balance at end of year.................................. -- -- -- -------- -------- -------- DEFERRED COMPENSATION UNDER LONG-TERM INCENTIVE PLAN Balance at beginning of year............................ (579) (300) (423) Shares used for Long-Term Incentive Plan................ (189) (480) (148) Amortization of Long-Term Incentive Plan deferred compensation expense.................................. 289 201 271 -------- -------- -------- Balance at end of year.................................. (479) (579) (300) -------- -------- -------- UNEARNED EMPLOYEE STOCK OWNERSHIP PLAN COMPENSATION Balance at beginning of year............................ (18,541) (19,792) (15,782) Restructuring of EDO Employee Stock Ownership Plan...... -- -- (4,891) Employee Stock Ownership Plan Shares committed-to-be- released.............................................. 1,251 1,251 881 -------- -------- -------- Balance at end of year.................................. (17,290) (18,541) (19,792) -------- -------- -------- MANAGEMENT GROUP RECEIVABLES Balance at beginning of year............................ (593) (845) (1,220) Payments received on management loans................... 242 252 375 -------- -------- -------- Balance at end of year.................................. (351) (593) (845) -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY................................ $190,332 $168,273 $174,498 ======== ======== ======== COMPREHENSIVE INCOME (LOSS) Net earnings............................................ $ 14,809 $ 10,629 $ 14,952 Additional minimum pension liability, net of income tax expense of $3,175 in 2003 and net of income tax benefit of $14,316 in 2002 and $9,302 in 2001......... 4,568 (20,600) (13,385) Unrealized gain on marketable securities, net of income tax expense of $31 in 2001............................ -- -- 61 Unrealized gain on foreign currency..................... 50 86 -- -------- -------- -------- Comprehensive income (loss)............................. $ 19,427 $ (9,885) $ 1,628 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 37 CONSOLIDATED STATEMENTS OF CASH FLOWS EDO CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES: Earnings from operations.................................. $ 13,411 $ 10,629 $ 14,679 Adjustments to earnings to arrive at cash provided by operations: Depreciation........................................... 12,180 10,365 9,686 Amortization........................................... 4,885 956 1,710 Deferred tax (benefit) expense......................... (6,840) (2,984) 5,941 Write-off of purchased in-process research and development.......................................... -- 150 -- Real estate tax assessment adjustment.................. -- -- 7,846 Bad debt expense....................................... 568 407 220 Gain on repurchase of debentures....................... -- -- (171) Loss on sale of Deer Park facility..................... 9,160 -- -- (Gain) loss on sale of property, plant and equipment... (131) 53 (76) Gain on sale of marketable securities.................. -- -- (81) Deferred compensation expense.......................... 289 201 271 Non-cash Employee Stock Ownership Plan compensation expense.............................................. 3,281 4,043 1,781 Dividends on unallocated Employee Stock Ownership Plan shares............................................... 292 312 80 Non-cash compensation expense.......................... 292 -- 276 Common shares issued for directors' fees............... 108 142 157 Income tax benefit from stock options and Long-Term Incentive Plan....................................... 328 713 1,118 Cumulative effect of a change in accounting principle............................................ -- 3,363 -- Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable.................................. (3,203) (2,519) (10,753) Inventories.......................................... 1,406 (2,926) 2,033 Prepayments and other assets......................... 4,032 220 (629) Contribution to defined benefit pension plan......... (5,000) -- -- Accounts payable, accrued liabilities and other...... (5,402) 5,217 (4,974) Contract advances and deposits....................... (12,082) 3,575 (15,017) -------- -------- -------- Cash provided by operations................................. 17,574 31,917 14,097 -------- -------- -------- Net cash provided by discontinued operations................ 79 -- -- -------- -------- --------
38
YEARS ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (IN THOUSANDS) INVESTING ACTIVITIES: Purchase of plant and equipment........................... (8,865) (7,093) (14,298) Payments received on notes receivable..................... 1,385 350 347 Proceeds from sale of property, plant and equipment....... 21,304 1 280 Purchase of marketable securities......................... (23) (3) (59) Sale or redemption of marketable securities............... -- -- 14,455 Restricted cash........................................... 27,347 (27,347) -- Cash paid for acquisitions, net of cash acquired.......... (94,188) (59,024) (13,938) -------- -------- -------- Cash used by investing activities........................... (53,040) (93,116) (13,213) -------- -------- -------- FINANCING ACTIVITIES: Issuance of convertible subordinated notes................ -- 137,800 -- Proceeds from exercise of stock options................... 268 486 1,892 Proceeds from management group receivables................ 242 252 375 Proceeds from sale of stock in public offering, net of expenses............................................... -- -- 81,491 Borrowings under revolver................................. -- -- 20,800 Repayments of borrowings under revolver................... -- -- (20,800) Repayments of long-term debt.............................. -- -- (17,300) Repayments of acquired debt............................... (8,660) -- -- Repurchase of debentures.................................. -- -- (3,184) Purchase of treasury shares............................... -- -- (1,020) Payment of EDO ESOP loan obligation....................... -- -- (4,891) Payment made on note payable.............................. -- (500) (500) Payment of common share cash dividends.................... (2,367) (2,360) (1,920) Payment of preferred share cash dividends................. -- -- (194) -------- -------- -------- Cash provided (used) by financing activities................ (10,517) 135,678 54,749 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ (45,904) 74,479 55,633 Cash and cash equivalents at beginning of year.............. 132,320 57,841 2,208 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 86,416 $132,320 $ 57,841 ======== ======== ======== Supplemental disclosures: Cash paid for: Interest............................................... $ 7,234 $ 3,878 $ 2,166 ======== ======== ======== Income taxes........................................... $ 11,880 $ 14,063 $ 5,913 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 39 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 (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, 2003, there was no restricted cash. At December 31, 2002 the $27.3 million of restricted cash related 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 expired or were cancelled, collateral was released. (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. Our 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. (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 our defense contracts), less the portion of such costs charged to cost of sales. All other inventories are stated at the lower of cost (principally first-in, first-out method) or market. 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. 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 40 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. (F) LONG-LIVED ASSETS, OTHER THAN GOODWILL AND OTHER INTANGIBLES 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 the Company determines that the useful life of property, plant and equipment 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. The Company accounts for its investments in long-lived assets in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets". The Company adopted SFAS No. 144 on January 1, 2002. SFAS No. 144 requires the Company to review its long-lived assets 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, which is used to determine recoverability, is based upon, among other things, certain assumptions about future operating performance. The Company's estimates of undiscounted cash flow may differ from actual cash flow due to such factors including technological advances, changes to the Company's business model, or changes in the Company's capital strategy or planned use of long-lived assets. 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. 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 2003 and 2002, the Company capitalized approximately $1.1 million and $0.3 million, respectively, of such costs. These costs are being amortized on a straight-line basis over a period of two to four years. Deferred financing costs are amortized on a straight-line basis over the life of the related financing. The unamortized balances of $4.1 million and $5.5 million are included in other assets at December 31, 2003 and 2002, respectively. (G) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the FASB issued 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 41 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for the non-amortization of goodwill were effective July 1, 2001 for acquisitions completed after the issuance of SFAS No. 141. In accordance with SFAS No. 142, 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 the 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 profits, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and/or a material decrease in the fair value of some or all of the assets. In 2003, the Company performed the required impairment tests of goodwill as of October 1, 2003. There was no indication of impairment. In 2002 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 years ended December 31, 2003 and 2002 are as follows:
COMMUNICATIONS AND SPACE ENGINEERED DEFENSE PRODUCTS MATERIALS TOTAL ------- -------------- ---------- ------- (IN THOUSANDS) Balance as of January 1, 2002............ $20,601 $ -- $ 2,274 $22,875 Impairment Loss.......................... -- -- (2,274) (2,274) Acquisition of Condor Systems, Inc. ..... 37,059 3,692 -- 40,751 ------- ------- ------- ------- Balance as of January 1, 2003............ $57,660 $ 3,692 $ -- $61,352 Settlement of certain pre-acquisition Condor liabilities..................... 1,569 (2,031) -- (462) Adjustments to pre-acquisition tax liabilities............................ (3,059) -- -- (3,059) Acquisition of AERA...................... 11,626 -- -- 11,626 Acquisition of Darlington................ 13,462 -- -- 13,462 Acquisition of Emblem.................... 9,608 -- -- 9,608 ------- ------- ------- ------- Balance as of December 31, 2003.......... $90,866 $ 1,661 $ -- $92,527 ======= ======= ======= =======
42 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized below are intangible assets subject to amortization as of December 31:
2003 2002 LIFE ------- ------- ----------- (IN THOUSANDS) Capitalized non-compete agreements related to the acquisitions of DSI/AERA/Darlington/Emblem......... $ 2,968 $ 200 1-5 years Purchased technologies related to the acquisitions of Condor/Emblem...................................... 17,003 11,648 8-20 years Customer contracts and relationships related to the acquisitions of AERA/Darlington/Emblem............. 39,198 -- 10-20 years Tradename related to the acquisitions of AERA/ Darlington/Emblem.................................. 1,569 -- 5-10 years Other intangible assets related to the acquisition of Condor Systems, Inc. .............................. 916 916 2 years ------- ------- 61,654 12,764 Less accumulated amortization........................ (5,756) (897) ------- ------- $55,898 $11,867 ======= =======
The amortization expense for the years ended December 31, 2003, 2002 and 2001 amounted to $4.9 million, $0.9 million and $0.1 million, respectively. Amortization expense for 2004, 2005, 2006, 2007, 2008 and thereafter related to these intangible assets is estimated to be $5.5 million, $5.2 million, $5.2 million, $5.2 million, $4.6 million and $30.2 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 that are not subject to amortization. 43 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table represents a reconciliation of reported net earnings from continuing operations available for common shares to adjusted net earnings from continuing operations available for common shares exclusive of amortization expense associated with goodwill and intangible assets that are no longer being amortized subsequent to the adoption of SFAS No. 142, effective January 1, 2002:
YEARS ENDED DECEMBER 31, --------------------------- 2003 2002 2001 ------- ------- ------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Reported net earnings from continuing operations available for common shares........................... $13,411 $10,629 $14,485 Add back: Goodwill and trademark amortization, net of taxes................................................. -- -- 571 ------- ------- ------- Pro Forma............................................... $13,411 $10,629 $15,056 ======= ======= ======= Basic earnings per share: Reported net earnings from continuing operations available for common shares........................ $ 0.78 $ 0.62 $ 1.14 Add back: Goodwill and trademark amortization, net of taxes................................................. -- -- 0.04 ------- ------- ------- Adjusted net earnings................................... $ 0.78 $ 0.62 $ 1.18 ======= ======= ======= Diluted earnings per share: Reported net earnings from continuing operations available for common shares........................ $ 0.76 $ 0.61 $ 1.09 Add back: Goodwill and trademark amortization, net of taxes................................................. -- -- 0.04 ------- ------- ------- Adjusted net earnings................................... $ 0.76 $ 0.61 $ 1.13 ======= ======= =======
(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, 2003 was approximately $150.6 million based on recent market transactions compared to a carrying value of $137.8 million. At December 31, 2002, the fair value of the Notes approximated the carrying value of $137.8 million. 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. 44 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair market value recognition provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" whereby compensation expense would be recognized as incurred for stock-based employee compensation. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The per share weighted-average fair value of stock options granted was $10.63, $15.28 and $4.88 in 2003, 2002 and 2001, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2003 -- expected dividend yield of 1%, risk free interest rate of 3.6%, expected volatility of 51%, and an expected option life of 7 1/2 years; 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.
2003 2002 2001 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings: As reported........................................... $13,411 $10,629 $14,679 Stock option compensation expense based on fair value method, net of tax................................. (1,626) (1,078) (466) ------- ------- ------- Pro forma............................................. $11,785 $ 9,551 $14,213 Basic earnings per common share: As reported........................................... $ 0.78 $ 0.62 $ 1.14 Pro forma............................................. 0.68 0.56 1.10 Diluted earnings per common share: As reported........................................... $ 0.76 $ 0.61 $ 1.09 Pro forma............................................. 0.67 0.55 1.05 ======= ======= =======
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 above. 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. 45 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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. (2) ACQUISITIONS On June 16, 2003, the Company acquired for cash all of the stock of Emblem Group Ltd. ("Emblem"), a privately-held company based in Brighton, England. Emblem, now known as EDO (UK) Ltd., is a supplier of aerospace and defense products and services, primarily through its MBM Technology unit in England and Artisan Technologies, Inc. subsidiary in the United States. Emblem has a core competency in aircraft weapons-carriage and interfacing systems that will reinforce EDO's position as a global leader in aircraft armament release systems. Emblem is expected to broaden the Company's customer base in Europe. The purchase price was L16.3 million ($27.3 million), excluding transaction costs of approximately $1.9 million. Emblem became part of the Company's Defense segment. The excess of the purchase price over the net assets acquired recorded as goodwill and other intangibles related to Emblem's units located in England is deductible for U.S. income tax purposes over 15 years. The excess of the purchase price over the net assets acquired related to Artisan Technologies, Inc. is not deductible for income tax purposes. On March 10, 2003, the Company acquired for cash all of the stock of Darlington, Inc. ("Darlington"), a privately-held defense communications company based in Alexandria, Virginia. Darlington 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 purchase price was $25.6 million, excluding transaction costs of approximately $0.3 million. In addition, the Company acquired and immediately paid off debt of $4.9 million. Darlington became part of the Company's Defense segment. The excess of the purchase price over the net assets acquired recorded as goodwill and other intangible assets is deductible for income tax purposes over 15 years. On February 5, 2003, a wholly-owned subsidiary of the Company acquired for cash all of the stock of Advanced Engineering & Research Associates, Inc.("AERA"), a privately-held company located in Alexandria, Virginia. AERA, which was merged with another EDO subsidiary and renamed EDO Professional Services Inc., 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 that the Company offers. The purchase price was $38.1 million, excluding transaction costs of $0.3 million. In addition, the Company acquired and immediately paid off debt of $3.8 million. AERA became part of the Company's Defense segment. The excess of the purchase price over the net assets acquired recorded as goodwill and other intangible assets is deductible for income tax purposes over 15 years. On July 26, 2002, a wholly-owned subsidiary of the Company acquired substantially all of the assets and assumed certain liabilities of Condor Systems, Inc., a privately-held defense electronics company and its domestic subsidiary (together, "Condor") for $62.5 million in cash, in addition to transaction costs of 46 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $5.0 million. The acquisition expanded the Company's electronic warfare business in the areas of reconnaissance and surveillance systems. The assets became part of the Company's Defense and Communications and Space Products segments. The excess of the purchase price over the net assets acquired recorded as goodwill, IPR&D and other intangible assets is deductible for income tax purposes over 15 years. 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 strengthened and expanded the range of services the Company offered to both existing and new customers. The 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 recorded as goodwill is not deductible for income tax purposes. These acquisitions were accounted for as purchases and, accordingly, their operating results are included in the Company's consolidated financial statements since their respective acquisition dates. Associated with the acquisition and included in operating earnings for 2003 and 2002 is $0.9 million and $0.6 million, respectively, of acquisition-related costs, of which $0.2 million in 2002 represents the write-off of purchased in-process research and development ("IPR&D"). This IPR&D was determined 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 acquisitions of Emblem, Darlington, AERA and Condor had been completed at the beginning of each period are summarized below. The results reflect adjustments to net sales, cost of sales, amortization expense, compensation expense, purchased in-process research and development costs, interest income and expense and income tax expense. The interest rate used in determining pro forma adjustments to interest income or expense was based on the average yield of the Company's invested cash and cash equivalents and approximated 1.0% for each of the respective periods presented below.
YEAR ENDED ----------------------------------------- DECEMBER 31, 2003 DECEMBER 31, 2002 ------------------- ------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales........................................... $489,531 $494,332 Earnings available for common shares, before discontinued operations and cumulative effect of a change in accounting principle.................... $ 15,995 $ 15,456 Diluted earnings per common share................... $ 0.91 $ 0.89
The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had these acquisitions been completed at the beginning of the periods, or of the results which may occur in the future. 47 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisition.
EMBLEM DARLINGTON AERA AT CONDOR AT AT JUNE 16, AT MARCH 10, FEBRUARY 5, JULY 26, 2003 2003 2003 2002 ----------- ------------ -------------- ----------- (IN THOUSANDS) Current assets........................ $ 9,314 $ 11,943 $13,022 $ 31,775 Plant and equipment................... 3,537 1,534 1,048 5,543 Customer contracts and relationships....................... 7,698 14,400 17,100 -- Purchased in-process research and development......................... -- -- -- 150 Purchased technologies................ 5,355 -- -- 11,648 Purchased backlog..................... -- -- -- 916 Non-compete agreements................ 318 30 2,420 -- Tradename............................. 669 400 500 -- Goodwill.............................. 9,608 13,462 11,626 40,290 Other assets.......................... -- 446 414 76 Liabilities........................... (7,257) (16,326) (7,768) (22,922) ------- -------- ------- -------- Total purchase price.................. $29,242 $ 25,889 $38,362 $ 67,476 ======= ======== ======= ========
Adjustments resulting from the settlement of purchase prices on Condor, AERA and Darlington have been made. In addition, there were adjustments due to the settlement of certain pre-acquisition Condor liabilities. Adjustments related to the settlement of the Emblem purchase price are expected to be determined in the first half of 2004. (3) DISCONTINUED OPERATIONS In 2003, we received notification of final settlement of bankruptcy matters pertaining to our former energy business. Upon the discontinuance of such business in 1996, a liability was established pending final settlement of the bankruptcy. This liability was reversed in the second quarter of 2003. Consequently, $1.4 million, net of income tax expense of $0.9 million, was reported as earnings from discontinued operations in the accompanying statement of earnings. (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, 2003 and 2002, the marketable securities balance represents amounts in mutual funds. (5) ACCOUNTS AND NOTES RECEIVABLE Accounts receivable included $ 44.1 million and $43.0 million at December 31, 2003 and 2002, respectively, of unbilled revenues. Substantially all of the unbilled balances at December 31, 2003 will be billed and are expected to be collected during 2004. Total billed receivables due from the United States Government, either directly or as a subcontractor to a prime contractor with the Government, were $67.6 million and $31.0 million at December 31, 2003 and 2002, respectively. 48 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Notes receivable at December 31, 2003 and 2002 include $1.6 million and $1.9 million, respectively, from the sale of the Company's College Point facility in January 1996 all of which is included in current assets at December 31, 2003 and $0.4 million is in current assets at December 31, 2002. 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, 2003 is $6.5 million from the sale in July 2003 of the Company's Deer Park facility. At December 2002, notes receivable included $1.1 million from the sale of certain parcels of land and a building at the Company's Deer Park facility, which was collected in 2003. (6) INVENTORIES Inventories are summarized by major classification as follows at December 31:
2003 2002 -------- ------- (IN THOUSANDS) Raw material and supplies................................... $ 8,624 $ 7,804 Work-in-process............................................. 38,052 27,024 Finished goods.............................................. 1,870 2,041 Less: Unliquidated progress payments...................... (13,813) (4,463) -------- ------- Finished goods.............................................. $ 34,733 $32,406 ======== =======
(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:
2003 2002 LIFE -------- -------- ----------- (IN THOUSANDS) Land.............................................. $ 128 $ 18,080 Buildings and improvements........................ 1,015 25,906 10-30 years Machinery and equipment........................... 70,079 59,550 3-19 years Software.......................................... 3,158 2,030 2-4 years Leasehold improvements............................ 16,039 13,151 Lease terms -------- -------- 90,419 118,717 Less accumulated depreciation and amortization.... (59,064) (54,245) -------- -------- $ 31,355 $ 64,472 ======== ========
On June 24, 2003, the Board of Directors of the Company approved the decision to sell the Company's 726,000 square foot facility in Deer Park, NY. The Company recorded a pre-tax impairment loss of $9.2 million in the second quarter of 2003, as the net book value of the assets exceeded the fair value less the costs to sell. The fair value was based on a $29.0 million sales price per the sales agreement entered into in July 2003. This impairment charge represents the entire loss the Company expects to incur. Of the $29.0 million sales price, $22.0 million is in cash and $7.0 million is in the form of a purchase money mortgage and note. The Company closed on the sale in October 2003 and received the cash less closing payments. The note receivable is due when the Company vacates the facility. As part of the agreement, the Company will lease the facility for a period not to exceed two years. The lease agreement does not have any renewal or buyout options. 49 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) ACCRUED LIABILITIES Accrued liabilities consisted of the following at December 31:
2003 2002 ------- ------- (IN THOUSANDS) Employee compensation and benefits.......................... $22,453 $16,744 Deferred revenue and accrual for future costs related to acquired contracts........................................ 11,161 11,562 Income taxes payable........................................ 7,175 3,991 Accrued interest............................................ 1,673 1,782 Warranty.................................................... 1,612 1,622 Current portion of environmental obligation................. 264 250 Other....................................................... 17,604 19,497 ------- ------- $61,942 $55,448 ======= =======
(9) LONG-TERM DEBT AND CREDIT FACILITY CREDIT FACILITY At December 31, 2003, the Company has a $200 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 million credit facility in place at December 31, 2001. In connection with the amended facility, $0.9 million and $1.2 million of deferred finance costs are included in other assets on the accompanying consolidated balance sheet at December 31, 2003 and 2002, respectively, 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, 2003, LIBOR was approximately 1.15% 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, 2003 or 2002. Letters of credit outstanding at December 31, 2003 pertaining to the credit facility were $52.3 million, resulting in $72.7 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. Also, the Company cannot declare or pay any dividend on its outstanding common stock in an amount that exceeds fifty percent of its consolidated net income for the immediately preceding quarter. As of December 31, 2003, the Company was in compliance with its covenants. The credit facility is secured by the Company's accounts receivables, inventory and machinery and equipment. 50 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, was $1.5 million at December 31, 2003 and 2002. In connection with the offering of the Notes, there are $3.1 million and $4.1 million of unamortized debt issuance costs at December 31, 2003 and 2002, respectively, 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, 2003, 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 Prior to 2001 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. 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) a special allocation for employees who meet certain service requirements (iii) a fixed amount per participant chosen annually; and (iv) 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 2003, 2002 and 2001 non-cash ESOP compensation expense recorded by the Company amounted to $3.3 million, $4.0 million, and $1.8 million, respectively. At December 31, 2003, there are 2,330,684 unearned/unallocated shares which have an aggregate market value of $57.5 million and 1,768,349 allocated 51 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) shares. Total principal and interest payments made in 2003, 2002, and 2001 under the merged ESOP indirect loan amounted to $1.7 million, $1.7 million, and $1.1 million, respectively. (11) INCOME TAXES The 2003, 2002 and 2001 significant components of the provision for income taxes attributable to continuing operations are as follows:
2003 2002 2001 ------- ------- ------ (IN THOUSANDS) Federal Current................................................ $12,927 $10,659 $2,345 Deferred............................................... (5,900) (2,503) 5,598 ------- ------- ------ $ 7,027 $ 8,156 $7,943 ------- ------- ------ Foreign Current................................................ 207 -- -- Deferred............................................... 82 -- -- ------- ------- ------ $ 289 $ -- $ -- ------- ------- ------ State Current................................................ $ 3,350 $ 2,667 $1,097 Deferred............................................... (1,022) (481) 170 ------- ------- ------ $ 2,328 $ 2,186 $1,267 ------- ------- ------ Total.................................................... $ 9,644 $10,342 $9,210 ======= ======= ======
The reconciliation of income tax attributable to continuing operations computed at the U.S. Federal tax rate to income tax expense is:
PERCENT OF PRE-TAX EARNINGS ------------------ 2003 2002 2001 ---- ---- ---- Tax at statutory rate....................................... 35.0% 35.0% 35.0% State taxes, net of Federal benefit......................... 5.0 5.0 3.0 Non-deductible goodwill amortization........................ -- -- 1.0 Non-cash ESOP compensation expense.......................... 2.0 3.0 0.5 Foreign sales benefit....................................... (1.3) (1.4) (1.4) Other, net.................................................. 1.1 0.9 0.5 ---- ---- ---- Effective income tax rate................................... 41.8% 42.5% 38.6% ==== ==== ====
52 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The significant components of deferred tax assets and liabilities as of December 31 are as follows:
2003 2002 ------- ------- (IN THOUSANDS) DEFERRED TAX ASSETS Retirement plans' additional minimum liability.............. $20,442 $23,617 Post-retirement benefits obligation other than pensions..... 5,233 5,001 Deferred revenue............................................ 1,697 980 Deferred compensation....................................... 3,614 2,843 Inventory valuation......................................... 1,897 2,242 Other....................................................... 404 99 ------- ------- Total deferred tax assets................................... 33,287 34,782 ------- ------- DEFERRED TAX LIABILITIES Depreciation and amortization............................... 4,306 7,946 Prepaid pension asset....................................... 3,613 3,175 ------- ------- Total deferred tax liabilities.............................. 7,919 11,121 ------- ------- Net deferred tax asset...................................... $25,368 $23,661 ======= =======
(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, 2003, the Company had acquired approximately 4,091,000 common shares in open market transactions at prevailing market prices. Approximately 4,041,000 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, 2003 and 2002, respectively, the Company held 88,128 and 94,322 common shares in its treasury for future use. At December 31, 2003, the Company had reserved 6,113,646 authorized and unissued common shares for stock option and long-term incentive plans and conversion of the Notes. 53 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
2003 2002 2001 ------- ------- ------- (IN THOUSANDS) Numerator: Earnings from continuing operations available for common shares for basic calculation................ $13,411 $10,629 $14,485 Effect of dilutive securities: Convertible debentures............................. -- -- 998 Convertible preferred shares....................... -- -- 5 ------- ------- ------- Numerator for diluted calculation..................... $13,411 $10,629 $15,488 ======= ======= ======= Denominator: Denominator for basic calculation..................... 17,308 17,080 12,776 Effect of dilutive securities: Stock options...................................... 253 299 270 Convertible preferred shares....................... -- -- 153 Convertible debentures............................. -- -- 1,055 ------- ------- ------- Denominator for diluted calculation................... 17,561 17,379 14,254 ======= ======= =======
The assumed conversion of the Notes was anti-dilutive for 2002 and 2003. The following table summarizes, for each year presented, the number of shares excluded from the computation of diluted earnings per share, as their effect upon potential issuance was anti-dilutive.
FOR THE YEARS ENDED DECEMBER 31, -------------------- 2003 2002 2001 ----- ----- ---- (IN THOUSANDS) 5.25% Convertible Subordinated Notes........................ 4,408 3,285 -- Unexercised Stock Options................................... 311 326 4 ----- ----- ---- 4,719 3,611 4 ===== ===== ====
(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. 54 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Changes in options outstanding are as follows:
2003 2002 2001 ---------------------- ---------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE SHARES AVERAGE SHARES AVERAGE SHARES EXERCISE SUBJECT TO EXERCISE SUBJECT TO EXERCISE SUBJECT TO PRICE OPTION PRICE OPTION PRICE OPTION --------- ---------- --------- ---------- --------- ---------- Beginning of year..... $13.59 1,057,143 $ 7.75 805,876 $6.46 848,211 Options granted....... 19.00 224,405 26.72 327,850 9.76 275,350 Options exercised..... 6.66 (37,327) 6.98 (69,433) 6.02 (314,458) Options expired/cancelled... 18.53 (38,125) 22.02 (7,150) 7.08 (3,227) ------ --------- ------ --------- ----- -------- End of year........... $14.65 1,206,096 $13.59 1,057,143 $7.75 805,876 ------ --------- ------ --------- ----- -------- Exercisable at year end................. $11.26 602,916 $10.70 490,243 $6.76 455,426 ====== ========= ====== ========= ===== ========
The options outstanding as of December 31, 2003 are summarized as follows:
WEIGHTED- NUMBER OF WEIGHTED- RANGE OF AVERAGE OPTIONS AVERAGE EXERCISE PRICES EXERCISE PRICE OUTSTANDING REMAINING LIFE - --------------- -------------- ----------- -------------- $3.07-5.69..................................... $ 3.88 31,500 1 year 6.13-9.60...................................... 7.90 645,591 6 years 17.10-31.40.................................... 23.54 529,005 9 years --------- 1,206,096 =========
The 2002 plan also provides for restricted common share long-term incentive awards as defined under the plan. As of December 31, 2003 plan participants had been awarded 405,000 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 fair value of a restricted common share award is calculated as the average of the high and low market values of our common shares on the grant date, as reported for such date on a national exchange or nationally recognized system of price quotation. In the event that there are no transactions reported on such exchange or system on such date, the average would be based on the high and low market values of our common shares on the immediately preceding date. The amount charged to operations in 2003, 2002 and 2001 was $0.3 million, $0.2 million and $0.3 million, respectively. As of December 31, 2003, 499,361 shares are available for additional awards. (15) OTHER EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PLANS The Company maintains a qualified noncontributory defined benefit pension plan covering less than one half 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 2003, the Company recorded pension expense of $3.9 million. In 2002, the Company recorded pension expense of $6.0 million, which included a curtailment loss of $2.0 million resulting from the aforementioned amendment to the plan. In 2001, the Company recorded pension income of $2.8 million. 55 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the assumptions used in pension calculations follows:
WEIGHTED-AVERAGE RATE ASSUMPTIONS AS OF DECEMBER 31 ---------------------------------- 2004 2003 2002 2001 ------- ------- ----- ------ Discount Rate (for obligations as of Dec 31)......... n/a 6.25% 6.75% 7.25% Expected long-term return on plan assets............. 8.25% 8.75% 9.50% 10.00% Rate of compensation increase........................ Note 1 Note 1 4.95% 4.95%
- --------------- Note 1: The Company froze the Defined Benefit plan in December 2002, therefore there is no future compensation increase for subsequent years. The expected long-term rate of return on plan assets to be used for 2004 expense is 8.25% as shown above. This rate of return was determined by application of a statistical forecast modeling algorithm which, using the pension investment mix and pension demographic data, simulates the long term performance of the plan over a series of 2000 trials of variable economic conditions, rounded to the nearest quarter-percent. The resulting rate is a 50 basis-point reduction in the forecast from the previous year. Previously, the company used the building block approach to the estimation of the long-term rate of return on assets. Under this approach, the Company reviewed the publicly available common source data for the range of returns on basic types of equity and fixed income instruments and the differential to those rates provided by active investment management. In consultation with the Company's actuarial and active asset management consultants and taking into account the funds' actual performance and expected asset allocation going forward, the Company selected an overall return rate within the resulting range. Plan asset investment decisions are made by the Pension Investment Committee of the Board of Directors. This committee utilizes the services of a financial advisor in the selection and monitoring of specific asset managers. At its periodic meetings the committee reviews the performance of various funds against benchmarks and makes investment decisions which are then carried out by the fund trustee. The target asset allocation is 65% equity instruments and 35% fixed income instruments. Each asset class has a minimum and maximum range as follows: For equity-based securities -- a minimum of 60% and a maximum of 70%; for fixed-income-based securities -- a minimum of 30% and a maximum of 40%. The plan may also have a minimum of 0% and a maximum of 5% in cash and cash equivalents. The assets are invested in a variety of both actively managed and passive funds chosen by the committee. The investment mix of plan assets as of December 31 in each year was:
AS OF DECEMBER 31 --------------------- 2003 2002 2001 ----- ----- ----- (AS A % OF PLAN ASSET FAIR VALUE) Equity Securities........................................... 69.7% 65.0% 66.9% Debt Securities............................................. 29.7% 34.4% 33.1% Cash........................................................ 0.6% 0.6% 0.0% ----- ----- ----- Total....................................................... 100.0% 100.0% 100.0% ===== ===== =====
In 2003, the Company made a $5.0 million contribution to the plan. With regard to the Company's planned contributions in the next calendar year, the Company does not foresee any required or voluntary contributions. 56 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the components of net periodic pension (expense) income follows:
2003 2002 2001 -------- -------- -------- (IN THOUSANDS) Service cost......................................... $ -- $ (4,353) $ (3,693) Interest on projected benefit obligation............. (12,727) (15,091) (14,281) Expected return on plan assets....................... 12,250 17,217 20,820 Amortization of transitional assets.................. -- -- 8 Amortization of prior service cost................... -- (261) (85) Recognized net actuarial loss........................ (3,454) (1,476) -- Curtailment loss..................................... -- (1,998) -- -------- -------- -------- Net pension (expense) income......................... $ (3,931) $ (5,962) $ 2,769 ======== ======== ========
The following sets forth the funded status of the plan as of December 31:
2003 2002 -------- -------- (IN THOUSANDS) Change in projected benefit obligation: Projected benefit obligation at beginning of year........... $197,188 $214,273 Service cost................................................ -- 4,353 Interest cost............................................... 12,727 15,091 Benefits paid............................................... (20,058) (17,279) Actuarial loss.............................................. 14,582 12 Effect of curtailment....................................... -- (19,262) -------- -------- Projected benefit obligation at end of year................. $204,439 $197,188 -------- -------- Change in plan assets: Fair value of plan assets at beginning of year.............. $148,635 $187,350 Actual return on plan assets................................ 30,447 (21,436) Employer contribution....................................... 5,000 -- Benefits paid............................................... (20,058) (17,279) -------- -------- Fair value of plan assets at end of year.................... $164,024 $148,635 -------- -------- Funded status............................................... $(40,415) $(48,553) Unrecognized net loss....................................... 48,362 55,432 -------- -------- Prepaid pension cost........................................ $ 7,947 $ 6,879 ======== ========
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 offset by fund performance and Company contributions in 2003, the accumulated benefit obligation at December 31, 2003 and 2002 exceeded the fair value of plan assets by $40.4 million and $48.6 million, respectively. The Company recorded an additional minimum liability of $48.4 million and $55.4 million in 2003 and 2002, respectively, and net of tax comprehensive income of 57 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $4.2 million and loss of $19.8 million were charged against shareholders' equity in 2003 and 2002, respectively. Amounts recognized in the consolidated balance sheets at December 31 are as follows:
2003 2002 -------- -------- (IN THOUSANDS) Prepaid pension cost (included in other assets)............. $ 7,947 $ 6,879 ======== ======== Additional minimum liability (included in post-retirement benefits obligations)..................................... $(48,362) $(55,432) ======== ======== Accumulated other comprehensive loss (included in shareholders' equity)..................................... $ 48,362 $ 55,432 ======== ========
NON-QUALIFIED PLANS The Company has a supplemental defined benefit plan for employees with long term service at AIL and EDO 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. In November 2003 the plan was amended whereby benefits under the plan were frozen for all but two individuals as of December 31, 2003. Consequently, a curtailment charge of $0.9 million was recorded. The plan is unfunded and has no assets. The following is a table of the weighted average assumptions as of December 31 on each year:
RATE 2003 2002 2001 - ---- ---- ---- ---- Discount Rate............................................... 6.25% 6.75% 7.25% Expected rate of Return on Assets........................... n/a n/a n/a Rate of Compensation Increase............................... 5.00% 4.95% 4.95%
Total expenses under the non-qualified plans in 2003, 2002 and 2001 were $2.6 million, $1.4 million and $0.7 million, respectively. The supplemental plans of EDO and AIL were combined in 2001. A summary of the components of net periodic pension expense follows:
2003 2002 ------ ------ (IN THOUSANDS) Service cost................................................ $ 372 $ 190 Interest on projected benefit obligation.................... 802 815 Amortization of transitional assets......................... 3 32 Amortization of prior service cost.......................... 184 141 Recognized net actuarial loss............................... 273 225 Effect of curtailment....................................... 942 -- ------ ------ Net pension expense......................................... $2,576 $1,403 ====== ======
58 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized below is the funded status of the combined supplemental plans as of December 31:
2003 2002 -------- -------- (IN THOUSANDS) Change in projected benefit obligation: Projected benefit obligation at beginning of year........... $ 13,047 $ 11,538 Service cost................................................ 372 190 Interest cost............................................... 802 815 Benefits paid............................................... (987) (847) Actuarial loss.............................................. 158 951 Plan amendments............................................. -- 400 Effect of curtailment....................................... (1,752) -- -------- -------- Projected benefit obligation at end of year................. $ 11,640 $ 13,047 -------- -------- Change in plan assets: Fair value of plan assets at beginning of the year.......... $ -- $ -- Employer contribution....................................... 987 847 Benefits paid............................................... (987) (847) -------- -------- Fair value of plan assets at end of year.................... $ -- $ -- -------- -------- Funded status............................................... $(11,640) $(13,047) Unrecognized net loss....................................... 2,338 4,204 Unrecognized prior service cost............................. 558 1,684 Unrecognized net obligation................................. 7 10 -------- -------- Accrued benefit cost........................................ $ (8,737) $ (7,149) ======== ========
The accumulated benefit obligation at December 31, 2003 and 2002 exceeded the fair value of plan assets by $10.8 million and $11.0 million, respectively. The Company recorded an additional minimum liability of $2.1 million and $3.9 million in 2003 and 2002, respectively, and net of tax comprehensive income of $0.4 million and loss of $0.8 million were charged against shareholders' equity in 2003 and 2002, respectively. Amounts recognized in the consolidated balance sheets at December 31 are as follows:
2003 2002 ------- ------- (IN THOUSANDS) Accrued benefit cost (included in post-retirement benefits obligation)............................................... $(8,737) $(7,149) ======= ======= Intangible asset (included in other assets)................. $ 565 $ 1,694 ======= ======= Additional minimum liability (included in post-retirement benefits obligations)..................................... $(2,062) $(3,864) ======= ======= Accumulated other comprehensive loss (included in shareholders' equity)..................................... $ 1,497 $ 2,170 ======= =======
401(K) PLANS The Company sponsors a 401(k) plan covering substantially all employees which provides for a match 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. 59 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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:
2003 2002 2001 ---- ---- ----- (IN THOUSANDS) Service cost................................................ $ -- $ -- $ 69 Interest cost............................................... 126 171 229 Curtailment gain............................................ -- -- (929) ---- ---- ----- Total post-retirement health care and life insurance expense (income).................................................. $126 $171 $(631) ==== ==== =====
In 2001, the Company recognized a curtailment gain as a result of a plan amendment whereby coverage will not be provided for future retirees. The funded status of the EDO post-retirement health care and life insurance benefits plan is as follows as of December 31:
2003 2002 ------ ------ (IN THOUSANDS) Change in accumulated post-retirement benefit obligation: Accumulated benefit obligation at beginning of year....... $2,113 $2,317 Interest cost............................................. 126 171 Benefits paid............................................. (432) (448) Participant contributions................................. 27 31 Actuarial loss............................................ 608 42 ------ ------ Unfunded accumulated post-retirement benefit obligation at end of year............................................... $2,442 $2,113 Unrecognized net (loss) gain................................ (569) 39 ------ ------ Accrued post-retirement benefit cost........................ $1,873 $2,152 ====== ======
Actuarial assumptions used in determining the accumulated post-retirement benefit obligation include a discount rate of 6.25% and 6.75% at December 31, 2003 and 2002, 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. Since no increase above the said 5% rate is possible no effect would take place if the actual rate were above the assumed rate. A 1% decrease in the trend rate would decrease the benefit obligation at the end of the year by approximately $13,000 and the interest cost by $1,000. 60 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) AIL POST-RETIREMENT BENEFIT PLAN Post-retirement expense included in the consolidated financial statements comprised the following:
2003 2002 2001 ------ ----- ---- (IN THOUSANDS) Service cost................................................ $ 453 $ 313 $ 86 Interest cost............................................... 765 431 663 Recognized net actuarial loss (gain)........................ 40 (269) (11) ------ ----- ---- Total post-retirement expense............................... $1,258 $ 475 $738 ====== ===== ====
The funded status of the AIL post-retirement benefit plan is as follows as of December 31:
2003 2002 ------- ------- (IN THOUSANDS) Change in accumulated post-retirement benefit obligation: Accumulated benefit obligation.............................. $11,771 $ 8,737 Service cost................................................ 453 313 Interest cost............................................... 765 431 Benefits paid............................................... (441) (449) Actuarial (gain) loss....................................... (291) 2,739 ------- ------- Unfunded accumulated post-retirement benefit obligation at end of year............................................... $12,257 $11,771 Unrecognized loss........................................... (1,394) (1,725) ------- ------- Accrued post-retirement benefit cost........................ $10,863 $10,046 ======= =======
Actuarial assumptions used in determining the accumulated post-retirement benefit obligation include a discount rate of 6.25% and 6.75% at December 31, 2003 and 2002, respectively. The accumulated benefit obligation would not be affected by increases in healthcare costs for retirees since such costs are funded by the participants. Healthcare trend costs will only affect the amounts related to disabled participants. An increase of 1% in the trend rate would increase the benefit obligation at the end of the year by approximately $0.5 million and the interest cost and service cost by approximately $58,000. A decrease of 1% in the trend rate would decrease the benefit obligation at the end of the year by approximately $0.5 million and interest cost and service cost by approximately $52,000. 61 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (17) COMMITMENTS AND CONTINGENCIES In order to aggregate all commitments and contractual obligations as of December 31, 2003, the following table is included. The Company is obligated under building and equipment leases expiring between 2004 and 2012. The aggregate future minimum lease commitments under those obligations with noncancellable terms in excess of one year are shown below. The Company's commitments under letters of credit and advance payment and performance bonds relate primarily to advances received on foreign contracts which would be paid only if the Company failed to perform in accordance with the contract terms. The Company does 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: -------------------------------------------------------- 2009 AND TOTAL 2004 2005 2006 2007 2008 BEYOND ------ ----- ----- ---- ------ ---- -------- (IN MILLIONS) 5.25% Convertible Subordinated Notes due 2007................................... $137.8 $ -- $ -- $ -- $137.8 $ -- $ -- Operating leases......................... 72.1 13.6 11.0 7.8 6.8 6.3 26.6 Letters of credit........................ 53.7 26.0 27.4 -- -- 0.3 -- Advance payment and performance bonds.... 1.9 0.2 -- -- -- -- 1.7 ------ ----- ----- ---- ------ ---- ----- Total.................................... $265.5 $39.8 $38.4 $7.8 $144.6 $6.6 $28.3 ====== ===== ===== ==== ====== ==== =====
Rental expense for the years ended December 31, 2003, 2002 and 2001 amounted to $10.7 million, $5.4 million and $4.7 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, 2003, the discounted liability over the remainder of the twenty two years related to these two operable units is approximately $2.0 million of which approximately $0.3 million has been classified as current and is included in accrued liabilities. Approximately $0.6 million of the $2.0 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, which is consistent with how management operates the Company. The Company's continuing operations are 62 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) conducted in three business segments: Defense, Communications and Space Products, and Engineered Materials. The 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. The Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing and electronic warfare industries. The 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 76%, 75% and 69% of net sales, which were 80%, 82% and 77% of Defense's net sales, 71%, 62% and 55% of Communications and Space Products' net sales and 49%, 42% and 41% of Engineered Materials' net sales for 2003, 2002 and 2001, respectively. International sales comprised 18%, 15% and 15% of net sales for 2003, 2002 and 2001, respectively. In addition, the Universal Exciter Upgrade program in the Defense segment comprised approximately 2%, 14% and 15% of net sales for 2003, 2002 and 2001, respectively. Principal products and services by segment are as follows: DEFENSE SEGMENT - Electronic Warfare - Reconnaissance and Surveillance Systems - Integrated Combat Systems - Mobile Communication Systems - Rugged Computer and Electronics - Aircraft Armament - Undersea Warfare Sonar Systems - Airborne Mine Countermeasures Systems - Sonar Systems - Professional Services COMMUNICATIONS AND SPACE PRODUCTS SEGMENT - Antenna Products - Interference Cancellation - Force Protection Technology ENGINEERED MATERIALS SEGMENT - Electro-Ceramic Products - Integrated Composite Structures Products 63 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
2003 2002 2001 -------- -------- -------- (IN THOUSANDS) Net sales: Defense............................................ $360,001 $243,447 $183,454 Communications and Space Products.................. 55,458 47,262 39,998 Engineered Materials............................... 45,208 38,167 36,509 -------- -------- -------- $460,667 $328,876 $259,961 -------- -------- -------- Operating earnings: Defense............................................ $ 35,062 $ 28,674 $ 21,927 Communications and Space Products.................. 3,583 (441) (383) Engineered Materials............................... 2,385 3,150 4,603 Impairment loss on Deer Park facility.............. (9,160) -- -- Curtailment (loss) gain............................ (942) (1,998) 929 -------- -------- -------- $ 30,928 $ 29,385 $ 27,076 Net interest expense................................. (8,152) (4,956) (2,216) Other expense, net................................... 279 (95) (971) -------- -------- -------- Earnings from continuing operations before income taxes and cumulative effect of a change in accounting principle............................... $ 23,055 $ 24,334 $ 23,889 -------- -------- -------- Identifiable assets: Defense............................................ $303,881 $224,017 $129,631 Communications and Space Products.................. 34,684 40,001 49,769 Engineered Materials............................... 30,482 28,496 27,690 Corporate.......................................... 125,649 189,060 78,540 -------- -------- -------- $494,696 $481,574 $285,630 -------- -------- -------- Depreciation and amortization: Defense............................................ $ 12,551 $ 7,440 $ 6,081 Communications and Space Products.................. 2,335 1,895 2,438 Engineered Materials............................... 1,893 1,800 2,029 Corporate.......................................... 286 186 848 -------- -------- -------- $ 17,065 $ 11,321 $ 11,396 -------- -------- -------- Capital expenditures: Defense............................................ $ 4,309 $ 3,587 $ 7,896 Communications and Space Products.................. 956 816 4,308 Engineered Materials............................... 2,347 1,819 1,479 Corporate.......................................... 1,253 871 615 -------- -------- -------- $ 8,865 $ 7,093 $ 14,298 ======== ======== ========
64 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Acquisition-related costs in 2003 and 2002, including IPR&D, attributable to the Condor acquisition and in 2001 attributable to the EDO-AIL merger are included in the segments as follows:
2003 2002 2001 ---- ---- ------ (IN THOUSANDS) Defense..................................................... $929 $567 $ 937 Communications and Space Products........................... -- -- 184 Engineered Materials........................................ -- -- 197 ---- ---- ------ Total....................................................... $929 $567 $1,318 ==== ==== ======
(20) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES The Company may, from time to time, issue indebtedness, a condition of which would be the guarantee of this indebtedness by certain of its subsidiaries. Presented below is condensed consolidating financial information for the Company and the contemplated subsidiary guarantors and non-guarantors at December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003. There were no subsidiaries that would have been non-guarantor subsidiaries for 2002 and 2001. Each contemplated subsidiary guarantor is 100% owned, directly or indirectly, by the Company. Any guarantees that may be issued will be full and unconditional, as well as joint and several. In connection with the Company's credit facility, the Company cannot declare or pay any dividend on its outstanding common stock in an amount that exceeds fifty percent of its consolidated net income for the immediately preceding quarter. 65 EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2003
EDO CORPORATION PARENT COMPANY SUBSIDIARY ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents.... $ 69,877 $ 11,371 $ 5,168 -- $ 86,416 Marketable securities........ 216 -- -- -- 216 Accounts receivable, net..... 29,087 101,233 3,984 (1) 134,303 Inventories.................. 5,320 26,124 3,289 -- 34,733 Deferred income tax asset, net........................ 3,594 -- -- -- 3,594 Prepayments and other........ 2,610 3,014 330 -- 5,954 -------- -------- ------- --------- -------- Total current assets......... 110,704 141,742 12,771 (1) 265,216 Investment in subsidiaries... 261,950 -- -- (261,950) -- Property, plant and equipment, net............. 6,966 20,674 3,715 -- 31,355 Notes receivable............. 6,538 -- -- -- 6,538 Goodwill..................... -- 82,919 9,608 -- 92,527 Other intangible assets, net........................ -- 42,276 13,622 -- 55,898 Deferred income tax asset, net........................ 21,774 -- -- -- 21,774 Other assets................. 19,850 1,538 -- -- 21,388 -------- -------- ------- --------- -------- $427,782 $289,149 $39,716 $(261,951) $494,696 ======== ======== ======= ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities................ $ 34,061 $ 44,679 $ 6,004 $ (1) 84,743 Contract advances and deposits................... 2,788 5,407 -- -- 8,195 -------- -------- ------- --------- -------- Total current liabilities.... 36,849 50,086 6,004 (1) 92,938 Long-term debt............... 137,800 -- -- -- 137,800 Deferred income tax liabilities, net........... (82) -- 82 -- -- Post retirement benefits obligations................ 61,035 10,863 -- -- 71,898 Environmental obligation..... 1,728 -- -- -- 1,728 Intercompany accounts........ -- 126,326 26,611 (152,937) -- Shareholders' equity: Preferred shares............. -- -- -- -- -- Common shares................ 19,832 99 -- (99) 19,832 Additional paid-in capital... 150,097 25,221 6,486 (31,707) 150,097 Retained earnings............ 69,059 80,878 548 (81,426) 69,059 Accumulated other comprehensive loss, net of income tax benefit......... (29,512) 79 (15) 167 (29,281) Treasury shares.............. (1,255) (4,052) 4,052 (1,255) Unearned ESOP shares......... (17,290) -- -- -- (17,290) Management group receivables................ -- (351) -- -- (351) Deferred compensation under Long-Term Incentive Plan... (479) -- -- -- (479) -------- -------- ------- --------- -------- Total shareholders' equity... 190,452 101,874 7,019 (109,013) 190,332 -------- -------- ------- --------- -------- $427,782 $289,149 $39,716 $(261,951) $494,696 ======== ======== ======= ========= ========
66 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS DECEMBER 31, 2003
EDO CORPORATION PARENT COMPANY SUBSIDIARY ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- -------------- ------------ ------------ Continuing Operations: Net Sales.................... $91,420 $371,306 $16,047 $(18,106) $460,667 Costs and expenses: Cost of sales................ 76,684 271,384 8,297 (18,106) 338,259 Selling, general and administrative............. 5,420 60,132 6,303 -- 71,855 Research and development..... 2,970 5,210 414 -- 8,594 Acquisition-related costs.... 250 679 -- -- 929 Benefit plan curtailment loss....................... 942 -- -- -- 942 Impairment loss on Deer Park facility................... -- 9,160 -- -- 9,160 ------- -------- ------- -------- -------- 86,266 346,565 15,014 (18,106) 429,739 ------- -------- ------- -------- -------- Operating Earnings........... 5,154 24,741 1,033 -- 30,928 Non-operating income (expense) Interest income.............. 630 282 29 -- 941 Interest expense............. (9,093) -- -- -- (9,093) Other, net................... (42) 321 -- -- 279 ------- -------- ------- -------- -------- (8,505) 603 29 -- (7,873) (Loss) earnings from continuing operations before income taxes........ (3,351) 25,344 1,062 -- 23,055 Income tax (benefit) expense.................... (1,068) 10,198 514 -- 9,644 ------- -------- ------- -------- -------- (Loss) earnings from continuing operations...... (2,283) 15,146 548 -- 13,411 Equity in undistributed earnings of subsidiaries... 15,694 -- -- (15,694) -- ------- -------- ------- -------- -------- 13,411 15,146 548 (15,694) 13,411 Earnings from discontinued operations................. 1,398 -- -- -- 1,398 ------- -------- ------- -------- -------- Net earnings................. $14,809 $ 15,146 $ 548 $(15,694) $ 14,809 ======= ======== ======= ======== ========
67 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS DECEMBER 31, 2003
EDO CORPORATION PARENT COMPANY SUBSIDIARY ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- -------------- ------------ ------------ Operating Activities: Earnings from continuing operations.......... $ 13,411 $ 15,146 $ 548 $(15,694) $ 13,411 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation................................. 1,748 10,082 350 -- 12,180 Amortization................................. 0 4,466 419 -- 4,885 Deferred tax benefit......................... (7,227) 387 -- -- (6,840) Bad debt expense............................. -- 568 -- -- 568 Loss (gain) on sale of property, plant and equipment.................................. 6 (137) -- -- (131) Impairment loss on assets held for sale...... 9,160 -- -- 9,160 Deferred compensation expense................ 289 -- -- -- 289 Non-cash Employee Stock Ownership Plan compensation expense....................... 3,281 -- -- -- 3,281 Non-cash stock option compensation expense... 292 -- -- -- 292 Dividends on unallocated Employee Stock Ownership Plan shares...................... 292 -- -- -- 292 Common shares issued for directors' fees..... 108 -- -- -- 108 Income tax benefit from stock options........ 328 -- -- -- 328 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries........... (15,694) -- -- 15,694 -- Intercompany................................. 33,636 (36,859) 3,223 -- -- Accounts receivable.......................... (4,500) 217 1,080 -- (3,203) Inventories.................................. (4,228) 5,190 444 -- 1,406 Prepayments and other assets................. 4,334 (295) (7) -- 4,032 Contribution to defined benefit pension plan....................................... (5,000) -- -- -- (5,000) Accounts payable, accrued liabilities and other...................................... 22,406 (27,447) (361) -- (5,402) Contract advances and deposits............... (8,297) (3,785) -- -- (12,082) -------- -------- ------ -------- -------- Cash provided (used) by continuing operations................................. 35,185 (23,307) 5,696 -- 17,574 Net cash provided by discontinued operations................................. 79 -- -- -- 79 Investing Activities: Purchase of plant and equipment.............. (3,224) (5,113) (528) -- (8,865) Proceeds from sale of property, plant and equipment.................................. -- 21,304 -- -- 21,304 Payments received on notes receivable........ 300 1,085 -- -- 1,385 Purchase of marketable securities............ (23) -- -- -- (23) Restricted cash.............................. 27,347 -- -- -- 27,347 Cash paid for acquisitions, net of cash acquired................................... (94,188) -- -- -- (94,188) -------- -------- ------ -------- -------- Cash (used) provided by investing activities................................. (69,788) 17,276 (528) -- (53,040) Financing Activities: Proceeds from exercise of stock options...... 268 -- -- -- 268 Proceeds from management group receivables... -- 242 -- -- 242 Repayments of acquired debt.................. (8,660) -- -- -- (8,660) Payment of common share cash dividends....... (2,367) -- -- -- (2,367) -------- -------- ------ -------- -------- Cash (used) provided by financing activities................................. (10,759) 242 -- -- (10,517) -------- -------- ------ -------- -------- Net decrease in cash and cash equivalents.... (45,283) (5,789) 5,168 -- (45,904) Cash and cash equivalents at beginning of year....................................... 115,160 17,160 -- -- 132,320 -------- -------- ------ -------- -------- Cash and cash equivalents at end of year..... $ 69,877 $ 11,371 $5,168 $ -- $ 86,416 ======== ======== ====== ======== ========
68 EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2002
EDO CORPORATION PARENT COMPANY SUBSIDIARY ONLY GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents.................. $115,160 $ 17,160 -- $132,320 Restricted cash............................ 27,347 -- -- 27,347 Marketable securities...................... 193 -- -- 193 Accounts receivable, net................... 24,587 76,001 6 100,594 Inventories................................ 1,092 31,314 -- 32,406 Deferred income tax asset, net............. (10,202) 13,424 -- 3,222 Prepayments and other...................... 1,296 1,837 -- 3,133 -------- -------- --------- -------- Total current assets....................... 159,473 139,736 6 299,215 Investment in subsidiaries................. 192,099 -- (192,099) -- Property, plant and equipment, net......... 5,495 58,977 -- 64,472 Notes receivable........................... 1,525 1,031 -- 2,556 Goodwill................................... -- 61,352 -- 61,352 Other intangible assets, net............... -- 11,867 -- 11,867 Deferred income tax asset, net............. 20,439 -- - 20,439 Other assets............................... 20,467 1,206 -- 21,673 -------- -------- --------- -------- $399,498 $274,169 $(192,093) $481,574 ======== ======== ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities... $ 23,438 $ 51,112 $ 6 $ 74,556 Contract advances and deposits............. 11,085 9,192 20,277 -------- -------- --------- -------- Total current liabilities.................. 34,523 60,304 6 94,833 Long-term debt............................. 137,800 -- -- 137,800 Deferred income tax liabilities, net....... (12,227) 12,227 -- 0 Post retirement benefits obligations....... 68,597 10,046 -- 78,643 Environmental obligation................... 2,025 -- 2,025 Intercompany accounts...................... -- 111,690 (111,690) -- Shareholders' equity: Preferred shares........................... -- -- -- -- Common shares.............................. 19,790 93 (93) 19,790 Additional paid-in capital................. 147,091 14,708 (14,708) 147,091 Retained earnings.......................... 56,325 65,732 (65,732) 56,325 Accumulated other comprehensive loss, net of income tax benefit.................... (33,985) 86 -- (33,899) Treasury shares............................ (1,321) (124) 124 (1,321) Unearned ESOP shares....................... (18,541) -- (18,541) Management group receivables............... -- (593) -- (593) Deferred compensation under Long-Term Incentive Plan........................... (579) -- -- (579) -------- -------- --------- -------- Total shareholders' equity................. 168,780 79,902 (80,409) 168,273 -------- -------- --------- -------- $399,498 $274,169 $(192,093) $481,574 ======== ======== ========= ========
69 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS DECEMBER 31, 2002
EDO CORPORATION PARENT COMPANY SUBSIDIARY ONLY GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- ------------ ------------ Continuing Operations: Net Sales.................................. $87,154 $254,772 $(13,050) $328,876 Costs and expenses: Cost of sales.............................. 68,827 185,073 (13,050) 240,850 Selling, general and administrative........ 5,891 41,693 -- 47,584 Research and development................... 3,698 4,794 -- 8,492 Write-off of purchased in-process research and development and related costs........ 42 525 -- 567 Defined benefit pension plan curtailment loss..................................... 1,998 -- -- 1,998 ------- -------- -------- -------- 80,456 232,085 (13,050) 299,491 ------- -------- -------- -------- Operating Earnings......................... 6,698 22,687 -- 29,385 Non-operating income (expense) Interest income............................ 1,515 214 -- 1,729 Interest expense........................... (6,685) -- -- (6,685) Other, net................................. (301) 206 -- (95) ------- -------- -------- -------- (5,471) 420 -- (5,051) Earnings from continuing operations before income taxes............................. 1,227 23,107 -- 24,334 Income tax expense......................... 1,048 9,294 -- 10,342 ------- -------- -------- -------- Earnings from continuing operations........ 179 13,813 -- 13,992 Equity in undistributed earnings of subsidiaries............................. 10,450 -- (10,450) -- ------- -------- -------- -------- 10,629 13,813 (10,450) 13,992 Cumulative effect of a change in accounting principle, net of tax.................... -- (3,363) -- (3,363) ------- -------- -------- -------- Net earnings............................... $10,629 $ 10,450 $(10,450) $ 10,629 ======= ======== ======== ========
70 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS DECEMBER 31, 2002
EDO CORPORATION PARENT COMPANY SUBSIDIARY ONLY GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- ------------ ------------ Operating Activities: Earnings from continuing operations.................. $ 10,629 $10,450 $(10,450) $ 10,629 Adjustments to earnings to arrive at cash provided by continuing operations: Depreciation......................................... 1,751 8,614 -- 10,365 Amortization......................................... -- 956 956 Deferred tax benefit................................. (2,984) -- -- (2,984) Write-off of purchased in-process research and development........................................ -- 150 -- 150 Bad debt expense..................................... -- 407 -- 407 Loss on sale of property, plant and equipment........ -- 53 -- 53 Deferred compensation expense........................ 201 -- -- 201 Non-cash Employee Stock Ownership Plan compensation expense............................................ 4,043 -- -- 4,043 Dividends on unallocated Employee Stock Ownership Plan shares........................................ 312 -- -- 312 Common shares issued for directors' fees............. 142 -- -- 142 Income tax benefit from stock options and Long-Term Incentive Plan..................................... 713 -- -- 713 Cumulative effect of a change in accounting principle.......................................... 3,363 -- -- 3,363 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries................... (10,450) -- 10,450 -- Intercompany......................................... 1,412 (1,412) -- -- Accounts receivable.................................. (197) (2,322) -- (2,519) Inventories.......................................... 944 (3,870) -- (2,926) Prepayments and other assets......................... 3,859 (3,639) -- 220 Accounts payable, accrued liabilities and other...... 9,136 (3,919) -- 5,217 Contract advances and deposits....................... (3,484) 7,059 -- 3,575 -------- ------- -------- -------- Cash provided by operations.......................... 19,390 12,527 -- 31,917 Investing Activities: Purchase of plant and equipment...................... (3,099) (3,994) -- (7,093) Payments received on notes receivable................ 300 50 -- 350 Proceeds from sale of property, plant and equipment.......................................... -- 1 1 Purchase of marketable securities.................... (3) -- -- (3) Restricted cash...................................... (27,347) -- -- (27,347) Cash paid for acquisitions, net of cash acquired..... (59,024) -- -- (59,024) -------- ------- -------- -------- Cash used by investing activities.................... (89,173) (3,943) -- (93,116) Financing Activities: Issuance of convertible subordinated notes........... 137,800 -- -- 137,800 Proceeds from exercise of stock options.............. 486 -- -- 486 Proceeds from management group receivables........... -- 252 -- 252 Payment made on note payable......................... (500) -- -- (500) Payment of common share cash dividends............... (2,360) -- -- (2,360) -------- ------- -------- -------- Cash provided by financing activities................ 135,426 252 -- 135,678 -------- ------- -------- -------- Net increase in cash and cash equivalents............ 65,643 8,836 -- 74,479 Cash and cash equivalents at beginning of year....... 49,517 8,324 -- 57,841 -------- ------- -------- -------- Cash and cash equivalents at end of year............. $115,160 $17,160 $ -- $132,320 ======== ======= ======== ========
71 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS DECEMBER 31, 2001
EDO CORPORATION PARENT COMPANY SUBSIDIARY ONLY GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- ------------ ------------ Continuing Operations: Net Sales.................................. $86,752 $181,406 $(8,197) $259,961 Costs and expenses: Cost of sales.............................. 62,392 135,538 (8,197) 189,733 Selling, general and administrative........ 4,351 29,662 -- 34,013 Research and development................... 3,803 4,947 -- 8,750 Write-off of merger-related costs.......... 1,318 -- -- 1,318 Postretirement curtailment gain............ (929) -- -- (929) ------- -------- ------- -------- 70,935 170,147 (8,197) 232,885 ------- -------- ------- -------- Operating Earnings......................... 15,817 11,259 -- 27,076 Non-operating income (expense) Interest income............................ 670 245 -- 915 Interest expense........................... (2,456) (675) -- (3,131) Other, net................................. (955) (16) -- (971) ------- -------- ------- -------- (2,741) (446) -- (3,187) Earnings from continuing operations before income taxes............................. 13,076 10,813 -- 23,889 Income tax expense......................... 4,940 4,270 -- 9,210 ------- -------- ------- -------- Earnings from continuing operations........ 8,136 6,543 -- 14,679 Equity in undistributed earnings of subsidiaries............................. 6,543 -- (6,543) -- ------- -------- ------- -------- 14,679 6,543 (6,543) 14,679 Discontinued operations.................... 273 -- -- 273 ------- -------- ------- -------- Net earnings............................... $14,952 $ 6,543 $(6,543) $ 14,952 ======= ======== ======= ========
72 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS DECEMBER 31, 2001
EDO CORPORATION PARENT COMPANY SUBSIDIARY ONLY GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------- ------------ ------------ Operating Activities: Earnings from operations.................................... $ 14,679 $ 6,543 $(6,543) $ 14,679 Adjustments to earnings to arrive at cash (used) provided by operations: Depreciation................................................ 1,529 8,157 -- 9,686 Amortization................................................ 717 993 -- 1,710 Deferred tax expense........................................ 5,941 -- -- 5,941 Real estate tax assessment adjustment....................... -- 7,846 -- 7,846 Bad debt expense............................................ 30 190 -- 220 Gain on repurchase of debentures............................ (171) -- -- (171) Gain on sale of property, plant and equipment............... -- (76) -- (76) Gain on sale of marketable securities....................... (81) -- -- (81) Deferred compensation expense............................... 271 -- -- 271 Non-cash Employee Stock Ownership Plan compensation expense................................................... 1,781 -- -- 1,781 Dividends on unallocated Employee Stock Ownership Plan shares.................................................... 80 -- -- 80 Non-cash compensation expense............................... 276 -- -- 276 Common shares issued for directors' fees.................... 157 -- -- 157 Income tax benefit from stock options and Long-Term Incentive Plan............................................ 1,118 -- -- 1,118 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries.......................... (6,543) -- 6,543 -- Intercompany................................................ (12,383) 12,383 -- -- Accounts receivable......................................... (2,880) (7,873) -- (10,753) Inventories................................................. 4,352 (2,319) -- 2,033 Prepayments and other assets................................ (6,243) 5,614 -- (629) Accounts payable, accrued liabilities and other............. (890) (4,084) -- (4,974) Contract advances and deposits.............................. (12,713) (2,304) -- (15,017) -------- -------- ------- -------- Cash (used) provided by operations.......................... (10,973) 25,070 -- 14,097 Investing Activities: Purchase of plant and equipment............................. (1,754) (12,544) -- (14,298) Payments received on notes receivable....................... 300 47 -- 347 Proceeds from sale of property, plant and equipment......... -- 280 -- 280 Purchase of marketable securities........................... (59) -- -- (59) Sale or redemption of marketable securities................. 14,455 -- -- 14,455 Cash paid for acquisitions, net of cash acquired............ (13,938) -- -- (13,938) -------- -------- ------- -------- Cash used by investing activities........................... (996) (12,217) -- (13,213) Financing Activities: Proceeds from exercise of stock options..................... 1,892 -- -- 1,892 Proceeds from management group receivables.................. -- 375 -- 375 Proceeds from sale of stock in public offering, net of expenses.................................................. 81,491 -- -- 81,491 Borrowings under revolver................................... 20,800 -- -- 20,800 Repayments of borrowings under revolver..................... (20,800) -- -- (20,800) Repayments of long-term debt................................ (14,450) (2,850) -- (17,300) Repurchase of debentures.................................... (3,184) -- -- (3,184) Purchase of treasury shares................................. (1,020) -- -- (1,020) Payment of EDO ESOP loan obligation......................... (4,891) -- -- (4,891) Payment made on note payable................................ (500) -- -- (500) Payment of common share cash dividends...................... (1,920) -- -- (1,920) Payment of preferred share cash dividends................... (194) -- -- (194) -------- -------- ------- -------- Cash provided (used) by financing activities................ 57,224 (2,475) -- 54,749 -------- -------- ------- -------- Net increase in cash and cash equivalents................... 45,255 10,378 -- 55,633 Cash and cash equivalents at beginning of year.............. 4,262 (2,054) 2,208 -------- -------- ------- -------- Cash and cash equivalents at end of year.................... $ 49,517 $ 8,324 $ -- $ 57,841 ======== ======== ======= ========
73 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, 2003 and 2002, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule 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, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 13, 2004 74 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth unaudited quarterly financial information for 2003 and 2002 (in thousands, except per share amounts).
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------------ ------------------- ------------------ ------------------- 2003 2002 2003 2002 2003 2002 2003 2002 ------- -------- -------- ------- -------- ------- -------- -------- Net sales from continuing operations.................... $94,377 $ 66,909 $111,736 $73,719 $118,783 $85,104 $135,771 $103,144 Net earnings (loss): Continuing operations......... 2,982(a) 2,810 (1,626)(b) 3,074 5,559(c) 3,371(d) 6,496(e) 4,737(f) Discontinued operations....... -- -- 1,398 -- -- -- -- -- Cumulative effect of a change in accounting principle, net of tax........................... -- (3,363)(g) -- -- -- -- -- -- ------- -------- -------- ------- -------- ------- -------- -------- Earnings (loss)................. 2,982 (553) (228) 3,074 5,559 3,371 6,496 4,737 Earnings (loss) per share: Basic: Continuing operations....... 0.17 0.17 (0.09) 0.18 0.32 0.20 0.37 0.28 Discontinued operations..... -- -- 0.08 -- -- -- -- -- Cumulative effect of a change in accounting principle, net of tax..... -- (0.20) -- -- -- -- -- -- ------- -------- -------- ------- -------- ------- -------- -------- Earnings (loss) -- Basic.... 0.17 (0.03) (0.01) 0.18 0.32 0.20 0.37 0.28 Diluted: Continuing operations....... 0.17 0.16 (0.09) 0.18 0.30 0.19 0.34 0.26 Discontinued operations..... -- -- 0.08 -- -- -- -- -- Cumulative effect of a change in accounting principle, net of tax:.... -- (0.20) -- -- -- -- -- -- ------- -------- -------- ------- -------- ------- -------- -------- Earnings (loss) -- Diluted.... 0.17 (0.04) (0.01) 0.18 0.30 0.19 0.34 0.26 ------- -------- -------- ------- -------- ------- -------- --------
- --------------- (a) Includes acquisition-related costs of $0.2 million. (b) Includes acquisition-related costs of $0.2 million and an impairment loss on the facility at Deer Park of $9.2 million. (c) Includes acquisition-related costs of $0.2 million. (d) Includes write-off of purchased in-process research and development costs of $0.2 million and acquisition-related costs of $0.2 million. (e) Includes acquisition-related costs of $0.3 million and a $0.9 million non-qualified pension plan curtailment loss. (f) Includes acquisition-related costs of $0.2 million and a $2.0 million defined benefit pension plan curtailment loss. (g) 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this Annual Report on Form 10-K, EDO carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures under the supervision 75 and with the participation of its management, including its Review and Disclosure Committee, its Chief Executive Officer and its Chief Financial Officer. The Chief Executive Officer and Chief Financial Officer concluded that EDO's disclosure controls and procedures are effective to ensure that material information 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 changes in EDO's internal controls over financial reporting during EDO's last fiscal quarter that have materially affected, or are likely to materially affect internal controls over financial reporting. 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 27, 2004. EXECUTIVE OFFICERS
NAME AGE POSITION, TERM OF OFFICE AND PRIOR POSITIONS - ---- --- -------------------------------------------- James M. Smith............................ 62 Chairman of the Board (since May 2002) President and Chief Executive Officer (since April 2000). Previously, he was President and CEO of AIL Systems, Inc. Frederic B. Bassett....................... 57 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...................... 53 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................................ 61 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.......................... 62 Vice President-Administration and Shareholder Relations (since April 2000) and Secretary (since May 2001). Milo Hyde................................. 50 Vice President -- Systems & Analysis Group (since April 2000); prior thereto, he served as Systems and Analysis Group General Manager. Harvey N. Kreisberg....................... 67 Vice President-Corporate Development (since January 2001). Prior thereto, he was Director -- Diversified Products Group of AIL Systems, Inc.
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NAME AGE POSITION, TERM OF OFFICE AND PRIOR POSITIONS - ---- --- -------------------------------------------- Frank Otto................................ 54 Executive Vice President (since September 2002) and Chief Operating Officer (since February 2004). Prior thereto, he was Vice President -- Integrated Systems and Structures Group (January 2001-September 2002). Prior thereto, he was General Manager of the Marine and Aircraft Systems Division. Lisa M. Palumbo........................... 45 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.
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 27, 2004. 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 27, 2004. 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 27, 2004. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by Item 14 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 27, 2004. 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, 2003 and 2002 Consolidated Statements of Earnings for the Years Ended December 31, 2003, 2002 and 2001 77 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 Notes to Consolidated Financial Statements Report of Ernst & Young LLP 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 WRITE- BALANCE AT BEGINNING OF COSTS AND OTHER OFFS/ END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ----------- ------------ ---------- ---------- ----------- ---------- (IN THOUSANDS) Year ended December 31, 2003: Allowance for doubtful accounts...... $1,023 568 216(a) (448) $1,359 Year ended December 31, 2002: Allowance for doubtful accounts...... $ 893 407 44(b) (321) $1,023 Year ended December 31, 2001: Allowance for doubtful accounts...... $ 981 220 63(c) (371) $ 893
- --------------- (a) Amounts acquired as a result of purchase of Emblem Group Ltd. on June 16, 2003, Darlington, Inc. on March 10, 2003, and Advanced Engineering & Research Associates, Inc. on February 5, 2003. (b) Amount acquired as a result of purchase of Condor Systems, Inc. on July 26, 2002. (c) Amount acquired as a result of purchase of Dynamic Systems, Inc. on October 9, 2001. 3. EXHIBITS
EXHIBIT NUMBER EXHIBIT - ------- ------- 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 Seller (incorporated herein by reference to the Company's Current Report on Form 8-K dated July 26, 2002, Exhibits 2.1 and 2.2).
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EXHIBIT NUMBER EXHIBIT - ------- ------- 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). 2(g) Stock Purchase Agreement, dated as of March 10, 2003, by the Company, as Buyer, and three individuals as Sellers (incorporated by reference to the Company's Current Report on Form 8-K dated March 10, 2003, Exhibit 2.1). 3(a)(1)* Restated Certificate of Incorporation of the Company dated May 15, 2003. 3(b)* By-Laws of the Company as amended December 1, 2003. 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)). 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. (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(a)(1)) 10(a)(2) Amendment No. 1, dated December 20, 2002, to the Credit Agreement dated as of November 8, 2002 described above (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(a)(2)). 10(a)(3) Amendment No. 2, dated February 4, 2003, to the Credit Agreement dated as of November 8, 2002 described above (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(a)(3)). 10(a)(4) Amendment No. 3, dated February 28, 2003, to the Credit Agreement dated as of November 8, 2002 described above (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(a)(4)). 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 as amended January 1, 2004. 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 24 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)* EDO Corporation Nonqualified Deferred Compensation Plan, effective January 1, 2004. 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 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(h)). 10(i) EDO Corporation Compensation Plan for Directors (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, Exhibit 10(g)).
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EXHIBIT NUMBER EXHIBIT - ------- ------- 10(j) Supplemental Executive Retirement Plan, dated July 1, 2001 (incorporated herein 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 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(k)). 10(l) Change in Control Agreement dated March 3, 2003 between the Company and Frederic B. Bassett (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(l)). 10(m) Change in Control Agreement dated March 21, 2003 between the Company and Patricia D. Comiskey (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(m)). 10(n) Change in Control Agreement dated March 25, 2003 between the Company and George P. Fox, Jr. (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(n)). 10(o) Change in Control Agreement dated March 21, 2003 between the Company and William J. Frost (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(o)). 10(p) Change in Control Agreement dated March 22, 2003 between the Company and Milo Hyde (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(p)). 10(q) Change in Control Agreement dated March 21, 2003 between the Company and Harvey N. Kreisberg (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(q)). 10(r) Change in Control Agreement dated March 26, 2003 between the Company and Frank W. Otto (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(r)). 10(s) Change in Control Agreement dated May 1, 2003 between the Company and Lisa M. Palumbo (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(s)). 10(t)* Form of Amendment to the Change in Control Agreement. 10(u)* Form of 2004 Restricted Share and Retention Incentive Award Agreement. 10(v)* Form of 2003 Stock Option Agreement. 10(w) 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. 14* EDO Corporation Standards Ethical Business Conduct for all EDO Employees. 21* List of Subsidiaries. 23* Consent of Independent Auditors. 24* Powers of Attorney (included on the signature page). 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------- * Filed herewith. 80 (b) Reports on 8-K The following reports on 8-K were filed during the three months ended on December 31, 2003:
DATE OF REPORT ITEMS REPORTED - -------------- -------------- November 5, 2003 Earnings Release, dated November 5, 2003, announcing financial results for the quarter ended September 27, 2003. December 23, 2003 Adding a footnote to the Company's Consolidated Financial Statements containing condensed consolidating financial information for the Registrant's subsidiaries which are expected to guarantee the indebtedness the Registrant may issue pursuant to its shelf registration statement on Form S-3 filed with the Securities and Exchange Commission on December 23, 2003.
81 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, its principal executive officer, thereunto duly authorized. EDO CORPORATION (REGISTRANT) By: /s/ JAMES M. SMITH ------------------------------------ James M. Smith President and Chief Executive Officer Dated: March 5, 2004 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lisa M. Palumbo and William J. Frost, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the Annual Report on Form 10-K for the Company's 2003 fiscal year, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 5, 2004 by the following persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ JAMES M. SMITH Chairman, President, Chief Executive Officer and - -------------------------------------- Director (principal executive officer) (James M. Smith) /s/ FREDERIC B. BASSETT Vice President -- Finance, Treasurer and - -------------------------------------- Chief Financial Officer (Frederic B. Bassett) (principal financial and accounting officer) /s/ ROBERT E. ALLEN Director - -------------------------------------- (Robert E. Allen) /s/ ROBERT ALVINE Director - -------------------------------------- (Robert Alvine) /s/ GEORGE M. BALL Director - -------------------------------------- (George M. Ball) /s/ DENNIS C. BLAIR Director - -------------------------------------- (Dennis C. Blair)
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SIGNATURE TITLE --------- ----- /s/ ROBERT M. HANISEE Director - -------------------------------------- (Robert M. Hanisee) Director - -------------------------------------- (Michael J. Hegarty) /s/ LESLIE F. KENNE Director - -------------------------------------- (Leslie F. Kenne) /s/ RONALD L. LEACH Director - -------------------------------------- (Ronald L. Leach) Director - -------------------------------------- (James Roth)
83 EX-3.A.1 3 y94563exv3waw1.txt RESTATED CERTIFICATE OF INCORPORATION Exhibit 3(a)(l) RESTATED CERTIFICATE OF INCORPORATION OF EDO CORPORATION UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW The undersigned, being the Vice President - Administration and Secretary 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 original 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. An Amendment of the Certificate of Incorporation was filed by the Department of State on June 20, 1984, amending Article THIRD by increasing the number of shares of Common Stock of the Corporation from 12,000,000 to 25,000,000 shares, par value $1 per share. 5. An Amendment of the Certificate of Incorporation was filed by the Department of State on July 20, 1988, adding Article EIGHTH. 6. An Amendment of the Certificate of Incorporation, Amending Article THIRD, was filed by the Department of State on July 22, 1988, adding Paragraph A.1 following Paragraph A of Article THIRD. 7. An Amendment of the Certificate of Incorporation was filed by the Department of State on August 12, 1998, amending Article FOURTH. 8. An Amendment of the Certificate of Incorporation was filed by the Department of State on May 17, 2002, amending Article THIRD by increasing the number of shares of Common Stock of the Corporation from 25,000,000 to 50,000,000 shares, par value $1 per share. 9. At a meeting of the Board of Directors held on October 1, 2002, the Board of Directors adopted a resolution approving the restatement of the Certificate of Incorporation, in such form as the officer executing the Restated Certificate of Incorporation deems necessary or advisable, his execution of the Restated Certificate of Incorporation being conclusive evidence as to the necessity or advisability therefor. 10. The text of the Certificate of Incorporation is hereby restated without further amendments or change to read as follows: ARTICLE ONE The name of the Corporation is EDO Corporation. ARTICLE TWO The purposes for which it is to be formed are as follows: 2.1 To design, develop, experiment with, produce, manufacture, buy, sell, export, import, deal in, lease, repair and equip aircraft equipment of every kind or description, and motors, engines, parts, accessories, apparatus, supplies and other property related thereto or connected therewith; 2.2 To operate and use at any place or places in United States or elsewhere any kind of aircraft, aeroplane, hydroplane, autogyro, flying boat or other machine capable of flying in the air or suitable for aerial operation or navigation, and to use the same for any purpose, including transportation, exhibition flying, racing, advertising or any other form of commercial use; 2.3 To design, develop, experiment with, produce, manufacture, buy, sell, export, import, deal in, lease, repair and equip goods, wares, products, machinery, merchandise, articles or materials of every sort, kind and description, and in general to engage in any manufacturing, industrial or mercantile business of any kind whatsoever; 2.4 To purchase, lease or otherwise acquire, hold, sell, mortgage, rent, manage and deal in real estate, buildings or constructions of any kind, and every kind of right or interest in real estate, and to maintain and operate or otherwise turn to account the same; 2.5 To acquire by purchase, subscription or otherwise and to hold, sell, negotiate, transfer, mortgage, pledge or otherwise dispose of any shares of capital stock, scrip or voting trust certificates in respect of shares of capital stock of, or any bonds, mortgages, debentures, securities or evidences of indebtedness issued or created by any other corporation, joint stock company or association, public or private, or by any Government of the United States or any foreign government, or any state, territory, municipality or other political subdivision or any governmental agency of the Government of the United States of America or of any other government, and to exercise all the rights and privileges as owner or holder with respect to any thereof; 2.6 To purchase, hold, cancel, reissue, sell, transfer and deal in its own shares or other securities in so far as the same may be permitted by law; provided, however, that shares of its own capital stock shall not be voted directly or indirectly; 2.7 To borrow or raise monies for the business of the Corporation and any and all of its purposes; 2.8 To buy, lease, or otherwise acquire the whole or any part of the business, goodwill and assets of any person, firm, association or corporation, foreign or domestic, engaged in any business which this Corporation is authorized to carry on; 2 2.9 To advance or lend money with or without security to, and otherwise aid, by guarantee or otherwise, any corporation, association or firm, any of the securities of which or interest in shall be owned by the Corporation or in which, or in the business of which, the Corporation shall have any interest; 2.10 To carry on any of the foregoing businesses either as principal or as agent, and at any place or places inside or outside the State of New York or the United States of America, in every part of the world; 2.11 To have and to exercise all the powers now or hereafter conferred by laws of the State of New York upon corporations organized under the Business Corporation Law. The foregoing clauses shall be construed as purposes and powers in furtherance and not in limitation of the general powers conferred by the State of New York, and the enumeration herein of specific purposes and powers shall not be held to limit or restrict in any way the general powers of the Corporation, but nothing herein contained is to be construed as authorizing this Corporation to carry on the business of discounting bills, notes, or other evidences of debt, or receiving deposits of money or foreign coins, of buying and selling bills of exchange, or issuing bills, notes, or other evidences of debt for circulation as money, or of engaging in any other form of banking or shall be deemed to authorize or permit this Corporation to carry on any business, exercise any power, or do any act which a corporation organized under the Business Corporation Law of the State of New York may not at the time lawfully do. ARTICLE THREE 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. The designations, relative rights, preferences and limitations of each class of shares of the corporation shall be as follows: 3.1 The Preferred Shares may be issued from time to time in one or more series, in such number, and with such distinctive serial designations and relative rights, preferences and limitations, as may be fixed by the Board of Directors. Subject to the limitations set forth herein and any limitations prescribed by law, the Board of Directors is expressly authorized, prior to the issue of any series of Preferred Shares, to fix the numbers of shares included in such series and the designation, relative rights, preferences and limitations of such series and to file a certificate of amendment pursuant to section 805 of the Business Corporation Law or any statute amendatory thereof or supplemental thereto, establishing or changing the number, designation and relative rights, preferences and limitations of such series. Pursuant to the foregoing general authority vested in the Board of Directors, but not in limitation of the powers conferred on the Board of Directors thereby and by laws of the State of New York, the Board of Directors is expressly authorized to determine with respect to each series of Preferred Shares: 3.1.1 the distinctive designation or designations of such series and the number of shares constituting such series; 3 3.1.2 the rate or amount and times at which, and the preferences and conditions under which, dividends shall be payable on shares of such series, the status of such dividends as cumulative or non-cumulative, the date or dates from which dividends, if cumulative, shall accumulate, and the status of such shares as participating or non- participating after the payment of dividends as to which such shares are entitled to any preference; 3.1.3 the rights and preferences, if any, of the holders of shares of such series upon the liquidation, dissolution or winding-up of the affairs of, or upon any distribution of the assets of, the Corporation, which amount may vary depending upon whether such liquidation, dissolution or winding-up is voluntary or involuntary and, if voluntary, may vary at different dates, and the status of the shares of such series as participating or non- participating after the satisfaction of any such rights and preferences; 3.1.4 the full or limited voting rights, if any, to be provided for shares of such series, in addition to the voting rights provided by law; 3.1.5 the times, terms and conditions, if any, upon which shares of such series shall be subject to redemption, including the amount the holders of shares of such series shall be entitled to receive upon redemption (which amount may vary under different conditions or at different redemption dates) and the amount, terms, conditions and manner of operation of any purchase, retirement or sinking fund to be provided for the shares of such series; 3.1.6 the rights, if any, of holders of shares of such series to convert such shares into, or to exchange such shares for, shares of any other class or classes or of any other series of the same class, the prices or rates of conversion or exchange, and adjustments thereto, and any other terms and conditions applicable to such conversion or exchange; 3.1.7 the limitations, if any, applicable while such series is outstanding on the payment of dividends or making of distributions on, or the acquisition or redemption of, Common Shares or any other class of shares ranking junior, either as to dividends or upon liquidation, to the shares of such series; 3.1.8 the conditions or restrictions, if any, upon the issue of any additional shares (including additional shares of such series or any other series or of any other class) ranking on a parity with or prior to the shares of such series either as to dividends or upon liquidation; and 3.1.9 any other preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of shares of such series; in each case, so far as not inconsistent with the provisions of this Certificate of Incorporation or the laws of the State of New York as then in effect. All Preferred Shares shall be identical and of equal rank except in respect to the particulars that may be fixed by the Board of Directors as provided above, and all shares of each series of Preferred Shares shall be identical and of equal rank except as to the times from which cumulative dividends, if any, thereon shall be cumulative. The number of authorized Preferred Shares may be increased or decreased by the affirmative 4 vote of the holders of a majority of the shares of the Corporation entitled to vote thereon, without any requirement that such increase or decrease be approved by a class vote on the part of the holders of the Preferred Shares or any series thereof, or on the part of any other class of shares of the Corporation, except as may be otherwise required by the laws of the State of New York or provided in the certificate of amendment establishing the voting rights of any series of Preferred Shares. The Board of Directors may from time to time amend any of the provisions of any certificate of amendment establishing any series of Preferred Shares, subject to any class voting rights of the holders of such shares and subject to the requirements of the laws of the State of New York. 3.2 ESOP Convertible Cumulative Preferred Shares, Series A. The number, designation, relative rights, preferences and limitations of the ESOP Convertible Cumulative Preferred Shares, Series A, are as follows: 3.2.1 Designation and Number of Shares. 89,772 of the Preferred Shares shall be, and be designated as, ESOP Convertible Cumulative Preferred Shares, Series A (hereinafter referred to as the "Series A Preferred Shares"). 3.2.2 Dividends. 3.2.2.1 The holders of the Series A Preferred Shares shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, cumulative cash dividends in the amount of $17.10 per share per annum, and no more. Dividends shall accumulate and be payable quarterly on the fifteenth day of March, June, September and December in each year (each a "Dividend Payment Date" or collectively, "Dividend Payment Dates"), commencing September 15,1988, except that if any Dividend Payment Date is not a business day in New York City, then such quarterly dividend shall be payable on the next succeeding business day and such next succeeding business day shall be the Dividend Payment Date. Dividends on the Series A Preferred Shares shall accrue and be cumulative from the date of their original issue. The amount of dividends payable on the Series A Preferred Shares for each full quarterly dividend period shall be computed by dividing $17.10 by four. Dividends payable on the Series A Preferred Shares for the initial dividend period and for any period less than a full quarter shall be computed on the basis of a 360-day year of twelve 30-day months. Dividends paid on Series A Preferred Shares in an amount less than the total amount of such dividends at the time accumulated and payable on such shares shall be allocated pro rata on a share-by- share basis among all such shares at the time outstanding. 3.2.2.2 If at any time the Corporation has failed to pay accrued dividends on any Series A Preferred Shares or any Parity Shares outstanding at the times such dividends are payable, unless the same have been or contemporaneously are paid in full or a sum sufficient for the payment thereof set aside for payment, the Corporation shall not: (i) declare or pay any dividend on the Common Shares or on any Junior Shares or make any payment on account of, or set apart money 5 for, a sinking or other analogous fund for, the purchase, redemption or other retirement of, any Common Shares, or any Junior Shares or make any distribution in respect thereof, either directly or indirectly and whether in cash or property or in obligations or shares of the Corporation (other than in Common Shares or Junior Shares); (ii) purchase any Series A Preferred Shares or Parity Shares (except for a consideration payable in Common Shares or Junior Shares) or redeem fewer than all of the Series A Preferred Shares and Parity Shares then outstanding; or (iii) permit any corporation or other entity directly or indirectly controlled by the Corporation to purchase any Common Shares, Junior Shares, Series A Preferred Shares or Parity Shares. Unless and until all dividends accrued and payable but unpaid on Series A Preferred Shares and any Parity Shares at the time outstanding have been paid in full, all dividends declared by the Corporation upon Series A Preferred Shares or Parity Shares shall be declared pro rata with respect to all Series A Preferred Shares and Parity Shares then outstanding, so that the amounts of any dividends declared on Series A Preferred Shares and such Parity Shares shall in all cases bear to each other the same ratio that, at the time of such declaration, all accrued and payable but unpaid dividends on Series A Preferred Shares and such other Parity Shares, respectively, bear to each other. 3.2.3 Optional Redemptions. 3.2.3.1 The Corporation may, at its option, at any time and from time to time after June 15,1991, redeem all, or any number less than all, of the outstanding Series A Preferred Shares. Any redemption of Series A Preferred Shares shall be effected at the prices set forth below: 6
If Redeemed During the Redemption Price Twelve-Month Period Beginning Per Share ----------------------------- --------- June 15, 1991 $227.39 June 15, 1992 $225.68 June 15, 1993 $223.97 June 15, 1994 $222.26 June 15, 1995 $220.55 June 15, 1996 $218.84 June 15, 1997 $217.13 June 15, 1998 $215.42
and thereafter at $213.71 per share plus, in each case, an amount equal to all dividends (whether or not declared or due) accrued and unpaid on such Series A Preferred Share to the date fixed for redemption. 3.2.3.2 In the event of a change or a proposed change in the Federal tax laws, which has the effect of precluding the Corporation from claiming a tax deduction for dividends paid on the Series A Preferred Shares as provided by section 404(k)(2) of the Internal Revenue Code of 1986, as amended, the Corporation may, at its option, at any time and from time to time thereafter redeem all of the outstanding Series A Preferred Shares at a price equal to $213.71 per share, plus, in each case, an amount equal to all dividends (whether or not declared or due) accrued and unpaid on such Series A Preferred Shares to the date fixed for redemption. 3.2.3.3 Notwithstanding the foregoing provisions of this clause (3), the Corporation may elect to pay the redemption price for all Series A Preferred Shares in shares of Qualifying Employer Securities of the Corporation rather than in cash. The redemption price per share shall be equal to the number of shares of Qualifying Employer Securities having a fair value (as determined in good faith by the Board of Directors) equal to the cash which would have been paid pursuant to the foregoing clause 3.2.3.1 or 3.2.3.2, as the case may be. 3.2.3.4 Notice of any proposed redemption of Series A Preferred Shares pursuant to this clause 3.2.3 shall be given by the Corporation by mailing a copy of such notice no less than 20 days nor more than 60 days prior to the date fixed for such redemption to holders of record of the Series A Preferred Shares to be redeemed at their respective addresses appearing on the books of the Corporation. Such notice shall specify (i) the shares called for redemption, (ii) the redemption price and (iii) the place at which and the date on which the shares called for redemption will, upon presentation and surrender of the certificates of stock evidencing such shares, be redeemed and the redemption price therefor paid. In the case of the redemption of the less than all the outstanding Series A Preferred Shares, the Corporation will select the shares to be redeemed among all then outstanding Series A Preferred Shares in such manner as may be prescribed by the Board of Directors. From and after the date fixed in any such notice as of the date 7 of redemption of Series A Preferred Shares, unless the Corporation shall default in providing monies at the time and place specified for the payment of the redemption price (including any accrued and unpaid dividends) pursuant to such notice, all dividends on the Series A Preferred Shares thereby called for redemption shall cease to accrue, such Series A Preferred Shares shall no longer be deemed to be outstanding and all rights of the holders thereof as shareholders of the Corporation, except the right to receive the redemption price (including any accrued and unpaid dividends), shall cease and terminate. 3.2.3.5 The holder of any Series A Preferred Shares redeemed pursuant to this clause 3.2 upon any exercise of the Corporation's redemption right shall not be entitled to receive payment of the redemption price for such shares until such holder shall cause to be delivered to the place specified in the notice given with respect to such redemption (i) the certificate or certificates representing such Series A Preferred Shares and (ii) transfer instrument(s) satisfactory to the Corporation and sufficient to transfer such Series A Preferred Shares to the Corporation free of any adverse interest. No interest shall accrue on the redemption price of any Series A Preferred Shares after the date fixed for its redemption. 3.2.3.6 All Series A Preferred Shares which shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued Preferred Shares, without designation as to series, and the number of Preferred Shares which the Corporation shall have authority to issue shall not be decreased by the redemption of Series A Preferred Shares. 3.2.4 Redemption Upon Merger or Consolidation. 3.2.4.1 In the event an Option Event occurs, each holder of Series A Preferred Shares may require the Corporation to redeem all or any portion of the Series A Preferred Shares owned by such holder at a price per share equal to $213.71 plus, in each case, an amount equal to all dividends (whether or not declared or due) accrued and unpaid on such Series A Preferred Share to the date fixed for redemption. The Corporation will notify each holder of Series A Preferred Shares of a proposed Option Event at least 30 days prior to the occurrence thereof, and each such holder will have until 10 days prior to the occurrence of such proposed Option Event to request redemption (by written notice delivered to the Corporation) of all or any portion the Series A Preferred Shares owned by such holder. Upon receipt of such request, the Corporation will be obligated to redeem the number of Series A Preferred Shares specified in such request upon the occurrence of the Option Event. An "Option Event" will be deemed to have occurred in the event of the occurrence of (i) any consolidation of the Corporation with, or merger of the Corporation into, any other Person, (ii) any merger of another Person into the Corporation (other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any reclassification or change of outstanding Common Shares) or (iii) any sale or transfer of all or substantially all of the assets of the Corporation, other than any such consolidation, merger, sale or transfer in which the kind and 8 amount of cash, securities and other property receivable by a holder of Common Shares pursuant to such transaction shall either (a) include cash at least equal to the Conversion Price in effect immediately prior to such consolidation, merger, sale or transfer, or (b) consist solely of publicly-traded common stock of either (Y) the Person formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, or (Z) the Person (if any) which owns 100% of the voting stock of the Person referred to in subclause (Y), provided that such common stock then constitutes a Qualifying Employer Security. 3.2.4.2 In the event that the holders of 85% or more of all of the outstanding Series A Preferred Shares cause the Corporation to redeem such shares pursuant to clause 3.2.4.1, the Corporation may, at its option, at any time and from time to time thereafter redeem all of the remaining outstanding shares of Series A Preferred Shares at a price per share equal to $213.71 plus, in each case, an amount equal to all dividends (whether or not declared or due) accrued and unpaid on such Series A Preferred Share to the date fixed for redemption. The Corporation shall provide notice to the holders of the Series A Preferred Shares to be redeemed in accordance with clause 3.2.3.3. 3.2.4.3 Notwithstanding the foregoing provisions of this clause 3.2.4, the Corporation (or its successor) may elect to pay the redemption price for all Series A Preferred Shares in shares of Qualifying Employer Securities of the Corporation (or its successor) rather than in cash. The redemption price per share shall be equal to the number of shares of Qualifying Employer Securities having a fair value (as determined in good faith by the Board of Directors) equal to the cash which would have been paid pursuant to the foregoing clause 3.2.4.1 or 3.2.4.2, as the case may be. 3.2.5 Conversion Rights. 3.2.5.1 Each Series A Preferred Share shall be convertible at the option of the holder thereof at any time (except that if any such share shall have been called for redemption, then, as to such share, such right shall terminate at the close of business on the date two business days prior to the date fixed for such redemption, unless default shall be made by the Corporation in making the payment due upon redemption) into fully paid and nonassessable Common Shares. The number of Common Shares issued upon conversion of each Series A Preferred Share shall be equal to $213.71 divided by the Conversion Price then in effect. The Conversion Price initially shall be $21.371; provided that the Conversion Price shall be subject to adjustment from time to time in certain instances as hereinafter provided. 3.2.5.2 The Common Shares deliverable upon conversion of Series A Preferred Shares shall be Common Shares of the Corporation, par value $1.00 per share, as constituted at the date of this certificate, except as otherwise provided in subclauses (i) and (vii) of clause 3.2.5.5, and in clause 3.2.5.6. 9 3.2.5.3 In order for any holder of Series A Preferred Shares to convert the same into Common Shares, such holder shall surrender the certificate or certificates for such Series A Preferred Shares at the corporate office of the Corporation for the Series A Preferred Shares during usual business hours, which certificate or certificates, if the Corporation shall so request, shall be duly endorsed to the Corporation or in blank, or accompanied by proper instruments of transfer to the Corporation or in blank, and shall give written notice to the Corporation at such office that such holder elects so to convert such Series A Preferred Shares, and state in writing therein the name or names in which such holder wishes the certificate or certificates for Common Shares to be issued. 3.2.5.4 The Corporation will, as soon as practicable after such deposit of certificates for Series A Preferred Shares accompanied by the written notice and the statement above prescribed, deliver at said office, to the Person for whose account such certificates for Series A Preferred Shares were so surrendered, or to such Person's nominee or nominees, certificates for the number of Common Shares to which such Person shall be entitled as aforesaid, together with any cash adjustment of any fraction of a share as hereinafter provided. Subject to the following provisions of this clause 3.2.5.4, such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Series A Preferred Shares to be converted, and the Person or Persons entitled to receive the Common Shares deliverable upon conversion of such Series A Preferred Shares shall be treated for all purposes as the record holder or holders of such Common Shares on such date. The Corporation shall not be required to convert any Series A Preferred Shares while the stock transfer books of the Corporation are closed for any purpose; but the surrender of Series A Preferred Shares for conversion during any period while such books are so closed shall become effective for conversion upon reopening of such books, as if the surrender had been made immediately prior to the close of business on the date of such reopening, and conversion shall be at the Conversion Price in effect at such date. 3.2.5.5 The Conversion Price shall be subject to adjustment as follows: (i) In case the Corporation shall (A) pay a dividend on its Common Shares in its Common Shares, (B) subdivide its outstanding Common Shares into a greater number of shares, or (C) combine its outstanding Common Shares into a smaller number of shares, the Conversion Price in effect at the time of the record date of such dividend, or the effective date of such subdivision or combination, as the case may be, shall be proportionately adjusted so that the holder of any Series A Preferred Shares surrendered for conversion after such time shall be entitled to receive the number and kind of shares which such holder would have owned or have been entitled to receive had such Series A Preferred Shares been converted immediately prior to such time. Such adjustment shall be made successively whenever any event listed above shall occur and shall become effective retroactively to immediately after the record 10 date of such dividend or immediately after the effective date of such subdivision or combination. (ii) Unless the holders of Series A Preferred Shares shall be permitted to subscribe for or purchase Common Shares on the same basis as if theretofore converted into Common Shares, in case the Corporation shall issue rights or warrants to all holders of its Common Shares entitling them (for a period expiring within 45 days after the record date for the determination of shareholders entitled to receive such rights or warrants) to subscribe for or purchase Common Shares at a price per share less than the Closing Price (as defined below) per Common Share on such record date, then in each such case the Conversion Price shall be adjusted to equal the price determined by dividing the Conversion Price in effect immediately prior to such record date by a fraction of which the numerator shall be the number of Common Shares outstanding on such record date plus the number of additional Common Shares offered for subscription or purchase pursuant to such rights or warrants and of which the denominator shall be the number of Common Shares outstanding on such record date plus the number of Common Shares which the aggregate offering price of the total number of shares so offered pursuant to such rights or warrants would purchase at such Closing Price. Such adjustment shall be made successively whenever such rights or warrants are issued, and shall become effective retroactively to immediately after the record date for the determination of shareholders entitled to receive such rights or warrants; provided that in the event that all the Common Shares offered for subscription or purchase are not delivered upon the exercise of such rights or warrants, upon the expiration of such rights or warrants the Conversion Price shall be readjusted to the Conversion Price which would have been in effect had the numerator and the denominator of the foregoing fraction and the resulting adjustment been made based upon the number of Common Shares actually delivered upon the exercise of such rights or warrants rather than upon the number of Common Shares offered for subscription or purchase. For the purposes of this subclause (ii), the number of Common Shares at any time outstanding shall not include shares held in the treasury of the Corporation but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of Common Shares. (iii) In case the Corporation shall distribute, to all holders of its Common Shares, shares of its capital stock (other than Common Shares); evidences of indebtedness, cash or assets of the Corporation (excluding any regular, periodic dividend paid in, or distributions of, cash to the extent of an amount (the "Non-Excess Portion") equal to the amount by which such dividend is at a rate that is less than 150% of the rate (adjusted for any subsequent mergers, consolidations, or events of the type referred to in clauses (A), (B) and (C) of clause (i) above) at which the last previous regular periodic cash dividend was paid) or subscription rights or warrants to subscribe for or purchase securities of the Corporation 11 (excluding those referred to in subclause (ii) above), then in each such case the Conversion Price shall be adjusted to equal the price determined by dividing the Conversion Price in effect immediately prior to the record date for the determination of shareholders entitled to receive such distribution by a fraction of which the numerator shall be the Closing Price per Common Share on such record date and of which the denominator shall be such Closing Price per Common Share less the amount equal to the sum of (x) the excess of the cash distributed over the amount, if any, thereof constituting the Non-Excess Portion and (y) the fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the capital stock (other than Common Shares), evidences of indebtedness or assets or subscription rights or warrants distributed applicable to one Common Share. Such adjustment shall be made successively whenever any such distribution is made, and shall become effective retroactively to immediately after such record date. (iv) For the purpose of any computation under subclauses (ii) and (iii) above, the "Closing Price" for each day shall be the reported last sale price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case as reported on the New York Stock Exchange Composite Tape, or, if any time the Common Shares are not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Shares are listed or admitted to trading, or if the Common Shares are not listed or admitted to trading on any national securities exchange, on the National Association of Securities Dealers Automated Quotations National Market System, or if the Common Shares are not listed or admitted to trading on any national securities exchange or quoted on any such National Market System, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for such purpose, or if no such bid and asked prices can be obtained from any such firm, the fair market value of one Common Share on each such day as determined in good faith by the Board of Directors. (v) In any case in which this clause 3.2.5.5 shall require that an adjustment as a result of any event becomes effective retroactively to immediately after a record date or effective date for such event, the Corporation may elect to defer until after the occurrence of such event issuing to the holder of any Series A Preferred Shares converted after such record date and before the occurrence of such event the additional Common Shares issuable upon such conversion over and above the Common Shares issuable upon such conversion on the basis of the Conversion Price prior to adjustment and, in lieu of the shares the issuance of which is so deferred, the Corporation will cause its Transfer Agent to issue due bills or other appropriate evidence of the right to receive such shares and such cash. 12 (vi) No adjustment to the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Conversion Price; provided that the Corporation may make any such adjustment at its election; and provided further that any adjustments which by reason of this subclause (vi) are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this clause 3.2.5.5 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this clause 3.2.5.5 notwithstanding, the Corporation shall be entitled to make such deceases in the Conversion Price, in addition to those required by this clause 3.2.5.5, as it in its discretion shall determine to be advisable in order that any stock dividend, subdivision or combination of shares, distribution of rights or warrants to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock hereafter made by the Corporation to its shareholders shall not be taxable. (vii) If the Corporation makes any distribution, dividend, issuance of rights or warrants or subdivision, combination or reclassification of or on the Common Shares, or any security to which the conversion right addressed in this clause 3.2.5 then applies, which is not covered by any of the preceding provisions of this clause 3.2.5.5 and which equitably requires an adjustment in the Conversion Price, such adjustment shall be made as determined by the Board of Directors of the Corporation. In such case, the determination of the Board of Directors as to whether an adjustment in the Conversion Price is required, the amount of any such adjustment, and the effective date of any such adjustment shall be conclusive. 3.2.5.6 In the case of any consolidation of the Corporation into, or merger of the Corporation with or into, any other corporation (other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any reclassification or change of outstanding Common Shares), or in case of any sale or transfer of all or substantially all of the assets of the Corporation, or in case of any reclassification or change of outstanding Common Shares (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of subdivision or combination, but including any reclassification of the Common Shares into two or more classes), or in case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Corporation), the holder of each Series A Preferred Share then outstanding shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities, cash and other property receivable upon such consolidation, merger, sale, transfer, reclassification, change or statutory exchange by a holder of the number of Common Shares of the Corporation into which such Series A Preferred Share might have been converted immediately prior to such consolidation, merger, sale, transfer, reclassification, change or statutory exchange (assuming that the holder 13 of such Series A Preferred Share, as a holder of Common Shares prior to such transaction, would not have exercised any rights of election as a holder of Common Shares as to the kind or amount of shares of stock and other securities, cash and other property receivable upon such consolidation, merger, sale, transfer reclassification, change or statutory exchange; provided that if the kind of amount of shares of stock and other securities, cash and other property receivable upon such consolidation, merger, sale, transfer, reclassification, change or statutory exchange is not the same for each non-electing Common Share, then the kind and amount of shares of stock and other securities, cash and other property receivable shall be deemed to be the kind and amount so receivable by a plurality of the non-electing shares). In any such event, effective provision shall be made, in the articles or certificate of incorporation of the resulting or surviving corporation or other corporation issuing or delivering such shares of stock, other securities, cash or other property or otherwise, so that the provisions set forth herein for the protection of the conversion rights of the Series A Preferred Shares shall thereafter be applicable, as nearly as reasonably may be, to any such other shares of stock and other securities, cash or other property deliverable upon conversion of the Series A Preferred Shares remaining outstanding or other convertible stock or securities received by the holders of the Series A Preferred Shares in place thereof; and any such resulting or surviving corporation or other corporation issuing or delivering such shares of stock, other securities, cash or other property shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, such shares of stock, other securities, cash or other property as the holders of the Series A Preferred Shares remaining outstanding, or other convertible stock or securities received by the holders of the Series A Preferred Shares in place thereof, shall be entitled to receive, pursuant to the provisions hereof, and to make provision for the protection of the conversion right as above provided. In case shares of stock, other securities, cash or other property is deliverable upon conversion as aforesaid, then all references to Common Shares in this clause 3.2.5 shall be deemed to apply, so far as provided and as nearly as is reasonable, to any such shares, other securities, cash or other property. The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers, reclassification, changes or statutory exchanges. 3.2.5.7 No fractional interests in Common Shares shall be issued upon conversion of Series A Preferred Shares. If more than on Series A Preferred Share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares issuable by the Corporation upon conversion thereof shall be computed on the basis of the aggregate number of Series A Preferred Shares so surrendered. Instead of any fractional Common Share which would otherwise be issuable upon conversion of any Series A Preferred Share, the Corporation will pay a cash adjustment in respect of such fractional interest in an amount equal to the same fraction of the Closing Price per Common Share determined as of the business day preceding the date of conversion. 3.2.5.8 Whenever any adjustment is required in the Conversion Price or the number or type of shares of stock or other securities, cash or other property into which each Series A Preferred Shares is convertible, the Corporation shall 14 forthwith (i) file with each of the Transfer Agent for the Series A Preferred Shares and the Transfer Agent for the Common Shares a statement describing in reasonable detail the adjustment in the Conversion Price or conversion right, the date on which the adjustment became effective and the facts requiring such adjustment and (ii) cause a copy of such statement to be mailed to the holders of record of the Series A Preferred Shares. 3.2.5.9 Upon any conversion of Series A Preferred Shares, the shares so converted shall have the status of authorized and unissued Preferred Shares, without designation as to series, and the number of Preferred Shares which the Corporation shall have authority to issue shall not be decreased by the conversion of Series A Preferred Shares. The Corporation shall at all times reserve and keep available, free from preemptive rights, out of its authorized and unissued Common Shares or Common Shares held as treasury shares, solely for the purpose of effecting the conversion of the Series A Preferred Shares, such number of its Common Shares as shall from time to time be sufficient to effect the conversion of all Series A Preferred Shares at such time outstanding. For the purpose of this clause 3.2.5.9, the full number of Common Shares, issuable upon the conversion of all outstanding Series A Preferred Shares shall be computed as if at the time of computation of such number of Common Shares all outstanding Series A Preferred Shares were held by a single holder. The Corporation shall from time to time, in accordance with the laws of the State of New York, increase the authorized number of its Common Shares if at any time the authorized number of its Common Shares not outstanding shall not be sufficient to permit the conversion of all the then outstanding Series A Preferred Shares. 3.2.5.10 The Corporation will pay any and all issue or other taxes that may be payable in respect of any issue or delivery of Common Shares on conversion of Series A Preferred Shares pursuant hereto. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of Common Shares in a name other than that in which the Series A Preferred Shares so converted was registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid. 3.2.5.11 Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the Common Shares, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable Common Shares at the Conversion Price as so adjusted. 3.2.5.12 In the event that: (i) the Corporation shall declare a dividend (or any other distribution) on its Common Shares (other than cash dividends paid out of the retained earnings of the Corporation and dividends payable in Common Shares); or (ii) the Corporation shall authorize the granting to the holders of its Common Shares of rights or warrants to subscribe for or purchase any shares of 15 stock of any class or of any other rights or warrants; or (iii) of any reclassification or change of the Common Shares of the Corporation (other than a subdivision or combination of its outstanding Common Shares (but including any reclassification of the Common Shares into two or more classes), or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Corporation is a party or of any statutory exchange of securities with another corporation and for which approval of any shareholders of the Corporation is required, or of the sale or transfer of all or substantially all of the assets of the Corporation; or (iv) of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation; then, in each such case, the Corporation shall mail to each holder of Series A Preferred Shares at least fifteen days prior to the applicable date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution of rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution or rights or warrants are to be determined, or (B) the date on which such reclassification, change, consolidation, merger, sale, transfer, statutory exchange, dissolution, liquidation or winding-up is expected to become effective, and the dates of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities, cash or other property deliverable upon such reclassification, change, consolidation, merger, sale, transfer, statutory exchange, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not, however, affect the legality or validity of any action described in subclauses (i), (ii), (iii) or (iv) of this clause 3.2.5.12. 3.2.6 Right of First Refusal. If the holder of any Series A Preferred Shares desires to accept an offer (which may be irrevocable by its terms for a least 60 days) from any prospective purchaser to purchase all or any part of the Series A Preferred Shares at any time owned by such holder, such holder shall give notice in writing to the Corporation (i) designating the number of shares proposed to be sold, (ii) naming the prospective purchaser of such shares and (iii) specifying the cash or other consideration or combination thereof (the "Offered Consideration") for which, and the terms (the "Offer Terms") upon which, such holder desires to sell the same. During the 30-day period following receipt of such notice (the "Refusal Period") by the Corporation, the Corporation shall have the right to purchase from such holder all (but not less than all) of the Series A Preferred Shares specified in such notice, with, at the option of the Corporation, cash in an amount equal to the fair value (as determined in good faith by the Board of Directors) of the Offered Consideration or Qualifying Employer Securities of the Corporation having a fair value (as determined in good faith by the Board of Directors) equal to the fair value (as determined in good faith by the Board of Directors) of the Offered Consideration and on the Offer Terms. The rights provided hereunder shall be exercised by written notice to such holder given at any time during the applicable period. If such right is exercised, the Corporation shall deliver such cash or Qualifying Employer Securities of the Corporation to such holder against delivery of certificates or other instruments representing the shares so purchased, appropriately endorsed by such holder. If such right shall not have been exercised prior to the expiration of the Refusal Period, then at any time during the 30 days following the expiration of the Refusal 16 Period, such holder may sell such shares to (but only to) the intended purchaser named in his notice to the Corporation for the Offered Consideration and on the Offer Terms specified in such notice, free of all restrictions or obligations imposed by this clause 3.2.6. 3.2.7 Liquidation. 3.2.7.1 The liquidation price of Series A Preferred Shares, in case of the voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, shall be $213.71 per share, plus an amount equal to the dividends accrued and unpaid thereon to the payment date. 3.2.7.2 In the event if any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, the holders of Series A Preferred Shares shall be entitled to receive the liquidation price of such shares held by them in preference to and in priority over any distributions upon the Common Shares and all Junior Shares. Upon payment in full of the liquidation price to which the holders of Series A Preferred Shares are entitled, the holders of Series A Preferred Shares will not be entitled to any further participation in any distribution of assets by the Corporation. If the assets of the Corporation are not sufficient to pay in full the liquidation price payable to the holders of Series A Preferred Shares and the liquidation price payable to the holders of all Parity Shares, the holders of all such shares shall share ratably in such distribution of assets in accordance with the amounts which would be payable on such distribution if the amounts to which the holders of Series A Preferred Shares and the holders of Parity Shares are entitled were paid in full. 3.2.7.3 Neither a consolidation or merger of the Corporation with or into any other corporation, nor a merger of any other corporation with or into the Corporation, nor a sale or transfer of all or any part of the Corporation's assets for cash or securities shall be considered a liquidation, dissolution or winding-up of the Corporation within the meaning of this clause 3.2.7. 3.2.8 Voting Rights. 3.2.8.1 In addition to any voting rights provided by applicable law or elsewhere in this clause 3.2.8, the holders of Series A Preferred Shares shall be entitled to vote upon all matters upon which the holders of Common Shares are entitled to vote and shall vote together with the holders of Common Shares (and of any other class or series which may similarly be entitled to vote with the Common Shares, if any) as a single class. For the purpose of any vote contemplated by this clause 3.2.8.1, each Series A Preferred Share shall be entitled to the number of votes equal to the number of Common Shares into which such Series A Preferred Share could then be converted (including for such purpose any fractional share into which it could then be converted were it not for the provisions of clause 3.2.5.7 pursuant to the provisions of clause 3.2.5 on the record date for the determination of shareholders entitled to vote on such matters multiplied by 1.23. 17 3.2.8.2 If at any time dividends payable on the Series A Preferred Shares, or on any Parity Shares, are in arrears and unpaid in an amount equal to or exceeding the amount of dividends payable thereon for six quarterly dividend periods, the number of members of the Board of Directors shall increase by two, and the holders of the outstanding Series A Preferred Shares and of such Parity Shares will have the exclusive right, voting separately as a class, to elect such two directors of the Corporation at the next regular or special meeting of shareholders of the Corporation. Such voting right will continue until all dividends on the Series A Preferred Shares and on such Parity Shares have been paid in full, at which time such voting right of the holders of Series A Preferred Shares and such Parity Shares will terminate, subject to re-vesting in the event of a subsequent arrearage. Upon any termination of the aforesaid voting right, the term of office of all the directors elected by holders of Series A Preferred Shares and such Parity Shares voting separately as a class will terminate and the number of members of the Board of Directors shall decrease by two. 3.2.9 Certain Definitions. As used in this Paragraph 3.2 of this Certificate of Incorporation, the following terms shall have the following respective meanings: "Common Shares" shall include any shares of the Corporation of any class or series which have no preference or priority in the payment of dividends or in the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation and which are not subject to redemption by the Corporation. However, Common Shares issuable upon conversion of Series A Preferred Shares shall include only shares of the class designated as Common Shares as of the original date of issuance of Series A Preferred Shares, or shares of the Corporation of any classes or series resulting from any reclassification or reclassifications thereof and which have no preference or priority in the payment of dividends or in the distribution of assets upon any voluntary or involuntary liquidation. "Junior Shares" shall mean Preference Shares of any class of the Corporation which are by their terms expressly made junior to Series A Preferred Shares at the time outstanding both as to dividends and as to the distribution of assets on any voluntary or involuntary liquidation of the Corporation. "Parity Shares" shall mean any Preference Shares which are by their terms on a parity with the Series A Preferred Shares at the time outstanding both as to dividends and as to the distribution of assets on any voluntary or involuntary liquidation of the Corporation. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and any government or any department or agency thereof. "Preference Shares" shall mean any class of shares of the Corporation ranking prior to at least one other class of shares of the Corporation as to the payment of 18 dividends or the distribution of assets on any voluntary or involuntary liquidation of the Corporation. "Qualifying Employer Securities" shall have the meaning set forth in Section 4975(e)(8) of the Internal Revenue Code of 1986, as amended. "Senior Shares" shall mean any Preference Shares of any class of the Corporation which are by their terms expressly made senior to Series A Preferred Shares at the time outstanding both as to dividends and as to the distribution of assets on any voluntary or involuntary liquidation of the Corporation. 3.3 Except as otherwise provided by the laws of the State of New York or by any certificate of amendment filed pursuant to Paragraph 3.1 of this Article THIRD, setting forth the relative rights, preferences and limitations of any series of Preferred Shares, the entire voting power of the shares of the Corporation for the election of Directors and for all other purposes, as well as all other rights appertaining to shares of the Corporation, shall be vested exclusively in the Common Shares. Each Common Share shall have one vote upon all matters to be voted on by the holders of the Common Shares, and shall be entitled to participate equally in all dividends payable with respect to the Common Shares and to share ratably, subject to the rights and preferences of any such Preferred Shares, in all assets of the Corporation in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Corporation. ARTICLE FOUR The office of the Corporation is to be located in the City of New York, Borough of Manhattan, County of New York and State of New York. The Secretary of State of the State of New York is hereby designated as the agent of the Corporation upon whom process in any action or proceeding against it may be served within the State of New York, and the address to which the Secretary of State shall mail a copy of any process against the Corporation which may be served upon his or her pursuant to law is EDO Corporation, 60 East 42nd Street, Suite 5010, New York, NY 10165. ARTICLE FIVE The number of directors constituting the entire Board of Directors of the Corporation shall be not less than nine nor more than fifteen. The Board of Directors shall be divided into three classes. The vote of the holders of 80% of the outstanding shares of the Corporation entitled to vote thereon shall be required to amend, alter, change or repeal this Article FIVE or to remove any director without cause. ARTICLE SIX No shareholder of the Corporation, as such, shall be entitled as a matter of right to purchase, subscribe for or otherwise acquire any new or additional shares of the Corporation of any class, whether now or hereafter authorized, or any options or warrants to purchase, subscribe for or otherwise acquire any such new or additional shares, or any shares, notes, bonds, debentures or other securities, convertible into or carrying options or warrants to purchase, subscribe for or otherwise acquire any such new or additional shares. 19 ARTICLE SEVEN 7.1 Vote Required for Certain Business Combinations. 7.1.1 Higher Vote for Certain Business Combinations. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in Section 7.2 of this Article SEVEN: (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Shareholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the Corporation, or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more; or (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities, or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder; shall require the affirmative vote of the holders of two-thirds of the outstanding Shares of the Corporation entitled to vote generally in the election of Directors (the "Voting Shares"), which are not beneficially owned directly or indirectly by an Interested Shareholder voting together as a single class (it being understood that for purposes of this Article SEVENTH, each share of the Voting Shares shall have the number of votes granted to it pursuant to Article THIRD of this Certificate of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, 20 or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. 7.1.2 Definition of "Business Combination." The term "Business Combination" as used in this Article SEVEN shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph 7.1.1 of this Section 7.1. 7.2 When Higher Vote is Not Required. The provisions of Section 7.1 of this Article SEVEN shall not be applicable to any particular Business Combination; and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Restated Certificate of Incorporation, if all the conditions specified in either of the following paragraphs 7.2.1 and 7.2.2 are met. 7.2.1 Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined). 7.2.2 Price and Procedure Requirements. All of the following conditions shall have been met: (i) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Shares in such Business Combination shall be at least equal to the highest of the following: (a) A price equal to the Fair Market Value of the Common Shares on the date of the first public announcement of the proposed Business Combination multiplied by a fraction the numerator of which is the highest per share price (including brokerage commissions and/or soliciting dealers' fees) which the Interested Shareholder has theretofore paid for any of the Common Shares already owned by it and the denominator of which is the Fair Market Value of the Common Shares immediately prior to the commencement of acquisition of the Common Shares by the Interested Shareholder; (b) The highest per share price (including brokerage commissions and/or soliciting dealers' fees) paid by the Interested Shareholder in acquiring any of its holdings of the Common Shares; (c) The Fair Market Value per Common Share on the date of the first public announcement of the proposed Business Combination or on the date on which the Interested Shareholder became an Interested Shareholder, whichever is higher; and (d) The earnings per Common Share of the Corporation for the four full consecutive fiscal quarters immediately preceding the record date for solicitation of votes on such Business Combination, multiplied by the then price/earnings multiple (if any) of the Interested Shareholder as customarily computed and reported in the financial community. 21 (ii) The consideration to be received by holders of a particular class or series of outstanding Voting Shares shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class or series. If the Interested Shareholder has paid for Voting Shares of any class or series with varying forms of consideration, the form of consideration for such class or series in the Business Combination shall be either cash or the form used to acquire the largest number of shares of such class or series previously acquired by the Interested Shareholder prior to the first public announcement of the proposed Business Combination. (iii) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on the outstanding Preferred Shares; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Shares (except as necessary to reflect any subdivision of the Common Shares), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding Common Shares, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (c) such Interested Shareholder shall have not become the beneficial owner of any additional Voting Shares except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder. (iv) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (v) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act rules or regulations) shall be mailed to public shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). 7.3 Certain Definitions. For the purposes of this Article SEVEN: 7.3.1 A "person" shall mean any individual, firm, corporation or other entity. 22 7.3.2 "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary, and other than any employee stock ownership plan or the employee benefit plan of the Corporation or any subsidiary or any trustee of, or fiduciary with respect to, any such plan when acting in such capacity) who or which: (i) is the beneficial owner, directly or indirectly, of 10% or more of the Voting Shares; or (ii) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the Voting Shares; or (iii) is an assignee of or has otherwise succeeded to any Voting Shares which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 7.3.3 A person shall be a "beneficial owner" of any Voting Shares: (i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any Voting Shares. 7.3.4 For the purposes of determining whether a person is an Interested Shareholder pursuant to paragraph 7.3.2 of this Section 7.3, the number of Voting Shares deemed to be outstanding shall include shares deemed owned through application of paragraph 7.3.3 of this Section 7.3 but shall not include any other Voting Shares which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 7.3.5 "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on March 9, 1983. 23 7.3.6 "Subsidiary" means any corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth in paragraph 7.3.2 of this Section 7.3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. 7.3.7 "Continuing Director" means any member of the Board of Directors of the Corporation (the "Board") who is unaffiliated with the Interested Shareholder and was a member of the Board prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of the Continuing Directors then on the Board. For purposes of this Article SEVEN, any action by "a majority of Continuing Directors" shall require the affirmative votes of a majority of the Continuing Directors then in office at a time when there are at least seven Continuing Directors. 7.3.8 "Fair Market Value" means: (i) in the case of shares, the highest closing sale price per share during the 30-day period immediately preceding the date in question on the Composite Tape, or, if such shares are not quoted on the Composite Tape, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such shares are listed, or, if such shares are not listed on any such exchange, the highest closing bid quotation with respect to such shares during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations Systems or any system then in use, or if no such quotations are available, the fair market value on the date in question per share as determined by the Board in good faith; and (ii) in the case of property other than cash or shares, the fair market value of such property on the date in question as determined by the Board in good faith. 7.3.9 In the event of any Business Combination in which the Corporation survives, the phrase "other consideration to be received" as used in paragraph 7.2.2 (i) of Section 7.2 of this Article SEVEN shall include the Common Shares and/or other shares of any other class of outstanding Voting Shares retained by the holders of such shares. The directors of the Corporation shall have the power and duty to determine for the purposes of this Article SEVEN, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Shareholder, (B) the number of Voting Shares beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another, and (D) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more. 24 7.4 No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article SEVEN shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. 7.5 Amendment, Repeal, etc. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Restated Certificate of Incorporation or by By-Laws of the Corporation), the affirmative vote of the holders of two-thirds of the outstanding Voting Shares of the Corporation which are not beneficially owned directly or indirectly by an Interested Shareholder voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article SEVEN of this Certificate of Incorporation. ARTICLE EIGHT No director of the Corporation shall be liable to the Corporation or its shareholders for damages for any breach of duty in such capacity, provided that nothing contained in this Article EIGHT shall eliminate or limit: (a) the liability of any director if a judgment or other final adjudication adverse to such director establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that such director personally gained in fact a financial profit or other advantage to which such director was not legally entitled or that his or her acts violated section 719 of the Business Corporation Law of the State of New York; or (b) the liability of any director for any act or omission prior to the adoption of the amendment to this Certificate of Incorporation that included this Article EIGHTH. IN WITNESS WHEREOF, the undersigned has made and subscribed this Restated Certificate of Incorporation and affirmed it as true under penalties of perjury, this 15th day of May, 2003. /s/ William J. Frost ----------------------------------- William J. Frost Secretary and Vice- President, Administration 25 EX-3.B 4 y94563exv3wb.txt BY-LAWS OF THE COMPANY AS AMENDEND Exhibit 3(b) EDO CORPORATION (A New York Corporation) BY-LAWS As Amended December 1, 2003 TABLE OF CONTENTS ARTICLE I Meetings of Shareholders Page Section 1.01 Annual Meetings..................................................4 Section 1.02 Special Meetings.................................................4 Section 1.03 Place of Meetings................................................4 Section 1.04 Notice of Meetings...............................................4 Section 1.05 Quorum...........................................................5 Section 1.06 Inspectors of Election...........................................5 Section 1.07 Qualification of Voters..........................................5 Section 1.08 Vote of Shareholders.............................................6 Section 1.09 Proxies..........................................................7 Section 1.10 Record Date......................................................7 Section 1.11 Adjourned Meetings...............................................8 Section 1.12 Notice of Shareholder Proposal...................................8 ARTICLE II Board of Directors Section 2.01 General Powers...................................................8 Section 2.02 Number, Term of Office, Election and Qualifications..............9 Section 2.03 Regular Meetings................................................10 Section 2.04 Special Meetings................................................10 Section 2.05 Quorum and Voting...............................................10 Section 2.06 Resignations....................................................11 Section 2.07 Directors Emeritus..............................................11 Section 2.08 Removal of Directors............................................11 Section 2.09 Newly Created Directorships and Vacancies.......................11 Section 2.10 Action by Written Consent.......................................12 Section 2.11 Participation in a Meeting by Telephone.........................12 ARTICLE III Executive Committee and other Committees Section 3.01 How Constituted.................................................12 Section 3.02 Powers of the Committees........................................12 Section 3.03 Proceedings, Quorum and Manner of Acting........................13 ARTICLE IV Notices Section 4.01 Form and Delivery...............................................13 Section 4.02 Waiver..........................................................13 ARTICLE V Officers Section 5.01 Number and Qualification........................................13 Section 5.02 Appointment and Term of Office..................................14 Section 5.03 Subordinate Officers............................................14 Section 5.04 Resignations....................................................14 Section 5.05 Removal.........................................................14 Section 5.06 Vacancies.......................................................14 Section 5.07 The Chief Executive Officer.....................................14 Section 5.08 The President...................................................15 Section 5.09 The Vice Presidents.............................................15 Section 5.10 The Secretary...................................................15 Section 5.11 The Treasurer...................................................16 ARTICLE VI Fiscal Matters Section 6.01 Execution of Instruments........................................16 Section 6.02 Loans, etc. ....................................................17 Section 6.03 Deposits........................................................17 Section 6.04 Checks, Drafts, etc. ...........................................17 2 ARTICLE VII Capital Stock Section 7.01 Certificate for Shares..........................................17 Section 7.02 Transfer of Shares; Registered Shareholders.....................18 Section 7.03 Transfer Agents and Registrars..................................18 Section 7.04 Record Date.....................................................18 Section 7.05 Lost or Destroyed Certificates..................................19 ARTICLE VIII Books and Records Section 8.01 Books and Records...............................................19 Section 8.02 Examination of Books............................................19 ARTICLE IX Indemnification Section 9.01 Indemnification - Third Party and Derivative Actions............20 Section 9.02 Payment of Indemnification; Repayment...........................21 Section 9.03 Procedure for Indemnification...................................22 Section 9.04 Survival; Preservation of Other Rights..........................23 Section 9.05 Savings Clause..................................................23 ARTICLE X Miscellaneous Section 10.01 Corporate Seal.................................................23 Section 10.02 Fiscal Year....................................................23 ARTICLE XI Amendments Section 11.01 Amendments.....................................................24 Section 11.02 Notice of Amendment............................................24 3 ARTICLE I Meetings of Shareholders Section 1.01 Annual Meetings The annual meeting of shareholders for the election of directors and for the transaction of such other business as properly may come before such meeting shall be held at such date and time as the Directors may determine. Section 1.02 Special Meetings Special meetings of shareholders may be called at any time by the Chairman of the Board of Directors, or by the Chief Executive Officer, or by order of the Board of Directors, or by a majority of the directors then in office acting without a meeting. At any special meeting of shareholders, only such business may be transacted as is related to the purpose or purposes set forth in the notice required by Section 1.04. Section 1.03 Place of Meetings Each meeting of shareholders shall be held at the principal office of the Corporation in the State of New York or at such other place within or without the State of New York as may be specified in the notice of the meeting. Section 1.04 Notice of Meetings Written or electronic notice of the place, date and hour of each meeting of the shareholders shall be given as provided in Section 4.01 to each shareholder entitled to vote thereat, or otherwise entitled by law to notice thereof, not less than 10 nor more than 60 days before the meeting or shall be given by third-class mail not fewer than twenty-four (24) nor more than sixty (60) days before the date of the meeting. If mailed such notice shall be deemed given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at the shareholder's address as it appears on the record of shareholders, or, if the shareholder shall have filed with the Secretary of the Corporation a request that notices to the shareholder be mailed to some other address, then directed to the shareholder at such other address. If transmitted electronically, such notice shall be deemed given when directed to the shareholder's electronic mail address as supplied by the shareholder to the Secretary of the Corporation or as otherwise directed pursuant to the shareholder's authorization or instructions. Notice of a special meeting shall also state the purposes for which the meeting is called and indicate by or at whose direction the notice is being issued. If any action is proposed to be taken at any shareholders' meeting which would, if taken, entitle shareholders fulfilling the requirements of section 623 of the New York Business Corporation Law (relating to a shareholder's statutory appraisal rights) to receive payment for their shares, the notice shall also include a statement to that effect. Notice of any meeting need not be given to any shareholder with whom communication is then unlawful by virtue of any law of the State of New York or of the United States of America 4 now or hereafter enacted or amended or any rule, regulation, proclamation or executive order issued under any such law. Section 1.05 Quorum of Shareholders Except as otherwise provided by law and subject to the provisions of Section 1.07 and Section 6.02(b), the holders of a majority of the votes of shares issued and outstanding entitled to vote thereat, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of shareholders, provided that when a specified item of business is required to be voted on by a particular class or series of shares, voting as a class, the holders of a majority of the votes of shares of such class or series shall constitute a quorum for the transaction of such specified item of business. Section 1.06 Inspectors of Election The Board of Directors shall appoint one or more inspectors to act at a meeting of shareholders or any adjournment thereof and make a written report thereof. The Board may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed, or if such persons are unable to act at the meeting, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his or her ability. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. The date and time (which need not be a particular time of day) of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting shall be announced by the person presiding at the meeting at the beginning of the meeting and, if no date and time is so announced, the polls shall close at the end of the meeting, including any adjournment thereof. Except as otherwise required by the New York Business Corporation Law, no ballot, proxies or consents, nor any revocation thereof or changes thereto, shall be accepted by the inspectors after the closing of polls. Section 1.07 Qualification of Voters (a) Unless otherwise provided in the Certificate of Incorporation at each meeting of shareholders, each holder of record of common shares entitled to vote at such meeting shall be entitled to one vote for each such common share 5 standing in his, her or its name on the record of shareholders on the record date as determined pursuant to Section 1.10. (b) Treasury shares and shares held by another domestic or foreign corporation of any type or kind, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the Corporation, shall not be shares entitled to vote or to be counted in determining the total number of outstanding shares (c) Shares held by an administrator, executor, guardian, conservator, committee or other fiduciary, except a trustee, may be voted by him, her or it, either in person or by proxy, without transfer of such shares into his, her or its name. (d) Shares held by a trustee may be voted by him, her or it, either in person or by proxy, only after the shares have been transferred into his, her or its name as trustee or into the name of his, her or its nominee. (e) Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent or proxy as the by-laws of such corporation may provide, or, in the absence of such provision, as the board of directors of such corporation may determine. (f) A shareholder shall not sell his, her or its vote or issue a proxy to vote to any person for any sum of money or anything of value except as permitted by law. (g) At each meeting of shareholders, each holder of record of preferred shares entitled to vote at such meeting shall be entitled to such number of votes as may be specified in the Certificate of Incorporation. Section 1.08 Vote of Shareholders Except as at the time otherwise expressly required by statute, by the Certificate of Incorporation of the Company or by Section 1.06 (regarding appointment of Inspectors), Section 2.02 (regarding election of directors) or Section 2.08 (regarding removal of directors), all corporate action to be taken by vote of the shareholders shall be authorized by a majority of the votes cast in favor or against such action by the holders of shares entitled to vote thereon at a meeting of the shareholders at which a quorum is present. Except as otherwise provided in the certificate of incorporation or the specific provision of a by-law adopted by the shareholders, an abstention shall not constitute a vote cast. The authority of the holder of a proxy to act shall not be revoked by the incompetence or death of the shareholder who executed the proxy unless, before the authority is exercised, written notice of an adjudication of such incompetence or of such death is received by the Secretary or any Assistant Secretary. Without limiting the manner in which a shareholder may authorize another person or persons to act for him, her or it as 6 proxy, the following shall constitute a valid means by which a shareholder may grant such authority: (1) A shareholder may execute a writing authorizing another person or persons to act for the shareholder as proxy. Execution may be accomplished by the shareholder or the shareholder's authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. (2) A shareholder may authorize another person or persons to act for the shareholder as proxy by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be reasonably determined that the telegram, cablegram or other electronic transmission was authorized by the shareholder. If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors shall specify the nature of the information upon which they relied. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 1.08 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 1.09 Proxies Any shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for him by proxy. Each proxy must be in writing, signed by the shareholder or by his attorney-in-fact and shall be filed with the secretary of any meeting at which the holder thereof votes thereunder. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Each proxy shall be revocable at the pleasure of the shareholder executing it, except if and to the extent that an irrevocable proxy is given and is permitted by law. Section 1.10 Record Date The Board of Directors may fix, in advance, a date as the record date for determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting. Such date shall be not more than 60 nor less than 10 days before the date of such meeting nor more than sixty (60) days prior to any other action. If no record date is 7 fixed: (1) the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if no notice is given, the day on which the meeting is held; and (2) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the resolution of the Board of Directors relating thereto is adopted. When a determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date for the adjourned meeting. Section 1.11 Adjourned Meetings The holders of a majority of the shares present in person or by proxy at a meeting and entitled to vote thereat may from time to time adjourn the meeting, whether or not a quorum was present at the meeting. When a determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders has been made pursuant to Section 1.10, such determination shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting. When a meeting is adjourned to another time or place, no notice need be given if such time or place is announced at the meeting at which the adjournment is taken. However, if the Board of Directors fixes a new record date for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record on the new record date entitled to notice. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Section 1.12 Notice of Shareholder Proposal For business proposed by a Shareholder to be a proper subject for action at an Annual Shareholders meeting, in addition to any requirement of law the Shareholder must timely request (by Certified Mail - Return Receipt Requested) that the proposal be included in the Corporation's proxy statement for the meeting, and such request must satisfy all of the provisions of Rule 14a-8 under the Securities Exchange Act of 1934, as amended. ARTICLE II Board of Directors Section 2.01 General Powers The property, affairs and business of the Corporation shall be managed under the direction of the Board of Directors. 8 Section 2.02 Number, Term of Office, Election and Qualifications (a) The full Board of Directors shall consist of not less than nine nor more than fifteen directors, all of whom shall be at least 21 years of age on the date of the annual meeting of shareholders. The Chairman of the Board of Directors shall be chosen by the Directors from among the directors and shall preside at all meetings of the shareholders and of the Board of Directors at which he shall be present. Past or present officers or employees of the Corporation shall not comprise more than one third of the Board of Directors. Each director shall hold at least 1000 shares of any class of the Corporation; provided that failure to hold such number of shares shall not prevent or disqualify any person not a director from being elected a director pursuant to this Section 2.02 or Section 2.09 or from serving as a director for a period of one year from the time of such election. (b) Subject to the provisions of this Section and of Section 2.09, the number of directors, within the limits provided, necessary to constitute a full Board shall be determined from time to time by vote of a majority of the entire Board of Directors. Directors shall be elected at the annual meeting of shareholders. If the number of directors be increased between annual meetings of shareholders, the additional directors to fill the vacancies thus created shall be elected as provided in Section 2.09. (c) There shall be three classes of directors. All classes shall be as nearly equal in number as possible, and no class shall include less than three directors. At each annual meeting of shareholders, each director elected to replace a director whose term expires at such annual meeting shall be elected to hold office for a term expiring at the third succeeding annual meeting after his election. Each director shall hold office until the expiration of his term and until his successor is elected and qualified or until his earlier death, resignation or removal. (d) A director elected to fill a vacancy, unless elected by the shareholders, shall be elected to hold office for a term expiring at the next meeting of shareholders at which the election of directors is in the regular order of business. If the number of directors is changed, (i) any newly created directorship or any decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible, and (ii) when the number of directors is increased by the Board and any newly created directorships are filled by the Board, there shall be no classification of the additional directors until the next annual meeting of shareholders. 9 (e) At each meeting of shareholders for the election of directors the directors shall be chosen and elected by a plurality of the votes cast at such meeting by the holders of shares entitled to vote in the election. Any shareholder may recommend a nominee for membership on the Board of Directors provided such recommendations for nominees, to be proposed at any Annual meeting are made in writing addressed to the Secretary of the Corporation prior to the fifteenth of December preceding the date of such meeting. (f) No person shall serve as a director beyond the annual meeting of shareholders following his or her attainment of age 72. Section 2.03 Regular Meetings Promptly after the close of each annual meeting of the shareholders, the Board of Directors shall, without notice, meet where such annual meeting was held, or at such other place as may be fixed by resolution of the Board of Directors, for the purpose of appointing officers and committees for the ensuing year and transacting other proper business. Other regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be scheduled and such schedule may be changed at any regular meeting of the Board of Directors or at any special meeting called for that purpose, provided that notice of the change shall be given to all directors no later than 5 days prior to the first meeting held under such schedule as so changed. Section 2.04 Special Meetings Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, the Chief Executive Officer, or any two directors. If such a meeting is called by the Chairman of the Board of Directors or by the Chief Executive Officer, such person shall, or shall direct the Secretary to, fix a time and place for and give notice of the time, place, and purposes of such meeting. If such a meeting is called by any two directors, upon delivery to the Chairman of the Board of Directors, Chief Executive Officer or Secretary, in person or by registered mail, of a request in writing for a special meeting, specifying the purposes thereof, it shall be the duty of the person to whom the request is delivered to fix a time and place for (unless the requesting directors shall have fixed such time and place) and give notice of the time, place and purposes of such meeting. All such notices of meetings shall be given as provided in Section 4.01, if by mail, at least three days before the day on which the meeting is to be held, or, if by personal delivery, telephone or telegram, not later than the day before the day on which the meeting is to be held. Section 2.05 Quorum and Voting A majority of directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if a quorum shall not be present thereat, a majority of the directors present may from time to time adjourn any such meeting until a quorum shall be present, and the meeting may be held at adjourned without further 10 notice. If a quorum is present at any meeting, the vote of a majority of the directors present shall be the act of the Board of Directors, except as otherwise provided by law. The directors shall act only as a Board and, except as provided in Section 1.02 (relating to calling special meetings of the shareholders), Section 2.04 (relating to the adjournment of meetings in the absence of a quorum), individual directors shall have no powers as such. Section 2.06 Resignations Any director may resign at any time by delivering a written resignation to either the Chairman of the Nominating and Governance Committee, the Chairman of the Board of Directors, the Chief Executive Officer, the President or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon such delivery. Section 2.07 Directors Emeritus The Board of Directors may also appoint a retiring Chairman of the Board to emeritus status which shall not include the right to vote, or to be counted toward the determination of the full Board of Directors or for the determination of a quorum. Section 2.08 Removal of Directors Any director may be removed at any time, either for or without cause, by the affirmative vote of the holders of a majority of the outstanding shares of the Corporation entitled to vote for the election of directors, given at a meeting of the shareholders called for the purpose. Any vacancy in the Board of Directors caused by any such removal may be filled at such meeting by the shareholders entitled to vote for the election of directors; if the shareholders do not fill such vacancy at such meeting, such vacancy may be filled in the manner provided in Section 2.08. The provisions of this Section may be amended, altered or repealed only by the shareholders in the manner specified in clause (1) of Section 11.01. Section 2.09 Newly Created Directorships and Vacancies Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of Directors for any reason except the removal of directors without cause may be filled (unless theretofore filled by the shareholders in accordance with the provisions of Section 2.09) by vote of a majority of the directors then in office, although less than a quorum exists. Any such newly created directorship or vacancy (unless theretofore filled by the directors in accordance with the provisions of this Section) may also be filled by the shareholders entitled to vote for the election of directors at any meeting held during the existence of such vacancy provided that the notice of the meeting shall have mentioned such vacancy or expected vacancy. 11 Section 2.10 Action by Written Consent Any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board of Directors or committee shall be filed with the minutes of the proceedings of the Board of Directors or committee. Section 2.11 Participation in a Meeting by Telephone Any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such meeting. ARTICLE III Committees of the Board Section 3.01 How Constituted By resolution adopted by a majority of the entire Board of Directors, the Board may designate one or more committees each consisting of three or more directors. Each such committee shall serve at the pleasure of the Board. Section 3.02 Powers of Committees To the extent provided by resolution adopted by a majority of the entire Board of Directors, committees shall have and may exercise any of the powers of the Board of Directors except that no such committee shall have authority as to the following matters: (a) the submission to shareholders of any action as to which shareholders' approval is required by law; (b) the filling of vacancies in the Board of Directors or in any committee thereof; (c) the fixing of compensation of the directors for serving on the Board of Directors or any committee thereof; (d) the amendment or repeal of the By-Laws, or the adoption of new By-Laws; or (e) the amendment or repeal of any resolution of the Board of Directors which by its terms shall not be so amendable or repealable. 12 Section 3.03 Proceedings, Quorum and Manner of Acting Subject to the control of the Board of Directors, each committee may adopt such rules and regulations governing its proceedings, quorum and manner of acting as it shall deem proper and desirable, provided that a quorum shall not be less than two directors. ARTICLE IV Notices Section 4.01 Form and Delivery Except as otherwise expressly provided by law or by these By-Laws, any written notice required to be given by law, the Certificate of Incorporation or these By-Laws to any shareholder, director or other person may be delivered personally or by mail or, in the case of notices to directors, by telephone or telegram. Notice by mail shall be deemed to have been given at the time when such notice is deposited in the United States mail, postage prepaid, addressed to such shareholder, director or other person at his last known address as the same appears on the records of the Corporation or, if a shareholder shall have filed with the Secretary a written request that notices to him or her be mailed to some other address, then directed to him or her at such other address. Section 4.02 Waiver No notice required to be given by any statute, by the Certificate of Incorporation or by these By-Laws need be given to any person otherwise entitled to notice who signs in person or, if a shareholder, by proxy, a waiver of notice, whether signed before or after the time of the action to which the notice relates. In addition, the attendance by any shareholder at any meeting of the shareholders in person or by proxy without protesting prior to the conclusion of such meeting the absence of notice thereof to such shareholder, and the attendance by any director at any meeting of the Board of Directors without protesting prior to such meeting or at its commencement such absence of notice, shall, in each such case, constitute a waiver of notice of such meeting ARTICLE V Officers Section 5.01 Number and Qualification The officers of the Corporation shall be a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary and a Treasurer, and such other officers as may be appointed in accordance with the provisions of Section 5.03. Any one person may hold more than one of such offices except those of President and Secretary. The Chief Executive Officer shall be chosen from among the directors. No other officer need be a 13 director. Officers shall be at least 21 years of age and no more than 70 years of age on the date of the annual meeting of shareholders. Section 5.02 Appointment and Term of Office Officers (unless appointed under power delegated pursuant to the second sentence of Section 5.03) shall be appointed by the Board of Directors and (unless appointed under the provisions of Section 5.03 for a different term) shall hold office until the first meeting of the Board of Directors following the next succeeding annual meeting of shareholders and thereafter until their successor(s) shall have been appointed and qualified or until their earlier death or disqualification or until they shall have resigned in the manner provided in Section 5.04 or shall have been removed in the manner provided in Section 5.05. Section 5.03 Subordinate Officers The Board of Directors from time to time may appoint such other officers or agents as it may deem advisable, each of whom shall have such title, hold office for such period, have such authority and perform such duties as the Board of Directors from time to time may determine. The Board of Directors may delegate to any officer or agent the power to appoint any such subordinate officers or agents and to prescribe their respective titles, terms of office, authorities and duties. Section 5.04 Resignations Any officer may resign at any time by delivering a written resignation to the Board of Directors, the Chief Executive Officer or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon such delivery. Section 5.05 Removal Any officer may be removed at any time, either for or without cause, by action of the Board of Directors. Section 5.06 Vacancies A vacancy in any office because of death, resignation, removal, disqualification or any other cause, may be filled in the manner prescribed in this Article for regular appointment to such office. Section 5.07 The Chief Executive Officer The Chief Executive Officer of the Corporation shall report directly to the Board. Except in such instances as the Board may confer powers in particular transactions upon any other officer, and subject to the control and direction of the Board, the Chief Executive Officer shall manage the business and affairs of the Corporation and shall communicate 14 to the Board and any committee thereof reports, proposals and recommendations for their respective consideration or action. He may do and perform all acts on behalf of the Corporation. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside at all meetings of the shareholders and of the Board of Directors at which he or she shall be present. Section 5.08 The President The President shall have such powers and performs such duties as the Board and the Chief Executive Officer (to the extent he is authorized by the Board of Directors to prescribe the authority and duties of other officers) may from time to time prescribe or as may be prescribed in these By-Laws. Section 5.09 The Vice Presidents The Vice Presidents shall have such powers and perform such duties as the Board or the Chief Executive Officer (to the extent he or she is authorized by the Board of Directors to prescribe the authority and duties of other officers) may from time to time prescribe or as may be prescribed in these By-Laws. Section 5.10 The Secretary The Secretary shall: (a) Keep the minutes of meetings of shareholders and of the Board of Directors and cause the same to be recorded in books kept for that purpose. (b) Upon the request of any shareholder given at or prior to any meeting of shareholders, produce at such meeting a list of shareholders as of the record date for such meeting, certified by the corporate officer responsible for its preparation or by a transfer agent. (c) Cause all notices to be duly given in accordance with the provisions of these By-Laws and as required by statute. (d) Be custodian of the records and seal of the Corporation, and cause such seal (or a facsimile thereof) to be affixed to all certificates for shares of the Corporation the issuance of which shall have been authorized by the Board of Directors, and to all instruments the execution of which under the seal of the Corporation shall have been duly authorized. (e) Cause a record of shareholders to be kept in accordance with Section 8.01. (f) In general, perform all duties incident to the office of the Secretary and such other duties as from time to time may be assigned to him or her by the Board of Directors or the President. 15 Section 5.11 The Treasurer The Treasurer shall: (a) Have charge of and supervision over and be responsible for the funds, securities, receipts and disbursements of the Corporation. (b) Cause the moneys and other valuable effects of the Corporation not otherwise employed to be deposited in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as shall be selected in accordance with Section 6.03. (c) Cause the moneys of the Corporation to be disbursed by electronic funds transfers, checks or drafts (signed as provided in Section 6.04) upon the authorized depositaries of the Corporation, and cause to be taken and preserved proper vouchers for all moneys disbursed. (d) Render to the Board of Directors or the Chief Executive Officer, whenever requested, a statement of the financial condition of the Corporation and of all transactions effected by the Treasurer, and render a full financial report at any annual meeting of shareholders if called upon to do so. (e) Cause to be kept at the principal office of the Corporation correct books of account of all its business and transactions and exhibit such books to any director upon application at such office during business hours. (f) Be empowered from time to time to require from all officers or agents of the Corporation reports or statements giving such information as he may desire with respect to any and all financial transactions of the Corporation. (g) In general, perform all duties incident to the office of the Treasurer and such other duties as from time to time may be assigned to him or her by the Board of Directors or the Chief Executive Officer. ARTICLE VI Fiscal Matters Section 6.01 Execution of Instruments The Chief Executive Officer, President, any Vice President or the Treasurer may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation in the ordinary course of its business. Subject to the approval of the Board of Directors, any officer or agent of the Corporation may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The 16 Board of Directors may authorize any officer or agent to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. Any such authorization may be general or confined to specific instances. Section 6.02. Loans, etc. (a) No loans or advances to or by the Corporation shall be contracted, and no notes or other evidences of indebtedness shall be issued in its name, unless and except as authorized by the Board of Directors. Any such authorization may be general or confined to specific instances. So far as may be lawful, any officer or agent of the Corporation thereunto so authorized may effect loans and advances to or by the Corporation, and for loans and advances made to the Corporation may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the Corporation. So far as may be lawful, any officer or agent of the Corporation thereunto so authorized may pledge, hypothecate or transfer, as security for the payment of any and all loans or advances to or indebtedness and liabilities of the Corporation, any and all stocks, bonds, claims and other personal property, securities or receivables at any time owned by the Corporation or to which it is or will be at any time entitled, and to that end may endorse, assign and deliver the same and take any action necessary or proper in connection therewith. (b) No loan shall be made by the Corporation to any officer or director of the Corporation except as may be permitted by law. Section 6.03. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to its credit in such banks or trust companies or with such bankers or other depositaries as the Board of Directors from time to time may select, or as may be selected by any officer or agent authorized to do so by the Board of Directors. Section 6.04 Checks, Drafts, etc. All notes, drafts, acceptances, checks, endorsements, and all evidences of indebtedness of the Corporation whatsoever, shall be signed by such officer or officers or such agent or agents of the Corporation and in such manner as the Board of Directors from time to time may determine. ARTICLE VII Capital Stock Section 7.01 Certificates for Shares Shares of the Corporation shall be represented by certificates, in form approved by the Board of Directors, signed by the Chairman of the Board of Directors, the President or a 17 Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of the Corporation. Such seal may be a facsimile, engraved, lithographed, printed or otherwise reproduced. The signatures of such persons upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation itself or its employee. In case any such person who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be in such position before such certificate is issued, it may be issued by the Corporation with the same effect as if such person had not ceased to be in such position at the date of its issue. Section 7.02 Transfer of Shares; Registered Shareholders (a) Shares of the Corporation shall be transferable only upon the books of the Corporation kept for such purpose upon surrender to the Corporation or its transfer agent or agents of a certificate representing shares, duly endorsed or accompanied by appropriate evidence of succession, assignment or authority to transfer. (b) The Board of Directors, subject to applicable law and these By-Laws, may make such rules, regulations and conditions as it may deem expedient concerning the subscription for, issue, transfer and registration of, shares of the Corporation. Except as otherwise provided by law, the Corporation, prior to due presentment for registration of transfer, may treat the registered owner of shares as the person exclusively entitled to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner. Section 7.03 Transfer Agents and Registrars The Board of Directors may appoint one or more transfer agents and may appoint one or more registrars of the shares of the Corporation, and upon such appointments being made, no certificate representing shares shall be valid unless and until countersigned by one of such transfer agents, if any, and registered by one of such registrars, if any. The same person may act as transfer agent and registrar for the shares of any class of the Corporation. Section 7.04 Record Date The Board of Directors may fix, in advance, a date as the record date for determining the shareholders entitled to receive payment of any dividend, the allotment of any rights, the making of any distribution, or for the delivery of evidences of rights or evidences of interests arising out of any change, conversion or exchange of shares. Such date shall be not more than 60 days prior to any such action. 18 Section 7.05 Lost or Destroyed Certificates The Corporation may issue a new certificate in the place of any certificate theretofore issued by it alleged to have been lost or destroyed, and the Board of Directors may require the owner of the lost or destroyed certificate, or his legal representative, to give the Corporation a bond in such sum as the Board may direct, with such surety or sureties as may be satisfactory to the Board, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate or the issuance of any such new certificate. A new certificate may be issued without requiring any bond when, in the judgment of the Board of Directors, it is proper to do so. ARTICLE VIII Books and Records Section 8.01 Books and Records The Corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of the shareholders, the Board of Directors and the Executive Committee, if any. The Corporation shall keep at the principal office of the Corporation in the State of New York or at the office of its transfer agent or registrar in the State of New York a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof. Any of the foregoing books, minutes or records may be in written form or in any other form capable of being converted into written form within a reasonable time. Unless otherwise expressly required by statute or by these By-Laws, the books and records of the Corporation shall be kept, within or outside the State of New York, at such place or places as may be designated from time to time by the Board of Directors. Section 8.02 Examination of Books So far as permitted by law, the Board of Directors shall have power to determine from time to time whether, to what extent, at what times and places and under what conditions and regulations, the books, records, documents and accounts of the Corporation, or any of them, shall be open to inspection by shareholders; and no shareholder shall have any right to inspect any books, records, documents or accounts of the Corporation, except as conferred by statute or these By-Laws or authorized by resolution of the shareholders or the Board of Directors. 19 Article IX Indemnification Section 9.01 Indemnification--Third Party and Derivative Actions (a) The Company shall indemnify any person made, or threatened to be made, a party to an action or proceeding (other than one by or in the right of the Company to procure a judgment in its favor), whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the Company served in any capacity at the request of the Company, by reason of the fact that such person, such person's testator or intestate, was a director or officer of the Company, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the Company and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful. (b) The termination of any such civil or criminal action or proceeding by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not in itself create a presumption that any such director or officer did not act, in good faith, for a purpose which such director or officer reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the Company or that such person had reasonable cause to believe that his conduct was unlawful. (c) The Company shall indemnify any person made, or threatened to be made, a party to an action by or in the right of the Company to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the Company, or is or was serving at the request of the Company as a director or officer of any other corporation of any type or kind, domestic or foreign, of any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and reasonable expenses, including attorneys' fees, actually and necessarily incurred by such person in connection with the defense or settlement of such action, or in connection with an appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests 20 of the Company, except that no indemnification under this subparagraph (c) shall be made in respect of (1) a threatened action, or a pending action which is settled or otherwise disposed of, or (2) any claim, issue or matter as to which such person shall have been adjudged to be liable to the Company, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper. (d) For the purpose of this Section 1, the Company shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the Company also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to applicable law shall be considered fines; and action taken or omitted by a person with respect to an employee benefit plan in the performance of such person's duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Company. Section 9.02 Payment of Indemnification; Repayment (a) A person who has been successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding of the character described in Section 1 of this Article shall be entitled to indemnification as authorized in such Section. (b) Except as provided in the foregoing sentence, any indemnification under Section 1 of this Article, unless ordered by a court under Section 724 of the New York Business Corporation Law as from time to time amended, shall be made by the Company, only if authorized in the specific case: (1) by the Board of Directors acting by a quorum consisting of directors who are not parties to such action or proceeding upon a finding that the director or officer has met the standard of conduct set forth in Section 1 of this Article or otherwise established by the Company pursuant to the last sentence of Section 4 of this Article; or (2) if a quorum under the foregoing subparagraph (1) is not obtainable or, even if obtainable, a quorum of disinterested directors so directs: (i) by the Board of Directors upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because the applicable standard of conduct set 21 forth in such Section 1 of this Article or otherwise established by the Company pursuant to the last sentence of Section 4 of this Article has been met by such director or officer, or (ii) by the shareholders upon a finding that the director or officer has met such applicable standard of conduct. (c) Expenses incurred in defending a civil or criminal action or proceeding shall be paid by the Company in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount as, and to the extent, required by Section 2(d) of this Article. (d) All expenses incurred in defending a civil or criminal action or proceeding which are advanced by the Company under this Article or allowed by a court shall be repaid in case the person receiving such advancement or allowance is ultimately found, under the procedure set forth in this Article, not to be entitled to indemnification or, where indemnity is granted, to the extent the expenses so advanced by the Company or allowed by the court exceed the indemnification to which he is entitled. Section 9.03 Procedure for Indemnification Any indemnification of a director or officer of the Company under Section 1, or advance of costs, charges and expenses under Section 2(c) of this Article, shall be made promptly, and in any event within 60 days, upon the written request of the director or officer. The right to indemnification or advances as granted by this Article shall be reenforceable by the director or officer in any court of competent jurisdiction if the Company denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such person's costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Company. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 2(c) of this Article where the required undertaking, if any, has been received by the Company) that the claimant has not met the standard of conduct set forth in Section 1 of this Article or otherwise established by the Company pursuant to the last sentence of Section 4 of this Article, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, its independent legal counsel, and its stockholders), to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 of this Article or otherwise established by the Company pursuant to the last sentence of Section 4 of this Article, nor the fact that there has been an actual determination by the Company (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such 22 applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 9.04 Survival; Preservation of Other Rights The foregoing indemnification provisions shall be deemed to be a contract between the Company and each director and officer (and each director and officer of any of its subsidiaries) who serves in such capacity at any time while these provisions as well as the relevant provisions of the New York Business Corporation Law are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit, or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a "contract right" may not be modified retroactively without the consent of such director or officer. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. The Company is hereby authorized to provide further indemnification if it deems it advisable by resolution of shareholders or directors or by agreement. Section 9.05 Savings Clause If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify each director or officer of the Company as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Company, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated and to the full extent permitted by applicable law. ARTICLE X Miscellaneous Section 10.01 Corporate Seal The seal of the Corporation shall be circular in form and shall bear the name of the Corporation and the words and figures "Corporate Seal - 1925 - New York. Section 10.02 Fiscal Year The fiscal year of the Corporation shall be the calendar year. 23 ARTICLE XI Amendments Section 11.01 Amendments All By-Laws of the Corporation, whether adopted by the Board of Directors or the shareholders, shall be subject to amendment, alteration or repeal, and new by-laws may be made, either (1) by vote of the holders of the shares of the Corporation at the time entitled to vote in the election of directors, given at any annual or special meeting of shareholders the notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new by-laws, or (2) by the affirmative vote of at least a majority of the total number of directors then necessary to constitute a full Board, as determined pursuant to Section 2.02, given at any annual, regular or special meeting the notice or waiver of notice of which, unless none is required under the provisions of Section 4.02, shall have specified or summarized the proposed amendment, alteration, repeal or new by-law, provided that the shareholders may at any time provide in the By-Laws that any specified provision or provisions of the By-Laws may be amended, altered or repealed only in the manner specified in the foregoing clause (1), in which event such provision or provisions shall be subject to amendment, alteration or repeal only in such manner. Section 11.02 Notice of Amendment If any by-law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the by-law so adopted, amended or repealed, together with a concise statement of the changes made. 24 EX-10.C 5 y94563exv10wc.txt 2002 LONG TERM INCENTIVE PLAN Exhibit 10(c) EDO CORPORATION 2002 Long-Term Incentive Plan As amended January 1, 2004 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. 2 "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. "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 that is intended to meet the requirements of Section 422 of the Code. "Nonstatutory Stock Option" shall mean an Option that 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. 3 "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. "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 Shares that are not subject to forfeiture are referred to herein as being "vested" and/or "non-forfeitable". "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 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 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 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 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 or, (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 6 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, (that is, vested and of value above the grant price) 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 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. Options not vested at the time of termination for any reason shall be forfeited, except by action of the Committee. (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). 7 (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 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) Restricted Period; Vesting. The Committee shall determine the Restricted Period applicable to any Award of Restricted Shares and shall include the Restricted Period in the Award agreement referenced in Section 7(a), above. Notwithstanding the Restricted Period set forth in the Award agreement, the Committee may accelerate the vesting of any Award of Restricted Shares or revise or waive any performance or other conditions with respect to the vesting of any such Award at any time. (c) Delivery of Shares. When part or all of an Award of Restricted Shares becomes vested (that is, when the Restricted Period ends or upon the accelerated date selected by the Committee) and the performance and other conditions with respect to the Award, if any, are satisfied (as determined by the Committee) or waived by the Committee, a stock certificate for the number of vested Common Shares with respect to the Award shall be delivered, free of all 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. 8 (d) Termination of Employment. If a Participant terminates Employment and, at that time, has an Award of Restricted Shares that are not yet vested, the non-vested portion of the Award will be forfeited as of the Participant's date of termination. However, if the Participant terminates employment as a result of his (i) death or (ii) Disability, that portion (described below) of the non-vested Award will become vested upon the Participant's termination of Employment. Except as provided in the next sentence, the portion of the non-vested Award which becomes vested pursuant to this paragraph equals the number of Restricted Shares subject to such Award multiplied by a fraction, the numerator of which is the number of days actually worked during the Restricted Period and the denominator of which is the total number of days during the Restricted Period. If a portion of the Award became vested before the end of the Restricted Period (i.e., pursuant to Committee acceleration), the portion of the non-vested Award which becomes vested pursuant to this paragraph equals the number of non-vested Restricted Shares subject to such Award multiplied by a fraction, the numerator of which is the number of days actually worked since the most recent acceleration of vesting during the Restricted Period and the denominator of which is the total number of days during the Restricted Period after the most recent acceleration of vesting. (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. 9 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 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. 10 (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 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 11 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 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. 12 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. (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. As amended, January 1, 2004 EDO CORPORATION By: /s/ PATRICIA D. COMISKEY ------------------------------------ Title: Vice-President Human Resources, & Assistant Secretary 15 EX-10.F 6 y94563exv10wf.txt NONQUALIFIED DEFFERRED COMPENSATION PLAN Exhibit 10(f) EDO CORPORATION NONQUALIFIED DEFERRED COMPENSATION PLAN Effective as of January 1, 2004 EDO CORPORATION NONQUALIFIED DEFERRED COMPENSATION PLAN This EDO Corporation Nonqualified Deferred Compensation Plan (the "Plan") is adopted by EDO Corporation (the "Employer"), effective as of January 1, 2004. The Plan is intended to be an unfunded deferred compensation plan maintained for a select group of management or highly-compensated employees and, thus, is not subject to Title I, Subtitle B of Parts 2, 3 and 4 of the Employee Retirement Income Security Act of 1974 ("ERISA"). ARTICLE 1: DEFINITIONS 1.1 ACCOUNT means an account on the books of the Employer which reflects the aggregate balances of the Participant's Compensation Deferrals Account and Employer Contributions Account. 1.2 CODE means the Internal Revenue Code of 1986 and the regulations thereunder, as amended from time to time. 1.3 COMPENSATION DEFERRALS AND COMPENSATION DEFERRALS ACCOUNT. Compensation Deferrals means those amounts credited to a Participant's Account in accordance with Section 3.1. A Participant's Compensation Deferrals Account is an account on the books of the Employer to which is credited Compensation Deferrals, adjusted for earnings and losses, as described below. Unless otherwise designated, all references in the Plan to earnings and losses shall refer to deemed earnings and losses, as described in Article 4. 1.4 DISABILITY will be determined to exist if the Participant is eligible for disability benefits under the Employer's long-term disability plan. If the Participant is not covered by the Employer's long-term disability plan, Disability will be determined to exist if the Participant is eligible for disability benefits under the Social Security Act. 1.5 EMPLOYER means EDO Corporation and its subsidiaries, successors and assigns unless otherwise herein provided, or any other corporation or business organization which, with the consent of EDO Corporation, or its successors or assigns, assumes the Employer's obligations hereunder, or any other corporation or business organization which agrees, with the consent of EDO Corporation, to become a party to the Plan. Furthermore, Employer shall include any committee established by the Board of Directors to carry out the terms and conditions of the Plan. 1.6 EMPLOYER CONTRIBUTIONS and EMPLOYER CONTRIBUTIONS ACCOUNT. Employer Contributions means those contributions credited to a Participant's Account in accordance with Section 3.2. A Participant's Employer Contributions Account is an account on the books of the Employer to which is credited Employer Contributions, adjusted for earnings and losses, as described below. The Employer Contributions Account shall be divided into the following three separate sub-accounts: the Discretionary Sub-account, the Supplemental 401(k) Employer Contributions Sub-Account and the Employer Performance Contribution Sub-Account. 1.7 PARTICIPANT means, for any Plan Year (or applicable portion thereof), a person employed by the Employer, who is determined by the Employer to be a member of a select group of management or highly compensated employees of the Employer and who is designated by the Employer's Board of Directors to be a Participant. The Employer will notify those individuals, if any, who will be Participants and the date on which they will become Participants. 1.8 PLAN YEAR means the twelve (12)-month period ending on the December 31 of each year during which the Plan is in effect. 1.9 VALUATION DATE means the last day of each Plan Year and any other date that the Employer, in its sole discretion, designates as a Valuation Date. 1.10 YEAR OF SERVICE means a 12-consecutive-month period, beginning on the Employee's date of hire and each anniversary thereafter during which the Employee is employed by the Employer. ARTICLE 2: ELIGIBILITY AND PARTICIPATION 2.1 REQUIREMENTS. Each Employee who was selected to participate in the Plan on or before the Effective Date shall be a Participant on the Effective Date. Employees selected after the Effective date shall become a Participant as of the beginning of the first payroll period on or after he or she is selected. No individual shall become a Participant, however, if he or she is not an Employee on the date his or her participation is to begin. 2.2 RE-EMPLOYMENT. If a Participant whose employment with the Employer is terminated is subsequently re-employed, he or she shall again become a Participant only after the Board of Directors of the Employer again appoints the Employee as a Participant in accordance with the provisions of Section 2.1. 2.3 CHANGE OF EMPLOYMENT CATEGORY. During any period in which a Participant remains in the employ of the Employer, but ceases to be a Participant, he or she shall not be eligible to make Compensation Deferrals or receive credits of Employer Contributions hereunder, but his or her vested Account will continue to be adjusted for earnings and losses. ARTICLE 3: CONTRIBUTIONS AND CREDITS 3.1 PARTICIPANT CONTRIBUTIONS AND CREDITS. (a) Compensation Deferrals. In accordance with rules established by the Employer, a Participant may elect to defer Compensation that is yet to be earned and which would otherwise be paid to the Participant. For purposes of this Section 3.1(a) , the term "Compensation" is defined as incentive compensation and/or incentive commissions. A Participant may elect to defer up to 100% of his or her incentive compensation and/or incentive commissions. In order to participate in the Plan, any Participant electing to defer Compensation hereunder for a given Plan Year must make an election to defer at least one thousand dollars ($1,000) for the Plan Year. Amounts so deferred shall be considered a Participant's "Compensation Deferrals" and shall be deducted by the Employer from the Compensation of a deferring Participant and shall be credited to the Account of the deferring Participant. Ordinarily, a Participant shall make such an election with respect to the coming twelve (12)-month Plan Year. The election must be made during the period beginning on November 1 and ending on November 30 of the prior calendar year, or during such other period as may be established by the Employer. 2 (b) Excess 401(k) Amounts. In accordance with rules established by the Employer, a Participant also may elect to defer that portion of compensation which the Participant elected to be contributed on his behalf to the tax-qualified 401(k) plan maintained by the Employer (the "401(k) plan"), but which could not be contributed because of limitations on annual compensation (section 401(a)(17) of the Code) and/or annual additions (section 415 of the Code). For purposes of this Section 3.1(b), the term "compensation" is defined in the same manner as that term is defined in the 401(k) plan. Amounts so deferred also shall be considered a Participant's "Compensation Deferrals" and shall be credited to the Account of the deferring Participant. Ordinarily, a Participant shall make such an election with respect to the coming twelve (12)-month Plan Year. The election must be made during the period beginning on the November 1 and ending on the November 30 of the prior calendar year, or during such other period as may be established by the Employer. (c) Election. The Participant's election with respect to his or her Compensation Deferrals is irrevocable and shall continue in force only for the Plan Year for which the election is effective. (d) Compensation Deferral Account. There shall be established and maintained by the Employer a separate Compensation Deferral Account in the name of each Participant to which shall be credited or debited amounts equal to the Participant's Compensation Deferrals. 3.2 EMPLOYER CONTRIBUTIONS (a) Employer Discretionary Contributions. The Employer, from time to time, may credit Participants' Discretionary Sub-accounts with amounts designated by the Employer as "Discretionary Employer Contributions" on behalf of each Participant the Employer decides to grant a discretionary contribution for the Plan Year. (b) Employer Non-Discretionary Contributions The Employer also will credit to each Participant's Employer Contributions Account the following amounts each year: (i) Supplemental 401(k) Employer Contributions. This amount is equal to the amount of contributions (excluding deferral contributions as defined in section 402(e)(3) of the Code) the Employer would have made to the tax-qualified 401(k) plan sponsored by the Employer if there were no limitations on annual compensation (section 401(a)(17) of the Code), annual additions (section 415 of the Code) or non-discrimination (sections 401(k) and 401(m) of the Code), less such amounts actually contributed by the Employer to the tax-qualified 401(k) plan. (ii) Employer Performance Contributions. This amount is equal to a percentage, determined annually by the Board of Directors, in an amount not to be less than 2% nor greater than 8% of the Participant's annual compensation. For this purpose, annual compensation means a Participant's total annual current cash remuneration, including but not limited to regular salary, incentive compensation awards and any other extraordinary remuneration paid by the Employer to the Participant with respect to his or her service for the Employer (as determined by the Employer, in its discretion). (c) Vesting. A Participant who is credited with at least three (3) years of Service is fully vested in his or her Employer Contributions Account. Participants with fewer than three Years of Service are not vested in their Employer Contributions Accounts. A Participant also is fully vested in his or her Employer Contributions Account if the Participant reaches Retirement 3 Age (age 65), dies or incurs a Disability before he or she terminates employment with the Employer. A Participant is always fully vested in his Compensation Deferral Account. Any Participant who terminates employment with the Employer prior to full vesting shall irrevocably forfeit the portion not vested. The Employer shall retain such forfeitures. (d) Forfeitures for Misconduct. If a Participant separates from service with the Employer as a result of the Participant's gross misconduct, within the meaning of Part 6 of Title I of ERISA, or if the Participant engages in unlawful business competition with the Employer, the Participant shall forfeit all amounts allocated to his or her Employer Contributions Account. The Employer shall retain such forfeitures. ARTICLE 4: CREDITING OF ACCOUNTS 4.1 ALLOCATION OF DEEMED EARNINGS ON DIRECTED ACCOUNTS. Each Participant may direct the Employer as to how his or her Compensation Deferral Account, Discretionary Employer Contributions Account and Supplemental Employer 401(k) Account ("Directed Accounts") shall be deemed to be invested. The Employer may, but is not required to, invest assets held by the Employer on behalf of the Participant pursuant to the deemed investment directions the Employer has properly received from the Participant. The value of the Participant's Directed Accounts shall be equal to the value of the deemed investments specified by the Participant as if the Employer had so invested the Participant Directed Accounts. As of each Valuation Date, the Participant's Directed Accounts will be credited or debited to reflect the Participant's deemed investments since the most recent Valuation Date. The Participant's Directed Accounts will be credited or debited with the increase or decrease in the realizable net asset value of the designated deemed investments, as follows: As of each Valuation Date, an amount equal to the net increase or decrease in realizable net asset value (as determined by the Employer) of each deemed investment option within the Account since the preceding Valuation Date shall be allocated among all Participants' Directed Accounts deemed to be invested in that investment option in accordance with the ratio which the portion of the Account of each Participant which is deemed to be invested within that investment option, determined as provided herein, bears to the aggregate of all amounts deemed to be invested within that investment option. A Participant's deemed investment direction shall designate the whole percentage of each portion of the Participant's Directed Accounts which is requested to be deemed to be invested in categories of deemed investments selected by the Employer, and shall be subject to the following rules: (a) Any initial or subsequent deemed investment direction shall be in writing or, if provided by the Employer, by telephonic and/or electronic transmission, (b) a designation shall be effective as soon as practicable after the direction is received and accepted by the Employer, (c) a Participant may make or change a deemed investment direction only at such time(s) permitted by the Employer, and a deemed investment direction shall continue indefinitely until changed by the Participant in accordance with rules established by the Employer. 4.2 CREDITING OF DEEMED EARNINGS TO EMPLOYER PERFORMANCE ACCOUNT. As of each Valuation Date, the Participant's Employer Performance Account will be credited with earnings equal to a fixed rate of interest, which will be determined annually at the discretion of the Board of Directors before the commencement of the Plan Year. For the initial Plan Year and until such time as the Board of Directors deems appropriate, the rate of return shall be equal to 8% and shall be compounded annually. 4 Notwithstanding any provision to the contrary, the Employer and the Board of Directors reserve the right to reduce the amount credited to a Participant's sub-account to the extent that the amount is required to be disclosed in the annual Proxy Statement of the Employer as mandated pursuant to Regulation S-K, as amended, of the Securities Exchange Commission. 4.3 CREDITING OF DISTRIBUTIONS. As of each Valuation Date, distributions made from the Participant's vested Account since the most recent Valuation Date shall be charged to such Participant's Account and Compensation Deferrals and Employer Contributions made since the most recent Valuation Date shall be credited to the Participant Account as provided in Article 3. 4.4 INTERIM VALUATIONS. If it is determined by the Employer that the value of a Participant's Account as of any date on which distributions are to be made differs materially from the value of the Participant's Account on the prior Valuation Date upon which the distribution is to be based, the Employer, in its discretion, shall have the right to designate any date in the interim as a Valuation Date for the purpose of revaluing the Participant's Account so that the Account will, prior to the distribution, reflect its share of such material difference in value. 4.5 EXPENSES AND TAXES. Expenses associated with the administration or operation of the Plan shall be paid by the Employer. Each Valuation Date, taxes (a) attributable to earnings on actual investments, if any, made by the Employer with respect to its obligation to pay benefits under the Plan to a Participant and (b) which are payable by the Employer since the most recent Valuation Date, shall be charged against the Participant's Account. The Participant's portion of taxes attributable to Employer Contributions and Compensation Deferrals credited for the year on behalf of a Participant, such as Federal social security tax and hospital insurance tax (FICA) and Federal unemployment tax (FUTA), will be withheld from the Participant's wages. ARTICLE 5: PAYMENT OF BENEFITS 5.1 ENTITLEMENT. Upon termination of Employment, death or Disability, a Participant or, if applicable, the Participant's Beneficiary, is entitled to receive or commence receiving payment of the Participant's vested Account. 5.2 TIMING AND MANNER OF PAYMENT. Upon death, Disability or termination of employment, the Participant's vested Account will be paid by the Employer as soon as practicable in a lump-sum payment. However, if the Participant terminates employment after reaching Retirement Age and elects, in writing, at least twelve (12) months prior to termination of employment, the Participant's Account will be paid in up to ten (10) substantially equal annual installments as selected by the Participant if each such annual installment is estimated by the Employer to be at least $1,000. The Participant's written election must be received by the Employer in order to be valid. If payment of the Participant's Account is to be made in installments, the first installment shall be paid to the Participant as soon as practicable after the Participant's termination of employment, and subsequent payments shall be made as soon as practicable after January 1st of each successive Plan Year. Amounts not yet distributed will continue to be adjusted for earnings or losses, as described above. If a Participant is receiving annual installments pursuant to this Section and is re-employed by the Employer, the remaining 5 distributions due to the Participant shall be suspended until such time as the Participant again terminates employment. ARTICLE 6: EARLY PAYMENT OF BENEFITS 6.1 COMPENSATION DEFERRAL ACCOUNTS. Before the beginning of each Plan Year, a Participant may elect, in writing, to have all or a portion of his or her Compensation Deferrals (as adjusted for earnings in the manner set forth above) and which are attributable to the immediately following Plan Year paid in a lump sum as soon as practicable after the Participant's "fixed payment date". The fixed payment date may not be earlier than the date which is three (3) years after the written election is made and received by the Employer and no later than January 1 of the fifth (5th) Plan Year after the Plan Year to which the election relates. The Participant's election of a "fixed payment date" is irrevocable, except that the Participant may elect, in writing, a later fixed payment date if the subsequent election is made by the Participant at least twelve (12) months prior to the new fixed payment date. If a Participant terminates employment with the Employer before the Participant's fixed payment date, the Participant's Compensation Deferral Account will be paid as soon as practicable after the Participant's termination of employment with the Employer. 6.2 HARDSHIP DISTRIBUTIONS. In the event of financial hardship of the Participant, as hereinafter defined, the Participant may request that the Employer distribute all or a portion of his or her vested Account. Upon a finding of financial hardship, the Employer will make the appropriate distribution to the Participant. In no event shall the aggregate amount of the distribution exceed either the full value of the Participant's vested Account or the amount determined by the Employer to be necessary to alleviate the Participant's financial hardship (which distribution may be increased to include any taxes due because of the distribution), and which is not reasonably available from other resources of the Participant. For purposes of this Section, the value of the Participant's vested Account shall be determined as of the date of the distribution. "Financial hardship" means (a) a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Code section 152(a)) of the Participant, (b) loss of the Participant's property due to casualty, or (c) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, each as determined by the Employer. 6.3 WITHDRAWALS. A Participant may request a full or partial withdrawal of his or her vested Account, subject to the approval of the Employer. In no event will the withdrawal be greater than 100% of the value of a Participant's vested Account. Any amount paid pursuant to this Section shall be subject to a ten percent (10%) penalty, with the amount of the penalty permanently forfeited from the Participant's Account and returned to the Employer on or about the date of the distribution. ARTICLE 7: BENEFICIARIES; PARTICIPANT DATA 7.1 DESIGNATION OF BENEFICIARIES. Each Participant from time to time may designate a beneficiary to receive such benefits as may be payable under the Plan upon or after the Participant's death, and such designation may be changed from time to time by the Participant by filing a new designation. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Employer, and will be effective only when filed in writing with the Employer during the Participant's lifetime. 6 7.2 PAYMENT TO ESTATE. In the absence of a valid Beneficiary designation, or if, at the time any benefit payment is due to a Beneficiary, there is no living Beneficiary validly named by the Participant, the Employer shall pay any such benefit payment to the Participant's spouse, if then living, but otherwise to the Participant's estate. 7.3 INABILITY TO LOCATE PARTICIPANTS OR BENEFICIARIES/ FOFEITURE. Any communication, statement or notice addressed to a Participant or to a Beneficiary at his or her last post office address as shown on the Employer's records shall be binding on the Participant or Beneficiary for all purposes of the Plan. The Employer shall not be obliged to search for any Participant or Beneficiary beyond the sending of a registered letter to such last known address. If the Employer notifies any Participant or Beneficiary that he or she is entitled to an amount under the Plan and the Participant or Beneficiary fails to claim such amount or make his or her location known to the Employer within one (1) year thereafter, then, except as otherwise required by law, the Participant's Account will be forfeited. ARTICLE 8: ADMINISTRATION 8.1 ADMINISTRATIVE AUTHORITY. Except as otherwise specifically provided herein, the Employer shall have the sole responsibility for and the sole control of the operation and administration of the Plan, and shall have the power and authority to take all action and to make all decisions and interpretations which may be necessary or appropriate in order to administer and operate the Plan, including, without limiting the generality of the foregoing, the power, duty and responsibility to: (a) Resolve and determine all disputes or questions arising under the Plan, and to remedy any ambiguities, inconsistencies or omissions in the Plan. (b) Adopt such rules of procedure and regulations as, in its opinion, may be necessary for the proper and efficient administration of the Plan and as are consistent with the Plan. (c) Implement the Plan in accordance with its terms and the rules and regulations adopted as above. (d) Make determinations with respect to the eligibility of any Eligible Employee as a Participant, interpret the provisions of the Plan and make determinations concerning the crediting of Plan Accounts. (e) Appoint any persons or firms, or otherwise act to secure specialized advice or assistance, as it deems necessary or desirable in connection with the administration and operation of the Plan, and the Employer shall be entitled to rely conclusively upon, and shall be fully protected in any action or omission taken by it in good faith reliance upon, the advice or opinion of such firms or persons. The Employer shall have the power and authority to delegate from time to time by written instrument all or any part of its duties, powers or responsibilities under the Plan, both ministerial and discretionary, as it deems appropriate, to any person or committee, and in the same manner to revoke any such delegation of duties, powers or responsibilities. Any action of such person or committee in the exercise of such delegated duties, powers or responsibilities shall have the same force and effect for all purposes hereunder as if such action had been taken by the Employer. Further, the Employer may authorize one or more persons to execute any certificate or document on behalf of the Employer, in which event any person notified by the Employer of such authorization shall be entitled to accept and conclusively 7 rely upon any such certificate or document executed by such person as representing action by the Employer until such notified person shall have been notified of the revocation of such authority. 8.2 DISCRETIONARY ACTS. Whenever, in the administration or operation of the Plan, discretionary actions by the Employer are required or permitted (including interpretation of the Plan), such actions shall be consistently and uniformly applied to all persons similarly situated, and no such action shall be taken which shall discriminate in favor of any particular person or group of persons. The Employer's interpretation of the Plan provisions shall be final and binding. 8.3 CLAIMS PROCEDURE. Any person claiming a benefit under the Plan (a "Claimant") shall present the claim, in writing, to the Employer, and the Employer shall respond in writing. If the claim is denied, the written notice of denial shall state the specific reason or reasons for the denial, with specific references to the Plan provisions on which the denial is based; a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or information is necessary; and an explanation of the Plan's claims review procedure. The written notice denying or granting the Claimant's claim shall be provided to the Claimant within ninety (90) days after the Employer's receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension is required, the Employer shall furnish notice of the extension to the Claimant within the initial ninety (90)-day period and in no event shall such an extension exceed a period of ninety (90) days from the end of the initial ninety (90)-day period. Any extension notice shall indicate the special circumstances requiring the extension and the date on which the Employer expects to render a decision on the claim. Any claim not granted or denied within the period noted above shall be deemed to have been denied. Any Claimant whose claim is denied, or deemed to have been denied under the preceding sentence (or such Claimant's authorized representative), may, within sixty (60) days after the Claimant's receipt of notice of the denial, or after the date of the deemed denial, request a review of the denial by notice given, in writing, to the Employer. Upon such a request for review, the claim shall be reviewed by the Employer (or its designated representative), which may, but shall not be required to, grant the Claimant a hearing. In connection with the review, the Claimant may have representation, may examine pertinent documents, and may submit issues and comments in writing. The decision on review normally shall be made within sixty (60) days of the Employer's receipt of the request for review. If an extension of time is required due to special circumstances, the Employer shall notify the Claimant, in writing, and the time limit for the decision on review shall be extended to one hundred twenty (120) days. The decision on review shall be in writing and shall state, in a manner calculated to be understood by the Claimant, the specific reasons for the decision and shall include references to the relevant Plan provisions on which the decision is based. The written decision on review shall be given to the Claimant within the sixty (60)-day (or, if applicable, the one hundred twenty (120)-day) time limit discussed above. If the decision on review is not communicated to the Claimant within the sixty (60)-day (or, if applicable, the one hundred twenty (120)-day) period discussed above, the claim shall be deemed to have been denied upon review. All decisions on review shall be final and binding with respect to all concerned parties. 8 ARTICLE 9: AMENDMENT AND TERMINATION 9.1 RIGHT TO AMEND. The Employer, by action of its Board of Directors, shall have the right to amend the Plan, at any time and with respect to any provisions hereof, and all parties hereto or claiming any interest hereunder shall be bound by such amendment; provided, however, that no such amendment shall deprive a Participant or a Beneficiary of a right accrued hereunder prior to the date of the amendment. 9.2 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN. The Employer reserves the right to terminate the Plan and/or its obligation to make further credits to Plan Accounts, by action of its Board of Directors. If the Plan is terminated, all benefits will be distributed as soon as practicable after termination of the Plan. The Employer also reserves the right to suspend the operation of the Plan for a fixed or indeterminate period of time, by action of its Board of Directors. If the Plan is suspended, all Compensation Deferrals and Employer Contributions shall cease, but Participants' Accounts will continue to be adjusted for earnings and losses. 9.3 SUCCESSOR TO EMPLOYER. Any corporation or other business organization which is a successor to the Employer by reason of a consolidation, merger or purchase of substantially all of the assets of the Employer shall have the right to become a party to the Plan by adopting the same by resolution of the entity's board of directors or other appropriate governing body. If, within ninety (90) days from the effective date of such consolidation, merger or sale of assets, such new entity does not become a party hereto, as above provided, the Plan automatically shall be terminated, and all Accounts shall be fully vested and distributed to Participants. ARTICLE 10: MISCELLANEOUS 10.1 CONSTRUCTION. If any provision of the Plan is held to be illegal or void, such illegality or invalidity shall not affect the remaining provisions of the Plan, but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein. For all purposes of the Plan, where the context admits, the singular shall include the plural, and the plural shall include the singular. Headings of Articles and Sections herein are inserted only for convenience of reference and are not to be considered in the construction of the Plan. The laws of the state of the Employer's incorporation shall govern, control and determine all questions of law arising with respect to the Plan and the interpretation and validity of its respective provisions, except where those laws are preempted by the laws of the United States. Participation under the Plan will not give any Participant the right to be retained in the service of the Employer nor any right or claim to any benefit under the Plan unless such right or claim has specifically accrued hereunder. 10.2 ALIENATION. No amount payable to a Participant or a Beneficiary under the Plan will, except as otherwise specifically provided by law, be subject in any manner to anticipation, alienation, attachment, garnishment, sale, transfer, assignment, levy, execution, pledge, encumbrance, charge or any other legal or equitable process, and any attempt to do so will be void; nor will any benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled thereto. 9 IN WITNESS WHEREOF, the Employer has caused the Plan to be executed and its seal to be affixed hereto, effective as of the 1st day of January, 2004. EDO CORPORATION By: /s/ PATRICIA D. COMISKEY ------------------------ Print: Patricia D. Comiskey -------------------- Title: Vice President, Human Resources ------------------------------- Date: February 26, 2004 ----------------- 10 EX-10.T 7 y94563exv10wt.txt FORM OF AMENDMENT TO THE CHANGE IN CONTROL AGMNT Exhibit 10(t) January 09, 2004 Dear Executive: In the Change of Control Agreement entered into between you and EDO Corporation in 2003, it states that the Agreement would expire as of December 31, 2003. It goes on to state however, that the Agreement may be renewed each year by mutual consent of the Company and the Executive by the issuance of a letter of notification and agreement to that effect. This letter is to advise that the Company does hereby extend the cancellation date to December 31, 2004. (see page 2, General, item 2 and 3). All other terms and conditions of the Agreement remain in place as presented in the above referenced document. Please sign both copies of this letter as an indication of your acceptance of this extension of the time period the Agreement is in effect. Please return one copy to me by January 31, 2004 and keep the other copy for your records. If you have any questions, please do not hesitate to call. S/ __________________________ James M. Smith, for EDO Corporation S/ __________________________ date:___________ ("Executive") EX-10.U 8 y94563exv10wu.txt FORM OF 2004 RESTRICTED SHARE AND RETENTION . . . Exhibit 10(u) 2004 RESTRICTED SHARE AND RETENTION INCENTIVE AWARD AGREEMENT Participant's Name: xxxx Awards: 200x: xxxx Shares 200x: xxxx Shares 200x: xxxx Shares 200x: xxxx Shares 200x: xxxx Shares
This 2004 RESTRICTED SHARE AND RETENTION INCENTIVE AWARD AGREEMENT (the "Agreement") dated as of January 2, 2004, is between EDO Corporation, a New York corporation (the "Company"), and _________________. The EDO Corporation 2002 Long-Term Incentive Plan (the "Plan") is intended to foster and promote the long-term financial success of the Company by motivating superior performance by means of providing for the acquisition of an ownership interest in the Company by Eligible Employees. The Company's Board of Directors has designated its Compensation Committee (the "Committee") as the committee to administer the Plan. The applicable terms of the Plan are incorporated herein by reference. Capitalized terms used in this Agreement and not defined herein shall have the meaning assigned to such terms in the Plan. Pursuant to Section 7(a) of the Plan, on January 2, 2004, the Committee decided to make the Awards of the Company's Common Stock, par value $1 per share (the "Common Shares") to you, as described above and subject to the terms and conditions described below. You must be employed by the Company on the January 2 of the applicable year set forth above in order to receive the grant of Restricted Shares for that year. 1. Restrictions on Disposition of Common Shares A certificate evidencing the Common Shares shall be held by the Company until the lapse of the restrictions and shall contain the following legend on the face thereof: "The transfer of the shares represented by this certificate is restricted pursuant to the terms of an Award Agreement under the EDO Corporation 2002 Long-Term Incentive Plan." Upon satisfaction of the restrictions pursuant to Section 2 of this Agreement, a share certificate without legend shall be delivered to you. 2. Restriction Period The Committee has set a Restriction Period for the Common Shares subject to this Agreement. The Restriction Period is [five (5)][three (3)] years, beginning on January 2 of the year, which relates to the applicable grant. Unless the Committee permits otherwise, and pursuant to Sections 7 and 11 of the Plan, you will receive the number of Common Shares listed above upon completion of the Restriction Period, which shall not be subject to any restrictions. Transfer of these shares to you will be treated as payment of compensation to you, equal to the Fair Market Value of the shares on that date. The application of the Restricted Period shall apply separately to each of the stated grant years as detailed above. As provided in the Plan, the Committee may, at any time and for any reason, accelerate the Restricted Period on these grants. The Committee also may, at any time and for any reason, accelerate the year(s) in which grants of Restricted Shares are to be received. 3. Rights as a Shareholder Subject to the provisions of Section 7(e) of the Plan, you shall be entitled to receive all dividends and other distributions with respect to the Common Shares. 4. Change in Control Notwithstanding any provision of the Plan or the Agreement, in the event of a "Change in Control" (as defined below), (i) if the Participant has not yet received all grants of Restricted Shares for all of the years set forth above, he shall immediately receive all grants of Restricted Shares for all remaining years, as set forth above; and (ii) the Restricted Period applicable to the Participant's Restricted Shares shall expire immediately and all such shares shall be nonforfeitable and immediately transferable; and (iii) such shares shall be immediately transferred to the Participant. For purposes of this Section 4, "Change in Control" shall mean the occurrence of any of the following events: (i) as a result of, or in connection with, any cash tender offer, merger, acquisition, disposition, business combination, sale of assets or contested election, or combination of the foregoing, the persons who were members of the Board shall cease to constitute a majority of the Board; or (ii) any "person," including a "group" is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) of the Exchange Act), directly or indirectly 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 approve a definitive agreement 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. For purposes of paragraph (ii), the terms "person" and "group" have the same meanings as used in Sections 13(d) and 14(d)(2) of the Exchange Act, except that the terms shall exclude the Company, its Subsidiaries, any employee benefit plan of the Company or any Subsidiary, 2 employees of the Company or any Subsidiary or any "group" of which any of the foregoing is a member). 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. Notwithstanding any other provision of the Plan, in the event that there is any material change in the Participant's duties, compensation, reporting obligations, location of employment, responsibilities and/or title, at any time following a Change in Control, all Awards of Restricted Shares under this agreement shall become immediately vested. 5. Vesting If a Participant terminates Employment and, at that time, has an Award of Restricted Shares for which the Restricted Period has not yet been satisfied, the Award will be forfeited as of the Participant's date of termination. However, if the Participant terminates employment as a result of his (i) death or (ii) Disability, the Restricted Period with respect to grants of Restricted Shares received in the current and prior years shall expire immediately upon the Participant's termination of Employment and such Restricted Shares shall be fully nonforfeitable; grants of Restricted Shares applicable to subsequent years shall be forfeited as of the Participant's date of termination. 6. Capital Adjustments for Corporate Transactions Upon the occurrence of an event described in Section 4(c) of the Plan, the number of the Common Shares covered by this Agreement shall be proportionately adjusted in accordance with the terms of that Section. 7. Withholding Taxes The Company shall have the right to sell shares and deduct withholding taxes from any payments made pursuant to this Agreement or to make such other provisions, as it deems necessary or appropriate to satisfy its obligations to withhold federal, state or local income or other taxes incurred by reason of payments or the issuance of Common Shares under this Agreement. Whenever, under this Agreement, Common Shares are to be delivered, the Committee shall be entitled to require as a condition of delivery that you remit an amount sufficient to satisfy all federal, state and other governmental withholding tax requirements related thereto. 8. Agreement Nothing contained in this Agreement and no action taken pursuant to this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and you, your executor, administrator or other legal representative, or designated beneficiary or any other persons. Any reserves that may be established by the Company in connection with this Agreement shall continue to be part of the general funds of the Company and no individual or entity other than the Company shall have any interest in such funds until paid. If and to the extent that you or your executor, administrator or other legal representative, as the case many be, acquires a right to receive any payment from the Company pursuant to this Agreement, such right shall be no greater than the right of an unsecured general creditor of the Company. 3 9. Notices You shall be responsible for furnishing the Company with the current and proper address for the mailing of notices and delivery of agreements, shares pursuant to this Agreement. Any notices required or permitted to be given shall be in writing and shall be deemed given if directed to the person to whom addressed at such address and mailed by regular United States mail, first-class and prepaid. If any item mailed to such address is returned as undeliverable to the addressee, mailing will be suspended until you furnish the proper address. Notice may also be given by fax, telegram, or cable. Notice shall be effective upon receipt. This provision shall not be construed as requiring the mailing of any notice or notification if such notice is not required under the terms of the Plan, this Agreement or any applicable law. Notice to the Company shall be given as follows: EDO Corporation Attn: Vice President, Human Resources 60 East 42nd Street, 42nd floor New York, New York 10165 10. Entire Agreement This Agreement and the Plan contain the entire agreement and understanding between the Company and you with respect to the subject matter hereof and may not be changed, modified or terminated orally but only by a written instrument executed by the Company and you. The Committee shall have complete discretionary authority to interpret this Agreement and the Plan in accordance with the provisions of the Plan. 11. Governing Law This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York without reference to its conflict of law rules to the extent not pre-empted by Federal law, which shall otherwise control. 12. Severability of Provisions If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed and enforced as if such provisions had not been included. 13. Interpretation, etc. The Committee in accordance with the applicable provisions of the Plan shall administer the Plan and this Agreement. All determinations by the Committee as to any matter, including matters of interpretation of this Agreement and the Plan shall be conclusive and binding upon you. In the event of a conflict between the terms of the Plan and the terms of this Agreement, the terms of the Plan shall control. 14. Amendments The Committee shall have the right, from time to time, to amend the Agreement provided that no such amendment shall impair your rights under this Agreement without your consent. The Company shall give written notice to you of any such alteration or amendment of this Agreement as promptly as 4 practicable after the adoption thereof. This Agreement may also be amended in a written document signed by both you and the Company. 15. No Right of Employment Nothing in this Agreement and no action by the Company, the Board or the Committee in establishing or administering this Agreement shall be construed as giving you the right to be retained in the employ of the Company or any Subsidiary. 16. Headings and Captions The headings and captions herein are provided for reference and convenience only. They shall not be considered part of this Agreement and shall not be employed in its construction. 17. Supplements The Committee may add any supplement to this Agreement at a later date if such supplement does not adversely affect your rights under this Agreement. All capitalized terms used in such supplements without definition are used as defined in this Agreement or the Plan. By signature below, the Company and you have duly executed this Agreement. EDO CORPORATION By: ___________________________ ______________________________ William J. Frost Participant Vice President - Administration And Shareholder Relations 5 EX-10.V 9 y94563exv10wv.txt FORM OF STOCK OPTION AGREEMENT Exhibit 10(v) 2003 STOCK OPTION AGREEMENT Employee's Name: XXXXXXXX Number of Common Shares: XXX Per Share Option Price: $XX.XX This 2003 STOCK OPTION AGREEMENT (the "Agreement") dated as of XXX XX, 2003 between EDO Corporation, a New York corporation (the "Company"), and XXXXXXXX ("Employee"). The Company's Board of Directors has designated its Compensation Committee (the "Committee") as the committee to administer the EDO Corporation 2002 Long-Term Incentive Plan (the "Plan"). Capitalized terms used in this Agreement and not defined herein shall have the meaning assigned to such terms in the Plan. Pursuant to paragraph 5(a) of the Plan, the Committee has the authority to grant Eligible Employees options ("Options") as defined in the Plan. Accordingly, on XXX XX, 2003, you have been granted an Option under the Plan to purchase common shares, par value $1 per share ("Common Shares"), of the Company on the terms set forth below. To evidence the Option so granted, and to set forth its terms and conditions as provided in the Plan, you and the Company agree as follows: 1. Grant of Option; Option Price The Company hereby evidences and confirms its grant to you on XXX XX, 2003, of an Option to purchase XXXXXXXXXXXX (XXX) Common Shares at an option price of $XX.XX per share which is the fair market value of the optioned shares (as defined in the Plan) on the day the Option was granted. The Option shall be subject to the provisions of the Plan. 2. Term for Exercise This Option is exercisable in full on or after the third anniversary of the date the Option was granted, subject to the provisions hereof, and shall remain exercisable over the remaining term of the Option. Unless an earlier expiration date is specified by this Agreement, the Option shall expire on the tenth anniversary of the date of grant of this Option. Notwithstanding the foregoing, upon the occurrence of a Change in Control (as defined in the Plan), any unexercised portion of the Option shall promptly be canceled in exchange for either (i) a payment in cash of an amount equal to the excess of the Change in Control Price over the exercise price for such Options, or (ii) an Alternative Award as defined in Section 10.(b) of the Plan. 3. Who May Exercise Except as provided in the Plan, the Options granted hereunder are exercisable during your lifetime only by you. If you die, become disabled or retire with the consent of the Committee all unexercised Options shall be exercisable by you, your 1 estate or legal guardian, as such may be the case, as provided for in Section 5.(d) of the Plan. 4. Termination of Service Except as provided for in Section 5.(d) of the Plan, all unexercised Options immediately terminate at the termination of your employment with the Company. 5. Manner of Exercise The Option may be exercised in whole or from time to time, in part, by notice in writing to the Company, specifying the number of full Common Shares in respect of which the Option is being exercised and accompanied by, or providing for (if applicable), full payment of the option price in United States dollars in cash or by check, bank draft, or postal or express money order. Alternatively, unless the Committee otherwise determines, you may elect to use any cashless exercise method approved by the Company. In the event that the Option shall be exercised by a person other than you in accordance with the provisions of Section 3 hereof, such person shall furnish the Company with evidence satisfactory to it of his or her right to exercise the same and of payment or provision for the payment of any estate, transfer, inheritance or death taxes payable with respect to the Option or with respect to related shares or payment. The Company may require you or the other person exercising the Option to furnish or execute such documents as the Company shall deem necessary to evidence such exercise, to determine whether registration is then required under the Securities Act of 1933, or to comply with or satisfy the requirements of the Securities Act of 1933 or any other law. 6. Nonassignability The Option is not assignable or transferable except as provided for in Section 11.(c) of the Plan, and by will or by the laws of descent and distribution. At your request, Common Shares purchased on exercise of the Option may be issued or transferred in your name and the name of another person jointly with the right of survivorship. 7. Rights as Shareholder You shall have no rights as a shareholder with respect to any Common Shares covered by the Option until the issuance of a certificate or certificates to you for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of such certificate or certificates. 8. Capital Adjustments for Corporate Transactions Upon the occurrence of an event described in Section 4(c) of the Plan, the number and price of the Common Shares covered by the Option shall be proportionately adjusted in accordance with the terms of that Section. 9. Withholding Taxes The Company shall have the right to deduct withholding taxes from any payments made pursuant to this Agreement or to make such other provisions as it deems necessary or appropriate to satisfy its obligations to withhold Federal, state or local income or other taxes incurred by reason of payments or the issuance of 2 Common Shares under this Agreement. Whenever under this Agreement Common Shares are to be delivered upon exercise of an Option, the Committee shall be entitled to require as a condition of delivery that you remit an amount sufficient to satisfy all Federal, state and other governmental withholding tax requirements related thereto. 10. Agreement Nothing contained in this Agreement and no action taken pursuant to this Agreement shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and you, your executor, administrator or other legal representative, or designated beneficiary or any other persons. Any reserves that may be established by the Company in connection with this Agreement shall continue to be part of the general funds of the Company and no individual or entity other than the Company shall have any interest in such funds until paid. If and to the extent that you or your executor, administrator or other legal representative, as the case many be, acquires a right to receive any payment from the Company pursuant to this Agreement, such right shall be no greater than the right of an unsecured general creditor of the Company. 11. Notices You shall be responsible for furnishing the Company with the current and proper address for the mailing of notices and delivery of agreements, shares and cash pursuant to this Agreement. Any notices required or permitted to be given shall be in writing and deemed given if directed to the person to whom addressed at such address and mailed by regular United States mail, first-class and prepaid. If any item mailed to such address is returned as undeliverable to the addressee, mailing will be suspended until you furnish the proper address. Notice may also be given by fax, telegram, or cable. Notice shall be effective upon receipt. This provision shall not be construed as requiring the mailing of any notice or notification if such notice is not required under the terms of this Agreement or any applicable law. Notice to the Company shall be given as follows: EDO Corporation 60 East 42nd Street, Suite 5010 New York, New York 10165 12. Entire Agreement This Agreement embodies the entire agreement and understanding between the Company and you with respect to the subject matter hereof and may not be changed, modified or terminated orally but only by a written instrument executed by the Company and you. The Committee shall have complete discretionary authority to interpret this Agreement in accordance with the provisions of the Plan. 13. Governing Law This Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of New York without reference to its conflict of law rules to the extent not pre-empted by Federal law, which shall otherwise control. 14. Severability of Provisions If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed and enforced as if such provisions had not been included. 3 15. Interpretation, etc. The Plan and this Agreement shall be administered by the Committee in accordance with the applicable provisions of the Plan. All determinations by the Committee as to any matter, including matters of interpretation of this Agreement and the Plan shall be conclusive and binding upon you. In the event of a conflict between the terms of the Plan and the terms of this Agreement, the terms of the Plan shall control. 16. Amendments The Committee shall have the right, from time to time, to amend the Agreement provided that no such amendment shall impair your rights under this Agreement without your consent. The Company shall give written notice to you of any such alteration or amendment of this Agreement as promptly as practicable after the adoption thereof. This Agreement may also be amended in a written document signed by both you and the Company. 17. No Right of Employment Nothing in this Agreement and no action by the Company, the Board or the Committee in establishing or administering this Agreement shall be construed as giving you the right to be retained in the employ of the Company or any Subsidiary. 18. Headings and Captions The headings and captions herein are provided for reference and convenience only, shall not be considered part of this Agreement and shall not be employed in the construction of this Agreement. 19. Supplements The Committee may add any supplement to this Agreement at a later date if such supplement does not adversely affect your rights under this Agreement. All capitalized terms used in such supplements without definition are used as defined in this Agreement or in the Plan. By signature below, the Company and you have duly executed this Agreement. EDO CORPORATION By:___________________ _____________________ William J. Frost Employee Vice President - Administration and Shareholder Relations 4 EX-14 10 y94563exv14.txt EDO CORPORATION STANDARDS ETHICAL BUSINESS CONDUCT EXHIBIT 14 E D O C O R P O R A T I O N S T A N D A R D S [PICTURES] ETHICAL BUSINESS CONDUCT For All EDO Employees [EDO CORPORATION LOGO] COMPANY-WIDE ETHICS HOT LINE NUMBER: 1.800.622.0012 You will be in direct contact with the appropriate representative at EDO who will speak with you in confidence. Your anonymity will be protected if your situation requires that your identity be kept confidential. If you are unsure of what to do in any situation . . .SEEK GUIDANCE BEFORE YOU ACT. TABLE OF CONTENTS Letter to EDO Employees ................................ 1 High Standards of Ethics - Essential to Our Success .... 3 Our Responsibilities.................................... 4 Obeying the Law ........................................ 5 Competition ............................................ 5 Conflicts of Interest .................................. 7 Government Contracts ................................... 9 Payments to Government Personnel ....................... 10 Gratuities and Kickbacks ............................... 11 Entertainment and Gifts ................................ 12 Political Contributions ................................ 13 Help is Available for Maintaining EDO's Standards ...... 14 How We Solve Ethics Problems at EDO .................... 14 Ethics Help is Available ............................... 15 Securities Laws ........................................ 17 International Shipments, Imports and Exports ........... 19 Computer Protocol ...................................... 21 Sexual Harassment - A Zero Tolerance Policy ............ 23 Affirmative Action Policy .............................. 25
2003 Dear Fellow EDO Employees, EDO Corporation has a long-standing reputation for business integrity. This is the EDO way of doing business and we view this as an essential Corporate asset. This reputation was built by generations of staff members who have understood the high value we place on honesty, fair dealings and ethical business practice. Every day, in every situation, each of us must uphold EDO's standards. If a potential course of action seems questionable, seek guidance. We encourage open communications regarding any possible violation of EDO's ethical principles and business practices. This booklet is designed to help you understand what EDO expects of you in situations that you may face on the job, in a summary manner. Specific policies and procedures should be referred to for more detailed guidance. This booklet cannot and does not attempt to cover every ethical issue, but the basics are reviewed here to help your understanding. We believe the EDO staff will unquestionably take the proper action when they have the facts they need to form correct judgements. We want you to be sensitive to situations that could result in illegal, unethical or improper actions. We ask that you should also be alert to activities that even appear to look improper. Our reputation is in your hands. Each of us must maintain and demand from others high ethical standards. Let us continue to demonstrate the integrity and honesty associated with the EDO way of doing business. /s/ James M. Smith ----------------------- James M. Smith Chairman, President and CEO EDO Corporation Ethical Business Conduct EDO has a long-standing reputation for business integrity, which is an essential corporate asset HIGH STANDARDS OF ETHICS - ESSENTIAL TO OUR SUCCESS This booklet covers a wide range of business policies and procedures that flow from the company's commitment to ethical business conduct. These policies apply to all EDO officers, directors, and employees and they must conduct themselves accordingly. To help avoid even the appearance of improper behavior, many of our standards go beyond legal requirements. Specifically addressed are: - Obeying the Law - Competition - Conflicts of Interest - Government Contracts - Payments to Government Personnel - Gratuities and Kickbacks - Entertainment and Gifts - Political Contributions - Securities Laws - Import/Export Control Policies - Misuse of Electronic Equipment - Prohibition of Sexual Harassment - Affirmative Action Policy Also included in this booklet is a section that addresses how we at EDO solve ethics problems. Each of us must become informed enough about these practices so that we can operate with the highest degree of personal integrity and honesty. Should we be in conflict with the interpretation of a practice, we must then seek consultation with a more knowledgeable authority such as a Supervisor, a Human Resources Representative or the EDO Ethics Hot Line. EDO views seriously its commitment to ethical business conduct. The company will take disciplinary action against those who violate company policies and procedures. Government business requires strict adherence to our standards of ethics, and often includes the need to comply with special government regulations. If you are working on government business, you need to know and pay special attention to these requirements. if you are in a situation which you believe may be in violation of EDO policy, follow the guidelines to action recommended on page 14 of this booklet. 3 EDO Corporation Ethical Business Conduct Each of us must maintain and demand from others high ethical standards OUR RESPONSIBILITIES THE COMPANY Under our Standards, the Company is responsible for: - Providing all employees with clear guidelines on matters of everyday business conduct; - Maintaining working conditions at all locations supportive of employee responsibilities under these Standards; - Recognizing employees who make an exemplary effort to implement and uphold the Standards; and - Implementing the EDO Corporation Standards of Ethical Business Conduct by: - Distributing the EDO Corporation Standards of Ethical Business Conduct booklet to all employees, - Ensuring that all employees are aware of and understand the Standards, - Providing continuing counsel on company rules and regulations to any employee who seeks it, and - Enforcing compliance with the Standards, SUPERVISORS Under these Standards, all levels of supervision have a special responsibility for the implementation of the Standards of Ethical Business Conduct, and they will be measured in their performance for: - Demonstrating their own commitment by conducting themselves and managing their departments and the activities of all employees under their supervision in accordance with the Standards; - Stressing to all employees, in word and deed, the need for a continuing commitment to the Standards; and - Maintaining a workplace environment that encourages frank and open communication, free of the fear of reprisal, ALL EMPLOYEES Under these Standards, all employees, regardless of position, are responsible for and will be measured in their performance for: - Upholding the Standards and the policies, procedures, and practices that support them as demonstrated by their daily business conduct; 4 EDO Corporation Ethical Business Conduct Good customer relationships are based on integrity and trust - Contributing to a workplace environment that is conducive to the maintenance of the Standards in daily business activities; - Reviewing, regularly, their knowledge and understanding of the Standards; - Seeking help when the proper course of action is unclear or unknown; - Remaining alert and sensitive to situations which could result in actions by any employee that are unlawful, unethical, in violation of the Standards or the policies and procedures that support the Standards, or otherwise improper; - Advising fellow employees when it appears they may be in danger of violating the Standards or Company policies and procedures; and - Reporting violations of the Standards to those to whom responsibility has been assigned. OBEYING THE LAW OBEYING THE LAW IS THE FOUNDATION FOR EDO'S ETHICAL STANDARDS. EDO regards the laws of the cities, states, and nations in which we conduct business as inviolable contracts with the citizens of these communities. In all EDO business activities, each of us shall respect and obey these laws. COMPETITION WE RESPECT THE RIGHTS OF THE COMPETITORS, CUSTOMERS, AND SUPPLIERS. We are fair and honest. The only competitive advantages we seek are those gained through superior research, engineering, manufacturing, and marketing. It is our intent to win business through excellent products and services, never through unethical or questionable business practices. We do not engage in unfair or illegal trade practices. Good customer relationships are based on integrity and trust. It is against EDO's policy to engage in unethical or illegal activity to win or keep business. Each EDO employee shall consider personal and corporate integrity an absolute quality in ail business activities on behalf of EDO. One customer should not get preferred treatment over another. Such treatment includes unauthorized services or special contract terms -- unless they have been approved in advance by management. It is our duty as representatives of EDO to exercise good judgment. All information we provide about EDO products and services should be correct. 5 EDO Corporation Ethical Business Conduct Always employ professional business practices in selecting sources, in negoti- tion, in awarding business, and in the administration of purchasing activities Basic honesty is the key to ethical behavior. Trustworthiness in the marketplace is essential to building solid and lasting relationships with our customers. ACCURATE RECORD-KEEPING IS ESSENTIAL TO HONEST COMPETITION. Although only a few EDO employees are tasked to maintain accounting records, we all, indirectly, help keep the company's records. For example, the data from our time charges will become the basis for EDO charges to customers. EDO policy requires that each staff member maintain their own time charges. Mischarging of time is illegal and subject to disciplinary action leading to the termination of employment, it is essential that all entries be accurate so that the proper customer be charged for the employee's time. Many employees regularly use business expense accounts, commonly referred to as travel and entertainment expenses. These expenses must be documented and recorded accurately. If you are not sure whether a potential expense is allowable, the correct approach is to ask your Supervisor. Employees in the Accounting Department, or others who keep the company's official records have an added professional responsibility. They must maintain EDO's books, records, accounts, and financial statements in a manner which is both accurate and auditable. It is against EDO's policy to make entries that intentionally conceal or disguise the true nature of any transaction. No funds or accounts should be kept for purposes not fully and accurately disclosed. Unrecorded or "off the books" funds or assets should not be kept for any purpose. Each of us must be certain that our records are accurate and maintained according to all applicable laws and regulations. If you have reason to believe that some aspect of EDO's record-keeping is not being conducted properly, talk to your Supervisor or follow the guidelines to action recommended on page 14 of this booklet. MANY OF US ARE INVOLVED IN PURCHASING ACTIVITIES, EVEN THOUGH WE ARE NOT IN THE PURCHASING DEPARTMENT. For example, you may be an engineer whose drawings generate a list of approved suppliers. Or you may decide which suppliers meet or exceed our quality standards. You may send out artwork or printing, recommending preferred sources. Or you may select 6 EDO Corporation Ethical Business Conduct It is extremely important to avoid EDO business actions that appear to be influenced by personal interests freight carriers or software vendors. Whenever you are involved in purchasing, it is important to be objective and fair. Always employ professional business practices in selecting sources, in negotiations, in awarding business, and in the administration of purchasing activities. The best approach is to be friendly, but strictly business-oriented. It is wrong to create the impression that a supplier has a "friend" at EDO exerting special influence. In deciding among competing suppliers, it is important to be impartial. The decision to place a supplier on a bidding list should be based on: - Product or service quality - Level of service - Price - Financial stability - Reliability Ultimately, the best interests of all concerned are served when EDO and its suppliers derive mutual benefit from relationships. The way to ensure this is to conduct business fairly, impartially, and honestly. SUCCESSFUL COMPETITION REQUIRES HIGH QUALITY. Quality is the cornerstone of our commitment to our customers and is essential to our ability to compete. EDO is committed to total quality leadership. It is our mission to produce, support, and continually improve upon effective, reliable, quality products and services which meet or exceed all of our customers' requirements and expectations. Quality goes beyond ethical considerations and encompasses all of our efforts to honor our commitments, seek maximum responsibility, and have a bias for action while serving our customers. Our quality standards and guidelines help define our corporate goals, among them, a good working relationship with our customer based on truth and integrity. As a corporation, we are committed to providing our customers with quality products and services. Individual dedication to excellence permits us to honor that commitment. CONFLICTS OF INTEREST WE EXPECT EDO EMPLOYEES TO AVOID ANY ASSOCIATION WHICH MIGHT CONFLICT WITH THEIR LOYALTY TO THE COMPANY OR COMPROMISE THEIR JUDGMENT. 7 EDO Corporation Ethical Business Conduct Preserving EDO's assets depends upon a strong sense of ethics by the individuals to whose care they are entrusted A conflict of interest arises when a person's private interests and his or her business responsibilities are at odds. It may help to ask yourself these questions: - Are you sure that your job-related decisions are made on sound business principles? - Have you permitted your personal interest to influence your EDO business decisions? It is extremely important to avoid EDO business actions that appear to be influenced by personal interests. By policy, no employee, if he or she is in the position to influence transactions, shall have an interest of more than one percent in any firm which deals with EDO. Such an interest must be disclosed to EDO's General Counsel. In addition, no employee shall place himself or herself in a position to influence the award by EDO of a contract, or to negotiate a contract on behalf of EDO with an organization in which a relative or close personal friend of the employee is a member of its management, without first disclosing such relationship to EDO's General Counsel and obtaining his or her approval for such actions. Although it may not be a conflict of interest, for many employees it is usually inappropriate to have a "moonlighting" job, either in a business you own, or one owned by another. If you are contemplating additional outside duties, discuss the situation thoroughly with your Supervisor first. Should you actively pursue an outside job during off-work hours, Human Resources must be notified in writing. Actual conflict of interest need not be present for a problem to arise. Its mere appearance must be avoided. Conflict of interest can arise innocently because of circumstances alone, without deliberate action on the part of an individual. Conflicts of interest are sometimes not clear-cut. Correct action may require consultation with higher levels of management, or the Company's General Counsel. So, before you act, it is especially important to discuss areas of concern with your Supervisor. INSIDE INFORMATION Another area of potential conflict is "inside information." Employees who have access to confidential information as part of their job are not permitted to use or share that information for stock trading purposes. To use such nonpublic information for financial benefit not only is unethical it is clearly illegal. THIS INCLUDES POSTING INFORMATION AND SPECULATION TO PUBLIC OR PRIVATE ELECTRONIC MESSAGE BOARDS. 8 EDO Corporation Ethical Business Conduct Loyalty to EDO also requires that employees help preserve EDO's assets, many of which are of great value. EDO policies and procedures are based heavily on trust and respect for the individual These include physical items and proprietary information. Proprietary information needs to be handled carefully. This includes EDO's intellectual property, such as: - Patents - Trademarks - Trade secrets - Copyrights Proprietary information also includes: - Business, marketing, and service plans, such as the Strategic Plan - Engineering and manufacturing skills - Designs - Internal data bases - Personnel records - Salary information - Unpublished financial data and reports - Employee lists, including Company telephone directories Any unauthorized use or disclosure of these types of information would violate EDO's standards. It would also be illegal, and could bring civil and even criminal penalties. We should all ensure that EDO property under our control is properly used, employing adequate control and safeguards. In addition, sensitive information should be stored and protected on a need-to-know basis, precluding unauthorized access, use or removal. Preserving EDO's assets depends upon a strong sense of ethics by the individuals to whose care they are entrusted. If you have any questions about your ethical responsibilities in this area, follow the guidelines to action recommended on page 14 of this booklet. GOVERNMENT CONTRACTS EDO products and services are marketed in the United States and internationally through vigorous competition. All EDO employees who are involved in International business must receive a briefing by General Counsel, or their designee, on prescribed conduct as outlined in the Foreign Corrupt Practices Act (FCPA) prior to contacting any 9 EDO Corporation Ethical Business Conduct We do not offer or accept kickbacks or bribes, or gifts of any value Foreign National. Since we deal with many governments, we must take care to comply with the special laws, rules, and regulations which govern these contracts. These laws and regulations may require evidence that detailed rules have, in fact, been followed. We must take care of safeguarding government property and classified data in our possession. In doing business with all governments, it is important to know the rules applicable to that government, If you are in doubt, discuss the matter with your Supervisor or, if appropriate, General Counsel, or their designee. On defense-related projects, be particularly alert to soliciting, accepting or possessing classified information for which you are not authorized, if you are authorized to have access to classified information, know and follow the rules for handling such information. In many areas of business practice, the U.S. Government has determined special rules of behavior which may differ from acceptable commercial practices. No employee shall offer or accept illegal or improper payments under any circumstances. This includes gratuities offered to U.S. Government officials or employees, however innocent in purpose and whether or not the employee seeks reimbursement from EDO. In addition, marketing, accounting, record keeping, purchasing, and quality - among other areas -require special attention including: - Accounting for costs - Proposal and bidding procedures - Pricing - Discussing potential employment with U.S. Government procurement officials - Maintenance of time records - Compliance with contract obligations PAYMENT TO GOVERNMENT PERSONNEL We do not make illegal payments to government officials of any country. In the case of U.S. Federal Government employees, our policy prohibits giving them anything of value. The promise, offer or delivery to an officer or employee of the U.S. Government of a gift, favor or other gratuity (i.e., anything of value) would not only violate EDO policy, it may also violate the law. It is clear that you must take special care when working with U.S. Government employees. You should investigate whether there are regulations imposed upon other customers you serve - state, local, and foreign government employees and representatives 10 EDO Corporation Ethical Business Conduct from the commercial sector. Awareness will help you avoid inappropriate and possibly illegal situations. Our policy prohibits company contributions to political candidates even where such contributions are lawful GRATUITIES AND KICKBACKS WE DO NOT OFFER OR ACCEPT BRIBES, GIFTS OR KICKBACKS OF ANY VALUE. No employee shall give, offer, or discuss giving or offering, a gratuity (i.e., anything of more than modest value) to any official or employee of the U.S. Government, however innocent in purpose and whether or not the employee seeks reimbursement from the Company. Examples of gratuities are the following: meals which exceed the allowable single or aggregate annual limit, transportation by taxi or private automobile (even where there is no additional expense in providing such service to the Government personnel), tickets to athletic or cultural events, parties and other social gatherings and loans of cash or property. Modest value is defined as gifts of $20 or less. A government employee may accept unsolicited gifts having an aggregate market value of $20 or less per occasion, provided that the aggregate market value of individual gifts received from any one person (contractor) shall not exceed $50 in a calendar year. "Gift" does not include modest items of food and refreshments, such as soft drinks, coffee and pastries, offered as other than as part of a meal (for example, meeting refreshments.) However, those employees who are registered lobbyists or who otherwise regularly represent the Company with U.S. Congressmen and staff are subject to, and must follow, more detailed special policy guidance. It is EDO's policy to reimburse employees for all approved expenses resulting from conducting business on behalf of EDO Corporation. In accordance with the Anti-kickback Act of 1986, no employee will provide, attempt to provide, offer to provide, solicit, accept, or attempt to accept a kickback. The purpose of business entertainment and gifts in a commercial or industrial setting is to create good will and sound working relationships. Their purpose is not to gain special advantage with customers. You are violating ethical behavior when your actions unduly influence recipients, make them feel obligated to pay EDO back or violate their own standards of conduct. It is your duty to exercise good judgment and to act with moderation in offering entertainment or gratuities. Practices in offering and accepting business gratuities vary among the markets we serve. It is important to observe a customer's regulations regarding gratuities. 11 EDO Corporation Ethical Business Conduct We at EDO understand that ethical business conduct depends upon the cooperation and full support all The approval of your General Manager is required before deciding to give or receive a business gratuity. The General Manager will also be the sole designee of those individuals who are deemed to be commercial representatives. Any requests to add a commercial representative shall be submitted in writing to the General Manager for approval. Our marketing activities must not entice representatives of customers to place their own personal interests above those of the organizations they represent. ENTERTAINMENT AND GIFTS EDO considers the proper handling of gifts and entertainment as an important element in our business relationships and reputation. It is important that all employees understand how to handle the legal and ethical issues associated with gifts and entertainment and how they can affect our relationships and reputation. A business gift is never permitted if prohibited by law or regulation, prohibited by known policies of the intended recipient's employer, intended to improperly influence, or would have the appearance of improperly influencing, the intended recipient. The issue of gifts and gratuities also has legal implications when the government, either within or outside of the United States, is involved. Serious consequences can result from mishandling these relationships. Please refer to the sections entitled "Government Contracts", "Payments to Government Personnel" and "Gratuities and Kickbacks" for information on this issue within those contexts. Business gifts and entertainment are courtesies designed to build goodwill and improve working relationships among business partners. However, we do not want to obtain business through improper means or use improper means to gain any special advantage in our relationships. Business gifts that compromise, or even appear to compromise, our ability to make fair and objective business decisions are, at all times, inappropriate. Reasonable business entertainment and gifts of nominal value are permitted, as long as what is offered is consistent with usual business practice, cannot be construed as a bribe or a payoff, is not in violation of any law or company policy and would not embarrass the Company or individual if disclosed publicly. Customer entertainment should be agreed upon in advance with a supervisor. These guidelines apply to anything given or received as a result of a business relationship for which the recipient does not pay fair market value, including things such as travel, lodging, goods, services and entertainment. These guidelines apply at all times, and do not change during traditional gift-giving seasons or during a business or special event. Items of nominal value are generally acceptable, but acceptance 12 EDO Corporation Ethical Business Conduct of even low-value items can be improper if done on a too frequent basis, and/or come from the same sources repeatedly. As EDO employees, we have tremendous responsibility to sustain EDO's image as an ethical company Solicitation of gifts is never appropriate. Our customers, suppliers and consultants are asked from time to time whether our employees have solicited them for gifts or entertainment. This is done in order to ensure our integrity in these relationships. POLITICAL CONTRIBUTIONS Our policy prohibits Company contributions to political candidates even where such contributions are lawful. Company contributions to political parties in connection with elections also are prohibited. We encourage individual employees to be involved in the political process, however, and to make personal contributions as they see fit. Good citizenship is fostered by taking part in activities on a local, regional, state or national level and expressing personal views on government, legislation, and other matters of public interest. However, there is a difference between being politically active personally, and being politically active as a representative of EDO. When we speak out on public issues, we must take care not to give the appearance of acting on EDO's behalf unless authorized to do so. In addition, EDO employees may not allow personal political efforts to infringe on their normal workday commitments to EDO. EDO facilities and equipment may not be used for personal political purposes. Employees may participate in the EDO Political Action Committee (EDOPAC). EDOPAC channels members' voluntary contributions to those candidates whose business philosophies are consistent with EDO's. Other than administrative costs, no corporate funds or property are used in connection with EDOPAC. Many laws regulate corporate political activity. United States Federal law prohibits corporations from making contributions to candidates running for Federal office. No corporation can do this. Although some state and local governments allow corporations to make political contributions within the state, our own internal policy prohibits us from doing so. The following activities are generally prohibited as a matter of company policy and may be illegal: - The purchase of a subscription to or advertising in any type of political publication - The use of company cars or other EDO property by political organizations, candidates or their staffs in connection with a political campaign - The use of corporate funds to purchase seats or tables at political dinners and political fund raising events 13 EDO Corporation Ethical Business Conduct If you are unsure of what to do in any situation... seek guidance before you act - The use of the EDO name in political or campaign literature If you are contemplating these activities, seek advice from the chair of the EDOPAC, Vice President, Washington Operations HELP IS AVAILABLE FOR MAINTAINING EDO'S STANDARDS As EDO employees, we have tremendous responsibility to sustain EDO's image as an ethical company. Continued honesty and integrity are vitally important. Let us do our best each day to maintain our standards. In doing so, we will contribute immensely to EDO's success. EDO policies and procedures are based heavily on trust and respect for the individual. We at EDO understand that ethical business conduct depends upon the cooperation and full support of all. If you have questions about ethics, follow the guidelines to action recommended below. If you are unsure of what to do in any situation, seek guidance before you act. HOW WE SOLVE ETHICS PROBLEMS AT EDO Some ethics issues we face are clear-cut and easily addressed. If the question involves a matter of law, we follow the law. But often, the questions are not so clear-cut and present us with difficult choices. It is impossible, of course, to prepare in advance for all possible problems. So, the best course of action is to understand clearly the way to solve such problems. These are steps to keep in mind: 1. GET ALL THE FACTS. It is difficult enough to find answers with the facts; it is impossible to reach intelligent solutions without them. 2. ASK YOURSELF: WHAT SPECIFICALLY AM I BEING TO DO? It should enable you to bring into sharp focus the proposed question you are faced with, and what alternatives you may have. 3. CLARIFY YOUR RESPONSIBILITY. Most situations we face involve shared responsibility. Are all other parties informed? By getting others involved, and airing the problem, a good course of action usually begins to come into focus. 14 EDO Corporation Ethical Business Conduct Everyday, in every situation, each of us must uphold EDO's Standards 4. IS IT FAIR? When the problem is not a clear-cut matter of law or company policy, this simple question is often a useful guide. If a course of action seems unfair, focus on why it seems unfair and who specifically may be wronged. Is it our customer? EDO's interests? Other employees? In many cases, the best course for ethical purposes is also the one that seems fairest to all concerned. 5. DISCUSS THE PROBLEM WITH YOUR SUPERVISOR. This is the basic guidance for most situations, and should be considered during any of the above steps. In most cases, your Supervisor will have a broader perspective than you do, and will appreciate being brought into the decision-making process before it is too late. Supervisors have a prime responsibility to help you solve problems. ETHICS HELP IS AVAILABLE In the rare case where it may not be appropriate to discuss an ethics issue with your Supervisor, perhaps you can discuss it locally with your Human Resources Representative or follow the process for internal contact for your business unit. If that also is not appropriate, you can take advantage of the toll-free number. COMPANY-WIDE ETHICS HOT LINE NUMBER: 1.800.622.0012 This will put you in direct contact with the appropriate representative at EDO who will speak with you in confidence. This representative reports directly to the Chairperson of the Audit Committee in matters of ethics. For employees who prefer to write, address your concerns to: EDO CORPORATION Ethics Office 60 East 42nd Street 42nd Floor New York, NY 10165 Your anonymity will be protected if your situation requires that your identity be kept secret. If you are unsure of what to do in any situation... SEEK GUIDANCE BEFORE YOU ACT. 15 EDO Corporation Ethical Business Conduct SECURITIES LAWS Insider information is confidential and should not be acted upon in connection with the purchase or sale of EDO's or any other company's securities or communicated to others SECURITIES LAWS Federal and state laws prohibit the purchase or sale of EDO's (or any other public company's) securities on the basis of MATERIAL INSIDE INFORMATION. Material Inside Information is defined as information which has not been released to the public and which is likely to affect the value of the company's stock. A person who, during the course of work for a company, obtains such information can be considered an "insider". This means that that person is liable to legal action and subject to civil and criminal penalties should he or she buy or sell company stock on the basis of the inside information. That person is also liable if he or she caused or "tips" others to buy or sell the company's shares on the basis of his information. Therefore, such information is confidential and should not be acted upon in connection with the purchase or sale of EDO's or any other company's securities or communicated to others. If any staff member has a question regarding securities matters, contact EDO's General Counsel. 17 EDO Corporation Ethical Business Conduct Each EDO business unit will have a designated Export Compliance Specialist, responsible for the management of this area INTERNATIONAL SHIPMENTS, IMPORTS AND EXPORTS It is EDO's policy to comply with the import and export laws of the countries in which we do business, as well as all applicable U.S. laws regarding proper business conduct, including U.S. Government licensing of exports of the Company's products and technology. Laws and regulations include, but are not limited to , the Foreign Corrupt Practices Act, trading with the Enemy Act and the Arms Export Control Act; each of which is dictated by U.S. statutes and carries severe penalties for offenders. Each EDO business unit will have a designated Export Compliance Specialist, responsible for the management of this area. (This may be a shared resource with another business unit.) If you have a question or concern regarding anything in this area, please contact the Specialist for your business unit. 19 EDO Corporation Ethical Business Conduct EDO has zero tolerance for discrimination or harassment of ANY type. COMPUTER PROTOCOL EDO staff members are reminded that ALL company computer systems are and will be monitored for appropriate use. This includes internet access, stand alone computer software installations (that is unauthorized "borrowed" copies being installed), telephone voice mail and electronic mail (email). Appropriate use means that transmitted (voice and email) correspondence should be limited to business purposes, not personal mail, and certainly NOT as the vehicle for disseminating "jokes", "for sale" information, solicitations of any type, and other personal observations that one would not want to be publicly broadcast. Email is not confidential. Staff members who violate company policy regarding the creation of a hostile working environment via the electronic or other distribution of statements or material that is unflattering, obscene, threatening or otherwise inappropriate, on a race, gender, religion, disability, veteran, national origin or age basis are subject to disciplinary steps that include termination of employment. EDO HAS ZERO TOLERANCE FOR DISCRIMINATION OR HARASSMENT OF ANY TYPE. If you ever have a problem with any material communicated in this manner, please contact either your local Human Resources Representative, your General Manager or the Vice President of Human Resources immediately. 21 EDO Corporation Ethical Business Conduct SEXUAL HARASSMENT - A ZERO TOLERANCE POLICY The management of EDO Corporation is responsible for and fully committed to the prevention or elimination of sexual harassment in our work place. SEXUAL HARASSMENT - A ZERO TOLERANCE POLICY Harassment on the basis of sex is a form of discrimination, and a violation of Title VII of the Civil Rights Act of 1964. Thus EDO Corporation reaffirms its policy that all staff members have the right to be free from sexual discrimination by any member of the work force or others who are on the premises. This community includes, but is not limited to, employees, contractors, vendors, and visitors. Employees should review the SEXUAL HARASSMENT - A ZERO TOLERANCE Brochure specifically detailing policies and procedures. In addition, there are specific requirements for Supervisors, of which they must be aware. Unwelcome sexual advances or requests for sexual favors, as a condition of employment or career advancement by a member of supervision, will not be tolerated. In addition, verbal or nonverbal speech or action between supervisor and staff member or between two or more staff members or others that creates a hostile work environment will not be condoned. If a staff member has a sexual harassment problem, they should make it absolutely clear to the other person(s) that their behavior or actions are unwelcome and that it must stop at once, If they feel uncomfortable about approaching the individual(s) directly, then they should request that their immediate supervisor speak on their behalf. If this does not stop the unwanted actions or comments, then contact the facility Human Resources Representative or the Vice President of Human Resources, and appropriate disciplinary action will be taken, up to and including dismissal. It may even lead to personal, legal, and financial liabilities when it has been shown that willful sexual harassment exists against any staff member who files a sexual grievance. The management of EDO Corporation is responsible for and fully committed to the prevention and elimination of sexual harassment in our work place. 23 EDO Corporation Ethical Business Conduct Our Affirmative Action Program at EDO Corporation is intended to effect attainment of these goals in our organization AFFIRMATIVE ACTION POLICY We at EDO Corporation believe that it is important to the future of our country for discriminatory barriers to be eliminated so that every person will be equal in their pursuit of employment opportunities regardless of race, religion, color, national origin, ancestry, age, gender, disability, or veteran status. These pursuits include, but are not limited to recruiting, hiring, transfer, promotion, layoff, recall from layoff, "fringe benefits," compensation, training, education, and tuition assistance, and social and recreational programs. We also believe that under the Equal Employment Opportunity doctrine, only ability and perseverance should limit an individual's advancement. Furthermore, we know that both the interests of our nation and our Company are best served when we help staff members to progress. We believe these goals will never be reached unless all people and all organizations dedicate themselves to their attainment. Our Affirmative Action Program at EDO Corporation is intended to effect attainment of these goals in our organization. If you have questions regarding this policy, contact your local Human Resources Representative. 25 EDO CORPORATION 60 East 42nd Street - 42nd Floor - New York, NY 10165 - USA www.edocorp.com [EDO CORPORATION LOGO] EX-21 11 y94563exv21.txt EDO CORPORATION'S SUBSIDIARIES . . . Exhibit 21 EDO CORPORATION'S SUBSIDIARIES ACTIVE SUBSIDARIES
NAMES UNDER WHICH SUBSIDIARY STATE OF INCORPORATION SUBSIDIARY DOES BUSINESS AIL Technologies Inc. Delaware AIL Systems Inc. (owned by AIL Delaware EDO Technical Services Operations Technologies Inc.) EDO Electronic Systems Group Darlington Inc. Delaware Darlington of Virginia, Inc. EDO Artisan Inc. New Jersey EDO Communications and California Countermeasures Systems Inc. EDO MTech Inc. Pennsylvania EDO M. Tech EDO Professional Services Inc. Virginia Advanced Engineering & Research Associates Which Will Do Business In California As Virginia AERA, Inc AERA Incorporated AERA, Inc. EDO Reconnaissance and Delaware EDO Communications and Surveillance Systems, Inc. Countermeasures Systems EDO Western Corporation Utah EDO Electro-Ceramic Products Specialty Plastics, Inc. Louisiana EDO Specialty Plastics
EX-23 12 y94563exv23.txt CONSENT OF INDEPENDENT AUDITORS 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, 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, the Registration Statement (Form S-3 No. 333-88620) relating to the issuance by EDO Corporation of its 5.25% Convertible Subordinated Notes due 2007, and the Registration Statement (Form S-8 No. 333-105265) pertaining to the EDO Corporation 2002 Non-Employee Director Stock Option Plan and the EDO Corporation 2002 Long-term Incentive Plan, of our report dated February 13, 2004, 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, 2003. /s/ Ernst & Young LLP New York, New York March 2, 2004 EX-31.1 13 y94563exv31w1.txt SECTION 302 CERTIFICATION FOR THE CEO Exhibit 31.1 CERTIFICATION PURSUANT TO 15 U.S.C. SECTION 10A, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James M. Smith, certify that: 1. I have reviewed this report on Form 10-K of EDO Corporation (the "registrant"); 2. Based on my knowledge, this 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 this amended report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) [omitted in accordance with SEC Release Nos. 33-8238 and 34-47986]; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 /s/ JAMES M. SMITH _____________________________ James M. Smith Chairman, President and Chief Executive Officer EX-31.2 14 y94563exv31w2.txt SECTION 302 CERTIFICATION FOR THE CFO Exhibit 31.2 CERTIFICATION PURSUANT TO 15 U.S.C. SECTION 10A, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Frederic B. Bassert, certify that: 1. I have reviewed this report on Form 10-K of EDO Corporation (the "registrant"); 2. Based on my knowledge, this 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 this amended report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) [omitted in accordance with SEC Release Nos. 33-8238 and 34-47986]; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5,2004 /s/ FREDERIC B. BASSETT _____________________________________ Frederic B. Bassett Vice President - Finance, Treasurer and Chief Financial Officer EX-32 15 y94563exv32.txt SECTION 906 CERTIFICATION FOR THE CEO & CFO Exhibit 32 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that (1) this Annual Report of EDO Corporation (the "Company") on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JAMES M. SMITH __________________________________ James M. Smith Chief Executive Officer March 5, 2004 /s/ FREDERIC B. BASSETT __________________________________ Frederic B. Bassett Chief Financial Officer March 5, 2004 -----END PRIVACY-ENHANCED MESSAGE-----