8-K/A 1 y27406a1e8vkza.txt FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------- FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------- DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 6, 2006 EDO CORPORATION (Exact name of Registrant as specified in its charter) NEW YORK 3812 11-0707740 (State or Other (Primary Standard (I.R.S. Employer Jurisdiction of Incorporation Industrial Classification Identification No.) or Organization) Code Number)
---------- 60 EAST 42ND STREET 42ND FLOOR NEW YORK, NY 10165 212.716.2000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ---------- NOT APPLICABLE (Former name or former address, if changed since last report) ---------- Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS. EDO Corporation, a New York corporation (the "Company"), is filing this Current Report on Form 8-K/A ("Form 8-K/A") to file certain audited and unaudited financial statements and unaudited pro forma financial information relating to the acquisition (the "Acquisition") by the Company of all of the outstanding capital stock of CAS, Inc., an Alabama Corporation. The closing of the Acquisition occurred on September 6, 2006. The Company filed a Current Report on Form 8-K on September 8, 2006 (Form 8-K") to report the Acquisition. The Company is filing the required audited and unaudited financial statements and unaudited pro forma financial information relating to the Acquisition in this Form 8-K/A. ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Business Acquired The required audited financial statements of CAS Inc. as of and for the year ended March 31, 2006 and the required unaudited interim financial statements of CAS, Inc. as of and for the three months ended June 30, 2006 and 2005. Report of Independent Auditors To the Board of Directors and Shareholders of EDO Corporation We have audited the accompanying balance sheet of CAS, Inc. (the "Company") as of March 31, 2006 and the related statements of earnings, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CAS, Inc. at March 31, 2006 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York November 9, 2006 CAS, INC. (AN S CORPORATION) BALANCE SHEET MARCH 31, 2006 Current assets: Cash and cash equivalents...................................... $ 69,800 Accounts receivable............................................ 36,918,670 Notes receivable .............................................. 6,942 Prepayments and other ......................................... 1,811,411 ----------- Total current assets........................................ 38,806,823 ----------- Property, plant and equipment, net ............................... 1,452,728 Investment in joint ventures ..................................... 106,194 Other assets ..................................................... 155,454 ----------- $40,521,199 ----------- Current liabilities: Accounts payable............................................... $13,925,900 Accrued liabilities............................................ 14,094,945 Note payable .................................................. 7,053,750 Billings in excess of costs and estimated earnings ............... 608,886 ----------- Total current liabilities................................... 35,683,481 ----------- Shareholders' equity: Class A Voting Common shares - $0.001 par value, 750,000 shares authorized and 2,020 issued and outstanding ................ 2 Class B Non-Voting Common shares - $0.001 par value, 250,000 shares authorized and 1,010 issued and outstanding.......... 1 Additional paid-in capital .................................... 4,503,027 Retained earnings ............................................. 334,688 ----------- Total shareholders' equity ................................. 4,837,718 ----------- $40,521,199 ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CAS, INC. (AN S CORPORATION) STATEMENT OF EARNINGS YEAR ENDED MARCH 31, 2006 NET SALES .............................. $189,640,053 COSTS AND EXPENSES Cost of sales ....................... 168,071,935 Selling, general and administrative.. 11,604,879 Research and development ............ 51,822 ------------ 179,728,636 ------------ Operating Earnings ..................... 9,911,417 NON-OPERATING INCOME (EXPENSE) Interest income ..................... 38,131 Interest expense .................... (210,834) Equity income in joint ventures ..... 143,976 Other, net .......................... (103,445) ------------ (132,172) ------------ NET EARNINGS ........................... $ 9,779,245 ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CAS, INC. (AN S CORPORATION) STATEMENT OF CASH FLOWS YEAR ENDED MARCH 31, 2006 Cash Flows from Operating Activities Net earnings ............................................... $ 9,779,245 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation ............................................ 663,189 Loss on disposal of fixed assets ........................ 5,329 Loss on sale of land .................................... 7,017 Equity income in joint ventures, net .................... (53,976) Changes in: Accounts receivable .................................. (11,823,004) Notes receivable ..................................... 279,772 Prepaid expenses ..................................... (201,874) Deposits ............................................. (56,681) Accounts payable ..................................... 6,096,892 Accrued expenses ..................................... 5,723,785 Vested vacation pay .................................. 259,581 Billings in excess of costs and estimated earnings ... 574,969 ------------ Net cash provided by operating activities .................. 11,254,244 ------------ Cash Flows from Investing Activities: Purchase of equipment ...................................... (1,027,408) Proceeds from sale of fixed assets & land .................. 6,750 ------------ Net cash used by investing activities ...................... (1,020,658) ------------ Cash Flows from Financing Activities: Proceeds from line of credit ............................... 95,446,440 Repayment of line of credit ................................ (96,116,219) Distributions to shareholders .............................. (11,075,247) ------------ Net cash used by financing activities ...................... (11,745,026) ------------ Net decrease in cash ....................................... (1,511,440) Cash at beginning of year .................................. 1,581,240 ------------ Cash at end of year ........................................ $ 69,800 ============ Supplemental Disclosure of Cash Flow Information Cash paid during the year for interest ..................... $ 233,167 ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CAS, INC. (AN S CORPORATION) STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY YEAR ENDED MARCH 31, 2006
Total Common Additional Retained Shareholders' Stock Paid-In Capital Earnings Equity ------ --------------- ------------ ------------- Balance at March 31, 2005 ...... $ 3 $4,503,027 $ 1,630,690 $ 6,133,720 Distributions to shareholders .. -- -- (11,075,247) (11,075,247) Net income ..................... -- -- 9,779,245 9,779,245 --- ---------- ------------ ------------ Balance at March 31, 2006 ... $ 3 $4,503,027 $ 334,688 $ 4,837,718 === ========== ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CAS, INC. (AN S CORPORATION) NOTES TO FINANCIAL STATEMENTS MARCH 31, 2006 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed by the Company and the method of applying those policies which affect the determination of financial position and results of operations are summarized below: Nature of Business The Company specializes in providing diversified engineering, systems development and analysis services for the evaluation of major weapon systems, primarily through major programs of various agencies of the United States Government. The Company is headquartered in Huntsville, Alabama with separate facilities located in Colorado, Texas, Virginia, and Germany. Revenue Recognition Sales under cost reimbursement contracts are recorded as costs are incurred and includes a proportional amount of the fee expected to be realized on each contract. Billings in excess of costs and estimated earnings are shown as a current liability. Certain contracts contain performance award fees. Such award fees are included in sales at the time that the amount of the fees to be awarded can be reasonably determined. Sales under fixed-price contracts are recorded under the percentage-of-completion method, based on costs incurred as compared to total costs estimated to complete the contract. Cash and Cash Equivalents The Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. The Company had no cash equivalents as of March 31, 2006. Investment in Joint Ventures The Company has investments in two joint ventures, described in Note 7, which are reported under the equity method of accounting. Concentration of Credit Risk The Company maintains its cash accounts at a financial institution located in Huntsville, Alabama. Accounts are insured by the Federal Deposit Insurance Corporation up to $100,000. There were no amounts in excess of the insured limits as of March 31 2006. We conduct a significant amount of our business with the United States Government. 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. Long-Lived Assets Furniture, equipment and vehicles are stated at cost, less accumulated depreciation. Depreciation is provided primarily by using accelerated methods at rates intended to distribute the cost of furniture, equipment and vehicles over their estimated service lives of 3 to 7 years. 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 are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow, 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. Income Taxes The Company elected, by unanimous consent of its shareholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code, effective April 1, 1982. Under those provisions, the Company does not pay federal and state corporate income taxes on its taxable income; instead, the shareholders are liable for individual income taxes on their respective shares of the Company's taxable income. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - ACCOUNTS RECEIVABLE Trade receivables from contracts (principally with the U.S. Government or U.S. Government contractors) at March 31, 2006 were as follows: Amounts billed ...................... $21,844,298 Estimated award fees receivable ..... 31,530 Unbilled costs and accrued profits .. 15,042,842 ----------- Total accounts receivable ........ $36,918,670 ===========
Management considers all receivables collectible, and therefore, has not provided an allowance for doubtful accounts. NOTE 3 -- FURNITURE, EQUIPMENT AND VEHICLES Furniture, equipment and vehicles at March 31, 2006 were as follows: Office furniture and equipment ................................... $ 385,832 Manufacturing equipment .......................................... 1,082,974 Computer center equipment ........................................ 3,860,012 Vehicles ......................................................... 31,678 ----------- 5,360,496 Accumulated depreciation ......................................... (3,907,768) ----------- Total furniture, equipment and vehicles, net of depreciation .. $ 1,452,728 ===========
NOTE 4 -- ACCRUED LIABILITIES Accrued liabilities consist of the following at March 31, 2006: Vacation ......................................................... $ 4,728,945 Subcontractor costs .............................................. 4,358,253 Salaries & payroll taxes ......................................... 3,117,481 Other ............................................................ 1,890,266 ----------- Total ............................................................ $14,094,945 ===========
NOTE 5 -- NOTE PAYABLE On June 2, 2005, the Company and its primary shareholders renewed a line of credit with a bank for borrowings of up to $7,000,000.00. Currently, the interest rate on the outstanding principal is based upon the one-month London Interbank Offered Rate (LIBOR) plus 2%. The effective rate as of March 31, 2006 was 6.8%. All interest is paid monthly. The obligation under this agreement is due on demand, but not later than September 30, 2006 and is collateralized by all the Company's accounts receivable and contract rights. Two of the Company's shareholders have each guaranteed up to $1,000,000 of the line of credit. On June 27, 2006, the Company increased the line of credit by $2,000,000 with the same interest rate and due on July 27, 2006, On August 31, 2006, the Company increased the line of credit by $1,000,000 at the same interest rate and due on September 30, 2006. The balance due under the note payable was $7,053,750 at March 31, 2006. NOTE 6 -- COMMITMENTS AND CONTINGENCIES Accounts Receivable As of March 31, 2003, management had recorded a bad debt for the entire accounts receivable balance due from a customer in the amount of $1,101,888. Subsequent to March 31, 2003, the Company reached an agreement with the customer whereby the customer is making payments in the form of a note bearing interest at 4.0%. The bad debt recovery is being recognized as note payments are received. Total principal and interest received for the year ended March 31, 2006 was $229,425 principal and $20,575 interest. Contracts Payments to the Company under cost reimbursable contracts are provisional payments which are subject to adjustment upon annual audit by the Defense Contract Audit Agency (DCAA). The audit of costs for the years ended March 31, 2006 and 2005 have not been initiated. It is management's opinion that the results of these audits will not have any material effect on the Company's financial position. Dental Insurance Claims Reserve On December 1, 1991, the Company established an employee dental benefit plan to self-insure claims. Claims above a predetermined ceiling amount were covered by a stop-loss insurance policy through November 30, 2001. Effective December 1, 2001, the Company's employee dental benefit plan is self-funded. Management believes that the Company has made provisions sufficient to cover estimated claims, including claims incurred, but not yet reported for the dental plan. Total dental insurance costs for the year ended March 31, 2006 were $561,560. Health insurance Effective April 1, 2000, the Company changed from a fully-insured health insurance program to a self-funded medical benefit plan structured as a Voluntary Employee Beneficiary Association (VEBA) welfare benefit trust. For the year ended March 31, 2006, health care claims were self-insured up to $150,000 per year for each individual covered (with an aggregating specific deductible of $30,000 per year beginning in 2006). Claims above this ceiling are covered by stop-loss insurance providing a maximum aggregate plan benefit of $1,000,000 per employee. Management believes that the Company has made sufficient trust provisions to cover estimated claims, including claims incurred, but not yet reported for the medical plan. Total health insurance costs for the year ended March 31, 2006 were $4,849,608 Leases On March 31, 2006, the Company was obligated under certain leases (which have not been capitalized) for building, equipment and vehicles. Rent expense was $3,154,174 for the year ended March 31, 2006. The following amounts represent future payment commitments:
Year Ending March 31, Rent Payments --------------------- -------------- 2007 $2,749,222 2008 2,482,862 2009 1,792,296 2010 1,402,265 2011 951,104 2012-2015 3,734,546
NOTE 7 - INVESTMENT IN JOINT VENTURES The Company has investments in two joint ventures which were formed for specific contracting purposes with various government programs. The ownership interests, 28.3%, and 15%, have both been accounted for using the equity method of accounting. The Company's combined equity interest in joint ventures totaled $106,194 at March 31, 2006. The Company's combined share of joint ventures net income included in its statements of income for the year ended March 31, 2006 was $143,976. The Company has guaranteed debt of one of the joint ventures in which it owns a 15% interest. The Company is contingently liable for up to $67,500 under the joint venture's line of credit. NOTE 8 - RELATED PARTY TRANSACTIONS Leases The Company has entered into various operating leases with two principal officers/shareholders representing approximately 9.1% of the total rent expense for the year ended March 31, 2006. In management's opinion, the terms and conditions of these transactions are substantially the same as similar transactions with unrelated parties. The leasing transactions are detailed below:
Rent expense in Year Ended Rent Commitment at Property Leased Lease Term March 31, 2006 March 31, 2006 --------------- -------------- --------------- ------------------ Equipment ............ 36 months $ 74,461 $ 53,810 Vehicles ............. 36 months 121,594 147,829 Land and buildings ... Month to month 91,658 --
Notes Receivable Notes receivable from officers bear interest at the prevailing short-term annual applicable federal rate. Interest income on officer notes totaled $4,428 for the year ended March 31, 2006. The notes receivable from officers were repaid in full as of March 31, 2006. NOTE 9- PREPAID EXPENSES Prepaid expenses at March 31, 2006 were as follows: Health Insurance ............ $1,229,968 Rent ........................ 194,936 Taxes & Licenses ............ 55,818 Equipment & Software ........ 321,955 Other ....................... 8,734 ---------- Total prepaid expenses ... $1,811,411 ==========
NOTE 10- RETIREMENT PLANS The Company previously maintained two defined contribution plans for the benefit of employees who meet eligibility requirements. The money purchase pension plan was created August 22, 1986 through amendment of the Company's existing profit-sharing plan. Contributions to the money purchase pension plan were based on 10% of eligible employees' taxable compensation. The Company also established a 401(k) profit-sharing plan on August 22, 1986 that allows employees to contribute their own earnings on a tax deferred basis up to limits prescribed by the Internal Revenue Code. The Company contributes an amount equal to 10% of the salary reduction contributions made by an employee and reserves the right to make discretionary contributions as determined by the Company's Board of Directors. The money purchase pension plan and 401(k) profit sharing plan were merged into one plan as of April 1, 2004. The Company expects to continue the plan indefinitely; however, the rights to modify, amend or terminate the plan have been reserved. The Company's pension expense was $6,182,212 for the year ended March 31, 2006. NOTE 11- SHAREHOLDERS' EQUITY Distributions to shareholders in the amount of $11,075,247 were made during the year ended March 31, 2006. In July 2005, the Certificate of Incorporation was amended to create Class A Voting Common Shares and Class B Non-Voting Common Shares. As of March 31, 2006, there are 750,000 shares of Class A Voting Common Shares authorized and 2,020 issued and outstanding, and 250,000 shares of Class B Non-voting Common Shares authorized and 1,010 issued and outstanding. NOTE 12- SUBSEQUENT EVENTS On July 26, 2006, the Company entered into a Stock Purchase Agreement to sell all of the issued and outstanding shares of the Company to EDO Corporation for $178.1 million. The transaction closed and the acquisition was completed on September 6, 2006. As a result of the acquisition, one of the joint ventures (Note 7) exercised its repurchase right for the units held by CAS, Inc. for a price of $87,679. CAS, INC. (AN S CORPORATION) BALANCE SHEET JUNE 30, 2006 (UNAUDITED) Current assets: Cash and cash equivalents ................................ $ 23,707 Accounts receivable ...................................... 37,111,616 Notes receivable ......................................... 6,934 Prepayments and other .................................... 599,527 ----------- Total current assets .................................. 37,741,784 Property, plant and equipment, net .......................... 1,304,172 Investment in joint ventures ................................ 113,850 Other assets ................................................ 132,501 ----------- $39,292,307 Current liabilities: Accounts payable ......................................... $ 9,690,774 Accrued liabilities ...................................... 18,625,952 Note payable ............................................. 7,377,848 ----------- Total current liabilities ............................. 35,694,574 Shareholders' equity: Class A Voting Common shares - $0.001 par value, 750,000 shares authorized and 2,020 issued and outstanding ... 2 Class B Non-Voting Common shares - $0.001 par value, 250,000 shares authorized and 1,010 issued and outstanding ........................................... 1 Additional paid-in capital ............................... 4,503,027 Accumulated deficit ...................................... (905,297) ----------- Total shareholders' equity ............................ 3,597,733 ----------- $39,292,307 ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CAS, INC. (AN S CORPORATION) STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED JUNE 30, (UNAUDITED)
2006 2005 ----------- ----------- NET SALES ................................. $46,186,727 $50,226,234 COSTS AND EXPENSES Cost of sales .......................... 41,708,191 44,521,658 Selling, general and administrative .... 3,178,687 4,021,789 Research and development ............... 15,206 44,183 ----------- ----------- 44,902,084 48,587,630 ----------- ----------- Operating Earnings ........................ 1,284,643 1,638,604 NON-OPERATING INCOME (EXPENSE) Interest income ........................ 6,753 7,661 Interest expense ....................... (81,156) (52,154) Equity income in joint ventures ........ 45,156 33,919 Other, net ............................. (23,179) (67,587) ----------- ----------- (52,426) (78,161) ----------- ----------- NET EARNINGS .............................. $ 1,232,217 $ 1,560,443 =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CAS, INC. (AN S CORPORATION) STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, (UNAUDITED)
2006 2005 ------------ ------------ OPERATING ACTIVITIES: Net earnings ............................................... $ 1,232,217 $ 1,560,443 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation ............................................ 153,921 168,185 Loss on disposal of fixed assets ........................ -- 5,187 Equity income in joint ventures, net .................... (7,656) (33,919) Changes in: Accounts receivable .................................. (192,946) (5,187,368) Notes receivable ..................................... 8 22 Prepaid expenses ..................................... 1,211,884 1,285,941 Other assets ......................................... 22,953 (47,522) Accounts payable ..................................... (4,235,126) (1,974,883) Accrued expenses ..................................... 4,292,797 5,942,669 Vested vacation pay .................................. 238,212 299,371 Billings in excess of costs and estimated earnings ... (608,886) 257,506 ------------ ------------ Net cash provided by operating activities ..................... 2,107,378 2,275,632 ------------ ------------ INVESTING ACTIVITIES: Purchase of equipment ...................................... (5,365) (147,494) ------------ ------------ Net cash used by investing activities ......................... (5,365) (147,494) ------------ ------------ FINANCING ACTIVITIES: Proceeds from line of credit ............................... 24,702,747 20,792,146 Repayments of line of credit ............................... (24,378,651) (22,516,873) Distributions to shareholders .............................. (2,472,202) (1,923,700) ------------ ------------ Net cash used by financing activities ......................... (2,148,106) (3,648,427) ------------ ------------ Net decrease in cash .......................................... (46,093) (1,520,289) Cash at beginning of year ..................................... 69,800 1,581,241 ------------ ------------ CASH AT END OF YEAR ........................................... $ 23,707 60,952 ============ ============ Supplemental Disclosure of Cash Flow Information Cash paid for Interest...................................... $ 83,299 $ 66,629
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. CAS, INC. (AN S CORPORATION) NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2006 AND 2005 (UNAUDITED) NOTE 1 UNAUDITED FINANCIAL STATEMENTS The accompanying unaudited financial statements do not include all information and footnotes normally included in consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements include all adjustments (consisting of normal recurring adjustments) that management considers necessary for a fair presentation of its consolidated financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year. The financial statements should be read in conjunction with the financial statements and notes thereto of CAS, Inc. (the "Company") for the year ended March 31, 2006. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed by the Company and the method of applying those policies which affect the determination of financial position and results of operations are summarized below: Nature of Business The Company specializes in providing diversified engineering, systems development and analysis services for the evaluation of major weapon systems, primarily through major programs of various agencies of the United States Government. The Company is headquartered in Huntsville, Alabama with separate facilities located in Colorado, Texas, Virginia, and Germany. Revenue Recognition Sales under cost reimbursement contracts are recorded as costs are incurred and includes a proportional amount of the fee expected to be realized on each contract. Billings in excess of costs and estimated earnings are shown as a current liability. Certain contracts contain performance award fees. Such award fees are included in sales at the time that the amount of the fees to be awarded can be reasonably determined. Sales under fixed-price contracts are recorded under the percentage-of-completion method, based on costs incurred as compared to total costs estimated to complete the contract. Cash and Cash Equivalents The Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. The Company had no cash equivalents as of June 30, 2006. Investment in Joint Ventures The Company has investments in two joint ventures, described in Note 3, which are reported under the equity method of accounting. Concentration of Credit Risk The Company maintains its cash accounts at a financial institution located in Huntsville, Alabama. Accounts are insured by the Federal Deposit Insurance Corporation up to $100,000. There were no amounts in excess of the insured limits as of June 30, 2006. We conduct a significant amount of our business with the United States Government. 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. Long-Lived Assets Furniture, equipment and vehicles are stated at cost, less accumulated depreciation. Depreciation is provided primarily by using accelerated methods at rates intended to distribute the cost of furniture, equipment and vehicles over their estimated service lives of 3 to 7 years. 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 are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow, 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. Income Taxes The Company elected, by unanimous consent of its shareholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code, effective April 1, 1982. Under those provisions, the Company does not pay federal and state corporate income taxes on its taxable income; instead, the shareholders are liable for individual income taxes on their respective shares of the Company's taxable income. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3 - INVESTMENT IN JOINT VENTURES The Company has investments in two joint ventures which were formed for specific contracting purposes with various government programs. The ownership interests, 28.3%, and 15%, have both been accounted for using the equity method of accounting. The Company's combined equity interest in joint ventures totaled $113,850 at June 30, 2006. The Company's combined share of joint ventures net income included in its statements of income for the three months ended June 30, 2006 and 2005 was $45,156 and $33,919, respectively. The Company has guaranteed debt of one of the joint ventures in which it owns a 15% interest. The Company is contingently liable for up to $67,500 under the joint venture's line of credit. NOTE 4 -- ACCRUED LIABILITIES Accrued liabilities consist of the following at June 30, 2006: Subcontractor costs $ 6,524,280 Vacation 4,967,158 Salaries & payroll taxes 4,452,289 Retirement plan 1,875,828 Other 806,397 ----------- Total 18,625,952 ===========
NOTE 5 - RETIREMENT PLANS The Company previously maintained two defined contribution plans for the benefit of employees who meet eligibility requirements. The money purchase pension plan was created August 22, 1986 through amendment of the Company's existing profit-sharing plan. Contributions to the money purchase pension plan were based on 10% of eligible employees' taxable compensation. The Company also established a 401(k) profit-sharing plan on August 22, 1986 that allows employees to contribute their own earnings on a tax deferred basis up to limits prescribed by the Internal Revenue Code. The Company contributes an amount equal to 10% of the salary reduction contributions made by an employee and reserves the right to make discretionary contributions as determined by the Company's Board of Directors. The money purchase pension plan and 401(k) profit sharing plan were merged into one plan as of April 1, 2004. The Company expects to continue the plan indefinitely; however, the rights to modify, amend or terminate the plan have been reserved. For the three months ended June 30, 2006 and 2005, the Company recorded pension expense of $1,761,274 and $1,960,666, respectively. NOTE 6 - COMMITMENTS AND CONTINGENCIES Dental Insurance Claims Reserve On December 1, 1991, the Company established an employee dental benefit plan to self-insure claims. Claims above a predetermined ceiling amount were covered by a stop-loss insurance policy through November 30, 2001. Effective December 1, 2001, the Company's employee dental benefit plan is self-funded. Management believes that the Company has made provisions sufficient to cover estimated claims, including claims incurred, but not yet reported for the dental plan. Total dental insurance costs for the three months ended June 30, 2006 and 2005 were $150,191 and $158,022, respectively. Health insurance Effective April 1, 2000, the Company changed from a fully-insured health insurance program to a self-funded medical benefit plan structured as a Voluntary Employee Beneficiary Association (VEBA) welfare benefit trust, for the year ended March 31, 2006, health care claims were self-insured up to $150,000 per year for each individual covered (with an aggregating specific deductible of $30,000 per year beginning in 2006). Claims above this ceiling are covered by stop-loss insurance providing a maximum aggregate plan benefit of $1,000,000 per employee. Management believes that the Company has made sufficient trust provisions to cover estimated claims, including claims incurred, but not yet reported for the medical plan. Total health insurance costs for the three months ended June 30, 2006 and 2005 were $1,302,021 and $1,278,675, respectively. NOTE 7 - RELATED PARTY TRANSACTIONS Leases The Company has entered into various operating leases with two principal officers/shareholders representing approximately 9.1% and 9.6% of the total rent expense for the three months ended June 30, 2006 and 2005, respectively. In management's opinion, the terms and conditions of these transactions are substantially the same as similar transactions with unrelated parties. The leasing transactions are detailed below:
Rent expense Three Rent expense Three Months ended Months ended Rent Commitment Property Leased Lease Term 6/30/06 6/30/05 6/30/06 --------------- -------------- ------------------ ------------------ --------------- Equipment 36 months $12,722 $20,628 $ 41,088 Vehicles 36 months 29,635 31,172 118,194 Land and buildings Month to month 22,914 22,914 --
NOTE 8 - SUBSEQUENT EVENTS On July 26, 2006, the Company entered into a Stock Purchase Agreement to sell all of the issued and outstanding shares of the Company to EDO Corporation for $178.1 million. The transaction closed and the acquisition was completed on September 6, 2006. As a result of the acquisition, one of the joint ventures (Note 3) exercised its repurchase right for the units held by CAS, Inc. for a price of $87,679. (b) Pro forma Financial Statements Unaudited pro forma condensed combined statements of earnings for the year ended December 31, 2005 and the six months ended June 24, 2006. On September 6, 2006, EDO Corporation ("EDO" or the "Company") acquired, all of the outstanding common stock of CAS, Inc. ("CAS") for $178.1 million consisting of a cash payment of $173.2 million and 214,574 EDO common shares valued at $4.9 million and subject to certain post-closing purchase price adjustments. We financed $100 million of the purchase price from our credit facility. The credit agreement provides for a revolving credit facility in an aggregate amount equal to $300 million with sub-limits of $20 million for short-term swing loans and $100 million for letters of credit. The potential cash borrowing under the facility is reduced by the amount of outstanding letters of credit. The Company has the option to select Base Rate or Eurodollar Rate loans under the terms of the Credit Agreement. Any borrowings under the facility would be priced initially at LIBOR plus a predetermined amount depending on our consolidated leverage ratio at the time of the borrowing. Under the terms of the credit facility, we will be subject to various operating and financial covenants. CAS was a privately-held company providing engineering services, logistics support, and weapon-systems analysis to the DoD. This acquisition is expected to strengthen and expand our range of professional and engineering services. CAS previously operated using a March 31, fiscal year end. The following unaudited pro forma condensed combined statement of earnings for the year ended December 31, 2005 was prepared by combining the audited historical statements of income of the Company and CAS, Inc. for the year ended December 31, 2005 and the six months ended June 24, 2006, respectively, giving effect to the acquisition as though it was completed at the beginning of the fiscal years presented. The unaudited pro forma condensed combined financial information is presented in accordance with Article 11 of Regulation S-X. The acquisition has been accounted for under the purchase method of accounting in accordance with Statements of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. Under the purchase method of accounting, the total estimated purchase price, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible and intangible assets acquired and liabilities assumed of CAS, Inc. in connection with the acquisition, based on their estimated fair values at the acquisition date. The Company has not yet completed its analysis of the fair value of the acquired assets and liabilities. Consequently, the excess purchase price over the net assets acquired has been temporarily assigned to goodwill, and amounts recorded are subject to change. The unaudited pro forma condensed combined financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the consolidated financial position or results of operations in future periods or the results that actually would have been realized had EDO Corporation and CAS, Inc. been a combined company during the specified periods. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and cost savings EDO Corporation may achieve with respect to the combined companies. The pro forma adjustments are based upon available information and assumptions that the Company believes are reasonable at this point in time. The unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, EDO's historical consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2005 and in its Form 10-Q for the six months ended June 24, 2006, and the CAS, Inc. historical consolidated financial statements for the year ended March 31, 2006 and for the three months ended June 30, 2006. EDO CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF EARNINGS (in thousands, except per share data) FOR THE YEAR ENDED DECEMBER 31, 2005
December 31, March 31, EDO 2005 2006 Pro Forma ----------- -------- Pro Forma Combined EDO CAS Adjustments December 31, 2005 ----------- -------- -------------- ----------------- NET SALES ............................................ $648,482 $189,640 $838,122 COSTS AND EXPENSES Cost of sales ..................................... 490,617 168,072 658,689 Selling, general and administrative ............... 85,921 11,605 1,891 a), b), c) 99,417 Research and development .......................... 17,122 52 17,174 Environmental cost provision, Deer Park facility .. 1,543 -- 1,543 -------- -------- ------- -------- 595,203 179,729 1,891 776,823 -------- -------- ------- -------- OPERATING EARNINGS ................................... 53,279 9,911 (1,891) 61,299 NON-OPERATING INCOME (EXPENSE) Interest income ................................... 2,300 38 (2,167)d) 171 Interest expense .................................. (9,420) (211) (4,878)e) (14,509) Loss on redemption of 5.25% Convertible Subordinated Notes ............................. (4,171) -- (4,171) Equity income in joint ventures ................... -- 144 144 Other, net ........................................ (147) (103) (250) -------- -------- ------- -------- (11,438) (132) (7,045) (18,615) -------- -------- ------- -------- Earnings before income taxes ......................... 41,841 9,779 (8,936) 42,684 Income tax expense ................................... (15,572) -- (346)f) (15,918) -------- -------- ------- -------- NET EARNINGS ......................................... $ 26,269 $ 9,779 $(9,282) $ 26,766 ======== ======== ======= ======== NET EARNINGS PER COMMON SHARE: Basic ............................................. $ 1.45 $ 1.46 ======== ======== Diluted ........................................... $ 1.33 $ 1.34 ======== ======== Weighted-average common shares outstanding: Basic ............................................. 18,081 18,296 ======== ======== Diluted ........................................... 23,001 23,216 ======== ========
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements are an integral part of these financial statements EDO CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF EARNINGS (in thousands, except per share data) FOR THE SIX MONTHS ENDED JUNE 24, 2006
June 24, June 30, EDO 2006 2006 Pro forma ------------- ------------- Pro Forma Combined EDO CAS Adjustments June 24, 2006 -------- -------- ----------- ------------- NET SALES.................................. $272,107 $96,529 $368,636 COSTS AND EXPENSES Cost of sales............................ 210,901 84,868 295,769 Selling, general and administrative...... 49,261 5,372 1,183 a), b), c) 55,816 Research and development................. 6,212 15 6,227 -------- ------- ------- --------- 266,374 90,255 1,183 357,812 -------- ------- ------- --------- OPERATING EARNINGS......................... 5,733 6,274 (1,183) 10,824 NON-OPERATING INCOME (EXPENSE) Interest income.......................... 2,122 19 (1,497)d) 644 Interest expense......................... (4,661) (143) (2,988)e) (7,792) Equity income in joint ventures -- 115 115 Other, net............................... (257) (40) (297) -------- ------- ------- --------- (2,796) (49) (4,485) (7,330) -------- ------- ------- --------- Earnings before income taxes............... 2,937 6,225 (5,668) 3,494 Income tax benefit (expense)............... 2,395 ------- (228)f) 2,167 ----- -- -------- ---------- NET EARNINGS............................... $ 5,332 $ 6,225 $(5,897) $ 5,660 ======== ======= ======== ========== NET EARNINGS PER COMMON SHARE: Basic.................................... $ 0.30 $ 0.31 ======== ========== Diluted.................................. $ 0.29 $ 0.28 ======== ========== Weighted-average common shares outstanding: Basic.................................... 18,055 18,270 ======== ========== Diluted.................................. 18,538 24,639 ======== ==========
The accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements are an integral part of these financial statements EDO CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF EARNINGS NOTE 1 -- DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION On September 6, 2006 EDO Corporation ("the Company") acquired all of the stock of CAS Inc., (CAS) for $178.1 million, consisting of a cash payment of $173.2 million and 214,574 EDO common shares valued at $4.9 million. The closing was effected under the terms of an Amended and Restated Merger Agreement dated as of September 6, 2006 (the "Agreement"). Within 90 days after the closing, the Company is required to pay to the Former Shareholders the amount, if any, by which the Net Book Value (as defined) at the closing is more than the targeted Net Book Value (as defined), and the former Shareholders are required to pay to the Company the amount if any by which the Net Book Value is less than the targeted amount. As of November 20, 2006, the final Net Book Value has not been determined. Certain reclassifications have been made to the historical financial statements of CAS Inc. to conform to the presentation used in EDO Corporations historical financial statements. Such reclassifications had no effect on CAS Inc. previously reported results from operations. The unaudited proforma condensed combined statement of earnings for the year ended December 31, 2005 has been prepared assuming the acquisition occurred as of January 1, 2005. The unaudited proforma condensed combined statement of earnings for the six months ended June 24,2006 has been prepared assuming the acquisition occurred as of January 1, 2005. NOTE 2 -- PURCHASE PRICE The Company has accounted for the acquisition as a purchase under the accounting principles generally accepted in the United States. Under the purchase method of accounting, the assets and liabilities of CAS, Inc. will be recorded as of the acquisition date at their respective fair values and consolidated with those of EDO Corporation. The Company has not yet completed its analysis of the fair value of the acquired assets and liabilities. Consequently, the excess purchase price over the net assets acquired has been temporarily assigned to goodwill, and amounts recorded are subject to change. The preliminary estimate of the purchase price allocation, which includes approximately $1.4 million in transaction related costs, is as follows (in thousands): Total current assets $ 34,842 Goodwill 167,938 Property, plant and equipment, net 1,317 Total liabilities (24,570) --------- Total purchase price $ 179,527 ========= Note 3 - Pro Forma Adjustments EDO Corporation's fiscal year ended December 31, 2005, while CAS, Inc. fiscal year ended March 31, 2006. The interim period Pro Forma is EDO Corporations six months ended June 24, 2006 and CAS, Inc's. three months ended March 31, 2006 combined with their first quarter three months ended June 30, 2006. a) To eliminate $1.6 million of salaries paid to their previous owners for the year ended March 31, 2006 ($0.5 million for the three months ended March 31, 2006 combined with the three months ended June 30, 2006), which will no longer continue. b) To eliminate $0.3 million ($0.2 million for the three months ended March 31, 2006 combined with the three months ended June 30, 2006), of costs incurred by CAS, Inc. related to this transaction which will not continue. c) To reflect additional stay pay compensation of $3.8 million ($1.9 million for the six months ended June 30, 2006) to key employees due to the acquisition that will be expensed over three years. d) To reflect the reduction of interest income of $2.1 million ($1.5 million for the six months ended June 24, 2006) due to the assumed use of $73.2 million of the Company's existing cash to fund the acquisition and eliminate CAS, Inc's. interest income of $0.04 million ($0.01 million for the three months ended March 31, 2006 combined with the three months ended June 30, 2006). e) To reflect $5.1 million incremental annual interest expense ($3.0 million for the six months ended June 24, 2006) arising from assumed issuance of $100 million of debt to fund the transaction at an estimated interest rate of 5% and eliminate CAS, Inc. interest expense of $0.3 million ($0.1 million for the three months ended March 31, 2006 combined with the three months ended June 30, 2006). f) To reflect taxes on the pro forma adjustments to income at EDO's marginal rate of 41%. In addition, this rate was also applied to the pretax income of CAS, Inc. as CAS, Inc. operated as an S Corp. and was not subject to income taxes. (d) Exhibits 2(a)Stock Purchase Agreement, dated as of July 26, 2006 ("Stock Purchase Agreement"), by and among EDO Corporation, as Buyer, Fredric H. Clark, William H. Stender, Jr. and Elizabeth L. Boyer, as Trustee of the William H. Stender, Jr. Estate Preservation Trust, as Sellers, and CAS, Inc. 2(b) First Amendment, dated September 6, 2006, to Stock Purchase Agreement. SIGNATURE Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 20, 2006 EDO CORPORATION By: /s/ Frederic B. Bassett ------------------------------------ Name: Frederic B. Bassett Title: Senior Vice President-Finance, Treasurer and Chief Financial Officer EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT -------------- ---------------------- Exhibit 2.1 Stock Purchase Agreement, dated July 26, 2006, by and among EDO Corporation, CAS, Inc. and William H. Stender, Jr., Frederic H. Clark and Elizabeth L. Boyer, as trustee of the William H. Stender, Jr. Estate Preservation Trust as Sellers (incorporated by reference to Exhibit 2.1 to Current Form 8-K filed with SEC on August 1, 2006 +Exhibit 2.2 First Amendment to Stock Purchase Agreement, dated September 6, 2006, by and among EDO Corporation, CAS, Inc. and William H. Stender, Jr., Frederic H. Clark and Elizabeth L. Boyer, as trustee of the William H. Stender, Jr. Estate Preservation Trust as Sellers. *Exhibit 23.1 Consent of Ernst & Young LLP
* Filed herewith. + Previously filed.