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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 1997 1-3985
EDO CORPORATION
Exact name of Registrant as specified in its charter.
State of Incorporation: IRS Employer Identification No.:
New York 11-0707740
Address of principal executive offices:
60 East 42nd Street, Suite 5010, New York, New York 10165
Telephone No.:
(212) 716-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Shares New York Stock Exchange
par value $1 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 3, 1998................................. $54,328,482
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock as of March 3, 1998 ................................. 6,468,178
Documents Incorporated by Reference
Portions of the Definitive Proxy Statement of the Registrant, dated March 20,
1998, are incorporated by reference into Part III.
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Table of Contents
PART I.......................................................................1
ITEM 1 BUSINESS..............................................................1
MARINE AND AIRCRAFT SYSTEMS..................................................1
Aircraft Stores Suspension and Release Equipment.............................1
Airborne Mine Countermeasures Systems........................................1
COMBAT SYSTEMS...............................................................1
Command and Control Systems..................................................2
Undersea Warfare Sonar.......................................................2
ELECTRO-OPTIC SYSTEMS........................................................2
ELECTRO-CERAMIC PRODUCTS.....................................................2
FIBER COMPOSITE PRODUCTS.....................................................2
DISCONTINUED OPERATIONS......................................................2
RESEARCH AND DEVELOPMENT.....................................................3
MARKETING AND INTERNATIONAL SALES............................................3
BACKLOG......................................................................4
GOVERNMENT CONTRACTS.........................................................4
COMPETITION AND OTHER FACTORS................................................4
EMPLOYEES....................................................................5
EXECUTIVE OFFICERS OF THE REGISTRANT.........................................5
ITEM 2 PROPERTIES............................................................5
ITEM 3 LEGAL PROCEEDINGS.....................................................5
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................5
PART II......................................................................5
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.......................................5
ITEM 6 SELECTED FINANCIAL DATA...............................................5
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................5
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................6
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................6
PART III.....................................................................6
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................6
ITEM 11 EXECUTIVE COMPENSATION...............................................6
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......6
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................6
PART IV......................................................................6
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....6
SIGNATURES...................................................................8
SELECTED FINANCIAL DATA......................................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................10
BUSINESS ENVIRONMENT........................................................10
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996...............................10
FINANCIAL CONDITION.........................................................11
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995...............................11
NEW ACCOUNTING STANDARD.....................................................11
YEAR 2000 DATE CONVERSION...................................................12
COMMON SHARE PRICES.........................................................12
DIVIDENDS...................................................................12
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995..................................................12
CONSOLIDATED STATEMENTS OF EARNINGS.........................................13
CONSOLIDATED BALANCE SHEETS.................................................14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY.............................15
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................................16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................17
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)................................ 26
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PART I
ITEM 1. BUSINESS
The term "Registrant" as used in this Annual Report refers to EDO Corporation.
The term "Company" as used in this Annual Report, except where the context
otherwise requires, includes the Registrant and its subsidiaries.
EDO Corporation was incorporated in New York in 1925 by Earl Dodge Osborn, from
whose initials "EDO" is derived.
The Company designs and manufactures advanced electro-optical, electronic,
mechanical, acoustic and composite products for the defense and aerospace
industries. A description of the principal products of the Company is set
forth below.
In 1996, the Company sold its general aviation floats business and announced
the discontinuance of its energy-related businesses. Further information about
the discontinuance of the energy-related businesses is provided in
"Discontinued Operations" on pages 2 and 3, and in Note 3 on page 19 of this
Report.
In 1997, the Company also discontinued certain of its instrument product lines.
Refer to the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 10 through 12, and Note 18 on page 25 of this
Report for information regarding the cost of compliance with environmental
regulations.
The following discussion relates to the Company's continuing operations.
MARINE AND AIRCRAFT SYSTEMS
Marine and aircraft systems include the design, development and manufacture of
sophisticated mechanical, electromechanical, structural, hydrodynamic and
aerodynamic systems for military use. Additionally, the Company provides
logistics support for such products following initial hardware deliveries
including spare and repair parts, upgrade modifications, training and technical
services. The revenue from these support functions is a significant portion of
sales. The major marine and aircraft systems are aircraft stores suspension
and release equipment and airborne mine countermeasures systems.
Aircraft Stores Suspension and Release Equipment
The Company developed and manufactures bomb release units (BRU) for the U.S.
Air Force F-15E, ejection release units (ERU) for the Tornado Multirole Combat
Aircraft and jettison release mechanisms (JRM) for the U.S. Navy F-14
aircraft. In 1997, the Company continued production of BRUs for the F-15E and
for an international customer under prior orders received and new orders
received in 1997, and provided spare parts support for Tornado ERUs previously
produced. In addition, the Company continued the development of the Advanced
Medium Range Air To Air Missile (AMRAAM) launcher for the F-22 air superiority
fighter. Funded development for this missile launcher, which employs new
internal carriage technology, is expected to continue throughout 1998. In
1997, the Company received a subcontract from Boeing for development of new
weapons carriage technology for application to the Joint Strike Fighter and
future aircraft. This effort is expected to continue throughout 1998. For
1997, 1996 and 1995, sales of aircraft stores suspension and release equipment
represented 19% of consolidated net sales in all three years.
Airborne Mine Countermeasures Systems
The Company is the only manufacturer of the MK 105 helicopter-towed magnetic
minesweeping system designed and developed by the Company in conjunction with
the U.S. Navy. In 1994, the Company completed development of a funded upgrade
to the MK 105. The upgraded system was delivered to the U.S. Navy for testing
and evaluation. These tests were completed in the first half of 1995. The
first production contract for this upgrade was received at the end of 1995. An
additional production contract was received in 1996. Production under this
contract is expected to continue throughout 1998. In 1994, the Company began
work on a new U.S. Navy funded contract to develop a lightweight, self
contained, helicopter-towed magnetic sweep for shallow water applications.
This system underwent U.S. Navy testing and evaluation in 1996 and was used in
fleet and NATO operations in 1997. In addition, the Company continued to
provide logistic support for MK 105 systems previously provided to both the
U.S. Navy and an international customer.
For 1997, 1996 and 1995, respectively, sales of airborne mine countermeasures
systems represented 12%, 7% and 5% of consolidated net sales.
COMBAT SYSTEMS
Combat systems include the design, development and manufacture of command,
control and communications systems, and undersea warfare systems. In addition,
the Company provides logistics support including spare and repair parts,
training and technical services for such products.
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Command and Control Systems
Command, control and communication systems include integrated command systems,
tactical data links, display consoles and communication control and monitoring
systems for domestic and international customers. In 1997, the Company
delivered a tactical data link monitoring and test system to the Royal
Australian Air Force. Work continued on the NATO Ship-Shore-Ship Buffer (SSSB)
program deliverable to several international customers in 1998 and 1999.
Additional SSSB orders were received in 1997 from other NATO international
customers.
Undersea Warfare Sonar
The Company has been a supplier of undersea warfare systems for more than forty
years. In 1997, the Company completed and delivered a major signal processing
subsystem of an upgrade to the U.S. Navy's AN/SQQ-89 undersea warfare system
to Northrop-Grumman and Lockheed Martin. Logistics, maintenance and training
support was provided for EDO sonar systems installed in FF-1052 class ships in
service for several international navies. Work continued in 1997 for an
international customer on a major upgrade to the EDO Model 610E sonar system.
Work under this contract is expected to continue for five years. In 1997, the
Company received an order for an additional Model 610E upgraded sonar system
for a new class of ship for this same international customer. For 1997, 1996,
and 1995, respectively, sales of sonar systems represented 7%, 3% and 10% of
consolidated net sales.
ELECTRO-OPTIC SYSTEMS
Electro-optic systems include the design, development and manufacture of
products and systems for satellites. The primary products include infrared
earth sensors and sun sensors which are used to provide satellites with
information relative to stabilization and orbit position. In 1997, the Company
continued to provide earth sensor assemblies to Hughes for commercial
satellites, to Orbital Sciences Corporation for the ORBCOMM digital data
transmission system and to Lockheed Martin for the U.S. Air Force Global
Positioning Satellite System (GPS-IIR), the NASA Television and Infrared
Observation Satellite (TIROS) and the Motorola Iridium communication satellite
constellation. In addition, the Company began delivering earth sensor
assemblies to Hughes for the ICO constellation and earth and sun sensor
assemblies to DASA for the Loral Globalstar constellation. New orders were
received for earth sensor assemblies from Boeing for the newest U.S. Air Force
Global Positioning Satellite System (GPS-IIF) and for follow-on orders for
additional sensors for Iridium and Globalstar. For 1997, 1996 and 1995,
respectively, sales of spaceflight systems represented 22%, 24% and 14% of
consolidated net sales.
ELECTRO-CERAMIC PRODUCTS
The Company is one of North America's leading manufacturers of piezoceramic
components for defense applications and also concentrates on commercial
applications of ceramic technology.
Piezoceramic elements convert acoustic energy to electrical energy and form the
basis of many defense and commercial products ranging from military sonars to
ink jet printers. The Company has automated and improved its production
processes and is focusing its efforts on industrial markets in addition to
maintaining its position as a leading supplier of ceramics for military
applications. For 1997, 1996 and 1995, respectively, sales of piezoceramics
represented 13%, 11% and 10% of consolidated net sales.
The Company also designs and produces military and commercial transducers which
it provides for its own acoustic systems as well as for the market.
The Company is developing products for the active vibration control
marketplace. This initiative is intended to apply the Company's expertise in
piezoceramic materials and transducers to reduce vibration emanating from
industrial machinery. The Company has been working on a partially government
funded program for vibration reduction in precision machine tools, specifically
cylindrical grinders. In addition, the Company is delivering products it
designed and manufactured to reduce vibration in the manufacturing process for
semiconductors.
FIBER COMPOSITE PRODUCTS
The Company's fiber composite products focus on the development, production and
after-market support of its traditional composite water and waste tanks for the
commercial aviation market. This concentrated technical and marketing effort
yielded long-term production contracts from Boeing.
Additionally, the Company continues to pursue programs in other commercial
markets. The Company is now supplying composite pressure vessels for use as
air start reservoirs on large trucks. Composite pressure vessels are also
being developed and tested for use in railroad car rapid discharge and braking
systems.
DISCONTINUED OPERATIONS
The Company's former energy-related businesses consisted of the following: its
wholly-owned subsidiary EDO Energy Corporation, which provided program
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management activities for compressed natural gas vehicles (CNGVs) and other
alternative fuel projects; its wholly-owned subsidiary EDO Automotive Natural
Gas, Inc. ("EDO ANGI"), which designed and manufactured CNGV refueling
stations and related equipment; and a 50.4% interest in EDO (Canada) Ltd.
("ECL"), which designed and manufactured LiteRider(R) fuel cylinders. The
products of these businesses were generally sold through independent
distributors and dealers to end users, and by employees of these businesses to
original equipment manufacturers.
Due to the current and projected growth rates and financial returns of the
energy-related businesses failing to meet the Company's strategic criteria, the
Company decided in September 1996 to divest itself from these businesses.
Accordingly, in 1996, the Company recorded a provision for loss of $7,000,000,
consisting of $2,000,000 in operating losses for the phase out period, and
$5,000,000 for reduction of asset values and provisions for estimated future
disposal costs.
In 1997, the Company sold the net assets of its EDO-ANGI subsidiary. The EDO
Energy operations were mostly discontinued. The Company continues only to
fulfill any outstanding contractual obligations. In 1997, ECL made a voluntary
assignment in bankruptcy pursuant to the Bankruptcy and Insolvency Act of
Canada and subsequently liquidated its assets through the equivalent of Chapter
7 of the U.S. bankruptcy laws.
The Company believes that adequate provision for the ultimate loss on disposal
of these businesses has been made in the Company's financial statements, which
provision is described in Note 3 on page 19 of this Report.
RESEARCH AND DEVELOPMENT
Research and development, performed both under development contracts with
customers and at Company expense, are important factors in the Company's
business. The Company's research and development efforts involve approximately
90 employees in the fields of combat systems, acoustic, electronic,
hydrodynamic, aerodynamic, structural and material engineering. Research and
development programs are designed to develop technology for new products or to
extend the capability of existing products and to assess their commercial
potential.
Customer-sponsored research and development programs are principally related to
military programs. Major customer-sponsored research and development programs
include: improvements to the AN/SQR-18A(V) TACTAS system; improvements to the
MK 105 mine countermeasures system; development of a new shallow-water mine
countermeasures system; development of new aircraft weapons carriage
technology; developments in combat systems integration; development of new and
improved stores launchers; and development of new earth and sun sensors for
satellites.
Expenditures under development contracts with customers vary in amount from
year to year because of the timing of contract funding and other factors. In
1997, customer-sponsored research and development expenditures in the aggregate
were 29% higher than in 1996, although such expenditures for certain products
were lower than in 1996.
Company-sponsored research and development has contributed to a number of
advances in sonar systems, transducers, stores release systems, mine
countermeasures systems, digital data links, filament-wound structures, and
composite pressure vessels. Principal current research and development
involves: image and signal processing and other improvements for combat
systems, improvements to minesweeping technology, continued development of
satellite-based sensors, the application of its acoustic and ceramic
technologies to vibration control, and development of composite pressure
vessels for the truck and train markets.
The following table sets forth research and development expenditures for the
periods presented.
========================================================================
Year Ended December 31,
1997 1996 1995
(in thousands)
------------------------------------------------------------------------
Customer-sponsored $ 23,000 $ 17,800 $ 13,300
Company-sponsored 2,100 1,000 1,000
------------------------------------------------------------------------
Total $ 25,100 $ 18,800 $ 14,300
========================================================================
MARKETING AND INTERNATIONAL SALES
Military sales of the Company's products to both the U.S. and foreign
governments are usually made under negotiated long-term contracts or
subcontracts covering one or more years of production. The Company believes
that its long history of association with its military customers is an
important factor in the Company's overall business, and that the experience
gained through this history has enhanced the Company's ability to anticipate
its customers' needs. The Company's approach to its military business is to
anticipate specific customer needs and to develop systems to meet those needs
either at its own expense or pursuant to research and development contracts.
The Company sells military and space flight products as a prime contractor and
through subcontracts with other prime contractors. In addition to military
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sales to the U.S. Department of Defense, the Company also sells military and
space flight equipment to the U.S. Government for resale to foreign
governments under the Foreign Military Sales program and, subject to approval
by the U.S. Department of State, directly to foreign governments.
Commercial products are sold in industrial and commercial markets. In foreign
markets, piezoelectric and electronic products are generally sold commercially
through a network of sales representatives. Fiber-reinforced composite
products are sold, in certain product areas, on a direct basis and, in other
product areas, through sales representatives.
It is the Company's policy to denominate all foreign contracts in U.S. dollars
and generally to incur no significant costs in connection with long-term
foreign contracts until the Company has received advance payments or letters of
credit on amounts due under the contracts.
Refer to Note 1(a) on page 17 of this Report for the amount of export sales for
the last three fiscal years.
BACKLOG
A significant portion of the Company's sales are made directly or indirectly
through prime contractors to the U.S. armed services and foreign governments
pursuant to long-term contracts. Accordingly, the Company's backlog of
unfilled orders consists in large part of orders under these government
contracts. As of December 31, 1997, the Company's total backlog was
approximately $111.6 million, as compared with $103.0 million on December 31,
1996. Of the total backlog as of December 31, 1997, approximately 65% was
scheduled for delivery in 1998.
GOVERNMENT CONTRACTS
Sales to the U.S. Government, as a prime contractor and through subcontracts
with other prime contractors, accounted for 41% of the Company's 1997
consolidated net sales compared with 36% in 1996 and 43% in 1995, and consisted
primarily of sales to the Department of Defense. Such sales do not include
sales of military equipment to the U.S. Government for resale to foreign
governments under the Foreign Military Sales program.
The Company's military business can be and has been significantly affected by
changes in national defense policy and spending. The Company's 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.
The Company's contracts with the Department of Defense consist of fixed price
contracts, cost-reimbursable contracts and incentive contracts of both types.
Fixed-price contracts provide fixed compensation for specified work.
Cost-reimbursable contracts require the Company to perform specified work in
return for reimbursement of costs (to the extent allowable under government
regulations) and a specified fee. In general, while the risk of loss is
greater under fixed-price contracts than under cost-reimbursable contracts,
the potential for profit under such contracts is greater than under
cost-reimbursable contracts. Under both fixed-price incentive contracts and
cost-reimbursable incentive contracts, an incentive adjustment is made in the
Company's fee based on attainment of scheduling, cost, quality or other goals.
The distribution of the Company's government contracts among the categories of
contracts referred to above varies from time to time, although in recent years
only a small percentage of the Company's contracts have been on a
cost-reimbursable or incentive basis.
COMPETITION AND OTHER FACTORS
Some of the Company's products are sold in markets containing a number of
competitors substantially larger than the Company and with greater financial
resources. Direct sales of military products to U.S. and foreign governments
are based principally on product performance 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.
The Company purchases certain materials and components used in its systems and
equipment from independent suppliers. These materials and components are
normally not purchased under long-term contracts unless the Company has
actually received a long-term sales contract requiring them. The Company
believes that most of the items it purchases are obtainable from a variety of
suppliers and it normally obtains alternative sources for major items, although
the Company is sometimes dependent on a single supplier or a few suppliers for
some items.
It is difficult to state precisely the Company's market position in all of its
market segments because information as to the volume of sales of similar
products by its competitors is not generally available and the relevant markets
are often not precisely defined. However, the Company believes that it is a
significant factor in the markets for stores release mechanisms for military
aircraft, military sonar systems, military data links, helicopter-towed mine
countermeasures
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systems, piezoelectric ceramics, and satellite attitude and
position sensors.
Although the Company owns some patents and has filed applications for
additional patents, it does not believe that its businesses depend
significantly upon its patents. In addition, most of the Company's U.S.
Government contracts license it to use patents owned by others. Similar
provisions in the U.S. Government contracts awarded to other companies make it
impossible for the Company to prevent the use by other companies of its patents
in most domestic defense work.
EMPLOYEES
As of December 31, 1997, the Company employed 637 persons.
EXECUTIVE OFFICERS OF THE REGISTRANT
===============================================================================
Name Age Position, Term of Office and Prior Positions
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Frank A. Fariello 63 Chairman of the Board since 1997, Chief Executive
Officer since 1994, President since 1993 and
Director since 1982.
William J. Frost 56 Vice President-Administration since 1994,
Assistant Secretary since 1995, prior to which
he was Assistant to the Vice President-
Administration since 1989.
Marvin D. Genzer 57 Vice President since 1990, General Counsel since
1988, and Secretary since 1995.
Ira Kaplan 62 Executive Vice President and Chief Operating
Officer since 1997, prior to which he was
corporate Vice President since 1995. From 1989
to 1995, he was Vice President/General Manager
of the Government Systems Division.
Kenneth A. Paladino 40 Vice President-Finance and Treasurer since 1995,
prior to which he was Controller since 1989.
===============================================================================
Each executive officer is appointed by the Board of Directors (the "Board"),
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 the Company's By-Laws.
ITEM 2. PROPERTIES
All operating properties are leased facilities. The College Point corporate
headquarters and manufacturing facility had been owned until early 1996 when it
was sold. The company moved its corporate office in 1997 to New York, NY. The
Company's facilities are adequate for present purposes. Except for College
Point (the Company will be moving its College Point operations to North
Amityville, NY in 1998), 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. The Company's
obligations under the various leases are set forth in Note 17 on page 25 of
this Report.
Set forth below is a listing of the Company's principal plants and other
materially important physical properties.
===============================================================================
Approximate Floor
Location Area (in sq. ft.)
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Marine and Aircraft Systems North Amityville, NY 85,000
Combat Systems Chesapeake, VA 30,000
Barnes Shelton, CT 72,000
Electro-Ceramic Products Salt Lake City, UT 117,000
Fiber Science Salt Lake City, UT 105,000
===============================================================================
ITEM 3. LEGAL PROCEEDINGS
The information responsive to this item is set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 10 through 12, and in Note 18 on page 25 of this Report.
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 12 and "Dividends" on page 12, together with dividend
information contained in the "Consolidated Statements of Shareholders' Equity"
on page 15, Note 9 on page 20, and Note 10 on pages 20 and 21 of this Report.
ITEM 6. SELECTED FINANCIAL DATA
The information responsive to this item is set forth under the heading
"Selected Financial Data" on page 9 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information responsive to this item is set forth
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under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 10 through 12 of this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
Independent Auditors' Report thereon of KPMG Peat Marwick LLP and the unaudited
"Quarterly Financial Information" are set forth on pages 13 through 26 of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is set forth under the headings "Election of
Directors" and "The Board of Directors and Its Committees" on pages 1 through 3
of the Company's Proxy Statement dated March 20, 1998, which is incorporated by
reference.
Information regarding executive officers is set forth in Part I of this Report
under "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Company's executive officers is set
forth under the heading "Compensation of Executive Officers" on pages 5 through
9 of the Company's Proxy Statement dated March 20, 1998, which is incorporated
by reference, except for such information required by Item 402(k) and (l) of
Regulation S-K, which shall not be deemed to be filed as part of this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth under the headings "Securities Ownership of Directors
and Executive Officers" on page 4 and "Principal Shareholders" on page 10 of
the Company's Proxy Statement dated March 20, 1998, which is incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules and Exhibits
1. Financial Statements.
The consolidated financial statements as of December 31, 1997 and 1996 and for
the years ended December 31, 1997, 1996 and 1995, together with the report
thereon of KPMG Peat Marwick LLP, independent auditors, dated February 13,
1998, appear on pages 13 through 25 of this Report.
2. Financial Statement Schedules.
Schedules have been omitted either because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
3. Exhibits.
Exhibits which are noted with an asterisk (*) are management contracts or
compensatory plans or arrangements.
3(i) Certificate of Incorporation of the Company and amendments thereto dated
June 14, 1984, July 18, 1988 and July 22, 1988. Incorporated by reference to
Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
3(ii) By-Laws of the Company. Incorporated by reference to Exhibit 3(ii) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
4(a) Indenture dated December 1, 1986 between Chase Manhattan Bank as successor
in interest to Manufacturers Hanover Trust Company, as Trustee, and EDO
Corporation. Incorporated by reference to Exhibit 4(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
4(b) Guarantee Agreement, dated as of July 22, 1988, as amended, made by the
Company in favor of Fleet Bank as successor in interest to NatWest Bank NA and
Manufacturers Hanover Trust Company. Incorporated by reference to Exhibit 4(c)
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
4(c) Term Loan Agreement, dated as of July 22, 1988, as amended, between The
Bank of New York, as trustee of the trust established under
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the EDO Corporation Employee Stock Ownership Plan, and Fleet Bank as successor
in interest to NatWest Bank NA and Manufacturers Hanover Trust Company.
Incorporated by reference to Exhibit 4(d) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
4(d) Term Note, dated July 22, 1988, as amended, between The Bank of New York,
as trustee of the trust established under the EDO Corporation Employee Stock
Ownership Plan, and Fleet Bank as successor in interest to NatWest Bank NA and
Manufacturers Hanover Trust Company. Incorporated by reference to Exhibit 4(e)
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
4(e) Pledge and Security Agreement, dated as of July 22, 1988, as amended,
between The Bank of New York, as trustee of the trust established under the EDO
Corporation Employee Stock Ownership Plan, and Fleet Bank as successor in
interest to NatWest Bank NA and Manufacturers Hanover Trust Company.
Incorporated by reference to Exhibit 4(f) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
4(f) Amendment No. 6 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective March 27, 1993. Incorporated by reference to Exhibit 4(i) to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 26,
1993.
4(g) Amendment No. 7 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective March 3, 1994. Incorporated by reference to Exhibit 4(h) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1993.
4(h) Amendment No. 8 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective February 10, 1995. Incorporated by reference to Exhibit 4(h)
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1994.
4(i) Amendment No. 9 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective June 30, 1995. Incorporated by reference to Exhibit 4(i) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
4(j) Amendment No. 10 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective June 30, 1996. Incorporated by reference to Exhibit 4(j) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
10(a)* EDO Corporation 1996 Long-Term Incentive Plan. Incorporated by
reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
10(b)* EDO Corporation Executive Termination Agreements, as amended through
November 24, 1989, between the Company and two employees. Incorporated by
reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
10(c)* Executive Life Insurance Plan Agreements, as amended through January 23,
1990, between the Company and 30 employees and retirees. Incorporated by
reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
10(d)* Form of Directors' and Officers' Indemnification Agreements between EDO
Corporation and 14 current Company directors and officers. Incorporated by
reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
10(e) Consent Decree, entered on November 25, 1992, amongst the United States,
EDO Corporation, Plessey, Inc., Vernitron Corporation and Pitney Bowes, Inc.
Incorporated by reference to Exhibit 10(j) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
21 List of Subsidiaries.
23 Consent of Independent Auditors to the incorporation by reference in the
Company's Registration Statements on Form S-8 of their report included in Item
14(a)1 of this Annual Report on Form 10-K.
24 Powers of Attorney used in connection with the execution of this Annual
Report on Form 10-K.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the three months ended
December 31, 1997.
Page 7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, its chief financial and accounting officer,
thereunto duly authorized.
EDO CORPORATION (Registrant)
Dated: March 20, 1998 By: Kenneth A. Paladino
-----------------------------
Vice President-Finance
Pursuant to the requirements of Instruction D to Form 10-K under the Securities
Exchange Act of 1934, this Report has been signed below on March 20, 1998 by
the following persons on behalf of the Registrant and in the capacities
indicated.
Signature Title
Kenneth A. Paladino Vice President-Finance
and Treasurer __
Frank A. Fariello Chairman of the Board, |
President, Chief Executive |
Officer and Director |
William J. Frost Vice President- |
Administration |
Marvin D. Genzer Vice President, General |
Counsel and Secretary |- By: Kenneth A. Paladino
Ira Kaplan Executive Vice President and | ---------------------
Chief Operating Officer | Attorney-in-Fact
Robert E. Allen Director |
Robert Alvine Director |
Mellon C. Baird Director |
George M. Ball Director |
Joseph F. Engelberger Director |
Robert M. Hanisee Director |
Michael J. Hegarty Director |
George A. Strutz, Jr. Director __|
Page 8
<PAGE>
SELECTED FINANCIAL DATA
EDO CORPORATION AND SUBSIDIARIES
(NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
===============================================================================
1997 1996 1995 1994 1993
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------
Summary of Operations
Net Sales $ 94,362 94,586 78,932 81,256 100,107
===============================================================================
Operating
earnings (loss) 7,536 13,900a 5,365 (21,110)b,c (2,979)b
- -------------------------------------------------------------------------------
Net interest expense (459) (766) (1,199) (2,160) (2,337)
Other income
(expense), net (50) (66) (41) 335 (1,355)
- -------------------------------------------------------------------------------
Earnings (loss) before
Federal income taxes
and cumulative effect
of accounting change 7,027 13,068 4,125 (22,935) (6,671)
Provision (benefit)
for Federal income taxes - - - (3,800) (4,901)
- -------------------------------------------------------------------------------
Earnings (loss) from
continuing operations
before cumulative effect
of accounting change 7,027 13,068 4,125 (19,135) (1,770)
===============================================================================
Earnings (loss) from:
Continuing operations 7,027 13,068 4,125 (19,135) (11,170)d
Discontinued operations - (8,637) (1,465) (3,421) (5,178)
===============================================================================
Net earnings (loss) 7,027 4,431 2,660 (22,556) (16,348)
Dividends on
preferred shares 1,127 1,179 1,239 1,333 1,406
- -------------------------------------------------------------------------------
Net earnings (loss)
available for common
shares $ 5,900 3,252 1,421 (23,889) (17,754)
===============================================================================
Per Common Share Data
Basic net earnings (loss)
Continuing operations $ 0.94 1.99 0.50 (3.69) (2.32)
Discontinued operations $ - (1.45) (0.25) (0.61) (0.96)
- -------------------------------------------------------------------------------
Total $ 0.94 0.54 0.25 (4.30) (3.28)
Diluted net earnings
(loss) $ 0.81 0.46 0.20 (4.30) (3.28)
Cash dividends per
common share $ 0.10 - - 0.14 0.28
Other Information
Working capital $ 44,477 37,382 33,582 31,374 40,001
Depreciation and
amortization of
fixed assets $ 4,186 3,471 4,568 5,677 5,974
Plant and equipment
expenditures $ 4,083 4,227 1,800 1,731 4,287
Total assets $108,801 94,223 95,526 94,747 115,414
Long-term debt $ 29,317 29,317 29,317 29,317 29,317
ESOT loan obligation $ 10,368 11,676 12,887 14,007 15,045
Shareholders' equity $ 28,135 19,823 14,997 11,610 35,035
Backlog of
unfilled orders $111,557 102,981 85,558 70,682 86,468
===============================================================================
a Includes a $7,120 curtailment gain for the discontinuance of postretirement
health care benefits for Medicare-eligible retirees.
b Includes restructuring charges of $1,127 and $9,800 in 1994 and 1993,
respectively, relating to the discontinuance, relocation and downsizing of
certain operations.
c Includes a $5,400 write off of a previously established receivable in
anticipation of the recovery of remediation costs related to a Superfund site.
d Includes the cumulative effect of a change in accounting for postretirement
health benefits, as required by the adoption of SFAS No. 106, of $9,400, net of
taxes, or $1.74 per share on basic net earnings.
Page 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
EDO Corporation's financial results continued to improve in 1997 due to the
continuing focus on its core operations. This has resulted in the third
straight year of increased earnings and a year-end backlog that is the highest
since 1991. This increase in year-end backlog reflects both the strength of
the Company's core products and the Company's ability to provide new products
to meet the needs of its customers in an increasingly competitive environment.
The Company's overall financial condition also continued to improve as
evidenced by increases in cash and marketable securities, working capital and
shareholders' equity, and a decrease in leverage ratios.
In 1997, the Company substantially completed the exit from its energy-related
businesses, which had been accounted for as discontinued operations,
substantially in accordance with the provision recorded in 1996. This is more
fully explained in the accompanying financial statements.
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996
Net sales for 1997 were $94.4 million compared to sales of $94.6 million in
1996. Sales increases from mine countermeasures systems and sonar systems were
offset by decreases in satellite system sales.
Total operating earnings improved 11% to $7.5 million compared to $6.8 million
in 1996, excluding the effect of a $7.1 million non-cash curtailment gain from
the discontinuance of medical benefits for Medicare eligible retirees in 1996.
The increased operating earnings result from improvements in margins in
substantially all of the Company's product lines.
The Company's operating results for 1997 were adversely affected by a charge of
$2.0 million associated with the consolidation and discontinuance of certain
acoustic instrument products as described in Note 2 to the Consolidated
Financial Statements. Additionally, the Company incurred operating and
disposal losses of approximately $0.6 million from the sale of a microscope
product line. The decision to exit these product lines is consistent with the
Company's objective of focusing its efforts on its core defense and aerospace
products.
In 1997, the Company settled an insurance action against one of its insurance
carriers for $2.9 million which was paid to the Company in 1998. This action
was related to an environmental matter which is more fully explained in Note 18
to the Consolidated Financial Statements.
Selling, general and administrative expenses decreased to $13.8 million in 1997
from $15.6 million in 1996 primarily due to decreased costs in connection with
certain electro-optic products resulting from the decrease in satellite system
sales and the sale of the microscope product line noted above.
Company-sponsored research and development expenditures doubled in 1997 to $2.1
million from $1.0 million in 1996. This increased level of research and
development is consistent with the Company's strategy of increased investment
in development for products that will contribute to future growth.
Customer-sponsored research and development was $23.0 million compared to $17.8
million in 1996. Customer-sponsored research and development is included in
cost of sales and represents the engineering development portion of programs
where new products are being developed or technologies are being advanced.
Interest expense, net of interest income, was $0.5 million in 1997 compared to
$0.8 million in 1996 due to increased interest income on higher average
balances of interest-earning assets. Interest expense is primarily the
interest paid on the 7% Convertible Subordinated Debentures Due 2011.
In 1997 and 1996, the Company did not have a provision for Federal income taxes
due to the utilization of tax loss carryforwards.
Net earnings available for common shares in 1997 were $5.9 million compared to
net earnings in 1996 of $3.3 million. Net earnings in 1996 included a $7.0
million loss from the discontinuance of the Company's energy-related businesses
(see Note 3 to the Consolidated Financial Statements) and a $7.1 million
curtailment gain (see Note 16 to the Consolidated Financial Statements).
Basic net earnings per share were $0.94 in 1997 compared to $0.54 in 1996.
Basic net earnings per share calculations are based on a weighted average of
6.3 million and 6.0 million common shares outstanding in 1997 and 1996,
respectively. Diluted earnings per share were $0.81 in 1997 compared to $0.46
in 1996.
Page 10
<PAGE>
FINANCIAL CONDITION
The Company's cash, cash equivalents and marketable securities increased by
$13.5 million in 1997 to $34.2 million at December 31, 1997. This resulted
from an improvement in cash flow from operations which was $17.6 million in
1997 compared to $2.6 million in 1996. This improvement was due primarily to
an increase in contract advances and the absence of an increase in accounts
receivable in 1997, as well as improved operating profits, excluding the
postretirement health care curtailment gain in 1996.
The Company has outstanding $29.3 million of 7% Convertible Subordinated
Debentures Due 2011. Commencing in 1996 and until their retirement, the
Company is making annual sinking fund payments of $1.8 million. As of December
31, 1997, the Company had $2.2 million of these debentures remaining in
treasury to be used for these annual requirements.
The Company also has an ESOT loan obligation with a balance at December 31,
1997 of $10.4 million at an interest rate of 82% of the prime lending rate.
The ESOT obligation agreement can be canceled or refinanced by the Company or
the lender on or after April 1, 2000. The repayment of this obligation is
funded through dividends on the Company's preferred shares and cash
contributions.
The Company maintains a $15.0 million secured line of credit with a bank for
short-term borrowing and letters of credit. The agreement expires on June 30,
1998 and limits the cash portion of potential borrowings to $10.0 million.
There have been no direct cash borrowings under this agreement.
The Company is incurring costs in connection with the remediation of a
Superfund site (noted above and more fully explained in Note 18 to the
Consolidated Financial Statements). The Company has expensed all of the costs
it has incurred, as well as a discounted estimate of all future costs related
to this matter. The liability for these future costs as of December 31, 1997
is approximately $3.5 million of which $0.6 million is classified as a current
liability. Approximately 26% of the $3.5 million liability will be expended
over the next 2 years.
The Company believes that it has adequate liquidity and sufficient capital to
fund its current operating plans.
Backlog increased from $103.0 million at December 31, 1996 to $111.6 million at
December 31, 1997.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
Net sales for 1996 were $94.6 million, a 20% increase compared to sales of
$78.9 million in 1995. Increases in sales of satellite systems and
piezo-ceramic and fiber composite products were partially offset by reductions
in sales of sonar systems and acoustic products.
Operating earnings, excluding the effect of a $7.1 million non-cash curtailment
gain from the discontinuance of medical benefits for Medicare eligible retirees
(see Note 16 to the Consolidated Financial Statements), improved 26% to $6.8
million in 1996, compared to $5.4 million in 1995. The increase resulted
primarily from the higher sales levels as well as a modest improvement in
margins and increases in pension and postretirement benefit income, partially
offset by higher costs incurred during the completion of the development
portion of fixed-price development programs for new satellite products.
Selling, general and administrative expenses increased to $15.6 million from
$14.2 million in 1995 principally as a result of increased sales and marketing
expenses. Company funded research and development expenditures were
approximately $1.0 million for each year while customer funded research and
development increased $4.5 million to $17.8 million in 1996. Customer funded
research and development is included in cost of sales and represents the
engineering development portion of programs where new products are being
developed or technologies are being advanced.
Interest expense, net of interest income, decreased 33% to $0.8 million from
$1.2 million in 1995, primarily due to increased interest income on higher
average balances of interest-earning assets. Interest expense primarily
represents the interest paid on the 7% Convertible Subordinated Debentures Due
2011.
In 1996, the Company did not have a provision for Federal income taxes due to
the utilization of tax loss carryforwards and tax benefits associated with the
preferred stock dividends.
Net earnings in 1996 were $3.3 million compared to net earnings in 1995 of $1.4
million. Net earnings in 1996 included a $7.0 million loss from the
discontinuance of the Company's energy-related businesses (see Note 3 to the
Consolidated Financial Statements) and, as noted above, a $7.1 million
curtailment gain. Basic net earnings per share were $0.54 as compared to $0.25
in 1995. Basic net earnings per share calculations are based on a weighted
average of 6.0 million and 5.7 million common shares outstanding in 1996 and
1995, respectively.
NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which is effective
Page 11
<PAGE>
for fiscal years beginning after December 15, 1997. This statement establishes
standards for reporting information about operating segments, and related
disclosures about products and services, geographic areas and major customers.
The Company has not determined the impact that the adoption of this new
accounting standard will have on its consolidated financial statement
disclosures. The Company will adopt this statement effective January 1, 1998,
as required. Interim information is not required until the second year of
application, at which time comparative information is required.
YEAR 2000 DATE CONVERSION
The year 2000 issue affects computer systems that have time-sensitive programs
that may not properly recognize the year 2000. At the Company, this could
result in failures or miscalculations in the computerized accounting programs
used at the Company which are provided by outside vendors. These vendors have
assured the Company that modifications to their programs will be timely
provided to deal with the year 2000 issue. If necessary modifications and
conversions by such vendors are not provided timely, the year 2000 issue may
have a material adverse effect on the Company's consolidated results of
operations. The total cost associated with required modifications and
conversions is not expected to be material to the Company's consolidated
results of operations and financial position and is being expensed as incurred.
COMMON SHARE PRICES
EDO common shares are traded on the New York Stock Exchange. As of February 2,
1998, there were 2,495 shareholders of record (brokers and nominees counted as
one each).
The price range in 1997 and 1996 was as follows:
===================================================
1997 1996
High Low High Low
---------------------------------------------------
1st Quarter 7-7/8 6-3/8 5-7/8 4-5/8
2nd Quarter 8-15/16 6-3/8 10-7/8 5
3rd Quarter 10-3/4 7-5/8 8-5/8 5-7/8
4th Quarter 10-5/8 8-1/4 9-1/4 6-1/2
===================================================
Dividends
During 1997, the Board of Directors approved the payment of quarterly cash
dividends of $0.025 per common share. The Company's ESOT guarantee agreement
places certain limits on the payment of cash dividends. See Note 10 to the
Consolidated Financial Statements.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements in this Annual Report on Form 10-K and in the message from the
Chairman of the Board, President and Chief Executive Officer contained in the
Annual Report to Shareholders for 1997 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.
U.S. and international military program sales, follow-on procurement, contract
continuance, and future program awards, upgrades and spares support are subject
to: U.S. and international military budget constraints and determinations;
U.S. congressional and international legislative body discretion; U.S. and
international government administration policies and priorities; changing world
military threats, strategies and missions; competition from foreign
manufacturers of platforms and equipment; NATO country determinations regarding
participation in common programs; changes in U.S. and international government
procurement timing, strategies and practices; and the general state of world
military readiness and deployment.
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 revenues and underestimation of
anticipated costs on specific programs.
The Company has no obligation to update any forward-looking statements.
Page 12
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
EDO CORPORATION AND SUBSIDIARIES
===============================================================================
Years Ended December 31
1997 1996 1995
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------
Continuing Operations:
Income
Net sales $ 94,362 $ 94,586 $ 78,932
Other 119 388 450
- -------------------------------------------------------------------------------
94,481 94,974 79,382
- -------------------------------------------------------------------------------
Costs and Expenses
Cost of sales (including a $2,000
charge for the discontinuance
of a product line in 1997) 73,981 71,561 58,849
Selling, general and administrative 13,785 15,631 14,177
Research and development 2,079 1,002 991
Litigation settlement income (2,900) - -
Postretirement health care
curtailment gain - (7,120) -
- -------------------------------------------------------------------------------
86,945 81,074 74,017
- -------------------------------------------------------------------------------
Operating Earnings 7,536 13,900 5,365
Non-operating Income (Expense)
- -------------------------------------------------------------------------------
Interest income 1,838 1,427 1,097
Interest expense (2,297) (2,193) (2,296)
Other, net (50) (66) (41)
- -------------------------------------------------------------------------------
(509) (832) (1,240)
- -------------------------------------------------------------------------------
Earnings before Federal income taxes 7,027 13,068 4,125
Federal income tax expense - - -
- -------------------------------------------------------------------------------
Earnings from Continuing Operations 7,027 13,068 4,125
Discontinued Operations:
Loss from operations of discontinued
energy business - (1,637) (1,465)
Loss from discontinuance, including
provision of $2,000 for operating
losses during phase out period - (7,000) -
- -------------------------------------------------------------------------------
Loss from Discontinued operations - (8,637) (1,465)
- -------------------------------------------------------------------------------
Net Earnings 7,027 4,431 2,660
Dividends on preferred shares 1,127 1,179 1,239
- -------------------------------------------------------------------------------
Net Earnings Available for
Common Shares $ 5,900 $ 3,252 $ 1,421
===============================================================================
Earnings (Loss) Per Common Share:
Basic:
Continuing operations $ 0.94 $ 1.99 $ 0.50
Discontinued operations - (1.45) (0.25)
- -------------------------------------------------------------------------------
Net Earnings $ 0.94 $ 0.54 $ 0.25
===============================================================================
Diluted:
Continuing operations $ 0.81 $ 1.67 $ 0.41
Discontinued operations - (1.21) (0.21)
- -------------------------------------------------------------------------------
Net Earnings $ 0.81 $ 0.46 $ 0.20
===============================================================================
See accompanying Notes to Consolidated Financial Statements.
Page 13
<PAGE>
CONSOLIDATED BALANCE SHEETS
EDO CORPORATION AND SUBSIDIARIES
===============================================================================
December 31
1997 1996
(in thousands, except
share and per share amounts)
- -------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 20,351 $ 20,745
Marketable securities 13,851 -
Accounts receivable 32,421 32,518
Inventories 6,816 7,994
Prepayments and other 5,564 2,678
- -------------------------------------------------------------------------------
Total current assets 79,003 63,935
- -------------------------------------------------------------------------------
Property, plant and equipment, net 12,865 12,968
Notes receivable 3,000 3,900
Cost in excess of fair value of
net assets acquired, net 6,792 7,159
Other assets 7,141 6,261
- -------------------------------------------------------------------------------
$ 108,801 $ 94,223
===============================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 21,773 $ 21,517
Contract advances and deposits 12,753 4,809
Net liabilities of discontinued operations - 227
- -------------------------------------------------------------------------------
Total current liabilities 34,526 26,553
- -------------------------------------------------------------------------------
Long-term debt 29,317 29,317
ESOT loan obligation 10,368 11,676
Postretirement obligation 3,526 3,995
Environmental obligation 2,929 2,859
Shareholders' Equity:
8% convertible preferred shares, par value
$1 per share (liquidation preference $213.71
per share or $13,858 in the aggregate in
1997), authorized 500,000 shares (64,843
issued in 1997 and 67,832 in 1996) 65 68
Common shares, par value $1 per share,
authorized 25,000,000 shares (8,453,902
issued in both years) 8,454 8,454
Additional paid-in capital 32,546 35,438
Retained earnings 27,641 22,368
- -------------------------------------------------------------------------------
68,706 66,328
Less: Treasury shares at cost
(2,054,474 shares in 1997 and
2,409,136 shares in 1996) (29,201) (34,240)
ESOT loan obligation (10,368) (11,676)
Deferred compensation under
Long-Term Incentive Plan (1,002) (589)
- -------------------------------------------------------------------------------
Total shareholders' equity 28,135 19,823
- -------------------------------------------------------------------------------
$ 108,801 $ 94,223
===============================================================================
See accompanying Notes to Consolidated Financial Statements.
Page 14
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
EDO CORPORATION AND SUBSIDIARIES
===============================================================================
1997 1996 1995
(in thousands)
Amount Shares Amount Shares Amount Shares
- -------------------------------------------------------------------------------
Preferred shares
Balance at beginning
of year $ 68 68 $ 71 71 $ 75 75
Par value of shares
converted (3) (3) (3) (3) (4) (4)
- -------------------------------------------------------------------------------
Balance at end of year 65 65 68 68 71 71
- -------------------------------------------------------------------------------
Common shares
- -------------------------------------------------------------------------------
Par value of
shares issued 8,454 8,454 8,454 8,454 8,454 8,454
- -------------------------------------------------------------------------------
Additional paid-in
capital
Balance at beginning
of year 35,438 37,847 39,330
Exercise of stock
options (1,132) (227) -
Shares used for payment
of directors' fees (64) (57) (137)
Effect of sale of
subsidiary's (EDO
(Canada) Ltd.)
capital stock - - 795
Shares used for
Long-Term Incentive
Plans (721) (1,146) -
Conversion of
preferred shares
to common shares (975) (979) (2,141)
- -------------------------------------------------------------------------------
Balance at end of year 32,546 35,438 37,847
- -------------------------------------------------------------------------------
Retained earnings
Balance at beginning
of year 22,368 19,116 17,695
Net earnings 7,027 4,431 2,660
Common stock dividends
($0.10 per share
in 1997) (627) - -
Dividends on
preferred shares (1,127) (1,179) (1,239)
- -------------------------------------------------------------------------------
Balance at end of year 27,641 22,368 19,116
- -------------------------------------------------------------------------------
Treasury shares at cost
Balance at beginning
of year (34,240) (2,409) (37,604) (2,646) (39,937) (2,810)
Shares used for
exercise of stock
options 2,491 175 393 28 - -
Shares used for
payment of
directors' fees 149 11 106 7 188 13
Shares used for
Long-Term Incentive
Plans 1,421 100 1,883 133 - -
Shares used for
conversion of
preferred shares 978 69 982 69 2,145 151
- -------------------------------------------------------------------------------
Balance at end of year (29,201) (2,054) (34,240) (2,409) (37,604) (2,646)
- -------------------------------------------------------------------------------
ESOT loan obligation
Balance at beginning
of year (11,676) (12,887) (14,007)
Repayments made
during year 1,308 1,211 1,120
- -------------------------------------------------------------------------------
Balance at end of year (10,368) (11,676) (12,887)
- -------------------------------------------------------------------------------
Deferred compensation
under Long-Term
Incentive Plan
Balance at beginning
of year (589) - -
Shares used for Long-
Term Incentive Plans (700) (737) -
Amortization of Long-
Term Incentive Plan
deferred expense 287 148 -
- -------------------------------------------------------------------------------
Balance at end of year (1,002) (589) -
===============================================================================
Total Shareholders'
Equity $28,135 $19,823 $14,997
===============================================================================
See accompanying Notes to Consolidated Financial Statements.
Page 15
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
EDO CORPORATION AND SUBSIDIARIES
===============================================================================
Years Ended December 31
1997 1996 1995
(in thousands)
- -------------------------------------------------------------------------------
Operating Activities:
Earnings from continuing operations $ 7,027 $ 13,068 $ 4,125
Adjustments to earnings to arrive at
cash provided by continuing operations:
Postretirement health care
curtailment gain - (7,120) -
Depreciation and amortization 6,027 5,303 4,935
Write-down of acoustic product
line inventory 1,500 - -
Deferred compensation expense 287 148 -
Common shares issued for
directors' fees 85 49 51
Changes in:
Accounts receivable 97 (8,913) (2,216)
Inventories (322) 93 814
Prepayments, other assets and other (5,279) (4,341) (1,479)
Recoverable and deferred income taxes - - 3,649
Accounts payable and accrued liabilities 256 5,178 (1,877)
Contract advances and deposits 7,944 (833) 2,142
- -------------------------------------------------------------------------------
Cash provided by continuing operations 17,622 2,632 10,144
Net cash used by discontinued operations - (1,804) (2,024)
Investing Activities:
Purchase of property, plant and equipment (4,083) (4,227) (1,800)
Purchase of marketable securities (13,851) - -
Proceeds from assets held for sale - 1,976 -
- -------------------------------------------------------------------------------
Cash used by investing activities (17,934) (2,251) (1,800)
Financing Activities:
Proceeds from exercise of stock options 1,359 166 -
Payments received on notes receivable 313 263 -
Payment of common share cash dividends (627) - -
Payment of preferred share cash dividends (1,127) (1,179) (1,239)
- -------------------------------------------------------------------------------
Cash used by financing activities (82) (750) (1,239)
===============================================================================
Net increase (decrease) in cash
and cash equivalents (394) (2,173) 5,081
Cash and cash equivalents at
beginning of year 20,745 22,918 17,837
- -------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 20,351 $ 20,745 $ 22,918
===============================================================================
Supplemental disclosures:
Cash paid for:
Interest $ 2,058 $ 2,072 $ 2,143
Income taxes $ 1,137 $ 190 $ 345
===============================================================================
See accompanying Notes to Consolidated Financial Statements.
Page 16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
EDO CORPORATION AND SUBSIDIARIES
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Business
The consolidated financial statements include the accounts of EDO Corporation
and all majority-owned subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company operates in one segment and designs and manufactures advanced
electro-optical, electronic, mechanical, acoustic and composite products for
the defense and aerospace industries. Domestic government sales, which include
sales to prime contractors of the government, amounted to 41%, 36% and 43% of
net sales, and export sales comprised 33%, 35% and 31% of net sales for 1997,
1996 and 1995, respectively. The Company discontinued its energy-related
business in 1996 (Note 3).
(b) Cash Equivalents
The Company considers all securities with an original maturity of three months
or less at the date of acquisition to be cash equivalents.
(c) Marketable Securities
The Company's marketable securities, consisting of U.S. government-backed
securities, mortgage-backed securities and corporate bonds, are categorized as
available-for-sale. The securities have been reflected at cost, which
approximates market value at December 31, 1997.
(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 are made. Estimated
losses on long-term contracts are recorded when identified. Sales under cost
reimbursement contracts are recorded as costs are incurred. Sales on other
than long-term contract orders (principally commercial products) are recorded
as shipments are made.
(e) Inventories
Inventories under long-term contracts and programs reflect all accumulated
production costs, including factory overhead, initial tooling and other related
costs (including general and administrative expenses relating to certain of the
Company's defense contracts), less the portion of such costs charged to cost of
sales. Inventory costs in excess of amounts recoverable under contracts are
charged to cost of sales when they become known. All other inventories are
stated at the lower of cost (principally first-in, first-out method) or market.
(f) Depreciation
Depreciation and amortization of property, plant and equipment have been
provided primarily using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are being amortized over the
lesser of their estimated useful lives or their respective lease periods.
Deferred financing costs are amortized on a straight-line basis over the life
of the related financing. The unamortized balances of $1,012,000 and
$1,153,000 are included in other assets at December 31, 1997 and 1996,
respectively.
(g) Cost in Excess of Fair Value of Net Assets Acquired (Goodwill)
The excess of the total acquisition cost of Barnes Engineering Company over the
fair value of net assets acquired of approximately $11.0 million ($6.8 million,
net of accumulated amortization at December 31, 1997) is being amortized on a
straight-line basis over thirty years. The Company assesses the recoverability
of unamortized goodwill by determining whether the amortization of the goodwill
balance over its estimated life can be recovered through the undiscounted
projected future earnings of the acquired business.
(h) Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles to
be held and used or disposed of for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable when measured by comparing the carrying amount of an asset to the
future net cash flows expected to be generated by the asset.
Page 17
<PAGE>
(i) 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.
(j) Treasury Stock
Treasury stock is recorded at cost, with issuances from treasury stock recorded
at average cost. Treasury stock issued for directors' fees is recorded as an
expense for an amount equal to the fair market value of the stock on the
issuance date.
(k) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share,"
which the Company adopted in the fourth quarter of 1997. Under SFAS No. 128,
the Company presents basic and diluted earnings per share (Note 13). Prior
year earnings per share data have been restated to apply the provisions of SFAS
No. 128.
(l) Financial Instruments
The fair value and book value of the Company's long-term debt and ESOT
obligation at December 31, 1997 were $35,368,000 and $39,685,000, respectively
(Notes 9 and 10). The net carrying value of notes receivable approximates fair
value based on current rates for comparable commercial mortgages. The fair
value of the environmental obligation (Note 18) approximates its carrying value
since it has been discounted.
The fair values of all other financial instruments approximate book values
because of the short maturities of these instruments.
(m) 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 financial statements in
conformity with generally accepted accounting principles. Among the more
significant estimates included in these financial statements are the estimated
costs to complete contracts in process, the estimated remediation costs related
to the environmental matter discussed in Note 18 and the collectibility of
receivables. Actual results could differ from these and other estimates.
(n) Accounting for Stock-Based Compensation
The Company records compensation expense for employee and director stock
options and warrants only if the current market price of the underlying stock
exceeds the exercise price on the date of the grant. On January 1, 1996, the
Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The
Company has elected not to implement the fair value based accounting method for
employee and director stock options and warrants, but has elected to disclose
the pro forma net earnings and pro forma earnings per share for employee and
director stock option and warrant grants made beginning in 1995 as if such
method had been used to account for stock-based compensation cost (Note 14).
(2) Consolidation and Discontinuance of Product Lines
In December 1997, the Company made the decision to consolidate its Acoustic
Products product lines. The acoustic sensor products will be consolidated into
the Company's Electro-Ceramic Products operations and the acoustic systems
products into its Combat Systems operations. Such consolidation will result in
the discontinuance of certain products within the Acoustic Products product
lines.
In connection with the consolidation, the Company recorded a charge (included
in cost of sales) of $2,000,000, which is principally comprised of the
write-down of inventory related to the discontinued product lines to its net
realizable value.
Page 18
<PAGE>
(3) Discontinued Operations
Pursuant to a Board of Directors resolution in September 1996, the Company
adopted a plan to exit its energy-related businesses. Those businesses
included: the Company's 50.4% interest in EDO (Canada) Limited, a manufacturer
of Compressed Natural Gas (CNG) fuel cylinders; EDO Automotive Natural Gas Inc.
(EDO ANGI), a designer and manufacturer of CNG refueling stations and related
equipment; and EDO Energy Corporation, a wholly owned subsidiary of the Company
involved in program management activities in CNG and other alternative fuel
projects. In April 1997, the Company sold EDO ANGI for approximately the book
value of the related net assets. In May 1997, EDO (Canada) Ltd. made a
voluntary assignment in bankruptcy pursuant to the Bankruptcy and Insolvency
Act of Canada. EDO Energy Corporation satisfied most of its obligations in
1997 and will cease operations in 1998. The terms of these events did not
result in a modification to the loss from discontinuing the businesses provided
in 1996.
The consolidated financial statements of the Company reflect the effects of the
Company's decision to treat its energy-related businesses as discontinued
operations. Accordingly, the revenues, costs and expenses, assets and
liabilities, and cash flows associated with the energy-related businesses are
excluded from the respective captions in the Consolidated Statements of
Earnings, Balance Sheets and Statements of Cash Flows. The net operating
results of these entities are reported as "Loss from discontinued operations";
the net liabilities of these entities are reported as "Net liabilities of
discontinued operations"; and the cash flows of these entities are reported as
"Net cash used by discontinued operations."
Net sales of the discontinued operations prior to the date of discontinuance
were $9,321,000, and $12,181,000 for the years ended December 31, 1996 and
1995, respectively. Net liabilities of discontinued operations at December 31,
1996 were as follows:
===========================================================
(in thousands)
-----------------------------------------------------------
Assets-net $ 1,579
Liabilities (806)
Accrual for losses during phase out period (1,000)
-----------------------------------------------------------
Net liabilities of discontinued operations $ (227)
===========================================================
(4) Subsidiary Equity Transaction
In December 1995, EDO (Canada) Ltd. received $3.5 million from the sale of its
capital stock to three companies. As a result, the Company's ownership of EDO
(Canada) Ltd. was reduced from approximately 60% to approximately 50.4% with
approximately 33% owned by the Province of Alberta and approximately 17% owned
by three other minority shareholders. The Company's additional paid-in capital
was increased by $795,000, representing its equity in EDO (Canada) Ltd.'s
capital transactions in 1995.
(5) Accounts Receivable
Accounts receivable included $17,917,000 and $16,121,000 at December 31, 1997
and 1996, respectively, representing unbilled revenues. Substantially all of
the unbilled balances at December 31, 1997 will be billed and are expected to
be collected during 1998. Total receivables due from the United States
government, either directly or as a subcontractor to a prime contractor with
the government, were $11,822,000 and $6,910,000 at December 31, 1997 and 1996,
respectively.
(6) Inventories
Inventories are summarized by major classification as follows at December 31,
1997 and 1996:
=====================================================
1997 1996
(in thousands)
------------------------------------------------------
Raw material and supplies $ 3,471 $ 4,226
Work-in-process 3,120 3,380
Finished goods 225 388
------------------------------------------------------
$ 6,816 $ 7,994
=====================================================
(7) Property, Plant and Equipment, Net
The Company's property, plant and equipment at December 31, 1997 and 1996, and
their related useful lives are summarized as follows:
================================================================
1997 1996 Range in
(in thousands) Years
----------------------------------------------------------------
Machinery and equipment $ 53,418 $ 50,244 3 - 10
Leasehold improvements 8,687 8,595 lease terms
----------------------------------------------------------------
62,105 58,839
Less accumulated depreciation
and amortization 49,240 45,871
----------------------------------------------------------------
$ 12,865 $ 12,968
================================================================
In January 1996, buildings, building improvements and land at the Company's
College Point facility were sold for $2.0 million of cash, net of expenses,
$4.6 million of notes, and other consideration including prepaid rent. The
total consideration received approximated the carrying value of the assets.
The notes receivable of $3,975,000 at December 31, 1997, of which $975,000 is
included in current assets are due in varying annual amounts through 2004 and
bear interest at 7% commencing January 1, 1998 for $1,850,000 of the notes and
January 1, 1999 for the balance of the notes. The notes receivable are secured
by a mortgage on the related facility.
Page 19
<PAGE>
(8) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following at December
31, 1997 and 1996:
===================================================================
1997 1996
(in thousands)
-------------------------------------------------------------------
Trade payables $ 4,205 $ 3,568
Employee compensation and benefits 3,092 2,579
Current portion of environmental obligation 571 1,254
Other 13,905 14,116
-------------------------------------------------------------------
$ 21,773 $ 21,517
===================================================================
(9) Long-Term Debt and Line of Credit
Long-term debt of the Company at December 31, 1997 and 1996 consisted of the 7%
Convertible Subordinated Debentures Due 2011 that were issued in November 1986.
The debentures are convertible at the rate of 45.45 common shares for each
$1,000 principal amount, which is equivalent to $22 per share. Debentures are
redeemable at the option of the Company at par and at the option of the holder
under certain circumstances involving a change in control of the Company.
Commencing in 1996 and until retirement, the Company is required to make
sinking fund payments of $1,750,000 per year. As of December 31, 1997, the
Company had $2,183,000 of these debentures remaining in treasury which may be
used to satisfy a portion of the sinking fund requirements. The carrying value
of the debentures as of December 31, 1997 is $29,317,000. The Company
estimates the fair value of the debentures as of December 31, 1997 to be
approximately $25,000,000 based on trades during late 1997.
The Company has a $15.0 million line of credit agreement with a bank for both
short-term borrowings and letters of credit. The agreement expires on June 30,
1998 and limits the cash portion of potential borrowings to $10.0 million.
Borrowings under the agreement bear interest based on the bank's prime rate
plus 0.5% and are secured by the Company's accounts receivable, inventory,
machinery and equipment. A condition to this agreement is compliance with the
Company's Employee Stock Ownership Trust guarantee agreement that is described
in Note 10. There have been no direct borrowings under this agreement.
Borrowings under this agreement would be senior to the debentures described
above.
(10) Employee Stock Ownership Plan and Trust
The Company's Employee Stock Ownership Plan (ESOP) provides retirement benefits
to substantially all employees. During 1997, 1996 and 1995, respectively, cash
contributions of $942,000, $879,000 and $839,000 were made to the ESOP. As of
December 31, 1997, there were 273,784 common shares in the ESOP.
During 1988, the Employee Stock Ownership Trust (ESOT) purchased 89,772
convertible preferred shares from the Company for approximately $19,185,000.
The shares are being allocated to employees through 2003 on the basis of
compensation. The preferred shares provide for dividends of 8% per annum,
which are deductible by the Company for Federal and state income tax purposes.
The tax benefit that is attributable to unallocated shares is reflected as an
increase to retained earnings. Each unallocated preferred share is convertible
at its stated conversion rate into 10 common shares. Allocated shares are
convertible at the greater of the stated conversion rate or the fair value of
each preferred share ($190 at December 31, 1997) divided by the current market
price of each common share. As of December 31, 1997, 53,488 shares have been
allocated, 36,284 shares remained unallocated and 24,929 shares have been
converted into 689,300 common shares. Until converted, each preferred share is
entitled to 12.3 votes. The preferred shares are entitled to vote on all
matters presented to holders of common shares voting together as a class,
except that certain amendments and mergers could entitle the holders of
preferred shares to vote separately as a class. The ESOP provides for
pass-through of voting rights to the ESOP participants and beneficiaries.
The ESOT purchased the preferred shares from the Company using the proceeds of
a borrowing guaranteed by the Company. The ESOT services this obligation with
the dividends received on the preferred shares and any additional contributions
from the Company as required. Principal and interest payments on the note of
the ESOT are to be made in quarterly installments through 2003. Interest is
charged at 82% of the prime lending rate. During 1997, 1996 and 1995,
respectively, the Company's cash contributions and preferred dividends were
used to repay principal of $1,308,000, $1,211,000 and $1,120,000 and pay
interest of $780,000, $865,000 and $982,000. Both the Company and the lender
have the option to cancel or refinance the borrowing on or after April 1, 2000.
The guarantee agreement also provides that the Company may be obligated to
prepay the ESOT loan through redemption of the preferred shares at
Page 20
<PAGE>
$213.71 per share upon the occurrence of certain prepayment events.
In addition to these prepayment events, there are certain covenants placed on
the Company that require that several predetermined ratios be maintained. At
December 31, 1997, the Company was in compliance with such covenants. In
addition, payments of common stock dividends in 1998 and beyond will be limited
to each year's net income in excess of net income for that year required for
the Company to be in compliance with its net worth debt covenant (approximately
$3.7 million of net income in 1998) up to $0.28 per common share. This
obligation is secured with the Company's accounts receivable, inventory,
machinery and equipment. The fair value of the ESOT obligation approximates
book value since the interest rate is prime-based and accordingly is adjusted
for market rate fluctuations.
The ESOT's borrowing guaranteed by the Company is reflected as a liability on
the balance sheet with an equal amount as a reduction of shareholders' equity,
offsetting the increase in the capital stock accounts. As the principal
portion of the note is repaid through 2003, the liability and the ESOT loan
obligation will be reduced concurrently.
(11) Federal Income Taxes
The 1997, 1996 and 1995 provision for Federal income taxes for continuing
operations was comprised of the following amounts:
===============================================
1997 1996 1995
(in thousands)
-----------------------------------------------
Federal
Current $ - $ - $ -
Deferred - - -
-----------------------------------------------
Total $ - $ - $ -
===============================================
Included in the 1997 and 1996 current Federal provision are $238,000 and
$858,000, respectively, of benefit for the utilization of net operating loss
carryforwards.
State income taxes of $313,000, $257,000 and $295,000 in 1997, 1996 and 1995,
respectively, are included in general and administrative expenses.
The effective Federal income tax rate differed from the statutory Federal
income tax rate for the following reasons:
=======================================================================
Percent of Pretax Earnings
1997 1996 1995
-----------------------------------------------------------------------
Tax at statutory rate 34.0% 34.0% 34.0%
Preferred stock dividends (2.4) (1.2) (6.5)
Decrease in valuation allowance (28.3) (29.4) (26.3)
Other, net (3.3) (3.4) (1.2)
-----------------------------------------------------------------------
Effective Federal income tax rate - - -
=======================================================================
Page 21
<PAGE>
The items that comprise the significant portions of deferred tax assets and
liabilities as of December 31, 1997 and 1996 are as follows:
=======================================================================
December 31
Deferred Tax Assets 1997 1996
-----------------------------------------------------------------------
Postretirement obligation other than pensions $ 1,199 $ 1,358
U.S. net operating loss carryforwards 2,853 3,091
Environmental obligation 958 1,398
R&D and alternative minimum
tax credit carryforwards 2,138 2,326
Deferred compensation 1,792 1,480
Capital loss carryforwards 976 1,207
Discontinued operations - 2,380
Other 1,977 429
-----------------------------------------------------------------------
Total deferred tax assets 11,893 13,669
Less: Valuation allowance (3,477) (5,328)
-----------------------------------------------------------------------
8,416 8,341
Deferred Tax Liabilities
-----------------------------------------------------------------------
Depreciation and amortization 3,535 3,357
Contract tax accounting 897 839
Prepaid pension asset 1,796 1,393
Other 2,188 2,752
-----------------------------------------------------------------------
Total deferred tax liabilities 8,416 8,341
-----------------------------------------------------------------------
Net deferred tax asset (liability) $ - $ -
=======================================================================
Deferred income tax assets as of December 31, 1997 include U.S. net operating
loss carryforwards and capital loss carryforwards for income tax purposes of
approximately $8,400,000 and $2,870,000, respectively, primarily expiring in
2009 and 2000, respectively, of which approximately $1,070,000 of the tax
benefits will be allocated to retained earnings. R&D credits expire in the
years 2008 and 2009. Realization of these assets is dependent on future
taxable earnings and capital gains. A valuation allowance has been
established at December 31, 1997 for the Company's net deferred tax asset
since, based on the Company's recent cumulative losses, management cannot
conclude that it is more likely than not that the deferred tax assets will be
realized.
(12) Shareholders' Equity
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 shares of the Company's common stock. As of December 31, 1997, the
Company had acquired approximately 3,957,000 shares in open market transactions
at prevailing market prices. Approximately 1,903,000 of these shares have been
used for various purposes, including: conversion of preferred shares;
contributions of shares to the EDO Corporation Employee Stock Ownership Plan;
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, 1997 and 1996, the Company held 2,054,474 and
2,409,136 treasury shares, respectively, for future use.
At December 31, 1997, the Company had reserved, authorized and unissued common
shares for the following purposes:
=========================================================================
Shares
-------------------------------------------------------------------------
Conversion of 7% Convertible Subordinated Debentures Due 2011 1,332,590
Stock option and long-term incentive plans 1,062,050
Conversion of preferred shares 982,856
-------------------------------------------------------------------------
3,377,496
=========================================================================
(13) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
==============================================================================
1997 1996 1995
(in thousands)
- ------------------------------------------------------------------------------
Numerator:
Net earnings available for common shares $ 5,900 $ 3,252 $ 1,421
Impact of assumed conversion of preferred shares 97 - -
- ------------------------------------------------------------------------------
Numerator for diluted calculation $ 5,997 $ 3,252 $ 1,421
==============================================================================
Denominator:
Weighted average common shares outstanding 6,261 5,975 5,736
Dilutive effect of stock options 151 111 32
Dilutive effect of conversion of preferred shares 983 1,054 1,233
- ------------------------------------------------------------------------------
Denominator for diluted calculation 7,395 7,140 7,001
==============================================================================
The assumed conversion of the convertible debentures was anti-dilutive for all
periods presented.
(14) Stock Plans
The Company has granted nonqualified stock options to officers, directors and
other key employees, under a plan, approved by the shareholders in 1996, which
replaced all previous stock option and long-term incentive plans, for the
purchase of its common shares at the fair market value of the shares on the
dates of grant. Options 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.
Changes in options outstanding are as follows:
Page 22
<PAGE>
===============================================================================
1997 1996 1995
Weighted Shares Weighted Shares Weighted Shares
Average Subject Average Subject Average Subject
Exercise to Exercise to Exercise to
Price Option Price Option Price Option
- -------------------------------------------------------------------------------
Beginning
of year $ 6.57 737,313 $ 6.54 767,800 $ 7.09 790,238
Options
granted 7.20 157,750 5.54 27,500 3.40 96,750
Options
exercised 7.26 (175,313) 5.12 (27,662) - -
Options
cancelled 6.39 (30,800) 6.30 (30,325) 7.67 (119,188)
- -------------------------------------------------------------------------------
End of
year $ 6.55 688,950 $ 6.57 737,313 $ 6.54 767,800
- -------------------------------------------------------------------------------
Exercisable
at year end $ 6.79 462,575 595,985 576,800
===============================================================================
The options outstanding as of December 31, 1997 are summarized in ranges as
follows:
===============================================================================
Range of Weighted Average Number of Options Weighted Average -
Exercise Price Exercise Price Outstanding Remaining Life
- -------------------------------------------------------------------------------
$3.07 - 5.99 3.72 198,750 7 years
$6.00 - 8.99 7.46 461,200 5 years
$9.00 - 11.56 11.37 29,000 2 years
- -------------------------------------------------------------------------------
688,950
===============================================================================
The plan, approved by the shareholders of the Company in 1996, also provides
for restricted common share long-term incentive awards as defined under the
plan. All shares authorized under the previous plans not yet awarded were
canceled upon the approval of the 1996 plan. As of December 31, 1997, plan
participants had been awarded 232,500 restricted common shares and 165,250 non
qualified stock options. The 1996 plan will expire in 2005. The cost of the
awards under the 1996 plan (and the previous plans which it replaced) is
amortized over the five-year period the related services are provided. The
amount charged to operations in 1997, 1996 and 1995 was $287,000, $148,000 and
$0, respectively.
The per share weighted-average fair value of stock options granted was $2.77,
$2.70 and $2.37 in 1997, 1996 and 1995, respectively, on the dates of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield of 1.3%, risk
free interest rate of 5.5%, expected stock volatility of 30%, and an expected
option life of 7-1/2 years; 1996 - expected dividend yield of 0%, risk free
interest rate of 6%, expected stock volatility of 40%, and an expected option
life of 7-1/2 years; 1995 - expected dividend yield of 0%, risk free interest
rate of 5%, expected stock volatility of 50%, and an expected option life of
7/1-2 years.
The Company applies APB Opinion No. 25 in accounting for its stock option
grants and, accordingly, no compensation cost has been recognized in the
financial statements for its stock options, which have exercise prices equal to
or greater than the fair values of the stock on the dates of the grant. Had
the Company determined compensation cost based on the fair values at the grant
dates for its stock options under SFAS No. 123, the Company's earnings from
continuing operations, and basic and diluted earnings from continuing
operations per common share would have been reduced to the pro forma amounts
indicated below:
============================================================
1997 1996 1995
------------------------------------------------------------
(in thousands, except
per share amounts)
------------------------------------------------------------
Earnings from
continuing operations:
As reported $ 7,027 $ 13,068 $ 4,125
Pro forma 6,879 13,007 4,079
Basic earnings per share:
As reported $ 0.94 $ 1.99 $ 0.50
Pro forma 0.92 1.98 0.50
Diluted earnings per share:
As reported $ 0.81 $ 1.67 $ 0.41
Pro forma 0.79 1.66 0.41
============================================================
Pro forma earnings from continuing operations reflect only options granted
beginning in 1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma earnings
from continuing operations amounts presented above because compensation cost is
reflected over the options' vesting period and compensation cost for options
granted prior to January 1, 1995 was not considered.
(15) Other Employee Benefit Plans
The Company maintains a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and the employee's highest five-year average base salary in the final ten years
of employment. The Company's funding policy is to make annual contributions to
the extent such contributions are actuarially determined and tax deductible.
The net pension (income) expense for 1997, 1996 and 1995 was $(1,185,000),
$(1,285,000), and $316,000, respectively. In addition, during 1995 the Company
experienced a curtailment gain of $645,000 which reduced cost of sales in the
Consolidated Statements of Earnings, as a result of its reduction in the number
of employees. The expected long-
Page 23
<PAGE>
term rate of return on plan assets was 9.0% in 1997, 1996 and 1995. The
actuarial computations assumed a discount rate on benefit obligations at
December 31, 1997 and 1996 of 7.0% and 7.5%, respectively. The assumed rate of
compensation increase approximates the Company's previous experience. The
assets of the pension plan consist primarily of equity and fixed income
securities, which are readily marketable.
A summary of the components of net periodic pension (income) expense follows:
====================================================================
1997 1996 1995
(in thousands)
--------------------------------------------------------------------
Service cost $ 1,380 $ 1,277 $ 1,192
Interest cost on projected
benefit obligation 5,999 5,359 5,469
Actual return on plan assets (17,306) (16,369) (18,791)
Net amortization and deferral 8,742 8,448 12,446
--------------------------------------------------------------------
Net pension (income) expense $ (1,185) $ (1,285) $ 316
====================================================================
The funded status of the plan as of December 31 was as follows:
============================================================================
1997 1996
(in thousands)
----------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $81,819 and $69,704 for
1997 and 1996, respectively $ (83,114) $ (71,404)
----------------------------------------------------------------------------
Projected benefit obligation for service
rendered to date $ (88,654) $ (76,290)
Plan assets at fair value 109,793 97,837
----------------------------------------------------------------------------
Funded status of plan 21,139 21,547
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions (16,985) (18,777)
Unrecognized prior service cost 1,160 1,368
Unrecognized net asset at December 31,
being amortized over 15 years through 2001 (33) (42)
----------------------------------------------------------------------------
Prepaid pension cost (in other assets) $ 5,281 $ 4,096
============================================================================
In addition, the Company established in 1988 a supplemental defined benefit
plan for substantially all employees. In 1997, 1996 and 1995, the net pension
expense for this plan was approximately $125,900, $64,800, and $58,300,
respectively.
The Company also has a supplemental retirement plan for officers and certain
employees under which the Company has agreed to pay a predetermined retirement
benefit. In the event of preretirement death or disability, the plan provides
for similar benefits. Total expenses under this plan in 1997, 1996 and 1995
were $600,000, $585,000 and $468,000, respectively.
(16) Postretirement Health Care and Life Insurance Benefits
The Company provides certain health care and life insurance benefits to
qualified retired employees and dependents at certain locations. These
benefits are funded on a pay-as-you-go basis, with the retiree paying a portion
of the cost through contributions, deductibles and coinsurance provisions. The
Company has always retained the right to modify or terminate the plans
providing these benefits.
In accordance with SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," the Company recognizes these benefit expenses on
an accrual basis as the employees earn them during their employment rather than
when they are actually paid.
Cash outlays relating to retiree health care and life insurance benefits
amounted to $740,000, $631,000 and $1,131,000 for 1997, 1996 and 1995,
respectively.
Postretirement health care and life insurance expense (income) included the
following components:
=====================================================================
1997 1996 1995
(in thousands)
---------------------------------------------------------------------
Service cost $ 36 $ 42 $ 53
Interest cost 250 320 694
Amortization of prior service cost - (796) (662)
Amortization of net unrecognized gain (15) (36) (71)
---------------------------------------------------------------------
Total postretirement health care and
life insurance expense (income) $ 271 $ (470) $ 14
=====================================================================
In 1995 the Company modified these benefit plans to shift the cost for certain
participants over age 65 to Medicare HMO type plans. The effect of this change
was to reduce the postretirement obligation by approximately $5.0 million.
During 1996, the Company recognized a non-cash curtailment gain of $7,120,000
in connection with the discontinuance of postretirement medical benefits for
Medicare-eligible retirees. This gain represents the reversal of a significant
portion of the postretirement obligation established upon the adoption of SFAS
No. 106 in 1993.
The funded status and breakdown of the postretirement health care and life
insurance benefits are as follows as of December 31:
===============================================================================
1997 1996
(in thousands)
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 2,326 $ 2,367
Eligible active employees 631 571
Other ineligible active employees 617 583
- -------------------------------------------------------------------------------
Unfunded accumulated postretirement benefit obligation $ 3,574 $ 3,521
Unrecognized net (loss) gain (48) 474
- -------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 3,526 $ 3,995
===============================================================================
Page 24
<PAGE>
Actuarial assumptions used in determining the accumulated postretirement
benefit obligation include a discount rate of 7.0% and 7.5% at December 31,
1997 and 1996, 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.
(17) Commitments and Contingencies
The Company is contingently liable under the terms of letters of credit (Note
9) aggregating approximately $10,844,000 at December 31, 1997, should it fail
to perform in accordance with the terms of its contracts with foreign
customers.
At December 31, 1997, the Company and its subsidiaries were obligated under
building and equipment leases expiring between 1998 and 2012. Rental expense
under such leases for the years ended December 31, 1997, 1996 and 1995 amounted
to $3,555,000, $3,490,000 and $2,450,000, respectively. Minimum future rentals
under those obligations with noncancellable terms in excess of one year are as
follows:
1998 - $ 3,130,000
1999 - $ 3,070,000
2000 - $ 3,050,000
2001 - $ 3,060,000
2002 - $ 2,740,000
Thereafter - $11,500,000
(18) Legal Matters
The Company and three other companies have entered into a consent decree with
the Federal government for the remediation of a Superfund site. The Company
believes that the aggregate amount of the obligation and timing of cash
payments associated with this matter are reasonably fixed and determinable.
Accordingly, the environmental obligation has been discounted at five percent.
Management estimates that as of December 31, 1997 the discounted liability over
the remainder of the twenty-eight years related to this matter is approximately
$3.5 million of which approximately $0.6 million has been classified as current
and is included in accounts payable and accrued liabilities. Approximately
$1.2 million of the $3.5 million liability will be incurred over the next five
years. Management believes it is covered by liability insurance for all of the
unreimbursed costs it incurs. During 1997, the Company settled with one of its
insurance carriers for $2,900,000, which was recorded as litigation settlement
income in 1997 and was collected in January 1998. The Company is in the
process of seeking collection from another insurance carrier.
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.
KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
EDO Corporation
We have audited the accompanying consolidated balance sheets of EDO Corporation
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
years in the three year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Jericho, New York
February 13, 1998
Page 25
<PAGE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth unaudited quarterly financial information for
1997 and 1996 (in thousands, except per share amounts).
==============================================================================
First Quarter Second Quarter Third Quarter Fourth Quarter
1997 1996 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------
Net sales $23,704 $23,669 $23,193 $24,771 $23,246 $23,107 $24,219 $23,039
Gross profitb 5,476 5,022 5,440 5,891 5,528 4,711 1,858c 6,399
Earnings
(loss):
Continuing
operations 1,561 1,480 1,703 1,534 1,878 8,754a 1,885 1,300
Discontinued
operations - (527) - (491) - (7,619) - -
- ------------------------------------------------------------------------------
Total 1,561 953 1,703 1,043 1,878 1,135 1,885 1,300
Earnings
(loss)
per share:
Basic
Continuing
operations 0.21 0.20 0.23 0.21 0.25 1.40 0.25 0.17
Discontinued
operations - (0.09) - (0.08) - (1.26) - -
- -------------------------------------------------------------------------------
Total 0.21 0.11 0.23 0.13 0.25 0.14 0.25 0.17
Diluted
Continuing
operations 0.18 0.17 0.20 0.18 0.22 1.18 0.22 0.14
Discontinued
operations - (0.08) - (0.07) - (1.06) - -
- -------------------------------------------------------------------------------
Total 0.18 0.09 0.20 0.11 0.22 0.12 0.22 0.14
Preferred
dividends
paid 290 303 281 293 281 293 275 290
===============================================================================
a The 1996 third quarter results from continuing operations include a $7,120
curtailment gain (or $1.19 per share) for the discontinuance of postretirement
health care benefits for Medicare-eligible retirees.
b Gross profit represents net sales less cost of sales and Company-sponsored
research and development.
c Includes a charge of approximately $2,000 for the consolidation and
discontinuance of an Acoustic Products product line.
Page 26
<PAGE>
EXHIBIT INDEX
Exhibits which are noted with an asterisk (*) are management contracts or
compensatory plans or arrangements.
3(i) Certificate of Incorporation of the Company and amendments thereto dated
June 14, 1984, July 18, 1988 and July 22, 1988. Incorporated by reference to
Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
3(ii) By-Laws of the Company. Incorporated by reference to Exhibit 3(ii) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
4(a) Indenture dated December 1, 1986 between Chase Manhattan Bank as successor
in interest to Manufacturers Hanover Trust Company, as Trustee, and EDO
Corporation. Incorporated by reference to Exhibit 4(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
4(b) Guarantee Agreement, dated as of July 22, 1988, as amended, made by the
Company in favor of Fleet Bank as successor in interest to NatWest Bank NA and
Manufacturers Hanover Trust Company. Incorporated by reference to Exhibit 4(c)
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
4(c) Term Loan Agreement, dated as of July 22, 1988, as amended, between The
Bank of New York, as trustee of the trust established under the EDO Corporation
Employee Stock Ownership Plan, and Fleet Bank as successor in interest to
NatWest Bank NA and Manufacturers Hanover Trust Company. Incorporated by
reference to Exhibit 4(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
4(d) Term Note, dated July 22, 1988, as amended, between The Bank of New York,
as trustee of the trust established under the EDO Corporation Employee Stock
Ownership Plan, and Fleet Bank as successor in interest to NatWest Bank NA and
Manufacturers Hanover Trust Company. Incorporated by reference to Exhibit 4(e)
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
4(e) Pledge and Security Agreement, dated as of July 22, 1988, as amended,
between The Bank of New York, as trustee of the trust established under the EDO
Corporation Employee Stock Ownership Plan, and Fleet Bank as successor in
interest to NatWest Bank NA and Manufacturers Hanover Trust Company.
Incorporated by reference to Exhibit 4(f) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
4(f) Amendment No. 6 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective March 27, 1993. Incorporated by reference to Exhibit 4(i) to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 26,
1993.
4(g) Amendment No. 7 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective March 3, 1994. Incorporated by reference to Exhibit 4(h) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1993.
4(h) Amendment No. 8 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective February 10, 1995. Incorporated by reference to Exhibit 4(h)
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1994.
4(i) Amendment No. 9 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective June 30, 1995. Incorporated by reference to Exhibit 4(i) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
4(j) Amendment No. 10 to the Guarantee Agreement referred to in Exhibit 4(b)
above, effective June 30, 1996. Incorporated by reference to Exhibit 4(j) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
10(a)* EDO Corporation 1996 Long-Term Incentive Plan. Incorporated by
reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
10(b)* EDO Corporation Executive Termination Agreements, as amended through
November 24, 1989, between the Company and two employees. Incorporated by
reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
10(c)* Executive Life Insurance Plan Agreements, as amended through January 23,
1990, between the Company and 30 employees and retirees. Incorporated by
reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
10(d)* Form of Directors' and Officers' Indemnification Agreements between EDO
Corporation and 14 current Company directors and officers. Incorporated by
reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
10(e) Consent Decree, entered on November 25, 1992, amongst the United States,
EDO Corporation, Plessey, Inc., Vernitron Corporation and Pitney Bowes, Inc.
Incorporated by reference to Exhibit 10(j) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
21 List of Subsidiaries.
23 Consent of Independent Auditors to the incorporation by reference in the
Company's Registration Statements on Form S-8 of their report included in Item
14(a)1 of this Annual Report on Form 10-K.
24 Powers of Attorney used in connection with the execution of this Annual
Report on Form 10-K.
27 Financial Data Schedule.
EXHIBIT 21
LIST OF SUBSIDIARIES
The following are subsidiaries of the Company, the respective jurisdictions of
their incorporation and names (if any) under which they do business. The
Company owns all of the voting securities (including directors' qualifying
shares owned beneficially by the Company) of each such subsidiary except the
Company owns only approximately 50% of EDO (Canada) Limited.
The names of particular subsidiaries of the Company have been omitted. When
considered in the aggregate as a single subsidiary, these omitted subsidiaries
do not constitute a "significant subsidiary" as such term is defined in Rule
1-02(v) of Regulation S-X of the Securities Exchange Act of 1934, as amended.
Jurisdiction Name Under Which
of Subsidiary
Name Incorporation Does Business
EDO Western Corporation Utah EDO Electro-Ceramics
Barnes Engineering Company Delaware EDO Barnes
EDO (Canada) Limited Canada
EDO Operations (Israel) Ltd. Israel
EDO Foreign Sales Corporation U.S. Virgin Islands
EDO Sports, Inc. Delaware
EDO Western International Corporation Delaware
EDO International Corporation Delaware
VT Technologies, Inc. Delaware
EDO Energy Corporation Delaware
EDO Automotive Natural Gas, Inc. Delaware
Exhibit 23
KPMG Peat Marwick LLP
Consent of Independent Auditors
The Board of Directors
EDO Corporation:
We consent to incorporation by reference in Registration Statement Nos.2-69243,
33-1526 and 33-28020 on Form S-8 of EDO Corporation of our report dated
February 13, 1998, relating to the consolidated balance sheets of EDO
Corporation and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997, which
report appears in the December 31, 1997 annual report on Form 10-K of EDO
Corporation.
KPMG PEAT MARWICK LLP
Jericho, New York
March 17, 1998
EXHIBIT 24
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Kenneth A. Paladino and Marvin
D. Genzer, and each of them, with full power of substitution, the undersigned's
true and lawful attorneys and agents to execute in his name and on his behalf,
in any and all capabilities, the Annual Report on Form 10-K of EDO Corporation
(the "Company"), a New York corporation, for the fiscal year ended December 31,
1997, and any and all other instruments which such attorneys and agents, or
either of them, deem necessary or advisable to enable the Company to comply
with the annual reporting requirements of the Securities Exchange Act of 1934,
as amended, and the rules, regulations and requirements of the Securities and
Exchange Commission; and the undersigned hereby ratifies and confirms as his
own act and deed all that such attorneys and agents, and each of them, shall do
or cause to be done by virtue hereof. Either of such attorneys and agents shall
have, and may exercise, all of the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned have subscribed their signatures this 20th
day of March, 1998.
Robert E. Allen
Robert Alvine
Mellon C. Baird
George M. Ball
Joseph F. Engelberger
Frank A. Fariello
William J. Frost
Marvin D. Genzer
Robert M. Hanisee
Michael J. Hegarty
Ira Kaplan
George A. Strutz, Jr.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 20,351
<SECURITIES> 13,851
<RECEIVABLES> 32,421
<ALLOWANCES> 352
<INVENTORY> 6,816
<CURRENT-ASSETS> 79,003
<PP&E> 62,105
<DEPRECIATION> 49,240
<TOTAL-ASSETS> 108,801
<CURRENT-LIABILITIES> 34,526
<BONDS> 39,685
<COMMON> 8,454
0
65
<OTHER-SE> 19,616
<TOTAL-LIABILITY-AND-EQUITY> 108,801
<SALES> 94,362
<TOTAL-REVENUES> 94,481
<CGS> 73,981
<TOTAL-COSTS> 86,945
<OTHER-EXPENSES> 50
<LOSS-PROVISION> 62
<INTEREST-EXPENSE> (2,297)
<INCOME-PRETAX> 7,027
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,900
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<CHANGES> 0
<NET-INCOME> 5,900
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.81
</TABLE>
