SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______to______
Commission file number 1-10596
ESCO ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
Missouri 43-1554045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8888 Ladue Road, Suite 200 63124-2090
St. Louis, Missouri (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (314) 213-7200
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
Number of common stock trust receipts outstanding at July 31, 1998:
12,449,018 receipts.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
Three Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 98,236 109,348
-------- -------
Costs and expenses:
Cost of sales 72,595 83,835
Selling, general and administrative expenses 16,966 17,063
Interest expense 2,021 1,935
Other, net 1,056 1,096
-------- -------
Total costs and expenses 92,638 103,929
-------- -------
Earnings before income taxes 5,598 5,419
Income tax expense 1,751 2,089
-------- -------
Net earnings $ 3,847 3,330
======== =======
Earnings per share: - Basic $ .32 .28
======== =======
- Diluted .31 .27
======== =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
Nine Months Ended
June 30,
1998 1997
---------- ---------
<S> <C> <C>
Net sales $262,343 267,058
-------- -------
Costs and expenses:
Cost of sales 190,077 202,158
Selling, general and administrative expenses 49,783 45,754
Interest expense 5,664 3,446
Other, net 2,774 2,895
-------- -------
Total costs and expenses 248,298 254,253
------- -------
Earnings before income taxes 14,045 12,805
Income tax expense 4,348 4,526
------- -------
Net earnings $ 9,697 8,279
======== =======
Earnings per share: - Basic $ .82 .70
======== =======
- Diluted .78 .68
======== =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
June 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 4,845 5,818
Accounts receivable, less allowance for doubtful
accounts of $536 and $462, respectively 52,376 48,612
Costs and estimated earnings on long-term
contracts, less progress billings of
$53,669 and $56,451, respectively 36,913 54,633
Inventories 88,550 45,110
Other current assets 4,253 2,794
------- -------
Total current assets 186,937 156,967
------- -------
Property, plant and equipment, at cost 145,041 135,002
Less accumulated depreciation and amortization 49,977 38,470
------- -------
Net property, plant and equipment 95,064 96,532
Excess of cost over net assets of purchased
businesses, less accumulated amortization
of $4,029 and $2,735, respectively 58,833 54,996
Deferred tax assets 43,875 48,510
Other assets 21,192 21,182
------- -------
$405,901 378,187
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 51,000 25,500
Accounts payable 38,575 38,238
Advance payments on long-term contracts, less costs
incurred of $1,317 and $1,624, respectively 6,846 6,348
Accrued expenses and other current liabilities 23,130 24,590
------- -------
Total current liabilities 119,551 94,676
------- -------
Other liabilities 26,441 28,548
Long-term debt 45,147 50,000
------- -------
Total liabilities 191,139 173,224
------- -------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, par value $.01 per share,
authorized 10,000,000 shares - -
Common stock, par value $.01 per share, authorized
50,000,000 shares; issued 12,639,345 and
12,478,328 shares, respectively 126 125
Additional paid-in capital 195,118 194,663
Retained earnings since elimination of
deficit of $60,798 at September 30, 1993 25,678 15,981
Cumulative foreign currency translation
adjustment (551) 196
Minimum pension liability (181) (181)
-------- --------
220,190 210,784
Less treasury stock, at cost; 635,445
and 689,945 common shares, respectively (5,428) (5,821)
-------- --------
Total shareholders' equity 214,762 204,963
------- -------
$405,901 378,187
======= =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
Nine Months Ended
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 9,697 8,279
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation and amortization 13,718 10,513
Changes in operating working capital,
net of acquired businesses (32,077) (17,609)
Other 4,221 5,333
------- -------
Net cash provided (used) by operating
activities (4,441) 6,516
------- -------
Cash flows from investing activities:
Capital expenditures ( 9,839) (7,518)
Acquisition of businesses, less cash
acquired ( 4,722) (92,900)
-------- --------
Net cash used by investing activities (14,561) (100,418)
-------- ---------
Cash flows from financing activities:
Net increase in short-term borrowings 24,476 33,000
Proceeds from long-term debt - 60,000
Principal payments on long-term debt (5,113) (14,675)
Other (1,334) (631)
-------- --------
Net cash provided by financing activities 18,029 77,694
------- -------
Net decrease in cash and cash equivalents (973) (16,208)
Cash and cash equivalents, beginning of period 5,818 22,209
-------- --------
Cash and cash equivalents, end of period $ 4,845 6,001
======= =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements, in the
opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results for
the interim periods presented. The condensed consolidated financial
statements are presented in accordance with the requirements of Form 10-Q
and consequently do not include all the disclosures required by generally
accepted accounting principles. For further information refer to the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended
September 30, 1997. Certain prior year amounts have been reclassified to
conform with the fiscal 1998 presentation.
The results for the three and nine month periods ended June 30, 1998 are
not necessarily indicative of the results for the entire 1998 fiscal year.
2. Earnings Per Share
Basic earnings per share is calculated using the weighted average number
of common shares outstanding during the period. Diluted earnings per
share is calculated using the weighted average number of common shares
outstanding during the period plus shares issuable upon the assumed
exercise of dilutive common share options and performance shares by using
the treasury stock method. The number of shares used in the calculation
of earnings per share for each period presented is as follows (in
thousands):
<TABLE>
Three Months Ended Nine Months ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average Shares
Outstanding - Basic 11,965 11,804 11,880 11,810
Dilutive Options and
Performance Shares 534 415 535 424
------ ------ ------ ------
Adjusted Shares - Diluted 12,499 12,219 12,415 12,234
====== ====== ====== ======
</TABLE>
Options to purchase 77,500 shares of common stock at approximately
$18.00 - $19.22 per share and options to purchase 163,750 shares of
common stock at $12.38 were outstanding during the nine month periods
ended June 30, 1998 and June 30, 1997, respectively, but were not
included in the respective computations of diluted EPS because the
options exercise price was greater than the average market price of the
common shares. These options expire in 2007 and 2008. Approximately
113,000 and 334,000 performance shares were outstanding but unearned at
June 30, 1998, and 1997, respectively, and therefore, were not included
in the respective computations of diluted EPS. The unearned performance
shares expire in 2001.
3. Inventories
Inventories consist of the following (dollars in thousands):
<TABLE>
June 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Finished Goods $ 8,670 8,542
Work in process, including long-term
contracts 64,177 22,971
Raw materials 15,703 13,597
------ ------
Total inventories $88,550 45,110
====== ======
</TABLE>
Under the contractual arrangements by which progress payments are
received, the U.S. Government has a security interest in the inventories
associated with specific contracts. Inventories are net of progress
payment receipts of $3.1 million and $3.2 million at June 30, 1998 and
September 30, 1997, respectively. The increase in inventories
(work-in-process) is primarily related to the TUNNER program at SEI, as
well as a normal inventory build-up at the other operating units
necessary to satisfy the increased sales requirements for the remaining
three months of fiscal 1998.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations - Three months ended June 30, 1998 compared with
three months ended June 30, 1997.
Net sales of $98.2 million for the third quarter of fiscal 1998 decreased
$11.1 million (10.2%) from net sales of $109.3 million for the third quarter
of fiscal 1997. The sales decrease in the current quarter reflects lower
defense sales at Systems & Electronics Inc. (SEI) resulting from the timing
of the receipt of defense orders. This decrease was partially offset by
additional commercial sales at PTI and Filtertek. Commercial sales were
$55.1 million (56.1%) and defense sales were $43.1 million (43.9%) for the
third quarter of fiscal 1998, compared with commercial and defense sales of
$56.5 million (51.7%) and $52.8 million (48.3%), respectively, in the third
quarter of fiscal 1997. Commercial sales decreased ($1.4 million, net) in
the third quarter of fiscal 1998 compared with the third quarter of fiscal
1997 due to lower U.S. Postal Service sales at SEI, partially offset by
an increase in filtration/fluid flow products at PTI and Filtertek.
Order backlog at June 30, 1998 was $285.3 million, compared with
$253.4 million at March 31, 1998. During the fiscal 1998 third quarter, new
orders aggregating $130.1 million were received, compared with
$88.0 million (48% increase) in the third quarter of fiscal 1997. The most
significant orders in the current period were for electric utility
communication and automatic meter reading systems, filtration/fluid flow
products, long-lead funding for the 60K/TUNNER aircraft loader program,
U.S. Postal Service equipment, and electronic test equipment.
The gross profit percentage was 26.1% in the third quarter of fiscal 1998
and 23.3% in the third quarter of fiscal 1997. The gross margin increased
in the third quarter of fiscal 1998 due to an improved sales mix throughout
the Company.
Selling, general and administrative (SG&A) expenses for the third quarter of
fiscal 1998 were $17.0 million, or 17.3% of net sales, compared with
$17.1 million, or 15.6% of net sales, for the same period a year ago. The
percentage increase is the result of the lower sales level in fiscal 1998.
Interest expense increased to $2.0 million in fiscal 1998 from
$1.9 million in fiscal 1997 as a result of higher average outstanding
borrowings in the current period. A significant amount of the outstanding
borrowings in both periods presented were incurred in conjunction with the
1997 acquisition of Filtertek.
Other costs and expenses, net, were $1.1 million in the third quarter of
fiscal 1998, consistent with the $1.1 million in the same period of fiscal
1997.
The effective income tax rate in the third quarter of fiscal 1998 was 31.3%
compared to 38.5% in the third quarter of fiscal 1997. The lower effective
tax rate is primarily attributable to the earnings contributed from the
Company's foreign operations.
Results of Operations - Nine months ended June 30, 1998 compared with nine
months ended June 30, 1997
Net sales of $262.3 million for the first nine months of fiscal 1998
decreased $4.8 million (1.8%) from net sales of $267.1 million for the first
nine months of fiscal 1997. The decrease primarily reflects lower defense
sales at SEI. This decrease was partially offset by additional commercial
sales resulting from the Filtertek acquisition ($26.4 million net increase)
and higher volume at EMC Test Systems and PTI. Commercial sales were
$145.9 million (55.6%) and defense sales were $116.4 million (44.4%) for the
first nine months of fiscal 1998, compared with commercial and defense sales
of $122.1 million (45.7%) and $145 million, (54.3%) respectively,
in the first nine months of fiscal 1997.
The order backlog at June 30, 1998 was $285.3 million, compared with
$228.2 million at September 30, 1997. During the first nine months of fiscal
1998, new orders aggregating $319.4 million were received, compared with
$240.6 million (32.8% increase) in the first nine months of fiscal 1997. The
most significant orders in the current period were for filtration/fluid flow
products, electric utility communication and automatic meter reading systems,
long-lead funding for the 60K/TUNNER aircraft loader program, M1000 tank
transporters, airborne radar systems, and fire support mission equipment.
The gross profit percentage was 27.5% in the first nine months of fiscal 1998
and 24.3% in the first nine months of fiscal 1997. The fiscal 1998 gross
profit percentage increased from fiscal 1997 due to an improved sales mix
throughout the Company.
Selling, general and administrative expenses for the first nine months of
fiscal 1998 were $49.8 million, or 19.0% of net sales, compared with
$45.8 million or 17.1% of net sales, for the same period a year ago. The
increase in fiscal 1998 SG&A expenses is primarily due to the inclusion of
Filtertek for the entire period of fiscal 1998 as compared to a partial
period of fiscal 1997 as the acquisition was completed February 7, 1997.
Interest expense increased to $5.7 million from $3.4 million as a result of
higher average outstanding borrowings in fiscal 1998 compared to fiscal 1997.
A significant amount of the outstanding borrowings in 1998 were incurred in
conjunction with the February 1997 acquisition of Filtertek.
Other costs and expenses, net, were $2.8 million in the first nine months of
fiscal 1998, consistent with the $2.9 million in the same period of fiscal
1997.
The effective income tax rate in the first nine months of fiscal 1998 was
31.0% compared with 35.3% for the first nine months of fiscal 1997. The lower
effective tax rate for the first nine months of fiscal 1998 is attributable
to the earnings contributed from the Company's Puerto Rican and other foreign
operations, and refunds received relating to the resolutions of state and
local tax matters. Management estimates the annual effective tax rate for
fiscal 1998 to be approximately 31%.
Financial Condition
Working capital increased to $67.4 million at June 30, 1998 from
$62.3 million at September 30, 1997. During the first nine months of fiscal
1998: accounts receivable increased by $3.8 million as a result of the timing
of sales and deliveries throughout the period; costs and estimated earnings
on long-term contracts and inventories increased in the aggregate by
$25.7 million in support of near-term production requirements
(primarily 60K/TUNNER); and accounts payable and accrued expenses decreased
by $1.0 million due to the timing of payments.
Net cash used by operating activities was $4.4 million in the first nine
months of fiscal 1998. Net cash generated by operating activities was
$6.5 million in the same period of fiscal 1997. The 1998 cash usage was
primarily due to the inventory requirements discussed in the previous
paragraph.
Capital expenditures were $9.8 million in the first nine months of fiscal
1998 compared with $7.5 million in the comparable period of fiscal 1997.
Major expenditures in the current period included manufacturing equipment at
Filtertek and PTI.
On December 31, 1997, the Company completed the purchase of Euroshield OY for
consideration which included $3.5 million in cash. Euroshield, based in Eura,
Finland, designs and manufactures high quality shielding products used in the
electromagnetic compatibility (EMC) industry.
The Year 2000 Issue
The Year 2000 (Y2K) issue refers to the inability of a date-sensitive computer
program to recognize a two-digit date field designated as "00" as the year
2000. Mistaking "00" for 1900 could result in a system failure or
miscalculations causing disruptions to operations, including manufacturing,
a temporary inability to process transactions, send invoices, or engage in
other normal business activities. This is a significant issue for most, if
not all, companies with far reaching implications, some of which cannot be
anticipated or predicted with any degree of certainty.
The Company is currently assessing the magnitude of its Y2K issue and has
already determined that it may be required to modify or replace certain
portions of its software so that its computer systems will be able to
function properly beyond December 31, 1999. This may require software
replacement, reprogramming or other remedial action. The Company is also
communicating with its suppliers and customers to determine the extent of
the Company s vulnerability to the failure of third parties to remediate
their own Y2K issue.
In conjunction with this assessment, the Company is finalizing its action
plans to address the Y2K issue, including contingencies to address unforeseen
problems. The Company plans to use both internal and external resources to
complete Y2K reprogramming, software replacement and testing. Preliminary
plans anticipate completion of the Y2K remedial work by September 30, 1999.
To date, the company has incurred approximately $1.25 million related to the
Y2K remedial work. The total cost of the Y2K remedial work is estimated to be
less than $5 million and will be expensed as incurred over the next
15 months.
The expected costs of the project and the date on which the Company plans to
complete the Y2K remediation work are based on management s best estimates,
which were derived from numerous assumptions about future events, including
the availability of certain resources, third-party modification plans, and
other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
Specific factors that might cause material differences include, but are not
limited to, the availability and cost of personnel trained in this area and
the ability to identify and correct all relevant computer codes.
Forward Looking Statements
Statements in this report that are not strictly historical are "forward
looking" statements within the meaning of the safe harbor provisions of the
federal securities laws. Investors are cautioned that such statements are
only predictions, and speak only as of the date of this report. Actual
results may differ due to risks and uncertainties which are described in the
Company's Form 10-K for fiscal year 1997, on page 37 of the 1997 Annual
Report to Shareholders and in The Year 2000 Issue section above.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit
Number
4 Credit Agreement dated as of September 23, 1990
(as most recently amended and restated as of
February 7, 1997 and amended as of May 6, 1997,
November 21, 1997 and June 29, 1998)among the
Company, Defense Holding Corp., the Banks listed
therein and Morgan Guaranty Trust Company of
New York, as agent.
10(a) Notice of Award - stock award to executive
officer
10(b) Notice of Award - stock award to executive
officer
b) Reports on Form 8-K There were no reports on Form 8-K filed
during the quarter ended June 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCO ELECTRONICS CORPORATION
/s/Philip M. Ford
-----------------
Philip M. Ford
Senior Vice President
and Chief Financial Officer
(as duly authorized officer
and principal financial
Dated: August 13, 1998 officer of the registrant)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,845
<SECURITIES> 0
<RECEIVABLES> 52,912<F1>
<ALLOWANCES> 536
<INVENTORY> 88,550
<CURRENT-ASSETS> 186,937
<PP&E> 145,041
<DEPRECIATION> 49,977
<TOTAL-ASSETS> 405,901
<CURRENT-LIABILITIES> 119,551
<BONDS> 0
0
0
<COMMON> 126
<OTHER-SE> 214,636
<TOTAL-LIABILITY-AND-EQUITY> 405,901
<SALES> 262,343
<TOTAL-REVENUES> 262,343
<CGS> 190,077
<TOTAL-COSTS> 239,860
<OTHER-EXPENSES> 2,774
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,664
<INCOME-PRETAX> 14,045
<INCOME-TAX> 4,348
<INCOME-CONTINUING> 9,697
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,697
<EPS-PRIMARY> .82
<EPS-DILUTED> .78
<FN>
<F1>THIS NUMBER DOES NOT INCLUDE $36.9 MILLION OF COSTS AND ESTIMATED EARNINGS ON
LONG-TERM CONTRACTS
</FN>
</TABLE>
EXECUTION COPY
THIRD AMENDMENT dated as of June 29, 1998,
to the Credit Agreement dated as of
September 23, 1990 (as amended and restated as
of February 7, 1997), as amended by the
Amendments dated as of May 6, 1997, and
November 21, 1997 (the "Credit Agreement"),
among ESCO ELECTRONICS CORPORATION, a Missouri
corporation ("ESCO"), DEFENSE HOLDING CORP., a
Delaware corporation (the "Borrower"), the BANKS
party thereto (the "Banks") and MORGAN GUARANTY
TRUST COMPANY OF NEW YORK, as Agent (the
"Agent").
A. Capitalized terms used and not otherwise defined
herein shall have the meanings assigned to them in the Credit
Agreement, as amended hereby.
B. ESCO and the Borrower have requested that certain
provisions of the Credit Agreement be amended as set forth herein.
The Banks are willing to so amend the Credit Agreement subject to
the terms and conditions set forth herein.
Accordingly, in consideration of the mutual agreements
herein contained and other good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, the
parties hereto hereby agree as follows:
SECTION 1. Amendments. (a) Section 1.01 of the Credit
Agreement is hereby amended to add the following definitions:
"AMT" means Advanced Membrane Technology, Inc., a
California corporation.
"AMT Investment" means the acquisition by a Wholly-
Owned Consolidated Subsidiary of all of the outstanding
common stock of AMT in exchange for consideration of
approximately $15,000,000 (adjusted upward to reflect AMT's
cash at closing and downward to reflect AMT's debt at
closing) payable approximately 45% in cash and 55% in shares
of common stock of ESCO.
(b) Article II of the Credit Agreement is hereby
amended and restated by adding the following Section 2.17 at the
end of such Article:
SECTION 2.17. Conversion. Effective upon the
consummation of the AMT Investment, (a) Working Capital
Borrowings in an aggregate principal amount of $7,000,000
shall be automatically converted into Term Borrowings and (b)
the Working Capital Commitments shall be ratably reduced by
$7,000,000. Prior to the date of such conversion, the
Borrower shall notify the Agent in writing of the Working
Capital Borrowing or Borrowings (or portions thereof) that
are to be converted pursuant to the preceding sentence. The
conversion of each such Borrowing (or portion thereof) shall
be allocated ratably to the Loans included in such Borrowing.
If the aggregate principal amount of outstanding Working
Capital Loans would be less than $7,000,000 on the date that
such conversion is to be made pursuant to the first sentence
of this Section, then the Borrower shall borrow additional
Working Capital Loans so that there are not less than
$7,000,000 in aggregate principal amount of Working Capital
Loans outstanding at the time of such conversion.
Notwithstanding the foregoing, no such conversion shall
become effective until receipt by the Security Agent of an
amendment to each mortgage, deed of trust, assignment of
leases or similar instrument or document required by law or
reasonably requested by the Security Agent (all in form and
substance reasonably satisfactory to the Required Banks) to
be filed, registered or recorded in order to maintain in
favor of the Security Agent (or a trustee on its behalf) for
the benefit of the Banks a valid, legal and perfected first
priority security interest in or lien on the real property
(and improvements thereon) owned by the Borrower or any
Specified Subsidiary and identified on Schedule 3.01(j) to
the Credit Agreement, in each case duly executed and
delivered by each mortgagor, grantor or pledgor thereunder.
(c) Section 5.09 of the Credit Agreement is hereby
amended by deleting the words "clause (f), (l) or (n)" from the
second sentence thereof and substituting the words "clause (f),
(l), (n) or (o)".
(d) Section 5.11(a) of the Credit Agreement is hereby
amended by replacing the period at the end of clause (xiv) thereof
with a semicolon and by adding the following clauses (xv) and (xvi)
at the end of such Section:
(xv) Debt of any Subsidiary acquired pursuant to an
acquisition consummated in reliance upon clause (f) or (o) of
Section 5.16; provided that (A) such Debt is outstanding at
the time of and is not incurred in contemplation of such
acquisition and (B) the aggregate principal amount of Debt at
any time outstanding under this clause (xv) shall not exceed
$1,000,000; and
(xvi) Debt incurred by DCS to finance the purchase of
real property and improvements thereon to be used by DCS as
its headquarters, and any Guarantee of such Debt by ESCO;
provided that the aggregate principal amount of such Debt of
DCS at any time outstanding under this clause (xvi) shall not
exceed $2,500,000.
(e) Section 5.16 of the Credit Agreement is hereby
amended by replacing the period at the end of clause (n) thereof
with "; and" and adding the following clause (o) at the end of such
Section:
(o) if at the time thereof and after giving effect
thereto no Default shall have occurred and be continuing, an
Investment by a Wholly-Owned Consolidated Subsidiary
consisting of the AMT Investment; provided that the cash
portion of the consideration for such Investment made
pursuant to this clause (o) and any Debt of AMT remaining
outstanding after the AMT Acquisition shall be treated as an
Investment made pursuant to clause (f) of this Section for
purposes of determining compliance with the limitations of
such clause (f).
(f) Section 5.17 of the Credit Agreement is hereby
amended by replacing the period at the end of clause (n) thereof
with "; and" and adding the following clause (o) at the end of such
Section:
(o) Liens on the real property and improvements referred
to in clause (xvi) of Section 5.11(a) securing Debt of DCS
permitted by such clause.
(g) Section 5.23 of the Credit Agreement is hereby
amended and restated as follows:
SECTION 5.23. Leverage Ratio. The Leverage
Ratio will not exceed (i) 0.70 to 1.00 at any date prior to
October 1, 1999, or (ii) 0.65 to 1.00 at any date on or after
October 1, 1999.
SECTION 2. Representations and Warranties. Each of
ESCO and the Borrower hereby represents and warrants to each Bank,
on and as of the date hereof, that:
(a) This Third Amendment has been duly authorized,
executed and delivered by each of ESCO and the Borrower, and each
of this Third Amendment and the Credit Agreement as amended by this
Third Amendment constitutes a legal, valid and binding obligation
of each of ESCO and the Borrower, enforceable in accordance with
its terms.
(b) The representations and warranties of ESCO, the
Borrower and its Subsidiaries contained in the Credit Agreement and
in each other Loan Document are true and correct in all respects
with the same effect as if made on and as of the date hereof,
except to the extent that such representations and warranties
expressly relate to an earlier date.
(c) After giving effect to this Third Amendment, no
Default has occurred and is continuing.
SECTION 3. Effectiveness. This Third Amendment shall
become effective upon receipt by the Agent of counterparts hereof
signed by each of ESCO, the Borrower and each Bank.
SECTION 4. Miscellaneous. (a) This Third Amendment
constitutes the entire agreement and understanding of the parties
with respect to the subject matter hereof and supersedes any and
all prior agreements and understandings, oral or written, relating
to the subject matter hereof.
(b) Section headings used herein are for convenience
of reference only and are not to affect the construction of, or to
be taken into consideration in interpreting, this Third Amendment.
(c) This Third Amendment shall be construed in
accordance with and governed by the law of the State of New York.
(d) Each reference to a party hereto shall be deemed
to include its successors and assigns, all of whom shall be bound
by this Third Amendment and to whose benefit the provisions of this
Third Amendment shall inure.
(e) This Third Amendment may be executed in any number
of counterparts, each of which shall be an original but all of
which, when taken together, shall constitute but one instrument.
(f) Except as specifically amended or modified hereby,
the Credit Agreement shall continue in full force and effect in
accordance with the provisions thereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Third Amendment to be duly executed by their respective authorized
officers as of the date first above written.
ESCO ELECTRONICS CORPORATION
DEFENSE HOLDING CORP.
MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, individually and as Agent
NATIONSBANK, N.A.
THE BANK OF NEW YORK
THE BANK OF NOVA SCOTIA
NATIONAL CITY BANK
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
SANWA BUSINESS CREDIT CORPORATION
NOTICE OF AWARD
To: Walter Stark
From: Human Resources and Ethics Committee of the Board of
Directors of ESCO Electronics Corporation (Committee)
Subject: Award of Restricted Shares
1. Award. The Committee has awarded to you 9,000 Shares of Company
Stock (as hereinafter defined), subject to the terms hereinafter set
forth.
2. Terms. The following are the terms of the Award:
a) During the period commencing on the date hereof and ending
on September 30, 2001 (the Restriction Period ) you must remain employed
by the Company. If during the Restriction Period you terminate employment
for any reason other than death or disability, you will forfeit the
shares of Company Stock awarded hereunder. If, during the Restriction
Period, you terminate employment on account of death or disability (as
determined by the Board), you (or your estate) shall become fully vested
in the shares of Company Stock awarded hereunder and the employment
requirement of this subparagraph (a) shall cease to apply.
b) During the Restriction Period, the certificates representing
the shares of Company Stock awarded hereunder shall be held by an escrow
agent selected by the Company. At the end of the Restriction Period (or
upon your earlier termination of employment on account of death or
disability as determined under subparagraph (a), above, or upon a change
of Control under the circumstances described in subparagraph (c), below)
the escrow agent shall deliver such certificates to you (or to your
estate). During the Restriction Period you will be entitled to all
dividends paid on the shares of Company Stock awarded hereunder and you
will be entitled to instruct the escrow agent how to vote such shares.
c) If there is a Change of Control (as hereinafter defined) and
you are employed by the Company on the date of the Change of Control, you
will become fully vested in the shares of Company stock awarded hereunder
and the employment requirement of subparagraph (b) shall cease to apply.
3. Definitions
a) Change of Control shall mean:
i) The purchase or other acquisition (other than from the
Company) by any persons, entity or group of persons, within the meaning
of Section 13 (d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the Exchange Act ) (excluding, for this purpose, the Company or
its subsidiaries or any employee benefit plan of the Company or its
subsidiaries), of the beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 50% or more of either the
then-outstanding shares of Common Stock of the Company or the combined
voting power of the Company s then-outstanding voting securities entitled
to vote generally in the election of directors; or
ii) Individuals who, as of the date hereof, constitute the
Board (as the date hereof, the Incumbent Board ) cease for any reason to
constitute at least a majority of the Board, provided that any person who
becomes a director subsequent to the date hereof whose election, or
nomination for election by the Company s shareholders, was approved by a
vote of at least a majority of the directors then comprising the
Incumbent Board (other than an individual whose initial assumption of
office is in connection with an actual or threatened election contest
relating to the election of directors of the Company, as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act)
shall be, for purposes of this section, considered as though such person
were a member of the Incumbent Board; or
iii) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case with respect to
which persons who were the stockholders of the Company immediately prior
to such reorganization, merger or consolidation do not, immediately
thereafter, own more than 50% of respectively, the common stock and the
combined voting power entitled to vote generally in the elections of
directors of the reorganized, merged or consolidated corporations then-
outstanding voting securities, or of a liquidation or dissolution of the
Company or of the sale of all substantially all of the assets of the
Company.
b) Company Stock means common stock of the Company as well as
common stock trust receipts issued pursuant to the Deposit and Trust
Agreement dated September 24, 1990 among the Company, Emerson Electric
Co. and Boatmen s Trust Company, as Trustee
4. Amendment. The Award may be amended by written consent between
the Company and you.
Executed this 22 day of May 1998
ESCO ELECTRONICS CORPORATION
BY: Deborah J. Hanlon
ATTEST: D. J. Moore, Secretary
AGREED TO AND ACCEPTED:
Walter Stark
NOTICE OF AWARD
To: Philip M. Ford
From: Human Resources and Ethics Committee of the Board of
Directors of ESCO Electronics Corporation ( Committee )
Subject: Award of Restricted Shares
1. Award. The Committee has awarded to you 9,000 Shares of Company
Stock (as hereinafter defined), subject to the terms hereinafter set
forth.
2. Terms. The following are the terms of the Award:
a) During the period commencing on the date hereof and ending
on September 30, 2001 (the Restriction Period ) you must remain employed
by the Company. If during the Restriction Period you terminate employment
for any reason other than death or disability, you will forfeit the
shares of Company Stock awarded hereunder. If, during the Restriction
Period, you terminate employment on account of death or disability (as
determined by the Board), you (or your estate) shall become fully vested
in the shares of Company Stock awarded hereunder and the employment
requirement of this subparagraph (a) shall cease to apply.
b) During the Restriction Period, the certificates representing
the shares of Company Stock awarded hereunder shall be held by an escrow
agent selected by the Company. At the end of the Restriction Period (or
upon your earlier termination of employment on account of death or
disability as determined under subparagraph (a), above, or upon a change
of Control under the circumstances described in subparagraph (c), below)
the escrow agent shall deliver such certificates to you (or to your
estate). During the Restriction Period you will be entitled to all
dividends paid on the shares of Company Stock awarded hereunder and you
will be entitled to instruct the escrow agent how to vote such shares.
c) If there is a Change of Control (as hereinafter defined) and
you are employed by the Company on the date of the Change of Control, you
will become fully vested in the shares of Company stock awarded hereunder
and the employment requirement of subparagraph (b) shall cease to apply.
3. Definitions
a) Change of Control shall mean:
i) The purchase or other acquisition (other than from the
Company) by any persons, entity or group of persons, within the meaning
of Section 13 (d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the Exchange Act ) (excluding, for this purpose, the Company or
its subsidiaries or any employee benefit plan of the Company or its
subsidiaries), of the beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 50% or more of either the
then-outstanding shares of Common Stock of the Company or the combined
voting power of the Company s then-outstanding voting securities entitled
to vote generally in the election of directors; or
ii) Individuals who, as of the date hereof, constitute the
Board (as the date hereof, the Incumbent Board ) cease for any reason to
constitute at least a majority of the Board, provided that any person who
becomes a director subsequent to the date hereof whose election, or
nomination for election by the Company s shareholders, was approved by a
vote of at least a majority of the directors then comprising the
Incumbent Board (other than an individual whose initial assumption of
office is in connection with an actual or threatened election contest
relating to the election of directors of the Company, as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act)
shall be, for purposes of this section, considered as though such person
were a member of the Incumbent Board; or
iii) Approval by the stockholders of the Company of a
reorganization, merger or consolidation, in each case with respect to
which persons who were the stockholders of the Company immediately prior
to such reorganization, merger or consolidation do not, immediately
thereafter, own more than 50% of respectively, the common stock and the
combined voting power entitled to vote generally in the elections of
directors of the reorganized, merged or consolidated corporations then-
outstanding voting securities, or of a liquidation or dissolution of the
Company or of the sale of all substantially all of the assets of the
Company.
b) Company Stock means common stock of the Company as well as
common stock trust receipts issued pursuant to the Deposit and Trust
Agreement dated September 24, 1990 among the Company, Emerson Electric
Co. and Boatmen s Trust Company, as Trustee
4. Amendment. The Award may be amended by written consent between
the Company and you.
Executed this 22 day of May 1998
ESCO ELECTRONICS CORPORATION
BY: Deborah J. Hanlon
ATTEST: D. J. Moore, Secretary
AGREED TO AND ACCEPTED:
Walter Stark
