<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the year ended October 31, 1995 Commission file number 0-13880
ENGINEERED SUPPORT SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Missouri 43-1313242
(State of Incorporation) (IRS Employer Identification No.)
1270 North Price Road, St. Louis, Missouri 63132
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (314) 993-5880
Securities registered pursuant to Section 12(b) of the Securities Exchange
Act of 1934:
Name of each exchange on
Title of each class which registered
------------------- ----------------------------
Common stock, $.01 par value Over the counter
National Market System
National Association of
Security Dealers
No securities are registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934.
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
---- ----
Based on the closing price of January 12, 1996, the aggregate market value
of the voting stock held by nonaffiliates of the Registrant was
approximately $11,327,000.
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at January 12, 1996 was 2,986,126.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II incorporate by reference portions of the Engineered Support
Systems, Inc. Annual Report to Shareholders (the Annual Report) for the
year ended October 31, 1995. Part III incorporates by reference portions of
the Engineered Support Systems, Inc. Proxy Statement for the Annual
Shareholders Meeting to be held on March 6, 1996 (the Definitive Proxy
Statement) to be filed within 120 days after the close of the year ended
October 31, 1995.
<PAGE> 2
PART I
Item 1. BUSINESS
- ----------------
Engineered Support Systems, Inc. (Company) is a holding company for two
wholly-owned subsidiaries: Engineered Air Systems, Inc. (Engineered Air)
and Engineered Specialty Plastics, Inc. (ESP).
Engineered Air is a military ground support equipment contractor which
specializes in designing, marketing and manufacturing nuclear, biological
and chemical defense systems; air conditioning and heating systems; water
and petroleum distribution systems; and other ground support equipment.
This equipment is designed to be used in any location where U.S. forces may
be deployed. It is designed for rapid deployment and multi-purpose use in
remote locations. Substantially all of Engineered Air's revenues have come
from the sale of equipment to the Department of Defense (DOD) and defense
contractors. ESP is a manufacturer of injection molded plastic products
used primarily in consumer goods such as television cabinets, computer
terminals, communication and word processing equipment, automotive
components, lawn and garden equipment, medical devices and containers for
the food processing industry. ESP also produces Lifetime Faucets, a
proprietary line of nonmetallic faucets.
Engineered Air was incorporated under the laws of the State of Missouri on
December 24, 1981, and acquired the assets of the Defense Systems Division
of Allis-Chalmers Corporation on March 30, 1982. The Company was
incorporated under the laws of the State of Missouri in December 1983, and
exchanged all of its outstanding common stock for two-thirds of the common
stock of Engineered Air held by the Company'S founders. The Company
purchased the remaining one-third of the common stock of Engineered Air in
January 1984, effective as of November 1, 1983. The Company became a
publicly-owned corporation on August 21, 1985. On March 9, 1993, the
Company purchased all of the outstanding stock of Associated Products, Inc.
(subsequently changed to Engineered Specialty Plastics, Inc.) from an
investor group.
Marketing
- ---------
Engineered Air's marketing activities focus on determining the current and
future needs of the U.S. military for ground support equipment and systems.
To identify those needs, the Company gathers information from primary
sources such as the DOD budget and its supporting documents, and military
requirement documents such as the Air Force's Statement of Need, the Navy's
Operational Requirements and the Army's Required Operational Capability.
The Company believes its ability to identify and respond quickly to
changing military needs enhances Engineered Air's ability to obtain new
contracts. The Company believes its defense operations are to some extent
insulated from the effect of reductions or elimination of specific military
programs because of the relative stability of the demand for military
ground support equipment and Engineered Air's ability to provide a wide
variety of products to that market. This is especially true with the recent
trend of the Government away from nuclear threats and toward support for
our conventional forces, with an emphasis on mobility and rapid deployment
as evidenced by U.S. participation in the Bosnian conflict.
<PAGE> 3
ESP's principal customers are large, well-established producers of consumer
products. (For the year ended October 31, 1995, 45% of ESP sales were to
one customer). Sales of custom molded plastic products are both direct and
through sales representatives. Customers typically submit sample parts and
drawings to ESP for quotations. An accepted quote sheet is formalized and
becomes the contract. Contracts can be canceled on 30 days notice.
A significant portion of ESP sales are within the television industry,
which remains strong. In recognition of a trend toward larger sets, a
significant capital investment has been made in equipment capable of
producing larger television cabinets. The Company also anticipates that
sales for ESP will continue to be strong within the office equipment
market. Custom molded parts for computer terminals, communication and word
processing equipment represent a significant portion of sales volume.
However, ESP is capable of producing a wide variety of custom molded
products including automotive parts, medical apparatus, electronic
switching equipment, electrical appliances, and most small electronic
devices. Sales of its proprietary line of kitchen and lavatory faucets are
primarily through sales representatives, and focus on service and price.
Engineering
- -----------
Engineered Air has approximately 16 persons engaged in activities for the
development of new products and the improvement of existing products.
Essentially all of Engineered Air's development activities are conducted
pursuant to U.S. Government contracts in response to designated performance
specifications. The Company's own expenditures on research and development
were insignificant during the three-year period ended October 31, 1995.
Engineering capabilities include expertise in thermodynamics, air flow and
liquid pumping, stress analysis, liquid fuel combustion, dynamic and
climatic environmental engineering, biological and chemical
decontamination, non-pyrotechnic smoke generation, and filtration of
nuclear, biological and chemical contamination.
The design phase of Engineered Air's product development activities is
enhanced by use of a computer-aided design and manufacturing system. This
system is used by engineers and draftsmen to design complex products and
component parts in three-dimensional views, and minimizes the need for
time-consuming manual methods of prototype development. Engineered Air's
engineering staff and CAD/CAM system provide it with the ability to adapt
its production process to new product needs on a timely basis.
Engineered Air maintains extensive laboratory facilities used for
supporting engineering development and production operations. These include
test facilities for measurement of product performance from -65 degrees to
+140 degrees and a completely equipped prototype shop. Engineered Air also
has the capability to provide complete technical data support for the
products it manufactures. This includes integrated logistics support,
provisioning and preparation of technical manuals.
<PAGE> 4
Manufacturing and Procurement
- -----------------------------
Engineered Air manufactures certain components for its products and systems
including fabricated metal cabinets, control panels and frames. However, a
significant portion of parts and materials for the products manufactured
by Engineered Air are purchased from third party suppliers. Engineered Air
believes that the materials and services it requires are readily available
through competitive sources and that it is not dependent upon any one
particular subcontractor or vendor. Engineered Air is qualified by the U.S.
Government to the military quality control specification MIL-I-45208, which
applies to all contracts currently in progress.
EPS's principal competitive advantage lies in the fact that it is
vertically integrated, with the manufacturing facilities to both mold and
finish plastic to high quality specifications. ESP operates 30 injection
molding machines ranging in size from 45 to 1,500 tons of clamp pressure.
Material handling capacity is achieved through five silos with a combined
capacity exceeding 200,000 pounds, a central vacuum loading system, blend
mixers, and a computer-integrated MRP system. Finishing equipment is "state
of the art" and includes a 650 foot paint conveyor, 20 paint spray booths,
drying ovens, hot stamp machines, pad printing machines, silk screen
machines, a 150 foot motorized assembly line and sonic welders.
ESP also manufactures and distributes Lifetime Faucets, a proprietary line
of plastic lavatory and kitchen faucets. ESP subcontracts the assembly and
packaging of these faucets to an outside vendor. Assembly supervision, as
well as molding requirements, are maintained by ESP.
Products
- --------
Products are manufactured by the Company within two industry segments:
military ground support equipment produced by Engineered Air and custom
molded plastic products produced by ESP. Pages 3 and 14 of the 1995 Annual
Report to shareholders are incorporated herein by reference.
The Company has manufactured over 40 distinct products for the U.S.
Government during the past five years. The fluctuations in revenues by
product from period to period result primarily from changes in DOD
requirements. As a result, period to period comparisons of revenues by
product may not be meaningful.
Government Contracting
- ----------------------
The Company's government contracts are obtained through the DOD procurement
process as governed by the Federal Acquisition Regulations and related
agency supplements, and are typically fixed-priced contracts. This means
that the price is agreed upon before the contract is awarded and the
Company assumes complete responsibility for any difference between
estimated and actual costs. Other important considerations in government
contracting are discussed herein.
Under the Truth in Negotiations Act of 1962 (the Act), the U.S. Government
has the right for three years after final payment on certain negotiated
contracts, subcontracts and modifications thereto, to determine whether the
Company furnished the U.S. Government with complete, accurate and current
cost or pricing data as defined by the Act. In the event the Company fails
<PAGE> 5
to satisfy this requirement, the U.S. Government has the right to adjust a
contract or subcontract price by the amount of any overstatement as defined
by the Act.
U.S. Government contracts typically contain terms permitting the contract
to be terminated at the convenience of the U.S. Government. In the event of
such termination, the Company is entitled to reimbursement for certain
expenditures and overhead as provided for in applicable U.S. Government
procurement regulations. Generally, this results in the contractor being
reasonably compensated for work actually done, but not for anticipated
profits. The U.S. Government may also terminate contracts for cause if the
Company fails to perform in strict accordance with contract terms.
The Company has never had a contract terminated by the U.S. Government for
failure to perform in accordance with contract terms. If the U.S.
Government would terminate any significant contracts with the Company for
cause, such condition could have an adverse effect on the Company's
revenues and business.
Similarly, U.S. Government contracts typically permit the U.S. Government
to change, alter or modify the contract at its discretion. In the event the
U.S. Government exercises this right, the Company is entitled to
reimbursement of all allowable and allocable costs incurred in making the
change plus a reasonable profit.
The U.S. Government typically finances a substantial portion of the
Company's contract costs through progress payments. The Company currently
receives progress payments in accordance with DOD contract terms for "small
business" concerns. These terms provide for progress payments at a
specified rate applied on the basis of costs incurred while progress
payments for concerns other than small businesses provide for payment based
on costs actually paid and at a 5% to 10% lower rate. Since completion of
the ESP acquisition, the Company has maintained total employment of less
than 500 people and therefore continues to qualify as a small business for
government contracting purposes.
Patents
- -------
Engineered Air has approximately 40 patents with expiration dates extending
through February 2002. From time to time, Engineered Air develops
proprietary information and trade secrets regarding the design and
manufacture of various military products.
ESP has developed a patent for a reversible faucet cartridge. The benefit
of the reversing feature is that by turning the cartridge one-half
revolution the user achieves the same result as though he had replaced a
washer to stop a leaking faucet. This patent expires in October 2002.
The Company considers it's proprietary information and patents to be
valuable assets. However, the Company's business is not materially
dependent on patent protection.
<PAGE> 6
Competition
- -----------
Substantially all of Engineered Air's revenues have come from direct and
indirect contracts with the U.S. Government. There is significant
competition for obtaining U.S. Government contracts. In order to obtain
U.S. Government contracts, Engineered Air must comply with detailed and
complex procurement procedures adopted by the U.S. Government pursuant to
regulations promulgated by appropriate government agencies, including the
DOD. The regulations and procurement procedures are adopted to promote
competitive bidding. Engineered Air's competition varies for each of the
classifications of military equipment systems that it manufactures.
ESP's competitive market is regional due to the significant relative impact
of freight costs. However, the Company believes that ESP has more capacity
and flexibility than its primary competitors in the Mid-South region. Its
ability to both mold and finish plastic to high quality specifications
represents a significant advantage.
There are various domestic manufacturers of plastic faucets and several
importers with which ESP's Lifetime Faucets line competes. The Company
believes that its ability to produce a quality, low-cost line of faucets
represents a significant and profitable market niche. To further
distinguish this line, ESP produces its faucets in a variety of colors.
Defense Backlog
- ---------------
The following table summarizes funded defense backlog information (in
millions) as of October 31 for the indicated years:
1995 $90.4
1994 77.9
1993 52.8
1992 38.4
1991 40.7
The backlog is exclusive of any options to order the Company's products
under existing contracts. The Company's contracts contain customary
provisions permitting termination at the convenience of the U.S.
Government. See "Government Contracting."
Employees
- ---------
At December 31, 1995, the Company employed 447 persons. Of the 284
employees at Engineered Air, 247 were engaged in manufacturing activities,
16 in engineering activities, and 21 in office administration and
management functions. Approximately 136 of Engineered Air's employees are
covered by a collective bargaining agreement with Lodge 1012 of the
International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths,
Forgers, and Helpers, A.F.L.-C.I.O. Effective November 1, 1995, Engineered
Air entered into an agreement with the bargaining unit, which expires
October 31, 1998.
Of the 163 employees at ESP, 134 are engaged in manufacturing activities
and 29 in sales, office administration and management functions.
The Company considers its employee relations to be satisfactory.
<PAGE> 7
Item 2. PROPERTIES
- ------------------
The Company owns two facilities in the metropolitan St. Louis area
consisting of approximately 320,000 square feet. Engineered Air's main
manufacturing facility and the Company's corporate headquarters are located
in a Company-owned building in St. Louis County, Missouri consisting of
approximately 170,000 square feet on 11 acres.
The Company owns one facility adjacent thereto consisting of a 150,000
square foot building on approximately 6 acres. In 1992, the Company
completed consolidation of all operations previously performed at this
location into its main facility. The vacated facility is currently being
leased to an unrelated third party and is for sale.
The Company's St. Louis properties are subject to Deeds of Trust in favor
of its lender under a consolidated credit agreement.
Engineered Air leases a building consisting of approximately 40,000 square
feet on 3 acres in New Haven, Missouri. This facility is used for
manufacturing and assembly. Engineered Air also leases warehouse space of
6,000 square feet in New Haven, Missouri and 11,000 square feet in St.
Louis City, Missouri.
ESP owns a manufacturing facility in Hot Springs, Arkansas. The
Company-owned building consists of approximately 100,000 square feet on 4.5
acres.
The Company also leases additional storage space under various short-term
leases. The Company believes that its current facilities are sufficient for
the conduct of its current level of operations.
Item 3. LEGAL PROCEEDINGS
- -------------------------
In the opinion of management, there are no legal proceedings or threatened
legal proceedings which would have a material adverse effect on the
Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
- -------------------------------------------------------
There were no matters submitted to a vote of shareholders during the fourth
quarter of the year ended October 31, 1995.
<PAGE> 8
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
- ------------------------------------------------------------------------
Information concerning the principal market on which the Company's common
stock is traded and the high and low sales prices for such stock during
1995 is shown in Supplemental Information on page 16 of the 1995 Annual
Report, incorporated herein by reference. During the year, the Company
initiated a semi-annual dividend program beginning with a dividend of $.01
per share payable July 31, 1995 to shareholders of record as of June 30,
1995. This is the Company's first dividend since its initial public
offering in 1985.
Item 6. SELECTED FINANCIAL DATA
- -------------------------------
Financial data required under this section is shown in the Summary of
Selected Financial Data on page 2 of the 1995 Annual Report, incorporated
herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations, shown on pages 4 through 5 of the 1995 Annual Report, is
incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The following consolidated financial statements of Engineered Support
Systems, Inc. included in the Annual Report for the year ended October 31,
1995 at the pages indicated, are incorporated herein by reference:
Consolidated Balance Sheets, October 31, 1995 and 1994, page 6.
Consolidated Statements of Income, years ended October 31, 1995, 1994 and
1993, page 7.
Consolidated Statements of Shareholders' Equity, years ended October 31,
1995, 1994 and 1993, page 7.
Consolidated Statements of Cash Flows, years ended October 31, 1995,
1994, and 1993, page 8.
Notes to Consolidated Financial Statements, pages 9 through 14.
The quarterly financial information included in Supplementary Information
on page 16 of the 1995 Annual Report is incorporated herein by reference.
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements
or the notes thereto.
<PAGE> 9
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
- -------------------------------------------------------------------------
None
<PAGE> 10
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The executive officers and directors of the Company and Engineered Air as
of January 12, 1996 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------- ----- ------------------------------
<S> <C> <C>
Michael F. Shanahan Sr. (1) 56 Chairman, President, Chief
Executive Officer and
Director (Company)
John J. Wichlenski (1) 52 Director (Company) and
President and Chief Executive
Officer (Engineered Air)
W. Raymond Barrett (1)(2) 63 Director (Company)
Alexander M. Cornwell Jr. (3) 69 Director (Company)
Thomas J. Guilfoil (3) 77 Director (Company)
LTG Kenneth E. Lewi (2) 65 Director (Company)
John J. Quinn (3) 58 Director (Company)
Michael F. Shanahan Jr. (1)(3) 29 Director (Company)
Earl W. Wims, Ph.D. (2) 56 Director (Company)
Harvey W. Bright 53 President and Chief Executive
Officer (ESP)
Ronald W. Davis 49 Vice President-Marketing
(Engineered Air)
Gary C. Gerhardt 50 Executive Vice President and
Chief Financial Officer
(Company, Engineered Air
and ESP)
Dan D. Jura 43 Vice President-Sales
(Engineered Air)
E. Allen Springer Jr. 50 Vice President-Engineering
(Engineered Air)
- ------------------------------------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
</TABLE>
<PAGE> 11
The officers serve at the discretion of the Board of Directors, subject to
the terms and conditions of their employment agreements.
Executive Officers
- ------------------
Michael F. Shanahan Sr. has been a director of the Company since its
formation. Mr. Shanahan was named the Chief Executive Officer of the
Company in 1985 and was named Chairman of the Company and of Engineered Air
in 1987.
John J. Wichlenski has been President and Chief Executive Officer of
Engineered Air since July 1992 and prior thereto served as Chief Operating
Officer since 1991. He served as Executive Vice President from March 1990
to July 1992. Prior thereto, he served as Group Vice President-Operations
since 1988. Mr. Wichlenski joined Engineered Air as Vice
President-Engineering in August 1986.
Gary C. Gerhardt was named Executive Vice President of the Company,
Engineered Air and ESP in December 1994. He has been Chief Financial
Officer of the Company, Engineered Air and ESP, since October 1993. Prior
thereto, he was Vice President-Contract Administration of Engineered Air
since 1985. Mr. Gerhardt joined Engineered Air in 1982 as Manager of
Contract Administration.
Harvey W. Bright has been President and Chief Executive Officer of ESP
since December 1994. He previously served as Vice President-Manufacturing
of ESP. Prior thereto, he served as Plant Manager of the Zenith Electronics
plant in Springfield, Missouri for 15 years.
Dan D. Jura has been Vice President-Sales since November 1993. Mr. Jura
joined Engineered Air in 1984 as Marketing Manager.
All of the remaining executive officers have been employed by the Company
in the positions indicated or comparable positions for the past five years.
Non-Employee Directors
- ----------------------
W. Raymond Barrett has been a director of the Company since June 1985. Mr.
Barrett is the brother-in-law of Mr. Shanahan and has been the President
and principal shareholder of Bio-Medical Systems, Inc. since January 1975.
Alexander M. Cornwell, Jr. has been a director of the Company since March
1993. He is a licensed professional engineer. Mr. Cornwell was the Chairman
and Chief Executive Officer of Street Industries, Inc. of St. Louis from
1985 through 1988. Mr. Cornwell has provided consulting services to the
Company since 1988.
Thomas J. Guilfoil has been a director of the Company since March 1993. He
is the senior and founding partner of the St. Louis law firm of Guilfoil,
Petzall & Shoemake. His legal career began in St. Louis in 1941.
LTG Kenneth E. Lewi (U.S. Army, Retired) has been a director of the Company
since July 1990. He retired from the U.S. Army in August 1989 after more
than 34 years of service in various command and staff positions. His career
<PAGE> 12
in the U.S. Army centered primarily on providing logistical support to U.S.
armed forces.
John J. Quinn has been a director of the Company since May 1993. He has
served as President of the St. Louis Blues Hockey Club since 1983.
Michael F. Shanahan Jr. has been a director of the Company since December
1994. He has been a Producer for Lockton Companies, an insurance concern,
since October 1994. Prior thereto he served as Assistant to the Chairman of
the Board of the Company since May 1991. He joined Engineered Air in
January 1990 as Marketing Representative.
Earl W. Wims, Ph.D. has been a director of the Company since December 1991.
He has been Chairman of Marketing Horizons, a marketing research and
consulting firm, since 1986.
Item 11. EXECUTIVE COMPENSATION
- -------------------------------
Information concerning executive compensation is shown in the Company's
Definitive Proxy Statement (to be filed within 120 days after the close of
the fiscal year ended October 31, 1995) incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Information relating to the ownership of the Company's securities by
certain beneficial owners and management is shown in the Definitive Proxy
Statement (to be filed within 120 days after the close of the year ended
October 31, 1995) incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information on certain relationships, related transactions and affiliation
of directors is shown in the Definitive Proxy Statement (to be filed within
120 days after the close of the year ended October 31, 1995) incorporated
herein by reference.
<PAGE> 13
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) (1) and (2) Index of Financial Statements and Financial Statement
Schedules
The following consolidated financial statements of Engineered Support
Systems, Inc., included in the 1995 Annual Report of the registrant to its
shareholders, are incorporated by reference in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets-October 31, 1995 and 1994
Consolidated Statements of Income-years ended October 31, 1995, 1994 and
1993
Consolidated Statements of Shareholders' Equity-years ended October 31,
1995, 1994 and 1993
Consolidated Statements of Cash Flows-years ended October 31, 1995, 1994
and 1993
Notes to Consolidated Financial Statements-October 31, 1995
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
3. Lists of Exhibits (listed by numbers corresponding to exhibit table
of Item 601 in regulation S-K)
3.1 Articles of Incorporation of Engineered Support Systems, Inc. (1)
3.2 Amendment of Articles of Incorporation (2)
3.3 Amended and Restated By-Laws of Engineered Support Systems, Inc.
(2)
4.1 Credit Agreement dated August 19, 1993 by and between The Boatmen's
National Bank of St. Louis and Engineered Support Systems, Inc. (8)
4.2 Engineered Air Systems, Inc. 1987 Stock Equity Plan (4)
4.3 Engineered Air Systems, Inc. 1990 Stock Equity Plan (5)
4.4 Engineered Air Systems, Inc. 1991 Stock Equity Plan (11)
4.5 Engineered Support Systems, Inc. 1992 Stock Option Plan for
Nonemployee Directors (12)
4.6 Engineered Support Systems, Inc. 1993 Stock Option Plan (13)
4.7 Engineered Air Systems, Inc. Employee Stock Ownership Plan (6)
<PAGE> 14
4.8 Trust Agreement for the Engineered Air Systems, Inc. Employee Stock
Ownership Trust (6)
10.1 Employment Agreement with Michael F. Shanahan Sr. (3)
10.2 Form of Indemnification Agreement with Directors (2)
10.3 Lease Agreement dated February 15, 1992 by and between Engineered
Air Systems, Inc. and Hermann Marketing, Inc. (7)
10.4 Covenants Not to Compete dated March 8, 1993 by and between Parker
Boys, Inc. and KWH Holdings, as covenantors, and Engineered Support
Systems, Inc. (8)
10.5 Form of Employment Agreement with Presidents and Vice Presidents of
Engineered Air and ESP. (14)
10.6 Engineered Support Systems, Inc. Amended and Restated Executive
Incentive Plan. (14)
10.7 Agreement dated November 18, 1994 by and between Department of the
Air Force and Engineered Air Systems, Inc. (14)
10.8 Agreement dated June 3, 1994 by and between Department of the Air
Force and Engineered Air Systems, Inc. (14)
10.9 Agreement dated March 17, 1994 by and between Department of the Air
Force and Engineered Air Systems, Inc. (9)
10.10 Agreement dated December 8, 1993 by and between Department of the
Air Force and Engineered Air Systems, Inc. (9)
10.11 Agreement dated May 11, 1994 by and between the Department of the
Army and Engineered Air Systems, Inc. (10)
11 Statement Re: Computation of Net Income Per Share.
13 Engineered Support Systems, Inc. Annual Report for the year ended
October 31, 1995 (the Annual Report). Except for the portions
incorporated herein by reference as evidenced in the Form 10-K, the
Annual Report is furnished for the information of the Securities
and Exchange Commission and is not deemed filed as part of this
10-K.
22 Subsidiary of Registrant (1)
24 Consent of Price Waterhouse LLP, Independent Accountants
25 Statement Re: Summary Financial Information
<PAGE> 15
(1) This information is incorporated herein by reference from Form S-1
Registration Statement filed on July 10, 1985, registration Number
2-98909, as amended on August 13, 1985 and August 21, 1985.
(2) This information is incorporated herein by reference from Form 10-K
Annual Report filed on January 30, 1989.
(3) This information is incorporated herein by reference from Form 10-K
Annual Report filed on January 29, 1990.
(4) This information is incorporated herein by reference from Form S-8
registration statement, effective October 3, 1990, registration
Number 33-36817.
(5) This information is incorporated herein by reference from Form S-8
registration statement, effective October 3, 1990, registration
Number 33-36818.
(6) This information is incorporated herein by reference from Form S-8
registration statement, effective June 11, 1987, registration Number
33-14504.
(7) This information is incorporated herein by reference from Form 10-K
Annual Report filed on January 29, 1993.
(8) This information is incorporated herein by reference from Form 10-K
Annual Report filed on January 31, 1994.
(9) This information is incorporated herein by reference from Form 10-Q
Quarterly Report filed on March 17, 1994.
(10) This information is incorporated herein by reference from Form 10-Q
Quarterly Report filed on June 14, 1994.
(11) This information is incorporated herein by reference from Form S-8
registration statement, effective April 5, 1994, registration number
33-77338.
(12) This information is incorporated herein by reference from Form S-8
registration statement, effective April 5, 1994, registration number
33-77340.
(13) This information is incorporated herein by reference from Form S-8
registration statement, effective April 5, 1994, registration number
33-77342.
(14) This information is incorporated herein by reference from Form 10-K
Annual Report filed on January 27, 1995.
(b) There were no reports filed on Form 8-K during the fourth quarter of
1995.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this Report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this Report.
<PAGE> 16
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to
be signed on its behalf by the undersigned thereunto duly authorized.
ENGINEERED SUPPORT SYSTEMS, INC.
Dated: January 29, 1996 By: /s/ Gary C. Gerhardt
----------------------- ---------------------------
Gary C. Gerhardt
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael F. Shanahan Sr. January 29, 1996
- --------------------------- Chairman of the ----------------
Michael F. Shanahan Sr. Board of Directors,
President and Chief
Executive Officer
/s/ Gary C. Gerhardt January 29, 1996
- ----------------------- Executive Vice President ----------------
Gary C. Gerhardt and Chief Financial Officer
<PAGE> 17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Directors
---------
/s/ MICHAEL F. SHANAHAN SR. Jan. 29, 1996
- -------------------------- -------------
MICHAEL F. SHANAHAN SR. Date
/s/ W. RAYMOND BARRETT Jan. 29, 1996
- -------------------------- -------------
W. RAYMOND BARRETT Date
/s/ THOMAS J. GUILFOIL Jan. 29, 1996
- -------------------------- -------------
THOMAS J. GUILFOIL Date
/s/ JOHN J. QUINN Jan. 29, 1996
- -------------------------- -------------
JOHN J. QUINN Date
/s/ EARL W. WIMS Jan. 29, 1996
- -------------------------- -------------
EARL W. WIMS Date
/s/ JOHN J. WICHLENSKI Jan. 29, 1996
- -------------------------- -------------
JOHN J. WICHLENSKI Date
/s/ ALEXANDER M. CORNWELL Jan. 29, 1996
- -------------------------- -------------
ALEXANDER M. CORNWELL Date
/s/ KENNETH E. LEWI Jan. 29, 1996
- -------------------------- -------------
KENNETH E. LEWI Date
/s/ MICHAEL F. SHANAHAN JR. Jan. 29, 1996
- --------------------------- -------------
MICHAEL F. SHANAHAN JR. Date
<PAGE> 18
ENGINEERED SUPPORT SYSTEMS, INC.
EXHIBIT INDEX
Page No.
11. Statement Re: Computation of Net Income Per Share.
13. Engineered Support Systems, Inc., Annual Report for year
ended October 31, 1995 (the Annual Report). Except for the
portions incorporated herein by reference as evidenced in
the Form 10-K, the Annual Report is furnished for the
information of the Securities and Exchange Commission and
is not deemed filed as part of this Form 10-K.
24. Consent of Price Waterhouse LLP, Independent Accountants.
25. Statement Re: Summary Financial Information.
EXHIBIT 11
ENGINEERED SUPPORT SYSTEMS, INC.
Article 11 -- Statement Re: Computation of Net Income Per Share
<TABLE>
<CAPTION>
Year Ended October 31
------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME $2,473,062 $ 755,316 $ 519,681
========== ========== ==========
NET INCOME PER SHARE
Average shares outstanding 3,035,582 3,322,486 3,335,287
========== ========== ==========
Net income $.81 $.23 $.16
========== ========== ==========
PRIMARY EARNINGS PER SHARE
Average shares outstanding 3,035,582 3,322,486 3,335,287
Net effect of dilutive stock
options (1) 228,294 211,080 128,396
---------- ---------- ----------
3,263,876 3,533,566 3,463,683
========== ========== ==========
Net income $.76 $.21 $.15
========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE
Average shares outstanding 3,035,582 3,322,486 3,335,287
Net effect of dilutive stock
options (1) 266,992 216,987 144,286
---------- ---------- ----------
3,302,574 3,539,473 3,479,573
========== ========== ==========
Net income $.75 $.21 $.15
========== ========== ==========
</TABLE>
(1) Based on the treasury stock method
1995, 1994 and 1993 net income per share, as presented in the consolidated
financial statements, is based on the fully diluted weighted average number
of common and common equivalent shares outstanding.
ENGINEERED SUPPORT SYSTEMS, INC.
--------------------------------
1995 ANNUAL REPORT
(logo) (logo)
ENGINEERED AIR SYSTEMS, INC. ENGINEERED SPECIALTY PLASTICS
PROVIDING SHAREHOLDER VALUE THROUGH DIVERSIFICATION AND GROWTH
---------------------------------------------------------------
EARNINGS PER SHARE MARKET VALUE PER SHARE
------------------ ----------------------
1995 -- $.75 1995 -- $6.50
1992 -- $(.07) 1992 -- $1.50
REVENUES PER SHARE BOOK VALUE PER SHARE
------------------ --------------------
1995 -- $19.84 1995 -- $5.10
1992 -- $12.00 1992 -- $3.73
- --------
CONTENTS
- --------
Letter to the Shareholders
Management's Discussion
and Analysis
Consolidated Financial
Statements
Supplemental Information
Directors and
Officers Inside Back Cover
- --------------------------
LETTER TO THE SHAREHOLDERS
- --------------------------
Dear Shareholder:
1995 was a year of substantial growth for Engineered Support Systems, Inc.
On a per share basis, our net income, net revenues and book value increased
257%, 24% and 21%, respectively, from the prior year. The by-product of
this operational success has been a significant increase in shareholder
value, which continues to be our long-term goal. We expect revenues and
profitability to grow in 1996 and beyond, building additional value for our
shareholders.
Summary of 1995
- ---------------
The Company reported net income of $2,473,000, or seventy-five cents per
share, on revenues of $65.5 million for 1995. This compares with net income
of $755,000, or twenty-one cents per share, on revenues of $56.6 million
for 1994. 1995 revenues were the Company's highest since 1991 and net
income per share was its best since 1986.
The defense subsidiary, Engineered Air Systems, Inc. (Engineered Air)
turned in an outstanding year with revenues increasing 30% from 1994. This
follows a 19% increase in the prior year. However, profitability increases
were even more dramatic at this subsidiary primarily for two reasons.
First, Engineered Air has implemented a more selective bidding strategy
during the last two years. This approach to contract procurement has
resulted in a backlog of contracts which is, on average, larger in amount,
longer in duration (generating increased production efficiencies), well
within the Company's realm of expertise and therefore more profitable.
Secondly, the defense subsidiary has increased capacity utilization and
significantly leveraged its fixed operating costs. Production levels are
expected to grow in 1996 and beyond as Engineered Air benefits from its
existing backlog and from the government's continued emphasis on "best
value" buying programs. A best value program considers past performance in
terms of quality and delivery, along with bid price, when evaluating
prospective bidders. We also believe that Engineered Air will benefit from
what has been a major industry shake-out of low cost providers of military
ground support equipment during the first half of the decade.
The commercial subsidiary, Engineered Specialty Plastics, Inc. (ESP)
experienced a decrease in revenues of $0.9 million, or 4%, from the prior
year. This decrease was primarily the result of a significant drop in
shipments of television cabinets to its primary customer during the second
and third quarters of the year. However, in the fourth quarter, more
normalized shipments of television cabinets and the initial effects of a
customer diversification program resulted in record quarterly revenues for
the subsidiary.
ESP implemented a highly successful cost containment program during 1995
and Lifetime Faucets, a proprietary line of nonmetallic faucets, posted
record profitability. As a result, operating profit increased from $0.6
million in 1994 to $1.0 million in 1995 even though the subsidiary
experienced a decline in revenues and a capacity-based contraction in its
gross margin.
Significant capital improvements have been made at ESP since its
acquisition in March 1993. These improvements include a fully-integrated
business information system, complete computer-aided design (CAD)
capabilities, and a more extensive and efficient resin storage and
distribution system. In addition, ESP operates a wide range of fully
automated and robotically-controlled injection molding machines, from 45 to
1,500 tons of clamp pressure, and provides significant value-added service
through its extensive finishing capabilities. We believe that this
state-of-the-art facility can be extremely profitable and we will continue
to focus our efforts on increasing volume by emphasizing quality, price and
flexibility.
Stock Repurchase and Dividend Programs
- --------------------------------------
In March 1995, we completed the repurchase of 259,716 shares of common
stock under an agreement entered into during 1994. As of October 31, 1995,
the Company had 475,835 total shares of treasury stock. Although this
represents almost 14% of total shares issued as of this date we have
announced a plan to repurchase up to 150,000 additional shares of common
stock. At current valuation levels, we believe this to be a sound use of
capital and an additional means of enhancing shareholder value.
During the year, we also initiated a semi-annual dividend program. This is
the first dividend the Company has declared since its initial public
offering in 1985. Although we began this program with a dividend of just
$.01 per share, we anticipate a steady increase in the amount over time as
the Company continues to grow and prosper.
Significant Cash Flow
- ---------------------
In 1995, the Company generated free cash flow, defined as net income plus
non-cash items less capital expenditures, of $3.44 million, or $1.04 per
share. In addition to financing $0.9 million of capital expenditures during
the year, we were also able to reduce our term debt by $1.1 million, as
well as to repurchase $1.0 million of treasury shares with internally
generated funds. It is anticipated that the Company will continue to
generate significant cash flow in 1996. These funds will be used to reduce
our reliance on debt and to support both internal and external growth
opportunities.
New Contract Awards
- -------------------
Engineered Air's funded backlog of defense orders increased to $90 million
as of October 31, 1995 compared with $78 million in the prior year. New
orders booked in 1995 totaled $55 million, which represents a 40% increase
over average annual bookings for the preceding five-year period. Although
we have yet to receive any accelerated orders resulting from the Bosnian
conflict, we expect many of our products to be pulled from existing
military inventories and used to support the U.S. effort there.
In summary, 1995 was a year of outstanding achievement and we enter 1996
with considerable momentum. We believe that revenues and profitability will
continue to grow in upcoming years. Further, we are continuing to consider
any strategic acquisitions which would bring added value to our Company and
shareholders.
To our employees, directors and shareholders, I want to say thank you for
your continued belief in and commitment to our goals and for your support
of Engineered Support Systems, Inc.
Sincerely,
/s/ Michael F. Shanahan, Sr.
Chairman of the Board, President and Chief Executive Officer
<TABLE>
Summary of Selected Financial Data In thousands, except for per share data
- ----------------------------------
<CAPTION>
Year Ended October 31 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Net revenues $65,533 $56,619 $42,227 $40,432 $67,712
Gross profit 10,745 8,145 7,461 4,635 7,470
Interest expense, net 895 828 686 384 675
Income (loss) before income
taxes 4,121 1,257 860 (379) 1,081
Income tax provision
(benefit) 1,648 502 340 (140) 420
Net income (loss) 2,473 755 520 (239) 661
======= ======= ======= ======= =======
Financial Position:
Working capital $ 4,700 $ 3,120 $ 4,255 $ 8,122 $ 8,488
Property, plant and
equipment, net 14,601 15,290 14,998 8,068 8,702
Total assets 33,792 34,386 28,574 23,079 24,605
Long-term debt and ESOP
bank loan 3,924 5,152 6,179 4,004 5,106
Shareholders' equity 15,217 13,330 13,161 12,426 12,360
======= ======= ======= ======= =======
Per Share Data:
Net income (loss) $.75 $.21 $.15 $(.07) $.20
Dividends .01 .00 .00 .00 .00
Book value 5.10 4.21 3.93 3.73 3.71
Net revenues 19.84 16.00 12.14 12.00 20.15
------- ------- ------- ------- -------
Backlog of defense orders $90,385 $77,856 $52,847 $38,424 $40,730
======= ======= ======= ======= =======
</TABLE>
- ----------------------------
ENGINEERED AIR SYSTEMS, INC.
- ----------------------------
Brief descriptions of significant programs are presented below:
MA-3D and C-5 Flight Line Air Conditioners
- ------------------------------------------
These flight line units deliver general purpose air conditioning to
aircraft avionics during maintenance and preflight periods. The majority of
these units will be utilized for aircraft such as the F-15, F-16, F-111,
C-5, C-17, C-130 and C-135. In addition, these units are also used to cool
maintenance shelters, portable hangars and other similar enclosures.
Chemically/Biologically Hardened Air Management Plant (CHAMP)
- -------------------------------------------------------------
The CHAMP units will be used initially by the U.S. Air Force in chemically
hardened air transportable hospitals (CHATHs). These units will consolidate
generators, blowers, filters, and environmental control elements into one
single unit, reducing transportation weight and size by 80%. These CHAMP
units will enable medical staff and patients to reduce infection, survive
chemical attacks and continue emergency operations in a contaminated
environment.
Revetment Kits
- --------------
The revetment kits consist of two parallel steel walls up to 16 feet high
and 252 feet long. The walls are positioned 7 feet apart. The space between
the walls can be filled with dirt or stone. The revetments are used to
protect parked aircraft and other military equipment from enemy artillery
and small arms fire.
Air Force Water Distribution Systems
- ------------------------------------
These rapidly deployable water storage and distribution systems are
designed for an unlimited variety of terrains and applications. They will
be used primarily as a component of the Air Force ''Bare Base'' system. Air
transportability is inherent as all components are designed to size and
weight limitations. These systems are used for the safe storage and
distribution of potable water.
Aviation Ground Power Unit (AGPU)
- ---------------------------------
The AGPU is a self-contained, turbine driven, ground power unit which
provides electrical, hydraulic and pneumatic power in dual combination or
simultaneously. The units will provide minimum power requirements for the
AH-64 advanced attack helicopter, the UH-60 utility tactical transport
aircraft system, the CH-47 medium helicopter, and other aircraft including
the OH-6, AH-1 and C-12.
Army Space Heaters (ASH)
- ------------------------
The ASH provides automatic, remote or manual temperature-controlled heating
to meet the needs of personnel and equipment in shelters, vans, hospitals
and other enclosed areas. Most recently the ASH has been shipped overseas
to provide warmth for U.S. military personnel in the extreme winter
conditions of Bosnia.
B-1B/B-2 Flight Line Air Conditioners
- -------------------------------------
These flight line air conditioners are used to cool the avionics of B-1 and
B-2 bombers during preflight checkouts. These units are also used in
support of U.S. Air Force Talon I and Talon II Gunships. Designed and built
by Engineered Air, these are the largest air conditioning units ever built
for the U.S. Air Force employing state of the art technology and utilizing
R-134a refrigerant, which is ozone-friendly and environmentally safe.
- -----------------------------------
ENGINEERED SPECIALTY PLASTICS, INC.
- -----------------------------------
ESP, located in Hot Springs, Arkansas, manufactures a wide range of
injection molded plastic products used primarily in consumer goods. These
products include television cabinets and backs, communication and word
processing equipment, components for computer terminals, automotive
components, lawn and garden components, medical devices, containers for the
food processing industry and other items used in consumer products.
ESP also manufactures and distributes Lifetime Faucets, a proprietary line
of nonmetallic kitchen and lavatory faucets. These faucets, which are known
for their high quality and low cost, are sold in a variety of colors and
styles to a broad base of customers ranging from very large retailers to
small hardware stores.
ESP currently operates a single facility with approximately 100,000 square
feet of manufacturing space. This facility houses 30 injection molding
machines ranging in size from 45 to 1500 tons of clamp pressure and
processes over 10 million pounds of resin per year. In addition, ESP has
modern finishing equipment which can perform a variety of secondary
operations.
ESP is positioning itself for future growth and has complete computer-aided
design (CAD) capabilities within its engineering department. ESP has also
added a fully integrated business information system during the last two
years. This system enhances ESP's inventory control and product performance
while increasing machine efficiency.
ESP implements a continuous improvement program to ensure that competitive
advantages through cost-efficient operations are maintained and is
currently in the process of ISO9000 certification.
- --------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31 1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Results of Operations
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 83.6 85.6 82.3
----- ----- -----
Gross profit 16.4 14.4 17.7
Selling, general and administrative expense 8.7 10.7 14.0
----- ----- -----
Income from operations 7.7 3.7 3.7
Interest expense, net 1.4 1.5 1.7
----- ----- -----
Income before income taxes 6.3 2.2 2.0
Income tax provision 2.5 0.9 0.8
----- ----- -----
Net income 3.8% 1.3% 1.2%
----- ----- -----
</TABLE>
The discussion set forth below analyzes certain factors and trends related
to the financial results for each of the three years ended October 31,
1995, 1994, and 1993. This discussion should be read in conjunction with
the Consolidated Financial Statements and Notes to the Consolidated
Financial Statements.
1995 Compared to 1994
- ---------------------
Net revenues increased 16% in 1995 to $65.5 million. The commercial
subsidiary, Engineered Specialty Plastics, Inc. (ESP), contributed $22.6
million to net revenues in 1995 compared to $23.6 million in 1994. This 4%
decrease resulted from reduced shipments of television cabinets to its
primary customer in the second and third quarters of the year. (However,
fourth quarter net revenues at ESP rebounded to their highest level since
the subsidiary was acquired by the Company in March 1993. This was a result
of more normalized shipments to its primary customer and of the early
impact of a strategic diversification program.)
Net revenues for the defense subsidiary, Engineered Air Systems, Inc.
(Engineered Air) increased 30% in 1995 to $42.9 million from $33.0 million
in 1994. Higher production levels at Engineered Air were generated
primarily through its air conditioning and heating products -- most
notably, the MA-3D and C-5 Flight Line Air Conditioner, the B-1B/B-2 Air
Conditioner and the Army Space Heater.
Gross profit was $10.7 million in 1995 compared to $8.1 million in 1994.
The gross margin improved to 16.4% in 1995 from 14.4% in 1994. These
increases are due to significantly higher margins at Engineered Air,
resulting from a profitable mix of contracts and increased capacity
utilization, as offset by slightly lower margins at ESP.
In spite of the significant increase in consolidated net revenues, selling,
general and administrative expense decreased from $6.1 million in 1994 to
$5.7 million in 1995. As a percentage of net revenues, this expense
decreased from 10.7% in 1994 to 8.7% in 1995. Management's concerted effort
to control selling, general and administrative expense, along with the
increase in gross margins, contributed to an overall expansion of the
Company's operating margin from 3.7% in 1994 to 7.7% in 1995.
Net interest expense increased to $0.9 million in 1995 from $0.8 million in
1994. The effective income tax rate was 40% in both 1995 and 1994.
1994 Compared to 1993
- ---------------------
Net revenues increased 34% in 1994 to $56.6 million. Engineered Air posted
net revenues of $33.0 million in 1994 versus $27.8 million in 1993, as
various defense contracts moved from the development stage into full
production. ESP contributed net revenues of $23.6 million in 1994 as
compared to $14.4 million for the eight-month period following its
acquisition in 1993.
Gross profit increased from $7.5 million in 1993 to $8.1 million in 1994.
However, the overall gross margin decreased from 17.7% in 1993 to 14.4% in
1994. This decrease was primarily the result of a $4.2 million ROWPU claim
settlement received by Engineered Air in 1993. (See note E to the
Consolidated Financial Statements.)
Because of the inclusion of ESP operating results for an entire year in
1994, selling, general and administrative expense increased slightly in
absolute terms from $5.9 million in 1993 to $6.1 million in 1994. However,
this expense decreased significantly as a percentage of net revenues from
14.0% in 1993 to 10.7% in 1994. This decrease reflects the Company's
continuing emphasis on cost containment.
Net interest expense increased from $0.7 million in 1993 to $0.8 million in
1994 due primarily to financing costs associated with $2.2 million of
capital improvements at ESP. The effective income tax rate was
approximately 40% in 1994 and 1993.
Outlook for 1996 and Future Years
- ---------------------------------
The Company's firm backlog of defense orders increased to $90.4 million at
October 31, 1995 from $77.9 million at October 31, 1994. New contract
awards, which totaled $55.5 million in 1995, consisted of awards of
production options on existing contracts and other new programs, some of
which are described on page 3 of the Annual Report. The existing contracts
also include available options totaling $100 million as of October 31,
1995.
The Company anticipates that revenues and net income will increase in 1996.
During the upcoming year, Engineered Air will derive the most significant
portion of its revenues from contracts for MA-3D and C-5 Flight Line Air
Conditioners, Revetment Kits, Aviation Ground Power Units and Air Force
Water Distribution Systems. The latter will be completed in 1996, while the
remaining three contracts are expected to run through the majority of 1997.
Production levels at the defense subsidiary will remain near full capacity
for 1996. As a result of a profitable backlog of contracts and of a
significant leveraging of fixed operating costs, Engineered Air will
provide continued strong earnings and cash flow for the foreseeable future.
ESP completed 1995 by posting its highest quarterly revenues since being
acquired by the Company. It is anticipated that this subsidiary's fourth
quarter success will provide a solid foundation for continued steady growth
in revenues and operating margins.
The Company is actively pursuing new acquisitions and business
opportunities to complement existing product lines and provide strategic
diversification.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of short-term financing are from cost
reimbursements under contracts with the U.S. Government via receipt of
progress payments, billings for delivered products and bank borrowings
under a $6.4 million line of credit. As of October 31, 1995, the Company
had $4,919,000 of unused credit related to this line. During 1995, average
daily borrowings under the line of credit agreement were $4.1 million. The
Company anticipates that its borrowing requirements under the agreement
will decrease significantly in 1996 as cash provided from operations
continues to improve. This improvement is expected as a result of continued
significant cash flow from Engineered Air.
On October 31, 1995, the Company's working capital and ratio of current
assets to current liabilities were $4.7 million and 1.39 to 1 as compared
with $3.1 million and 1.24 to 1 a year ago. This growth in liquidity is net
of $1.1 million of payments on long-term debt, $0.9 million of capital
expenditures and of a $1.0 million treasury stock purchase. The ratio of
the long-term debt and ESOP bank loan to shareholders' equity improved to
0.26 to 1 at October 31, 1995 as compared with 0.39 to 1 at October 31,
1994.
The Company anticipates that capital expenditures in 1996 will approximate
$1.0 million. In addition, the Company has announced a plan to repurchase
up to 150,000 shares of its common stock, or approximately 5% of shares
currently outstanding. Management believes that cash flow generated from
operations, together with the available line of credit, will provide the
necessary resources to meet the needs of the Company, including capital
expenditures and any treasury stock purchases, in the foreseeable future.
Inflation
- ---------
Since substantially all of the Engineered Air's contracts are at fixed
prices, inflation can affect the ultimate profit to be realized on them.
Some contracts have price adjustment provisions that limit the impact of
inflation on profits. In addition, Engineered Air's volume purchasing and
forward purchasing policies serve to limit the effects of inflation.
Engineered Air considers potential inflation in preparation of contract
proposals and bids. ESP's products are predominantly custom-made. Therefore
the impact of inflation on its operating results is typically not
significant. ESP attempts to alleviate inflationary pressures by increasing
selling prices to help offset rising costs (subject to competitive
conditions), increasing productivity and improving manufacturing
techniques. Because of these factors, management does not believe that
inflation has had, or that anticipated inflation will have, a significant
effect on the Company's operations.
Revenues by Product Classification (in millions)
- ----------------------------------
The following table sets forth net revenues for the years ended October 31,
1995, 1994 and 1993 from each of the Company's product classifications:
<TABLE>
<CAPTION>
Year Ended October 31 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Engineered Air Systems, Inc.:
Air conditioning and heating
systems $33.3 50.8% $11.1 19.6% $ 5.9 14.0%
Water and petroleum distribution
systems 3.5 5.4 11.9 21.0 14.7 34.8
Other ground support equipment 6.1 9.3 10.0 17.7 7.2 17.1
----- ----- ----- ----- ----- -----
42.9 65.5 33.0 58.3 27.8 65.9
Engineered Specialty
Plastics, Inc.:
Custom molded plastic products 22.6 34.5 23.6 41.7 14.4 34.1
----- ----- ----- ----- ----- -----
Total $65.5 100.0% $56.6 100.0% $42.2 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
Consolidated Balance Sheets
- ---------------------------
<TABLE>
<CAPTION>
October 31 1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 386,609 $ 417,748
Accounts receivable, net 3,510,596 5,614,224
Contracts in process and inventories, net 12,117,479 9,544,444
Deferred income taxes 372,045 460,804
Prepaid expenses and other assets 242,250 151,862
----------- -----------
Total Current Assets 16,628,979 16,189,082
Property, Plant and Equipment
Land 769,798 769,798
Buildings and improvements 9,889,825 9,900,939
Machinery and equipment 14,953,138 14,131,418
Furniture and fixtures 615,174 615,174
----------- -----------
26,227,935 25,417,329
Less accumulated depreciation 11,626,806 10,127,359
----------- -----------
14,601,129 15,289,970
Other Assets
Cost in excess of net assets acquired, less
accumulated amortization of $304,931 and
$252,190 753,835 806,576
Covenant not to compete, less accumulated
amortization of $534,136 and $333,736 465,864 666,264
Other assets 1,341,805 1,433,867
----------- -----------
2,561,504 2,906,707
----------- -----------
Total Assets $33,791,612 $34,385,759
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 1,124,041 $ 5,042,399
Current maturities of long-term debt 827,371 855,897
Accounts payable 7,702,941 4,705,367
Income taxes payable 78,149 593,917
Accrued employee compensation 1,309,658 723,955
Other liabilities 887,112 1,147,127
----------- -----------
Total Current Liabilities 11,929,272 13,068,662
Long-term debt 2,755,157 3,848,419
Deferred income taxes 2,722,059 2,834,818
ESOP guaranteed bank loan 1,168,500 1,303,800
Shareholders' Equity
Common Stock, par value $.01 per share;
10,000,000 shares authorized; 3,456,961
and 3,391,898 shares issued 34,570 33,919
Additional paid-in capital 7,917,844 7,670,152
Retained earnings 10,217,090 7,773,365
----------- -----------
18,169,504 15,477,436
Less ESOP guaranteed bank loan 1,168,500 1,303,800
Less treasury stock at cost,
475,835 and 224,594 shares 1,784,380 843,576
----------- -----------
Total Shareholders' Equity 15,216,624 13,330,060
----------- -----------
Total Liabilities and Shareholders' Equity $33,791,612 $34,385,759
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Consolidated Statements of Income
- ---------------------------------
<TABLE>
<CAPTION>
Year Ended October 31 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues $65,532,702 $56,619,331 $42,227,253
Cost of revenues 54,787,720 48,473,895 34,766,217
----------- ----------- -----------
Gross profit 10,744,982 8,145,436 7,461,036
Selling, general
and administrative expense 5,729,287 6,059,690 5,915,491
----------- ----------- -----------
Income from operations 5,015,695 2,085,746 1,545,545
Interest expense, net 894,633 828,430 685,864
----------- ----------- -----------
Income before income taxes 4,121,062 1,257,316 859,681
Income tax provision 1,648,000 502,000 340,000
----------- ----------- -----------
Net income $ 2,473,062 $ 755,316 $ 519,681
----------- ----------- -----------
Net income per share $.75 $.21 $.15
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders' Equity
- -----------------------------------------------
<TABLE>
<CAPTION>
Additional ESOP
Common Paid-In Retained Guaranteed Treasury
Stock Capital Earnings Bank Loan Stock Total
------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance
at
October
31, 1992 $33,315 $7,532,689 $ 6,498,368 $(1,638,719) $12,425,653
Net income 519,681 519,681
Exercise
of stock
options 150 28,630 28,780
Reduction
of ESOP
guaranteed
bank loan 187,319 187,319
------- ---------- ----------- ------------ ------------ -----------
Balance at
October
31, 1993 33,465 7,561,319 7,018,049 (1,451,400) 13,161,433
Net income 755,316 755,316
Exercise
of stock
options 454 108,833 109,287
Reduction
of ESOP
guaranteed
bank loan 147,600 147,600
Purchase
of
treasury
stock $ (843,576) (843,576)
------- ---------- ----------- ------------ ------------ -----------
Balance at
October
31, 1994 33,919 7,670,152 7,773,365 (1,303,800) (843,576) 13,330,060
Net income 2,473,062 2,473,062
Cash
dividend (29,337) (29,337)
Exercise
of stock
options 651 235,158 235,809
Reduction
of ESOP
guaranteed
bank
loan 135,300 135,300
Purchase
of
treasury
stock (972,586) (972,586)
Issuance
of
treasury
stock
to ESOP 12,534 31,782 44,316
------- ---------- ----------- ------------ ------------ -----------
Balance at
October
31, 1995 $34,570 $7,917,844 $10,217,090 $(1,168,500) $(1,784,380) $15,216,624
======= ========== =========== ============ ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
- -------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flow from Operating Activities
Net income $2,473,062 $ 755,316 $ 519,681
Adjustments to reconcile net income
to net cash provided by
(used in) operations:
Depreciation and amortization 1,894,869 2,016,317 1,739,872
Deferred income taxes (24,000) (163,000) 700,000
---------- ---------- ----------
Cash provided before changes
in operating assets and liabilities 4,343,931 2,608,633 2,959,553
Changes in operating assets and
liabilities, net of the purchases
of ESP and of treasury stock:
Accounts receivable 2,103,628 (1,623,794) 1,209,691
Contracts in process and inventories (2,573,035) (4,370,842) 3,173,077
Accounts payable 2,997,574 1,265,449 (1,756,301)
Current income taxes (515,768) 871,184 (792,874)
Net changes in other assets and
liabilities 254,486 107,784 (320,274)
---------- ---------- ----------
Net cash provided by (used in)
operations 6,610,816 (1,141,586) 4,472,872
---------- ---------- ----------
Cash Flow from Investing Activities
Purchase of ESP, net of cash acquired (3,934,356)
Additions to property, plant and
equipment (908,795) (2,236,389) (609,985)
Proceeds from sale of property,
plant and equipment 73,100
---------- ---------- ----------
Net cash provided by (used in)
investing activities (835,695) (2,236,389) (4,544,341)
---------- ---------- ----------
Cash Flow from Financing Activities
Net borrowings (payments)
under line-of-credit agreements (3,918,358) 4,587,785 454,614
Proceeds of long-term debt 1,500,000 3,000,000
Payments of long-term debt (1,121,788) (2,478,864) (5,394,394)
Exercise of stock options 235,809 109,287 28,780
Purchase of treasury stock (972,586) (187,500)
Cash dividend (29,337)
---------- ---------- ----------
Net cash provided by (used in)
financing activities (5,806,260) 3,530,708 (1,911,000)
---------- ---------- ----------
Net increase (decrease) in cash (31,139) 152,733 (1,982,469)
Cash at beginning of year 417,748 265,015 2,247,484
---------- ---------- ----------
Cash at End of Year $ 386,609 $ 417,748 $ 265,015
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
- ------------------------------------------
Notes to Consolidated Financial Statements
- ------------------------------------------
Note A -- Significant Accounting Policies
- -----------------------------------------
Basis of Presentation and Principles of Consolidation: The consolidated
financial statements include the accounts of Engineered Support Systems,
Inc. (Company) and its wholly owned subsidiaries, Engineered Air Systems,
Inc. (Engineered Air) and Engineered Specialty Plastics, Inc. (ESP),
formerly Associated Products, Inc. All material intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition: Revenues on long-term contracts performed by
Engineered Air, substantially all of which are with the U.S. Government,
are recognized under the percentage of completion method and include a
proportion of the earnings that are expected to be realized on the contract
in the ratio that production costs incurred bear to total estimated
production costs. Earnings expectations are based upon estimates of
contract values and costs at completion. Contracts in process are reviewed
on a periodic basis. Adjustments to revenues and earnings are made in the
current accounting period based upon revisions in contract values and
estimated cost at completion. Provisions for estimated losses on contracts
are recorded when identified.
Revenue is recognized by ESP when products are shipped. Allowances for
anticipated doubtful accounts are provided based on historical experience
and evaluation of specific accounts. The allowance for doubtful accounts
was $110,000 and $84,000 at October 31, 1995 and 1994, respectively.
Contracts in Process and Inventories: Contracts in process and inventories
represent accumulated contract costs, estimated earnings thereon based upon
the percentage of completion method and contract inventories reduced by the
contract value of delivered items of Engineered Air. Inventories of ESP are
valued at the lower of cost or market using the first-in, first-out method.
Accumulated contract costs and inventories are stated at actual costs
incurred and consist of direct engineering, production, tooling, applicable
overhead and other costs (excluding selling, general and administrative
costs which are charged against income as incurred). Title to or a security
interest in certain items included in contracts in process and inventories
is vested in the U.S. Government by reason of progress payment provisions
of related contracts. In accordance with industry standards, contracts in
process and inventories related to long-term contracts are classified as
current assets even though a portion may not be realized within one year.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost and are depreciated using the straight-line method over their
estimated useful lives, which range from 3 to 30 years.
Income Taxes: Deferred income taxes have been provided for the tax effects
of temporary differences between financial and income tax reporting. These
differences principally relate to the reporting of contract revenues,
depreciation expense and employee benefits.
Cost in Excess of Net Assets Acquired: The excess of cost over net assets
of acquired minority interest in Engineered Air is being amortized on a
straight-line basis over a 40-year period. The cost in excess of the
acquired net assets of ESP is being amortized on a straight-line basis over
a 10-year period.
Covenant Not to Compete: Included in the purchased assets of ESP is a
covenant not to compete which is being amortized on a straight-line basis
over a 5-year period.
Net Income Per Share: Net income per share for 1995, 1994 and 1993 is based
on the weighted average number of common and common equivalent shares
outstanding of 3,302,574, 3,539,473 and 3,479,573, respectively. Common
stock equivalents represent common stock options as computed based on the
treasury stock method. Primary and fully diluted earnings per share are
substantially the same for each of the years presented.
Industry Information: Engineered Air operates predominantly in one
segment--military ground support equipment--and substantially all of its
revenues are related to contracts with the U.S. Government. ESP
manufactures and sells made-to-order injection molded plastic products, and
manufactures and distributes kitchen and bathroom faucets.
Note B -- Acquisition of Engineered Specialty Plastics, Inc.
- ------------------------------------------------------------
On March 9, 1993, the Company purchased all of the outstanding stock of
Associated Products, Inc. (subsequently changed to Engineered Specialty
Plastics, Inc.) from an investor group for approximately $3.9 million. The
fair value of assets acquired, including goodwill, was $13.1 million and
liabilities assumed totaled $9.2 million. Included in purchased assets were
a $1,000,000 covenant not to compete and goodwill of $345,000 which have
been recorded as intangible assets. The purchase price was financed with
approximately $1.2 million of available cash resources and interim
borrowings of $2.7 million, including $1.7 million borrowed from the
Chairman of the Board. Effective August 20, 1993, permanent financing of
the acquisition was obtained and all interim borrowings were retired. The
operating results of ESP are included in the Company's consolidated results
of operations from the date of acquisition.
If the acquisition had occurred on November 1, 1992, management estimates
that on an unaudited pro forma basis, net revenues, net income and net
income per share would have been $48,003,000, $462,000 and $.13,
respectively, for the year ended October 31, 1993. These pro forma results
are not necessarily indicative of the combined results that would have
occurred had the acquisition actually taken place on November 1, 1992.
Note C -- Accounts Receivable
- -----------------------------
Accounts receivable includes amounts due from the U.S. Government of
$1,753,850 and $3,743,963 at October 31, 1995 and 1994, respectively.
Note D -- Contracts in Process and Inventories
- ----------------------------------------------
Contracts in process and inventories are comprised of the following:
<TABLE>
<CAPTION>
October 31 1995 1994
----------- ----------
<S> <C> <C>
Raw materials $ 1,594,199 $1,790,459
Work-in-process 142,615 91,945
Finished goods 368,400 241,730
Inventories substantially applicable
to government contracts in process,
reduced by progress payments
of $15,182,542 and $11,682,475
in 1995 and 1994, respectively 10,012,265 7,420,310
----------- ----------
$12,117,479 $9,544,444
=========== ==========
</TABLE>
Contracts in process and inventories at October 31, 1995 and 1994 include
estimated revenue of $18,094,000 and $15,694,000, respectively,
representing accumulated contract costs and related estimated earnings on
uncompleted government contracts.
Note E -- Settlement of ROWPU Claim
- -----------------------------------
As directed by the U.S. Government, the Company submitted a claim in 1990
for an increase in the value of its Reverse Osmosis Water Purification Unit
(ROWPU) contract awarded in 1987 and completed in 1992. The claim related
to significant delays incurred to contractual production schedule
requirements as a result of numerous government directed enhancements and
modifications to the ROWPU. In June 1991, the U.S. Government issued a
contract modification for $5.3 million to increase the value of the ROWPU
contract to cover the increased cost of raw materials and purchased parts
resulting from such delays.
The remaining portion of the ROWPU claim related to unabsorbed overhead
costs incurred by the Company in previous years as a result of these
delays. In September 1993, the Company reached a settlement under which the
U.S. Government issued a contract modification for $4.2 million to increase
the value of the ROWPU contract to cover these unabsorbed overhead costs.
The claim amount was received and recorded as revenue in the fourth quarter
of 1993.
Note F -- Notes Payable and Long-Term Debt
- ------------------------------------------
In August 1993, the Company entered into a loan agreement with a bank. This
agreement, as amended in September 1995, expires in 1998 and provides a
$6,400,000 revolving credit line. The amount of the revolving credit
borrowing cannot exceed the lesser of a calculated borrowing base or
$6,400,000. The borrowing base is determined by applying specified
percentages to qualified inventories and accounts receivable balances. The
original bank credit agreement also provided for a $3,000,000 term loan. In
December 1994, the Company retired the outstanding balance of the
Industrial Development Refunding Revenue Bonds with proceeds generated upon
restructuring this bank term loan.
Borrowings under the revolving credit line and the term loan bear interest
at the bank's prime rate. No compensating balance is required or maintained
related to the credit agreement. As of October 31, 1995, the Company had
$4,919,000 of unused credit related to this agreement.
In December 1993, ESP entered into a loan agreement with the Arkansas
Teachers Retirement Fund. This agreement provided for a $1,500,000 loan
payable in monthly installments of $14,335 including interest at 8%, with a
final payment of $1,029,400 in 2001. Proceeds of the loan were used to
reduce the outstanding balance of the Company's existing bank term loan.
Long-term debt consists of:
<TABLE>
<CAPTION>
October 31 1995 1994
---------- ----------
<S> <C> <C>
Term loan, prime rate, payable in
monthly installments of $60,402
plus interest, due 1998 $2,114,068 $ 865,091
Installment note, 8.0%, payable in
monthly installments of $14,335
including interest, with a final
payment of $1,029,400 in 2001 1,402,346 1,459,664
Industrial Development Refunding
Revenue Bonds, 7.0%, payable
in quarterly installments of
$85,000 plus interest, due 2000 2,025,000
Other 66,114 354,561
---------- ----------
3,582,528 4,704,316
Less current maturities 827,371 855,897
---------- ----------
$2,755,157 $3,848,419
========== ==========
</TABLE>
The Company has guaranteed a bank term loan for the Engineered Support
Systems, Inc. Employee Stock Ownership Plan (ESOP). As loan payments are
made, shares which had been purchased with proceeds from the loan are
released and allocated to participant accounts. The bank holds the
unallocated shares as collateral for the loan. In August 1993, the Company
refinanced the ESOP loan. The loan, which matures in August 2003, bears
interest at the bank's prime rate and is payable in monthly installments of
$12,300. Under the terms of the loan agreement, the Company is required to
make contributions to the ESOP in an amount no less than the amount
sufficient to fund the monthly installments.
Borrowings under the revolving credit agreement, the bank term loan and the
ESOP loan are secured by substantially all assets of the Company,
Engineered Air and ESP and are guaranteed by the Company. The revolving
credit agreement contains restrictive covenants relating to net worth, debt
to net worth, minimum operating cash flow, and operating cash flow to fixed
charges. At October 31, 1995, the Company was in compliance with all
restrictive covenants of its credit agreement.
Annual principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ended October 31
<S> <C>
1996 $ 827,371
1997 796,599
1998 742,128
1999 84,132
2000 90,834
Thereafter 1,041,464
----------
$3,582,528
==========
</TABLE>
Interest paid was $958,000, $833,000 and $651,000 in 1995, 1994, and 1993,
respectively.
Note G -- Income Taxes
- ----------------------
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
Year Ended October 31 1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $1,554,000 $ 583,000 $(377,000)
State 118,000 82,000 17,000
---------- --------- ---------
1,672,000 665,000 (360,000)
---------- --------- ---------
Deferred:
Federal (20,000) (139,000) 658,000
State (4,000) (24,000) 42,000
---------- --------- ---------
(24,000) (163,000) 700,000
---------- --------- ---------
$1,648,000 $ 502,000 $ 340,000
========== ========= =========
</TABLE>
The deferred income tax provision (benefit) results from the following
temporary differences:
<TABLE>
<CAPTION>
Year Ended October 31 1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Uncompleted contracts $ (37,000) $ 10,000 $ 919,000
Depreciation (118,000) (132,000) (145,000)
Contributions to employee
benefit plans 94,000 (85,000) (74,000)
Other, net 37,000 44,000
---------- --------- ---------
$ (24,000) $(163,000) $ 700,000
========== ========= =========
</TABLE>
A reconciliation between the income tax provision and the annual amount
computed by applying the statutory federal income tax rate to income before
income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended October 31 1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Income tax provision at
statutory federal rate $1,401,000 $428,000 $292,000
State income taxes and other, net 247,000 74,000 48,000
---------- -------- --------
$1,648,000 $502,000 $340,000
========== ======== ========
</TABLE>
Income taxes paid (refunded) were $2,072,000, $(206,000) and $401,000 in
1995, 1994 and 1993, respectively.
As of October 31, 1995, the Company has net operating loss carryforwards of
approximately $23,000 available to offset future taxable income, and
investment and targeted jobs tax credit carryforwards of approximately
$288,000 available to offset future federal income taxes which would
otherwise be payable. These carryforwards, which relate to ESP, expire
through fiscal year 2003. The Company expects the carryforwards to be fully
utilized and, accordingly, has recorded a deferred tax asset relating to
the carryforwards.
Note H -- Leases
- ----------------
The Company leases manufacturing facilities, data processing equipment and
office equipment under non-cancelable operating leases. Rental expense for
all operating leases was $307,000, $433,000 and $369,000 in 1995, 1994, and
1993, respectively.
Future minimum payments under non-cancelable operating leases with initial
or remaining terms of one year or more are as follows:
<TABLE>
<CAPTION>
Year Ended October 31
<S> <C>
1996 $226,000
1997 140,000
1998 29,000
1999 2,000
--------
$397,000
========
</TABLE>
Note I -- Shareholders' Equity
- ------------------------------
The Company has established plans whereby options may be granted to
employees and directors of the Company to purchase shares of the Company's
common stock. Options granted are at an option price equal to the market
value on the date the option is granted. Subject to continuation of
employment, all options must be exercised within five years from the date
of grant and are exercisable at any time during this period. As of October
31, 1995, 540,637 shares of unissued common stock were authorized and
reserved for outstanding options.
Transactions involving the stock option plans are as follows:
<TABLE>
<CAPTION>
Shares Price per share
------- ---------------
<S> <C> <C>
Outstanding at October 31, 1993 487,250 $1.31 to $3.50
Options exercised (45,375) $1.50 to $3.50
Options granted 7,500 $3.56
Options canceled (28,000) $1.50 to $3.50
------- ---------------
Outstanding at October 31, 1994 421,375 $1.31 to $3.56
Options exercised (65,063) $1.50 to $3.50
Options granted 50,500 $4.25 and $5.75
Options canceled (41,500) $1.50 to $3.50
------- ---------------
Outstanding at October 31, 1995 365,312 $1.31 to $5.75
======= ===============
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS 123), which addresses accounting for stock option,
purchase and award plans. The Company will adopt SFAS 123 in 1997, when
required, and will then have the option of valuing stock compensation using
either the "fair value based method" or the "intrinsic value based method."
The Company anticipates that, when adopted, SFAS 123 will have no material
effect on its financial position or results of operations.
On August 16, 1994, the Company entered into an agreement to purchase
484,310 shares of common stock from a former director. On the date of this
agreement, 224,594 of these shares were purchased for $187,500 of cash and
$656,076 of inventories and equipment. The remaining 259,716 shares were
purchased on March 30, 1995 for $972,586 in cash.
Note J -- Retirement Plans
- --------------------------
Engineered Air has a non-contributory defined benefit pension plan covering
substantially all full-time employees covered by a collective bargaining
agreement. The Company's funding policy is to make annual contributions to
the pension plan sufficient to fund the normal cost including the
amortization of prior service cost over a period of 15 years.
A summary of the components of net periodic pension cost for the defined
benefit plan is as follows:
<TABLE>
<CAPTION>
Year Ended October 31 1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Service cost $113,100 $ 97,100 $ 98,200
Interest cost on projected benefit
obligation 242,800 226,600 212,000
Actual return on plan assets (430,200) (295,200) (279,000)
Net amortization and deferral 191,600 39,000 80,900
-------- --------- ---------
Total pension expense $117,300 $ 67,500 $ 112,100
======== ========= =========
</TABLE>
Assumptions used in accounting for the defined benefit plan in 1995, 1994,
and 1993 were a weighted average discount rate of 7.25 percent, 8.0
percent, and 7.0 percent, respectively, and an expected long-term rate of
return on assets of 9.0 percent.
The following table sets forth the funded status and the amounts recognized
in the consolidated balance sheets for the defined benefit pension plan:
<TABLE>
<CAPTION>
October 31 1995 1994
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation $3,468,300 $3,015,600
Non-vested benefit obligation 69,700 52,800
---------- ----------
Accumulated benefit obligation $3,538,000 $3,068,400
========== ==========
Plan assets at fair value -- primarily
listed common stocks, bonds and U.S.
Government securities $3,545,100 $3,193,700
Projected benefit obligation 3,538,000 3,068,400
---------- ----------
Plan assets in excess of projected
benefit obligation 7,100 125,300
Unrecognized net gain (235,600) (339,000)
Unrecognized prior service cost 174,800 199,800
Unrecognized net obligation at
November 1, 1986, net of amortization 36,000 50,000
---------- ---------
Net pension asset (liability)
recognized in consolidated balance sheets $ (17,700) $ 36,100
========== ==========
</TABLE>
The Company has an Employee Stock Ownership Plan (ESOP) covering all
salaried employees of Engineered Air, all non-salaried employees of
Engineered Air who are not covered by a collective bargaining agreement and
all employees of ESP. The ESOP provides for a matching contribution by the
Company of no less than 25% of each employee's contributions up to a
maximum of 6% of the employee's earnings. The Company also makes
discretionary annual contributions in an amount no less than the amount
sufficient to pay the monthly installments of the ESOP bank loan. All
employee contributions to the ESOP and all matching contributions are 100
percent vested, and employees are vested at a rate of 20 percent per year
in the discretionary Company contributions. The Company has recorded
expense based on contributions to the ESOP for the years ended October 31,
1995, 1994, and 1993 of $311,000, $347,000, and $313,000, respectively.
Interest payments on the ESOP bank loan were $121,000, $119,000, and
$99,000 in 1995, 1994, and 1993, respectively.
The Accounting Standards Division of the American Institute of Certified
Public Accountants issued Statement of Position 93-6 "Employers' Accounting
for Employee Stock Ownership Plans" (SOP 93-6), in November 1993. SOP 93-6
requires accounting for ESOPs under the shares allocated method for shares
purchased by ESOPs after December 31, 1992. The Company is covered by the
grandfather provisions of SOP 93-6 for its current ESOP shares which were
purchased from the Company prior to December 31, 1992 and are accounted for
under the cash payment method. All ESOP shares are considered outstanding
for net income per common share purposes.
Note K -- Segment Information
- -----------------------------
The Company operates in two industry segments: the military ground support
equipment segment and the custom molded plastic products segment. The
military ground support equipment operations involve the engineering,
fabrication and assembly of a broad range of support equipment designed for
rapid deployment around the world. The custom molded plastic products
operations involve the manufacture and sale of a broad range of injection
molded resin products, as well as the manufacture and sale of a proprietary
line of plastic faucets. All corporate expenses and assets have been
allocated to the business segments.
Approximately 78%, 75% and 78%, respectively, of 1995, 1994 and 1993
consolidated revenues were from two customers -- 63%, 56% and 63%,
respectively, from the U.S. Government and 15%, 19% and 15%, respectively,
from another customer. The Company's export net sales and intersegment net
sales are not significant.
Information by industry segment is summarized as follows:
<TABLE>
<CAPTION>
Year Ended October 31 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net Revenues:
Military Ground Support Equipment $42,892,939 $33,067,325 $27,845,468
Custom Molded Plastic Products 22,639,763 23,552,006 14,381,785
----------- ----------- -----------
Total $65,532,702 $56,619,331 $42,227,253
=========== =========== ===========
Income from Operations:
Military Ground Support Equipment $ 4,029,748 $ 1,456,163 $ 859,007
Custom Molded Plastic Products 985,947 629,583 686,538
----------- ----------- -----------
Total $ 5,015,695 $ 2,085,746 $ 1,545,545
=========== =========== ===========
Identifiable Assets:
Military Ground Support Equipment $20,007,390 $19,726,944 $14,379,894
Custom Molded Plastic Products 13,784,222 14,658,815 14,193,769
----------- ----------- -----------
Total $33,791,612 $34,385,759 $28,573,663
=========== =========== ===========
Depreciation and Amortization
Expense:
Military Ground Support Equipment $ 719,474 $ 948,618 $ 1,047,159
Custom Molded Plastic Products 1,175,395 1,067,699 692,713
----------- ----------- -----------
Total $ 1,894,869 $ 2,016,317 $ 1,739,872
=========== =========== ===========
Capital Expenditures:
Military Ground Support Equipment $ 212,624 $ 75,829 $ 156,273
Custom Molded Plastic Products 696,171 2,160,560 453,712
----------- ----------- -----------
Total $ 908,795 $ 2,236,389 $ 609,985
=========== =========== ===========
</TABLE>
Note L -- Contingencies
- -----------------------
As a government contractor, Engineered Air is continually subject to audit
by various agencies of the U.S. Government to determine compliance with
various procurement laws and regulations. As a result of such audits and as
part of normal business operations, various claims and charges are asserted
against Engineered Air. It is not possible at this time to predict the
outcome of all such actions currently being reviewed by Engineered Air.
However, management is of the opinion that Engineered Air has good defenses
against such actions and believes that none of these matters will have a
material effect on the consolidated financial position or the results of
operations of the Company.
- ---------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
To the Board of Directors and Shareholders of Engineered Support Systems,
Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of income, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of
Engineered Support Systems, Inc. and its subsidiaries at October 31, 1995
and 1994, and the results of their operations and their cash flows for each
of the three years in the period ended October 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
St. Louis, Missouri
December 8, 1995
- -------------------------------------
REPORT OF MANAGEMENT RESPONSIBILITIES
- -------------------------------------
The Company's management is responsible for the fair presentation and
consistency of all financial data included in the annual report. Where
necessary, the data reflects management estimates.
The Company's Audit Committee consists of three non-employee directors.
This Committe meets with financial officers and Price Waterhouse LLP
personnel to review internal controls, financial reporting and accounting
practices. Price Waterhouse LLP meets with the Audit Committee, with and
without management present, to discuss their examinations, the adequacy of
internal controls and the quality of financial reporting.
- ------------------------
SUPPLEMENTAL INFORMATION
- ------------------------
The table below presents unaudited quarterly financial information in
thousands, except for per share data, for the years ended October 31, 1995
and 1994:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
January 31 April 30 July 31 October 31
1995 1994 1995 1994 1995 1994 1995 1994
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net
revenues $15,344 $11,433 $17,655 $11,230 $15,454 $15,571 $17,080 $18,385
------- ------- ------- ------- ------- ------- ------- -------
Gross
profit 2,204 1,738 2,859 1,787 2,715 1,921 2,967 2,699
------- ------- ------- ------- ------- ------- ------- -------
Net income 330 29 675 118 684 173 784 435
------- ------- ------- ------- ------- ------- ------- -------
Net income
per share .10 .01 .20 .03 .21 .05 .24 .12
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Market Data
- -----------
The Company's common stock trades on the NASDAQ Stock Market under the
symbol EASI. As of December 15, 1995, the approximate number of common
shareholders was 2,100. The following table sets forth the high and low
stock prices for each quarter as provided by the NASDAQ Stock Market.
<TABLE>
<CAPTION>
1995 1994
High Low High Low
--------------------- ------------------
<S> <C> <C> <C> <C>
Quarter Ended:
January 31 4 1/8 3 13/16 4 3 1/8
April 30 5 1/8 3 7/8 4 1/8 3 3/8
July 31 7 1/8 5 4 5/8 3 3/4
October 31 8 5 3/8 4 1/8 3 5/8
----- ------- ----- -----
</TABLE>
Dividends
- ---------
The Board of Directors initiated a semi-annual dividend program during the
year beginning with a $.01 per share dividend payable July 31, 1995 to
shareholders of record on June 30, 1995.
- ---------------------
CORPORATE INFORMATION
- ---------------------
Transfer Agent and Registrar
Boatmen's Trust Company
510 Locust Street
St. Louis, MO 63178
Independent Accountants
Price Waterhouse LLP
One Boatmen's Plaza
St. Louis, MO 63101
Legal Counsel
Bearden, Breckenridge and Mattern
1034 S. Brentwood Blvd.
St. Louis, MO 63117
Annual Meeting
March 6, 1996
10:00 a.m. at the offices of the Company
1270 North Price Road
St. Louis, MO 63132
Form 10-K
A copy of the Company's 1995 Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available upon written request to:
Investor Relations
Engineered Support Systems, Inc.
1270 North Price Road
St. Louis, MO 63132
- ----------------------
DIRECTORS AND OFFICERS
- ----------------------
Directors
Engineered Support Systems, Inc.
- --------------------------------
Michael F. Shanahan, Sr.
Chairman, President and Chief Executive Officer
John J. Wichlenski
President and Chief Executive Officer Engineered Air Systems, Inc.
W. Raymond Barrett
President
Bio-Medical Systems, Inc.
Alexander M. Cornwell, Jr.
President
Cornwell Consulting
Thomas J. Guilfoil
Partner
Guilfoil, Petzall & Shoemake
LTG Kenneth E. Lewi
U.S. Army, Retired
John J. Quinn
President
St. Louis Blues Hockey Club
Michael F. Shanahan, Jr.
Lockton Companies
Earl W. Wims
Chairman
Marketing Horizons, Inc.
Management
Engineered Support Systems, Inc.
- --------------------------------
Michael F. Shanahan, Sr.
Chairman, President and
Chief Executive Officer
Gary C. Gerhardt
Executive Vice President
and Chief Financial Officer
Management
Engineered Air Systems, Inc.
- ----------------------------
Michael F. Shanahan, Sr.
Chairman
John J. Wichlenski
President and Chief
Executive Officer
Gary C. Gerhardt
Executive Vice President
and Chief Financial Officer
Ronald W. Davis
Vice President-Marketing
Dan D. Jura
Vice President-Sales
E. Allen Springer
Vice President-Engineering
Management
Engineered Specialty Plastics, Inc.
- -----------------------------------
Michael F. Shanahan, Sr.
Chairman
Harvey W. Bright
President and Chief
Executive Officer
Gary C. Gerhardt
Executive Vice President
and Chief Financial Officer
Engineered Support Systems, Inc.
- --------------------------------
1270 North Price Rd.
St. Louis, Missouri 63132
Phone: (314)993-5880
Fax: (314)567-4052
EXHIBIT 24
ENGINEERED SUPPORT SYSTEMS, INC.
ARTICLE 24 - CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-14504) pertaining to the Engineered Air Systems,
Inc. Employee Stock Ownership Plan and the Registration Statements (Form
S-8 Nos. 33-36817, 33-36818, 33-77338, 33-77340 and 33-77342) pertaining to
the 1987 Stock Equity Plan, the 1990 Stock Equity Plan, the 1991 Stock
Equity Plan, the 1992 Stock Option Plan for Non-employee Directors and 1993
Stock Option Plan of Engineered Air Systems, Inc., respectively, of our
report dated December 8, 1995, which appears on page 15 of the 1995 Annual
Report to Shareholders of Engineered Support Systems, Inc. which is
incorporated by reference in Engineered Support Systems, Inc.'s Annual
Report on Form 10-K for the year ended October 31, 1995.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
St. Louis, Missouri
January 25, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT AS INCORPORATED BY REFERENCE IN FORM 10-K FOR THE YEAR ENDED OCTOBER 31,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<CASH> 386,609
<SECURITIES> 0
<RECEIVABLES> 3,620,596
<ALLOWANCES> 110,000
<INVENTORY> 12,117,479
<CURRENT-ASSETS> 16,628,979
<PP&E> 26,227,935
<DEPRECIATION> 11,626,806
<TOTAL-ASSETS> 33,791,612
<CURRENT-LIABILITIES> 11,929,272
<BONDS> 3,923,657
<COMMON> 34,570
0
0
<OTHER-SE> 15,182,054
<TOTAL-LIABILITY-AND-EQUITY> 33,791,612
<SALES> 65,532,702
<TOTAL-REVENUES> 65,532,702
<CGS> 54,787,720
<TOTAL-COSTS> 54,787,720
<OTHER-EXPENSES> 5,703,287
<LOSS-PROVISION> 26,000
<INTEREST-EXPENSE> 894,633
<INCOME-PRETAX> 4,121,062
<INCOME-TAX> 1,648,000
<INCOME-CONTINUING> 2,473,062
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,473,062
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
