<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, 1996 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 15, 1997, the aggregate market
value of the voting stock held by nonaffiliates of the Registrant was
approximately $29,281,000.
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at January 15, 1997 was 3,189,460.
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, 1996. 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, 1997 (the Definitive Proxy
Statement) to be filed within 120 days after the close of the year ended
October 31, 1996.
<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
storage containers. 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.
ESP's principal customers are large, well-established producers of
consumer products. (For the year ended October 31, 1996, 23% 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.
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A significant portion of ESP sales are of storage containers. ESP
anticipates that container sales will remain strong as it is in geographic
proximity to several large purchasers of these products, including companies
within the poultry industry. 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 23 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, 1996.
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.
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 specifications
MIL-I-45208 and MIL-Q-9858, which apply to all contracts currently in
progress.
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ESP'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 1996
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 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.
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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 its proprietary information and patents to be
valuable assets. However, the Company's business is not materially dependent
on patent protection.
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.
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DEFENSE BACKLOG
- ---------------
The following table summarizes funded defense backlog information (in
millions) as of October 31 for the indicated years:
1996 $90.7
1995 90.4
1994 77.9
1993 52.8
1992 38.4
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, 1996, the Company employed 353 persons. Of the 226
employees at Engineered Air, 177 were engaged in manufacturing activities, 23
in engineering activities, and 26 in office administration and management
functions. Approximately 100 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 127 employees at ESP, 99 are engaged in manufacturing activities
and 28 in sales, office administration and management functions.
The Company considers its employee relations to be satisfactory.
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 approximately 14,000
square feet in St. Louis County, Missouri. This facility is also used for
manufacturing and assembly.
ESP owns a manufacturing facility in Hot Springs, Arkansas. The
Company-owned building consists of approximately 100,000 square feet on 4.5
acres.
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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, 1996.
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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 sale prices for such stock during
1996 is shown in Supplemental Information on page 16 of the 1996 Annual Report,
incorporated herein by reference. During 1995, the Company initiated a
semi-annual dividend program. The most recently declared dividend was in the
amount of $.0115 per share payable January 31, 1997 to shareholders of record
as of December 31, 1996.
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 1996 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 1996 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, 1996
at the pages indicated, are incorporated herein by reference:
Consolidated Balance Sheets, October 31, 1996 and 1995, page 6.
Consolidated Statements of Income, years ended October 31, 1996, 1995 and
1994, page 7.
Consolidated Statements of Shareholders' Equity, years ended October 31,
1996, 1995 and 1994, page 7.
Consolidated Statements of Cash Flows, years ended October 31, 1996, 1995
and 1994, page 8.
Notes to Consolidated Financial Statements, pages 9 through 14.
The quarterly financial information included in Supplementary Information on
page 16 of the 1996 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The executive officers and directors of the Company, Engineered Air and
ESP as of January 15, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------------- --- --------------------------------------
<S> <C> <C>
Michael F. Shanahan Sr.<F1> 57 Chairman, President, Chief
Executive Officer and Director
(Company)
John J. Wichlenski<F1> 53 Director (Company) and President
and Chief Executive Officer
(Engineered Air)
W. Raymond Barrett<F1><F3> 64 Director (Company)
Alexander M. Cornwell Jr.<F2> 70 Director (Company)
Thomas J. Guilfoil<F2> 77 Director (Company)
LTG Kenneth E. Lewi<F3> 66 Director (Company)
Michael F. Shanahan Jr.<F1><F2><F3> 30 Director (Company)
Earl W. Walker<F2> 76 Director (Company)
Earl W. Wims, Ph.D.<F3> 57 Director (Company)
John E. Capeless 51 Vice-President and General Manager
(ESP)
Ronald W. Davis 50 Vice President-Marketing
(Engineered Air)
Michael W. Donnelly 41 Vice President-Manufacturing
(Engineered Air)
Gary C. Gerhardt 51 Executive Vice President
and Chief Financial Officer
(Company, Engineered Air and ESP)
Dan D. Jura 44 Vice President-Sales
(Engineered Air)
E. Allen Springer Jr. 51 Vice President-Engineering
(Engineered Air)
<FN>
- -------------------
<F1> Member of Executive Committee
<F2> Member of Audit Committee
<F3> Member of Compensation Committee
</TABLE>
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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. He was named Chairman of the Company and of Engineered Air in 1987, and
was named Chairman of ESP upon its acquisition in 1993.
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. 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.
John E. Capeless has been Vice President and General Manager of ESP since
April 1996. Prior thereto, he was Vice President of Operations for Atlantis
Plastics, Inc. from 1994. He served as Director of Manufacturing for Frem
Corporation from 1989 to 1994.
Michael W. Donnelly has been Vice President-Manufacturing of Engineered
Air since March 1996. He served as Director of Manufacturing from May 1994
to March 1996. Prior thereto, he was Manager of Industrial Engineering since
1989. Mr. Donnelly joined Engineered Air in 1981.
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 in the U.S. Army centered primarily on providing logistical support
to U.S. armed forces.
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<PAGE> 11
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 E. Walker has been a director of the Company since March 1996. He has
been the President and principal shareholder of Carr Lane Manufacturing since
founding it in 1952.
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, 1996) incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANGEMENT
- -------- -------------------------------------------------------------
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, 1996) 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, 1996) incorporated
herein by reference.
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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 1996 Annual Report of the registrant to its
shareholders, are incorporated by reference in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets-October 31, 1996 and 1995
Consolidated Statements of Income-years ended October 31, 1996, 1995 and
1994.
Consolidated Statements of Shareholders' Equity-years ended October 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows-years ended October 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements-October 31, 1996
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. List 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. <F1>
3.2 Amendment of Articles of Incorporation <F2>
3.3 Amended and Restated By-Laws of Engineered Support Systems, Inc. <F2>
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4.1 Credit Agreement dated August 19, 1993 by and between The Boatmen's
National Bank of St. Louis and Engineered Support Systems, Inc. <F8>
4.2 Engineered Air Systems, Inc. 1987 Stock Equity Plan <F4>
4.3 Engineered Air Systems, Inc. 1990 Stock Equity Plan <F5>
4.4 Engineered Air Systems, Inc. 1991 Stock Equity Plan <F9>
4.5 Engineered Support Systems, Inc. 1992 Stock Option Plan for
Nonemployee Directors <F10>
4.6 Engineered Support Systems, Inc. 1993 Stock Option Plan <F11>
4.7 Engineered Air Systems, Inc. Employee Stock Ownership Plan <F6>
4.8 Trust Agreement for the Engineered Air Systems, Inc. Employee Stock
Ownership Trust <F6>
10.1 Employment Agreement with Michael F. Shanahan Sr. <F3>
10.2 Form of Indemnification Agreement with Directors <F2>
10.3 Lease Agreement dated February 15, 1992 by and between Engineered Air
Systems, Inc. and Hermann Marketing, Inc. <F7>
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. <F8>
10.5 Form of Employment Agreement with Presidents and Vice Presidents
of Engineered Air and ESP. <F12>
10.6 Engineered Support Systems, Inc. Amended and Restated Executive
Incentive Plan. <F12>
11. Statement Re: Computation of Net Income Per Share.
13. Engineered Support Systems, Inc. Annual Report for the year ended
October 31, 1996 (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 <F1>
24. Consent of Price Waterhouse LLP, Independent Accountants
27. Statement Re: Summary Financial Information
13
<PAGE> 14
[FN]
<F1> 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.
<F2> This information is incorporated herein by reference from Form
10-K Annual Report filed on January 30, 1989.
<F3> This information is incorporated herein by reference from Form
10-K Annual Report filed on January 29, 1990.
<F4> This information is incorporated herein by reference from Form
S-8 registration statement, effective October 3, 1990,
registration Number 33-36817.
<F5> This information is incorporated herein by reference from Form
S-8 registration statement, effective October 3, 1990,
registration Number 33-36818.
<F6> This information is incorporated herein by reference from Form
S-8 registration statement, effective June 11, 1987, registration
Number 33-14504.
<F7> This information is incorporated herein by reference from Form
10-K Annual Report filed on January 29, 1993.
<F8> This information is incorporated herein by reference from Form
10-K Annual Report filed on January 31, 1994.
<F9> This information is incorporated herein by reference from Form
S-8 registration statement, effective April 5, 1994, registration
Number 33-77338.
<F10> This information is incorporated herein by reference from Form
S-8 registration statement, effective April 5, 1994, registration
Number 33-77340.
<F11> This information is incorporated herein by reference from Form
S-8 registration statement, effective April 5, 1994, registration
Number 33-77342.
<F12> This information is incorporated herein by reference from Form
10-K Annual Report filed on January 27, 1996.
(b) There were no reports filed on Form 8-K during the fourth quarter of 1996.
(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.
14
<PAGE> 15
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 15, 1997 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. Chairman of the January 15, 1997
- ---------------------------- Board of Directors,
MICHAEL F. SHANAHAN SR. President and Chief
Executive Officer
/s/ Gary C. Gerhardt Executive Vice President January 15, 1997
- ---------------------------- and Chief Financial Officer
GARY C. GERHARDT
15
<PAGE> 16
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.
<TABLE>
DIRECTORS
---------
<S> <C> <C> <C>
/s/ Michael F. Shanahan Sr. Jan. 15, 1997 /s/ John J. Wichlenski Jan. 15, 1997
- ------------------------------ ------------- ------------------------------ -------------
MICHAEL F. SHANAHAN SR. Date JOHN J. WICHLENSKI Date
/s/ W. Raymond Barrett Jan. 15, 1997 /s/ Alexander M. Cornwell Jan. 15, 1997
- ------------------------------ ------------- ------------------------------ -------------
W. RAYMOND BARRETT Date ALEXANDER M. CORNWELL Date
/s/ Thomas J. Guilfoil Jan. 15, 1997 /s/ Kenneth E. Lewi Jan. 15, 1997
- ------------------------------ ------------- ------------------------------ -------------
THOMAS J. GUILFOIL Date KENNETH E. LEWI Date
/s/ Michael F. Shanahan Jr. Jan. 15, 1997 /s/ Earl W. Wims Jan. 15, 1997
- ------------------------------ ------------- ------------------------------ -------------
MICHAEL F. SHANAHAN JR. Date EARL W. WIMS Date
/s/ Earl E. Walker Jan. 15, 1997
- ------------------------------ -------------
EARL E. WALKER Date
</TABLE>
16
<PAGE> 17
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, 1996 (the Annual Reoprt). 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.
27. Statement Re: Summary Financial Information.
17
<PAGE> 1
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
<CAPTION>
Year Ended October 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME $3,314,208 $2,473,062 $ 755,316
========== ========== ==========
NET INCOME PER SHARE
Average shares outstanding 3,061,905 3,035,582 3,322,486
========== ========== ==========
Net income $1.08 $.81 $.23
========== ========== ==========
PRIMARY EARNINGS PER SHARE
Average shares outstanding 3,061,905 3,035,582 3,322,486
Net effect of dilutive stock options<F1> 191,391 228,294 211,080
---------- ---------- ----------
3,253,296 3,263,876 3,533,566
========== ========== ==========
Net income $1.02 $.76 $.21
========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE
Average shares outstanding 3,061,905 3,035,582 3,322,486
Net effect of dilutive stock options<F1> 216,098 266,992 216,987
---------- ---------- ----------
3,278,003 3,302,574 3,539,473
========== ========== ==========
Net income $1.01 $.75 $.21
========== ========== ==========
<FN>
<F1>Based on the treasury stock method
</TABLE>
1996, 1995 and 1994 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.
<PAGE> 1
/ / CONTENTS
<TABLE>
<S> <C>
Letter to the Shareholders.................. 1
Management's Discussion
and Analysis................................ 4
Consolidated Financial
Statements.................................. 6
Supplemental Information.................... 16
Directors and
Officers..................... INSIDE BACK COVER
</TABLE>
<PAGE> 2
/ / LETTER TO THE SHAREHOLDERS
Dear Shareholder:
I am pleased to report that 1996 was a year of record performance for
Engineered Support Systems, Inc. Net income, net revenues and book value
increased to their highest levels in Company history. More importantly, our
ability to transform our operations over the course of the last five years and
thereby reach these record levels has resulted in a significant increase in
shareholder value. Total shareholder return for the five-year period ended
December 31, 1996 was 883%. Because we expect revenues and profitability to
continue to grow, we look forward to providing additional value to our
shareholders in future years.
SUMMARY OF 1996
The Company reported net income of $3,314,000, or $1.01 per share, on
revenues of $81.5 million for 1996. This compares with net income of
$2,473,000, or $0.75 per share, on revenues of $65.5 million for 1995.
The defense subsidiary, Engineered Air Systems, Inc. (Engineered Air) once
again posted outstanding results for the year with net revenues increasing 38%
from 1995. This follows revenue increases of 30% in 1995 and 19% in 1994.
Engineered Air also generated the lion's share of consolidated earnings in
1996. The defense subsidiary continues to benefit from a profitable backlog of
contracts, cultivated from the Company's selective bidding strategy, and from a
government emphasis on ``best value'' buying programs, which has resulted in a
shakeout of low cost competitors and has rewarded Engineered Air for its
exceptional performance record. In spite of the substantial increase in volume,
Engineered Air's funded backlog at October 31, 1996 remained strong at $90.7
million, or approximately one and one-half times current year net revenues.
This level of backlog provides a significant revenue base headed into 1997.
The past year was a challenging one for Engineered Specialty Plastics, Inc.
(ESP), the commercial subsidiary. In spite of the loss of its most significant
customer, ESP experienced a decrease in net revenues of just $0.3 million, or
1%, in 1996. This accomplishment was the result of an intensified marketing
effort and has left ESP with a more diversified and profitable portfolio of
business. Fourth quarter net revenues and net income for the subsidiary
surpassed those of each of the first three quarters of the year. Therefore, we
believe that ESP is poised for significant top- and bottom-line gains in 1997
and beyond.
GROWING FINANCIAL STRENGTH
The Company's record 1996 performance has provided added flexibility to an
already strong financial position. In 1996, the Company generated free cash
flow, defined as net income plus non-cash items less capital expenditures, of
$3.61 million, or $1.10 per share. Cash and cash equivalents less revolving
credit borrowings increased by $2.2 million. Working capital increased from
$4.7 million to $8.4 million and shareholders' equity increased from $15.2
million to $19.3 million during the year.
In addition to $1.1 million of capital expenditures and $0.9 million of
payments on long-term debt, the Company utilized $0.5 million to purchase
additional treasury shares. In total, 537,941 shares of treasury stock have
been purchased in the past three years for approximately $2.3 million, or $4.25
per share. These purchases have provided a significant return on investment to
our shareholders.
However, as previously announced, the Company is actively investigating the
possibility of an acquisition. We believe that such a transaction could provide
tremendous opportunities by way of leveraging our existing resources and
further enhancing shareholder value.
LARGEST CONTRACT IN COMPANY HISTORY
Whether or not the Company is able to finalize a suitable acquisition,
significant internal opportunities already exist. Primary among these is the
recent U.S. Army award to Engineered Air of the Chemical and Biological
Protected Shelter System (CBPSS) contract. The CBPSS provides a contamination
free, environmentally controlled work area that is used as a field medical
facility. This contract is the
1 / /
<PAGE> 3
largest in Company history with an anticipated value, including options, in
excess of $110 million. It provides a significant revenue stream through the
year 2003 and represents an opportunity for similar awards from the other
branches of the military, as well as from foreign governments.
I would like to thank all of our fine employees and directors for making 1996
a year to remember.
However, I am confident that 1997 will be even better.
Sincerely,
/s/ Michael F. Shanahan, Sr.
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 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net revenues $81,507 $65,533 $56,619 $42,227 $40,432
Gross profit 12,414 10,745 8,145 7,461 4,635
Income from operations 5,956 5,016 2,085 1,546 5
Interest expense, net 434 895 828 686 384
Income (loss) before income taxes 5,522 4,121 1,257 860 (379)
Income tax provision (benefit) 2,208 1,648 502 340 (140)
Net income (loss) 3,314 2,473 755 520 (239)
- --------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION:
Working capital $ 8,354 $ 4,700 $ 3,120 $ 4,255 $ 8,122
Property, plant and equipment, net 14,097 14,601 15,290 14,998 8,068
Total assets 34,092 33,792 34,386 28,574 23,079
Long-term debt and ESOP bank loan 2,959 3,924 5,152 6,179 4,004
Shareholders' equity 19,251 15,217 13,330 13,161 12,426
- --------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net income (loss) $1.01 $.75 $.21 $.15 $(.07)
Dividends .02 .01 .00 .00 .00
Shareholders' equity 6.08 5.10 4.21 3.93 3.73
Net revenues 24.86 19.84 16.00 12.14 12.00
- --------------------------------------------------------------------------------------------------------------
BACKLOG OF DEFENSE ORDERS $90,722 $90,385 $77,856 $52,847 $38,424
- --------------------------------------------------------------------------------------------------------------
</TABLE>
/ / 2
<PAGE> 4
/ / ENGINEERED AIR SYSTEMS, INC.
Engineered Air was formed on December 24, 1981 and on March 30, 1982 acquired
certain assets and liabilities of the Defense Systems Division of
Allis-Chalmers Corporation. This subsidiary specializes in the engineering,
fabrication and assembly of a broad range of military ground support equipment.
Brief descriptions of significant programs are presented below:
CHEMICAL AND BIOLOGICAL
PROTECTED SHELTER SYSTEM
The CBPSS provides a contamination free, environmentally controlled work area
that is used as a field medical facility. It is a specially designed system
whose center piece is a soft walled tent supported by pumped columns of air.
The air beams support the tent without any additional framing. The tent is
connected to and carried by a High Mobility Multi-purpose Wheeled Vehicle, more
commonly known as a ``Humvee.'' The CBPSS permits medical specialists to treat
soldiers in an area free of chemical or biological contamination during the
most extreme weather conditions. The heart of the CBPSS is an Engineered
Air-designed, hydraulically powered Environmental Support System (ESS) that
provides heating, cooling and ventilated air as well as nuclear, chemical and
biological filtration. The system also provides the power to operate lights,
communication and medical equipment.
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
are 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 used to cool maintenance shelters, portable
hangers 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 are 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 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, was acquired from a private investor
group on March 9, 1993. This subsidiary manufactures a wide range of injection
molded plastic products used primarily in consumer goods. These products
include television cabinets and backs, storage containers, 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. This subsidiary
also has a fully integrated business information system which 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.
3 / /
<PAGE> 5
/ / MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 84.8 83.6 85.6
- -------------------------------------------------------------------------------------------------------------------
Gross profit 15.2 16.4 14.4
Selling, general and administrative expense 7.9 8.7 10.7
- -------------------------------------------------------------------------------------------------------------------
Income from operations 7.3 7.7 3.7
Interest expense, net 0.5 1.4 1.5
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 6.8 6.3 2.2
Income tax provision 2.7 2.5 0.9
- -------------------------------------------------------------------------------------------------------------------
Net income 4.1% 3.8% 1.3%
- -------------------------------------------------------------------------------------------------------------------
</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, 1996, 1995,
and 1994. This discussion should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements.
1996 COMPARED TO 1995
Net revenues increased 24% in 1996 to a record $81.5 million. The defense
subsidiary, Engineered Air Systems, Inc. (Engineered Air), posted net revenues
of $59.2 million in 1996 versus $42.9 million in 1995, an increase of 38%.
Higher production levels at Engineered Air were primarily generated from its
contracts for MA-3D and C-5 Flight Line Air Conditioners, Air Force Water
Distribution Systems, Aviation Ground Power Units, Revetment Kits and Army
Space Heaters.
The commercial subsidiary, Engineered Specialty Plastics, Inc. (ESP),
contributed net revenues of $22.3 million in 1996 as compared to $22.6 million
in 1995. This relatively unchanged level of net revenues was achieved in spite
of a $5.0 million reduction in sales to the subsidiary's primary customer,
which ended its relationship with ESP in June 1996 as part of a strategic
restructuring. Despite this loss, fourth quarter net revenues at ESP were $6.6
million, representing the subsidiary's best quarter of 1996.
Gross profit increased from $10.7 million in 1995 to $12.4 million in 1996.
This increase was primarily the result of the significant increase in volume at
Engineered Air during the year. Selling, general and administrative expense
increased from $5.7 million in 1995 to $6.5 million in 1996. However, this
expense decreased as a percentage of net revenues from 8.7% in 1995 to 7.9% in
1996. This decrease reflects the Company's emphasis on cost containment as an
integral component of its growth objectives.
Net interest expense decreased from $0.9 million in 1995 to $0.4 million in
1996 primarily as a result of the substantial cash flow provided by Engineered
Air operations. The effective income tax rate was 40% in both 1996 and 1995.
1995 COMPARED TO 1994
Net revenues increased 16% in 1995 to $65.5 million. 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. Net revenues for
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.
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.
OUTLOOK FOR 1997
AND FUTURE YEARS
The Company's firm backlog of defense orders increased to $90.7 million at
October 31, 1996 from $90.4 million at October 31, 1995. New contract awards,
which totaled $59.6 million in 1996, 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
/ / 4
<PAGE> 6
totaling $154 million as of October 31, 1996.
The Company anticipates that revenue and net income will increase in 1997 at
both subsidiaries. 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, Aviation Ground Power Units, Revetment Kits, B-1B
Air Conditioners and the Chemical and Biological Protected Shelter System
(CBPSS). The first four contracts are in the production phase. Engineered Air's
1997 efforts on the latter relate to first article development on this contract
which includes production options in excess of $100 million extending through
the year 2003. CBPSS, therefore, provides the Company with a significant base
of revenues through its contract life. 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 in the upcoming year.
In 1996, ESP absorbed the loss of its single most significant customer and by
the fourth quarter had more than replaced the related revenues and gross
profit. As a result, this subsidiary enters 1997 with a more diversified,
stable and profitable customer base. The Company anticipates that ESP will post
significant gains in revenues and net income during 1997 and believes that the
subsidiary has outstanding growth potential in future years within both
existing and untapped markets.
The Company is actively pursuing new acquisitions, primarily within the
defense industry, 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, 1996, the Company had no borrowings
against this line and a cash balance of $1.4 million. The Company anticipates
that its cash balance will increase significantly in 1997 as cash provided from
operations continues to improve. This improvement is expected as a result of
continued significant cash flow from Engineered Air and from an improvement in
the operating results of ESP.
On October 31, 1996, the Company's working capital and ratio of current
assets to current liabilities were $8.4 million and 1.92 to 1 as compared with
$4.7 million and 1.39 to 1 a year ago. This growth in liquidity is net of $0.9
million of payments on long-term debt, $1.1 million of capital expenditures and
$0.5 million of treasury stock purchases. The ratio of the long-term debt and
ESOP bank loan to shareholders' equity improved to 0.15 to 1 at October 31,
1996 as compared with 0.26 to 1 at October 31, 1995.
The Company anticipates that capital expenditures in 1997 will approximate
$1.0 million. 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,
1996, 1995 and 1994 from each of the Company's product classifications:
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Engineered Air Systems, Inc.:
Air conditioning and heating systems $25.0 30.6% $33.3 50.8% $11.1 19.6%
Water and petroleum distribution systems 13.4 16.5 3.5 5.4 11.9 21.0
Other ground support equipment 20.8 25.5 6.1 9.3 10.0 17.7
- -------------------------------------------------------------------------------------------------------------------------
59.2 72.6 42.9 65.5 33.0 58.3
Engineered Specialty Plastics, Inc.:
Custom molded plastic products 22.3 27.4 22.6 34.5 23.6 41.7
- -------------------------------------------------------------------------------------------------------------------------
Total $81.5 100.0% $65.5 100.0% $56.6 100.0%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
5 / /
<PAGE> 7
<TABLE>
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
October 31 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,415,773 $ 386,609
Accounts receivable, net 4,855,330 3,510,596
Contracts in process and inventories, net 10,014,627 12,117,479
Refundable income taxes 88,486
Deferred income taxes 836,625 372,045
Prepaid expenses and other assets 223,943 242,250
- ------------------------------------------------------------------------------------------------------------
Total Current Assets 17,434,784 16,628,979
PROPERTY, PLANT AND EQUIPMENT
Land 769,798 769,798
Buildings and improvements 9,912,566 9,889,825
Machinery and equipment 15,969,185 14,953,138
Furniture and fixtures 621,781 615,174
- ------------------------------------------------------------------------------------------------------------
27,273,330 26,227,935
Less accumulated depreciation 13,176,403 11,626,806
- ------------------------------------------------------------------------------------------------------------
14,096,927 14,601,129
OTHER ASSETS
Cost in excess of net assets acquired, less
accumulated amortization of $357,996 and $304,931 700,770 753,835
Covenant not to compete, less accumulated amortization
of $734,536 and $534,136 265,464 465,864
Other assets 1,594,186 1,341,805
- ------------------------------------------------------------------------------------------------------------
2,560,420 2,561,504
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $34,092,131 $33,791,612
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ $ 1,124,041
Current maturities of long-term debt 786,802 827,371
Accounts payable 5,834,454 7,702,941
Income taxes payable 78,149
Accrued employee compensation 1,408,759 1,309,658
Other liabilities 1,050,556 887,112
- ------------------------------------------------------------------------------------------------------------
Total Current Liabilities 9,080,571 11,929,272
LONG-TERM DEBT 1,937,805 2,755,157
DEFERRED INCOME TAXES 2,801,639 2,722,059
ESOP GUARANTEED BANK LOAN 1,020,900 1,168,500
SHAREHOLDERS' EQUITY
Common Stock, par value $.01 per share; 10,000,000 shares
authorized; 3,687,273 and 3,456,961 shares issued 36,873 34,570
Additional paid-in capital 8,998,489 7,917,844
Retained earnings 13,465,694 10,217,090
- ------------------------------------------------------------------------------------------------------------
22,501,056 18,169,504
Less ESOP guaranteed bank loan 1,020,900 1,168,500
Less treasury stock at cost, 522,313 and 475,835 shares 2,228,940 1,784,380
- ------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 19,251,216 15,216,624
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $34,092,131 $33,791,612
- ------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
/ / 6
<PAGE> 8
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $81,506,943 $65,532,702 $56,619,331
Cost of revenues 69,093,075 54,787,720 48,473,895
- ---------------------------------------------------------------------------------------------------------
Gross profit 12,413,868 10,744,982 8,145,436
Selling, general and administrative expense 6,457,512 5,729,287 6,059,690
- ---------------------------------------------------------------------------------------------------------
Income from operations 5,956,356 5,015,695 2,085,746
Interest expense, net 434,148 894,633 828,430
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 5,522,208 4,121,062 1,257,316
Income tax provision 2,208,000 1,648,000 502,000
- ---------------------------------------------------------------------------------------------------------
Net income $ 3,314,208 $ 2,473,062 $ 755,316
- ---------------------------------------------------------------------------------------------------------
Net income per share $1.01 $.75 $.21
- ---------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
<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, 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 dividends (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
Net income 3,314,208 3,314,208
Cash dividends (65,604) (65,604)
Exercise of stock options 2,303 1,051,464 1,053,767
Reduction of ESOP guaranteed
bank loan 147,600 147,600
Purchase of treasury stock (471,382) (471,382)
Issuance of treasury
stock to ESOP 29,181 26,822 56,003
- -------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1996 $36,873 $8,998,489 $13,465,694 $(1,020,900) $(2,228,940) $19,251,216
- -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
7 / /
<PAGE> 9
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 3,314,208 $ 2,473,062 $ 755,316
Adjustments to reconcile net income
to net cash provided by (used in) operations:
Depreciation and amortization 1,849,807 1,894,869 2,016,317
Deferred income taxes (385,000) (24,000) (163,000)
Gain on disposal of assets (20,339)
- -----------------------------------------------------------------------------------------------------
Cash provided before changes
in operating assets and liabilities 4,758,676 4,343,931 2,608,633
Changes in operating assets and liabilities:
Accounts receivable (1,344,734) 2,103,628 (1,623,794)
Contracts in process and inventories 2,102,852 (2,573,035) (4,370,842)
Accounts payable (1,868,487) 2,997,574 1,265,449
Current income taxes (166,635) (515,768) 871,184
Net changes in other assets and liabilities 55,647 254,486 107,784
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations 3,537,319 6,610,816 (1,141,586)
- -----------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (1,145,395) (908,795) (2,236,389)
Proceeds from sale of property, plant and
equipment 102,421 73,100
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,042,974) (835,695) (2,236,389)
- -----------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (payments) under
line-of-credit agreements (1,124,041) (3,918,358) 4,587,785
Proceeds of long-term debt 1,500,000
Payments of long-term debt (857,921) (1,121,788) (2,478,864)
Exercise of stock options 1,053,767 235,809 109,287
Purchase of treasury stock (471,382) (972,586) (187,500)
Cash dividends (65,604) (29,337)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (1,465,181) (5,806,260) 3,530,708
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 1,029,164 (31,139) 152,733
Cash and cash equivalents at beginning of year 386,609 417,748 265,015
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,415,773 $ 386,609 $ 417,748
- -----------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
/ / 8
<PAGE> 10
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). All material
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates: In preparing these financial statements, management makes
estimates and uses assumptions that effect some of the reported amounts and
disclosures. Actual results could differ from these estimates and assumptions.
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 costs 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
$271,000 and $110,000 at October 31, 1996 and 1995, 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 although 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.
Cash and Cash Equivalents: Cash equivalents include temporary investments with
original maturities of three months or less.
Net Income Per Share: Net income per share for 1996, 1995 and 1994 is based on
the weighted average number of common and common equivalent shares outstanding
of 3,278,003, 3,302,574 and 3,539,473, 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.
Impairment of Long-Lived Assets: The Financial Accounting Standards Board
(FASB) recently issued Statement of Financial Accounting Standards No. 121,
``Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of,'' (SFAS 121), which the Company is required to adopt effective
November 1, 1996. SFAS 121 requires that long-lived assets and certain
identifiable intangibles held and used by a company be reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 also requires that
long-lived assets and certain identifiable intangibles held for sale, other
than those related to discontinued operations, be reported at the lower of
carrying amount or fair value less cost to sell. The Company does not expect
the effect of its adoption of SFAS 121 to be material.
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 a proprietary line of kitchen and bathroom faucets.
9 / /
<PAGE> 11
NOTE B -- ACCOUNTS RECEIVABLE
Accounts receivable includes amounts due from the U.S. Government of $2,953,619
and $1,753,850 at October 31, 1996 and 1995, respectively.
NOTE C -- CONTRACTS IN PROCESS AND INVENTORIES
Contracts in process and inventories are comprised of the following:
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
October 31 1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
Raw materials $ 1,643,824 $ 1,594,199
Work-in-process 142,604 142,615
Finished goods 557,900 368,400
Inventories substantially applicable to government
contracts in process, reduced by progress payments
of $17,619,487 and $15,182,542 7,670,299 10,012,265
- -----------------------------------------------------------------------------------------------
$10,014,627 $12,117,479
- -----------------------------------------------------------------------------------------------
</TABLE>
Contracts in process and inventories at October 31, 1996 and 1995 include
estimated revenue of $8,619,000 and $18,094,000, respectively, representing
accumulated contract costs and related estimated earnings on uncompleted
government contracts.
NOTE D -- 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 bank credit agreement also
provides for a 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, 1996,
the Company had $6,400,000 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 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Term loan, prime rate, payable in monthly
installments of $60,402 plus interest, due 1998 $1,389,244 $2,114,068
Installment note, 8.0%, payable in monthly installments
of $14,335 including interest, with a final payment
of $1,029,400 in 2001 1,335,363 1,402,346
Other 66,114
- -------------------------------------------------------------------------------------------------
2,724,607 3,582,528
Less current maturities 786,802 827,371
- -------------------------------------------------------------------------------------------------
$1,937,805 $2,755,157
- -------------------------------------------------------------------------------------------------
</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. The loan, which matures in August 2003, bears interest
at the bank's prime rate and is payable in monthly installments of $12,300 plus
interest. 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, 1996, the Company was in compliance with all restrictive covenants
of its credit agreement.
/ / 10
<PAGE> 12
Annual principal payments of long-term debt are as follows:
<TABLE>
- --------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31
- --------------------------------------------------------------------------------------
<S> <C>
1997 $786,802
1998 737,194
1999 78,819
2000 85,109
2001 1,036,683
- --------------------------------------------------------------------------------------
$2,724,607
- --------------------------------------------------------------------------------------
</TABLE>
Interest paid was $531,000, $958,000 and $833,000 in 1996, 1995 and 1994,
respectively.
NOTE E -- INCOME TAXES
The income tax provision is comprised of the following:
<TABLE>
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $2,380,000 $1,554,000 $ 583,000
State 213,000 118,000 82,000
- ------------------------------------------------------------------------------------------------------------
2,593,000 1,672,000 665,000
- ------------------------------------------------------------------------------------------------------------
Deferred:
Federal (327,000) (20,000) (139,000)
State (58,000) (4,000) (24,000)
- ------------------------------------------------------------------------------------------------------------
(385,000) (24,000) (163,000)
- ------------------------------------------------------------------------------------------------------------
$2,208,000 $1,648,000 $ 502,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The deferred income tax provision (benefit) results from the following
temporary differences:
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Uncompleted contracts $(332,000) $ (37,000) $ 10,000
Depreciation 18,000 (118,000) (132,000)
Contributions to employee benefit plans (56,000) 94,000 (85,000)
Other, net (15,000) 37,000 44,000
- ----------------------------------------------------------------------------------------------------------
$(385,000) $ (24,000) $(163,000)
- ----------------------------------------------------------------------------------------------------------
</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 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at statutory federal rate $1,878,000 $1,401,000 $428,000
State income taxes and other, net 330,000 247,000 74,000
- -----------------------------------------------------------------------------------------------------------
$2,208,000 $1,648,000 $502,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Income taxes paid (refunded) were $2,239,000, $2,072,000, and $(206,000) in
1996, 1995 and 1994, respectively.
As of October 31, 1996, the Company had net operating loss carryforwards of
approximately $20,000 available to offset future taxable income, and investment
and targeted jobs tax credit carryforwards of approximately $225,000 available
to offset future federal income taxes which would otherwise be payable. These
carryforwards, which relate to ESP, expire in 2003. The Company expects the
carryforwards to be fully utilized and, accordingly, has recorded a deferred
tax asset relating to the carryforwards.
11 / /
<PAGE> 13
NOTE F -- LEASES
The Company leases manufacturing facilities, data processing equipment and
office equipment under non-cancelable operating leases. Rental expense for all
operating leases was $350,000, $307,000 and $433,000 in 1996, 1995 and 1994,
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>
1997 $199,000
1998 68,000
1999 22,000
2000 22,000
2001 2,000
- ------------------------------------------------------------------------------------
$313,000
- ------------------------------------------------------------------------------------
</TABLE>
NOTE G -- 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, 1996, 310,325 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, 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
Options exercised (230,312) $1.31 to $6.88
Options granted 96,500 $6.13 to $9.63
Options canceled (18,000) $1.88 to $4.25
- ---------------------------------------------------------------------------------------------
Outstanding at October 31, 1996 213,500 $1.88 to $9.63
- ---------------------------------------------------------------------------------------------
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ``Accounting for Stock-Based
Compensation'' (SFAS 123). In 1997, the Company will adopt SFAS 123 but will
continue to use the ``intrinsic value method'' to account for stock-based
compensation. This requires pro forma disclosure of net income and net income
per share as if the ``fair value based method'' was used. The adoption of SFAS
123 will have no effect on the Company's 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 H -- 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.
/ / 12
<PAGE> 14
A summary of the components of net periodic pension cost for the defined
benefit plan is as follows:
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 133,600 $ 113,100 $ 97,100
Interest cost on projected benefit obligation 261,300 242,800 226,600
Actual return on plan assets (288,200) (430,200) (295,200)
Net amortization and deferral 28,300 191,600 39,000
- ----------------------------------------------------------------------------------------------------------
Total pension expense $ 135,000 $ 117,300 $ 67,500
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in accounting for the defined benefit plan in 1996, 1995 and
1994 were a weighted average discount rate of 7.75 percent, 7.25 percent and
8.0 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 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation $3,758,400 $3,468,300
Non-vested benefit obligation 216,000 69,700
- ----------------------------------------------------------------------------------------------
Accumulated benefit obligation $3,974,400 $3,538,000
- ----------------------------------------------------------------------------------------------
Plan assets at fair value--primarily listed common stocks,
bonds and U.S. Government securities $4,204,400 $3,545,100
Projected benefit obligation 3,974,400 3,538,000
- ----------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 230,000 7,100
Unrecognized net gain (195,500) (235,600)
Unrecognized prior service cost 313,500 174,800
Unrecognized net obligation at November 1, 1986, net of
amortization 22,000 36,000
- ----------------------------------------------------------------------------------------------
Net pension asset (liability) recognized in consolidated
balance sheets $ 370,000 $ (17,700)
- ----------------------------------------------------------------------------------------------
</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 then
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 and employer contributions to the ESOP are 100
percent vested. The Company has recorded expenses based on contributions to the
ESOP for the years ended October 31, 1996, 1995 and 1994 of $293,000, $311,000
and $347,000, respectively. Interest payments on the ESOP bank loan were
$93,000, $121,000 and $119,000, in 1996, 1995 and 1994, respectively.
The Company accounts for ESOP shares under the cash payment method. All ESOP
shares are considered outstanding for purposes of computing net income per
share.
NOTE I -- 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 79%, 78% and 75%, respectively, of 1996, 1995 and 1994
consolidated revenues were from two customers--73%, 63% and 56%, respectively,
from the U.S. Government and 6%, 15% and 19%, respectively, from another
customer. The Company's export net sales and intersegment net sales are not
significant.
13 / /
<PAGE> 15
Information by industry segment is summarized as follows:
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended October 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues:
Military Ground Support Equipment $59,179,141 $42,892,939 $33,067,325
Custom Molded Plastic Products 22,327,802 22,639,763 23,552,006
- ---------------------------------------------------------------------------------------------------------
Total $81,506,943 $65,532,702 $56,619,331
- ---------------------------------------------------------------------------------------------------------
Income from Operations:
Military Ground Support Equipment $ 5,087,705 $ 4,029,748 $ 1,456,163
Custom Molded Plastic Products 868,651 985,947 629,583
- ---------------------------------------------------------------------------------------------------------
Total $ 5,956,356 $ 5,015,695 $ 2,085,746
- ---------------------------------------------------------------------------------------------------------
Identifiable Assets:
Military Ground Support Equipment $21,033,652 $20,007,390 $19,726,944
Custom Molded Plastic Products 13,058,479 13,784,222 14,658,815
- ---------------------------------------------------------------------------------------------------------
Total $34,092,131 $33,791,612 $34,385,759
- ---------------------------------------------------------------------------------------------------------
Depreciation and Amortization Expense:
Military Ground Support Equipment $ 746,581 $ 719,474 $ 948,618
Custom Molded Plastic Products 1,103,226 1,175,395 1,067,699
- ---------------------------------------------------------------------------------------------------------
Total $ 1,849,807 $ 1,894,869 $ 2,016,317
- ---------------------------------------------------------------------------------------------------------
Capital Expenditures:
Military Ground Support Equipment $ 1,035,240 $ 212,624 $ 75,829
Custom Molded Plastic Products 110,155 696,171 2,160,560
- ---------------------------------------------------------------------------------------------------------
Total $ 1,145,395 $ 908,795 $ 2,236,389
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE J -- 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 the
normal business operations of Engineered Air and of ESP, various claims and
charges are asserted against the Company. It is not possible at this time to
predict the outcome of all such actions. However, management is of the opinion
that it 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.
/ / 14
<PAGE> 16
/ / 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1996, 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 5, 1996
/ / 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
Committee 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.
15 / /
<PAGE> 17
/ / SUPPLEMENTAL INFORMATION
The table below presents unaudited quarterly financial information in
thousands, except for per share data, for the years ended October 31, 1996 and
1995:
<TABLE>
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------------------------------------------
January 31 April 30 July 31 October 31
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $17,047 $15,344 $18,924 $17,655 $21,623 $15,454 $23,913 $17,080
- -------------------------------------------------------------------------------------------------------------------
Gross profit 2,480 2,204 2,968 2,859 3,264 2,715 3,702 2,967
- -------------------------------------------------------------------------------------------------------------------
Net income 486 330 717 675 916 684 1,195 784
- -------------------------------------------------------------------------------------------------------------------
Net income per share .15 .10 .22 .20 .28 .21 .36 .24
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
MARKET DATA
The Company's common stock trades on the NASDAQ Stock Market under the symbol
EASI. As of December 31, 1996, the approximate number of common shareholders
was 2,000. The following table sets forth the high and low stock prices for
each quarter as provided by the NASDAQ Stock Market.
<TABLE>
- ---------------------------------------------------------------
<CAPTION>
1996 1995
- ---------------------------------------------------------------
HIGH LOW High Low
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter Ended:
January 31 7 5 3/4 4 1/8 3 13/16
April 30 7 7/8 6 1/2 5 1/8 3 7/8
July 31 8 1/8 7 1/8 7 1/8 5
October 31 12 3/8 7 1/4 8 5 3/8
- ---------------------------------------------------------------
</TABLE>
DIVIDENDS
The Board of Directors initiated a semi-annual dividend program in 1995. The
most recently declared dividend was in the amount of $.0115 per share payable
January 31, 1997 to shareholders of record on December 31, 1996.
/ / 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, Mattern, Breckenridge,
Washburn, Gidlow and Kazanas LLC
1034 S. Brentwood Blvd.
St. Louis, MO 63117
ANNUAL MEETING
March 6, 1997
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 1996 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
/ / 16
<PAGE> 18
/ / 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
Michael F. Shanahan, Jr.
Lockton Companies
Earl E. Walker
President
Carr Lane Manufacturing Company
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
Michael W. Donnelly
Vice President-Manufacturing
Dan D. Jura
Vice President-Sales
E. Allen Springer
Vice President-Engineering
MANAGEMENT
ENGINEERED SPECIALTY PLASTICS, INC.
Michael F. Shanahan, Sr.
Chairman
Gary C. Gerhardt
Executive Vice President
and Chief Financial Officer
John E. Capeless
Vice President and
General Manager
<PAGE> 19
ENGINEERED SUPPORT SYSTEMS, INC.
1270 North Price Rd.
St. Louis, Missouri 63132
Phone: (314) 993-5880
Fax: (314) 567-4052
<PAGE> 1
ENGINEERED SUPPORT SYSTEMS, INC.
EXHIBIT 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 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 5,
1996, which appears on page 15 of the 1996 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, 1996.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
St. Louis, Missouri
January 23, 1997
<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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 1,415,773
<SECURITIES> 0
<RECEIVABLES> 5,126,330
<ALLOWANCES> 271,000
<INVENTORY> 10,014,627
<CURRENT-ASSETS> 17,434,784
<PP&E> 27,273,330
<DEPRECIATION> 13,176,403
<TOTAL-ASSETS> 34,092,131
<CURRENT-LIABILITIES> 9,080,571
<BONDS> 2,958,705
<COMMON> 36,873
0
0
<OTHER-SE> 19,214,343
<TOTAL-LIABILITY-AND-EQUITY> 34,092,131
<SALES> 81,506,943
<TOTAL-REVENUES> 81,506,943
<CGS> 69,093,075
<TOTAL-COSTS> 69,093,075
<OTHER-EXPENSES> 6,296,512
<LOSS-PROVISION> 161,000
<INTEREST-EXPENSE> 434,148
<INCOME-PRETAX> 5,522,208
<INCOME-TAX> 2,208,000
<INCOME-CONTINUING> 3,314,208
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,314,208
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.01
</TABLE>
