<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1999
REGISTRATION NO. 333-74135
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
ENGINEERED SUPPORT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-1313242
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1270 NORTH PRICE ROAD, ST. LOUIS, MISSOURI 63132
(314) 993-5880
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------------------
MICHAEL F. SHANAHAN SR.
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ENGINEERED SUPPORT SYSTEMS, INC.
1270 NORTH PRICE ROAD, ST. LOUIS, MISSOURI 63132
(314) 993-5880
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
----------------------------------
WITH COPIES TO:
JOHN L. GILLIS, JR., ESQ. BRIAN HOFFMANN, ESQ.
ARMSTRONG TEASDALE LLP CADWALADER, WICKERSHAM & TAFT
ONE METROPOLITAN SQUARE, SUITE 2600 100 MAIDEN LANE
ST. LOUIS, MISSOURI 63102-2740 NEW YORK, NEW YORK 10038
(314) 621-5070 (212) 504-6000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes
effective.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE
OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER
THE SECURITIES ACT OF 1933, CHECK THE FOLLOWING BOX. / /
IF THE REGISTRANT ELECTS TO DELIVER ITS LATEST ANNUAL REPORT TO
SECURITY HOLDERS, OR A COMPLETE AND LEGIBLE FACSIMILE THEREOF,
PURSUANT TO ITEM 11(A)(1) OF THIS FORM, CHECK THE FOLLOWING BOX. / /
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN
OFFERING PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, CHECK THE
FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT
NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME
OFFERING. / / ------
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO
RULE 462(C) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND
LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / / ------
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO
RULE 462(D) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND
LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / / ------
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO
RULE 434, PLEASE CHECK THE FOLLOWING BOX. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL
THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY
STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF
1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------
<PAGE>
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 24, 1999.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
2,200,000 SHARES
[LOGO]
ENGINEERED SUPPORT SYSTEMS, INC.
COMMON STOCK
$ PER SHARE
- ------------------------------------------------------------------------
Engineered Support Systems, Inc. is offering 2,000,000 shares of
common stock and the selling stockholder identified in this
prospectus is offering 200,000 shares. Engineered Support will not
receive any proceeds from the sale of shares by the selling
stockholder. This is a firm commitment underwriting.
The common stock is listed on the Nasdaq National Market under the
symbol "EASI." On March 23, 1999, the last reported sale price of the
common stock on the Nasdaq National Market was $17.00 per share.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Price to the public......................................... $ $
Underwriting discount.......................................
Proceeds to Engineered Support..............................
Proceeds to the selling stockholder.........................
</TABLE>
Three stockholders, including the selling stockholder, have granted
an over-allotment option to the underwriters. Under this option, the
underwriters may elect to purchase a maximum of 330,000 additional
shares from the three selling stockholders within 30 days following
the date of this prospectus to cover over-allotments.
- ------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CIBC OPPENHEIMER
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
PAULI JOHNSON CAPITAL & RESEARCH
INCORPORATED
The date of this Prospectus is , 1999
<PAGE>
<PAGE>
[PHOTO]
The Chemical/Biological Protected Shelter System is a mobile medical aid
station for use where chemical or biological contaminants are present.
[PHOTO] The Field Deployable Tactical Quiet [PHOTO]
Environmental Control Generators used
Unit is a heat pump by all branches
used to cool, heat, of the U. S.
dehumidify, filter Military for
and circulate air electrical power.
for shelters, tents,
vans and other
enclosures.
ESSI [LOGO]
[PHOTO] Flight Line Air [PHOTO]
Conditioners used to
cool avionics and The Chemically
electronics during Hardened Air
aircraft maintenance. Management Plant
designed for the
U. S. Air Force to
[PHOTO] provide filtered,
cooled, heated and
[PHOTO] contamination free
air, along with
Shipboard ventilation and electrical power to
refrigeration systems for Air Transportable
most of the Navy's Combat Hospitals.
Vessels.
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Forward-Looking Statements.................................. 11
Common Stock Market Price Data.............................. 11
Use of Proceeds............................................. 12
Dividend Policy............................................. 12
Capitalization.............................................. 12
Selected Consolidated Financial Information................. 13
Unaudited Consolidated Pro Forma Financial Information...... 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 22
Management.................................................. 30
Principal and Selling Stockholders.......................... 32
Description of Common Stock................................. 33
Underwriting................................................ 34
Legal Matters............................................... 35
Experts..................................................... 35
Where You Can Find More Information......................... 36
Index to Financial Statements............................... F-1
</TABLE>
--------------------------------
As used in this prospectus, the terms "we," "us," "our," and
"Engineered Support" mean Engineered Support Systems, Inc. and its
subsidiaries (unless the context indicates a different meaning) and
the term "common stock" means our common stock, $0.01 par value per
share. References to "Keco" mean Keco Industries, Inc., which we
acquired in June 1998. References to "Marlo" mean Nuclear Cooling,
Inc., d/b/a Marlo Coil, which we acquired in February 1998 and is
now known as Engineered Coil Company.
Our principal executive offices are located at 1270 North Price
Road, St. Louis, Missouri 63132. Our telephone number is (314)
993-5880.
Unless otherwise stated herein, all information contained in this
prospectus assumes no exercise of the over-allotment option granted
to the underwriters.
On June 26, 1998, we effected a 3-for-2 stock split by paying a
stock dividend. All common share numbers in this prospectus reflect
the stock split.
The underwriters are offering the shares subject to various
conditions and may reject all or part of any order. The shares
should be ready for delivery on or about , 1999
against payment in immediately available funds.
3
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this
prospectus. It is not complete and may not contain all of the
information that you should consider before investing in the shares.
You should read the entire prospectus carefully. Information stated
on a pro forma basis for the fiscal year ended October 31, 1998
included in this summary and elsewhere in the prospectus includes
the results of operations of Marlo and Keco as if such acquisitions
had been consummated November 1, 1997. The pro forma information
does not include the results of operations of the Fermont Division
of Dynamics Corporation of America which we acquired in February 1999.
THE COMPANY
Engineered Support is a leading designer and manufacturer of
military ground support equipment. Our product line includes
chemical and biological defense systems and other ground support
products for the United States armed forces. We refer to these
products as chemically and biologically hardened. We also
manufacture specialized commercial and industrial air handling
equipment, as well as injection molded specialty and custom plastic
products. We have grown substantially during the last five years.
Our growth has resulted from acquisitions of strategic businesses
and internal growth. From fiscal 1994 to fiscal 1998, our net
revenues increased from $56.6 million to $97.0 million, a compound
annual growth rate of 14.4%, and our net income increased from $0.8
million to $5.8 million, a compound annual growth rate of 66.5%. On
a pro forma basis for fiscal 1998, our net revenues were $130.4
million and our net income was $6.1 million.
We believe that we are well positioned to benefit from various
trends within the defense industry. These trends include:
* U.S. defense strategy has shifted in focus from its Cold War
emphasis on the Soviet Union to a focus on regional conflicts
such as Iraq and Bosnia and the threat of terrorist attacks. This
shift has resulted in an increased emphasis on the Pentagon's
ability to rapidly deploy troops and equipment to areas of
conflict or concern, and a heightened focus on protecting troops
against chemical and biological threats.
* The U.S. Department of Defense has shifted its procurement policy
from competition based solely on the lowest price to one of "best
value." Best value includes the engineering and design
capabilities of contractors, where experience, technical
expertise and ability to complete a project are rewarded.
* The U.S. defense industry has recently experienced a trend toward
consolidation, initially among major companies, but increasingly
among the large number of smaller prime contractors and industry
subcontractors.
* The budget for the Department of Defense has stabilized and the
procurement portion of the budget has increased in recent years.
Our strategy is to further expand through a combination of internal
growth and the acquisition of companies in the fragmented military
ground support equipment and related markets.
Military Products. Our focus is on designing and manufacturing
military ground support equipment, including equipment for
chemically and biologically hardened applications. We emphasize
products that can be rapidly deployed to remote locations. Our
military equipment meets stringent requirements with respect to
durability, reliability and portability. These requirements
generally exceed standards for equipment manufactured for commercial
applications. In fiscal 1998, the products we sold to the U.S. armed
forces provided approximately 66.7% of our net revenues and 56.9% of
our operating income, each on a pro forma basis. While our revenues
usually depend upon a few major contracts, over the last five years
we have provided over 40 distinct products for the Department of
Defense. We classify our military products into five general
categories:
Chemical and biological defense systems
* The Chemical and Biological Protected Shelter System, a
contamination-free,
4
<PAGE>
<PAGE>
environmentally-controlled mobile field medical facility;
* The Micro-Climatic Conditioning System, an on-board air
filtration system for Paladin tanks; and
* The Sanator/M-17, a lightweight chemical and biological
decontamination system.
Environmental control systems
* The Chemically/Biologically Hardened Air Management Plant,
initially designed for use by the U.S. Air Force with chemically
and biologically hardened air transportable hospitals;
* The B-1B/B-2 and the C-5/MA-3D Flight Line Air Conditioners,
which are used to cool aircraft avionics and electronics systems
during pre-flight and post-flight checkouts and repairs;
* The Field Deployable Environmental Control Unit, which is a field
deployable heat pump used to cool, heat, dehumidify, filter and
circulate air for portable shelters, tents and vans; and
* Fan coil units and assemblies, air handling units, coils, product
coolers and refrigeration plants for use aboard U.S. Navy ships
and military sealift and U.S. Coast Guard vessels.
Petroleum and water systems
* Petroleum storage, distribution and refueling equipment;
* Water storage and distribution equipment;
* Airmobile and Semi-trailer Mounted Petroleum Test Laboratories;
and
* Reverse Osmosis Water Purification Units, durable, mobile water
purification systems which provide safe drinking water, primarily
to forces in the field.
Containerized systems
* Transportable and connectible containers for multi-use storage or
transportation of bulk products; and
* Refrigerated container products.
General ground support equipment
* The Aviation Ground Power Unit, a self-propelled, self-contained
power unit that provides electrical, hydraulic and pneumatic
power to aircraft on the flight line;
* Portable field latrines, laundry, shower and shave facilities for
use by forward deployed combat units; and
* Deployable fire protection systems.
Commercial and Industrial Products. We capitalize on our naval
contracting experience to provide a broad range of air handling and
heat transfer equipment for commercial and industrial applications.
These applications include:
* Commercial and institutional building applications;
* Civilian marine vessels; and
* Pharmaceutical, semiconductor and telecommunications clean rooms.
We intend to explore opportunities to market our chemically and
biologically hardened air handling equipment for commercial,
industrial and civil defense uses. In fiscal 1998, commercial and
industrial air conditioning and heating products provided
approximately 12.5% of our net revenues and 17.3% of our operating
income, each on a pro forma basis.
We have the ability to both mold and finish plastic products to high
quality specifications. We operate 33 injection molding machines
ranging in size from 45 to 2,200 tons of clamp pressure. We believe
that our vertical integration, range of machine size and higher
pressure molding capacity provide us with a competitive advantage
within our geographic market. In fiscal 1998, injection molded
custom and specialty plastic products provided approximately 20.8%
of our net revenues and 25.8% of our operating income, each on a pro
forma basis.
Our commercial and industrial operations help reduce our exposure to
potential defense industry volatility and possible downturns or
fluctuations in U.S. defense procurement.
5
<PAGE>
<PAGE>
RECENT DEVELOPMENTS
In February 1999 we completed the acquisition of the Fermont
Division of Dynamics Corporation of America, a subsidiary of CTS
Corporation, for approximately $10.0 million in cash subject to
certain post-closing adjustments. We acquired the assets and assumed
certain liabilities of Fermont. The acquisition was partially
financed with our revolving line of credit. Fermont is a leading
supplier of electrical generators to the Department of Defense. This
acquisition broadened our product lines. We anticipate that we will
realize cost savings resulting from process improvements, greater
purchasing power and elimination of duplicative costs. Through the
Fermont acquisition, we believe we have enhanced our position as a
significant supplier to the Department of Defense. Because of the
timing and size of this acquisition, Fermont is not included in any
of the pro forma information in this prospectus.
<TABLE>
THE OFFERING
<S> <C>
Common stock offered by Engineered Support................. 2,000,000 shares<F1>
Common stock offered by the selling stockholder............ 200,000 shares<F1>
Common stock to be outstanding after the offering.......... 6,874,170 shares<F1><F2>
Use of proceeds............................................ Repayment of indebtedness.
Nasdaq National Market symbol.............................. EASI
<FN>
- ------------------------
<F1> Assumes the underwriters' over-allotment option is not exercised.
<F2> Excludes 855,788 shares reserved for issuance under our existing stock
option plans as of March 8, 1999.
</TABLE>
SUMMARY CONSOLIDATED HISTORICAL AND
UNAUDITED PRO FORMA FINANCIAL INFORMATION
(in thousands, except per share data)
The summary consolidated historical statement of income information
and statement of cash flow information presented below for each of
the fiscal years in the five-year period ended October 31, 1998 and
the balance sheet information at October 31, 1996, 1997 and 1998
have been derived from our audited consolidated financial statements
and include operations of Marlo from February 1, 1998 and of Keco
from June 25, 1998. We have derived the summary consolidated
historical statement of income information and statement of cash
flow information presented below for each of the three-month periods
ended January 31, 1998 and 1999, and the balance sheet information
at January 31, 1998 and 1999, from our unaudited financial
statements. We believe that the unaudited financial statements from
which we derived such financial information have been prepared on a
basis consistent with our audited consolidated financial statements
and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our financial
position at January 31, 1998 and 1999 and results of our operations
and cash flows for the three-month periods ended January 31, 1998
and 1999. Results for the three-month period ended January 31, 1999
are not necessarily indicative of the results that may be expected
for the fiscal year ending October 31, 1999. We derived the summary
pro forma statements of income and other information presented below
from "Unaudited Consolidated Pro Forma Financial Information,"
appearing elsewhere in this prospectus which gives pro forma effect
to the Marlo and Keco acquisitions. Such information gives effect to
those acquisitions as if they were consummated on November 1, 1997.
The pro forma consolidated financial information is based on
assumptions that we believe are reasonable and such information is
presented for comparative and informational purposes only and does
not purport to represent what our actual results of operations or
financial condition would have been had such transactions in fact
occurred on such dates or to project our results of operations for
any future period or financial condition at any future date. The
following table also includes certain unaudited other information.
The information presented below should be read in conjunction with
"Unaudited Consolidated Pro Forma Financial Information,"
"Management's Discussion and Analysis of
6
<PAGE>
<PAGE>
Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto of Engineered Support, Marlo
and Keco appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, PRO FORMA JANUARY 31,
---------------------------------------------------- FISCAL YEAR ENDED ----------------------
1994 1995 1996 1997 1998 OCTOBER 31, 1998 1998 1999
-------- -------- -------- -------- -------- ----------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
INFORMATION:
Net Revenues................ $ 56,619 $ 65,533 $ 81,507 $ 88,571 $ 96,973 $130,422 $ 16,238 $ 28,237
Cost of Revenues............ 48,474 54,788 69,093 73,816 74,343 102,451 12,934 21,656
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit.............. 8,145 10,745 12,414 14,755 22,630 27,971 3,304 6,581
Selling, General and
Administrative Expense..... 6,059 5,729 6,478 7,087 12,388 15,595 1,845 3,634
-------- -------- -------- -------- -------- -------- -------- --------
Income From Operations.... 2,086 5,016 5,936 7,668 10,242 12,376 1,459 2,947
Interest Expense............ (842) (929) (472) (222) (1,767) (3,148) (23) (694)
Interest Income............. 13 34 38 286 293 -- 96 57
Gain on Sale of Assets...... -- -- 20 -- 879 879 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income Before Income
Taxes.................... 1,257 4,121 5,522 7,732 9,647 10,107 1,532 2,310
Income Tax Provision........ 502 1,648 2,208 3,093 3,858 4,043 613 922
-------- -------- -------- -------- -------- -------- -------- --------
Net Income................ $ 755 $ 2,473 $ 3,314 $ 4,639 $ 5,789 $ 6,064 $ 919 $ 1,388
======== ======== ======== ======== ======== ======== ======== ========
Earnings Per Share:
Basic..................... $ 0.15 $ 0.54 $ 0.72 $ 0.98 $ 1.21 $ 1.27<F5> $ 0.19 $ 0.29<F5>
Diluted................... 0.14 0.51 0.68 0.94 1.16 1.21<F5> 0.19 0.28<F5>
Weighted Average Shares
Outstanding:
Basic..................... 4,984 4,553 4,593 4,753 4,785 4,785 4,762 4,852
Diluted................... 5,300 4,896 4,880 4,955 4,991 4,991 4,967 5,032
Dividends Per Share......... -- $ 0.006 $ 0.013 $ 0.017 $ 0.028 $ 0.028 $ 0.009 $ 0.018
STATEMENT OF CASH FLOW
INFORMATION:
Net Cash Provided by (Used
in) Operations............. $ (1,142) $ 6,611 $ 3,537 $ 10,748 $ 5,352 $ (2,189) $ 316
Net Cash Provided by (Used
in) Investing Activities... (2,236) (836) (1,043) (1,987) (49,702) (73) (399)
Net Cash Provided by (Used
in) Financing Activities... 3,531 (5,806) (1,465) (1,863) 41,810 (1,564) (1,912)
OTHER INFORMATION:
EBITDA<F1>.................. $ 4,102 $ 6,911 $ 7,806 $ 9,566 $ 13,934 $ 16,931 $ 1,924 $ 3,838
Depreciation and
Amortization............... 2,016 1,895 1,850 1,898 2,813 3,677 464 890
Capital Expenditures........ 2,236 909 1,145 1,987 1,331 1,760 73 399
Backlog of Defense Orders:
Funded Backlog<F2>........ 77,856 90,385 90,722 44,114 80,801 80,801 37,219 99,309
Government Options on
Funded Backlog<F3>....... 153,668 100,172 153,795 155,039 319,575 319,575 151,605 286,244
<CAPTION>
AT OCTOBER 31, AT JANUARY 31,
------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working Capital............. $ 8,354 $ 11,560 $ 18,210 $ 11,599 $ 18,160
Total Assets................ 34,092 37,084 92,160 33,994 89,411
Total Debt<F4>.............. 3,746 2,141 44,709 836 42,913
Shareholders' Equity........ 19,251 23,726 30,166 24,385 31,637
<FN>
- ------------------------------
<F1> EBITDA represents earnings before interest expense, interest income,
income tax provision, depreciation and amortization. EBITDA is presented
because it is a widely accepted indicator of a company's ability to incur
and service indebtedness. EBITDA, however, should not be considered as an
alternative to net income, as a measure of operating performance, as an
alternative to cash flow or as a measure of liquidity. In addition, this
measure of EBITDA may not be comparable to similar measures reported by
other companies.
<F2> Funded backlog represents products the government has committed by
contract to purchase from us as of the end of the period indicated. See
"Risk Factors--Our operating results may fluctuate and our backlog is
subject to reduction and cancellation" and "Business--Defense Backlog."
<F3> Government Options on Funded Backlog include products the government has
the option to purchase under contract with us as of the end of the period
indicated, including, with respect to contracts which include a maximum
future amount purchasable by the government thereunder, such maximum
amount, and with respect to contracts without a specified maximum amount,
our estimate of the future amount we expect the government to purchase,
using the government's best estimated quantity as a guide where one is
specified. See "Risk Factors--Our operating results may fluctuate and our
backlog is subject to reduction and cancellation," and "Business--Defense
Backlog."
<PAGE>
<F4> Total Debt represents the sum of the current and long-term portions of
term debt, and the ESOP guaranteed bank loan.
<F5> Giving effect to the offering and the application of proceeds therefrom
as if they had occurred on November 1, 1997, basic and diluted
supplemental earnings per share would have been $1.08 and $1.05,
respectively, for the year ended October 31, 1998, and $0.24 and $0.24,
respectively, for the three months ended January 31, 1999. Such amounts
reflect the reduction of interest expense of $1,268,000 for the year ended
October 31, 1998 and $290,000 for the three months ended January 31, 1999,
net of taxes, and the issuance of 2,000,000 shares.
</TABLE>
7
<PAGE>
<PAGE>
RISK FACTORS
You should carefully consider the following factors before deciding
to invest in the shares. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties
not presently known to us that we currently consider immaterial or
that are similar to those faced by other companies in our industry
or business may also impair our business operations. The following
risks could materially and adversely affect our business, financial
condition or results of future operations. In such case, the trading
price of our common stock could decline, and you could lose all or
part of your investment. This prospectus also contains
forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in
this prospectus. Please refer to "Forward-Looking Statements" on
page 11.
WE DEPEND ON A FEW LARGE CUSTOMERS
A substantial portion of our business is dependent on continued
sales to the U.S. government and its prime contractors. Sales
associated with our U.S. government defense contracts accounted for
72.6% of our net revenues in fiscal 1996, 72.7% in fiscal 1997,
60.0% in fiscal 1998 and 66.7% for pro forma 1998.
In addition, sales to Rubbermaid Incorporated accounted for
approximately 10.4% of our net revenues in fiscal 1998. We do not
have long-term commitments or contracts with Rubbermaid and,
accordingly, there can be no assurance that such sales will
continue. We expect that a small number of customers will continue
to account for a significant portion of our sales for the
foreseeable future. As a result, the decision of a single customer
to reduce or terminate its orders with us could have a material
adverse effect on our business, financial condition and results of
operations. In addition, there can be no assurance that sales to our
primary customers will continue or will stay at historical levels.
WE DEPEND ON GOVERNMENT CONTRACTS
A significant portion of our revenues are derived from contracts
with the U.S. government and its prime contractors. Such contracts
are subject to termination either upon default by us or at the
convenience of the U.S. government. Termination for convenience
provisions generally entitle us to recover costs incurred,
settlement expenses and profit on work completed prior to
termination. These contracts are also conditioned upon Congress
appropriating funds. Congress usually appropriates funds for a given
program on a government fiscal year basis even though contract
performance may take more than one year. Consequently, at the outset
of a major program, the contract is usually only partially funded.
Additional funds are committed to the contract as Congress
authorizes funds each year. Termination of, or elimination of,
appropriations for one or more of our significant government
contracts could have a material adverse effect on our business,
financial condition and results of operations. We also face other
risks, including possible suspension or debarment from bidding on
government contracts if we are found to have violated government
contracting regulations.
WE FACE RISKS INVOLVING FIXED PRICE CONTRACTS
Substantially all of our Department of Defense contract revenues are
derived from long term, fixed price contracts. Such contracts
provide for a predetermined fixed price regardless of the costs
incurred. We have experienced cost overruns on such contracts in the
past. Any future cost overruns on government fixed price contracts
could result in losses on such contracts.
OUR OPERATING RESULTS MAY FLUCTUATE AND OUR BACKLOG IS SUBJECT TO
REDUCTION AND CANCELLATION
Our results of operations have fluctuated in the past and may
continue to fluctuate in the future as a result of a number of
factors, many of which are beyond our control. These factors
include:
* The termination of a key government contract as the result of a
reduction or cancellation of funding;
* The size and timing of new contract awards to replace completed
or expired contracts;
* Our ability to design and produce new products meeting the
specifications of our customers;
* Increased competition from existing competitors and new entrants
to the market; and
8
<PAGE>
<PAGE>
* Changes in Department of Defense policies and budgetary
priorities.
A substantial portion of our business has been and is expected to
continue to be derived from a limited number of contracts. Our
failure to replace one or more significant defense contracts upon
expiration or termination could have a material adverse effect upon
our business, financial condition and results of operations.
We record our defense backlog as either funded backlog or government
options on funded backlog. Our funded backlog as of January 31, 1999
was approximately $99.3 million. Our funded backlog is subject to
fluctuations and is not necessarily indicative of future sales.
Funded backlog represents products the government has committed by
contract to purchase from us. Government options include products
the government has the option to purchase under contract with us.
With respect to contracts which include a maximum future amount
purchasable by the government thereunder, our government option
amount includes such maximum amount. With respect to contracts
without a specified maximum amount, our government option amount
includes an estimate of the future amount we expect the government
to purchase, using the government's best estimated quantity as a
guide where one is specified. There are no commitments by the
government to purchase products included in government options and
there can be no assurance that any or all of such amounts will
result in revenues for us. Moreover, cancellations of purchase
orders or reductions of product quantities in existing contracts
could substantially and materially reduce our funded backlog and,
consequently, future revenues. Our failure to replace canceled or
reduced backlog, whether funded backlog or government options, or to
convert a significant portion of government options to funded
backlog, could result in lower revenues.
WE FACE RISKS OF REDUCTIONS OR CHANGES IN MILITARY EXPENDITURES
Our primary customers are agencies of the Department of Defense.
Sales under contracts, directly or indirectly, with the Department
of Defense represented approximately 66.7% of our fiscal 1998 net
revenues on a pro forma basis. We expect to continue to derive a
substantial portion of our net revenues from direct and indirect
sales to the Department of Defense. The U.S. defense budget
declined in real terms from 1985 through 1998. This resulted in
delays in new program starts, delays in existing programs and
program cancellations. A significant decline in U.S. military
expenditures on ground support equipment could have a material
adverse effect upon our ability to generate revenues.
WE FACE CHALLENGES IMPLEMENTING OUR ACQUISITION STRATEGY
Finding, consummating and successfully integrating acquisitions is
an important component of our growth strategy. Our continued ability
to grow by acquisition is dependent upon the availability of
acquisition candidates at reasonable prices, limitations in our then
existing loan agreements and our ability to obtain additional
acquisition financing on acceptable terms. We experience competition
in making acquisitions from larger companies with significantly
greater resources. Implementation of our acquisition strategy may
depend upon our ability to attract and retain qualified management
personnel to oversee our expanded operations resulting from future
acquisitions. We may need to use significant amounts of cash, issue
additional equity securities, incur debt and amortize expenses
related to goodwill and other intangibles in connection with future
acquisitions, each of which could have a material adverse effect on
our business, financial condition and results of operations. In
addition, acquisitions involve numerous other risks, including:
* Difficulties in assimilating and integrating the operations,
technologies, and products acquired;
* The diversion of management's attention from other business
concerns;
* The risks of entering markets in which we have limited or no
prior experience; and
* The potential loss of key employees.
Further, there can be no assurance that our management will be able
to maintain or enhance the profitability of any acquired business or
consolidate its operations to achieve cost savings.
9
<PAGE>
<PAGE>
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE
The markets for our products are highly competitive. In all phases
of our operations, we compete on both performance and price with
companies, some of which are considerably larger, more diversified
and have greater financial resources and sales than we do. We may
not be able to effectively compete in our product markets in the
future, and we may encounter increased competition in the future.
Any of such occurrences could have a material adverse effect on us.
WE FACE POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
We must comply with a variety of local, state and federal
governmental regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic or
other hazardous substances used in the manufacture of our products.
If we fail to comply with current or future regulations we could be
subject to substantial fines, suspension of production, alteration
of our manufacturing processes or cessation of operations.
WE ARE DEPENDENT ON KEY PERSONNEL
We are dependent on the services of our senior management, the loss
of certain members of which could adversely affect us. Although we
have employment agreements with certain of our senior officers, the
services of these individuals or any other members of operating or
senior management may not continue to be available to us.
WE FACE RISKS CONCERNING YEAR 2000 ISSUES
We are dependent on our software programs and operating systems for
internal operations and for processing product orders with our
customers and suppliers. We have made a preliminary determination
that we will not incur significant costs to make our software
programs and operating systems Year 2000 compliant and we expect to
be fully compliant in the third calendar quarter of 1999; however,
we currently are unable to determine the magnitude of any Year 2000
problems that may exist in the software programs and operating
systems of our customers and suppliers, or the impact that any such
problems could have on the sales made to such customers or goods and
services provided by such suppliers. The occurrence of Year 2000
related failures in the software programs and operating systems of
any of our significant customers or suppliers could have a material
adverse effect on our business, financial condition and results of
operations in subsequent periods. We derive approximately 75% of our
revenues directly or indirectly from the Department of Defense or
other government agencies. According to published reports, which we
have not verified, the government may not be fully Year 2000
compliant on a timely basis and any such noncompliance could have a
material adverse effect on our business, financial condition and
results of operations in subsequent periods, especially if it
results in delays in payments due to us. Year 2000 issues are more
fully discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
WE HAVE ANTI-TAKEOVER PROVISIONS
Our Articles of Incorporation and the General and Business
Corporation Law of Missouri contain provisions that reduce the
probability of a change of control or acquisition of Engineered
Support. Our By-Laws provide for a classified board of directors. We
are subject to the business combination provisions of Missouri
corporate law which allow our board of directors to retain
discretion over the approval of certain business combinations and
may prohibit a business combination between us and a stockholder
holding 20% or more of our outstanding voting stock. Another
provision permits our board of directors to consider the interests
of non-stockholder constituencies in connection with acquisition
proposals. These provisions may make it more difficult for a change
in control of Engineered Support to occur. In addition, Missouri
corporate law denies an acquiror voting rights with respect to any
shares of voting stock which increase its equity ownership to more
than specified thresholds. These provisions may have the effect of
delaying, deterring or preventing certain potential acquisitions or
a change of control of us. See "Description of Common Stock."
10
<PAGE>
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements within the meaning of the federal securities laws. These
statements include, among others, the following:
* Use of proceeds of this offering;
* Projected capital expenditures;
* The impact of Year 2000 on our vendors' and customers'
information systems;
* Funded backlog and the portion expected to be recognized as
revenues in fiscal 1999;
* Government options on funded backlog; and
* Strategy.
These statements may be found under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital
Resources," "--Year 2000" and "Business." Forward-looking statements
typically are identified by use of terms such as "may," "will,"
"expect," "anticipate," "estimate" and similar words, although some
forward-looking statements are expressed differently. You should be
aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of
factors, including:
* Our backlog is subject to reduction and cancellation and all or a
portion of our government options backlog may never be realized;
* Our estimate of the amount of funded backlog which we expect to
recognize as revenues in fiscal 1999 may be wrong;
* Our estimate of future capital expenditures may be wrong; and
* Our ability to achieve and integrate acquisitions.
You should also consider carefully the statements under "Risk
Factors" and other sections of this prospectus, which address
additional factors that could cause our actual results to differ
from those set forth in the forward-looking statements.
COMMON STOCK MARKET PRICE DATA
Our common stock is traded on the Nasdaq National Market under the
symbol "EASI." The following table sets forth, for the periods
indicated, (i) the high and low closing sale prices of our common
stock, as reported by the Nasdaq National Market, and (ii) dividends
paid on the common stock. All figures before June 26, 1998 have been
adjusted to reflect the 3-for-2 split of the common stock effected
on June 26, 1998.
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW PER SHARE
------ ------ ---------
<S> <C> <C> <C>
Fiscal 1997
-----------
First Quarter............................................. $10.33 $ 6.42 $0.008
Second Quarter............................................ 9.83 7.09 --
Third Quarter............................................. 13.33 7.33 0.009
Fourth Quarter............................................ 19.33 11.33 --
Fiscal 1998
-----------
First Quarter............................................. 16.00 9.67 0.009
Second Quarter............................................ 16.75 10.46 --
Third Quarter............................................. 20.83 15.83 0.018
Fourth Quarter............................................ 18.50 13.25 --
Fiscal 1999
-----------
First Quarter............................................. 17.63 14.25 0.018
Second Quarter (through March 23, 1999).................... 17.25 15.75 --
</TABLE>
11
<PAGE>
<PAGE>
On March 23, 1999, the last reported sale price of our common stock
on the Nasdaq National Market was $17.00 per share. As of March 23,
1999, there were approximately 480 holders of record of our common
stock.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of
common stock we are offering will be approximately $31.4 million. We
will not receive any proceeds if the underwriters fully exercise the
over-allotment option. "Net proceeds" is what we expect to receive
after paying the underwriting discount and other expenses of the
offering. For the purpose of estimating net proceeds, we are
assuming that the public offering price will be $17.00 per share.
We will not receive any proceeds from the sale of shares by the
selling stockholder.
We will use all of the net proceeds to repay a portion of the $40.9
million term loan outstanding under the $55.0 million Restated and
Amended Credit Agreement dated as of March 17, 1998 between
Engineered Support and NationsBank, N.A. as Agent for several
lenders (the "Credit Agreement"). The interest rate on the term loan
is calculated, at our option, at either LIBOR plus an applicable
margin or at the prime rate less 0.5%. The margin applicable to
LIBOR varies from 0.5% to 1.5% based upon our ratio of total
indebtedness to earnings before interest, taxes, depreciation and
amortization (leverage ratio). The term loan bore interest at a rate
of 6.30938% per annum on January 31, 1999, is payable in monthly
installments of principal and periodic installments of interest, and
matures on May 1, 2003. Proceeds from the term loan were used to
finance a portion of the Marlo and Keco acquisitions.
DIVIDEND POLICY
We first paid a dividend on the common stock in fiscal 1995 and it
is the objective of our board of directors to continue to pay
dividends. The continuation of dividend payments, however, will be
at the discretion of our board of directors and will be dependent
upon our earnings, financial condition, and cash requirements and
any other factors deemed relevant by the board of directors, as well
as any applicable restrictions contained in our then existing credit
agreements.
CAPITALIZATION
The following table shows:
* The capitalization of Engineered Support on January 31, 1999.
* The capitalization of Engineered Support on January 31, 1999,
assuming the completion of the offering at an assumed public
offering price of $17.00 per share and the use of the net
proceeds as described under "Use of Proceeds."
<TABLE>
<CAPTION>
JANUARY 31, 1999
-----------------------------------
HISTORICAL AS ADJUSTED
---------- -----------
($ in thousands, except share and per share data)
<S> <C> <C>
Current portion of long-term debt.......................... $ 7,454 $ 7,454
======= =======
Long-term debt, less current portion....................... $34,770 $ 3,380
ESOP guaranteed bank loan.................................. 689 689
------- -------
Total long-term debt................................... 35,459 4,069
------- -------
Stockholders' equity:
Common stock; $0.01 par value, 10,000,000 shares
authorized, 5,490,604 shares issued (7,490,604 shares as
adjusted for the offering).............................. 55 75
Additional paid-in capital............................... 11,230 42,600
Retained earnings........................................ 24,984 24,984
Treasury stock at cost, 629,684 shares................... (3,943) (3,943)
ESOP guaranteed bank loan................................ (689) (689)
------- -------
Total stockholders' equity............................. 31,637 63,027
------- -------
Total capitalization............................... $67,096 $67,096
======= =======
</TABLE>
12
<PAGE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
This section presents our selected historical financial information.
You should read carefully the financial statements included in this
prospectus, including the notes to the financial statements. The
selected information in this section is not intended to replace the
financial statements.
We derived the selected consolidated statement of income information
presented below for each of the fiscal years in the five-year period
ended October 31, 1998 and the balance sheet data at October 31,
1994, 1995, 1996, 1997 and 1998 from our audited consolidated
financial statements. This information includes operations of Marlo
from February 1, 1998 and of Keco from June 25, 1998. We derived the
selected consolidated statement of income information for the
three-month periods ended January 31, 1998 and 1999, and the balance
sheet data at January 31, 1998 and 1999 from our unaudited financial
statements. We believe that the unaudited financial statements from
which we derived such financial information have been prepared on a
basis consistent with our audited consolidated financial statements
and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our financial
position at January 31, 1998 and 1999 and our results of operations
for the three-month periods ended January 31, 1998 and 1999. Results
for the three-month period ended January 31, 1999 are not
necessarily indicative of the results that may be expected for the
fiscal year ending October 31, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
INFORMATION:
Net Revenues.............. $56,619 $65,533 $81,507 $88,571 $96,973 $16,238 $28,237
Cost of Revenues.......... 48,474 54,788 69,093 73,816 74,343 12,934 21,656
------- ------- ------- ------- ------- ------- -------
Gross Profit.......... 8,145 10,745 12,414 14,755 22,630 3,304 6,581
Selling, General and
Administrative Expense... 6,059 5,729 6,478 7,087 12,388 1,845 3,634
------- ------- ------- ------- ------- ------- -------
Income From
Operations............. 2,086 5,016 5,936 7,668 10,242 1,459 2,947
Interest Expense.......... (842) (929) (472) (222) (1,767) (23) (694)
Interest Income........... 13 34 38 286 293 96 57
Gain on Sale of Assets.... -- -- 20 -- 879 -- --
------- ------- ------- ------- ------- ------- -------
Income Before Income
Taxes.................. 1,257 4,121 5,522 7,732 9,647 1,532 2,310
Income Tax Provision...... 502 1,648 2,208 3,093 3,858 613 922
------- ------- ------- ------- ------- ------- -------
Net Income.......... $ 755 $ 2,473 $ 3,314 $ 4,639 $ 5,789 $ 919 $ 1,388
======= ======= ======= ======= ======= ======= =======
Earnings Per Share:
Basic................... $ 0.15 $ 0.54 $ 0.72 $ 0.98 $ 1.21 $ 0.19 $ 0.29
Diluted................. 0.14 0.51 0.68 0.94 1.16 0.19 0.28
Weighted Average Shares
Outstanding:
Basic................... 4,984 4,553 4,593 4,753 4,785 4,762 4,852
Diluted................. 5,300 4,896 4,880 4,955 4,991 4,967 5,032
<CAPTION>
AT OCTOBER 31, AT JANUARY 31,
----------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working Capital........... $ 3,120 $ 4,700 $ 8,354 $11,560 $18,210 $11,599 $18,160
Total Assets.............. 34,386 33,792 34,092 37,084 92,160 33,994 89,411
Total Debt................ 6,008 4,751 3,746 2,141 44,709 836 42,913
Shareholders' Equity...... 13,330 15,217 19,251 23,726 30,166 24,385 31,637
</TABLE>
13
<PAGE>
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
(in thousands, except per share data)
The unaudited consolidated pro forma statement of income information
presented below for the fiscal year ended October 31, 1998 gives pro
forma effect to the Marlo and Keco acquisitions as if each of such
transactions were consummated on November 1, 1997. The pro forma
statement of income information for the year ended October 31, 1998
includes our audited results of operations for the year ended
October 31, 1998, Marlo's unaudited results of operations for the
three months ended January 31, 1998, as well as Keco's unaudited
results of operations for the eight months ended June 24, 1998. The
consolidated pro forma statement of income information is based on
assumptions that we believe are reasonable and such information is
presented for comparative and informational purposes only. The pro
forma financial information does not purport to represent what our
results of operations would actually have been had such transactions
occurred on November 1, 1997 or to project our results of operations
for any future period or financial condition at any future date. The
pro forma financial information presented below should be read in
conjunction with the consolidated financial statements of Engineered
Support, Marlo and Keco and the notes thereto, "Summary Consolidated
Historical and Unaudited Pro Forma Financial Information" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus.
<TABLE>
FISCAL YEAR ENDED OCTOBER 31, 1998
----------------------------------
<CAPTION>
ACQUISITION
COMPANY MARLO KECO ADJUSTMENTS PRO FORMA
------- ------ ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME INFORMATION:
Net Revenues......................... $96,973 $6,708 $26,741 -- $130,422
Cost of Revenues..................... 74,343 4,679 23,341 $ 88 <F1> 102,451
------- ------ ------- ------- --------
Gross Profit....................... 22,630 2,029 3,400 (88) 27,971
Selling, General and Administrative
Expense.............................. 12,388 1,294 1,491 422 <F2> 15,595
------- ------ ------- ------- --------
Income From Operations............. 10,242 735 1,909 (510) 12,376
Interest Expense..................... (1,767) (18) (46) (1,317)<F3> (3,148)
Interest Income...................... 293 2 43 (338)<F3> --
Gain on Sale of Assets............... 879 -- -- -- 879
------- ------ ------- ------- --------
Income Before Income Taxes......... 9,647 719 1,906 (2,165) 10,107
Income Tax Provision................. 3,858 -- -- 185 <F4> 4,043
------- ------ ------- ------- --------
Net Income......................... $ 5,789 $ 719 $ 1,906 $(2,350) $ 6,064
======= ====== ======= ======= ========
Earnings Per Share:
Basic.............................. $ 1.21 $ 1.27<F5>
Diluted............................ 1.16 1.21<F5>
Weighted Average Shares Outstanding:
Basic.............................. 4,785 4,785
Diluted............................ 4,991 4,991
<FN>
- ---------------------------
<F1> Reflects additional depreciation expense related to the write-up of
property, plant and equipment of Marlo and Keco used in the manufacturing
process to fair market value using our historical depreciation policy.
<F2> Reflects adjustments related to amortization of goodwill and of
additional depreciation expense resulting from the write-up of plant,
property and equipment of Marlo and Keco to fair market value as stated
below.
<CAPTION>
YEAR ENDED
OCTOBER 31, 1998
----------------
<S> <C>
Marlo goodwill expenses (25-year life)................ $ 171
Keco goodwill expenses (25-year life)................. 197
Additional depreciation expense included within
selling, general and
administrative expense.............................. 14
Other adjustments..................................... 40
------
$ 422
======
14
<PAGE>
<PAGE>
<F3> Reflects adjustments to interest expense as follows:
<S> <C>
Interest expense at 6.89% on acquisition debt of $45.0
million............................................. $1,317
Interest income not earned at 5.69% on cash portion of
purchase price...................................... 338
------
$1,655
======
<F4> Reflects the impact on income tax expense of (1) the increase in
depreciation expense, goodwill amortization and interest expense, and (2)
an adjustment to reflect an income tax provision for Marlo and Keco
(which prior to being acquired filed as S corporations) as if filing as C
corporations with Engineered Support. An effective tax rate of 40% was
used to calculate these adjustments.
<F5> Giving effect to the offering and the application of proceeds therefrom
as if they had occurred on November 1, 1997, basic and diluted
supplemental earnings per share would have been $1.08 and $1.05, respectively,
for the year ended October 31, 1998. Such amounts reflect the reduction
of interest expense of $1,268,000, net of taxes, and the issuance of
2,000,000 shares.
</TABLE>
15
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with the financial
statements and other financial information included in this
prospectus. This prospectus also contains forward-looking statements
that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks faced
by us described below and elsewhere in this prospectus. Please refer
to "Forward-Looking Statements" on page 11.
OVERVIEW
We are a leading designer and manufacturer of military ground
support equipment, including chemically and biologically hardened
systems, and related products for the United States armed forces. We
also manufacture specialized commercial and industrial air handling
equipment, as well as injection molded specialty and custom plastic
products. During 1998, we completed the Marlo acquisition and the
Keco acquisition, both of which have enhanced our position as a
significant supplier of ground support equipment to the Department
of Defense, and further broadened our product offerings to the
Department of Defense in general and, through Marlo, to the U.S.
Navy in particular. In February 1999, we completed the Fermont
acquisition which further enhanced our position as a significant
supplier to the Department of Defense and broadened our product
lines.
In fiscal 1998, products sold directly and indirectly to the
Department of Defense provided approximately 66.7% of our net
revenues and 56.9% of our operating income on a pro forma basis.
Commercial and industrial air conditioning and heating products
provided approximately 12.5% of our net revenues and 17.3% of our
operating income on a pro forma basis in fiscal 1998 and injection
molded plastic products contributed approximate 20.8% of our net
revenues and 25.8% of our operating income on a pro forma basis in
fiscal 1998. Revenues from long-term contracts with the Department
of Defense (other than those derived from the business acquired in
the Marlo acquisition) are recognized under the percentage of
completion method and include a percentage of the earnings that are
expected to be realized on the contract. Revenue is recognized by
the business acquired in the Marlo acquisition and on sales of
injection molded plastic products when products are shipped.
The following table sets forth, for the periods indicated, selected
statement of operations data as a percentage of net revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
--------------------------------- -------------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Revenues......................... 84.8 83.3 76.7 79.7 76.7
----- ----- ----- ----- -----
Gross Profit........................... 15.2 16.7 23.3 20.3 23.3
Selling, General and Administrative
Expense................................. 7.9 8.0 12.8 11.4 12.9
----- ----- ----- ----- -----
Income From Operations................. 7.3 8.7 10.5 8.9 10.4
Interest Expense......................... (0.6) (0.3) (1.8) (0.1) (2.4)
Interest Income.......................... 0.1 0.3 0.3 0.6 0.2
Gain on Sale of Assets................... 0.0 0.0 0.9 0.0 0.0
----- ----- ----- ----- -----
Income Before Income Taxes............. 6.8 8.7 9.9 9.4 8.2
Income Tax Provision..................... 2.7 3.5 3.9 3.7 3.3
----- ----- ----- ----- -----
Net Income............................. 4.1% 5.2% 6.0% 5.7% 4.9%
===== ===== ===== ===== =====
</TABLE>
16
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THE THREE MONTHS
ENDED JANUARY 31, 1998
Net Revenues. Net revenues increased 73.9% in the first quarter of
fiscal 1999 to $28.2 million from $16.2 million in the first quarter
of fiscal 1998. Net revenues from military support and related
industrial/commercial equipment increased by $10.9 million to $22.3
million in the first quarter of fiscal 1999 from $11.4 million in the
first quarter of fiscal 1998. This increase was due to an additional
$14.8 million of net revenues generated by businesses acquired in 1998.
This increase was partially offset by a decrease of $3.9 million in
net revenues due primarily to the completion or near completion of
several significant Department of Defense contracts, including those
for Aviation Ground Power Units ("AGPU") and C-5/MA-3D Flight Line
Air Conditioners. Net revenues from sales of custom molded plastic
products increased $1.1 million to $5.9 million in the first quarter
of fiscal 1999 from $4.8 million in the first quarter of fiscal
1998.
Gross Profit. Gross profit for the first quarter of fiscal 1999
increased 99.2% to $6.6 million (23.3% of net revenues) from $3.3
million (20.3% of net revenues) in the prior year. The increase in
gross profit was a result of the businesses acquired in fiscal 1998,
net of a decrease in gross profit on our historical military support
business resulting from a significant decrease in net revenues. The
increase in gross margins was a result of higher margins in our
historical military support operations due to a more profitable mix
of contracts and of the addition of Marlo Coil, which generated
gross margins above those provided by our historical operations.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by $1.8 million to $3.6 million
(12.9% of net revenues) for the quarter ended January 31, 1999 from
$1.8 million (11.4% of net revenues) for the first quarter of fiscal
1998. These increases were due to the addition of selling, general
and administrative expense generated by the acquired businesses,
including additional goodwill amortization of $0.3 million.
Interest Expense and Interest Income. Interest expense increased by
$0.7 million to $0.7 million for the quarter ended January 31, 1999
as compared to the prior year as a result of debt incurred in
conjunction with acquisitions. Interest income was $0.1 million in
the first quarter of both fiscal 1999 and fiscal 1998.
Income Tax Provision. The effective income tax rate was 39.9% for
the quarter ended January 31, 1999 and 40.0% for the quarter ended
January 31, 1998.
Net Income. As a result of the foregoing, our net income increased
by 51.1% to $1.4 million (4.9% of net revenues) for the quarter
ended January 31, 1999 from $0.9 million (5.7% of net revenues) for
the first quarter of fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Revenues. Net revenues increased 9.5% in fiscal 1998 to $97.0
million from $88.6 million in fiscal 1997. Net revenues from
military support and related industrial/commercial equipment
increased by $5.5 million in fiscal 1998 to $69.9 million from $64.4
million in fiscal 1997. This increase was due to an additional $36.5
million of net revenues generated by businesses acquired in fiscal
1998. This increase was partially offset by a decrease of $31.0
million in net revenues due to the completion or near completion of
several significant Department of Defense contracts, including those
for C-5/MA-3D Flight Line Air Conditioners, Aviation Ground Power
Units, Revetment Kits and Harvest Falcon Water Distribution Systems.
Although several major contracts, primarily the Chemical and
Biological Protected Shelter System ("CBPSS"), the Chemically/
Biologically Hardened Air Management Plant ("CHAMP") and the
Field Deployable Environmental Control Unit ("FDECU"), underwent
significant development efforts during fiscal 1998, substantial
revenues derived from the production phase of the contracts will not
begin until fiscal 1999. Net revenues from sales of custom molded
plastic products increased $2.9 million to $27.1 million in fiscal
1998 from $24.2 million in fiscal 1997.
Gross Profit. Gross profit for fiscal 1998 increased 53.4% to $22.6
million (23.3% of net revenues) from $14.8 million (16.7% of net
revenues) in fiscal 1997. The increase in gross profit was a result
of higher net
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revenues and gross margins at our specialty plastic operations, as
well as the addition of gross profit from the businesses acquired in
fiscal 1998, net of a decrease in gross profit on our historical
military support business resulting from a significant decrease in
net revenues. The increase in gross margins was a result of higher
margins within our historical operations due to a more profitable
mix of contracts and products, and of the addition of Marlo Coil
which generated gross margins above those provided by our historical
operations.
Selling, general and administrative expense. Selling, general and
administrative expense increased by $5.3 million to $12.4 million
(12.8% of net revenues) in fiscal 1998 from $7.1 million (8.0% of
net revenues) in fiscal 1997. This increase was due to the addition
of selling, general and administrative expense generated by the
businesses acquired in fiscal 1998, including additional goodwill
amortization of $0.6 million.
Interest Expense and Interest Income. Interest expense increased by
$1.5 million to $1.8 million in fiscal 1998 as a result of term debt
incurred in conjunction with acquisitions. Interest income was $0.3
million in both fiscal 1998 and fiscal 1997.
Gain on Sale of Assets. In fiscal 1998, we realized a $0.9 million
gain primarily related to the sale of a facility previously leased
to an unrelated third party. Proceeds from the sale of all property,
plant and equipment totaled $2.6 million.
Income Tax Provision. The effective income tax rate for fiscal 1998
and fiscal 1997 was 40.0% resulting in total tax expense of $3.9
million in fiscal 1998 and $3.1 million in fiscal 1997.
Net Income. As a result of the foregoing, the net income of
Engineered Support increased 24.8% to $5.8 million (6.0% of net
revenues) in fiscal 1998 from $4.6 million (5.2% of net revenues) in
fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Revenues. Net revenues for fiscal 1997 increased by 8.7% to
$88.6 million from $81.5 million for fiscal 1996. Net revenues from
military support equipment increased by $5.2 million to $64.4
million for fiscal 1997 from $59.2 million for fiscal 1996,
primarily as a result of higher revenues generated from the AGPU
contract. Net revenues from sales of custom molded plastic products
increased by $1.9 million to $24.2 million for fiscal 1997 from
$22.3 million for fiscal 1996. The increase from sales of custom
molded plastic products was achieved in spite of reduced shipments
of houseware products in the fourth quarter of fiscal 1997 resulting
from reduced orders from our largest custom molded plastics
customer.
Gross Profit. Gross profit for fiscal 1997 increased by 18.9% to
$14.8 million (16.7% of net revenues) from $12.4 million (15.2% of
net revenues) for fiscal 1996. These increases were due to
significantly higher margins from sales of custom molded plastic
products resulting primarily from increased capacity utilization.
Selling, general and administrative expense. Selling, general and
administrative expense increased by $0.6 million to $7.1 million
(8.0% of net revenues) for fiscal 1997 from $6.5 million (7.9% of
net revenues) for fiscal 1996. This increase was consistent with the
growth in our net revenues.
Interest Expense and Interest Income. Because of strong operational
cash flow in 1997, total debt (excluding the ESOP guaranteed bank
loan) decreased from $2.7 million at October 31, 1996 to $1.3
million at October 31, 1997 and cash and cash equivalents increased
from $1.4 million at October 31, 1996 to $8.3 million at October 31,
1997. As a result, interest expense decreased $0.3 million and
interest income increased $0.2 million in 1997.
Income Tax Provision. The effective income tax rate for fiscal 1997
and fiscal 1996 was 40.0%, which resulted in total tax expense of
$3.1 million in fiscal 1997 and $2.2 million in fiscal 1996.
Net Income. As a result of the foregoing, our net income increased
by 40.0% to $4.6 million (5.2% of net revenues) for fiscal 1997 from
$3.3 million (4.1% of net revenues) for fiscal 1996.
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LIQUIDITY AND CAPITAL RESOURCES
In March 1998, we restated and amended our Credit Agreement to
provide a $45.0 million term loan to finance the Marlo and Keco
acquisitions and to provide a $10.0 million revolving credit
facility. Principal payments on the term loan began September 1,
1998, with the final payment due May 1, 2003. We may choose an
interest rate calculated at either LIBOR plus an applicable margin
or at the prime rate less 0.5%. The margin applicable to LIBOR
varies from 0.5% to 1.5% depending upon our ratio of total
indebtedness to earnings before interest, taxes, depreciation and
amortization (leverage ratio). At January 31, 1999, the effective
interest rate under the Credit Agreement was 6.30938% and we had
$10.0 million of availability under the revolving credit facility,
which bears interest at the same rate as our term loan and carries a
commitment fee of 0.125% of the unused portion. In February 1999 we
completed the Fermont acquisition for approximately $10.0 million in
cash, subject to certain post-closing adjustments. Approximately
$5.7 million of the Fermont purchase price was initially financed
under the revolving credit facility, which borrowing we anticipate
will be reduced with available cash flow from operations.
The Credit Agreement contains certain covenants including, among
others, maintaining a tangible net worth of at least $23.7 million
plus 50% of quarterly net income after April 30, 1998, and
maintaining a leverage ratio no greater than 3.5 to 1 through
October 31, 1999, no greater than 3.0 to 1 from October 31, 1999 to
October 31, 2000 and no greater than 2.5 to 1 subsequent to October
31, 2000. Pursuant to the terms of the Credit Agreement, we are
subject to various other financial and operating covenants and
maintenance criteria, including restrictions on our ability to incur
additional indebtedness, make capital expenditures, create liens,
dispose of material assets and enter into merger transactions and
lease agreements, and requirements to maintain certain levels of
consolidated cash flows and maintain fixed charge coverage and
consolidated current ratios. Although we are currently in compliance
with all covenants contained in the Credit Agreement, a failure to
comply with any of these covenants would constitute a default which,
if not timely corrected or waived, could result in an acceleration
of the maturity of certain of our debt obligations.
Proceeds of this offering will be applied to repayment of a portion
of the $45.0 million term loan. The $10.0 million revolving line of
credit will remain available in order to fund ongoing working
capital needs. While our ability to refinance our indebtedness or
secure additional credit in order to support both ongoing operations
and future acquisitions will depend on a number of factors, some of
which are beyond our control, we believe we will be able to obtain
sufficient additional financing to pursue our acquisition strategy.
We believe that our $10.0 million revolving line of credit, together
with our cash flow from operations, will provide sufficient capital
to fund operations and meet anticipated capital spending needs.
However, there can be no assurance that we will continue to generate
cash flow at or above current levels. Additionally, we believe that
the strength of our post-offering balance sheet will be adequate to
support future borrowings.
During fiscal 1998 and the three months ended January 31, 1999, we
spent $0.8 million and $0.1 million, respectively, repurchasing
stock in the open market. The stock repurchases were funded out of
cash flow. We have discontinued the stock repurchases at this time.
Our 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 our $10.0 million revolving line of credit. On
January 31, 1999, our working capital and ratio of current assets to
current liabilities were $18.2 million and 1.92 to 1.
Our working capital needs are generally funded through cash flow
from operations and our revolving line of credit. In the first three
months of fiscal 1999, we generated $0.3 million in cash flow from
operations compared to $5.4 million in fiscal 1998. Such cash flow
was used to fund investment in property, plant and equipment. In
fiscal 1999, we anticipate additional capital expenditures should
not exceed $2.0 million.
We believe that our cash flow from operations together with our
revolving line of credit will be sufficient to fund our working
capital needs and capital expenditures for the foreseeable future.
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BUSINESS AND MARKET CONCENTRATION
Approximately 66% of our consolidated net revenues for the three
months ended January 31, 1999 were directly or indirectly derived
from orders by the Department of Defense. As of January 31, 1999,
our funded backlog totaled $99.3 million, with related government
options of an additional $286.2 million.
INFLATION
Substantially all of our contracts with the Department of Defense
are at fixed prices and inflation can affect the ultimate profit to
be realized on such contracts. Some of these contracts have price
adjustment provisions that limit the impact of inflation on profits.
In addition, our volume purchasing and forward purchasing policies
serve to limit our exposure to inflation. We consider potential
inflation in preparation of contract proposals and bids. Because of
these factors, management does not believe that inflation has had,
or that anticipated inflation will have, a significant effect on our
operations.
YEAR 2000
The Year 2000 issue refers to the inability of a date-sensitive
computer program to recognize a two-digit date field designated "00"
as the year 2000. Mistaking "00" for 1900 could result in a system
failure or miscalculations causing disruptions to operations, including
manufacturing, a temporary inability to process transactions, send
invoices, or engage in other normal business activities. This is a
significant issue for many companies, with far reaching implications,
some of which cannot be anticipated or predicted with any degree of
certainty.
We are dependent upon computer hardware and software for internal
operations and for processing product orders with our customers and
suppliers. We rely on computerized systems for nearly every
component of our business operations including: production
scheduling and control; purchasing and receiving; inventory control;
sales orders and invoicing; accounting (including accounts payable,
accounts receivable, general ledger and payroll); engineering;
quality control and inspection; word processing; and, in some cases,
product testing.
We have developed and are implementing a plan to address Year 2000
issues which may impact our business. This plan includes: (a)
surveys of information technology systems, non-information
technology or non-IT systems and product categories; (b) assessment
of required replacement or other Year 2000 remediation; (c)
implementation and subsequent testing of systems for Year 2000
compliance; and (d) review of material suppliers' and customers'
Year 2000 status or impact on our ability to avoid business
interruption.
We have completed Year 2000 compliance testing on substantially all
of our information technology systems and expect to have such
testing completed by September 30, 1999. Such testing to date has
not revealed any material noncompliance. We are in the processing of
upgrading or replacing those systems we believe may be noncompliant
and expect to have such work completed by September 30, 1999.
With respect to non-IT systems such as security/alarm, fire control
and telephone systems, we have surveyed and evaluted these systems
for Year 2000 problems. In some instances, this evaluation has
included communications with the original manufacturers or suppliers
for representations regarding the equipment. We believe that the
majority of these non-IT systems do not function on date-sensitive
software or hardware. We therefore do not anticipate that Year 2000
poses a significant risk to non-IT systems.
We do not generally manufacture products which contain date-
sensitive computerized components other than control units for
some air handling units manufactured by Marlo. We obtain these
control units from third-party suppliers and test them for Year 2000
compliance at the time of installation. Accordingly, we do not
anticipate significant Year 2000 risks associated with our products.
We may be affected by the Year 2000 readiness of our major suppliers
and customers, over which we have no direct control. We believe that
there is no single supplier which is critical to our business as a
whole or which could cause a significant disruption in our
production (although some of our business
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could be affected if a particular supplier on a particular contract
were to fail to perform due to a Year 2000 failure within that
supplier's business at a critical time). We have contacted some of
our significant suppliers with Year 2000 surveys designed to assess
supplier Year 2000 readiness. Of the suppliers responding, a
significant number have indicated that they consider themselves Year
2000 compliant. We anticipate reviewing Year 2000 compliance of
selected other major suppliers by September 30, 1999 and may replace
any such selected suppliers who have failed to respond to surveys or
who cannot provide reasonable Year 2000 assurances.
Approximately 75% of our revenue comes from the Department of
Defense. Year 2000 compliance by government agencies is difficult to
assess. However, according to published reports, which we have not
verified, the government may not be fully Year 2000 compliant on a
timely basis. A disruption in the day-to-day functions of the
Department of Defense or other government agencies (and more
particularly, a disruption in the ability to pay accounts payable)
could have a material adverse impact on our business.
We expect to spend a total of approximately $300,000 on Year 2000
compliance, of which amount approximately $100,000 had been expended
through January 31, 1999.
In addition to the risks identified in the foregoing discussion, we
face material risks that (i) automated business functions could
falter due to undetected or unaddressed Year 2000 issues which, for
instance, could increase cost of operations and cause delays in
product shipment, and (ii) interruption in utilities could cause
plant shutdowns. Any one of these scenarios could have a material
adverse impact on our operations, liquidity and financial condition.
To date, we have not developed a formal Year 2000 contingency plan.
During the first half of calendar 1999, we will continue our Year
2000 compliance efforts as described above and, in conjunction
therewith, intend to research and develop alternative plans designed
to mitigate the potential adverse consequences of either an internal
or external Year 2000 problem. These plans will include, for
instance: (i) securing funding sources to cover our cash needs in
the event we suffer payment delays from a major customer, and (ii)
identifying alternative supply sources in the event significant
suppliers are unable to deliver products on a timely basis.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," which establishes standards for
the reporting and display of comprehensive income and its components
in the financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. In June 1997, the FASB also
issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," which establishes standards for the way
public companies disclose information about operating segments,
products and services, geographic areas and major customers. SFAS
No. 131 is effective for financial statements for periods beginning
after December 15, 1997. In February, 1998, the FASB issued SFAS No.
132, "Employers' Disclosures about Pension and Other Postretirement
Benefits," which revises employers' disclosures about pension and
other postretirement benefit plans. We have adopted these statements
for fiscal year 1999. We believe that adoption of these statements
will have no impact on our operating results, statement of financial
position on cash flows, as SFAS 130, 131 and 132 provide standards
on financial statement disclosure only.
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), was
issued in June 1998. SFAS provides standards on accounting and
disclosure for derivative instruments and requires that all
derivatives be measured at fair value and be reported as either
assets or liabilities in the statement of financial position. We are
required to adopt this statement no later than the beginning of
fiscal year 2000. The adoption of this statement will have no impact
on our operating results, statement of financial position or cash
flows, as we do not invest in derivative instruments.
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BUSINESS
INTRODUCTION
We are a leading designer and manufacturer of military ground
support equipment, including chemically and biologically hardened
systems and other ground support products, for the United States
armed forces. We also manufacture specialized commercial and
industrial air handling equipment, as well as injection molded
specialty and custom plastic products.
RECENT DEVELOPMENTS
On February 22, 1999, in connection with the implementation of our
business strategy, we completed the acquisition of the Fermont
Division of Dynamics Corporation of America, a subsidiary of CTS
Corporation, for approximately $10.0 million in cash subject to
certain post-closing adjustments. We acquired the assets and assumed
certain liabilities of Fermont. The acquisition was financed in part
with borrowings from our revolving line of credit. This transaction
was accounted for under the purchase method of accounting. Fermont
is a leading supplier of electrical generators to the Department of
Defense. This acquisition broadened our product lines, and we
anticipate that we will realize cost savings resulting from process
improvements, greater purchasing power and elimination of
duplicative costs. Through the Fermont acquisition, we believe we
have enhanced our position as a significant supplier to the
Department of Defense.
We regularly consider potential acquisitions and engage in
discussions with a variety of entities. Currently we have no
agreements, arrangements or understandings for any potential
acquisitions by us, and we cannot provide assurances that we will
consummate any acquisitions.
INDUSTRY TRENDS
U.S. defense strategy has shifted in focus from its Cold War
emphasis on the Soviet Union to a focus on regional conflicts such
as Iraq and Bosnia and the threat of terrorist attacks against U.S.
interests, territory and citizens both at home and abroad. This
shift has resulted in an increased emphasis at the Pentagon on the
ability to rapidly deploy troops and equipment to areas of conflict
or concern. There has also been a growing awareness, particularly
since the Gulf War, of the increased proliferation and threat of
chemical and biological weapons.
The U.S. defense industry has recently experienced a trend toward
consolidation, initially among major companies, but increasingly
among the large number of smaller prime contractors and industry
subcontractors. This consolidation activity is being driven by a
combination of generally smaller defense budgets, benefits of having
greater economies of scale and the increasing acceptance of single
rather than multiple sourcing by the Department of Defense and its
prime contractors. Additionally, the Department of Defense has
shifted its purchasing policies from competition based solely on
price to a "best value" philosophy. Best value takes into
consideration a number of factors including a contractor's past
performance on existing or prior contract awards.
The budget for the Department of Defense in fiscal year 1999 is
$262.6 billion and the Pentagon's fiscal year 2000 budget request is
$267.2 billion. The proposed fiscal year 2000 procurement budget is
$53 billion, a 6% increase over fiscal 1999.
BUSINESS STRATEGY
Our objective is to strengthen and broaden our position as an
industry leader in designing, engineering and manufacturing
specialized ground support equipment for the Department of Defense.
Our strategies for achieving our objectives include the following:
Pursue Strategic Acquisitions. We believe there will be continued
consolidation within the defense industry in response to the current
fragmentation within the industry, lower than historical defense
budgets, the Department of Defense's emphasis on awarding contracts
on the basis of "best value" and the Department of Defense's
increasing reliance on the engineering and design capabilities of
contractors.
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In response to this trend, we have implemented an acquisition
strategy which, to date, has resulted in the Keco, Marlo and Fermont
acquisitions. The Keco acquisition has strengthened our position as
a leading manufacturer of ground support equipment to U.S. forces in
the field. The Marlo acquisition broadened our customer base to
include the U.S. Navy and enhanced our environmental control systems
product lines. The Fermont acquisition has expanded our product line
to include electrical generators sold to the Department of Defense.
We intend to continue to seek acquisitions which will strengthen our
core defense business, expand our product offerings and realize
synergies and cost savings.
Address Growing Demand for Chemical and Biological Defense Systems.
We intend to continue to focus our product design and marketing
efforts on chemical and biological defense, in keeping with the
Department of Defense's increased strategic emphasis in this area
and in response to growing concerns regarding potential terrorist
threats, both domestically and internationally. Our CBPSS, MCS and
CHAMP systems are all chemically and biologically hardened and are
designed for use by U.S. forces deployed in areas where such threats
exist. We believe that our expertise and reputation with the
Department of Defense positions us to compete favorably for
additional contracts in this sector. In addition, we believe that we
can generate incremental net revenues through the sale of our
existing chemically and biologically hardened equipment to foreign
military forces and by employing our existing technologies for
possible commercial, institutional and civil defense applications.
Capitalize on Evolving Department of Defense Procurement Policies.
We believe we are well positioned to capitalize on shifts in the
Department of Defense's procurement policies and defense strategies.
We believe our established track record as a reliable provider of
high quality products to the Department of Defense is consistent
with the Department of Defense's evolving emphasis on "best value"
instead of lowest price. In addition, our focus on ground support
equipment is consistent with the Department of Defense's post Cold
War emphasis on rapid deployment of forces to remote locations. Our
engineering and technical staff works regularly with Department of
Defense personnel throughout the procurement process in response to
the Department of Defense's increasing outsourcing of design and
engineering functions to defense contractors.
PRODUCTS
Military Products. In fiscal 1998, products sold directly or
indirectly to the Department of Defense provided approximately 66.7%
and 56.9%, respectively, of our net revenues and operating income on
a pro forma basis. We provide products to U.S. armed forces in five
general categories:
Chemical and biological defense systems. We engineer and manufacture
products and systems which are designed to protect forward deployed
military units from the effects of chemical or biological weapons.
These include:
* CBPSS, which is a contamination-free, environmentally-controlled
work area used as a mobile field medical facility. It is a
specially designed system centered around a soft-walled tent
supported by inflated columns of air. 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 while deployed in an area exposed
to chemical or biological contamination.
* MCS, which is an on-board air-filtration unit for the Paladin
tank and is designed to enhance survivability for the Paladin
crews by providing air filtration of chemical and biological
materials, ventilation and cooling.
* Sanator/M-17, which is a lightweight chemical and biological
decontamination system used to decontaminate equipment in the
field utilizing a hot water and detergent spray mixture.
Environmental control systems. We engineer and manufacture systems
which regulate and modify environmental conditions in military
enclosures, aircraft, ships and vehicles. These include:
* CHAMP, which is an air management system providing cooling,
heating, standby electrical power and pressurized filtered air
protection against chemical and biological agents and was
initially designed for use by the U.S. Air Force in chemically
hardened, air transportable hospitals. This unit
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consolidates a generator, blowers, filters and environmental
control elements into a single system, reducing transportation
weight and size by 80%. This unit can be operated by either
commercial power or a self-contained diesel engine and enables
medical staff and patients to reduce infection and continue
emergency operations in a contaminated environment.
* Flight Line Air Conditioners, which are used to cool aircraft
avionics and electronics systems during pre-flight and
post-flight checkouts and repairs. Among these units are the
largest air conditioning units ever built for the U.S. Air Force
employing state-of-the-art technology and utilizing R-134
refrigerant, which is ozone friendly and environmentally safe.
These units support operations of various military aircraft
including: the B-1B and B-2 bombers; the C-5, C-130 and C-141
transports; all fighter aircraft; and the Talon I and Talon II
gunships.
* FDECU, which is a field deployable heat pump for use in cooling,
heating, dehumidifying, filtering and circulating air for
portable shelters, tents and vans. The unit is adaptable to
chemically and biologically contaminated areas.
* Army Space Heater ("ASH"), which provides automatic, remote or
normal 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. The unit is designed to be adapted
to chemically and biologically contaminated environments.
* Fan coil units and assemblies, which are used to meet air
conditioning and heating needs aboard U.S. Navy ships and
military sealift and Coast Guard vessels, including Arleigh Burke
Class Aegis destroyers, Ticonderoga Class Aegis cruisers, Seawolf
and Virginia Class attack submarines, San Antonio Class and LHD
amphibious assault ships and Nimitz Class and CVN-77 aircraft
carriers.
Petroleum and water systems. We manufacture systems for pumping,
storing and testing water and petroleum. These include:
* Petroleum storage, distribution and refueling equipment, which is
used in support of remotely located field equipment and weapon
systems. These systems include the Inland Petroleum Distribution
System, which is a portable pipeline, storage and distribution
system set up to transport fuel up to 270 miles over various
terrains.
* Water distribution and storage systems with trailer mounted pumps
and collapsible tanks.
* Airmobile and Semi-trailer Mounted Petroleum Test Laboratories,
which are used for testing the purity of fuels in the field.
* ROWPUs, which are durable and mobile water purification systems
which provide safe drinking water, primarily to forces in the
field with the capacity to filter highly contaminated water.
Containerized systems. We manufacture specialty designed container
systems. These include:
* Quadcon containers, which are transportable and connectible
containers for multi-use storage or transportation of bulk
products.
* Refrigerated containers, which are used to transport perishable
and frozen foods.
General ground support equipment. We also manufacture a range of
general ground support equipment, including:
* AGPU, which is a self-contained, turbine driven, ground power
unit which provides a mobile source of electrical, hydraulic and
pneumatic power. This unit provides minimum power requirements
for the AH-64 Advanced Attack Helicopter, the UH-60 Utility
Tactical Transport Aircraft System and other aircraft on the
flightline.
* Portable field latrines, laundry, shower and shave facilities,
which are used by forward deployed combat units.
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* Deployable Fire Protection Systems, which are trailer mounted
units designed to apply 500 gallons of fire-fighting foam in one
minute for use in areas where fuel is being distributed, such as
airfields. The system automatically detects fires across a 120
degrees vision area after being deployed.
Commercial and Industrial Products. We have been able to capitalize
on our naval contracting experience to design and manufacture a
broad range of air handling and heat transfer equipment for
commercial and industrial applications. Such applications include
commercial and institutional buildings, civilian marine
applications, and pharmaceutical, semiconductor and
telecommunications clean rooms. We intend to explore commercial,
industrial and civil defense marketing opportunities for chemically
and biologically hardened air handling equipment derived from our
military product line. In fiscal 1998, commercial and industrial air
conditioning and heating products provided approximately 12.5% of
our net revenues and 17.3% of our operating income, each on a pro
forma basis.
We engineer and manufacture injection molded custom and specialty
plastic products for consumer and industrial markets. These products
include housewares, food handling totes, storage containers, medical
devices, automotive equipment, plastic components for computer
terminals and telecommunications equipment and a proprietary line of
nonmetallic faucets. Approximately one third of our sales of
injection molded plastic products are generated by products which
are proprietary. In fiscal 1998, injection molded custom and
specialty plastic products provided approximately 20.8% of our net
revenues and 25.8% of our operating income, each on a pro forma
basis.
Our commercial and industrial operations help mitigate our exposure
to potential defense industry volatility and possible downturns or
fluctuations in U.S. defense spending.
ENGINEERING AND DESIGN
We employ approximately 79 people engaged in the design and
development of new products and the improvement of existing
products. Essentially all of these development activities are
conducted pursuant to, and funded by, Department of Defense
contracts in response to designated performance specifications. We
believe that our engineering expertise gives us a significant
advantage over smaller competitors who do not have such
capabilities. Our unreimbursed expenditures on research and
development were insignificant during the three-year period ended
October 31, 1998.
Our engineering capabilities include expertise in thermodynamics,
air flow, liquid pumping, stress analysis, liquid fuel combustion,
dynamic and climatic environmental engineering, biological and
chemical decontamination, non-pyrotechnic smoke generation, and
filtration of chemically and biologically contaminated air.
Our design and development of ground support equipment are enhanced
by a computer-aided design and manufacturing ("CAD/CAM") system.
This system is used by engineers and draftsmen to design complex
products and component parts in three-dimensional view, and
minimizes the need for time-consuming manual methods of prototype
development. Our engineering staff and CAD/CAM system provide us
with the ability to adapt our production process to new product
needs on a timely basis.
We maintain extensive laboratory facilities used for supporting
engineering development and production operations. These include
test facilities for measurement of product performance from 65
degrees below zero to 140 degrees above zero Fahrenheit and a
completely equipped prototype shop. We also have the capability to
provide complete technical data support for the products we
manufacture. This includes integrated logistics support, spare parts
provisioning and preparation of technical manuals.
MARKETING
Our marketing of military equipment focuses, in part, on determining
the current and future needs of the Department of Defense for ground
support equipment. To identify those needs, we gather information
from primary sources such as the Department of Defense 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, along
with direct interface with our customers. We analyze this data
through an established new business opportunity procedure and then
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determine whether or not to bid on specific projects based upon
determinations of potential profitability and the likelihood of
being awarded the contract.
Sales of custom commercial, industrial and marine air handling units
and coils are effected both directly and through sales
representatives located primarily in the United States, Canada, and
Puerto Rico. Generally, the customers' engineers and contractors
provide the required specifications and performance data. We, in
turn, design and manufacture the equipment to meet the specified
criteria with a focus on quality, value and service. Customers are
typically large and well established companies which require
equipment for industrial and other specialized applications with
specifications far more exacting than those that would normally be
supplied for comfort cooling and heating. The pharmaceutical,
telecommunications and healthcare industries represent a significant
portion of the sales volume.
Principal customers for injection molded custom and specialty
plastic products include large, well-established producers of
consumer and industrial products. Sales of injection molded plastic
products are effected both directly and through sales
representatives. Customers typically submit sample parts and
drawings to us for quotations. Contracts can typically be canceled
on 30 days notice. A significant portion of our sales of injection
molded plastics products are of storage containers. We anticipate
that container sales will remain strong as we are in geographic
proximity to several large purchasers of these products, including
companies within the housewares and poultry industries which we
believe is an important consideration in this market. We also
anticipate that sales for our injection molded plastic products will
continue to be strong within the office equipment market. Injection
molded parts for computer terminals and telecommunications equipment
represent a significant portion of sales volume. However, we are
capable of producing a wide variety of injection molded plastic
products, including automotive parts, medical equipment, electronic
switching equipment, electrical appliances and most small electronic
devices. Our sales of our proprietary line of kitchen and lavatory
faucets are effected primarily through sales representatives, and
marketing efforts focus on service and price.
MANUFACTURING AND PROCUREMENT
We manufacture certain components for our products and systems
including fabricated metal cabinets, control panels and frames. We
are equipped to bend, cut, drill and weld sheet metal. However, a
significant portion of component parts and materials for the
products we manufacture are purchased from third party suppliers.
We believe that the materials and services we require are readily
available through competitive sources and that we are not dependent
upon any one subcontractor or vendor. Two of our facilities have
received ISO 9000 certification and we are qualified by the U.S.
government to the military control specifications MIL-I-45208 and
MIL-Q-9858, which apply to most of our government contracts
currently in progress. We intend to seek ISO 9000 certification for
at least two of our other facilities.
Our injection molded plastic manufacturing operations are vertically
integrated, with the facilities to both mold and finish plastic
products to exacting specifications. We operate injection molding
machines ranging in size from 45 to 2,200 tons of clamp pressure.
Material handling capacity for injection molded plastic products is
achieved through five silos with a combined capacity exceeding
200,000 pounds, a central vacuum loading system, blend mixers and
computer-integrated manufacturing control software. Finishing
equipment includes a 650 foot paint conveyor, 20 paint spray booths,
drying ovens, hot stamp machines, silk screen machines, a 150 foot
motorized assembly line and sonic welders. We subcontract the
assembly and packaging of Lifetime Faucets to an outside vendor.
GOVERNMENT CONTRACTING
Our government contracts are obtained through the Department of
Defense procurement process as governed by the Federal Acquisition
Regulations and related agency supplements, and are typically fixed-
price contracts. This means that the price is agreed upon before the
contract is awarded and we assume complete responsibility for any
difference between estimated and actual costs.
26
<PAGE>
<PAGE>
Under the Truth in Negotiations Act of 1962, the U.S. government has
the right for three years after final payment on certain negotiated
contracts, subcontracts and modifications thereto, to determine
whether we furnished the U.S. government with complete, accurate and
current cost or pricing data as defined by the act. In the event we
fail 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, we are 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 we fail to perform in strict
accordance with contract terms. We have never had a contract
terminated by the U.S. government for failure to perform in
accordance with contract terms. Termination of, or elimination of
appropriation for, a significant government contract could have a
material adverse effect on our business, financial condition and
results of operations. Similarly, U.S. government contracts
typically permit the U.S. government to change, alter or modify the
contract at its discretion. If the U.S. government were to exercise
this right, we would be 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 our
contract costs through progress payments. We historically received
progress payments in accordance with Department of Defense contract
terms for "small business" concerns. These terms provide 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 at a rate that is
15% lower than that paid to small businesses. Recent acquisitions
have caused us to exceed certain thresholds relating to small
business qualification, and we will therefore qualify as a small
business only for specific government contracting purposes. We are,
however, reducing our emphasis on small business qualification for
purposes of future government work.
PATENTS
We own various patents in connection with our equipment supplied to
the Department of Defense with expiration dates extending through
February 2002. From time to time, we develop proprietary information
and trade secrets regarding the design and manufacture of various
military products.
We also hold 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 the washer
had been replaced to stop a leaking faucet. This patent expires in
October 2002.
We consider our proprietary information and patents to be valuable
assets. However, our business is not materially dependent on patent
protection.
COMPETITION
The markets for all of our products are highly competitive.
Approximately 60.0% and 66.1% of our net revenues in fiscal 1998 and
the three months ended January 31, 1999, have come from direct and
indirect contracts with the U.S. government. In order to obtain U.S.
government contracts, we must comply with detailed and complex
procurement procedures adopted by the Department of Defense pursuant
to regulations promulgated by the U.S. government. The regulations
and procurement procedures are adopted to promote competitive
bidding. In addition, we compete with a number of businesses with
plastic injection molding capabilities and compete with a large
number of suppliers to commercial and industrial air handling
customers. In all phases of our operations, we compete in both
performance and price with companies, some of which are considerably
larger, more diversified and have greater financial resources than
we do.
27
<PAGE>
<PAGE>
DEFENSE BACKLOG
We record our defense backlog as either funded backlog or government
options. Our funded backlog is subject to fluctuations and is not
necessarily indicative of future sales. Funded backlog represents
products the government has committed by contract to purchase from
us. Government options include products the government has the
option to purchase under contract with us, including, with respect
to contracts which include a maximum amount purchasable by the
government thereunder, such maximum amount, and with respect to
contracts without a specified maximum amount, our estimate of the
amount we expect the government to purchase, using the government's
best estimated quantity as a guide where a best estimated quantity
is specified. There are no commitments by the government to purchase
products included in government options and there can be no
assurance that any or all amounts included therein will generate
revenues for us. Moreover, cancellations of purchase orders or
reductions of product quantities in existing contracts could
substantially and materially reduce our funded backlog and,
consequently, future revenue. Any failure by us to replace canceled
or reduced backlog, whether funded backlog or government options, or
to convert a significant portion of government options to funded
backlog, could have a material adverse effect on our business,
financial condition and results of operations.
The following table summarizes funded backlog and government options
as of the dates indicated:
<TABLE>
<CAPTION>
AS OF FUNDED BACKLOG GOVERNMENT OPTIONS
----- -------------- ------------------
<S> <C> <C>
January 31, 1999 $99.3 $286.2
October 31, 1998 80.8 319.6
October 31, 1997 44.1 155.0
October 31, 1996 90.7 153.8
October 31, 1995 90.4 100.2
October 31, 1994 77.9 153.7
</TABLE>
Of the funded backlog as of January 31, 1999, we expect to recognize
as revenues approximately $68.6 million within the fiscal year
ending October 31, 1999. Backlog data at January 31, 1999 and
October 31, 1998 include backlog of the businesses acquired in the
Marlo acquisition and the Keco acquisition, and data for prior
periods do not include such amounts.
EMPLOYEES
As of January 31, 1999, we employed 1,001 persons, of whom 754 were
engaged in manufacturing activities, 79 in engineering activities,
and 168 in office administration and management functions.
Approximately 100 employees at our St. Louis facility are
represented by Lodge 1012 of the International Brotherhood of
Boilermakers under a collective bargaining agreement which expires
January 31, 2002.
We consider our employee relations to be satisfactory.
28
<PAGE>
<PAGE>
PROPERTIES
We conduct our business from 7 manufacturing and office facilities.
All owned facilities are subject to deeds of trust in favor of our
lender.
<TABLE>
<CAPTION>
LOCATION DESCRIPTION SIZE IN SQ. FEET OWNED/LEASED
-------- ----------- ---------------- ------------
<S> <C> <C> <C>
St. Louis County, Missouri Manufacturing/Office 171,000 Owned
St. Louis County, Missouri Project Testing 25,000 Leased
Hot Springs, Arkansas Manufacturing/Office 110,000 Owned
High Ridge, Missouri Manufacturing/Office 185,000 Owned
Florence, Kentucky Manufacturing/Office 174,000 Owned
Blue Ash, Ohio Manufacturing 132,000 Owned
Bridgeport, Connecticut Manufacturing/Office 109,000 Owned
</TABLE>
We believe that our current facilities are sufficient for the
conduct of our current level of operations.
LEGAL PROCEEDINGS
We are a defendant in a lawsuit pending in the Garland County
Circuit Court of Hot Springs, Arkansas. Plasco Designs of Arkansas,
Inc. ("Plasco"), a former customer of ours, alleges in the suit that
we designed a defective mold for use by us in fabricating products
for Plasco and that we improperly refused to return molds to Plasco
when the parties ceased doing business. In a number of counts
involving replevin, slander, breach of contract and other claims,
Plasco seeks aggregate damages of approximately $2.0 million, plus
punitive damages and attorneys' fees. In addition, we have brought a
counterclaim against Plasco seeking aggregate damages of
approximately $2.0 million, plus punitive damages and attorneys'
fees. We have also brought a third party claim against Omega Tool
Company, the manufacturer of the mold Plasco claims was defective.
The case is set for trial in April 1999. While we believe that we
have meritorious defenses and counterclaims, and intend to prosecute
the case vigorously, there can be no assurances as to its outcome.
We are a defendant in a lawsuit pending in the Circuit Court of
Jackson County, Missouri. In that suit, the plaintiff, Mr. Jacobs,
who is a former inspector for the Department of Defense, claims that
he suffered a respiratory illness as a result of fumes he inhaled
while inspecting work of several defense contractors at their plants.
One of Mr. Jacobs' claims is that we were negligent while acting as
landlord and contractor for work done by one of our subcontractors.
Specifically, Mr. Jacobs claims that we failed to protect him from
exposure to paint fumes. Mr. Jacobs seeks damages in an unspecified
amount in excess of $25,000 against all defendants, including us. Our
liability insurance carrier has accepted defense of this case and,
while the case is in its very early stages, we believe we have
meritorious defenses and intend to defend the case vigorously. There
can be no assurance as to the outcome of this case.
A former employee, Walter Heizmann, sued our Engineered Air subsidiary
in the U.S. District Court for the Eastern District of Missouri
alleging that Engineered Air terminated him at the age of 62 in large
part because of his age. Mr. Heizmann is claiming $350,000 for lost
wages and benefits based on age discrimination. Mr. Heizmann recently
amended his lawsuit to add a count alleging that Engineered Air had
terminated his employment in retaliation for his objection to what he
says he believed in good faith was Engineered Air's failure to produce
and validate technical manuals and related documentation in compliance
with requirements under certain government contracts and the federal
False Claims Act. On this retaliatory discharge claim, Mr. Heizmann is
claiming actual damages of $1,000,000 and punitive damages of $3,000,000.
With the assistance of counsel, we have preliminarily investigated Mr.
Heizmann's claims, and his retaliatory discharge claim in particular.
Based upon this investigation, and in part upon the advice of counsel,
we believe that Mr. Heizmann's claims are without merit and we intend
to defend against them vigorously.
We and our subsidiaries are from time to time parties to various
other legal proceedings arising out of their businesses. We believe
that there are no such other proceedings pending or threatened
against us or our subsidiaries which, if determined adversely, would
have a material adverse effect on our business, financial condition,
results of operations or cash flows.
29
<PAGE>
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees and our
operating subsidiaries are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael F. Shanahan Sr. <Fa><Fb> 59 Chairman of the Board, President and Chief
Executive Officer
Gary C. Gerhardt <Fb> 54 Executive Vice President and Chief Financial
Officer; Director
George W. Andrews 69 President and Chief Executive Officer of Keco
John E. Capeless 53 Vice President and General Manager of Engineered
Specialty Plastics, Inc.
Ronald W. Davis <Fb> 52 Vice President--Marketing of Engineered Air
Systems, Inc.
R. Bruce Earls <Fb> 52 President and Chief Executive Officer of Marlo;
Director
Thomas C. Santoro 45 President of Fermont
Marvin L. Smith 62 Executive Vice President of Keco
John J. Wichlenski <Fa><Fb> 55 President and Chief Executive Officer of
Engineered Air Systems, Inc.; Director
Maj. Gen. George E. Friel (ret.) <Fc> 56 Director
Thomas J. Guilfoil <Fd> 79 Director
Lt. Gen. Kenneth E. Lewi (ret.) <Fc> 68 Director
Michael F. Shanahan Jr. <Fa><Fd> 32 Director
Earl E. Walker <Fd> 79 Director
Earl W. Wims <Fa><Fc> 59 Director
<FN>
- ------------------------------
<Fa> Member of Executive Committee of the Board
<Fb> Member of Executive Management Committee of Engineered Support
<Fc> Member of Audit Committee of the Board
<Fd> Member of Compensation Committee of the Board
</TABLE>
Michael F. Shanahan Sr. has been a director since our formation. Mr.
Shanahan was named Chief Executive Officer in 1985. He was named our
Chairman in 1987. Mr. Shanahan is a director of Concord Bank and is
Chairman of the Board of Trustees of St. Louis University. From 1986
to 1995, Mr. Shanahan was Chairman of the St. Louis Blues, a
professional hockey team, and from 1982 to 1986, he was a Director
of the St. Louis Regional Commerce and Growth Association. In 1997,
Mr. Shanahan was inducted into the Missouri Sports Hall of Fame.
Gary C. Gerhardt has been a director since March 1998. He has been
Executive Vice President since December 1994. He has been our Chief
Financial Officer 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.
George W. Andrews has been President and Chief Executive Officer of
Keco since 1984.
John E. Capeless has been Vice President and General Manager of
Engineered Specialty Plastics since April 1996. Prior thereto, he
was Vice President of Operations for Atlantis Plastics, Inc., a
manufacturer of plastic products, from 1994 until April 1996. He
served as Director of Manufacturing for Frem Corporation from 1989
to 1994.
Ronald W. Davis has been Vice President of Marketing of Engineered
Air since 1990. He previously served as Vice President of Sales of
Engineered Air from 1985 to 1990. Mr. Davis joined us in 1983 as
Director of Sales of Engineered Air.
30
<PAGE>
<PAGE>
R. Bruce Earls has been a director since March 1998. He has been
President and Chief Executive Officer of Marlo since September 1994.
Prior thereto, he was Managing Partner of a KPMG Peat Marwick
Business Unit.
Thomas C. Santoro has been President of Fermont since February 1995.
Prior thereto, he served as Executive Vice President of Fermont
since 1993. Mr. Santoro joined Fermont in 1989 as Director of
Finance.
Marvin L. Smith has been Executive Vice President of Keco since
1990. Mr. Smith joined Keco in 1988 as Vice President of Operations.
John J. Wichlenski has been a director since March 1992 and has
served as President and Chief Executive Officer of Engineered Air
since July 1992; prior thereto, he served as Chief Operating Officer
of Engineered Air since 1990 and as Vice President--Engineering of
Engineered Air from August 1986 until 1991.
Maj. Gen. George E. Friel (ret.) has been a director since September
1998. He served in the United States Army for 38 years until his
retirement in July 1998. In the six years preceding his retirement,
Major General Friel headed the U.S. Army Chemical and Biological
Defense Command. He performs consulting services for various
entities including Engineered Support and its subsidiaries.
Thomas J. Guilfoil has been a director 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.
Lt. Gen. Kenneth E. Lewi (ret.) has been a director since July 1990
and serves as a consultant. 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.
Michael F. Shanahan Jr. has been a director 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 from May 1991 until October 1994. Mr. Shanahan
is the son of Michael F. Shanahan Sr.
Earl E. Walker has been a director since March 1996. He has been the
President and principal stockholder of Carr Lane Manufacturing, a
manufacturer of tooling, jig and fixture components since founding
it in 1952.
Earl W. Wims has been a director since December 1991. He has been
Chairman of Marketing Horizons, a marketing research and consulting
firm, since 1986. Mr. Wims is the father-in-law of Michael F. Shanahan Jr.
CERTAIN TRANSACTIONS
During the fiscal year ended October 31, 1998, Engineered Support paid
David D. Mattern and his law firm a total of $335,128 for legal services
rendered which were billed at their standard rates for such services.
Mr. Mattern, who is the son-in-law of Michael F. Shanahan, Sr., President,
Chairman and Chief Executive Officer of Engineered Support, had a material
interest in such fees.
31
<PAGE>
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of March 18, 1999, certain
information concerning the ownership of common stock by each person
who is known by us to own beneficially 5.0% or more of such stock,
by each director, by certain executive officers, by all directors
and officers as a group and by the selling stockholders. As of
March 18, 1999, there were 4,874,170 shares of common stock
outstanding.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO THE SHARES TO OWNERSHIP AFTER THE
OFFERING<F1> BE SOLD<F2> OFFERING<F1>
----------------------- ----------- -----------------------
SHARES PERCENT SHARES PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Michael F. Shanahan Sr.<F3><F4>.............. 1,388,531 27.4% 200,000<F5> 1,188,531 16.8%
Gary C. Gerhardt<F4>......................... 95,140 1.9% --<F5> 95,140 1.4%
George W. Andrews............................ 300 <F*> -- 300 <F*>
John E. Capeless<F4>......................... 13,547 <F*> -- 13,547 <F*>
Ronald W. Davis<F4>.......................... 88,604 1.8% --<F5> 88,604 1.3%
R. Bruce Earls............................... 15,289 <F*> -- 15,289 <F*>
Thomas C. Santoro............................ -- <F*> -- -- <F*>
Marvin L. Smith.............................. 5,000 <F*> -- 5,000 <F*>
John J. Wichlenski<F4><F6>................... 118,625 2.4% -- 118,625 1.7%
Maj. Gen. George E. Friel (ret.)............. 3,750 <F*> -- 3,750 <F*>
Thomas J. Guilfoil........................... 85,500 1.8% -- 85,500 1.2%
Lt. Gen. Kenneth E. Lewi (ret.).............. 24,750 <F*> -- 24,750 <F*>
Michael F. Shanahan Jr....................... 80,352 1.6% -- 80,352 1.2%
Earl E. Walker............................... 9,750 <F*> -- 9,750 <F*>
Earl W. Wims................................. 23,250 <F*> -- 23,250 <F*>
Fidelity Management & Research Company<F7>
82 Devonshire Street
Boston, MA 02109............................. 305,750 6.3% -- 305,750 4.4%
PIMCO Advisors L.P.<F8>
800 Newport Center Drive
Newport Beach, CA 92660...................... 287,050 5.9% -- 287,050 4.2%
All directors and officers as a group (15
persons)................................... 1,952,388 37.2% 200,000 1,752,388 24.2%
<FN>
- ------------------------------
<F*> Less than 1%.
<F1> Pursuant to the rules of the Commission, certain shares of our common stock
which a person has the right to acquire within 60 days pursuant to the
exercise of stock options and warrants are deemed to be outstanding for the
purpose of computing beneficial ownership and the percentage ownership of
that person but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. All directors and executive
officers as a group hold options to purchase an aggregate of 365,500 shares
of common stock. Unless otherwise noted, we believe that all persons named
in the table have sole voting and investment power with respect to all
shares of common stock that are beneficially owned by them.
<F2> Assumes the underwriters' over-allotment option is not exercised.
<F3> Mr. Shanahan holds 943,203 of these shares as nominee of the Michael F.
Shanahan Sr. First Amended and Restated Revocable Living Trust dated August
10, 1990. This Trust may be revoked by Mr. Shanahan at any time prior to
his death and Mr. Shanahan has all rights to vote, sell, and otherwise
dispose of the stock. 175,000 shares are held in The Shanahan Family Voting
Trust, dated December 11, 1998, over which Mary Ann Shanahan, wife of Mr.
Shanahan, has sole voting power. Of these remaining shares, 195,000 shares
relate to unexercised stock options held by Mr. Shanahan and 75,328 shares
are owned by Mr. Shanahan under the Engineered Support Systems, Inc. Employee
Stock Ownership Plan.
<F4> Includes shares issued under the Engineered Support Systems, Inc. Employee
Stock Ownership Plan as follows:
<CAPTION>
COMPANY
401k<Fa> CONTRIBUTED<Fb> TOTAL
-------- --------------- ------
<S> <C> <C> <C>
Michael F. Shanahan Sr...................................... 51,319 24,009 75,328
Ronald W. Davis............................................. 19,827 10,277 30,104
Gary C. Gerhardt............................................ 12,721 10,419 23,140
John J. Wichlenski.......................................... 13,408 14,730 28,138
John E. Capeless............................................ 290 757 1,047
R. Bruce Earls.............................................. 0 289 289
<FN>
-------------------------------
<Fa> Employee has sole voting and dispositive power.
<Fb> Employee has sole voting power; shares may not be disposed of until
eligible for distribution per plan provisions.
<F5> The shares beneficially owned by Mr. Shanahan to be sold pursuant to this
offer, including the over-allotment option of 300,000 shares, will be sold
by Mr. Shanahan's Living Trust. Messrs. Gerhardt and Davis have each
granted the underwriters an over-allotment option for 15,000 shares.
<F6> Mr. Wichlenski holds 20,700 shares as nominee of the John J. Wichlenski
Revocable Living Trust dated November 25, 1996. This Trust may be revoked
by Mr. Wichlenski at any time prior to his death and Mr. Wichlenski has all
rights to vote, sell or otherwise dispose of the stock.
<PAGE>
<F7> This amount, as reflected on Schedule 13F effective September 30, 1998,
consists of no sole or shared voting power, dispositive power with respect
to 305,750 shares and no shared dispositive power. Sole voting power for
305,750 resides with the Board of Trustees of the Fidelity Low Priced Stock
Fund.
<F8> This amount, as reflected on Schedule 13F effective December 31, 1998,
consists entirely of sole voting and dispositive power, with no shared
voting or dispositive power.
</TABLE>
32
<PAGE>
<PAGE>
DESCRIPTION OF COMMON STOCK
Our authorized capital stock consists of 10,000,000 shares of common
stock, par value $0.01 per share. As of March 8, 1999, there were
4,874,170 shares of common stock outstanding held by approximately 480
holders of record.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders.
Holders of common stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds
legally available therefor and to share ratably in any distributions
by us in liquidation after all of our debts and obligations have
been satisfied. Holders of common stock have no preemptive or
subscription rights and there are no redemption or conversion rights
with respect to such shares. There are no sinking fund provisions
applicable to the common stock.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Stockholder Services, Inc. is the transfer agent and
registrar for the common stock.
RESTRICTIONS ON CHANGES IN CONTROL
Our by-laws provide that the Board of Directors is divided into
three classes, with approximately one-third of the directors elected
each year. As less than a majority of the directors is elected each
year, it may be more difficult for a person seeking to gain control
of Engineered Support to elect a majority of the Board of Directors.
Missouri corporate law contains "control share acquisition" and
"business combination" provisions, and a provision which permits a
board of directors, in responding to an acquisition proposal, to
consider a number of factors, including social, legal and economic
effects on employees, suppliers, customers and others. These
provisions generally make it more difficult for a change in control
of Engineered Support to occur or for us to enter into certain
business combinations.
The "control share acquisition" provisions generally deny a person
(an "Acquiror") who acquires voting rights with respect to any
shares of voting stock ("Restricted Shares") of a corporation the
right to vote the Restricted Shares if such acquisition increases
the voting power of such Acquiror to (i) one-fifth or more but less
than one-third of all voting power of the corporation, (ii)
one-third or more but less than a majority of all voting power of
the corporation or (iii) a majority or more of all voting power of
the corporation. An Acquiror will, however, be entitled to vote
Restricted Shares to the extent that Restricted Shares are accorded
voting rights by the affirmative vote of a majority of all
outstanding shares entitled to vote, excluding all Restricted
Shares. If stockholders of the corporation grant an Acquiror rights
to vote Restricted Shares, stockholders who object to such grant of
voting rights and follow certain statutory procedures are entitled
to dissenters' rights to obtain from the corporation the fair value
of their shares as of the date prior to the date on which such vote
was taken.
The "business combination" provisions generally prohibit a Missouri
corporation from engaging in a business combination, such as a
merger, consolidation or sale of assets, with or as proposed by an
"Interested Stockholder" (as defined below) for five years following
the time a person becomes an Interested Stockholder, unless the
board of directors of the corporation approves the business
combination before the person becomes an Interested Stockholder. An
Interested Stockholder is a person, corporation or entity that is
the beneficial owner, directly or indirectly, of 20% or more of the
voting stock of the corporation or that is affiliated with the
corporation and at any time within the preceding five years was such
a 20% or greater holder of voting stock. If the corporation's board
of directors does not give prior approval to such a business
combination, the business combination generally can occur only after
five years from the date the person first becomes an Interested
Stockholder and either (i) the business combination is approved by
the affirmative vote of the holders of a majority of the
corporation's voting stock, excluding stock held by the Interested
Stockholder, or (ii) certain "fair pricing" provisions are met and
enable the stockholders of the corporation to receive in the
business combination the highest price and the same type of
consideration that was paid by the Interested Stockholder within the
five-year period preceding the announcement of the business
combination.
33
<PAGE>
<PAGE>
UNDERWRITING
Engineered Support and the selling stockholders have entered into an
underwriting agreement with the underwriters named below. CIBC
Oppenheimer Corp., A.G. Edwards & Sons, Inc., PaineWebber Incorporated
and Pauli Johnson Capital & Research Incorporated are acting as
representatives of the underwriters. PW Trust Company, an affiliate of
PaineWebber Incorporated, acts as trustee of Engineered Support's Employee
Stock Ownership Plan.
The underwriting agreement provides for the purchase of a specific
number of shares of common stock by each of the underwriters. The
underwriters' obligations are several, which means that each
underwriter is required to purchase a specified number of shares,
but is not responsible for the commitment of any other underwriter
to purchase shares. Subject to the terms and conditions of the
underwriting agreement, each underwriter has severally agreed to
purchase the number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
CIBC Oppenheimer Corp.......................................
A.G. Edwards & Sons, Inc....................................
PaineWebber Incorporated....................................
Pauli Johnson Capital & Research Incorporated...............
---------
Total................................................... 2,200,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the
underwriters have agreed to purchase all of the shares offered by
this prospectus (other than those covered by the over-allotment
option described below) if any are purchased. Pursuant to the
underwriting agreement, if an underwriter defaults in its commitment
to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated,
depending on the circumstances.
The representatives have advised Engineered Support and the selling
stockholders that the underwriters propose to offer the shares
directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representative
may offer some of the shares to certain securities dealers at such
price less a concession of $ per share. The underwriters may
also allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the shares are
released for sale to the public, the representatives may change the
offering price and other selling terms at various times.
Engineered Support and the selling stockholders have granted the
underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of 330,000 additional
shares from the selling stockholders to cover over-allotments. If
the underwriters exercise all or part of this option, they will
purchase shares covered by the option at the initial public offering
price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the
total price to public will be $ , the total proceeds to
Engineered Support will be $ and the total proceeds to the
selling stockholders will be $ . The underwriters have
severally agreed that, to the extent the over-allotment option is
exercised, they will each purchase a number of additional shares
proportionate to each underwriter's initial amount reflected in the
foregoing table.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by Engineered Support and
the selling stockholders:
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH FULL
EXERCISE OF EXERCISE OF
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- ---------------
<S> <C> <C> <C>
Engineered Support................................ $ $ $
Selling Stockholders.............................. $ $ $
-------------- --------------
Total......................................... $ $
</TABLE>
Engineered Support will pay all of the total expenses of the
offering, excluding the underwriting discount, which we estimate
will be approximately $ .
34
<PAGE>
<PAGE>
Engineered Support and the selling stockholders have agreed to
indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
Engineered Support, its officers and directors and certain other
stockholders have agreed to a 90-day "lock up" with respect to
1,737,823 shares of common stock of Engineered Support. This means
that, subject to certain exceptions, for a period of 90 days
following the date of this prospectus, Engineered Support and such
persons may not offer, sell, pledge or otherwise dispose of
Engineered Support common stock without the prior written consent of
CIBC Oppenheimer Corp.
Rules of the Securities and Exchange Commission may limit the
ability of the underwriters to bid for or purchase shares before the
distribution of the shares is completed. However, the underwriters
may engage in the following activities in accordance with the rules:
* Stabilizing transactions--The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the
price of shares, so long as stabilizing bids do not exceed a
specified maximum.
* Over-allotments and syndicate covering transaction--The
underwriters may create a short position in the shares by selling
more shares than are set forth on the cover page of this
prospectus. If a short position is created in connection with the
offering, the representatives may engage in syndicate covering
transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
LEGAL MATTERS
The validity of the shares of the common stock offered hereby will
be passed upon for Engineered Support by Armstrong Teasdale LLP, St.
Louis, Missouri. Certain legal matters will be passed upon for the
underwriters by Cadwalader, Wickersham & Taft, New York, New York.
EXPERTS
The consolidated financial statements of Engineered Support at
October 31, 1998 and 1997 and for each of the three years in the
period ended October 31, 1998, and the financial statements of Keco
Industries, Inc. at December 31, 1997 and 1996 and for each of the
two years then ended, included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of Nuclear Cooling, Inc., d/b/a Marlo Coil
at June 30, 1997 and 1996 and for each of the two years in the
period ended June 30, 1997 included in this prospectus have been so
included in reliance on the report of Arthur Andersen LLP,
independent public accountants, given on the authority of said firm
as experts in auditing and accounting.
35
<PAGE>
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Engineered Support has filed a registration statement on Form S-2
with the Securities and Exchange Commission in connection with this
offering. In addition, Engineered Support files annual, quarterly
and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy the
registration statement and any other documents filed by Engineered
Support at the Securities and Exchange Commission's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the Public Reference Room. Engineered Support
Securities and Exchange Commission filings are also available to the
public at the Securities and Exchange Commission's Internet site at
"http//www.sec.gov."
This prospectus is part of the registration statement and does not
contain all of the information included in the registration
statement. Whenever a reference is made in this prospectus to any
contract or other document of Engineered Support, the reference may
not be complete and you should refer to the exhibits that are a part
of the registration statement for a copy of the contract or
document.
The Securities and Exchange Commission allows Engineered Support to
"incorporate by reference" into this prospectus the information
Engineered Support files with it, which means that Engineered
Support can disclose important information to you by referring you
to those documents. Information incorporated by reference is part of
this prospectus. Later information filed with the Securities and
Exchange Commission will update and supersede this information.
Engineered Support incorporates by reference the documents listed
below and any future filing made with the Securities and Exchange
Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Securities. Exchange Act of 1934 until this offering is completed:
* Annual Report on Form 10-K for the year ended October 31, 1998.
* Proxy Statement dated February 1, 1999 relating to the Annual
Meeting of Shareholders held on March 8, 1999.
* Quarterly Report on Form 10-Q for the quarter ended January 31,
1999.
* Current Report on Form 8-K filed on March 8, 1999.
You may request a copy of these filings, at no cost, by contacting
us at:
Engineered Support Systems, Inc.
1270 North Price Road
St. Louis, Missouri 63132
Attention: Gary C. Gerhardt
Telephone Number: (314) 993-5880
36
<PAGE>
<PAGE>
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
ENGINEERED SUPPORT SYSTEMS, INC.
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of October 31, 1997 and 1998.............. F-3
Consolidated Statements of Income for the years ended October 31, 1996,
1997 and 1998.......................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
October 31, 1996, 1997 and 1998........................................ F-5
Consolidated Statements of Cash Flows for the years ended October 31,
1996, 1997 and 1998.................................................... F-6
Notes to Consolidated Financial Statements for the years ended October
31, 1996, 1997 and 1998................................................ F-7
Condensed Consolidated Balance Sheet as of January 31, 1999
(Unaudited)............................................................ F-18
Condensed Consolidated Statements of Income for the three months ended
January 31, 1998 and 1999 (Unaudited).................................. F-19
Condensed Consolidated Statements of Cash Flows for the three months
ended January 31, 1998 and 1999 (Unaudited)............................ F-20
Notes to Condensed Consolidated Financial Statements for the three months
ended January 31, 1998 and 1999 (Unaudited)............................ F-21
KECO INDUSTRIES, INC.
Report of Independent Accountants........................................ F-23
Balance Sheets as of December 31, 1996 and 1997.......................... F-24
Statements of Income and Retained Earnings for the years ended December
31, 1996 and 1997...................................................... F-25
Statements of Cash Flows for the years ended December 31, 1996 and
1997................................................................... F-26
Notes to Financial Statements for the years ended December 31, 1996 and
1997................................................................... F-27
Condensed Balance Sheet as of June 24, 1998 (Unaudited).................. F-30
Condensed Statements of Income for the six months ended June 30, 1997 and
June 24, 1998 (Unaudited).............................................. F-31
Condensed Statements of Cash Flows for the six months ended June 30, 1997
and June 24, 1998
(Unaudited)............................................................ F-32
Notes to Condensed Financial Statements for the six months ended June 30,
1997 and June 24, 1998
(Unaudited)............................................................ F-33
NUCLEAR COOLING, INC., D/B/A MARLO COIL
Report of Independent Public Accountants................................. F-34
Balance Sheets as of June 30, 1996 and 1997.............................. F-35
Statements of Income for the years ended June 30, 1996 and 1997.......... F-36
Statements of Stockholders' Equity for the years ended June 30, 1996 and
1997................................................................... F-37
Statements of Cash Flows for the years ended June 30, 1996 and 1997...... F-38
Notes to Financial Statements for the years ended June 30, 1996 and
1997................................................................... F-39
Condensed Balance Sheet as of January 31, 1998 (Unaudited)............... F-43
Condensed Statements of Income for the seven months ended January 31,
1997 and 1998 (Unaudited).............................................. F-44
Condensed Statements of Cash Flows for the seven months ended January 31,
1997 and 1998 (Unaudited).............................................. F-45
Notes to Condensed Financial Statements for the seven months ended
January 31, 1997 and 1998
(Unaudited)............................................................ F-46
</TABLE>
F-1
<PAGE>
<PAGE>
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,
of shareholders' equity and of cash flows present
fairly, in all material respects, the financial
position of Engineered Support Systems, Inc. and its
subsidiaries at October 31, 1997 and 1998, and the
results of their operations and their cash flows for
each of the three years in the period ended October 31,
1998, 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.
PricewaterhouseCoopers LLP
St. Louis, Missouri
December 4, 1998
F-2
<PAGE>
<PAGE>
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
OCTOBER 31,
-----------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 8,313,160 $ 5,773,529
Accounts receivable, net............................................... 3,398,973 14,036,184
Contracts in process and inventories, net.............................. 7,072,377 18,686,810
Refundable income taxes................................................ 175,989 971,925
Deferred income taxes.................................................. 1,062,281 112,685
Prepaid expenses and other assets...................................... 185,350 458,363
----------- -----------
Total Current Assets............................................... 20,208,130 40,039,496
----------- -----------
Property, Plant and Equipment:
Land................................................................... 769,798 1,833,320
Buildings and improvements............................................. 10,389,127 15,330,883
Machinery and equipment................................................ 17,474,282 20,580,343
Furniture and fixtures................................................. 624,078 1,215,762
----------- -----------
29,257,285 38,960,308
Less accumulated depreciation.......................................... 14,767,236 13,895,326
----------- -----------
14,490,049 25,064,982
----------- -----------
Other Assets:
Cost in excess of net assets acquired, less
accumulated amortization of $410,396 and $1,073,176.................. 648,370 25,835,892
Other assets........................................................... 1,737,505 1,219,852
----------- -----------
2,385,875 27,055,744
----------- -----------
Total Assets....................................................... $37,084,054 $92,160,222
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt................................... $ 73,273 $ 7,204,172
Accounts payable....................................................... 5,596,760 7,285,396
Accrued employee compensation.......................................... 1,342,054 2,503,745
Other liabilities...................................................... 1,636,353 3,642,852
Due to related party (Note B).......................................... 1,193,797
----------- -----------
Total Current Liabilities.......................................... 8,648,440 21,829,962
Long-term debt............................................................. 1,194,433 36,779,160
Deferred income taxes...................................................... 2,642,295 2,659,699
ESOP guaranteed bank loan.................................................. 873,300 725,700
Commitments and contingencies (Note J)
Shareholders' Equity:
Common Stock, par value $.01 per share; 10,000,000 shares authorized;
3,772,573 and 5,490,604 shares issued................................ 37,726 54,906
Additional paid-in capital............................................. 9,698,665 11,082,278
Retained earnings...................................................... 18,026,195 23,682,931
----------- -----------
27,762,586 34,820,115
Less ESOP guaranteed bank loan......................................... 873,300 725,700
Less treasury stock at cost, 598,858 and 638,702 shares................ 3,163,700 3,928,714
----------- -----------
Total Shareholders' Equity............................................. 23,725,586 30,165,701
----------- -----------
Total Liabilities and Shareholders' Equity......................... $37,084,054 $92,160,222
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
<PAGE>
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues...................................... $81,506,943 $88,570,970 $96,972,886
Cost of revenues.................................. 69,093,075 73,816,030 74,343,103
----------- ----------- -----------
Gross profit.................................... 12,413,868 14,754,940 22,629,783
Selling, general and administrative expense....... 6,477,851 7,087,026 12,387,419
----------- ----------- -----------
Income from operations.......................... 5,936,017 7,667,914 10,242,364
Interest expense.................................. (472,258) (221,987) (1,767,640)
Interest income................................... 38,110 286,019 293,379
Gain on sale of assets............................ 20,339 879,278
----------- ----------- -----------
Income before income taxes...................... 5,522,208 7,731,946 9,647,381
Income tax provision.............................. 2,208,000 3,093,000 3,858,000
----------- ----------- -----------
Net income...................................... $ 3,314,208 $ 4,638,946 $ 5,789,381
=========== =========== ===========
Earnings per share:
Basic......................................... $0.72 $0.98 $1.21
===== ===== =====
Diluted....................................... $0.68 $0.94 $1.16
===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<PAGE>
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
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, 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
Net income................. 4,638,946 4,638,946
Cash dividends............. (78,445) (78,445)
Exercise of stock
options.................. 853 628,581 629,434
Reduction of ESOP
guaranteed bank loan..... 147,600 147,600
Purchase of treasury
stock.................... (957,091) (957,091)
Issuance of treasury stock
to ESOP.................. 71,595 22,331 93,926
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 1997.... 37,726 9,698,665 18,026,195 (873,300) (3,163,700) 23,725,586
Net income................. 5,789,381 5,789,381
Cash dividends............. (132,645) (132,645)
Exercise of stock
options.................. 1,198 1,263,526 1,264,724
Reduction of ESOP
guaranteed bank loan..... 147,600 147,600
Three-for-two stock
split.................... 15,982 (15,982)
Purchase of treasury
stock.................... (802,349) (802,349)
Issuance of treasury stock
to ESOP.................. 136,069 37,335 173,404
----------- ----------- ----------- ----------- ----------- -----------
Balance at October 31, 1998.... $ 54,906 $11,082,278 $23,682,931 $ (725,700) $(3,928,714) $30,165,701
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
<PAGE>
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net income.......................................... $ 3,314,208 $ 4,638,946 $ 5,789,381
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization.................. 1,849,807 1,897,832 2,812,585
Deferred income taxes.......................... (385,000) (385,000) 967,000
Gain on sale of assets......................... (20,339) (879,278)
----------- ----------- ------------
Cash provided before changes in operating assets and
liabilities, excluding the effects of
acquisitions....................................... 4,758,676 6,151,778 8,689,688
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,344,734) 1,456,357 (1,543,761)
Contracts in process and inventories............. 2,102,852 2,942,250 (1,169,062)
Accounts payable................................. (1,868,487) (237,694) (698,894)
Current income taxes............................. (166,635) (87,503) (795,936)
Net changes in other assets and liabilities...... 55,647 522,524 870,462
----------- ----------- ------------
Net cash provided by operations.............. 3,537,319 10,747,712 5,352,497
----------- ----------- ------------
Cash Flow from Investing Activities:
Purchase of Marlo Coil, net of cash acquired......... (25,344,103)
Purchase of Keco Industries, net of cash acquired.... (24,092,537)
Purchase of McIntyre Engineering..................... (1,512,388)
Additions to property, plant and equipment........... (1,145,395) (1,987,322) (1,331,147)
Proceeds from sale of property, plant and
equipment............................................ 102,421 2,578,027
----------- ----------- ------------
Net cash used in investing activities........ (1,042,974) (1,987,322) (49,702,148)
----------- ----------- ------------
Cash Flow from Financing Activities:
Payments under line-of-credit agreement.............. (1,124,041) (1,075,961)
Proceeds of long-term debt........................... 45,000,000
Payments of long-term debt........................... (857,921) (1,456,901) (2,443,749)
Exercise of stock options............................ 1,053,767 629,434 1,264,724
Purchase of treasury stock........................... (471,382) (957,091) (802,349)
Cash dividends....................................... (65,604) (78,445) (132,645)
----------- ----------- ------------
Net cash provided by (used in) financing
activities................................. (1,465,181) (1,863,003) 41,810,020
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents..... 1,029,164 6,897,387 (2,539,631)
Cash and cash equivalents at beginning of year........... 386,609 1,415,773 8,313,160
----------- ----------- ------------
Cash and Cash Equivalents at End of Year................. $ 1,415,773 $ 8,313,160 $ 5,773,529
=========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
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), Keco
Industries, Inc. (Keco), Engineered Coil Company, d/b/a Marlo Coil
(Marlo Coil), 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 and
Keco, 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.
Marlo Coil and ESP recognize revenue 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 $273,000 and $283,000 at October
31, 1998 and 1997, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For purposes of financial reporting, the Company has determined that
the fair value of the Company's financial instruments, including
cash and cash equivalents, accounts receivable and long-term debt,
approximates book value at October 31, 1998 and 1997, based on terms
currently available to the Company in financial markets.
CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, and accounts receivable. At October 31, 1998 and 1997,
the Company's cash and cash equivalents were primarily invested in
money market accounts at a financial institution. Management
believes the credit risk is limited due to the short-term nature of
these funds. Management believes the credit risk related to accounts
receivable is limited due to the fact that 52% and 42%, respectively,
of accounts receivable at October 31, 1998 and 1997 are due from the
U.S. government and its agencies, and due to the adequacy of the
Company's allowance for doubtful accounts.
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 and Keco. Inventories of
Marlo Coil and 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
F-7
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contracts in process and inventories is vested in the U.S.
government by reason of the 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 are as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 15 to 40 years
Machinery and equipment..................................... 5 to 15 years
Furniture and fixtures...................................... 3 to 10 years
</TABLE>
INCOME TAXES
The income tax provision is based on earnings reported in the
financial statements. Deferred income taxes are provided for the tax
effects of temporary differences between financial and income tax
reporting using current statutory tax rates.
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of cost over net assets acquired in purchase transactions
is being amortized on a straight-line basis over approximately 25
years.
CASH AND CASH EQUIVALENTS
Cash equivalents include temporary investments with original
maturities of three months or less.
EARNINGS PER SHARE
Basic earnings per share for 1998, 1997 and 1996 is based on average
basic common shares outstanding, after the effect of the stock split
described in Note K, of 4,785,335, 4,753,265 and 4,592,858,
respectively. Diluted earnings per share for 1998, 1997 and 1996 is
based on average diluted common shares outstanding, after the effect
of the stock split described in Note K, of 4,991,453, 4,954,787 and
4,879,944, respectively. Average diluted common shares outstanding
include common stock equivalents, which represent common stock
options as computed based on the treasury stock method.
TREASURY STOCK
Shares of treasury stock are valued at cost using the first-in,
first-out method.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including goodwill, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected
future undiscounted cash flows is less than the carrying amount of
the asset, a loss is recognized for the difference between the fair
value and the carrying value of the asset.
INDUSTRY INFORMATION
Engineered Air and Keco operate predominately in one segment--
military ground support equipment--and substantially all revenues
for these subsidiaries are related to contracts with the U.S.
government. Marlo Coil
F-8
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
manufactures and sells heat transfer and air movement equipment
primarily to defense contractors, mechanical contractors and
industrial users. ESP manufactures and sells made-to-order injection
molded plastic products, and manufactures and distributes a
proprietary line of kitchen and bathroom faucets.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), and Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), in June 1997, and Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pension
and Other Postretirement Benefits" (SFAS 132), in February 1998.
SFAS 130 establishes standards for the reporting and display of the
Company's components of comprehensive income in the financial
statements. SFAS 131 defines segments in terms of the Company's
internal organization structure. SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans.
The Company will adopt these statements for fiscal year 1999. The
adoption of these statements will have no impact on the Company's
operating results, statement of financial position or cash flows, as
SFAS 130, 131 and 132 provide standards on financial statement
disclosure only.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), was
issued in June 1998. SFAS 133 provides standards on accounting and
disclosure for derivative instruments, and requires that all
derivatives be measured at fair value and reported as either assets
or liabilities in the statement of financial position. The Company
is required to adopt this statement no later than the beginning of
fiscal year 2000. The adoption of this statement will have no impact
on the Company's operating results, statement of financial position
or cash flows, as the Company does not invest in derivative
instruments.
NOTE B -- ACQUISITIONS
Effective February 1, 1998, Engineered Coil Company, a wholly-owned
subsidiary of the Company, acquired substantially all of the net
assets of Nuclear Cooling, Inc., d/b/a Marlo Coil, a manufacturer of
heat transfer and air movement equipment, from an investor group for
approximately $25.4 million. The fair value of the assets acquired,
including goodwill of $17.1 million, was $31.0 million and
liabilities assumed totaled $5.6 million. The purchase price was
financed with approximately $2.9 million of available cash resources
and bank term debt of $22.5 million. The operating results of
Engineered Coil Company (Marlo Coil) are included in the Company's
consolidated results of operations from the date of acquisition.
On May 29, 1998, Marlo Coil purchased the exclusive rights to
manufacture and distribute the U.S. Navy/Marine products of Edge
Electronics Corporation, d/b/a McIntyre Engineering, for
approximately $1.5 million. The fair value of the assets acquired
was $1.5 million, including goodwill of $1.4 million and a
seven-year covenant not to compete of $0.1 million. The purchase
price was financed with available cash resources.
On June 24, 1998, the Company purchased all of the outstanding
common stock of Keco Industries, Inc. (Keco), a manufacturer of
military ground support equipment, from an investor group for
approximately $26.7 million. ($1.2 million of this amount relates to
consideration to be paid to Keco's previous shareholders in order
for the Company to elect treatment of the transaction as an asset
purchase pursuant to Section 338(h)(10) of the Internal Revenue
Code. This election allows the Company to generate deductions for
goodwill amortization and additional depreciation for federal income
tax purposes. Section 338(h)(10) consideration to be paid is
reflected on the October 31, 1998 Consolidated Balance Sheet as Due
to Related Party.) The fair value of the assets acquired, including
goodwill of $7.4 million, was $29.6 million and liabilities assumed
totaled $2.9 million. The purchase price was financed with
approximately $4.2 million of available cash resources and bank term
debt of $22.5 million. The operating results of Keco are included in
the Company's consolidated results of operations from the date of
acquisition.
F-9
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma summary presents the combined
historical results of operations for the years ended October 31,
1998 and 1997 as adjusted to reflect the purchase transactions
assuming the acquisitions had occurred at November 1, 1996. These
pro forma results are not necessarily indicative of the combined
results that would have occurred had the acquisitions actually taken
place on November 1, 1996, nor are they necessarily indicative of
the combined results that may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net revenues................................................ $156,659,400 $130,422,267
============ ============
Net income.................................................. $ 6,183,958 $ 6,063,501
============ ============
Basic earnings per share.................................... $1.30 $1.27
===== =====
Diluted earnings per share.................................. $1.25 $1.21
===== =====
</TABLE>
NOTE C -- ACCOUNTS RECEIVABLE
Accounts receivable includes amounts due from the U.S. government of
$7,388,364 and $1,561,696 at October 31, 1998 and 1997, respectively.
NOTE D -- CONTRACTS IN PROCESS AND INVENTORIES
Contracts in process and inventories are comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------
1997 1998
---------- -----------
<S> <C> <C>
Raw materials.............................................................. $1,535,860 $ 4,578,766
Work-in-process............................................................ 167,043 1,397,593
Finished goods............................................................. 804,956 845,607
Inventories substantially applicable to government contracts in process,
reduced by progress payments of $9,333,930 and $15,932,239............... 4,564,518 11,864,844
---------- -----------
$7,072,377 $18,686,810
========== ===========
</TABLE>
Contracts in process and inventories at October 31, 1998 and 1997
include estimated revenue of $18,256,000 and $12,204,000,
respectively, representing accumulated contract costs and related
estimated earnings on uncompleted government contracts.
NOTE E -- NOTES PAYABLE AND LONG-TERM DEBT
In March 1998, the Company amended its bank credit agreement to
provide a $45.0 million term loan and a $10.0 million revolving
credit facility. Monthly principal payments on the term loan began
in September 1998 with final payment due in May 2003. Borrowings
under the term loan and the revolving credit facility are subject to
interest, at the Company's option, at either the London Interbank
Offered Rate (LIBOR) plus an applicable margin or at the prime rate
less 0.5%. The margin applicable to LIBOR varies from 0.5% to 1.5%
depending upon the Company's ratio of total indebtedness to earnings
before interest, taxes, depreciation and amortization (leverage
ratio). At October 31, 1998, the effective interest rate under the
credit agreement was 6.47%, and the Company had $10.0 million of
availability under the revolving credit facility, which carries an
unused commitment fee of 0.125%. The credit agreement contains
certain covenants, including maintaining tangible net worth of at
least $23.7 million plus 50% of quarterly net income after April 30,
1998, and maintaining a leverage ratio no greater than 3.5 to 1
through October 31, 1999, no greater than 3.0 to 1 from October 31,
1999 to October 31, 2000 and no greater than 2.5 to 1 subsequent to
October 31, 2000. Pursuant to the terms of the
F-10
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
credit agreement, the Company is subject to various other financial
and operating covenants and maintenance criteria, including
restrictions on the Company's ability to incur additional
indebtedness, make capital expenditures, create liens, dispose of
material assets and enter into merger transactions and lease
agreements, and requirements to maintain certain levels of
consolidated cash flows, fixed charge coverage and consolidated
current ratios. At October 31, 1998, the Company was in compliance
with all restrictive covenants of its amended credit agreement. No
compensating balance is required or maintained related to the
agreement.
Industrial revenue bonds in the amount of $750,000 were issued in
September 1982 for construction of Keco's office building and
primary manufacturing facility. The bonds require the Company to
make quarterly payments of principal and interest through 2002 at a
variable interest rate (5.695% at October 31, 1998). The bonds
provide the Company with the option to purchase the facility for a
nominal amount when fully paid.
Long-term debt consists of:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------
1997 1998
---------- -----------
<S> <C> <C>
Term loan, variable rate equal to the lesser of LIBOR plus applicable
margin or prime rate less 0.5%, payable in monthly installments of
principal plus interest, with a final payment of $1,333,328 in 2003...... $43,833,332
Industrial revenue bonds, variable rate, payable in quarterly installments
of $9,375 plus interest, due 2002........................................ 150,000
Installment note, 8.0%, payable in monthly installments of $14,335
including interest....................................................... $1,267,706
---------- -----------
1,267,706 43,983,332
Less current maturities.................................................... 73,273 7,204,172
---------- -----------
$1,194,433 $36,779,160
========== ===========
</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 facility, the bank term loan
and the ESOP loan are secured by substantially all assets of the
Company and its subsidiaries and are guaranteed by the Company.
Annual principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
- ----------------------
<S> <C>
1999.......................... $ 7,204,172
2000.......................... 8,204,160
2001.......................... 9,037,500
2002.......................... 10,204,168
2003.......................... 9,333,332
-----------
$43,983,332
===========
</TABLE>
Interest paid was $1,828,000, $158,000 and $531,000 in 1998, 1997
and 1996, respectively.
F-11
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- INCOME TAXES
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.......................................... $2,380,000 $3,170,000 $2,526,000
State............................................ 213,000 308,000 365,000
---------- ---------- ----------
2,593,000 3,478,000 2,891,000
---------- ---------- ----------
Deferred:
Federal........................................... (327,000) (327,000) 874,000
State............................................. (58,000) (58,000) 93,000
---------- ---------- ----------
(385,000) (385,000) 967,000
---------- ---------- ----------
$2,208,000 $3,093,000 $3,858,000
========== ========== ==========
</TABLE>
The deferred income tax provision (benefit) results from the
following temporary differences:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Uncompleted contracts............................. $(332,000) $ (23,000) $ 813,000
Depreciation...................................... 18,000 (229,000) (328,000)
Contributions to employee benefit plans........... (56,000) (60,000) 222,000
Other, net........................................ (15,000) (73,000) 260,000
--------- --------- ---------
$(385,000) $(385,000) $ 967,000
========= ========= =========
</TABLE>
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------
1997 1998
---------- ----------
<S> <C> <C>
Depreciation........................................................... $3,040,000 $2,740,000
Contract revenue....................................................... (460,000) 393,000
Employee benefits...................................................... (354,000) (124,000)
Asset reserves......................................................... (268,000) (182,000)
Net operating loss and tax credit carryforwards........................ (273,000) (195,000)
Other.................................................................. (105,000) (85,000)
---------- ----------
$1,580,000 $2,547,000
========== ==========
</TABLE>
F-12
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Income tax provision at statutory federal rate................... $1,878,000 $2,629,000 $3,280,000
State income taxes and other, net................................ 330,000 464,000 578,000
---------- ---------- ----------
$2,208,000 $3,093,000 $3,858,000
========== ========== ==========
</TABLE>
Income taxes paid were $3,081,000, $3,228,000 and $2,239,000 in
1998, 1997 and 1996, respectively.
As of October 31, 1998, the Company had net operating loss
carryforwards of approximately $13,000 available to offset future
taxable income, and investment and targeted jobs tax credit
carryforwards of approximately $190,000 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.
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, 1998, 869,038 shares of
unissued common stock were authorized and reserved for outstanding
options, which had a weighted average remaining contractual life of
3.7 years at that date.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations in accounting for the stock option plans.
Accordingly, no compensation expense has been recognized for stock
option awards. Had compensation expense for the Company's stock
option awards been determined based upon their grant date fair value
consistent with the methodology prescribed under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), the Company's net income would have been
reduced by $825,000, or $.17 per average diluted common share
outstanding, in 1998 and $219,000, or $.04 per average diluted
common share outstanding, in 1997. The fair value of options at the
grant date was estimated using the Black-Scholes model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Expected life............................................... 3.6 years 3.2 years
Volatility.................................................. 42% 50%
Dividend yield.............................................. 0.17% 0.30%
Risk-free interest rate..................................... 6.06% 4.67%
</TABLE>
F-13
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of options granted in 1998 and 1997
was $5.13 and $2.53, respectively. Transactions involving the stock
option plans are as follows:
<TABLE>
<CAPTION>
SHARES PRICE PER SHARE
-------- -----------------
<S> <C> <C>
Outstanding at October 31, 1996............................. 320,250 $ 1.25 to $6.42
Options granted............................................. 144,000 $ 6.50 to $8.25
Options exercised........................................... (127,950) $ 1.00 to $8.25
--------
Outstanding at October 31, 1997............................. 336,300 $ 1.25 to $8.25
Options granted............................................. 268,000 $10.46 to $15.00
Options exercised........................................... (143,500) $ 1.25 to $15.00
Options canceled............................................ (1,500) $15.00
--------
Outstanding at October 31, 1998............................. 459,300 $ 2.37 to $15.00
========
</TABLE>
The following table summarizes information for stock options
outstanding at October 31, 1998:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE
- ------------------------ ----------- ---------------- ----------------
<S> <C> <C> <C>
$2.37 to $3.83........................................ 18,000 1.13 years $ 2.80
$4.08 to $5.75........................................ 71,050 2.15 years $ 4.22
$6.42 to $8.25........................................ 126,250 3.09 years $ 6.58
$10.46 to $15.00...................................... 244,000 4.69 years $13.33
</TABLE>
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 amortization of prior service cost, over a
period of 15 years. A summary of the components of net periodic
pension cost for the defined benefit plan is as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................... $ 133,600 $ 140,000 $ 131,000
Interest cost on projected benefit obligation.............................. 261,300 306,000 335,000
Actual return on plan assets............................................... (288,200) (365,000) (425,000)
Net amortization and deferral.............................................. 28,300 53,800 47,000
--------- --------- ---------
Total pension expense...................................................... $ 135,000 $ 134,800 $ 88,000
========= ========= =========
</TABLE>
Assumptions used in accounting for the defined benefit plan in 1998,
1997 and 1996 were a weighted average discount rate of 6.75 percent,
7.5 percent and 7.75 percent, respectively, and an expected
long-term rate of return on assets of 9.0 percent. The decrease in
the discount rate assumption resulted in an increase of $421,000 in
the accumulated and projected benefit obligation as of October 31,
1998.
F-14
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth funded status and amounts recognized
in the consolidated balance sheets for the defined benefit pension
plan:
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------
1997 1998
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation............................................. $4,415,000 $5,087,000
Non-vested benefit obligation......................................... 186,000 112,000
---------- ----------
Accumulated benefit obligation........................................ $4,601,000 $5,199,000
========== ==========
Plan assets at fair value--primarily listed common stocks, bonds and U.S.
government securities.................................................... $4,893,000 $5,366,000
Projected benefit obligation............................................... 4,601,000 5,199,000
---------- ----------
Plan assets in excess of projected benefit obligation...................... 292,000 167,000
Unrecognized net (gain) loss............................................... (192,000) 793,000
Unrecognized prior service cost............................................ 274,000 234,000
Unrecognized net obligation at November 1, 1986, net of amortization....... 8,000
---------- ----------
Net pension asset recognized in consolidated balance sheets................ $ 382,000 $1,194,000
========== ==========
</TABLE>
The Company has an Employee Stock Ownership Plan (ESOP) covering all
salaried employees of Engineered Air, and all employees of ESP,
Marlo Coil (effective July 1, 1998) and Keco (effective January 1,
1999). The ESOP provides for a matching contribution by the Company
of no less than 25% of each employee's contributions up to a
maximum of 6% of the employee's earnings. The Company also makes
discretionary annual contributions in an amount no less than the
amount sufficient to pay the monthly installments of the ESOP bank
loan. All employee 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, 1998, 1997
and 1996 of $481,000, $377,000 and $293,000, respectively. Interest
payments on the ESOP bank loan were $62,000, $81,000 and $93,000 in
1998, 1997 and 1996, respectively. The Company accounts for ESOP
shares under the cash payment method. All ESOP shares are considered
outstanding for purposes of computing earnings per share
Prior to July 1, 1998, the Marlo Coil Employee Retirement Plan
(Marlo Plan) covered all full-time employees of Marlo Coil. The
Marlo Plan provided for a matching contribution by Marlo Coil of
50% of each employee's contributions up to a maximum of 4% of
the employee's earnings. Marlo Coil also made discretionary
contributions to the Marlo Plan. The Company has recorded expenses
based on contributions to the Marlo Plan for the year ended October
31, 1998 of $86,000. The Marlo Plan was terminated effective June
30, 1998 and all assets were transferred to the ESOP.
Prior to January 1, 1999, all full-time employees of Keco were
covered by the Keco Industries 401(k) Profit Sharing Plan (Keco
Plan). The Keco Plan provided for a matching contribution by Keco of
100% of each employee's contributions up to a maximum of 3% of the
employee's earnings. Keco also made additional contributions in an
amount equal to 2% of the employee's earnings to the Keco Plan. The
Company has recorded expenses based on contributions to the Keco
Plan for the year ended October 31, 1998 of $128,000. The Keco Plan
will be terminated effective February 28, 1999 and all assets will
be transferred to the ESOP.
NOTE I -- SEGMENT INFORMATION
The Company operates in two industry segments: the military support
and related industrial/commercial equipment segment and the custom
molded plastic products segment. The military support and related
F-15
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
industrial/commercial equipment operations involve the engineering,
fabrication and assembly of a broad range of military support
equipment designed for rapid deployment around the world, as well as
related heat transfer and air handling equipment sold to commercial
and industrial users. 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 55%, 82% and 79%, respectively, of 1998, 1997 and 1996
consolidated revenues were from two customers--45%, 71% and 73%,
respectively, from the U.S. government and 10%, 11% and 6%,
respectively, from another customer. The Company's export net sales
and intersegment net sales are not significant.
Information by industry segment is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net Revenues:
Military Support and Related Industrial/Commerical Equipment..... $59,179,141 $64,397,161 $69,912,976
Custom Molded Plastic Products................................... 22,327,802 24,173,809 27,059,910
----------- ----------- -----------
Total......................................................... $81,506,943 $88,570,970 $96,972,886
=========== =========== ===========
Income from Operations:
Military Support and Related Industrial/Commercial Equipment...... $ 5,087,705 $ 5,577,402 $ 7,051,192
Custom Molded Plastic Products.................................... 848,312 2,090,512 3,191,172
----------- ----------- -----------
Total......................................................... $ 5,936,017 $ 7,667,914 $10,242,364
=========== =========== ===========
Identifiable Assets:
Military Support and Related Industrial/Commercial Equipment...... $21,033,652 $24,255,029 $76,871,245
Custom Molded Plastic Products.................................... 13,058,479 12,829,025 15,288,977
----------- ----------- -----------
Total......................................................... $34,092,131 $37,084,054 $92,160,222
=========== =========== ===========
Depreciation and Amortization Expense:
Military Support and Related Industrial/Commercial Equipment...... $ 746,581 $ 833,008 $ 1,905,378
Custom Molded Plastic Products.................................... 1,103,226 1,064,824 907,207
----------- ----------- -----------
Total......................................................... $ 1,849,807 $ 1,897,832 $ 2,812,585
=========== =========== ===========
Capital Expenditures:
Military Support and Related Industrial/Commercial Equipment...... $ 1,035,240 $ 583,561 $ 332,030
Custom Molded Plastic Products.................................... 110,155 1,403,761 999,117
----------- ----------- -----------
Total......................................................... $ 1,145,395 $ 1,987,322 $ 1,331,147
=========== =========== ===========
</TABLE>
NOTE J -- CONTINGENCIES
As a government contractor, the Company is continually subject to
audit by various agencies of the U.S. government to determine
compliance with various procurement laws and regulations. As a
result of such audits and as part of normal business operations of
the Company, various claims and charges are asserted against the
F-16
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE K -- STOCK SPLIT
On June 26, 1998, the Company effected a 3-for-2 stock split in the
form of a 50% stock dividend. All per share amounts, as well as all
share amounts related to the Company's stock option plans, in this
report have been restated to reflect this stock split.
F-17
<PAGE>
<PAGE>
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
JANUARY 31,
1999
-----------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................................................................... $ 3,778,646
Accounts receivable............................................................................. 11,938,409
Contracts in process and inventories............................................................ 20,755,607
Other current assets............................................................................ 1,343,484
-----------
Total Current Assets........................................................................ 37,816,146
Property, plant and equipment, less accumulated depreciation of $14,580,148......................... 24,863,737
Cost in excess of net assets acquired, less accumulated amortization of $1,345,994.................. 25,563,074
Other assets........................................................................................ 1,168,524
-----------
Total Assets................................................................................ $89,411,481
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt............................................................ $ 7,454,168
Accounts payable................................................................................ 6,080,543
Other current liabilities....................................................................... 6,121,827
-----------
Total Current Liabilities................................................................... 19,656,538
Long-term debt...................................................................................... 34,769,787
Deferred income taxes............................................................................... 2,659,699
ESOP guaranteed bank loan........................................................................... 688,800
Shareholders' Equity:
Common Stock, par value $.01 per share; 10,000,000 shares authorized;
5,490,604 shares issued....................................................................... 54,906
Additional paid-in capital...................................................................... 11,230,443
Retained earnings............................................................................... 24,983,931
-----------
36,269,280
Less ESOP guaranteed bank loan.................................................................. 688,800
Less treasury stock at cost, 629,684 shares..................................................... 3,943,823
-----------
31,636,657
-----------
Total Liabilities and Shareholders' Equity.................................................. $89,411,481
===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-18
<PAGE>
<PAGE>
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
-----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net revenues......................................................................... $16,238,139 $28,236,975
Cost of revenues..................................................................... 12,934,370 21,655,628
----------- -----------
Gross profit..................................................................... 3,303,769 6,581,347
Selling, general and administrative expense.......................................... 1,844,460 3,633,948
----------- -----------
Income from operations........................................................... 1,459,309 2,947,399
Interest expense..................................................................... (23,396) (693,762)
Interest income...................................................................... 96,248 56,766
----------- -----------
Income before income taxes....................................................... 1,532,161 2,310,403
Income tax provision................................................................. 613,000 922,000
----------- -----------
Net income....................................................................... $ 919,161 $ 1,388,403
=========== ===========
Basic earnings per share............................................................. $0.19 $0.29
===== =====
Diluted earnings per share........................................................... $0.19 $0.28
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-19
<PAGE>
<PAGE>
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
------------------------------
1998 1999
----------- ------------
<S> <C> <C>
From operating activities:
Net income................................................................. $ 919,161 $ 1,388,403
Depreciation and amortization.............................................. 464,417 890,179
----------- ------------
Cash provided (used) before changes in operating assets and
liabilities........................................................... 1,383,578 2,278,582
Net (increase) decrease in non-cash current assets.......................... (1,347,010) 228,467
Net increase (decrease) in non-cash current liabilities..................... (2,445,336) (2,384,024)
(Increase) decrease in other assets......................................... 219,295 193,002
----------- ------------
Net cash provided by (used in) operating activities..................... (2,189,473) 316,027
----------- ------------
From investing activities:
Additions to property, plant and equipment.................................. (73,122) (399,079)
----------- ------------
Net cash provided by (used in) investing activities..................... (73,122) (399,079)
----------- ------------
From financing activities:
Payments of long-term debt.................................................. (1,267,706) (1,759,377)
Purchase of treasury stock.................................................. (339,758) (65,052)
Exercise of stock options................................................... 86,407
Cash dividends.............................................................. (43,115) (87,402)
----------- ------------
Net cash provided by (used in) financing activities..................... (1,564,172) (1,911,831)
----------- ------------
Net increase (decrease) in cash and cash equivalents............................ (3,826,767) (1,994,883)
Cash and cash equivalents at beginning of period................................ 8,313,160 5,773,529
----------- ------------
Cash and cash equivalents at end of period...................................... $ 4,486,393 $ 3,778,646
=========== ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-20
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have
been prepared by the Company without audit. In the opinion of
management, all adjustments (including normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three month period ended January 31, 1999
are not necessarily indicative of the results to be expected for the
entire fiscal year.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial statements and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. For further information, refer to the
consolidated financial statements for footnotes thereto included in
the Company's annual report to shareholders for the year ended
October 31, 1998.
NOTE B -- EARNINGS PER SHARE
All earnings per share amounts have been restated after giving
effect to the stock split described in Note E. Average diluted
common shares outstanding include common stock equivalents, which
represent common stock options as computed based on the treasury
stock method.
Basic earnings per share for the three months ended January 31, 1999
and 1998 is based on average basic common shares outstanding of
4,852,342 and 4,762,133, respectively. Diluted earnings per share
for the three months ended January 31, 1999 and 1998 is based
on average diluted common shares outstanding of 5,032,339 and
4,967,366, respectively.
NOTE C -- CONTRACTS IN PROCESS AND INVENTORIES
Contracts in process and inventories of Engineered Air Systems, Inc.
and Keco Industries, Inc. 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. Inventories of Engineered Specialty Plastics, Inc.
and Engineered Coil Company are valued at the lower of cost or
market using the first-in, first-out method. Contracts in process
and inventories are comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31, 1998 JANUARY 31, 1999
---------------- ----------------
<S> <C> <C>
Raw materials............................................... $ 4,578,766 $ 4,449,814
Work-in-process............................................. 1,397,593 1,385,119
Finished goods.............................................. 845,607 549,350
Inventories substantially applicable to government contracts
in process, less progress payments of $15,932,239 and
$14,719,950............................................... 11,864,844 14,371,324
----------- -----------
$18,686,810 $20,755,607
=========== ===========
</TABLE>
NOTE D -- ACQUISITIONS
Effective February 1, 1998, Engineered Coil Company, a wholly-owned
subsidiary of the Company, acquired substantially all of the net
assets of Nuclear Cooling, Inc., d/b/a Marlo Coil, a manufacturer of
heat transfer and air movement equipment, for approximately $25.4
million. The fair value of assets acquired, including goodwill of
$17.1 million, was $31.0 million and liabilities assumed totaled
$5.6 million. The purchase price was financed with approximately
$2.9 million of available cash resources and bank term debt of $22.5
million. The operating results of Engineered Coil Company (Marlo
Coil) are included in the Company's consolidated results of
operations from the date of acquisition.
F-21
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
On May 29, 1998, Marlo Coil purchased the exclusive rights to
manufacture and distribute the U.S. Navy/Marine products of Edge
Electronics Corporation, d/b/a McIntyre Engineering, for
approximately $1.5 million. The fair value of the assets acquired
was $1.5 million, including goodwill of $1.4 million and a
seven-year covenant not to compete of $0.1 million. The purchase
price was financed with available cash resources.
On June 24, 1998, the Company acquired all of the outstanding stock
of Keco Industries, Inc. (Keco), a manufacturer of military ground
support equipment, from an investor group for approximately $26.7
million. ($1.2 million of this amount relates to consideration to be
paid to Keco's previous shareholders in order for the Company to
elect treatment of the transaction as an asset purchase pursuant to
Section 338(h)(10) of the Internal Revenue Code. This election
allows the Company to generate deductions for goodwill amortization
and additional depreciation for federal income tax purposes. Section
338(h)(10) consideration to be paid is included in Other Current
Liabilities on the January 31, 1999 and October 31, 1998 Condensed
Consolidated Balance Sheets.) The fair value of the assets acquired,
including goodwill of $7.4 million, was $29.6 million and
liabilities assumed totaled $2.9 million. The purchase price was
financed with approximately $4.2 million of available cash resources
and bank term debt of $22.5 million. The operating results of Keco
are included in the Company's consolidated results of operations
from the date of acquisition.
If these acquisitions had occurred on November 1, 1997, net revenues
would have been $33,759,015 resulting in net income of $648,081, or
$.14 per basic common share and $.13 per diluted common share, on an
unaudited pro forma basis for the three months ended January 31,
1998. These pro forma results are not necessarily indicative of the
combined results that would have occurred had the acquisitions
actually taken place on November 1, 1997, nor are they necessarily
indicative of the combined results that may occur in the future.
NOTE E -- STOCK SPLIT
On June 26, 1998, the Company effected a 3-for-2 stock split in the
form of a 50% stock dividend. All earnings per share amounts in this
report have been restated to reflect this stock split.
NOTE F -- SUBSEQUENT EVENT
On February 22, 1999, Engineered Electric Company, a wholly-owned
subisidiary of the Company, acquired substantially all of the net
assets of the Fermont division of Dynamics Corp. of America, a
wholly-owned subsidiary of CTS Corporation, in a purchase
transaction for approximately $10 million subject to certain post-
closing adjustments. Fermont is a manufacturer of electrical
generators sold primarily to the Department of Defense.
F-22
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Keco Industries, Inc.
In our opinion, the accompanying balance sheets and
related statements of income and retained earnings and
of cash flows present fairly, in all material
respects, the financial position of Keco Industries,
Inc. at December 31, 1996 and 1997, and the results of
its operations and its cash flows for the years then
ended, 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 audits 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.
PricewaterhouseCoopers LLP
St. Louis, Missouri
July 10, 1998
F-23
<PAGE>
<PAGE>
<TABLE>
KECO INDUSTRIES, INC.
BALANCE SHEETS
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 1,590,584 $ 724,363
Accounts receivable..................................... 1,147,582 2,877,002
Contracts in process and inventories, net............... 9,313,067 11,084,052
Other current assets.................................... 33,450 35,678
----------- -----------
Total current assets................................ 12,084,683 14,721,095
Property, plant and equipment:
Land.................................................... 719,000 719,000
Buildings and improvements.............................. 6,003,939 6,053,574
Machinery and equipment................................. 2,231,058 2,387,877
Furniture and fixtures.................................. 1,120,934 1,174,702
Less: Accumulated depreciation.......................... (3,967,746) (4,357,531)
----------- -----------
6,107,185 5,977,622
----------- -----------
Total assets........................................ $18,191,868 $20,698,717
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable........................................... $ $ 1,000,000
Current maturities of long-term debt.................... 37,500 37,500
Accounts payable........................................ 1,676,627 1,982,102
Accrued employee compensation........................... 541,331 594,002
Other accrued expenses.................................. 239,507 144,445
Provisions for losses on contracts...................... 1,440,665 292,060
----------- -----------
Total current liabilities........................... 3,935,630 4,050,109
Commitments and contingencies (Note 7)
Long-term debt.............................................. 178,125 140,625
Shareholders' equity:
Common stock, no par value; 86,577 shares issued and
outstanding........................................... 1,650,980 1,650,980
Retained earnings....................................... 12,427,133 14,857,003
----------- -----------
Total shareholders' equity.......................... 14,078,113 16,507,983
----------- -----------
Total liabilities and shareholders' equity...... $18,191,868 $20,698,717
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
<PAGE>
<TABLE>
KECO INDUSTRIES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Net revenues................................................ $42,682,202 $41,718,730
Cost of revenues............................................ 38,301,680 35,627,863
----------- -----------
Gross profit................................................ 4,380,522 6,090,867
General and administrative expense.......................... 2,263,806 2,206,075
----------- -----------
Income from operations...................................... 2,116,716 3,884,792
Other income:
Interest, net........................................... 55,370 45,611
Other, net.............................................. 139,154 159,068
----------- -----------
Net income.................................................. 2,311,240 4,089,471
Retained earnings, beginning of period...................... 11,526,637 12,427,133
Less--distributions to shareholders......................... (1,410,744) (1,659,601)
----------- -----------
Retained earnings, end of period............................ $12,427,133 $14,857,003
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
<PAGE>
<TABLE>
KECO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 2,311,240 $ 4,089,471
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization..................... 395,922 389,785
Changes in operating assets and liabilities:
Accounts receivable............................... 3,144,978 (1,729,420)
Contracts in process and inventories, net......... (206,222) (1,770,985)
Other current assets.............................. (148) (2,228)
Accounts payable.................................. (142,780) 305,475
Accrued employee compensation..................... 67,337 52,671
Provisions for losses on contracts................ (884,136) (1,148,605)
Other accrued expenses............................ (68,221) (95,062)
----------- -----------
Net cash provided by operations................. 4,617,970 91,102
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment.............. (111,050) (260,222)
----------- -----------
Net cash used in investing activities........... (111,050) (260,222)
----------- -----------
Cash flows from financing activities:
Payments on long-term debt.............................. (1,787,500) (37,500)
Net proceeds from line of credit borrowings............. 1,000,000
Distributions to shareholders........................... (1,410,744) (1,659,601)
----------- -----------
Net cash used in financing activities........... (3,198,244) (697,101)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ 1,308,676 (866,221)
Cash and cash equivalents at beginning of year.............. 281,908 1,590,584
----------- -----------
Cash and cash equivalents at end of year.................... $ 1,590,584 $ 724,363
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 32,360 $ 35,286
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
<PAGE>
KECO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Keco Industries, Inc. (the "Company") is a manufacturer of a variety
of military ground support equipment. The Company operates
predominantly in this one segment and substantially all of its
revenues are related to contracts with the U.S. Government. The
financial statements of the Company are prepared on the accrual
basis of accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
REVENUE RECOGNITION
Revenues from long-term contracts 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 and 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, contracts in
process and inventories, net, other current assets and accrued
expenses approximates fair value due to the short maturity of those
instruments. The carrying amount of long-term debt approximates fair
value, as the debt instrument is at a variable interest rate which
is based on market rates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include temporary investments with
original maturities of three months or less.
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 related
progress payments received by the Company.
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 through the progress payment provisions of the 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
ranging from 5 to 40 years.
F-27
<PAGE>
<PAGE>
KECO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not
be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is
recognized for the difference between the fair value and the
carrying value of the asset.
2. CONTRACTS IN PROCESS AND INVENTORIES
Contracts in process and inventories are comprised of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Inventories substantially applicable to government contracts in
process......................................................... $21,505,308 $22,176,944
Less: Progress payments applied.................................. 12,192,241 11,092,892
----------- -----------
$ 9,313,067 $11,084,052
=========== ===========
</TABLE>
Contracts in process and inventories at December 31, 1997 and 1996
include estimated revenue of $9,579,423 and $10,200,751,
respectively, representing accumulated contract costs and related
estimated gross margin on uncompleted government contracts.
3. NOTES PAYABLE AND LONG-TERM DEBT
Industrial Revenue Bonds in the amount of $750,000 were issued on
September 1, 1982 for construction of the Company's office building
and primary manufacturing facility. The bonds require the Company to
make quarterly payments of principal and interest for 20 years
including interest at a variable interest rate (5.53% at December
31, 1997 and 1996). The Bonds provide the Company with the option to
purchase the facility for a nominal amount when the Bonds are fully
paid.
Annual principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1998.................................... $ 37,500
1999.................................... 37,500
2000.................................... 37,500
2001.................................... 37,500
2002.................................... 28,125
--------
$178,125
========
</TABLE>
The Company maintained an $8,000,000 revolving line of credit with a
financial institution, secured by receivables and inventory of the
Company. Interest on outstanding balances accrued at a variable rate
not to exceed prime less one-half percent (7.875% at December 31,
1997). The line of credit agreement expired on June 28, 1998. The
balance outstanding at December 31, 1997 was $1,000,000. No amount
was outstanding at December 31, 1996.
4. RETIREMENT PLANS
The Company has a 401(k) Profit Sharing Plan for qualified employees
who have completed one year of service and attained the age of
twenty-one. Once eligible, contributions are made by the Company on
behalf of the participants equal to 2% of eligible compensation as
defined in the Plan. Participants must complete at least 500 hours
of service during the Plan year or be employed as of the last day of
the Plan year to be eligible for Company contributions for that Plan
year.
F-28
<PAGE>
<PAGE>
KECO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Additionally, the Company makes matching contributions to the Plan
equal to 100% of participants pre-tax contributions up to a maximum
of 3% of eligible compensation contributed to the Plan by
participants. Contributions of $393,018 and $381,320 were made for
the years ended December 31, 1997 and 1996, respectively.
5. INCOME TAXES
The Company is organized under subchapter S of the Internal Revenue
Code. In lieu of corporate income taxes, the shareholders of the S
corporation are taxed on their proportionate share of the Company's
taxable income. Accordingly, no provision for corporate income taxes
has been recorded in these financial statements.
6. ECONOMIC DEPENDENCY
The Company is economically dependent on U.S. Government contracts
directly and indirectly. Products sold to the U.S. Government
represent the majority of sales in 1997 and 1996.
7. COMMITMENTS AND CONTINGENCIES
As a government contractor, the Company is continually subject to
audit by various agencies of the U.S. Government to determine
compliance with various procurement laws and regulations. As a
result of such audits and as part of normal business operations,
various claims and charges are asserted against the Company. It is
not possible at this time to predict the outcome of all such
actions. However, management believes they have adequately provided
for any such contingencies and none of these matters will have a
material adverse effect on the financial position or the results of
operations of the Company.
8. SUBSEQUENT EVENTS
The Company and Engineered Support Systems, Inc. signed a definitive
Stock Purchase Agreement on May 15, 1998, under which Engineered
Support Systems, Inc. agreed to purchase all of the outstanding
stock of the Company. This transaction was completed on June 24,
1998.
F-29
<PAGE>
<PAGE>
<TABLE>
KECO INDUSTRIES, INC.
CONDENSED BALANCE SHEET (UNAUDITED)
<CAPTION>
JUNE 24, 1998
-------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 2,588,969
Accounts receivable.............................................................. 2,715,038
Contracts in process and inventories............................................. 7,815,825
Prepaid expenses and other assets................................................ 41,826
-----------
Total Current Assets......................................................... 13,161,658
Property, plant & equipment, net of accumulated depreciation of $4,010,148........... 5,958,523
-----------
Total Assets................................................................. $19,120,181
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt............................................. $ 37,500
Accounts payable................................................................. 664,886
Other current liabilities........................................................ 1,535,240
-----------
Total Current Liabilities.................................................... 2,237,626
Long-term debt....................................................................... 121,875
Shareholders' Equity:
Common stock..................................................................... 1,650,980
Retained earnings................................................................ 15,109,700
-----------
Total Shareholders' Equity................................................... 16,760,680
-----------
Total Liabilities and Shareholders' Equity....................................... $19,120,181
===========
</TABLE>
See Notes to Condensed Financial Statements.
F-30
<PAGE>
<PAGE>
<TABLE>
KECO INDUSTRIES, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JUNE 30, 1997 JUNE 24, 1998
------------- -------------
<S> <C> <C>
Net revenues............................................................... $21,377,645 $19,216,911
Cost of revenues........................................................... 19,070,990 16,512,404
----------- -----------
Gross profit........................................................... 2,306,655 2,704,507
Selling, general & administrative expense.................................. 1,069,039 1,077,376
----------- -----------
Income from operations................................................. 1,237,616 1,627,131
Net interest expense (income).............................................. (55,958) (33,654)
----------- -----------
Income before income taxes............................................. 1,293,574 1,660,785
Income tax provision (Note C).............................................. 0 0
----------- -----------
Net income............................................................. $ 1,293,574 $ 1,660,785
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-31
<PAGE>
<PAGE>
<TABLE>
KECO INDUSTRIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JUNE 30, 1997 JUNE 24, 1998
------------- -------------
<S> <C> <C>
Cash Flow from Operating Activities:
Net income............................................................ $ 1,293,574 $ 1,660,785
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation..................................................... 196,487 157,617
----------- -----------
Cash provided before changes in operating assets and liabilities....... 1,490,061 1,818,402
Changes in operating assets and liabilities:
Accounts receivable................................................ (2,428,936) 161,964
Contracts in process and inventories............................... 3,609,074 3,268,227
Accounts payable................................................... (552,222) (1,317,216)
Other assets and liabilities....................................... (1,160,548) 498,585
----------- -----------
Net cash provided by operations................................ 957,429 4,429,962
----------- -----------
Cash Flow from Investing Activities:
Additions to property, plant and equipment............................. (128,648) (138,518)
----------- -----------
Net cash used in investing activities.............................. (128,648) (138,518)
----------- -----------
Cash Flow from Financing Activities:
Net payments under line-of-credit agreement............................ (1,000,000)
Payments of long-term debt............................................. (18,750) (18,750)
Distributions to shareholders.......................................... (1,231,444) (1,408,088)
----------- -----------
Net cash used in financing activities.............................. (1,250,194) (2,426,838)
----------- -----------
Net Increase (Decrease) in Cash............................................ (421,413) 1,864,606
Cash at Beginning of Period................................................ 1,590,584 724,363
----------- -----------
Cash at End of Period...................................................... $ 1,169,171 $ 2,588,969
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-32
<PAGE>
<PAGE>
KECO INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared
by the Company without audit. In the opinion of management, all
adjustments (including normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the six month period ended June 24, 1998 are not
necessarily indicative of the results to be expected for the entire
fiscal year.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial statements. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report to shareholders for the year
ended December 31, 1997.
NOTE B -- CONTRACTS IN PROCESS AND INVENTORIES
Contracts in process and inventories of the Company 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. Contracts in process and
inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 24, 1998
----------------- -------------
<S> <C> <C>
Inventories substantially applicable to government contracts
in process................................................ $22,176,944 $13,726,035
Less: Progress payments..................................... 11,092,892 5,910,210
----------- -----------
$11,084,052 $ 7,815,825
=========== ===========
</TABLE>
NOTE C -- INCOME TAXES
The Company is organized under subchapter S of the Internal Revenue
Code. In lieu of corporate income taxes, the shareholders of the S
corporation are taxed on their proportionate share of the Company's
taxable income. Accordingly, no provision for income taxes has been
recorded in these financial statements.
NOTE D -- SALE OF COMPANY
The Company and Engineered Support Systems, Inc. signed a definitive
Stock Purchase Agreement on May 15, 1998, under which Engineered
Support Systems, Inc. agreed to purchase all of the outstanding
stock of the Company. The transaction was completed on June 24,
1998.
F-33
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Nuclear Cooling, Inc.
d/b/a Marlo Coil
We have audited the accompanying balance sheets of
Nuclear Cooling, Inc. (a Missouri corporation), d/b/a
Marlo Coil, as of June 30, 1997 and 1996, and the
related statements of income, stockholders' equity and
cash flows for each of the two years in the period
ended June 30, 1997. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes assessing
the accounting principles used and significant
estimates made by management, as well as evaluating
the overall financial statement presentation. We
believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of Nuclear Cooling, Inc., d/b/a
Marlo Coil, as of June 30, 1997 and 1996, and the
results of its operations and its cash flows for each
of the two years in the period ended June 30, 1997 in
conformity with generally accepted accounting
principles.
Arthur Andersen LLP
St. Louis, Missouri
August 22, 1997
F-34
<PAGE>
<PAGE>
<TABLE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
BALANCE SHEETS
<CAPTION>
JUNE 30,
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 166,954 $ 810,476
Accounts receivable-trade and other..................... 3,647,202 3,423,422
Inventory............................................... 2,258,277 2,614,172
Prepaid expenses........................................ 95,927 106,426
Advance to stockholder.................................. 200,000
----------- -----------
Total current assets................................ 6,368,360 6,954,496
Property and equipment, net................................. 2,554,178 2,734,761
Real estate other, net...................................... 665,113 641,535
Land held for sale.......................................... 242,837 226,638
Deposits.................................................... 371,336 413,448
Other assets................................................ 512,406 493,316
----------- -----------
Total assets........................................ $10,714,230 $11,464,194
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank.................................... $ 1,026,000 $
Note payable to related party........................... 311,453 269,974
Accounts payable........................................ 465,130 976,172
Accrued payroll and commissions......................... 320,967 242,136
Other accrued expenses.................................. 787,674 1,160,824
Deferred revenue........................................ 152,540 51,506
----------- -----------
Total current liabilities........................... 3,063,764 2,700,612
----------- -----------
Deferred compensation liability............................. 205,502 204,475
Deferred revenue............................................ 169,000 123,696
----------- -----------
Total noncurrent liabilities........................ 374,502 328,171
----------- -----------
Stockholders' equity:
Common stock, $1 par value. Authorized 30,000 shares;
issued and outstanding 5,000 shares................... 5,000 5,000
Additional paid-in capital.............................. 80,591 80,591
Retained earnings....................................... 7,190,373 8,349,820
----------- -----------
Total Stockholders' Equity.......................... 7,275,964 8,435,411
----------- -----------
Total Liabilities and Stockholders' Equity.......... $10,714,230 $11,464,194
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
<PAGE>
<TABLE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
STATEMENTS OF INCOME
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Net sales................................................... $22,585,616 $25,761,886
Cost of goods sold.......................................... 16,562,604 17,833,713
----------- -----------
Gross profit............................................ 6,023,012 7,928,173
Selling, general and administrative expenses................ 4,132,365 4,960,027
----------- -----------
Income from operations.................................. 1,890,647 2,968,146
Other income (expenses):
Interest income......................................... 106,561 68,101
Interest expense........................................ (50,857) (113,923)
Gain on sale of assets.................................. 17,750 13,272
Other income............................................ 73,940 73,851
----------- -----------
Net income.......................................... $ 2,038,041 $ 3,009,447
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
<PAGE>
<TABLE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, June 30, 1995...................................... $5,000 $80,591 $ 8,390,332 $ 8,475,923
Dividends.............................................. (3,238,000) (3,238,000)
Net income............................................. 2,038,041 2,038,041
------ ------- ----------- -----------
Balance, June 30, 1996...................................... 5,000 80,591 7,190,373 7,275,964
Dividends............................................... (1,850,000) (1,850,000)
Net income.............................................. 3,009,447 3,009,447
------ ------- ----------- -----------
Balance, June 30, 1997...................................... $5,000 $80,591 $ 8,349,820 $ 8,435,411
====== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
<PAGE>
<TABLE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 2,038,041 $ 3,009,447
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................ 254,767 363,815
Gain on sale of assets.................................. (17,750) (13,272)
Decrease (increase) in accounts receivable--trade and
other................................................. (551,257) 223,780
(Increase) decrease in inventory........................ 171,419 (355,895)
Increase in prepaid expenses............................ (28,098) (10,499)
Increase in deposits.................................... (116,679) (42,112)
Decrease (increase) in other assets..................... (95,245) 19,179
Increase in accounts payable............................ 255,779 510,952
Decrease in accrued payroll and commissions............. (47,073) (78,831)
Increase (decrease) in other accrued expenses........... (218,686) 373,150
Decrease in deferred compensation liability............. (16,047) (1,027)
(Decrease) increase in deferred revenues................ 321,540 (146,338)
----------- -----------
Total adjustments................................... (87,330) 842,902
----------- -----------
Net cash provided by operating activities........... 1,950,711 3,852,349
----------- -----------
Cash flows from investing activities:
Additions to property and equipment..................... (356,674) (525,837)
Proceeds from sale of assets............................ 71,000 34,489
----------- -----------
Net cash used in investing activities............... (285,674) (491,348)
----------- -----------
Cash flows from financing activities:
(Repayments) borrowings on note payable, net............ 1,026,000 (1,026,000)
(Repayments) borrowings on note payable to related
party, net............................................ 35,383 (41,479)
Payment of dividends.................................... (3,238,000) (1,850,000)
Decrease (increase) in advance to stockholder........... (200,000) 200,000
----------- -----------
Net cash used in financing activities............... (2,376,617) (2,717,479)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (711,580) 643,522
Cash and cash equivalents, beginning of year................ 878,534 166,954
----------- -----------
Cash and cash equivalents, end of year...................... $ 166,954 $ 810,476
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
<PAGE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND OPERATING POLICIES
BUSINESS ACTIVITIES
Nuclear Cooling, Inc., d/b/a Marlo Coil (the Company) is a
manufacturer of industrial and commercial heat transfer equipment
which is generally produced to customer specifications. Its
principal products are coils and air handling units and its primary
customers are defense contractors, mechanical contractors and
industrial users located throughout the United States.
REVENUE RECOGNITION
Revenue from sales transactions is generally recognized upon
shipment of goods, at which time all rights and obligations are
transferred to the customer.
Approximately 48% and 45% of the Company's 1997 and 1996 sales,
respectively, were made to its 10 largest customers. Receivables
from these 10 customers were approximately 49% and 47% of trade
accounts receivable at June 30, 1997 and 1996, respectively.
USE OF ESTIMATES
The preparation of these financial statements required the use of
certain estimates by management in determining the Company's assets,
liabilities, revenues and expenses.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are stated at cost. Cash equivalents
consist of highly liquid investments with original maturities of
three months or less when purchased.
INVENTORY
Inventory is stated at the lower of cost or market (net realizable
value). Cost is determined principally on a first-in, first-out
basis.
The Company uses the last-in, first-out (LIFO) accounting method for
certain inventories. If the Company had used the first-in, first-out
method of computing inventory costs for these items, inventories
would have been approximately $50,900 and $80,700 higher than
reported at June 30, 1997 and 1996, respectively.
LAND HELD FOR SALE
Land held for sale is stated at the lower of cost or estimated net
realizable value. The Company capitalizes all direct acquisition and
development costs, including interest.
Revenue on sales of land held for sale is recognized when title
passes and adequate cash payments are received.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is provided over the
estimated useful lives of the respective assets. Depreciation is
provided principally on accelerated methods. The depreciable lives
used are:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.................................................................. 15-45
Office furniture, computer components and equipment........................ 5-7
Machinery and equipment.................................................... 5-7
Automobiles and trucks..................................................... 5
</TABLE>
F-39
<PAGE>
<PAGE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be
impaired, the carrying value is reviewed. If this review indicates
that the value of the asset will not be recoverable, as determined
based on projected undiscounted cash flows related to the asset over
the remaining life, then the carrying value of the asset is reduced
to its estimated fair value.
INCOME TAXES
The Company has made the election to be treated as an S corporation
under the provisions of the Internal Revenue Code. As such, all
income and losses flow through to the stockholders who are liable
for all applicable taxes. Accordingly, no provision or credit is
made for federal and state income taxes for the Company. The net
difference between the tax bases and the reported amounts of the
Company's assets and liabilities is not significant.
Deposits are required to be kept with the Internal Revenue Service,
due to the time lag between the fiscal year-end of the Company and
the calendar year-end of its stockholders. These deposits were
approximately $413,000 and $371,000 at June 30, 1997 and 1996,
respectively.
2. INVENTORY
The components of inventory are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Raw materials.............................................................. $1,751,436 $2,010,137
Work in process............................................................ 587,552 654,940
LIFO reserve............................................................... (80,711) (50,905)
---------- ----------
$2,258,277 $2,614,172
========== ==========
FIFO inventories........................................................... $1,803,243 $1,911,545
LIFO inventories........................................................... 455,034 702,627
---------- ----------
$2,258,277 $2,614,172
========== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
Following is a summary of property and equipment, at cost:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Land and land improvements................................................. $ 220,340 $ 220,340
Buildings.................................................................. 3,928,561 4,010,392
Office furniture, computer components and
equipment................................................................ 589,087 557,426
Machinery and equipment.................................................... 3,893,780 4,233,608
Automobiles and trucks..................................................... 72,219 93,143
---------- ----------
8,703,987 9,114,909
Less accumulated depreciation.............................................. 6,149,809 6,380,148
---------- ----------
$2,554,178 $2,734,761
========== ==========
</TABLE>
F-40
<PAGE>
<PAGE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE
The Company maintains an unsecured line of credit agreement with a
bank for maximum borrowings of $4,200,000, with interest payable
monthly at the prime rate less .25%, 8.25% at June 30, 1997. The
line of credit expires October 15, 1997. There are no compensating
balance requirements or other restrictions associated with this line
of credit agreement.
The Company has a note payable to an officer. The note was executed
during 1995, is due on demand and accrues interest at the prime
rate.
Interest expense on all debt during 1997 and 1996 was approximately
$114,000 and $51,000, respectively. Cash paid for interest during
these same periods was approximately $119,000 and $46,000,
respectively.
5. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan, the Marlo Coil
Employees Retirement Plan (the Plan). All full-time employees of the
Company who have completed one year of service and are age 21 or
older or were participants in prior plans are eligible to
participate. Under the terms of the Plan, the Company, at its
option, can contribute to the Plan a yearly amount based on
compensation paid or an additional match to participating employees
as defined by the Plan. Participants may also elect to defer a
certain portion of their compensation to the Plan on which the
Company must make a matching contribution. During 1997 and 1996,
Company contributions were approximately $140,000 and $112,000,
respectively.
Effective July 1, 1995, the Plan was restated. This restatement
changed the investment options available for participant directed
contributions. The restatement also increased the employer matching
contributions to 50% of each participant's deferred compensation up
to 4% of compensation and also made loans available to participants
based on their vested account balances. During 1997 the Company made
additional matching contributions which increased total
contributions for the year to 67% of 6% of compensation.
The Company has a nonparticipatory deferred compensation plan which
is given to certain key employees. This plan provides for benefits
of a fixed amount each year for nine years to participants who are
employed by the Company at age 55. The annual payment will vary by
participant. If the participant dies prior to age 55 while still
actively employed, the Company shall pay a lump sum death benefit in
lieu of any future benefit payments vested at time of death. The
Company employs a 10% discount rate in calculating the outstanding
liability. The Company incurred expenses of approximately $24,000
and $8,000 related to this plan for the years ended June 30, 1997
and 1996, respectively.
The Company had a deferred compensation plan for participating
employees over the age of 50, which was terminated during 1992.
Participants who elected to retire early receive $10,000 annual
payments for a total of 10 years. All others received cash
settlements. In connection with the plan termination, the Company
redeemed certain life insurance policies.
The Company owns various life insurance policies on plan
participants. These policies were purchased to fund deferred
compensation benefits described above. The cash surrender value on
these policies is recorded as an other asset on the balance sheet,
and was approximately $151,000 and $145,000 at June 30, 1997 and
1996, respectively. All liabilities related to the deferred
compensation benefits are recorded at the present value of expected
future cash payments.
6. RELATED-PARTY TRANSACTIONS
The Company has entered into a land development agreement with David
Enterprises, Inc., a related entity, whereby land owned by the
Company is developed and sold by the related party. Revenues derived
from land sales and the profit thereon are based on the current
market value of the land at date of sale. During 1997, land
F-41
<PAGE>
<PAGE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
sales resulted in a gain of approximately $12,400, which is included
in gain on sale of assets in the accompanying income statement. Land
sales during 1996 resulted in a gain of approximately $17,750.
In 1993, the Company purchased a building from the stockholders of
the Company for approximately $740,000. The purchase price was
financed with a cash payment of approximately $170,000 and relief of
a note receivable from the stockholders of approximately $570,000.
The building was leased in July 1993, to an unrelated third party
for $5,833 per month for an initial term of two years, with an
additional option for two separate and successive two year terms.
The lease has been renewed for the first additional term. The lessee
is responsible for the payment of all property taxes, insurance and
maintenance of the roofing structure. The building is recorded on
the balance sheet as Real Estate Other, net of an amount equal to
the related party seller's basis, which approximates fair market
value. The building is being depreciated over 31.5 years, which
approximates its estimated useful life.
During 1997 and 1996, the Company paid approximately $931,000 and
$542,000, respectively, to affiliated companies for material
components and subcontract labor.
The Company is the beneficiary of a $550,000 whole life insurance
policy on the life of its chairman and chief executive officer. The
cash surrender value of this policy is recorded as an other asset on
the balance sheet, and was approximately $211,000 and $204,000 at
June 30, 1997 and 1996, respectively. The Company's portion of cash
surrender value of an additional life insurance policy was
approximately $50,000 and $54,000, respectively, at June 30, 1997
and 1996, and is recorded as an other asset. The Company is not the
beneficiary of this policy, but is the owner and will recognize that
amount upon his death.
During 1996, the Company guaranteed a $3,500,000 bank line of credit
for Eureka Springs, Inc., a related entity. The debt outstanding on
this line of credit was $3,270,000 at June 30, 1997.
The Company has agreements with two individuals whereby, upon the
sale of the business, each will receive 5% and 2%, respectively, of
the total gross sales price, as defined in the agreements. In
addition, under the terms of these agreements the Company is
obligated to pay these individuals an annual bonus based on a
formula defined in the agreements. The amount of bonuses paid was
approximately $123,000 and $79,000 in 1997 and 1996, respectively.
7. CONTINGENCIES
Effective May 1, 1996, the Company entered into a five-year
production agreement with a customer whereby the Company will
produce and sell modular rooftop air handler units according to
certain design and delivery specifications. The customer paid the
Company approximately $350,000 prior to June 30, 1996, to reimburse
the Company for certain start-up costs including engineering,
training and plant changeover expenses. The Company will recognize
the reimbursement into income as related costs are incurred. The
unrecognized portion of this deferred revenue, totaling
approximately $105,000 and $240,000 at June 30, 1997 and 1996,
respectively, is separately stated on the accompanying balance sheet
in current and long-term liabilities, according to management's
estimates of when the related costs will be incurred. Cancellation
of the agreement without cause by either party during 1997 and 1998
would require a cash payout of $750,000 during 1997 or $300,000
during 1998.
From time to time, the Company is a party to certain lawsuits and
other claims related to the normal conduct of its business.
Management believes that liabilities, if any, resulting from the
resolution of pending or threatened proceedings would not materially
affect the financial condition or results of operations of the
Company.
F-42
<PAGE>
<PAGE>
<TABLE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
CONDENSED BALANCE SHEET (UNAUDITED)
<CAPTION>
JANUARY 31, 1998
----------------
<S> <C>
ASSETS
Current Assets:
Cash............................................................................. $ 30,030
Accounts receivable.............................................................. 6,378,412
Inventory........................................................................ 2,151,305
Prepaid expenses and other assets................................................ 218,555
-----------
Total Current Assets......................................................... 8,778,302
Property, plant & equipment, net of accumulated depreciation of $6,373,587........... 2,630,039
Other assets......................................................................... 1,763,140
-----------
Total Assets................................................................. $13,171,481
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable.................................................................... $ 1,075,961
Accounts payable................................................................. 1,646,172
Advance payments on contracts.................................................... 962,304
Other current liabilities........................................................ 1,631,440
-----------
Total Current Liabilities.................................................... 5,315,877
Other liabilities.................................................................... 318,101
Stockholders' Equity:
Common stock..................................................................... 5,000
Additional paid-in capital....................................................... 80,591
Retained earnings................................................................ 7,451,912
-----------
Total Stockholders' Equity................................................... 7,537,503
-----------
Total Liabilities and Stockholders' Equity....................................... $13,171,481
===========
</TABLE>
See Notes to Condensed Financial Statements.
F-43
<PAGE>
<PAGE>
<TABLE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
SEVEN MONTHS ENDED
JANUARY 31,
-----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net sales.................................................................. $12,920,766 $14,535,135
Cost of goods sold......................................................... 9,066,232 10,218,728
----------- -----------
Gross profit........................................................... 3,854,534 4,316,407
Selling, general and administrative expense................................ 2,950,230 3,015,931
----------- -----------
Income from operations................................................. 904,304 1,300,476
Net interest expense....................................................... 75,857 32,497
----------- -----------
Income before income taxes............................................. 828,447 1,267,979
Income tax provision (Note C).............................................. 0 0
----------- -----------
Net income............................................................. $ 828,447 $ 1,267,979
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-44
<PAGE>
<PAGE>
<TABLE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
SEVEN MONTHS ENDED JANUARY 31,
------------------------------
1997 1998
---------- -----------
<S> <C> <C>
Cash Flow from Operating Activities:
Net income............................................................ $ 828,447 $ 1,267,979
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation..................................................... 197,985 215,817
Loss on disposal of assets....................................... 3,876
---------- -----------
Cash provided before changes in operating assets and liabilities....... 1,026,432 1,487,672
Changes in operating assets and liabilities:
Accounts receivable................................................ (185,082) (2,954,990)
Inventory.......................................................... 105,734 462,867
Accounts payable................................................... 273,132 670,000
Advance payments on contracts...................................... 82,111 962,304
Other assets and liabilities....................................... (145,534) 66,572
---------- -----------
Net cash provided by operations.................................... 1,156,793 694,425
---------- -----------
Cash Flow from Investing Activities:
Additions to property, plant and equipment............................. (479,151) (114,971)
---------- -----------
Net cash used in investing activities.............................. (479,151) (114,971)
---------- -----------
Cash Flow from Financing Activities:
Net proceeds of notes payable.......................................... 1,205,230 805,987
Cash dividends......................................................... (879,029) (2,165,887)
Advance to stockholders................................................ (770,970)
---------- -----------
Net cash used in financing activities.............................. (444,769) (1,359,900)
---------- -----------
Net Increase (Decrease) in Cash............................................ 232,873 (780,446)
Cash at Beginning of Period................................................ 166,954 810,476
---------- -----------
Cash at End of Period...................................................... $ 399,827 $ 30,030
========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
F-45
<PAGE>
<PAGE>
NUCLEAR COOLING, INC.
D/B/A MARLO COIL
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared
by the Company without audit. In the opinion of management, all
adjustments (including normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the seven month period ended January 31, 1998 are not
necessarily indicative of the results to be expected for the entire
fiscal year.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial statements. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report to shareholders for the year
ended June 30, 1997.
NOTE B -- CONTRACTS IN PROCESS AND INVENTORIES
Substantially all of the inventories of the Company are valued at
the lower of cost or market using the first-in, first-out method.
Inventories are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997 JANUARY 31, 1998
------------- ----------------
<S> <C> <C>
Raw materials..................................... $1,959,232 $1,467,444
Work-in-process................................... 654,940 683,861
---------- ----------
$2,614,172 $2,151,305
========== ==========
</TABLE>
NOTE C -- INCOME TAXES
The Company is organized under subchapter S of the Internal Revenue
Code. In lieu of corporate income taxes, the shareholders of the S
corporation are taxed on their proportionate share of the Company's
taxable income. Accordingly, no provision for income taxes has been
recorded in these financial statements.
NOTE D -- SALE OF COMPANY
Effective February 1, 1998, the Company sold substantially all of
its net assets to Engineered Support Systems, Inc.
F-46
<PAGE>
<PAGE>
ESSI [LOGO]
Engineered Support Systems, Inc.
[PHOTO] [PHOTO]
Engineered Air Systems Keco Industries
St. Louis, MO Florence, KY
[PHOTO] [PHOTO]
Marlo Keco Industries
High Ridge, MO Blue Ash, OH
[PHOTO] [PHOTO]
Fermont Engineered Specialty Plastics
Bridgeport, CT Hot Springs, AR
<PAGE>
<PAGE>
- --------------------------------------------------------------------
[LOGO]
ENGINEERED SUPPORT
SYSTEMS, INC.
2,200,000 SHARES
COMMON STOCK
----------------
PROSPECTUS
----------------
, 1999
- --------------------------------------------------------------------
CIBC OPPENHEIMER
A.G. EDWARDS & SONS, INC.
PAINEWEBBER INCORPORATED
PAULI JOHNSON CAPITAL & RESEARCH
INCORPORATED
- --------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO
GIVE INFORMATION THAT IS NOT CONTAINED IN THIS PROSPECTUS. THIS
PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 11,781
National Association of Securities Dealers, Inc. Fee........ 4,738
Nasdaq National Market Listing Fee.......................... 17,500
Printing Expenses........................................... 75,000
Legal Fees and Expenses..................................... 210,000
Auditors' Fees and Expenses................................. 50,000
Transfer Agent and Registrar Fees........................... 4,000
Miscellaneous Expenses...................................... 26,981
--------
Total................................................... $400,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 351.355 of the Missouri General and Business Corporation Law
and Article Six of the Registrant's Bylaws provide for
indemnification of the Registrant's directors, officers and
employees in a variety of circumstances, which may include
liabilities under the Securities Act. The Registrant also maintains
directors' and officers' liability insurance.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant, each of its
directors, each of its officers who signed the Registration
Statement and each person who controls the Registrant within the
meaning of the Securities Act from certain liabilities under the
Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.<F*>
3.1 Articles of Incorporation of Engineered Support Systems, Inc. <Fa>
3.2 Amendment of Articles of Incorporation of Engineered Support
Systems, Inc. <Fb>
3.3 Amended and Restated By-Laws of Engineered Support Systems, Inc. <Fb>
4.1 Restated and Amended Credit Agreement dated March 17, 1998
by and among Engineered Support Systems, Inc. and its
Subsidiaries, the Several Lenders from time to time party
thereto and NationsBank, N.A. as Agent. <Fc>
4.2 Engineered Support Systems, Inc. 1992 Stock Option Plan for
Nonemployee Directors. <Fd>
4.3 Engineered Support Systems, Inc. 1993 Stock Option Plan. <Fe>
4.4 Engineered Support Systems, Inc. 1997 Stock Option Plan for
Nonemployee Directors. <Ff>
4.5 Engineered Support Systems, Inc. 1998 Stock Option Plan. <Fg>
II-1
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.6 Engineered Air Systems, Inc. Employee Stock Ownership Plan,
subsequently renamed the Engineered Support Systems, Inc.
Employee Stock Ownership Plan. <Fh>
4.7 Trust Agreement for the Engineered Air Systems, Inc.
Employee Stock Ownership Trust. <Fh>
5.1 Opinion of Armstrong Teasdale LLP.<F*>
10.1 Employee Agreement with Michael F. Shanahan Sr. <Fi>
10.2 Form of Indemnification Agreement with Directors. <Fb>
10.5 Form of Employment Agreement with Presidents and Vice
Presidents of Engineered Air Systems, Inc. and Engineered
Specialty Plastics, Inc. <Fj>
10.6 Engineered Support Systems, Inc. Amended and Restated
Executive Incentive Plan. <Fj>
10.7 Asset Purchase Agreement dated as of February 9, 1998, by
and among Nuclear Cooling, Inc. d/b/a Marlo Coil, David G.
Ault, Rita R. Ault and R. Bruce Earls, and Engineered Coil
Company, a wholly-owned subsidiary of Engineered Support
Systems, Inc. <Fk>
10.8 Stock Purchase Agreement dated as of May 15, 1998, by and
among Air Eagle Holdings, Inc., a wholly-owned subsidiary of
Engineered Support Systems, Inc., and George W. Andrews,
Trustee of the George W. Andrews Revocable Trust dated May 9,
1994, et al. <Fl>
10.9 Asset Purchase Agreement dated as of February 22, 1999 by and
between Dynamics Corporation of America and Engineered Electric
Company, a wholly-owned subsidiary of Engineered Support Systems,
Inc. <Fm>
11.1 Statement as to Computation of Per Share Earnings.<FN>
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.<F*>
23.2 Consent of Arthur Andersen LLP, Independent Accountants.<F*>
23.3 Consent of Armstrong Teasdale LLP (included in Exhibit 5.1).<F*>
24.1 Power of Attorney. <Fo>
27.1 Financial Data Schedule.<FN>
<FN>
------------------------
<Fa> This exhibit 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.
<Fb> This exhibit is incorporated herein by reference from Form 10-K Annual
Report filed on January 30, 1989.
<Fc> This exhibit is incorporated herein by reference from Form 10-Q filed on
June 5, 1998.
<Fd> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective April 5, 1994, registration number 33-77340.
<Fe> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective April 5, 1994, registration number 33-77342.
<Ff> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective May 23, 1997, registration number 333-27695.
<Fg> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective May 15, 1998, registration number 333-52753.
<Fh> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective June 11, 1987, registration number 33-14504.
<Fi> This exhibit is incorporated herein by reference from Form 10-K Annual
Report filed on January 29, 1990.
II-2
<PAGE>
<PAGE>
<Fj> This exhibit is incorporated herein by reference from Form 10-K Annual
Report filed on January 27, 1996.
<Fk> This exhibit is incorporated by reference from Form 8-K/A Amendment to
Current Report dated April 24, 1998.
<Fl> This exhibit is incorporated herein by reference from Form 8-K/A Amendment
to Current Report dated August 13, 1998.
<Fm> This exhibit is incorporated herein by reference from Form 8-K Current
Report filed on March 8, 1999.
<FN> This exhibit is incorporated herein by reference from Form 10-Q Quarterly
Report filed on March 8, 1999.
<Fo> This exhibit is contained on the signature page hereof.
<F*> Filed herewith.
</TABLE>
(B) FINANCIAL STATEMENT SCHEDULES.
None.
ITEM 17. UNDERTAKINGS.
A. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of
such issue.
B. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the exhibit omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-2 and has duly
caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the County
of St. Louis and State of Missouri on the 24th day of March, 1999.
Engineered Support Systems, Inc.
By: /s/ Michael F. Shanahan Sr.
--------------------------------
Michael F. Shanahan Sr.
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities indicated on March 24, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ Michael F. Shanahan Sr. Chairman of the Board, President, Chief Executive Officer and
-------------------------------- Director (Principal Executive Officer)
Michael F. Shanahan Sr.
/s/ Gary C. Gerhardt Executive Vice President, Chief Financial Officer and Director
-------------------------------- (Principal Financial Officer and Principal Accounting Officer)
Gary C. Gerhardt
<F*> Director
--------------------------------
R. Bruce Earls
<F*> Director
--------------------------------
George E. Friel
<F*> Director
--------------------------------
Thomas J. Guilfoil
II-4
<PAGE>
<PAGE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
<F*> Director
--------------------------------
Kenneth E. Lewi
<F*> Director
--------------------------------
Earl E. Walker
<F*> Director
--------------------------------
John J. Wichlenski
<F*> Director
--------------------------------
Earl W. Wims
<FN>
<F*>By: /s/ Michael F. Shanahan Sr.
----------------------------
Michael F. Shanahan Sr.
Attorney-in-fact
<F*>By: /s/ Gary C. Gerhardt
----------------------------
Gary C. Gerhardt
Attorney-in-fact
</TABLE>
II-5
<PAGE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.<F*>
3.1 Articles of Incorporation of Engineered Support Systems, Inc. <Fa>
3.2 Amendment of Articles of Incorporation of Engineered Support
Systems, Inc. <Fb>
3.3 Amended and Restated By-Laws of Engineered Support Systems, Inc. <Fb>
4.1 Restated and Amended Credit Agreement dated March 17, 1998
by and among Engineered Support Systems, Inc. and its
Subsidiaries, the Several Lenders from time to time party
thereto and NationsBank, N.A. as Agent. <Fc>
4.2 Engineered Support Systems, Inc. 1992 Stock Option Plan for
Nonemployee Directors. <Fd>
4.3 Engineered Support Systems, Inc. 1993 Stock Option Plan. <Fe>
4.4 Engineered Support Systems, Inc. 1997 Stock Option Plan for
Nonemployee Directors. <Ff>
4.5 Engineered Support Systems, Inc. 1998 Stock Option Plan. <Fg>
4.6 Engineered Air Systems, Inc. Employee Stock Ownership Plan,
subsequently renamed the Engineered Support Systems, Inc.
Employee Stock Ownership Plan. <Fh>
4.7 Trust Agreement for the Engineered Air Systems, Inc.
Employee Stock Ownership Trust. <Fh>
5.1 Opinion of Armstrong Teasdale LLP.<F*>
10.1 Employee Agreement with Michael F. Shanahan Sr. <Fi>
10.2 Form of Indemnification Agreement with Directors. <Fb>
10.5 Form of Employment Agreement with Presidents and Vice
Presidents of Engineered Air and ESP. <Fj>
10.6 Engineered Support Systems, Inc. Amended and Restated
Executive Incentive Plan. <Fj>
10.7 Asset Purchase Agreement dated as of February 9, 1998, by
and among Nuclear Cooling, Inc. d/b/a Marlo Coil, David G.
Ault, Rita R. Ault and R. Bruce Earls, and Engineered Coil
Company, a wholly-owned subsidiary of Engineered Support
Systems, Inc. <Fk>
10.8 Stock Purchase Agreement dated as of May 15, 1998, by and
among Air Eagle Holdings, Inc., a wholly-owned subsidiary of
Engineered Support Systems, Inc., and George W. Andrews,
Trustee of the George W. Andrews Revocable Trust dated May 9,
1994, et al. <Fl>
10.9 Asset Purchase Agreement dated as of February 22, 1999 by and
between Dynamics Corporation of America and Engineered Electric
Company, a wholly-owned subsidiary of Engineered Support Systems,
Inc. <Fm>
II-6
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11.1 Statement as to Computation of Per Share Earnings.<FN>
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.<F*>
23.2 Consent of Arthur Andersen LLP, Independent Accountants.<F*>
23.3 Consent of Armstrong Teasdale LLP (included in Exhibit 5.1).<F*>
24.1 Power of Attorney. <Fo>
27.1 Financial Data Schedule.<FN>
<FN>
------------------------
<Fa> This exhibit 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.
<Fb> This exhibit is incorporated herein by reference from Form 10-K Annual
Report filed on January 30, 1989.
<Fc> This exhibit is incorporated herein by reference from Form 10-Q Quarterly
Report filed on June 5, 1998.
<Fd> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective April 5, 1994, registration number 33-77340.
<Fe> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective April 5, 1994, registration number 33-77342.
<Ff> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective May 23, 1997, registration number 333-27695.
<Fg> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective May 15, 1998, registration number 333-52753.
<Fh> This exhibit is incorporated herein by reference from Form S-8 registration
statement, effective June 11, 1987, registration number 33-14504.
<Fi> This exhibit is incorporated herein by reference from Form 10-K Annual
Report filed on January 29, 1990.
<Fj> This exhibit is incorporated herein by reference from Form 10-K Annual
Report filed on January 27, 1996.
<Fk> This exhibit is incorporated by reference from Form 8-K/A Amendment to
Current Report dated April 24, 1998.
<Fl> This exhibit is incorporated herein by reference from Form 8-K/A Amendment
to Current Report dated August 13, 1998.
<Fm> This exhibit is incorporated herein by reference from Form 8-K Current
Report filed on March 8, 1999.
<FN> This exhibit is incorporated herein by reference from Form 10-Q Quarterly
Report filed on March 8, 1999.
<Fo> This exhibit is contained on the signature page hereof.
<F*> Filed herewith.
</TABLE>
II-7
<PAGE>
DRAFT
2,200,000 Shares
ENGINEERED SUPPORT SYSTEMS, INC.
Common Stock
par value $.01 per share
UNDERWRITING AGREEMENT
----------------------
_____________, 1999
CIBC Oppenheimer Corp.
A.G. Edwards & Sons, Inc.
Paine Webber Incorporated
Pauli Johnson Capital & Research Incorporated
c/o CIBC Oppenheimer Corp.
CIBC Oppenheimer Tower
World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named on
Schedule I attached hereto
Ladies and Gentlemen:
Engineered Support Systems, Inc., a Missouri corporation (the
"Company") and the selling shareholder named on Part I of Schedule II to
this Agreement (the "Firm Shares Selling Shareholder") propose, subject
to the terms and conditions contained herein, to sell to you and the
other underwriters named on Schedule I to this Agreement (the
"Underwriters"), for whom CIBC Oppenheimer Corp., A.G. Edwards & Sons,
Inc., Paine Webber Incorporated and Pauli Johnson Capital & Research
Incorporated are acting as representatives (the "Representatives"), an
aggregate of 2,200,000 shares (the "Firm Shares") of the Company's
Common Stock, par value $.01 per share (the "Common Stock"). Of the
2,200,000 Firm Shares, 2,000,000 are to be issued and sold by the
Company and 200,000 are to be sold by the Firm Shares Selling
Shareholder. In addition, those shareholders of the Company named on
Part II of Schedule II to this Agreement (the "Option Shares Selling
Shareholders" and collectively with the Firm Shares Selling Shareholder,
the "Selling Shareholders") propose to grant to the Underwriters an
option to purchase up to an aggregate of additional 330,000 shares (the
"Option Shares") of Common Stock for the purpose of covering over-
allotments in connection with the sale of the Firm Shares. The Firm
Shares and the Option Shares are hereinafter referred to collectively as
the "Shares."
<PAGE>
<PAGE>
1. Sale and Purchase of the Shares. On the basis of the
-------------------------------
representations, warranties and covenants contained in, and subject to
the terms and conditions of, this Agreement:
(a) The Company agrees to issue and sell to the
Underwriters 2,000,000 Firm Shares and the Firm Shares Selling
Shareholder agrees to sell to the Underwriters 200,000 Firm Shares, and
each of the Underwriters agrees, severally and not jointly, to purchase
from the Company and the Firm Shares Selling Shareholder, at a price of
U.S. $_________ per share (the "Initial Price"), the number of Firm
Shares set forth opposite the name of such Underwriter under the column
"Number of Firm Shares to be Purchased" on Schedule I to this Agreement,
subject to adjustment in accordance with Section 11 hereof.
(b) For purposes of covering over-allotments in connection
with the distribution and sale of the Firm Shares, each Option Shares
Selling Shareholder grants to the several Underwriters an option to
purchase, severally and not jointly, all or any part of the number of
Option Shares set forth opposite the name of such Option Shares Selling
Shareholder under the column "Number of Option Shares to be Sold" on
Part II of Schedule II to this Agreement, with a per share exercise
price equal to the Initial Price. The number of Option Shares to be
purchased by each Underwriter will be equal to the same percentage
(adjusted by the Representatives to eliminate fractions of shares) of
the total number of Option Shares to be purchased by the Underwriters as
such Underwriter is purchasing of the Firm Shares. Such option may be
exercised only to cover over-allotments in the sale of the Firm Shares
by the Underwriters and may be exercised in whole or in part at any time
on or before 12:00 noon, New York City time, on the business day two (2)
days before the Firm Shares Closing Date (as defined below), and from
the time thereafter within thirty (30) days after the date of this
Agreement, in each case upon written or telegraphic notice, or verbal or
telephonic notice confirmed by written or telegraphic notice, by the
Representatives to the Company no later than 12:00 noon, New York City
time, on the business day two (2) days before the Firm Shares Closing
Date or at least two (2) business days before the Option Shares Closing
Date (as defined below), as the case may be, setting forth the number of
Option Shares to be purchased and the time and date (if other than the
Firm Shares Closing Date) of such purchase.
2. Delivery and Payment. Delivery by the Company of the Firm
--------------------
Shares to the Representatives for the respective accounts of the
Underwriters, and payment of the purchase price therefor by wire
transfer payable in New York Clearing House (same day) funds drawn to
the order of the Company and the Firm Shares Selling Shareholder against
delivery of the Firm Shares to the Representatives for the several
accounts of the Underwriters, shall take place at the offices of CIBC
Oppenheimer Corp., CIBC Oppenheimer Tower, World Financial Center, New
York, New York 10281, at 10:00 a.m., New York City time, (a) if this
Agreement is executed and delivered before 4:30 p.m. New York time, on
the third business day following the date of this Agreement, (b) if this
Agreement is executed and delivered after 4:30 p.m. New York time, on
the fourth business day following the date of this Agreement, or (c) at
such time on such other date, not later than the fourth business day
following the Effective Date (as defined below), as shall be agreed upon
by the Company and the Representatives (such time and date of delivery
and payment are called the "Firm Shares Closing Date"); provided,
however, that if the Company has not made available to the
Representatives copies of the Prospectus (as defined below) within the
time provided in Section 7(d) hereof, the Firm Shares Closing Date shall
be postponed until the second full business day following delivery of
copies of the Prospectus to the
-2-
<PAGE>
<PAGE>
Representatives; and provided, further, that the Company shall provide
to the Underwriters wire transfer instructions at least two (2) days
prior to the Firm Shares Closing Date.
In the event the option with respect to the Option Shares is
exercised, delivery by the Option Shares Selling Shareholders of the
Option Shares to the Representatives for the respective accounts of the
Underwriters and payment of the purchase price by wire transfer payable
in New York Clearing House (same day) funds drawn to the order of the
Option Shares Selling Shareholders against delivery of the Option Shares
to the Representatives for the several accounts of the Underwriters,
will take place at the offices of CIBC Oppenheimer Corp. specified above
at the time and on the date (which may be the same date as, but in no
event will be earlier than, the Firm Shares Closing Date) specified in
the notice referred to in Section 1(b) hereof (such time and date of
delivery and payment are called the "Option Shares Closing Date"). The
Firm Shares Closing Date and the Option Shares Closing Date are called,
individually, a "Closing Date" and, together, the "Closing Dates."
The Shares will be registered in such names, and certificates
therefor will be in such denominations, as the Representatives shall
request at least two (2) business days before the Firm Shares Closing
Date or, in the case of Option Shares, on the day of notice of exercise
of the option as described in Section 1(b) hereof, and will be made
available to the Representatives for checking and packaging, at such
place as is designated by the Representatives, one (1) full business day
before the Firm Shares Closing Date (or the Option Shares Closing Date
in the case of the Option Shares).
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be
obligated to) make payment of the purchase price on behalf of any
Underwriter or Underwriters whose check or checks shall not have been
received by you prior to the Closing Date for the Firm Shares or the
Option Shares to be purchased by such Underwriter or Underwriters. Any
such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
3. Registration Statement and Prospectus: Public Offering.
-------------------------------------------------------
(a) The Company has prepared, in conformity with the
requirements of the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations thereunder (the "Securities Act
Rules") promulgated by the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-2 (No. 333-74135),
including a preliminary prospectus, relating to the Shares, and has
filed with the Commission such registration statement and such
amendments thereto as may have been required to the date of this
Agreement. Copies of such Registration Statement (including all
amendments thereof) and of the related preliminary prospectus have
heretofore been delivered by the Company to the Representatives.
(b) As used in this Agreement, the following terms have
the following meanings:
-3-
<PAGE>
<PAGE>
(i) "Effective Date" means each date on which the
Registration Statement and each post-effective amendment thereto, if
any, was declared effective by the Commission.
(ii) "Prospectus" as used in this Agreement means
the prospectus in the form included in the Registration Statement
(including all documents incorporated by reference therein) or (A) if
Rule 430(A) of the Securities Act Rules is relied on, the term,
"Prospectus" means the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Securities Act Rules and (B) if Rule 434
of the Securities Act Rules is relied on, then (1) the term "Prospectus"
means the "prospectus subject to completion" (as such term is defined in
Rule 434(g) of the Securities Act Rules) together with the term sheet
(the "Term Sheet") required under Rule 434(b) of the Securities Act
Rules and (2) the date of such Prospectus shall be deemed to the date of
the Term Sheet.
(iii) "preliminary prospectus" means each
preliminary prospectus (as described in Rule 434 of the Securities Act
Rules), including all documents incorporated by reference therein,
relating to the Shares and filed with the Commission; and
(iv) "Registration Statement" means the
registration statement described in Section 3(a) hereof and any
registration statement filed pursuant to Rule 462(b) of the Securities
Act Rules, including all documents incorporated by reference therein and
all exhibits filed therewith or incorporated by reference therein, in
the form it became effective, and including all information, if any,
deemed to be part of the registration statement pursuant to Rule 430A of
the Securities Act Rules.
Any reference to the Registration Statement or the Prospectus
shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-2 under the Securities
Act, as of the date of the Registration Statement or the Prospectus, as
the case may be. As used in this Agreement, the term "Incorporated
Documents" means the documents which at the time are incorporated by
reference in the Registration Statement, the Prospectus or any amendment
or supplement therein.
(c) The Company understands that the Underwriters propose
to make a public offering of the Shares as set forth in and pursuant to
the Prospectus, as soon after the Effective Date and the date of this
Agreement as the Representatives deem advisable. The Company herein
confirms that the Underwriters and dealers have been authorized to
distribute or cause to be distributed each preliminary prospectus and
are authorized to distribute the Prospectus (as from time to time
amended or supplemented if the Company furnishes amendments or
supplements thereto to the Underwriters).
4. Representations, Warranties and Certain Covenants of the
--------------------------------------------------------
Company and the Selling Shareholders.
- ------------------------------------
(a) The Company represents, warrants and covenants to each
Underwriter and each Selling Shareholder as follows:
(i) The Company meets the requirements for use of
Form S-2 under the Securities Act. The Registration Statement has
become effective and complied on the
-4-
<PAGE>
<PAGE>
Effective Date, and will comply on each Closing Date and on the date any
post-effective amendment to the Registration Statement shall become
effective, with the applicable provisions of the Securities Act, the
Securities Act Rules, the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations of the Commission
promulgated under the Exchange Act (the "Exchange Act Rules"). Each
preliminary prospectus, as of its date, and as of the date it, or any
supplement or amendment thereto, was filed with the Commission, complied
with the applicable provisions of the Securities Act, the Securities Act
Rules, the Exchange Act and the Exchange Act Rules. The Prospectus, as
of its date and as of the date on which any supplement or amendment
thereto was filed with the Commission, complied with, and will comply on
each Closing Date and on the date any supplement or amendment thereto is
filed with the Commission, with the applicable provisions of the
Securities Act, the Securities Act Rules, the Exchange Act and the
Exchange Act Rules. No order preventing or suspending the use of the
Registration Statement, any preliminary prospectus or the Prospectus has
been issued by the Commission.
(ii) The Registration Statement did not on the
Effective Date, and will not on each Closing Date and on the date any
post-effective amendment to the Registration Statement shall become
effective, contain an untrue statement of material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading. Each preliminary prospectus did not
on its date or on the date any supplement or amendment thereto was filed
with the Commission, contain an untrue statement of material fact or
omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Prospectus did not on its date, and did not or will not
on each Closing Date and on the date any supplement or amendment thereto
or was filed with the Commission, contain an untrue statement of
material fact or omit to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading.
(iii) The Incorporated Documents heretofore filed,
when they were filed (or, if any amendment with respect to any such
document was filed, when such amendment was filed), conformed in all
material respects with the requirements of the Exchange Act and the
Exchange Act Rules; and no such document when it was filed (or, if an
amendment with respect to any such document was filed, when such
amendment was filed), contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
Notwithstanding the foregoing, none of the representations and
warranties in this Section 4 applies to statements in, or omissions
from, the Registration Statement or the Prospectus made in reliance
upon, and in conformity with, information furnished in writing to the
Company by the Underwriters for use in such document. With respect to
the preceding sentence, the Company and the Selling Shareholders
acknowledge that only information furnished in writing by the
Underwriters for use in any such document is [the ________ paragraph(s)]
on the cover page of the Prospectus, the paragraph with respect to
stabilization and market making on [the inside front cover page of the
Prospectus] and the information contained in paragraphs _____ and _____
under the caption "Underwriting" in the Prospectus.
-5-
<PAGE>
<PAGE>
(iv) The financial statements of the Company and
its Subsidiaries (as defined below), including all notes and schedules
thereto, included or incorporated by reference in the Registration
Statement or the Prospectus present fairly the financial position,
results of operations, the statements of cash flows and the statements
of shareholders' equity and other information purported to be shown
therein of the Company and its Subsidiaries at the respective dates and
for the respective periods to which they apply. Such financial
statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods
involved, and include all adjustments necessary for a fair presentation
of the results for such periods; and the other financial and statistical
information and data included or incorporated by reference in the
Registration Statement, the Prospectus or any preliminary prospectus
present fairly the information shown therein and have been prepared on a
basis consistent with such financial statements and the books and
records of the Company. The sections entitled "Summary Consolidated
Historical and Unaudited Pro Forma Financial Information" and "Selected
Consolidated Financial Information" included in the Prospectus present
fairly the information shown therein at the respective dates and for the
respective periods specified and have been presented on a basis
consistent with the financial statements so included or incorporated by
reference in the Prospectus and other financial information and the
Company's audited financial statements not included or incorporated by
reference in the Prospectus. The pro forma balance sheet and statement
of income data in the Prospectus have been prepared in accordance with
the applicable Securities Act Rules and include all adjustments
necessary for a fair presentation of the pro forma financial position
and results of operations of the Company and its Subsidiaries as of the
dates and for the periods to which they apply. Except as otherwise
expressly specified in the Registration Statement or the Prospectus,
such financial statements are in accordance with the books and records
of the Company and its Subsidiaries in all material respects. No other
financial statements are required by the applicable form of the
Registration Statement or the Prospectus or otherwise to be included or
incorporated by reference in the Registration Statement or the
Prospectus.
(v) PricewaterhouseCoopers LLP, and Arthur
Andersen LLP whose reports are filed with the Commission as a part of
the Registration Statement, are, and during the period covered by their
respective reports were, independent public accountants as required by
the Securities Act and the Securities Act Rules.
(vi) There is no corporation or other entity that
is directly or indirectly owned, in whole or in part, or controlled by
the Company except for Engineered Air Systems, Inc., Associated Products
USA, Inc., Engineered Specialty Plastics, Inc., LifeTime Faucets, Inc.,
Engineered Coil Company, Inc., Air Eagle Holdings, Inc., Keco
Industries, Inc. and Engineered Electric Company (individually, a
"Subsidiary" and collectively, the "Subsidiaries"). Neither the Company
nor any of its Subsidiaries owns, directly or indirectly, any interest
in, or controls, directly or indirectly, any corporation, partnership,
joint venture, association or other business corporation other than the
Company's Subsidiaries or as disclosed in the Registration Statement and
the Prospectus.
(vii) Each of the Company and its Subsidiaries are
duly organized, validly existing and in good standing under the laws of
their respective jurisdictions of organization and are duly qualified as
a foreign corporation in each jurisdiction where such qualification is
required, except for such jurisdictions where the failure to so qualify,
individually
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or in the aggregate, would not have a material adverse effect on the
assets, properties, business, results of operations, prospects or
condition (financial or otherwise) of the Company and its Subsidiaries
taken as a whole (a "Material Adverse Effect"). Neither the Company nor
any of its Subsidiaries owns, leases or licenses any asset or property
or conducts any business outside the United States of America that is
required to be disclosed in the Registration Statement and the
Prospectus other than as disclosed in the Registration Statement and the
Prospectus. Each of the Company and its Subsidiaries has all requisite
power and authority, and all necessary authorizations, approvals,
consents, orders, licenses, certificates, franchises, and permits of and
from all governmental or regulatory bodies or any other person or entity
("Permits"), to own, lease and license their respective assets and
properties and conduct their respective businesses as now being
conducted and as described in or contemplated by the Prospectus, except
for such Permits which the failure to obtain, individually or in the
aggregate, would not have a Material Adverse Effect; no such Permit
contains a materially burdensome restriction other than as disclosed in
the Registration Statement and the Prospectus; the Company and its
Subsidiaries have fulfilled and performed in all material respects their
obligations with respect to such Permits and, to the knowledge of the
Company, no event has occurred which allows, or after notice or lapse of
time would allow, revocation or termination thereof, or any other
material impairment of the rights of the holder thereof; and the Company
has the requisite corporate power and authority, and such Permits to
enter into, deliver and perform this Agreement and to issue and sell the
Shares (except as may be required under the Securities Act, the Exchange
Act, under state and foreign securities and Blue Sky laws and from the
National Association of Securities Dealers, Inc. (the "NASD")). The
Company and each of its Subsidiaries has, and at the Closing Date will
have, all security clearances necessary to complete all current
contracts or agreements between the Company or any of its Subsidiaries,
on the one hand, and any Federal or state regulatory body,
administrative agency or other governmental body, domestic or foreign,
on the other hand.
(viii) Except as set forth in the Prospectus, each
of the Company and its Subsidiaries own or possess adequate and
enforceable rights, either as owner or licensee, to use all patents,
trade secrets, trademarks, service marks, copyrights, licenses, know-how
and other similar rights and proprietary knowledge (collectively, the
"Intangibles") necessary for the conduct of their respective businesses
as described in or as contemplated by the Prospectus. Except as set
forth in the Prospectus, neither the Company nor any of its Subsidiaries
has infringed, is infringing or has received any notice of asserted
rights of others with respect to any Intangibles. The expiration of any
Intangibles would not have a Material Adverse Effect.
(ix) Each of the Company and its Subsidiaries has
good and marketable title in fee simple to each of the items of real
property and good and marketable title to each of the items of personal
property reflected in the financial statements referred to in Section
4(a)(iv) hereof or described in the Prospectus as being owned by any of
them and valid and enforceable leasehold interests in each of the items
real and personal property that are referred to in the Prospectus as
being leased by any of them, in each case, free and clear of all liens,
encumbrances, claims, security interests and defects ("Liens"), other
than those which do not and will not have a Material Adverse Effect.
(x) Except as described in the Prospectus, there
is no action, suit or proceeding before or by any court or governmental
agency or body, domestic or foreign, pending
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or, to the Company's knowledge, threatened (and the Company does not
know of any basis therefor) against, or involving the assets, properties
or business of, the Company or any of its Subsidiaries or their
respective directors or officers.
(xi) Subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus, except as described therein, (A) there has not been any
material adverse change in the assets, properties, business, results of
operations, prospects or condition (financial or otherwise) of the
Company and its Subsidiaries, whether or not arising from transactions
in the ordinary course of business, (B) neither the Company nor any of
its Subsidiaries has sustained any material loss or interference with
the Company's assets, business, or properties (whether owned or leased)
from fire, explosion, earthquake, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree which would
have a Material Adverse Effect and (C) since the date of the latest
balance sheet included in the Prospectus, except as reflected therein,
neither the Company nor any of its Subsidiaries has (1) issued any
securities or incurred any liability or obligation, direct or
contingent, for borrowed money, except liabilities or obligations
incurred in the ordinary course of business or borrowing under the
Company's existing credit facilities), (2) entered into any material
transactions not in the ordinary course of business or (3) declared or
paid any dividend or made any distribution on any shares of its capital
stock or redeemed, purchased or otherwise acquired or agreed to redeem,
purchase or otherwise acquire any shares of its capital stock.
(xii) Neither the Company nor any of its
Subsidiaries nor, to the Company's knowledge, any other party, is in
default in the observance or performance of any term or obligation to be
performed under any contract, indenture, note, agreement, instrument,
lease, license, arrangement or understanding (collectively, a
"Contract") to which the Company or any of its Subsidiaries is a party
or by which their respective properties or businesses are bound and no
event has occurred that with notice or lapse of time or both would
constitute such a default, in any such case, which default or event
would have a Material Adverse Effect. Each such Contract is in full
force and effect and is the legal, valid and binding obligation of the
Company or its Subsidiary, as applicable, and to the Company's
knowledge, the other party or parties thereto, and is enforceable by the
Company or its Subsidiary, as applicable. There is no document or
Contract of a character required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement or any Incorporated Document which is not
described or filed as required.
(xiii) Neither the Company nor any of its
Subsidiaries is in violation of any term or provision of its certificate
or articles of incorporation, articles of amalgamation, by-laws,
operating agreement or other charter, organizational or governing
document, as applicable (collectively, "Charter Documents").
(xiv) Neither the execution, delivery and
performance of this Agreement by the Company nor the consummation of any
of the transactions contemplated hereby (including without limitation,
the issuance and sale by the Company of the Shares) nor the application
of the net proceeds from the offering and sale of the Shares in the
manner set forth in the Prospectus under the heading "Use of Proceeds"
will (A) give rise to a right to terminate or accelerate the due date of
any payment due under, or conflict with or result in the breach of any
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term or provision of, or constitute a default (or an event that with
notice or lapse of time or both would constitute a default) under, or
require any consent or waiver under, any Contract to which the Company
or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries or any of their respective properties or businesses is
bound or any Permit, judgment, order, statute, rule or regulation
applicable to the Company or any of its Subsidiaries (B) result in the
execution or imposition of any Lien upon any properties or assets of the
Company or any of its Subsidiaries or (C) violate any provision of their
respective Charter Documents.
(xv) The authorized, issued and outstanding
capital stock of the Company on (A) an actual basis (prior to the sale
of the Firm Shares), and (B) on an as adjusted basis (after giving
effect to the sale of the Firm Shares) is as set forth under the caption
"Capitalization" in the Prospectus (including the assumptions set forth
in the introductory paragraph to the table and the footnotes to the
table) as of the date specified therein. The description of the capital
stock of the Company in the Registration Statement and the Prospectus
is, and at each Closing Date will be, complete and accurate in all
material respects. There have been no changes in the outstanding
capital stock of the Company since that date. The certificates
evidencing the Shares are in due and proper legal form and have been
duly authorized for issuance by the Company. All of the issued and
outstanding securities of the Company and each of its Subsidiaries have
been duly authorized and validly issued, are fully paid and
nonassessable, have been issued in compliance with Federal, state, local
and other applicable laws and were issued without violation of any
preemptive, co-sale or other rights. The Shares, when issued and sold
pursuant to this Agreement, will be duly authorized and validly issued
and fully paid and nonassessable and the Underwriters will receive good
and marketable title to such Shares, free and clear of all Liens. There
are no preemptive, co-sale or other rights to subscribe for or to
purchase, or any restriction upon the voting or transfer of, any of the
securities of the Company or any of its Subsidiaries pursuant to their
respective Charter Documents or any Contract to which the Company or any
of its Subsidiaries is a party or by which any of them or any of their
respective assets or properties may be bound. Except as disclosed in
the Registration Statement and the Prospectus, there is no outstanding
option, warrant, agreement or other right calling for the issuance or
redemption of, and there is no commitment, plan or arrangement to issue
or redeem, any securities of the Company or any of its Subsidiaries.
The Company owns, beneficially and of record, all of the securities of
each of its Subsidiaries free and clear of any Liens, other than those
described in the Prospectus. Except as disclosed in the Prospectus,
neither the Company nor any of its Subsidiaries has any agreement or
understanding with respect to the acquisition or purchase of the
securities of or owned by any person or entity or the acquisition of the
business, assets or liabilities of any person or entity, and neither the
Company nor any of its Subsidiaries has any agreement or understanding
with respect to the disposition or sale of their respective business,
assets or property.
(xvi) There are no holders of securities of the
Company or any of its Subsidiaries who, by reason of the filing of the
Registration Statement under the Securities Act, the execution by the
Company of this Agreement or otherwise, have the right, not previously
satisfied or waived, to request or demand that the Company register
under the Securities Act or any Blue Sky or state securities laws such
securities held by them at any time during the period ending 180 days
after the date of this Agreement.
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(xvii) Each of the Company's officers and directors
and each Selling Shareholder has delivered to CIBC Oppenheimer Corp. its
written agreement (collectively, the "Lock-Up Agreements") that they
will not for a period of 90 days after the date of the Prospectus (the
"Lock-Up Period"), offer to sell, contract to sell or otherwise sell,
dispose of loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of Common Stock, any options
or warrants to purchase any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock
(collectively, "Securities") now owned or hereafter acquired directly by
such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (A) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to
be bound by this restriction, (B) as a distribution to partners or
shareholders of such person, provided that such partners or shareholders
agree in writing to be bound by the terms of this restriction, or (C)
with the prior written consent of CIBC Oppenheimer Corp. The foregoing
restriction has been expressly agreed to preclude a holder of Securities
from engaging in any hedging or other transaction which is designed to
or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-Up Period, even if such Securities would be
disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of any
right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to, or
derives any significant part of its value from, Securities.
Furthermore, such person has also agreed and consented to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with
this restriction. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the Lock-Up
Agreements presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its officers or
directors from any Lock-Up Agreements currently existing or hereafter
effected without the prior written consent of CIBC Oppenheimer Corp.
(xviii) The Company has all requisite power and
authority to execute, deliver and perform its obligations under this
Agreement. The execution and delivery of this Agreement and the
performance by the Company of its obligations under this Agreement and
the performance by the Company of its obligations under this Agreement
have been duly and validly authorized by all requisite corporate action
on the part of the Company. This Agreement is a legal, valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited
by bankruptcy, reorganization, insolvency, moratorium and other similar
laws affecting creditors' rights generally or by the application of
equitable principles.
(xix) No labor dispute with the employees of the
Company or any of its Subsidiaries exists or, to the Company's
knowledge, is threatened, and the Company is not aware of any existing
or imminent labor disturbance by the employees of any of its principal
suppliers, distributors or contractors that would have a Material
Adverse Effect. The Company is not aware of any threatened or pending
litigation or dispute between the Company or its Subsidiaries and any of
their executive officers or key employees which, if adversely
determined, could have a Material Adverse Effect and has no reason to
believe that any such officers or employees will not remain in the
employment of the Company for the foreseeable future.
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(xx) No transaction has occurred between or among
the Company or any of its Subsidiaries and any of their officers,
directors or five percent (5%) shareholders or any affiliate or
affiliates of any such officer, director or five percent (5%)
shareholder that is required to be described in the Registration
Statement, the Prospectus or the Incorporated Documents except those
that have been so disclosed.
(xxi) Neither the Company nor any of its
Subsidiaries has taken, or will take, directly or indirectly, any action
designed, or that might reasonably be expected, to cause or result in,
or that has constituted, or that might reasonably be expected to
constitute, the stabilization or manipulation of the price of the Common
Stock.
(xxii) Each of the Company and its Subsidiaries has
filed all Federal, state, local and foreign tax returns that were
required to be filed to the date hereof (each of which returns are true,
correct and complete in all material respects), or has received
extensions thereof, and has paid all taxes shown on such returns and all
assessments received by it to the extent that the same are material and
have become due, and there are no tax audits or investigations pending
which, if adversely determined, would have a Material Adverse Effect.
(xxiii) The books, records and accounts of the
Company and its Subsidiaries accurately and fairly reflect, in
reasonable detail, all transactions in and dispositions of the assets
of, and the results of operations of, the Company and its Subsidiaries.
Each of the Company and its Subsidiaries maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or
specific authorization, (B) transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles and to maintain asset accountability, (C)
access to assets is permitted only in accordance with management's
general or specific authorization and (D) the recorded accountability
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(xxiv) Neither the Company nor any of its
Subsidiaries nor any director, officer, employee, consultant or agent of
the Company or any of its Subsidiaries (in the course of such person's
actions for, or on behalf of, the Company or such Subsidiary) has used
any corporate funds for any unlawful contribution, gift, entertainment
or other unlawful expense relating to political activity or made any
direct or indirect unlawful payment to any foreign or domestic
governmental official or employee from corporate funds. Neither the
Company nor any of its subsidiaries nor, to the Company's knowledge, any
employee or agent of the Company or any subsidiary has received or
retained any funds in violation of any law, rule or regulation. Neither
the Company nor any of its Subsidiaries nor, to the Company's knowledge,
any director, officer, employee, consultant or agent of the Company or
its Subsidiaries (in the course of such person's actions for, or on
behalf of, the Company or such Subsidiary) has violated or is in
violation of any provisions of the Foreign Corrupt Practices Act of
1977, as amended, or made any bribe, rebate, payoff, influence, payment,
kickback or other unlawful payment.
(xxv) Each approval, consent, order, authorization,
designation, declaration or filing of, or with any regulatory,
administrative or other governmental body necessary in connection with
the execution and delivery by the Company of this Agreement and
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the consummation of the transactions herein contemplated required by the
NASD or as may be necessary to qualify the Shares for public offering by
the Underwriters under state or foreign securities or Blue Sky laws, has
been obtained or made and is in full force and effect.
(xxvi) The Shares have been duly authorized for
quotation on The Nasdaq National Market ("NMS") upon official notice of
issuance. The Company has duly executed a Nasdaq National Market
Notification Form for Listing of Additional Shares. A registration
statement relating to the Common Stock has been filed on Form 8-A
pursuant to Section 12 of the Exchange Act.
(xxvii) The Company has duly filed on a timely basis
with the Commission all reports, registration statements and other
documents required by the Securities Act, the Securities Act Rules, the
Exchange Act and the Exchange Act Rules. All of such reports,
registration statements and other documents, when they were filed with
the Commission, conformed in all material respects to the requirements
of the Securities Act, the Securities Act Rules, the Exchange Act and
the Exchange Act Rules, as appropriate. None of such reports,
registration statements or other documents contained an untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading.
(xxviii) There are no affiliations with the NASD among
the Company's officers, directors or, to the Company's knowledge, any
five percent (5%) or greater securityholder of the Company, except as
disclosed in writing to the Representatives.
(xxix) The Company has not distributed and, prior to
the last to occur of (i) the last Closing Date or (ii) completion of the
distribution of the Shares, will not distribute without the prior
written consent of the Representatives any offering material directly or
indirectly in connection with the offering and sale of the Shares other
than the preliminary prospectus and the Prospectus.
(xxx) The Company and its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are customary in the businesses in
which they are engaged or propose to engage after giving effect to the
transactions described in the Prospectus. Each of the Company and its
Subsidiaries maintains insurance of the types and in the amounts
generally deemed adequate for their respective businesses including, but
not limited to, insurance covering real and personal property owned or
leased by the Company or such Subsidiary against theft, damage,
destruction, acts of vandalism and all other risk customarily insured
against, all of which insurance is in full force and effect. Neither
the Company nor any of its Subsidiaries has been refused any insurance
coverage sought or applied for, and the Company has no reason to believe
that it or any of its Subsidiaries will not be able to renew its
existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not result in a Material
Adverse Effect. The Company has insurance covering the Company, its
officers and directors for claims of up to $_________ arising under the
Securities Act, the Securities Act Rules, the Exchange Act and the
Exchange Act Rules as well as the laws of the states and other
jurisdictions in which the Shares are sold
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that relate to any untrue statement or alleged untrue statement of
material fact or any omission or alleged omission of material fact in
the Registration Statement or Prospectus.
(xxxi) There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company or any of its
Subsidiaries to or for the benefit of any of the officers or directors
of the Company or any of its Subsidiaries or any affiliate or related
person of any of them.
(xxxii) (A) There has been no storage, disposal,
generation, manufacture, refinement, transportation,
handling or treatment of toxic wastes, medical wastes,
hazardous wastes or hazardous substances by the Company or
any of its Subsidiaries (or, to the knowledge of the
Company, any of their respective predecessors in interest)
at, upon or from any of the property now or previously owned
or leased by the Company or any of its Subsidiaries, in
violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would
require remedial action under any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit, except
for any violation or remedial action which would not have,
or could not be reasonably likely to have, individually or
in the aggregate with all such violations and remedial
actions, a Material Adverse Effect; there has been no
material spill, discharge, leak, emission, injection,
escape, dumping or release of any kind onto such property or
into the environment surrounding such property of any toxic
wastes, medical wastes, solid wastes, hazardous wastes or
hazardous substance due to or caused by the Company or any
of its Subsidiaries has knowledge, except for any such
spill, discharge, leak, emission, injection, escape, dumping
or release which would not have or would not be reasonably
likely to have, individually or in the aggregate with all
such spills, discharges, leaks, emissions, injections,
escapes, dumpings and release, a Material Adverse Effect;
and the terms "hazardous wastes," "toxic wastes," "hazardous
substances" and "medical wastes" shall have the meanings
specified in any applicable local, state, federal and
foreign laws or regulations with respect to environmental
protection.
(B) (1) Each of the Company and its Subsidiaries
are in compliance in all material respects with all rules,
laws and regulations relating to the use, treatment, storage
and disposal of toxic substances and protection of health or
the environment ("Environmental Laws") that are applicable
to their respective businesses, (2) neither the Company nor
any of its Subsidiaries has received any notice from any
governmental authority or third party of an asserted claim
under Environmental Laws, (3) each of the Company and its
Subsidiaries have received all Permits and other approvals
required of it under applicable Environmental Laws to
conduct their respective businesses and is in compliance
with all terms and conditions of any such permit, license or
approval, and (4) no property that is or has been owned,
leased or occupied by the Company or any of its Subsidiaries
has been designated as a Superfund site pursuant to the
Comprehensive Environmental Response, Compensation and
Liability Act
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of 1980, as amended (42 U.S.C. Section 9601 et seq.), or
otherwise designated as a contaminated site under applicable
Federal, state or local law.
(xxxiii) The Company is not, and after application of
the net proceeds from the offering as described in the Prospectus will
not be, an "investment company" or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
(xxxiv) Neither the Company nor any of its affiliates
does business with the government of Cuba or with any person or
affiliate located in Cuba within the meaning of Section 517.075, Florida
Statutes.
(xxxv) The Company is in full compliance with the
Marketplace Rules of the National Association of Securities Dealers with
respect to its audit committee, including, without limitation, Rule
4460, which requires that an issuer maintain an audit committee composed
of a majority of independent directors.
(b) Each of the Selling Shareholders, severally and not
jointly, represents, warrants and covenants to each Underwriter as
follows:
(i) the Michael F. Shanahan Sr. First Amended and
Restated Revocable Living Trust and The Shanahan Family Voting Trust
each have been duly organized and each is validly existing in good
standing under the laws of the state of its organization;
(ii) Such Selling Shareholder has all requisite
power and authority to execute, deliver and perform its obligations
under this Agreement. The execution and delivery of this Agreement and
the performance by such Selling Shareholder of its obligations under
this Agreement have been duly and validly authorized by all requisite
action on the part of such Selling Shareholder. This Agreement is a
legal, valid and binding agreement of such Selling Shareholder
enforceable against such Selling Shareholders in accordance with its
terms, except as such enforceability may be limited by bankruptcy,
reorganization, insolvency, moratorium and other similar laws affecting
creditors' rights generally or by the application of equitable
principles.
(iii) Such Selling Shareholder has duly executed
and delivered a custody agreement with respect to such Selling
Shareholder (the "Custody Agreement") in the form heretofore delivered
to the Representatives, appointing [INSERT NAME OF ATTORNEY-IN-FACT] as
such Selling Shareholder's attorney-in-fact (the "Attorney-in-Fact")
with authority to execute, deliver and perform this Agreement on behalf
of such Selling Shareholder and appointing ______________________, as
custodian thereunder (the "Custodian"). Certificates in negotiable
form, endorsed in blank or accompanied by blank stock powers duly
executed, with signatures appropriately guaranteed, representing the
Shares to be sold by such Selling Shareholder hereunder have been
deposited with the Custodian pursuant to the Custody Agreement for the
purpose of delivery pursuant to this Agreement. Such Selling
Shareholder has full power and authority to enter into the Custody
Agreement and to perform its obligations thereunder. The execution and
delivery of the Custody Agreement have been duly authorized by all
necessary action of such Selling Shareholder; the Custody Agreement has
been duly executed and delivered by such
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Selling Shareholder and, assuming due authorization, execution and
delivery by the Custodian, is the legal, valid, binding instrument of
such Selling Shareholder, enforceable in accordance with its terms.
Such Selling Shareholder agrees that each of the Shares represented by
the certificates on deposit with the Custodian is subject to the
interests of the Underwriters, the Company and the other Selling
Shareholders hereunder, that the arrangements made for such custody, the
appointment of the Attorney-in-Fact and the right, power and authority
of the Attorney-in-Fact to execute and deliver this Agreement and to
carry out the terms of this Agreement are to that extent irrevocable and
that the obligations of such Selling Shareholder hereunder shall not be
terminated, except as provided in this Agreement or the Custody
Agreement, by any act of such Selling Shareholder, by operation of law,
or otherwise, whether by its liquidation or dissolution. If any Selling
Shareholder shall liquidate or dissolve or if any other event should
occur, before the delivery of such Shares hereunder, the certificates
for such Shares deposited with the Custodian shall be delivered by the
Custodian in accordance with the respective terms and conditions of this
Agreement as if such liquidation or dissolution or other event had not
occurred, regardless of whether or not the Custodian or the Attorney-in-
Fact shall have received notice thereof.
(iv) Neither the execution, delivery and
performance of this Agreement and the Custody Agreement by or on behalf
of such Selling Shareholder nor the consummation of any of the
transactions contemplated hereby and thereby (including without
limitation, the sale of Shares by such Selling Shareholder) will (A)
give rise to a right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the breach of any term
or provision of, or constitute a default (or an event that with notice
or lapse of time or both would constitute a default) under, or require
any consent or waiver under, any Contract to which such Selling
Shareholder is a party or by which such Selling Shareholder or any of
such Selling Shareholder's properties or businesses is bound or any
Permit, judgment, order, statute, rule or regulation applicable to such
Selling Shareholder or (B) result in the execution or imposition of any
Lien upon any properties or assets of such Selling Shareholder.
(v) Such Selling Shareholder will have at each
Closing Date, good and marketable title to the Shares to be sold by such
Selling Shareholder to the Underwriters on such Closing Date hereunder,
free and clear of any security interest, mortgage, pledge, lien,
encumbrance, restrictions on transfer, claim or equity; and upon
delivery to the Underwriters of the Shares to be sold by such Selling
Shareholder hereunder and payment of the purchase price therefor by the
Underwriters as herein contemplated, each of the Underwriters will
receive good and marketable title to its ratable share of the Shares
purchased by it from such Selling Shareholder, free and clear of any
Lien.
(vi) All authorizations, approvals and consents
necessary for the execution, delivery and performance by or on behalf of
such Selling Shareholder of this Agreement and the Custody Agreement,
and the sale and delivery by such Selling Shareholder to the
Underwriters of the Shares to be sold by such Selling Shareholder
hereunder (other than, at the time of the execution hereof, the issuance
of the order of the Commission declaring the Registration Statement
effective and such authorizations, approvals or consents as may be
necessary under state securities laws) have been obtained and are in
full force and effect; and such Selling Shareholder has all requisite
right, power and authority to enter into and perform its obligations
under this Agreement and the Custody Agreement and to sell, transfer and
deliver the Shares to be sold by such Selling Shareholder to the
Underwriters hereunder.
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(vii) To the best knowledge of such Selling
Shareholder (without inquiry or investigation), each of the Registration
Statement and the Prospectus does not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and
each Preliminary Prospectus does not include an untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(viii) Such Selling Shareholder has not taken, and
will not take, directly or indirectly, any action designed, or that
might reasonably be expected, to cause or result in, or that has
constituted, or that might reasonably be expected to constitute,
stabilization or manipulation of the price of the Common Stock of the
Company to facilitate the sale or resale of the Shares pursuant to the
distribution contemplated by this Agreement, and other than as permitted
by the Securities Act, such Selling Shareholder has not distributed and
will not distribute any prospectus or other offering material in
connection with the offering and sale of the Shares.
(ix) The sale by such Selling Shareholder of
Shares pursuant hereto is not prompted by any adverse information
concerning the Company that is not set forth in the Registration
Statement or the Prospectus.
(x) Such Selling Shareholder has reviewed the
Prospectus and the Registration Statement, and the information regarding
such Selling Shareholder set forth therein under the caption "Principal
and Selling Shareholders" is complete and accurate.
(xi) At the Time of Delivery, all stock transfer
or other taxes (other than income taxes) which are required to be paid
in connection with the sale and transfer of Shares to be sold by such
Selling Shareholder to the several Underwriters hereunder will have been
fully paid or provided for by such Selling Shareholder and all laws
imposing such taxes will have been fully complied with.
(xii) The Selling Shareholder has not distributed
and, prior to the last to occur of (i) the last Closing Date or (ii)
completion of the distribution of the Shares will not distribute without
the prior written consent of the Representatives any offering material
directly or indirectly in connection with the offering and sale of the
Shares.
(xiii) None of the Company, counsel to the Company,
the Underwriters, or counsel to the Underwriters, or any of them, has
made any representations or warranties or provided any information to
such Selling Shareholder with respect to the tax consequences of the
sale of the Shares.
5. Conditions of the Underwriters' Obligations. The
-------------------------------------------
obligations of the Underwriters under this Agreement are several and not
joint. The respective obligations of the Underwriters to purchase the
Shares to be delivered at each Closing Date are subject to fulfillment
of each of the following terms and conditions:
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(a) Notification that the Registration Statement has
become effective and the Prospectus was timely filed with the Commission
shall have been received by the Representatives.
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus was or shall be in effect, no
order suspending the effectiveness of the Registration Statement shall
be in effect and no proceedings for such purpose shall be pending before
or threatened by the Commission or the securities authorities of any
state or other jurisdiction and any requests for additional information
on the part of the Commission (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with
to the satisfaction of the Representatives.
(c) The representations and warranties of the Company and
each Selling Shareholder contained in this Agreement and in the
certificate delivered pursuant to Sections 5(e) and 5(f) hereof shall
have been true and correct in all respects when made and shall be true
and correct in all respects on and as of each Closing Date as if made on
such date, and the Company shall have performed all covenants and
agreements and satisfied all the conditions contained in this Agreement
required to be performed or satisfied by it at or before such Closing
Date.
(d) The Representatives shall have been satisfied that (i)
as of each Closing Date, the statements made in the Registration
Statement and the Prospectus were true and correct and none of such
documents omitted to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they
were made, not misleading, (ii) since the Effective Date, no event has
occurred that should have been set forth in the Prospectus that has not
been so set forth, (iii) since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there has not been any Material Adverse Effect or any development
involving a prospective Material Adverse Effect and, since such dates,
except in the ordinary course of business, neither the Company nor any
of its Subsidiaries has entered into any material transaction not
described in the Prospectus, (iv) neither the Company nor any of its
Subsidiaries has any material contingent obligations that are not
disclosed in the Registration Statement and the Prospectus, (v) there
are no pending or known threatened legal proceedings to which the
Company or any of its Subsidiaries is a party or of which property of
the Company or any of its Subsidiaries is the subject that might result
in a Material Adverse Effect and that are not disclosed in the
Prospectus, (vi) there is no Contract that is required to be filed as an
exhibit to the Registration Statement or the Incorporated Documents that
has not been so filed, and (vii) there has not been any material change
in the market for securities in general or in political, financial or
economic conditions from those reasonably foreseeable as to render it
impracticable in the Representatives' reasonable judgment to make a
public offering of the Shares, or a material adverse change in market
levels for securities in general (or those of companies in particular)
in financial or economic conditions that render it inadvisable to
proceed.
(e) The Representatives shall have received on the Closing
Date a certificate, dated the Closing Date, signed by the Chief
Executive Officer of the Company stating that he has carefully examined
the Registration Statement and the Prospectus and that the statements
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included in Sections 5(b), 5(c) and clauses (i) through (vi) of Section
5(d) hereof are true and correct.
(f) The Representatives shall have received on the Closing
Date a certificate, dated the Closing Date, signed by each of the
Selling Shareholders, stating that each has carefully examined the
Registration Statement and the Prospectus and that the statements
included in Sections 5(b), 5(c) and clauses (i) and (ii) of Section 5(d)
hereof are true and correct.
(g) The Representatives shall have received at the time
this Agreement is executed and on each Closing Date a letter or letters
signed by PricewaterhouseCoopers LLP, addressed to the Company and the
Representatives and dated, respectively, the date of this Agreement and
each such Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants within
the meaning of the Securities Act and the Securities Act Rules, that the
response to Item 10 of the Registration Statement is correct insofar as
it relates to them and stating in effect that:
(i) in their opinion, the financial statements
and any supplementary financial information and schedules (and, if
applicable, financial forecasts and pro forma financial information)
examined by them and included or incorporated by reference in the
Registration Statement or the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act, the Securities Act Rules, the Exchange Act or the
Exchange Act Rules, as applicable; and, if applicable, they have made a
review in accordance with standards established by the American
Institute of Certified Public Accountants of the consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company and its
Subsidiaries for the periods specified in such letter, as indicated in
their reports thereon, copies of which have been separately furnished to
the Representatives;
(ii) they have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited condensed consolidated statements of
income, consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus or the Incorporated Documents, as
indicated in their reports thereon, copies of which have been separately
furnished to the Representatives; and on the basis of specified
procedures, including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether
the unaudited condensed consolidated financial statements referred to in
paragraph (v)(A)(1) below comply as to form in all material respects
with the applicable accounting requirements of the Securities Act, the
Securities Act Rules, the Exchange Act or the Exchange Act Rules,
nothing came to their attention that caused them to believe that the
unaudited condensed consolidated financial statements do not comply as
to form in all material respects with the applicable accounting
requirements of the Securities Act, the Securities Act Rules, the
Exchange Act and the Exchange Act Rules;
(iii) the unaudited selected financial information
with respect to the consolidated results of operations and financial
position of the Company and its Subsidiaries for the five (5) most
recent fiscal years included in the Prospectus and included or
incorporated by
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reference in the Company's Annual Report on Form 10-K for the most
recent fiscal year agrees with the corresponding amounts (after
restatement where applicable) in the audited consolidated financial
statements for such five (5) fiscal years which were included or
incorporated by reference in the Company's Annual Reports on Form 10-K
for such fiscal years;
(iv) they have compared the information in the
Prospectus under selected captions with the disclosure requirements of
Regulation S-K and on the basis of limited procedures specified in such
letter nothing came to their attention as a result of the foregoing
procedures that caused them to believe that this information does not
conform in all material respects with the disclosure requirements of
Items 301, 302, 402 and 503(d), respectively, of Regulation S-K;
(v) on the basis of limited procedures, not
constituting an examination in accordance with generally accepted
auditing standards, consisting of a reading of the unaudited financial
statements and other information referred to below, a reading of the
latest available interim financial statements of the Company and its
Subsidiaries, inspection of the minute books of the Company and its
Subsidiaries since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus, inquiries of
officials of the Company and its Subsidiaries responsible for financial
and accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused
them to believe that:
(A) (1) the unaudited condensed consolidated
statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the
Prospectus or included or incorporated by reference in the
Company's Quarterly Reports on Form 10-Q incorporated by
reference in the Prospectus do not comply as to form in all
material respects with the applicable accounting
requirements of the Exchange Act and the Exchange Act Rules,
or (2) any material modifications should be made to the
unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus or included in the
Company's Quarterly Reports on Form 10-Q incorporated by
reference in the Prospectus, for them to be in conformity
with generally accepted accounting principles;
(B) any other unaudited income statement
data and balance sheet items included in the Prospectus do
not agree with the corresponding items in the unaudited
consolidated financial statements from which such data and
items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with
the basis for the corresponding amounts in the audited
consolidated financial statements included or incorporated
by reference in the Company's Annual Report on Form 10-K for
the most recent fiscal year;
(C) the unaudited financial statements which
were not included in the Prospectus but from which were
derived the unaudited condensed financial statements
referred to in paragraph (A) above and any unaudited income
statement data and balance sheet items included in the
Prospectus and referred to in paragraph (B) above were not
determined on a basis substantially consistent
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with the basis for the audited financial statements included
or incorporated by reference in the Company's Annual Report
on Form 10-K for the most recent fiscal year;
(D) any unaudited pro forma consolidated
condensed financial statements included or incorporated by
reference in the Prospectus do not comply as to form in all
material respects with the applicable accounting
requirements of the Securities Act and the Securities Act
Rules or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of
those statements;
(E) as of a specified date not more than
five (5) days prior to the date of such letter, there have
been any changes in the consolidated capital stock (other
than issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in
each case which were outstanding on the date of the latest
balance sheet included or incorporated by reference in the
Prospectus) or any increase in the consolidated long-term
debt of the Company and its Subsidiaries, or any decreases
in consolidated net current assets or shareholders' equity
or other items specified by the Representative, or any
increase in any items specified by the Representative, in
each case as compared with amounts shown in the last balance
sheet included or incorporated by reference in the
Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(F) for the period from the date of the
latest financial statements included or incorporated by
reference in the Prospectus to the specified date referred
to in paragraph (E) above there were any decreases in
consolidated net revenues or operating profit or the total
or per share amounts of consolidated net income or other
items specified by the Representatives, or any increases in
any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year
and with any other period of corresponding length specified
by the Representatives, except in each case for increases or
decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(vi) in addition to the examination referred to in
their reports included or incorporated by reference in the Prospectus
and the limited procedures, inspection of minute books, inquiries and
other procedures referred to in paragraphs (iv) and (v) above, they have
carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information
specified by the Representatives which are derived from the general
accounting records of the Company and its Subsidiaries, which appear in
the Prospectus (excluding documents incorporated by reference) or in
Part II of, or in exhibits and schedules to, the Registration Statement
specified by the Representatives or in documents incorporated by
reference in the Prospectus specified by the Representatives, and have
compared certain of such
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<PAGE>
amounts, percentages and financial information with the accounting
records of the Company and its Subsidiaries and have found them to be in
agreement.
References to the Registration Statement and the Prospectus in
this paragraph (f) are to such documents as amended and supplemented at
the date of the letter.
The letter will not disclose any change, or any development
involving a prospective change, in or affecting the business or
properties of the Company and its Subsidiaries, taken as a whole, that
in the Representatives' sole judgment makes it impracticable or
inadvisable to proceed with the sale of Shares on such Closing Date.
(h) The Representatives shall have received at the time
this Agreement is executed and on each Closing Date a letter or letters
signed by Arthur Andersen LLP, addressed to the Company and the
Representatives and dated, respectively, the date of this Agreement and
each such Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants within
the meaning of the Securities Act and the Securities Act Rules, that the
response to Item 10 of the Registration Statement is correct insofar as
it relates to them and stating in effect that, in their opinion, the
financial statements and any supplementary financial information and
schedules (and, if applicable, financial forecasts and/or pro forma
financial information) examined by them and included or incorporated by
reference in the Registration Statement or the Prospectus comply as to
form in all material respects with the applicable accounting
requirements of the Securities Act, the Securities Act Rules, the
Exchange Act or the Exchange Act Rules, as applicable.
References to the Registration Statement and the Prospectus in
this paragraph (g) are to such documents as amended and supplemented at
the date of the letter.
(i) Armstrong, Teasdale, LLP, counsel for the Company,
shall have furnished to the Representatives their written opinion, dated
such Closing Date, in form and substance satisfactory to the
Representatives, to the effect that:
(i) the Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the
State of Missouri;
(ii) the Company is duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which failure to be so
qualified would subject it to material liability or disability;
(iii) each of the Company's Subsidiaries has been
duly organized and is validly existing as a corporation in good standing
under the laws of their respective jurisdictions of incorporation. Each
of the Company's Subsidiaries is duly qualified and in good standing as
a foreign corporation in each jurisdiction in which the failure to be so
qualified would have a Material Adverse Effect. All the outstanding
shares of capital stock of each of the Company's Subsidiaries have been
duly authorized and validly issued, are fully paid and nonassessable
and, to the best of such counsel's knowledge, are wholly-owned by the
Company, free and clear of any pledge, lien, encumbrance, security
interest, restriction, claim, equitable interest or other defect in
title;
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(iv) the Company and each of its Subsidiaries has
the requisite corporate power and authority to own, lease and license
its assets and properties and conduct its business as described in the
Registration Statement and the Prospectus;
(v) to the best of such counsel's knowledge and
other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
Subsidiaries is a party or of which any property of the Company or any
of its Subsidiaries is the subject which, if determined adversely to the
Company or any of its Subsidiaries, would individually or in the
aggregate have a Material Adverse Effect; and, to the best of such
counsel's knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
(vi) the Company has the requisite corporate power
and authority to execute, deliver and perform all of its obligations
under this Agreement and to issue, sell and deliver the Shares to the
several Underwriters as provided herein; all necessary corporate action
has been duly and validly taken by the Company to authorize the
execution, delivery and performance of this Agreement; this Agreement
has been duly authorized, executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company
enforceable in accordance with its terms;
(vii) the issuance and sale of the Shares by the
Company and the compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound or to which any of the property or assets of the
Company or any of its Subsidiaries is subject, nor will such action
result in any violation of the provisions of the Charter Documents of
the Company or any statute or any order, rule or regulation known to
such counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its Subsidiaries or any of their
properties;
(viii) no consent, approval, authorization, order,
registration or qualification of or with any court or governmental
agency or body is required for the issuance and sale of the Shares or
the consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Securities Act of the
Shares, and such consents, approvals, authorizations, registrations or
qualifications as may be required under state or foreign securities or
Blue Sky laws in connection with the purpose and distribution of the
Shares by the Underwriters;
(ix) the Company and its Subsidiaries have good
and marketable title in fee simple to all real property owned by them,
in each case free and clear of all Liens except such as are described in
the Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company and its Subsidiaries; and any real
property and buildings held under lease by the Company and its
Subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere
with the use made and proposed to
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be made of such property and buildings by the Company and its
Subsidiaries in giving the opinion in this clause, such counsel may
state that no examination of record titles for the purpose of such
opinion has been made, and that they are relying upon a general review
of the titles of the Company and its Subsidiaries, upon opinions of
local counsel and abstracts, reports and policies of title companies
rendered or issued at or subsequent to the time of acquisition of such
property by the Company or its Subsidiaries, upon opinions of counsel to
the lessors of such property and, in respect to matters of fact, upon
certificates of officers of the Company or its Subsidiaries, provided
that such counsel shall state that they believe that both the
Representatives and they are justified in relying upon such opinions,
abstracts, reports, policies and certificates;
(x) neither the Company nor any of its
Subsidiaries is in violation of its Charter Documents or other
organizational or governing instruments or in default in the performance
or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party
or by which it or any of its properties may be bound;
(xi) the authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus under the
caption "Capitalization;" all of the outstanding shares of Common Stock
have been, and the Shares to be issued on such Closing Date, upon
issuance and delivery and payment therefor in the manner described
herein, will be, duly authorized, validly issued, fully-paid and
nonassessable;
(xii) the statements set forth in the Prospectus
under the caption "Description of Common Stock," insofar as they purport
to constitute a summary of the terms of the Common Stock and under the
caption "Underwriting," insofar as they purport to describe the
provisions of U.S. laws and documents referred to therein, are accurate,
complete and fair;
(xiii) the form of certificate evidencing the Shares
conforms to the requirements of the Missouri General and Business
Corporation Law;
(xiv) the Company is not, and will not, following
consummation of the Offering and the application of the net proceeds
therefrom, become, an "investment company" or an entity "controlled" by
an "investment company," as such terms are defined in the Investment
Company Act;
(xv) the Shares have been conditionally approved
for quotation on the NMS;
(xvi) upon delivery of and payment for the Shares
being issued and sold by the Company, the several Underwriters will
receive good and valid title to such Shares, free and clear of all
liens, encumbrances, equities, security interests, claims or other
defects, assuming at such time that the Underwriters acquire such Shares
in good faith without notice of any adverse claim (within the meaning of
the Uniform Commercial Code provisions that govern the Company's sale of
Shares to the Underwriters); and
(xvii) the Registration Statement and the Prospectus
and any further amendments and supplements thereto made by the Company
prior to such Closing Date (other than the financial statements, notes
and related schedules and other fiscal and statistical data
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included therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Securities Act and the Securities Act Rules; and each of the
Incorporated Documents (except for the financial statements and notes
and schedules and other fiscal and statistical data included therein, as
to which such counsel need not express any opinion) complied when filed
pursuant to the Exchange Act as to form in all material respects with
the requirements of the Securities Act and the Securities Act Rules and
the Exchange Act and the Exchange Act Rules.
In addition such counsel will state that such counsel has
participated in conferences with officers and other representatives of
the Company, representatives of the Representatives and representatives
of the independent certified public accountants of the Company, at which
conferences the contents of the Registration Statement and the
Prospectus and related matters were discussed and, although such counsel
is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in such
documents, on the basis of the foregoing, no facts have come to the
attention of such counsel which lead such counsel to believe that the
Registration Statement, at the time it became effective, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; that the Prospectus, as of its date or as of any
Closing Date, contained any untrue statement of a material fact or
omitted to state a material fact required to be therein or necessary to
make the statements therein not misleading; or that any Incorporated
Document, at the time it was filed with the Commission, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that in making the foregoing
statements, such counsel will not be required to express any view as to
the financial statements and supporting schedules and other financial
information derived therefrom, included in, incorporated by reference in
or omitted from such documents.
(j) ____________________, counsel for the Selling
Shareholders, shall have furnished to the Representatives their written
opinion, dated such Closing Date, in form and substance satisfactory to
the Representatives, to the effect that:
(i) the Michael F. Shanahan Sr. First Amended and
Restated Revocable Living Trust and The Shanahan Family Voting Trust
each have been duly organized and each is validly existing in good
standing under the laws of the state of its organization;
(ii) each Selling Shareholder has the requisite
power and authority to execute deliver and perform all of its
obligations under this Agreement and the Custody Agreement and to sell
and deliver the Shares being sold by such Selling Shareholder to the
several Underwriters as provided herein; all necessary action has been
duly and validly taken by each Selling Shareholder to authorize the
execution, delivery and performance of this Agreement and the Custody
Agreement; this Agreement and the Custody Agreement have been duly
authorized, executed and delivered by the each Selling Shareholder and
constitute the legal, valid and binding obligations of each Selling
Shareholder enforceable in accordance with their respective terms;
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(iii) the sale of the Shares being sold by each
Selling Shareholder and the compliance by each Selling Shareholder with
all of the provisions of this Agreement and the Custody Agreement and
the consummation of the transactions herein and therein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument
known to such counsel to which any Selling Shareholder is a party or by
which any Selling Shareholder is bound or to which any of the property
or assets of any Selling Shareholder is subject, nor will such action
result in any violation of the provisions of any Charter Documents of
any Selling Shareholder or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body having
jurisdiction over any Selling Shareholder or any of their properties;
(iv) no consent, approval, authorization, order,
registration or qualification of or with any court or governmental
agency or body is required for the sale of the Shares being sold by any
Selling Shareholder or the consummation by the Selling Shareholders of
the transactions contemplated by this Agreement or the Custody
Agreement, except the registration under the Securities Act of the
Shares, and such consents, approvals, authorizations, registrations or
qualifications as may be required under state or foreign securities or
Blue Sky laws in connection with the purpose and distribution of the
Shares by the Underwriters;
(v) upon delivery of and payment for the Shares
being sold by each Selling Shareholder, the several Underwriters will
receive good and valid title to such Shares, free and clear of all
liens, encumbrances, equities, security interests, claims or other
defects, assuming at such time that the Underwriters acquire such Shares
in good faith without notice of any adverse claim (within the meaning of
the Uniform Commercial Code provisions that govern the Selling
Shareholders' sale of Shares to the Underwriters); and
(vi) there are no transfer or other taxes (other
than income taxes) known to such counsel payable in connection with the
sale and delivery of Shares by the Selling Shareholders to the several
Underwriters or all such taxes have been fully paid in connection with
such sale and delivery.
(k) All proceedings taken in connection with the sale of
the Firm Shares and the Option Shares as herein contemplated shall be
reasonably satisfactory in form and substance to the Representative and
their counsel and the Representatives shall have received from
Cadwalader, Wickersham & Taft, counsel for the Underwriters, favorable
opinions, addressed to the Representatives, with respect to the Shares,
the Registration Statement, the Prospectus, and such other related
matters as the Representatives may reasonably request, and the Company
shall have furnished to Cadwalader, Wickersham & Taft such documents as
they may reasonably request for the purpose of enabling them to pass
upon such matters.
(l) The Representatives shall have received on each
Closing Date (i) a certificate, including exhibits thereto, addressed to
the Representatives and dated such Closing Date, of the Secretary or an
Assistant Secretary of the Company, signed in such officer's capacity as
such officer, as to (A) the Company's Charter Documents, (B) the
Company's board of directors actions authorizing (1) the preparation,
execution and filing of the Registration Statement, (2) the execution
and delivery of this Agreement, (3) the performance of the
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transactions contemplated by this Agreement, the Registration Statement
and the Prospectus and (4) the offering of the Shares and (C) the
incumbency of the person or persons authorized to execute and deliver
the Registration Statement, this Agreement, and any other documents
contemplated by the offering of the Shares and (ii) similar
certificates, as applicable, as to the Selling Shareholders selling
Shares on such Closing Date.
(m) The Representatives shall have received on each
Closing Date, certificates, dated no more than five business days prior
to the Closing Date, of the Secretaries of State (or other relevant
authorities) of each State where the Company and each of its
Subsidiaries is incorporated or qualified as a foreign corporation as to
the good standing of the Company and each of its Subsidiaries. In
addition, the Representatives shall have received copies of all Charter
Documents of the Company and each of its Subsidiaries certified by the
Secretary of State (or other relevant authorities) of the jurisdiction
of incorporation of each of the Company and each of its Subsidiaries.
(n) The Company shall have made all filings required under
applicable securities laws and by the NMS.
(o) CIBC Oppenheimer Corp. shall have received copies of
the Lock-Up Agreements executed by each entity or person described in
Section 4(xvii) hereof.
(p) The Company and the Selling Shareholders shall have
furnished to the Representatives such further certificates and documents
as the Representatives reasonably request.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably
satisfactory to Cadwalader, Wickersham & Taft. The Company will furnish
the Representatives with such number of confirmed copies of such
opinions, certificates, letters and documents as the Representatives
shall reasonably request.
6. Conditions of the Company's and the Selling Shareholders'
---------------------------------------------------------
Obligations. The obligation of the Company to issue and sell the
- -----------
Shares to be issued and sold by it at each Closing Date, and of the
Selling Shareholders to sell the Shares being sold by each of them at
each Closing Date, is subject to fulfillment of each of the following
conditions:
(a) The Registration Statement shall be effective.
(b) No order preventing or suspending the use of the
Prospectus or the Registration Statement shall be in effect and no
proceedings for such purposes shall be pending before or threatened by
the Commission or the securities authorities of any state or other
jurisdiction.
7. Covenants of the Company. The Company covenants and agrees
------------------------
with each of the several Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the
parties hereto, to become effective as promptly as possible. The
Company
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will use its best efforts to cause any abbreviated registration
statement pursuant to Rule 462(b) of the Securities Act Rules as may be
required subsequent to the date the Registration Statement is declared
effective to become effective as promptly as possible. The Company will
notify the Representatives, promptly after it shall receive notice
thereof, of the time when the Registration Statement, any subsequent
amendment to the Registration Statement or any abbreviated registration
statement has become effective or any supplement to the Prospectus has
been filed. If the Company omitted information from the Registration
Statement at the time it was originally declared effective in reliance
upon Rule 430A(a) of the Securities Act Rules, the Company will provide
evidence satisfactory to the Representatives that the Prospectus
contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to Subparagraph (1) or (4) of
Rule 424(b) of the Securities Act Rules or as part of a post-effective
amendment to the Registration Statement as originally declared effective
which is declared effective by the Commission. The Company shall
promptly advise the Representatives of (i) any request by the Commission
for any amendment to the Registration Statement or the Prospectus or for
any additional information, (ii) the prevention or suspension of the use
of any preliminary Prospectus or the Prospectus or of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any
proceeding for that purpose, and (iii) of the receipt by the Company of
any notification with respect to the suspension of the qualification of
the Shares for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose. The Company shall not file any
amendment to the Registration Statement or supplement to the Prospectus
unless the Company has furnished the Representatives a copy for its
review prior to filing and shall not file any such proposed amendment or
supplement to which the Representatives shall reasonably object. The
Company shall use its best efforts to prevent the issuance of any such
stop order and, if issued, to obtain as soon as possible the withdrawal
thereof.
(b) If, at any time when a prospectus relating to the
Shares is required to be delivered under the Securities Act and the
Securities Act Rules, any event occurs as a result of which the
Prospectus would include any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if it will be necessary to supplement the Prospectus
to comply with the Securities Act or the Securities Act Rules, the
Company promptly will prepare and file with the Commission, subject to
the second sentence of Section 7(a) hereof, a supplement that shall
correct such statement or omission or that will effect such compliance.
(c) The Company will make generally available to its
securityholders and to the Representatives as soon as practicable, but
not later than forty-five (45) days after the end of the 12-month period
beginning at the end of the fiscal quarter of the Company during which
the Effective Date occurs (or 90 days if such 12-month period coincides
with the Company's fiscal year), an income statement (which need not be
audited) of the Company, covering such 12-month period, that satisfies
the provisions of Section 11(a) of the Securities Act or Rule 158 of the
Securities Act Rules.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters, without charge, signed copies of the
Registration Statement and to each other Underwriter a copy of the
Registration Statement (without exhibits thereto) and as many copies of
any preliminary prospectus and the Prospectus as the Representatives may
reasonably request.
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Provided, however, that the Company shall use reasonable efforts to
furnish copies of the Prospectus and any term sheet or abbreviated term
sheet under Rule 434 of the Securities Act Rules no later than the first
full business day following the first day that Shares are traded.
(e) In the event it becomes necessary to qualify the
Shares for sale in various states, the Company shall cooperate with the
Representatives and their counsel in endeavoring to qualify the Shares
for offer and sale in connection with this offering under the state
securities and Blue Sky laws of such jurisdictions as the
Representatives may designate and will maintain such qualifications in
effect so long as required for the distribution of the Shares; provided,
however, that the Company shall not be required in connection therewith,
as a condition thereof, to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction or
subject itself to taxation as doing business in any jurisdiction.
(f) For a period of five (5) years after the date of this
Agreement, the Company will supply to the Representatives, and to each
other Underwriter who may so request in writing, copies of such
financial statements and other periodic and special reports as the
Company may from time to time distribute generally to the holders of any
class of its capital stock and to furnish to the Representatives a copy
of each annual and other report it is required to file with the
Commission. During such five-year period, if the Company shall continue
to have active subsidiaries, the foregoing financial statements shall be
on a consolidated basis to the extent that the amounts of the Company
and its Subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not
so consolidated.
(g) The Company will take such steps as shall be necessary
to ensure that neither the Company nor any of its Subsidiaries shall
become an "investment company" within the meaning of the Investment
Company Act and the rules and regulations thereunder.
(h) Without the prior written consent of the
Representatives, for a period of 90 days after the date of this
Agreement, the Company will not and will cause its Subsidiaries and or
any of its individual directors and executive officers, not to issue,
sell, offer, contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any equity securities of
the Company (or any securities convertible into or exercisable or
exchangeable for or rights to purchase or acquire equity securities of
the Company or its Subsidiaries), except for the issuance of the Shares
pursuant to this Agreement. In the event that, during this period, any
shares are issued pursuant to the Company's existing stock option or
stock purchase plans, the Company will obtain a Lock-Up Agreement from
such grantee or purchaser or holder of such registered securities.
(i) On or before completion of this offering, the Company
will make all filings required under applicable securities laws and by
the NMS.
(j) The Company will apply the net proceeds from the
offering of the Shares in the manner set forth under "Use of Proceeds"
in the Prospectus.
(k) The Company will pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is
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terminated, all costs and expenses of the Company incidental to the
public offering of the Shares and the performance of the obligations
under this Agreement including those relating to: (i) the preparation,
printing, filing and distribution of the Registration Statement, each
preliminary prospectus, and the Prospectus and the printing, filing and
distribution of this Agreement, the agreement among underwriters, the
selected dealer agreement, the underwriters' questionnaire and any
instruments related to any of the foregoing; (ii) the preparation and
delivery of certificates for the Shares; (iii) the registration or
qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the various jurisdictions referred to in Section 7(e)
hereof, including the reasonable fees and disbursements of counsel for
the Underwriters in connection with such registration and qualification
and the preparation, printing, distribution and shipment of preliminary
and supplementary Blue Sky memoranda; (iv) the furnishing (including
costs of shipping and mailing) to the Representatives and to the
Underwriters of copies of each preliminary prospectus and the Prospectus
and of the several documents required by this Section 7 to be so
furnished, as may be reasonably requested for use in connection with the
offering and sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold; (v) the filing fees of the NASD in connection
with its review of the terms of the public offering and reasonable fees
and disbursements of counsel for the Underwriters in connection with
such review; (vi) the furnishing (including costs of shipping and
mailing) to the Representatives and to the Underwriters of copies of all
reports and information required by Section 7(e) hereof; (vii) the
inclusion of the Shares for quotation on the NMS; and (viii) all
transfer taxes, if any, with respect to the sale and delivery of the
Shares by the Company to the Underwriters. Subject to the provisions of
Section 8 hereof, the Underwriters will pay all costs and expenses
incident to the performance of the obligations of the Underwriters under
this Agreement not payable by the Company pursuant to the preceding
sentence, including, without limitation, the fees and disbursements of
counsel for the Underwriters.
8. Indemnification.
---------------
(a) The Company, jointly with the Selling Shareholders,
and Selling Shareholders, severally, will indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation,
legal and other expenses incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other Federal, state or local law or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon (i) with respect
to the Registration Statement, any untrue statement or alleged untrue
statement of a material fact, any omission or alleged omission of a
material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they are
made, not misleading, (ii) with respect to the Prospectus or any
preliminary prospectus, any untrue statement or alleged untrue statement
of material fact or any omission or alleged omission of material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (iii) any
breach of the representations and warranties set forth in Section 4
hereof; provided, however, that such indemnity will not inure to the
benefit of any Underwriter (or any person controlling such Underwriter)
on account of any losses, claims, damages or liabilities arising from
the sale of the Shares to any person by such
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<PAGE>
Underwriter if such untrue statement or omission or alleged untrue
statement or omission was made in such preliminary prospectus, the
Registration Statement or the Prospectus in reliance upon and in
conformity with information furnished in writing to the Company by the
Representatives on behalf of any Underwriter specifically for use
therein. The indemnification agreements of the Company contained in
this paragraph and the representations and warranties of the Company
contained in Section 4 will remain operative and in full force and
effect regardless of any investigation made by or on behalf of any
indemnified party and will survive the delivery of any payment for the
Shares.
(b) Each Underwriter will indemnify and hold harmless the
Company, each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, each director of the Company, each officer of the Company
who signs the Registration Statement and each Selling Shareholder, in
each case to the same extent as the foregoing indemnity from the Company
to each Underwriter, but only insofar as such losses, claims, damages or
liabilities arise out of or are based upon (i) with respect to the
information contained in the [____ paragraphs] of the cover page of the
Prospectus, the paragraph relating to stabilization and market making on
the [inside front cover page of Prospectus] and information contained
[in the ___, ___ and ___ paragraphs] under the caption "Underwriting" in
the Prospectus, any untrue statement or alleged untrue statement of a
material fact or any omission or alleged omission of material fact
required to be stated therein or necessary to make the statements
therein not misleading or (ii) with respect to such information as
contained in such sections of the Prospectus or any preliminary
prospectus, any untrue statement or alleged untrue statement of material
fact or any omission or alleged omission of material fact necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The obligation of each
Underwriter pursuant to this Section 8(b) is several and not joint. The
indemnification agreements of each Underwriter contained in this Section
8(b) will remain operative and in full force and effect regardless of
any investigation made by or on behalf of any indemnified party and will
survive the delivery of any payment for the Shares. The obligation of
each Underwriter to indemnify the Company (including any controlling
person, director or officer thereof) as the case may be shall be limited
to the net proceeds received by the Company from such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section 8 will, promptly after receipt of notice
of commencement of any action, suit or proceeding against such party in
respect of which a claim is to be made against an indemnifying party or
parties under this Section 8, notify each such indemnifying party of the
commencement of such action, suit or proceeding, enclosing a copy of all
papers served. No indemnification provided for in Section 8(a) or 8(b)
hereof, will be available to any party who fails to give notice as
provided in this Section 8(c) if the party to whom notice was not given
was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice but the
omission so to notify such indemnifying party of any such action, suit
or proceeding will not relieve it from any liability that it may have to
any indemnified party for contribution or otherwise other than under
this Section 8(c). In case any such action, suit or proceeding is
brought against any indemnified party and it notifies the indemnifying
party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it wishes, jointly
with any other indemnifying party similarly noticed, to assume the
defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice
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from the indemnifying party to such indemnified party of its election so
to assume the defense thereof and the approval by the indemnified party
of such counsel, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses, except as provided
below and except for the reasonable costs of investigation subsequently
incurred by such indemnified party in connection with the defense
thereof. The indemnified party will have the right to employ its
counsel in any such action, but the fees and expenses of such counsel
will be at the expense of such indemnified party unless (i) the
employment of counsel by such indemnified party is authorized in writing
by the indemnifying parties, (ii) the indemnified party reasonably
concludes that there may be a conflict of interest between the
indemnifying parties and the indemnified party in the conduct of the
defense of such action (in which case the indemnifying parties will not
have the right to direct the defense of such action on behalf of the
indemnified party) or (iii) the indemnifying parties do not employ
counsel to assume the defense of such action within a reasonable time
after notice of the commencement thereof, in each of which cases the
fees and expenses of one counsel will for all similarly situated
indemnified parties be at the expense of the indemnifying parties.
(d) The Company will not, without the prior written
consent of each Underwriter, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit
or proceeding in respect of which indemnification may be sought
hereunder (whether or not such Underwriter or any person who controls
such Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act is a party to such claim, action, suit
or proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or
proceeding.
(e) In addition to their other obligations under this
Section 8, the Company and the Selling Shareholders will reimburse the
Underwriters on a monthly basis for all reasonable legal and other
expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of
or based upon any statement or omission, or any alleged statement or
omission, described in Section 8(a) hereof, notwithstanding the absence
of a judicial determination as to the proprietary and enforceability of
the obligations under this Section 8(e) and the possibility that such
payments might later be held to be improper; provided, however, that (i)
to the extent any such payment is ultimately held to be improper, the
persons receiving such payments will promptly refund them and (ii) such
persons will provide to the Company, upon request, reasonable assurances
of their ability to effect any refund when and if due.
(f) The provisions of this Section 8 and of Section 9
hereof relating to the indemnification and contribution obligations of
the Company and the Selling Shareholders to the Underwriters and of the
Underwriters to the Company supersede the indemnification and
contribution provision contained in any registration rights or other
agreements or instruments between the Company and any of its
securityholders.
9. Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnification provided for
in Section 8(a) or 8(b) is due in accordance with its terms but for any
reason is held to be unavailable from the Company, the Selling
Shareholders, or the Underwriters or insufficient to hold harmless an
indemnified party
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under Section 8(a) or 8(b) hereof, the Company and the Selling
Shareholders, on the one hand, and the Underwriters, on the other hand,
will contribute to the aggregate losses, claims, damages and liabilities
(including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claims asserted, but after deducting
any contribution received by the Company and the Selling Shareholders
from persons other than the Underwriters, such as persons who control
the Company within the meaning of the Securities Act, officers of the
Company who signed the Registration Statement and directors of the
Company, who may also be liable for contribution) to which the Company
and one or more of the Underwriters may be subject in such proportion as
is appropriate to reflect the relative benefits received by the Company
and the Selling Shareholders, on the one hand, and the Underwriters, on
the other hand, from the offering of the Shares or, if such allocation
is not permitted by applicable law or indemnification is not available
as a result of the indemnifying party not having received notice as
provided in Section 8(c) hereof, in such proportion as is appropriate to
reflect not only the relative benefits referred to above but also the
relative fault of the Company, the Selling Shareholders, on the one
hand, and the Underwriters, on the other hand, in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, the
Selling Shareholders and the Underwriters will be deemed to be in the
same proportion as the total proceeds from the offering (net of
underwriting commissions but before deducting expenses) received by the
Company and the Selling Shareholders bear to the underwriting
commissions received by the Underwriters, each as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company,
the Selling Shareholders or the Underwriters will be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact related to information supplied by the
Company, the Selling Shareholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Selling
Shareholders and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 9, (i) in no case will
any Underwriter (except as may be provided in any Agreement Among
Underwriters) be liable or responsible for any amount in excess of the
underwriting commission applicable to the Shares purchased by such
Underwriter and no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 9, each person, if any,
who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act will have the same
rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of the Section 15 of the
Securities Act or Section 20 of the Exchange Act, each officer of the
Company who signed the Registration Statement and each director of the
Company will have the same rights to contribution as the Company,
subject in each case to the immediately preceding sentence. Any party
entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against another
party or parties under this Section, notify such party or parties from
whom contribution may
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be sought, but the omission to so notify such party or parties from whom
contribution may be sought will not relieve the party or parties from
whom contribution may be sought from any other obligation it or they may
have hereunder or otherwise (except as specifically provided in Section
8(c) hereof. The Underwriter's obligations to contribute pursuant to
this Section 9 are several in proportion to their respective
underwriting commitments and not joint.
The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof, including without
limitation the provisions of Sections 8 and 9 hereof, and are fully
informed regarding said provisions. They further acknowledge that the
provisions of Sections 8 and 9 hereof fairly allocate the risks in light
of the ability of the parties to investigate the Registration Statement
and the Prospectus as required by the Securities Act and the Exchange
Act. The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to
certain of the provisions of Sections 8 and 9 hereof, and the parties
hereto hereby expressly waive and relinquish any right or ability to
assert such public policy as a defense to a claim under Sections 8 or 9
hereof and further agree not to attempt to assert any such defense.
10. Termination. (a) This Agreement may be terminated with
-----------
respect to the Shares to be purchased on a Closing Date by the
Representatives, in its absolute discretion, by delivering written
notice to the Company, if any of the conditions specified in Section 5
hereof will not, in the Representatives' judgment, be fulfilled by such
Closing Date, or any of the following occurs after the date of this
Agreement: (i) if the Company shall have failed, refused or be unable
to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to
be fulfilled is not fulfilled, including, without limitation, any change
in the assets or properties, business, results of operations, prospects
or condition (financial or otherwise) of the Company and its
Subsidiaries from that set forth in the Registration Statement or
Prospectus, which, in the Representatives' judgment, is material and
adverse, or (ii) if additional material governmental restrictions, not
in force and effect on the date hereof, shall have been imposed upon
trading in securities generally or minimum or maximum prices shall have
been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter marked by the NASD,
or trading in securities generally shall have been suspended on either
such exchange or in the over the counter marked by the NASD, or if a
banking moratorium shall have been declared by Federal or New York
authorities, (iii) the taking of any action by any Federal, state or
local government or agency in respect of its monetary or fiscal affairs,
or (iv) if the Company or any of its Subsidiaries shall have sustained a
loss by strike, fire, flood, wind, earthquake, accident or other
calamity of such character as to interfere materially with the conduct
of the business and operations of the Company regardless of whether or
not such loss shall have been insured, (v) if there shall have been a
material adverse change in the general political or economic conditions
or financial markets as in the Representatives' reasonable judgment
makes it inadvisable or impracticable to proceed with the offering, sale
and delivery of the Shares, or (vi) if there shall have been an outbreak
or escalation of hostilities or of any other instruction or armed
conflict or the declaration by the United States of a national emergency
which, in the reasonable opinion of the Representatives, makes it
impracticable or inadvisable to proceed with the public offering of the
Shares as contemplated by the Prospectus.
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(b) If this Agreement is terminated pursuant to any of its
provisions, the Company will not be under any liability to any
Underwriter, and no Underwriter will be under any liability to the
Company, except that the Company will indemnify and hold harmless the
Underwriters for all reasonable out-of-pocket expenses (including the
reasonable fees and disbursements of their counsel) incurred by them in
connection with the proposed purchase and sale of the Shares or in
contemplation of performing their obligations hereunder.
11. Substitution of Underwriters. If one or more of the
----------------------------
Underwriters fails (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 10 hereof)
to purchase on any Closing Date the Shares agreed to be purchased on
such Closing Date by such Underwriter or Underwriters, the
Representatives may find one or more substitute underwriters to purchase
such Shares or make such other arrangements as the Representatives may
deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this
agreement. If no such arrangements have been made by the close of
business on the business day following such Closing Date:
(a) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date will not exceed 10% of the
Shares that all the Underwriters are obligated to purchase on such
Closing Date, then each of the nondefaulting Underwriters will be
obligated to purchase such Shares on the terms herein set forth in
proportion to their respective obligations hereunder; provided, that in
no event will the maximum number of Shares that any Underwriter has
agreed to purchase pursuant to Section 1 be increased pursuant to this
Section 11 by more than one-ninth of such number of Shares without the
written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date will exceed 10% of the
Shares that all the Underwriters are obligated to purchase on such
Closing Date, then the Company will be entitled to an additional
business day within which it may, but is not obligated to, find one or
more substitute underwriters reasonably satisfactory to the
Representatives to purchase such Shares upon the terms set forth in this
Agreement.
In any such case, either the Representatives or the Company will
have the right to postpone the applicable Closing Date for a period of
not more than five (5) business days in order that necessary changes and
arrangements (including any necessary amendments or supplements to the
Registration Statement or the Prospectus) may be effected by the
Representatives and the Company. If the number of shares to be
purchased on such Closing Date by such defaulting Underwriter or
Underwriters will exceed 10% of the Shares that all the Underwriters are
obligated to purchase on such Closing Date, and neither the
nondefaulting Underwriters nor the Company will make arrangements
pursuant to this Section 11 within the period stated for the purchase of
the Shares that the defaulting Underwriters agreed to purchase, this
Agreement will terminate with respect to the Shares to be purchased on
such Closing Date without liability on the part of any nondefaulting
Underwriter to the Company and without liability on the part of the
Company, except in both cases as provided in Sections 8 and 9. The
provisions of this Section 11 will not in any way affect the liability
of any defaulting Underwriter to the Company or the nondefaulting
Underwriters arising out of such default. A substitute underwriter
hereunder will become an Underwriter for all purposes of this Agreement.
-34-
<PAGE>
<PAGE>
12. Miscellaneous. (a) The respective agreements,
-------------
representations, warranties, indemnities and other statements of the
Company and of the Underwriters set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or
any of the officers, directors or controlling persons of the Company,
and will survive delivery of and payment for the Shares. The provisions
of Sections 8, 9 and 10 hereof shall survive the termination or
cancellation of this Agreement.
(b) This Agreement has been and is made for the benefit of
the Underwriters, the Company and the Selling Shareholders and their
respective successors and assigns, and, to the extent expressed herein,
for the benefit of persons controlling any of the Underwriters, or the
Company, and the directors and officers of the Company, and their
respective successors and assigns, and no other person will acquire or
have any right under or by virtue of this Agreement. The term
"successors and assigns" will not include any purchaser of Shares from
any Underwriter merely because of such purchase.
(c) All notices and communications hereunder will be in
writing and mailed or delivered or by telephone or telegraph if
subsequently confirmed in writing, (a) if to the Representatives, c/o
CIBC Oppenheimer Corp, CIBC Oppenheimer Tower, World Financial Center,
New York, New York 10281, Attention: Kevin Sweeney, (212) 667-5011,
with a copy to Cadwalader, Wickersham & Taft, 100 Maiden Lane, New York,
New York 10038, Attention: Brian Hoffmann, Esq., (212) 504-6383, (b) if
to the Company, to its agent for service as such agent's address appears
on the cover page of the Registration Statement with a copy to
Armstrong, Teasdale, LLP, One Metropolitan Square, Suite 2600, St.
Louis, Missouri 63102, Attention: John L. Gillis, Jr., Esq., (314) 342-
8007 and (c) if to the Selling Shareholders, to each of them c/o
Engineered Support Systems, Inc., 1270 North Price Road, St. Louis,
Missouri 63132.
(d) THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICT OF LAWS.
(e) This Agreement may be signed in any number of
counterparts, each of which will be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
-35-
<PAGE>
<PAGE>
DRAFT
Please confirm that the foregoing correctly sets forth the
agreement among us.
Very truly yours,
ENGINEERED SUPPORT SYSTEMS, INC.
By:_____________________________________
Name:
Title:
MICHAEL F. SHANAHAN SR. FIRST AMENDED
AND RESTATED REVOCABLE LIVING TRUST
By:_____________________________________
Name:
Title:
THE SHANAHAN FAMILY VOTING TRUST
By:_____________________________________
Name:
Title:
________________________________________
Gary C. Gerhardt
________________________________________
Ronald W. Davis
<PAGE>
<PAGE>
Confirmed:
CIBC OPPENHEIMER CORP.
A.G. EDWARDS & SONS, INC.
PAINE WEBBER INCORPORATED
PAULI JOHNSON CAPITAL & RESEARCH INCORPORATED
Acting severally on behalf of
themselves and as representative
of the several Underwriters named
in Schedule I annexed hereto.
CIBC OPPENHEIMER CORP.
By:____________________________________
Name:
Title:
A.G. EDWARDS & SONS, INC.
By:____________________________________
Name:
Title:
PAINE WEBBER INCORPORATED
By:____________________________________
Name:
Title:
PAULI JOHNSON CAPITAL & RESEARCH INCORPORATED
By:____________________________________
Name:
Title:
<PAGE>
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of Firm
Shares to be
Underwriter Purchased
------------- ----------------
CIBC Oppenheimer Corp.
A.G. Edwards & Sons, Inc.
Paine Webber Incorporated
Pauli Johnson Capital & Research
Incorporated
-------------------
2,200,000
<PAGE>
<PAGE>
SCHEDULE II
PART I. FIRM SHARES SELLING SHAREHOLDER
NUMBER OF FIRM
SHARES SELLING
SELLING SHAREHOLDER SHAREHOLDER SECURITIES
------------------- ----------------------
Michael F. Shanahan Sr. [ ]
First Amended and Restated
Revocable Living Trust
The Shanahan Family Voting [ ]
Trust
PART II. OPTION SHARES SELLING SHAREHOLDERS
NUMBER OF OPTION
SHARES SELLING
SELLING SHAREHOLDERS SHAREHOLDERS SECURITIES
-------------------- -----------------------
Michael F. Shanahan Sr. [ ]
First Amended and Restated
Revocable Living Trust
The Shanahan Family Voting [ ]
Trust
Ronald W. Davis 15,000
Gary C. Gerhardt 15,000
<PAGE>
[letterhead of Armstrong Teasdale LLP]
March 24, 1999
Engineered Support Systems, Inc.
1270 North Price Road
St. Louis, Missouri 63132
Re: Registration Statement on Form S-2 for up to 2,530,000 Shares of
----------------------------------------------------------------
Common Stock
------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-2 (the
"Registration Statement") filed by Engineered Support Systems, Inc., a
Missouri corporation (the "Company"), with the Securities and Exchange
Commission on March 9, 1999 (Registration No. 333-74135), as amended to
the date hereof, in connection with the registration under the Securities
Act of 1933, as amended, of up to an aggregate of 2,530,000 shares of the
Company's Common Stock, $0.01 par value per share (the "Common Stock"), of
which (i) 2,000,000 shares are being offered by the Company, (ii) 200,000
shares are being offered by an existing stockholder (the "Selling Stockholder")
and (iii) up to 330,000 additional shares may be offered by the Selling
Stockholder and two other stockholders pursuant to an over-allotment option
granted to the underwriters as set forth in the Registration Statement.
As your counsel, we have examined the Company's Articles of
Incorporation and Bylaws, each as amended to the date hereof, and the
records of corporate proceedings and other actions taken by the Company in
connection with the authorization, issuance and sale of the Common Stock.
Based upon the foregoing and in reliance thereon, we are of the opinion
that:
1. Subject to (i) compliance with applicable state securities laws
and (ii) receipt from the Securities and Exchange Commission of an order
declaring the Registration Statement effective, the 2,000,000 shares of
Common Stock to be sold by the Company, when issued and sold in the manner
described in the Registration Statement, will be legally issued, fully
paid and nonassessable;
2. The 200,000 shares of Common Stock to be sold by the Selling
Stockholder have been legally issued and are fully paid and nonassessable;
and
3. To the extent the underwriters' over-allotment option is
exercised, the up to 330,000 additional shares of Common Stock to be
sold by the Selling Stockholder and two other
<PAGE>
<PAGE>
Engineered Support Systems, Inc.
March 18, 1999
Page 2
stockholders pursuant to such option have been legally issued and are
fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name
under the caption "Legal Matters" in the Prospectus forming a part of said
Registration Statement.
Very truly yours,
/s/ ARMSTRONG TEASDALE LLP
ARMSTRONG TEASDALE LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-2 of our report dated December
4, 1998 relating to the consolidated financial statements of
Engineered Support Systems, Inc., and of our report dated July 10,
1998 relating to the financial statements of Keco Industries, Inc.,
which appear in such Prospectus. We also consent to the reference to
us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 23, 1999
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of
our report dated August 22, 1997, relating to the financial
statements of Nuclear Cooling, Inc., d/b/a Marlo Coil, as of June
30, 1997 and 1996, and for each of the two years in the period ended
June 30, 1997 (and to all references to our Firm), included in or made
a part of this registration statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
St. Louis, Missouri
March 24, 1999
