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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the nine months ended July 31, 1999 Commission file number 0-13880
ENGINEERED SUPPORT SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Missouri 43-1313242
(State of Incorporation) (IRS Employer Identification Number)
1270 North Price Road, St. Louis, Missouri 63132
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (314) 993-5880
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
The number of shares of the Registrant's common stock, $.01 par
value, outstanding at August 31, 1999 was 6,888,958.
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ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of July 31, 1999
and October 31, 1998 3
Condensed Consolidated Statements of Income for the three
and nine months ended July 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the
three and nine months ended July 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II - Other Information
Items 1-6 15
Signatures 16
Exhibits 17
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<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
July 31 October 31
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 517,703 $ 5,773,529
Accounts receivable 13,171,407 14,036,184
Contracts in process and inventories 35,890,357 18,686,810
Other current assets 1,188,980 1,542,973
------------ -----------
Total Current Assets 50,768,447 40,039,496
Property, plant and equipment, less accumulated
depreciation of $15,798,755 and $13,895,326 27,630,023 25,064,982
Cost in excess of net assets acquired, less accumulated
amortization of $1,865,309 and $1,073,176 24,123,759 25,835,892
Other assets 1,141,934 1,219,852
------------ -----------
Total Assets $103,664,163 $92,160,222
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 6,700,000 $
Current maturities of long-term debt 7,954,160 7,204,172
Accounts payable 10,480,212 7,285,396
Other current liabilities 6,330,751 7,340,394
------------ -----------
Total Current Liabilities 31,465,123 21,829,962
Long-term debt 7,801,041 36,779,160
Deferred income taxes 2,659,699 2,659,699
ESOP guaranteed bank loan 615,000 725,700
Shareholders' Equity
Common stock, par value $01 per share; 10,000,000
shares authorized; 7,503,854 and 5,490,604
shares issued 75,039 54,906
Additional paid-in capital 37,032,274 11,082,278
Retained earnings 28,519,355 23,682,931
------------ -----------
65,626,668 34,820,115
Less ESOP guaranteed bank loan 651,000 725,700
Less treasury stock at cost, 614,896 and 638,702 shares 3,888,368 3,928,714
------------ -----------
61,123,300 30,165,701
------------ -----------
Total Liabilities and Shareholders' Equity $103,664,163 $92,160,222
============ ===========
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues $37,899,879 $24,927,269 $106,834,049 $64,177,114
Cost of revenues 30,634,928 19,047,032 85,276,876 49,344,649
----------- ----------- ------------ -----------
Gross profit 7,264,951 5,880,237 21,557,173 14,832,465
Selling, general and administrative
expense 3,915,821 3,035,326 11,691,849 8,094,497
----------- ----------- ------------ -----------
Income from operations 3,349,130 2,844,911 9,865,324 6,737,968
Interest expense (315,667) (523,837) (1,680,851) (975,414)
Interest income 11,202 88,918 102,619 232,553
Gain on sale of assets 62,491 118,700 151,125
----------- ----------- ------------ -----------
Income before income taxes 3,107,156 2,409,992 8,405,792 6,146,232
Income tax provision 1,240,000 963,000 3,358,000 2,456,000
----------- ----------- ------------ -----------
Net income $ 1,867,156 $ 1,446,992 $ 5,047,792 $ 3,690,232
=========== =========== ============ ===========
Basic earnings per share $.27 $.30 $.90 $.77
=========== =========== ============ ===========
Diluted earnings per share $.27 $.29 $.88 $.74
=========== =========== ============ ===========
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
July 31
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
From operating activities:
Net income $ 5,047,792 $ 3,690,232
Depreciation and amortization 2,670,345 1,906,899
Gain on sale of assets (118,700) (151,125)
------------ ------------
Cash provided (used) before changes in operating
assets and liabilities 7,599,437 5,446,006
Net (increase) decrease in non-cash current assets (1,300,302) (100,823)
Net increase (decrease) in non-cash current liabilities (2,584,505) (2,242,549)
(Increase) decrease in other assets 1,340,634 988,767
------------ ------------
Net cash provided by (used in) operating activities 5,055,264 4,091,401
------------ ------------
From investing activities:
Purchase of Marlo Coil, net of cash acquired (25,314,467)
Purchase of Keco Industries, net of cash acquired (22,731,913)
Purchase of McIntyre Engineering (1,367,192)
Purchase of Fermont, net of cash acquired (9,937,136)
Purchase of Bossier City division of Engineered
Products, Inc. (3,128,684)
Additions to property, plant and equipment (1,256,633) (1,116,706)
Proceeds from sale of property, plant and equipment 141,741 151,125
------------ ------------
Net cash provided by (used in) investing activities (14,180,712) (50,379,153)
------------ ------------
From financing activities:
Net borrowings (payments) under line-of-credit agreement 6,700,000 (1,075,961)
Payments of long-term debt (28,228,131) (1,267,706)
Proceeds of long-term debt 45,000,000
Net proceeds from issuance of common stock 25,550,000
Purchase of treasury stock (65,052) (495,652)
Exercise of stock options 124,172 689,108
Cash dividends (211,367) (132,646)
------------ ------------
Net cash provided by (used in) financing activities 3,869,622 42,717,143
------------ ------------
Net increase (decrease) in cash and cash equivalents (5,255,826) (3,570,609)
Cash and cash equivalents at beginning of period 5,773,529 8,313,160
------------ ------------
Cash and cash equivalents at end of period $ 517,703 $ 4,742,551
============ ============
See notes to condensed consolidated financial statements
</TABLE>
5
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ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 1999
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 and nine month periods ended July 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 and 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 computed 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 July 31, 1999
and 1998 is based on average basic common shares outstanding of
6,882,717 and 4,790,372, respectively. Diluted earnings per share for
the three months ended July 31, 1999 and 1998 is based on average
diluted common shares outstanding of 7,006,125 and 5,019,260,
respectively.
Basic earnings per share for the nine months ended July 31, 1999
and 1998 is based on average basic common shares outstanding of
5,601,799 and 4,766,985, respectively. Diluted earnings per share for
the nine months ended July 31, 1999 and 1998 is based on average diluted
common shares outstanding of 5,760,328 and 4,985,906, respectively.
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NOTE C - CONTRACTS IN PROCESS AND INVENTORIES
Contracts in process and inventories of Engineered Air Systems,
Inc., Keco Industries, Inc. and Engineered Electric 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. 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>
July 31, 1999 October 31, 1998
------------- ----------------
<S> <C> <C>
Raw materials $ 3,756,244 $ 4,578,766
Work-in-process 1,372,070 1,397,593
Finished goods 1,657,570 845,607
Inventories substantially applicable to
government contracts in process, less
progress payments of $12,015,456 and
$15,932,239 29,104,473 11,864,844
----------- -----------
$35,890,357 $18,686,810
=========== ===========
</TABLE>
NOTE D - ACQUISITIONS
Effective February 1, 1998, Engineered Coil Company, a wholly-
owned subsidiary of Engineered Support Systems, Inc., 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 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 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 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.) The fair value of the
assets acquired, including goodwill of $6.5 million, was $29.6 million
and liabilities assumed totaled $2.9 million. The purchase price was
financed with
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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.
On February 22, 1999, Engineered Electric Company, a wholly-owned
subsidiary of the Company, acquired substantially all of the net assets
of the Fermont division of Dynamics Corporation of America, a
manufacturer of electrical generator sets primarily for the Department
of Defense, for approximately $9.9 million. The fair value of assets
acquired was $14.7 million and liabilities assumed totaled $4.8 million.
The purchase price was financed with available cash resources and short-
term borrowings under the Company's revolving credit facility. The
operating results of Engineered Electric Company (Fermont) are included
in the Company's consolidated results of operations from the date of
acquisition.
Effective July 1, 1999, Engineered Specialty Plastics, Inc.,
a wholly-owned subsidiary of the Company, acquired the inventory, fixed
assets, existing operations and customer base of the Bossier City division
of Engineered Products, Inc. (Bossier City) for approximately $3.1 million.
The fair value of assets acquired was $3.1 million. The purchase price
was financed with short-term borrowings under the Company's revolving
credit facility. The operating results of Bossier City are included in the
Company's consolidated results of operations from the date of acquisition.
The following unaudited pro forma summary presents the combined
historical results of operations for the nine months ended July 31, 1999
and 1998 as adjusted to reflect the purchase transactions assuming the
acquisitions had occurred at November 1, 1997. 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.
<TABLE>
<CAPTION>
Nine Months Ended
July 31
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net revenues $119,398,743 $130,644,390
============ ============
Net income $ 5,438,619 $ 3,486,541
============ ============
Basic earnings per share $.97 $.73
============ ============
Diluted earnings per share $.94 $.70
============ ============
</TABLE>
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 Form 10-Q have been restated to reflect this stock split.
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NOTE F - PUBLIC OFFERING OF COMMON STOCK
On April 23, 1999, the Company issued an additional 2,000,000
shares of common stock through a public offering, resulting in net
proceeds of $25,550,000. A portion of the proceeds was used to repay
borrowings under the Company's line-of-credit agreement with the
remainder used to repay a portion of the Company's long-term debt.
Shares outstanding at July 31, 1999 and October 31, 1998 were
6,888,958 and 4,851,902, respectively.
NOTE G - SUBSEQUENT EVENT
On August 23, 1999, Engineered Systems and Electronics, Inc.,
a wholly-owned subsidiary of the Company, agreed to acquire the common
stock of Systems & Electronics Inc. (SEI), a manufacturer of military
support equipment including transport systems, aircraft loading
systems, fire control support systems and avionics test equipment,
from ESCO Electronics Corporation. This transaction is contingent upon
receiving government approval under the Hart Scott Rodino Act.
For the fiscal year ended September 30, 1998, SEI's revenues were
approximately $141 million and assets, which consist primarily of
manufacturing facilities and working capital, were approximately $86
million. The purchase price is $85 million subject to certain post-
closing adjustments. The purchase price will be financed, and
substantially all existing borrowings of the Company retired, with a
new $145 million senior debt facility. Further details of the
transaction will be provided in Form 8-K to be filed with the
Securities and Exchange Commission.
9
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ENGINEERED SUPPORT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Revenues. Net revenues increased 52.0% in the third quarter
of 1999 to $37.9 million from $24.9 million in the third quarter of
1998. Net revenues from military support and related industrial/
commercial equipment increased by $16.8 million to $34.3 million in
the third quarter of 1999 from $17.5 million in the third quarter of
1998. This increase was due to an additional $14.9 million of net
revenues generated by the acquisitions of Keco Industries, Inc.
(Keco) and of Fermont, as discussed in Note D of the July 31, 1999
condensed consolidated financial statements, and a $2.5 million
increase at Engineered Air as several contracts moved to full
production during the year. Net revenues from sales of custom molded
plastic products through Engineered Specialty Plastics, Inc. (ESP)
decreased $3.9 million to $3.6 million in the third quarter of 1999
from $7.4 million in the third quarter of 1998. This decrease was the
result of a decrease in orders from this subsidiary's most significant
customer, offset by $0.5 million of revenues generated by the Bossier
City operations acquired July 1, 1999.
Net revenues increased 66.5% in the first nine months of 1999 to
$106.8 million from $64.2 million in the first nine months of 1998.
Net revenues from military support and related industrial/commercial
equipment increased by $48.4 million to $92.8 million in the first
nine months of 1999 from $44.4 million in the comparable 1998 period.
This increase was due to an additional $48.6 million of net revenues
generated by the acquisitions of Marlo Coil, Keco and Fermont. Net
revenues from the sales of custom molded plastic products through ESP
decreased $5.8 million in the first nine months of 1999 compared to
the prior year period as a result of the decrease in orders described
above.
Gross Profit. Gross profit for the third quarter of 1999
increased 23.6% to $7.3 million (19.2% of net revenues) from $5.9
million (23.6% of net revenues) in the third quarter of 1998. Gross
profit for the first nine months of 1999 increased 45.3% to $21.6
million (20.2% of net revenues) from $14.8 million (23.1% of net
revenues) in the first nine months of 1998. The increases in gross
profit were primarily a result of the businesses acquired, net of a
volume-driven decrease in gross profit at ESP. The decreases in gross
margins were primarily due to lower gross margins generated by Keco
and Fermont as compared to those experienced by historical operations,
as well as to a gross margin decrease at ESP resulting from the lower
sales levels described above.
Selling, General and Administrative Expense. Selling, general
and administrative expense increased by $0.9 million to $3.9 million
(10.3% of net revenues) for the third quarter of 1999 from $3.0
million (12.2% of net revenues) for the third quarter of 1998.
Selling general and administrative expense increased by $3.6 million
to $11.7 million (10.9% of net revenues) for the first nine months of
1999 from $8.1 million (12.6% of net revenues) in 1998. These
increases were due to the addition of selling, general and
administrative expense generated by the businesses acquired.
Interest Expense and Interest Income. Net interest expense
increased by $0.1 million to $0.3 million for the third quarter of 1999.
Net interest expense increased $0.8 million to $1.6 million for the
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first nine months of 1999 as compared to the same period in 1998 as a
result of debt incurred in conjunction with the Marlo Coil, Keco and
Fermont acquisitions, as reduced by proceeds of the Company's public
offering of additional common stock effected April 23, 1999.
Income Tax Provision. The effective income tax rate was 39.9%
for the third quarter of 1999 and 40.0% for the third quarter of 1998.
The effective income tax rate for the first nine months of 1999 was
39.9% compared to 40.0% for the first nine months of 1998.
Net Income. As a result of the foregoing, net income of the
Company increased by 29.0% to $1.9 million (4.9% of net revenues) for
the third quarter of 1999 from $1.4 million (5.8% of net revenues) for
the third quarter of 1998, and increased by 36.8% to $5.0 million
(4.7% of net revenues) for the first nine months of 1999 from $3.7
million (5.7% of net revenues) for the first nine months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
In March 1998, the Company restated and amended its credit
facility to provide a $45.0 million term loan to finance the Marlo
Coil and Keco acquisitions and to provide a $10.0 million revolving
credit facility. (The revolving credit facility was subsequently
increased to $15.0 million as of April 13, 1999). Principal payments
on the term loan began September 1, 1998, with the final payment due
May 1, 2003. The Company 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
the Company's ratio of total indebtedness to earnings before interest,
taxes, depreciation and amortization (leverage ratio). Pursuant to
the terms of the restated and amended credit facility, the Company is
subject to various financial and operating covenants. Although the
Company is currently in compliance with all such covenants, the
failure of the Company 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 the debt
obligations of the Company.
On April 23, 1999, the Company issued an additional 2,000,000
shares of common stock through a public offering, resulting in net
proceeds of $25,550,000. A portion of the proceeds were used to repay
outstanding borrowings under the Company's revolving credit facility
with the remainder used to repay a portion of the Company's long-term
debt.
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The Company's primary sources of short-term financing are from
cost reimbursements received under contracts with the U.S. government
via receipt of progress payments, billings for delivered products and
bank borrowings under its revolving credit facility. On July 31,
1999, the Company's working capital and ratio of current assets to
current liabilities were $19.3 million and 1.61 to 1 as compared to
$18.2 million and 1.83 to 1, respectively, at October 31, 1998.
During 1998, the Company purchased Marlo Coil, net of cash acquired,
for $25.3 million and purchased Keco, net of cash acquired, for $24.1
million. During 1999, the Company purchased Fermont, net of cash
acquired, for $9.9 million and the Bossier City division of Engineered
Products, Inc. for $3.1 million. These acquisitions were financed with
term loan borrowings under the restated and amended credit facility
and with available cash resources. As discussed in Note G of the
July 31, 1999 condensed consolidated financial statements, the Company
is securing a new $145 million senior debt facility in order to
finance the acquisition of Systems & Electronics Inc. and to retire
substantially all existing borrowings of the Company.
The Company invested $1.3 million in property, plant and
equipment during the nine months ended July 31, 1999 and anticipates
that capital expenditures will not exceed $2.0 million for the year
ended October 31, 1999
BUSINESS AND MARKET CONSIDERATIONS
Approximately 77% of consolidated net revenues for the nine
months ended July 31, 1999 were directly or indirectly derived from
defense orders by the U.S. government and its agencies. As of July
31, 1999, the Company's combined backlog of defense orders at
Engineered Air, Keco, Fermont and Marlo Coil totaled $164.3 million,
with related government options of an additional $470.4 million.
Management continues to pursue potential acquisitions, primarily
of those companies providing strategic consolidation within the
defense industry.
YEAR 2000 READINESS DISCLOSURE
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.
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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 process 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 evaluated 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 Coil. 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 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
and may contact other significant suppliers we conclude present a
material Year 2000 risk. Of the suppliers responding, a significant
number have indicated that they consider themselves Year 2000
compliant. We anticipate Year 2000 compliance of our significant
suppliers by September 30, 1999 and may replace any such suppliers who
have failed to respond to surveys or who cannot provide reasonable
Year 2000 assurances.
Approximately 77% of our revenues come directly or indirectly
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 expend a total of approximately $300,000 on Year
2000 compliance, of which approximately $250,000 had been expended
through July 31, 1999.
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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 the 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. 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.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report includes
certain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. The forward-looking
statements involve certain risks and uncertainties, including, but not
limited to acquisitions, additional financing requirements, the
decision of any of the Company's key customers (including the U.S.
government) to reduce or terminate orders with the Company, cutbacks
in defense spending by the U.S. government, increased competition in
the Company's markets, the Company's ability to achieve and integrate
acquisitions and the impact of any Year 2000 problems, which could
cause the Company's actual results to differ materially from those
projected in, or inferred by, the forward-looking statements.
14
<PAGE>
<PAGE>
PART II
OTHER INFORMATION
Items 1-5 Not applicable.
Item 6 (a) Exhibits
11. Statement Re: Computation of Earnings Per Share
27. Statement Re: Financial Data Schedule
(b) No reports on Form 8-K were filed during the three
months ended July 31, 1999.
15
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ENGINEERED SUPPORT SYSTEMS, INC.
Date: September 14, 1999 By: Michael F. Shanahan Sr.
----------------------- -----------------------------------
Michael F. Shanahan Sr.
Chairman of the Board, President
and Chief Executive Officer
Date: September 14, 1999 By: Gary C. Gerhardt
----------------------- -----------------------------------
Gary C. Gerhardt
Executive Vice President and
Chief Financial Officer
16
<PAGE>
Exhibit 11
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET INCOME $1,867,156 $1,446,992 $5,047,792 $3,690,232
========== ========== ========== ==========
BASIC EARNINGS PER SHARE
Average basic shares outstanding 6,882,717 4,790,372 5,601,799 4,766,985
========== ========== ========== ==========
$.27 $.30 $.90 $.77
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Average basic shares outstanding 6,882,717 4,790,372 5,601,799 4,766,985
Net effect of dilutive stock options<F1> 123,408 228,888 158,529 218,921
---------- ---------- ---------- ----------
7,006,125 5,019,260 5,760,328 4,985,906
========== ========== ========== ==========
$.27 $.29 $.88 $.74
========== ========== ========== ==========
<FN>
<F1> Based on the treasury stock method.
Note: On June 26, 1998, the Company effected a 3-for-2 stock split in
the form of a 50% stock dividend. All share and per share amounts
included on this schedule reflect this stock split.
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FORM 10-Q FOR THE NINE MONTHS ENDED JULY 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 517,703
<SECURITIES> 0
<RECEIVABLES> 13,171,407
<ALLOWANCES> 106,991
<INVENTORY> 35,890,357
<CURRENT-ASSETS> 50,768,447
<PP&E> 43,428,778
<DEPRECIATION> 15,798,755
<TOTAL-ASSETS> 103,664,163
<CURRENT-LIABILITIES> 31,465,123
<BONDS> 8,416,041
<COMMON> 75,039
0
0
<OTHER-SE> 61,048,261
<TOTAL-LIABILITY-AND-EQUITY> 103,664,163
<SALES> 106,834,049
<TOTAL-REVENUES> 106,834,049
<CGS> 85,276,876
<TOTAL-COSTS> 85,276,876
<OTHER-EXPENSES> 11,621,318
<LOSS-PROVISION> (48,169)
<INTEREST-EXPENSE> 1,578,232
<INCOME-PRETAX> 8,405,792
<INCOME-TAX> 3,358,000
<INCOME-CONTINUING> 5,047,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,047,792
<EPS-BASIC> .90
<EPS-DILUTED> .88
</TABLE>
