<PAGE>
<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-74135
2,200,000 SHARES
[LOGO]
ENGINEERED SUPPORT SYSTEMS, INC.
COMMON STOCK
$13.875 PER SHARE
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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 April 19, 1999, the last reported sale price of the
common stock on the Nasdaq National Market was $14.0625 per share.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Price to the public......................................... $13.875 $30,525,000
Underwriting discount....................................... 0.900 1,980,000
Proceeds to Engineered Support.............................. 12.975 25,950,000
Proceeds to the selling stockholder......................... 12.975 2,595,000
</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 April 20, 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
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<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>
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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 April 23, 1999 against
payment in immediately available funds.
3
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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
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<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
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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>
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<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
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<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 $1.05 and $1.01,
respectively, for the year ended October 31, 1998, and $0.24 and $0.23,
respectively, for the three months ended January 31, 1999. Such amounts
reflect the reduction of interest expense of $1,032,000 for the year ended
October 31, 1998 and $236,000 for the three months ended January 31, 1999,
net of taxes, and the issuance of 2,000,000 shares.
</TABLE>
7
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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
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* 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
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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 April 19, 1999).................... 17.44 13.44 --
</TABLE>
11
<PAGE>
<PAGE>
On April 19, 1999, the last reported sale price of our common stock
on the Nasdaq National Market was $14.0625 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 $25.5 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. 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 $55.0 million Restated and
Amended Credit Agreement dated as of March 17, 1998 between
Engineered Support and NationsBank, N.A. as Agent for several
lenders (the "Credit Agreement"). The interest rate on the term loan
is calculated, at our option, at either LIBOR plus an applicable
margin or at the prime rate less 0.5%. The margin applicable to
LIBOR varies from 0.5% to 1.5% based upon our ratio of total
indebtedness to earnings before interest, taxes, depreciation and
amortization (leverage ratio). The term loan bore interest at a rate
of 6.30938% per annum on January 31, 1999, is payable in monthly
installments of principal and periodic installments of interest, and
matures on May 1, 2003. Proceeds from the term loan were used to
finance a portion of the Marlo and Keco acquisitions.
DIVIDEND POLICY
We first paid a dividend on the common stock in fiscal 1995 and it
is the objective of our board of directors to continue to pay
dividends. The continuation of dividend payments, however, will be
at the discretion of our board of directors and will be dependent
upon our earnings, financial condition, and cash requirements and
any other factors deemed relevant by the board of directors, as well
as any applicable restrictions contained in our then existing credit
agreements.
CAPITALIZATION
The following table shows:
* The capitalization of Engineered Support on January 31, 1999.
* The capitalization of Engineered Support on January 31, 1999,
assuming the completion of the offering and the use of the net
proceeds as described under "Use of Proceeds."
<TABLE>
<CAPTION>
JANUARY 31, 1999
-----------------------------------
HISTORICAL AS ADJUSTED
---------- -----------
($ 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 $ 9,224
ESOP guaranteed bank loan.................................. 689 689
------- -------
Total long-term debt................................... 35,459 9,913
------- -------
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 36,756
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 57,183
------- -------
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 $1.05 and $1.01, respectively,
for the year ended October 31, 1998. Such amounts reflect the reduction
of interest expense of $1,032,000, 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
17
<PAGE>
<PAGE>
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.
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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 Leased
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....................................... 550,000
A.G. Edwards & Sons, Inc.................................... 550,000
PaineWebber Incorporated.................................... 550,000
Pauli Johnson Capital & Research Incorporated............... 550,000
---------
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 $0.48 per share. The underwriters may
also allow, and such dealers may reallow, a concession not in excess
of $0.10 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 $35,103,750, the total proceeds to
Engineered Support will be $25,950,000 and the total proceeds to the
selling stockholders will be $6,876,750. 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................................ $0.90 $1,800,000 $1,800,000
Selling Stockholders.............................. $0.90 $ 180,000 $ 477,000
---------- ----------
Total......................................... $1,980,000 $2,277,000
========== ==========
</TABLE>
<PAGE>
Engineered Support will pay all of the total expenses of the
offering, excluding the underwriting discount, which we estimate
will be approximately $400,000.
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
----------------
April 20, 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.
