<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended October 31, 1999 Commission file number 0-13880
ENGINEERED SUPPORT SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Missouri 43-1313242
(State of Incorporation) (IRS Employer Identification No.)
1270 North Price Road, St. Louis, Missouri 63132
(Address of principal executive officer) (Zip Code)
Registrant's telephone number including area code: (314) 993-5880
Securities registered pursuant to Section 12(b) of the Securities
Exchange Act of 1934:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common stock, $.01 par value Over the counter
National Market System
National Association of
Security Dealers
No securities are registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirement for the past 90 days.
Yes X No .
--- ---
Based on the closing price on January 17, 2000, the aggregate
market value of the voting stock held by non-affiliates of the
Registrant was approximately $78,358,000.
The number of shares of the Registrant's common stock, $.01 par
value, outstanding at January 17, 2000 was 6,897,958.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II incorporate by reference portions of the Engineered
Support Systems, Inc. Annual Report to Shareholders (the Annual Report)
for the year ended October 31, 1999. Part III incorporates by reference
portions of the Engineered Support Systems, Inc. Proxy Statement for the
Annual Shareholders Meeting to be held on March 7, 2000 (the Definitive
Proxy Statement) to be filed within 120 days after the close of the year
ended October 31, 1999.
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PART I
ITEM 1. BUSINESS
- ------- --------
Engineered Support Systems, Inc. is a holding company for six
wholly-owned subsidiaries: Systems & Electronics Inc. (SEI), Engineered
Air Systems, Inc. (Engineered Air), Keco Industries, Inc. (Keco),
Engineered Coil Company, d/b/a Marlo Coil (Marlo Coil), Engineered
Electric Company, d/b/a Fermont (Fermont) and Engineered Specialty
Plastics, Inc. (ESP). Engineered Support Systems, Inc. and its
subsidiaries (Company) are a leading designer and manufacturer of
military support equipment and electronics for the United States armed
forces. The Company also engineers and manufactures air handling and
heat transfer equipment, material handling equipment and custom molded
plastic products for commercial and industrial products.
Engineered Air was incorporated under the laws of the State of
Missouri on December 24, 1981, and acquired the assets of the Defense
Systems Division of Allis-Chalmers Corporation on March 30, 1982. The
Company was incorporated under the laws of the State of Missouri in
December 1983, and exchanged all of its outstanding common stock for
two-thirds of the common stock of Engineered Air held by the Company's
founders. The Company purchased the remaining one-third of the common
stock of Engineered Air in January 1984, effective as of November 1,
1983. The Company became a publicly owned corporation on August 21,
1985. On March 9, 1993, the Company purchased all of the outstanding
stock of Associated Products, Inc. (subsequently changed to Engineered
Specialty Plastics, Inc.). Effective February 1, 1998, Engineered Coil
Company acquired substantially all of the net assets of Nuclear Cooling,
Inc., d/b/a Marlo Coil. On June 24, 1998, the Company acquired all of
the outstanding common stock of Keco. On February 22, 1999, Engineered
Electric Company acquired substantially all of the net assets of the
Fermont Division of Dynamics Corporation of America, d/b/a Fermont. On
September 30, 1999, the Company, acquired all of the outstanding common
stock of Systems & Electronics Inc.
PRODUCTS
Products are manufactured by the Company within four operating
segments: heavy military support equipment, electronics and automation
systems, light military support and related industrial/commercial
equipment and custom molded plastic products. The heavy military
support equipment segment engineers and manufactures load management and
transport systems primarily for the U.S. Department of Defense (DoD).
Segment products include aircraft load management equipment, tank
transport systems and bridging systems. The electronics and automation
systems segment engineers and manufactures radar and electronic warfare
systems, fire support systems and avionics test equipment primarily for
the DoD. The segment also engineers and manufactures material handling
equipment primarily for the U.S. Postal Service and for the
pharmaceutical industry throughout the United States. The light
military support and related industrial/commercial equipment segment
engineers and manufactures a broad range of military support equipment
primarily for the DoD, as well as unrelated heat transfer and air
handling equipment for domestic commercial and industrial users.
Segment products include environmental control systems, petroleum and
water systems, chemical and biological defense systems and other
multipurpose military support equipment. The custom molded plastic
products segment manufactures a broad range of injection molded resin
products, as well as a proprietary line of plastic faucets, primarily
for commercial customers in the south-central United States.
See pages 7 through 12 and page 16 of the 1999 Annual Report which
are incorporated herein by reference.
2
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ENGINEERING AND DESIGN
The Company employs 447 people engaged in the design and
development of new products and the improvement of existing products.
The majority of these development activities are conducted pursuant to,
and funded by, DoD contracts in response to designated performance
specifications. However, with the acquisition of SEI, the Company
anticipates that it will perform substantially more research and
development at its own expense. The Company's expenditures on research
and development were approximately $0.2 million for the year ended
October 31, 1999, and were insignificant during the two-year period
ended October 31, 1998. The Company anticipates that unfunded internal
research and development will exceed $2.0 million in fiscal year 2000.
The Company believes that its engineering expertise gives it a
significant advantage over smaller competitors who do not have such
capabilities
The Company's engineering capabilities are in the areas of
systems, electro-mechanics, electro-chemical, mechanics, electrical
systems and electronics, and acoustics 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.
The Company's design and development of ground support equipment
is enhanced by computer-aided design and manufacturing (CAD/CAM) systems
used by engineers and draftsmen to design complex products and component
parts in three-dimensional view. The Company's engineering technologies
and expertise provide it with the ability to adapt its production
process to new product needs on a timely basis. The Company also has
the capability to provide complete technical data support for the
products it manufactures. This includes integrated logistics support,
spare parts provisioning and preparation of technical manuals.
MARKETING
The Company's marketing of military equipment focuses, in part, on
determining the current and future needs of the DoD for support
equipment. To identify those needs, the Company gathers information
from primary sources such as the DoD budget and its supporting
documents, and military requirement documents such as the Air Force's
Statement of Need, the Navy's Operational Requirements and the Army's
Required Operational Capability, along with direct interface with its
customers. The Company analyzes this data through an established new
business opportunity procedure and then determines whether or not to bid
on specific projects based upon determinations of potential
profitability and the likelihood of being awarded the contract.
For its defense products, the Company maintains a domestic field
marketing/sales network with offices located in the Washington, D.C.
area and at several major U.S. Government defense procurement centers.
The Washington, D.C. office carries out legislative activities, and
conducts customer liaison activities with all branches of the U.S. armed
services and with foreign government offices in the Washington, D.C.
area. The primary responsibility for individual products or programs is
handled within the product line organizations, with the field
organization providing closely coordinated assistance.
3
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In addition, the Company supplies electronic sorting and material
handling equipment to the U.S. Postal Service and other customers.
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, parts of Canada, and Puerto
Rico, with the pharmaceutical, telecommunications and healthcare
industries representing a significant portion of current 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. The Company's
sales of its proprietary line of kitchen and lavatory faucets are
effected primarily through sales representatives, and marketing efforts
focus on service and price.
PURCHASED COMPONENTS AND RAW MATERIALS
The Company's products require a wide variety of components and
materials. Although the Company has multiple sources of supply for most
of its material requirements, sole-source vendors supply certain
components, and the Company's ability to perform certain contracts
depends on their performance. In the past, these required raw materials
and various purchased components generally have been available in
sufficient quantities.
GOVERNMENT CONTRACTING
The Company's government contracts are obtained through the DoD
procurement process as governed by the Federal Acquisition Regulations
and related agency supplements, and are typically fixed-price contracts.
This means that the price is agreed upon before the contract is awarded
and the Company assumes complete responsibility for any difference
between estimated and actual costs.
Under the Truth in Negotiations Act of 1962 (Negotiations Act),
the U.S. government has the right for three years after final payment on
certain negotiated contracts, subcontracts and modifications thereto, to
determine whether the Company furnished the U.S. government with
complete, accurate and current cost or pricing data as defined by the
Negotiations Act. In the event the Company fails to satisfy this
requirement, the U.S. government has the right to adjust a contract or
subcontract price by the amount of any overstatement as defined by the
Negotiations Act.
U.S. government contracts typically contain terms permitting the
contract to be terminated at the convenience of the U.S. government. In
the event of such termination, the Company is entitled to reimbursement
for certain expenditures and overhead as provided for in applicable U.S.
government procurement regulations. Generally, this results in the
contractor being reasonably compensated for work actually done, but not
for anticipated profits. The U.S. government may also terminate
contracts for cause if the Company fails to perform in strict accordance
with contract terms. The Company has never had a contract terminated by
the U.S. government for failure to perform in accordance with contract
terms. Termination of, or elimination of appropriation for, a
significant government contract could have a material adverse effect on
the Company's business, financial condition and results of operations in
subsequent periods. 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, the
Company would be entitled to reimbursement of all allowable and
allocable costs incurred in making the change plus a reasonable profit.
4
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The U.S. government typically finances a substantial portion of
the Company's contract costs through progress payments. The Company
historically received progress payments in accordance with DoD 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 business provide
for payment based on costs actually paid at a rate that is 15% lower
than that paid to small businesses. The Company's recent acquisitions
have caused it to exceed certain thresholds relating to small business
qualification, and the Company will therefore qualify as a small
business only for specific government contracting purposes. The Company
is, however, reducing its emphasis on small business qualification for
purposes of future government work.
INTELLECTUAL PROPERTY
The Company owns various patents and other forms of intellectual
property. From time to time, the Company develops proprietary
information and trade secrets regarding the design and manufacture of
various products. The Company considers its proprietary information and
intellectual property to be valuable assets. However, the Company's
business is not materially dependent on their protection.
COMPETITION
The markets for all of the Company's products are highly competitive.
In order to obtain U.S. government contracts, the Company must comply
with detailed and complex procurement procedures adopted by the DoD
pursuant to regulations promulgated by the U.S. government. The regulations
and procurement procedures are adopted to promote competitive bidding.
In addition, the Company competes with a number of businesses with plastic
injection molding capabilities and competes with a large number of
suppliers to commercial and industrial air handling customers. In all
phases of its operations, the Company competes in both performance and
price with companies, some of which are considerably larger, more
diversified and have greater financial resources than the Company.
DEFENSE BACKLOG
The Company records its defense backlog as either funded backlog
or government options. The Company's funded backlog as of October 31,
1999 was approximately $277.2 million. The Company's 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 the Company. Government options include
products the government has the option to purchase under contract with
the Company, 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, the Company's estimate of the amount it expects the government
to purchase using the government's Best Estimated Quantity (BEQ) as a
guide where a BEQ 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 revenue for the Company. Moreover, cancellations of purchase
orders or reductions of product quantities in existing contracts could
substantially reduce the Company's funded backlog and, consequently,
future net revenues. Failure of the Company to replace canceled or
reduced backlog, whether funded backlog or government options, could
have a material adverse effect on the Company's business, financial
condition and results of operations in subsequent periods.
5
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The following table summarizes funded backlog and government
options on funded backlog (in millions) as of the indicated dates:
<TABLE>
<CAPTION>
Government Options
Funded Backlog On Funded Backlog
-------------- -----------------
<S> <C> <C>
October 31, 1999 $277.2 $850.5
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
</TABLE>
EMPLOYEES
As of October 31, 1999, the Company employed 2,510 persons, of
which 1,470 were engaged in manufacturing activities, 447 in engineering
activities, and 593 in office administration and management functions.
District No. 9 of the International Association of Machinists and
Aerospace Workers (AFL-CIO) represents approximately 427 employees under
a collective bargaining agreement, which expires February 13, 2000.
Although negotiations continue, the date of any new agreement with these
employees is uncertain at this time. Lodge 1012 of the International
Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers
and Helpers (AFL-CIO) represents approximately 126 employees under a
collective bargaining agreement, which expires January 31, 2002.
The Company considers its overall employee relations to be
satisfactory.
6
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ITEM 2. PROPERTIES
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The Company conducts its business from 12 manufacturing and office
facilities. All owned facilities are owned by the Company and are
subject to deeds of trust in favor of the Company's lender.
<TABLE>
<CAPTION>
Leased or
Location Description Size in Sq. Feet Owned
-------- ----------- ---------------- ---------
<S> <C> <C> <C>
St. Louis County, Manufacturing/Office 171,000 Owned
Missouri
St. Louis County, Manufacturing 31,000 Leased
Missouri
Hot Springs, Manufacturing/Office 110,000 Owned
Arkansas
Bossier City, Manufacturing 80,000 Owned
Louisiana
High Ridge, Manufacturing/Office 185,000 Owned
Missouri
Florence, Kentucky Manufacturing/Office 174,000 Leased
Blue Ash, Ohio Manufacturing 132,000 Owned
West Plains, Missouri Manufacturing 405,000 Owned
St. Louis County, Office 260,000 Owned
Missouri
Sanford, Florida Manufacturing 177,000 Owned
St. Louis County, Warehouse 25,000 Leased
Missouri
Bridgeport, Manufacturing/Office 109,000 Owned
Connecticut
</TABLE>
The Company believes that its current facilities are sufficient for
the conduct of its current level of operations.
ITEM 3. LEGAL PROCEEDINGS
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The Company and its subsidiaries are from time to time parties
to various other legal proceedings arising out of their business.
Management believes that there are no such other proceedings pending or
threatened against them which, if determined adversely, would have a
material adverse effect on the business or financial condition of the
Company.
7
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
- ------- -----------------------------------------------
There were no matters submitted to a vote of shareholders during
the fourth quarter of the year ended October 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
- ------- ----------------------------------------------------
SHAREHOLDER MATTERS
-------------------
Information concerning the principal market on which the Company's
common stock is traded and the high and low sales prices for such stock
during 1999 is shown in Supplemental Information on page 28 of the 1999
Annual Report, incorporated herein by reference. During 1995, the
Company initiated a semi-annual dividend program. The most recently
declared dividend was in the amount of $.018 per share payable January
31, 2000 to shareholders of record as of December 31, 1999.
ITEM 6. SELECTED FINANCIAL DATA
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Financial data required under this section is shown in the Summary
of Selected Financial Data on page 1 of the 1999 Annual Report,
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations, shown on pages 13 through 16 of the 1999 Annual
Report, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The following consolidated financial statements of Engineered
Support Systems, Inc. included in the Annual Report for the year ended
October 31, 1999 at the pages indicated, are incorporated herein by
reference:
Consolidated Balance Sheets, October 31, 1999 and 1998, page 17.
Consolidated Statements of Income, years ended October 31, 1999,
1998 and 1997, page 18.
Consolidated Statements of Shareholders' Equity, years ended
October 31, 1999, 1998 and 1997, page 18.
Consolidated Statements of Cash Flows, years ended October 31,
1999, 1998 and 1997, page 19.
Notes to Consolidated Financial Statements, pages 20 through 26.
The quarterly financial information included in Supplementary
Information on page 28 of the 1999 Annual Report is incorporated herein
by reference.
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements
or the notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------- -----------------------------------------------------------
AND FINANCIAL DISCLOSURES
-------------------------
None.
8
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The directors, executive officers and key employees of the Company
as of January 17, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Michael F. Shanahan Sr. <F1> 60 Chairman, Chief Executive Officer and
Director (Company)
Gerald A. Potthoff 59 President, Chief Operating Officer and
Director (Company)
Gary C. Gerhardt 54 Vice Chairman-Administration,
Chief Financial Officer and Director
(Company)
R. Bruce Earls 53 Director (Company) and
President and Chief Executive Officer (Marlo Coil)
John J. Wichlenski 56 Director (Company) and President and
Chief Executive Officer
(Engineered Air)
MG George E. Friel <F2><F3> 57 Director (Company)
Thomas J. Guilfoil <F1> 80 Director (Company)
LTG Kenneth E. Lewi <F2><F3> 69 Director (Company)
Michael F. Shanahan Jr. <F1><F2><F3> 33 Director (Company)
Earl E. Walker 79 Director (Company)
Earl W. Wims <F1><F2> 60 Director (Company)
Ronald W. Davis 53 Vice President-Planning and
Development (Company)
Steven J. Landmann 40 Vice President-Controller
(Company)
David D. Mattern 41 Secretary and General Counsel
(Company)
John E. Capeless 54 President and Chief Executive Officer
(ESP)
Daniel A. Rodrigues 44 Senior Vice President and
General Manager (SEI)
9
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Thomas C. Santoro 46 President and Chief Executive Officer
(Fermont)
Marvin L. Smith 62 President and Chief Executive Officer
(Keco)
<FN>
<F1> Member of Executive Committee of the Board
<F2> Member of Audit Committee of the Board
<F3> Member of Compensation Committee of the Board
</TABLE>
EXECUTIVE OFFICERS
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The officers serve at the discretion of the Board of Directors,
subject to the terms and conditions of their employment agreements.
Michael F. Shanahan Sr. has been a director of the Company since
its formation. Mr. Shanahan was named Chief Executive Officer of the
Company in 1985. He was named Chairman of the Company in 1987.
Gerald A. Potthoff was appointed as a director in October 1999.
At the same time, he was named President and Chief Operating Officer
of the Company. Mr. Potthoff has served as President of Systems &
Electronics Inc. since October 1991.
Gary C. Gerhardt has been a director of the Company since March
1998. He was named Vice Chairman-Administration of the Company in
October 1999 and prior thereto served as Executive Vice President of the
Company since 1994. He has been Chief Financial Officer of the Company
since 1994. Mr. Gerhardt joined Engineered Air in 1982 as Manager of
Contract Administration.
R. Bruce Earls has been a director of the Company since March
1998. He has been President and Chief Executive Officer of Marlo Coil
since 1994. Prior thereto, he was Managing Partner of a KPMG Peat
Marwick Business Unit.
John J. Wichlenski has been a director of the Company since 1992.
He has been President and Chief Executive Officer of Engineered Air
since 1992. Mr. Wichlenski joined Engineered Air as Vice President
of Engineering in 1986.
Ronald W. Davis has been Vice President-Planning and Development
of the Company since December 1999. Prior thereto, he served as Vice
President-Marketing for the Company since April 1999 and for Engineered
Air since 1990. Mr. Davis joined Engineered Air in 1983.
Steven J. Landmann has been Vice President-Controller of the
Company since December 1999. Prior thereto, he served as Controller
for the Company since September 1998 and for Engineered Air since 1994.
Mr. Landmann joined Engineered Air in 1988.
David D. Mattern was appointed Secretary and General Counsel of
the Company in December 1999. Prior thereto, he served as the Company's
Secretary since 1992 and as outside counsel to the Company.
John E. Capeless has been President and Chief Executive Officer of
ESP since April 1999. Prior thereto, he served as Vice President and
General Manager of ESP since 1996. Before joining ESP, he was Vice
President of Operations for Atlantis Plastics, Inc. from 1994. Mr.
Capeless served as Director of Manufacturing for Frem Corporation from
1989 to 1994.
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Daniel A. Rodriques has been Senior Vice President and General
Manager of Systems & Electronics Inc. since July 1999. Prior thereto,
he served as SEI's Vice President of Program Administration since
October 1995. Mr. Rodriques joined SEI in 1977.
Thomas C. Santoro has been President and Chief Executive Officer
of Fermont since February 1995. Prior thereto, he served as Fermont's
Executive Vice President since 1993. Mr. Santoro joined Fermont as
Director of Finance in 1989.
Marvin L. Smith has been President and Chief Executive Officer of
Keco since April 1999. Prior thereto, he served as Keco's Executive
Vice President since 1990. Mr. Smith joined Keco in 1988 as Vice
President of Operations.
11
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NON-EMPLOYEE DIRECTORS
- ----------------------
MG George E. Friel (U.S. Army, Retired) has been a director of the
Company since September 1998. He retired from the U.S. Army in July
1998 after 38 years of service. In the six years preceding his
retirement, he headed the U.S. Army Chemical and Biological Defense
Command (CBDCOM).
Thomas J. Guilfoil has been a director of the Company since 1993.
He is the senior and founding partner of the St. Louis law firm of
Guilfoil, Petzall & Shoemake and serves as Vice Chairman of the Arizona
Football Cardinals. His legal career began in St. Louis in 1941.
LTG Kenneth E. Lewi (U.S. Army, Retired) has been a director of
the Company since 1990. He retired from the U.S. Army in August 1989
after 34 years of service. 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 of the Company since
1994. He has been a Producer for Lockton Companies, an insurance
concern, since 1994. Prior thereto he served as Assistant to the
Chairman of the Board of the Company since 1991. He joined Engineered
Air in 1990 as Marketing Representative.
Earl E. Walker has been a director of the Company since 1996.
He has been the President and principal shareholder of Carr Lane
Manufacturing since founding it in 1952.
Earl W. Wims has been a director of the Company since 1991.
He has been Chairman of Marketing Horizons, a marketing research and
consulting firm, since 1986.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
Information concerning executive compensation is shown in the
Company's Definitive Proxy Statement (to be filed within 120 days after
the close of the fiscal year ended October 31, 1999) incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT
----------
Information relating to the ownership of the Company's securities
by certain beneficial owners and management is shown in the Definitive
Proxy Statement (to be filed within 120 days after the close of the
year ended October 31, 1999) incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
Information on certain relationships, related transactions and
affiliation of directors is shown in the Definitive Proxy Statement (to
be filed within 120 days after the close of the year ended October 31,
1999) incorporated herein by reference.
12
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
- -------- --------------------------------------------------------
FORM 8-K
--------
(a) (1) and (2) Index of Financial Statements and Financial Statement
Schedules
The following consolidated financial statements of Engineered
Support Systems, Inc., included in the 1999 Annual Report of the
registrant to its shareholders, are incorporated by reference in Item 8:
Report of Independent Accountants
Consolidated Balance Sheets-October 31, 1999 and 1998
Consolidated Statements of Income-years ended October 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity-years ended
October 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows-years ended October 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements-October 31, 1999
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
3.0 Lists of Exhibits (listed by numbers corresponding to
exhibit table of Item 601 in regulation S-K)
3.1 Articles of Incorporation of Engineered Support Systems,
Inc. <F1>
3.2 Amendment of Articles of Incorporation <F2>
3.3 Amended and Restated By-Laws of Engineered Support Systems,
Inc. <F2>
4.1 Credit Agreement dated as of September 30, 1999 among
Engineered Support Systems, Inc., Bank of America, National
Association, as Agent and as Swing Line Lender, and the
Other Financial Institutions Party Hereto <F9>
4.2 Engineered Support Systems, Inc. 1992 Stock Option Plan for
Nonemployee Directors <F4>
4.3 Engineered Support Systems, Inc. 1993 Stock Option Plan <F6>
4.4 Engineered Support Systems, Inc. 1997 Stock Option Plan for
Nonemployee Directors <F7>
4.5 Engineered Support Systems, Inc. 1998 Stock Option Plan <F10>
4.6 Engineered Air Systems, Inc. Employee Stock Ownership Plan,
subsequently renamed the Engineered Support Systems, Inc.
Employee Stock Ownership Plan <F5>
4.7 Trust Agreement for the Engineered Air Systems, Inc.
Employee Stock Ownership Trust <F5>
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10.1 Employee Agreement with Michael F. Shanahan Sr. <F3>
10.2 Form of Indemnification Agreement with Directors <F2>
10.3 Engineered Support Systems, Inc. Amended and Restated
Executive Incentive Plan <F8>
11 Statement Re: Computation of Earnings Per Share
13 Engineered Support Systems, Inc. Annual Report for the year
ended October 31, 1999 (the Annual Report). Except for the
portions incorporated herein by reference as evidenced in
the Form 10-K, the Annual Report is furnished for the
information of the Securities and Exchange Commission and is
not deemed filed as part of this 10-K
21 Subsidiary of Registrant <F1>
23 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
27 Statement Re: Financial Data Schedule
14
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<F1> This information is incorporated herein by reference from
Form S-1 Registration Statement filed on July 10, 1985,
registration number 2-98909 as amended on August 13, 1985
and August 21, 1985.
<F2> This information is incorporated herein by reference from
Form 10-K Annual Report filed on January 30, 1989.
<F3> This information is incorporated herein by reference from
Form 10-K Annual Report filed on January 29, 1990.
<F4> This information is incorporated herein by reference from
Form S-8 registration statement, effective April 5, 1994,
registration number 33-77340.
<F5> This information is incorporated herein by reference from
Form S-8 registration statement, effective June 11, 1987,
registration number 33-14504.
<F6> This information is incorporated herein by reference from
Form S-8 registration statement, effective April 5, 1994,
registration number 33-77342.
<F7> This information is incorporated herein by reference from
Form S-8 registration statement, effective May 23, 1997,
registration number 333-27695.
<F8> This information is incorporated herein by reference from
Form 10-K Annual Report filed on January 27, 1996.
<F9> This information is incorporated herein by reference from
Form 8-K/A filed on December 14, 1999.
<F10> This information is incorporated herein by reference from
Form S-8 registration statement, effective May 15, 1998,
registration number 333-52753.
(b) During the fourth quarter of 1999, the Company filed one report on
Form 8-K. This filing was with regard to the acquisition by the
Company on September 30, 1999 of the outstanding stock of Systems
& Electronics Inc. This initial filing was amended on Form 8-K/A
dated December 14, 1999.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this Report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this Report.
15
<PAGE>
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
annual report to be signed on its behalf by the undersigned thereunto
duly authorized.
ENGINEERED SUPPORT SYSTEMS, INC.
--------------------------------
Dated: January 17, 2000 By: /s/ Gary C. Gerhardt
----------------------- ---------------------------------
GARY C. GERHARDT
Vice Chairman-Administration
and Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael F. Shanahan Sr. Chairman of the Board January 17, 2000
- ------------------------------- of Directors and ----------------
MICHAEL F. SHANAHAN SR. Chief Executive Officer
/s/ Gary C. Gerhardt Vice Chairman-Administration and January 17, 2000
- ------------------------------- Chief Financial Officer ----------------
GARY C. GERHARDT
</TABLE>
16
<PAGE>
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
DIRECTORS
---------
<S> <C> <C> <C>
/s/ Michael F. Shanahan Sr. January 17, 2000 /s/ Thomas J. Guilfoil January 17, 2000
- ----------------------------- ---------------- ---------------------------- ----------------
MICHAEL F. SHANAHAN SR. THOMAS J. GUILFOIL
/s/ Gerald A. Potthoff January 17, 2000 /s/ Kenneth E. Lewi January 17, 2000
- ----------------------------- ---------------- ---------------------------- ----------------
GERALD A. POTTHOFF KENNETH E. LEWI
/s/ Gary C. Gerhardt January 17, 2000 /s/ Michael F. Shanahan Jr. January 17, 2000
- ----------------------------- ---------------- ---------------------------- ----------------
GARY C. GERHARDT MICHAEL F. SHANAHAN JR.
/s/ R. Bruce Earls January 17, 2000 /s/ Earl E. Walker January 17, 2000
- ----------------------------- ---------------- ---------------------------- ----------------
R. BRUCE EARLS EARL E. WALKER
/s/ John J. Wichlenski January 17, 2000 /s/ Earl W. Wims January 17, 2000
- ----------------------------- ---------------- ---------------------------- ----------------
JOHN J. WICHLENSKI EARL W. WIMS
/s/ George E. Friel January 17, 2000
- ----------------------------- ----------------
GEORGE E. FRIEL
</TABLE>
17
<PAGE>
<PAGE>
ENGINEERED SUPPORT SYSTEMS, INC.
EXHIBIT INDEX
Page No.
--------
11. Statement Re: Computation of Earnings Per Share
13. Engineered Support Systems, Inc. Annual Report for year ended
October 31, 1999 (the Annual Report). Except for the portions
incorporated herein by reference as evidenced in the Form 10-K,
the Annual Report is furnished for the information of the
Securities and Exchange Commission and is not deemed filed as
part of this Form 10-K.
23. Consent of PricewaterhouseCoopers LLP, Independent Accountants
27. Statement Re: Financial Data Schedule
18
<PAGE>
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Year Ended
----------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME $7,309,291 $5,789,381 $4,638,946
========== ========== ==========
BASIC EARNINGS PER SHARE
Average basic shares outstanding 5,926,234 4,785,335 4,753,265
========== ========== ==========
Net income $1.23 $1.21 $0.98
===== ===== =====
DILUTED EARNINGS PER SHARE
Average basic shares outstanding 5,926,234 4,785,335 4,753,265
Net effect of dilutive stock options<F1> 155,410 206,118 201,522
---------- ---------- ----------
Average diluted shares outstanding 6,081,644 4,991,453 4,954,787
========== ========== ==========
Net income $1.20 $1.16 $0.94
===== ===== =====
<FN>
<F1> Based on the treasury stock method
</TABLE>
NOTE: On June 26, 1998, the Company effected a 3-for-2 stock split in
the form of a 50% stock dividend. All share and per share amounts
included on this schedule reflect this stock split.
<PAGE>
Engineered Support Systems, Inc.
1999 ANNUAL REPORT
<PAGE>
<PAGE>
CONTENTS
Financial Highlights 1
Letter to Shareholders 2
ESSI at a Glance 4
Overview of Military Marketplace 6
Military Products 7
Commercial/Industrial Products 12
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 13
Consolidated Financial Statements 17
Notes to Consolidated Financial
Statements 20
Report of Independent Accountants 27
Supplemental Information 28
Directors and Officers Inside Back Cover
ABOUT THE COVER
The radar screen symbolizes the company's
continuing, aggressive search for strategic
growth prospects through complementary
acquisitions as well as the recognition of
tactical consolidation opportunities within
its core business.
<< TUNNER 60K AIRCRAFT CARGO
LOADER/TRANSPORTER
[PHOTO]
<PAGE>
<PAGE>
Engineered Support Systems, Inc. is expanding
its presence in the military support industry as
a result of four strategic acquisitions within the
past two years. The company is positioned to
capitalize on positive shifts in U.S. military strategy
and Department of Defense procurement policy.
<TABLE>
FINANCIAL HIGHLIGHTS >>
<CAPTION>
In thousands, except for per share data
- --------------------------------------------------------------------------------------------------------------
Year Ended October 31 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Net revenues $165,256 $96,973 $88,571 $81,507 $65,533
Gross profit 31,879 22,630 14,755 12,414 10,745
Income from operations 14,656 10,242 7,668 5,936 5,016
Net income 7,309 5,789 4,639 3,314 2,473
Earnings per share (diluted) $ 1.20 $ 1.16 $ .94 $ .68 $ .51
Weighted shares outstanding (diluted) 6,082 4,991 4,955 4,880 4,896
- --------------------------------------------------------------------------------------------------------------
Financial Position:
Working capital $ 14,305 $18,210 $11,560 $ 8,354 $ 4,700
Total assets 239,396 92,160 37,084 34,092 33,792
Long-term debt and ESOP bank loan 80,653 37,505 2,068 2,959 3,924
Shareholders' equity 63,422 30,166 23,726 19,251 15,217
- --------------------------------------------------------------------------------------------------------------
Backlog of Defense Orders:
Funded backlog $277,156 $80,801 $44,114 $90,722 $90,385
Government options on funded backlog 850,479 319,575 155,039 153,795 100,172
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Net Revenues
in millions
[GRAPH]
Operating Income
in millions
[GRAPH]
Diluted Earnings Per Share
[GRAPH]
Funded Backlog
in millions
[GRAPH]
Total Backlog
in millions
[GRAPH]
1
<PAGE>
<PAGE>
To Our Shareholders:
>> In fiscal 1999, following our plan of tactical consolidation and
strategic growth, Engineered Support Systems achieved record profits
and put in place the operational structure for greatly expanded
revenues and earnings in the future.
<FACT>
Annualized revenues
of more than $350
million for 2000.
<FACT>
Total backlog
of $1.1 billion -
almost three times
greater than 1998.
For the year ended October 31, 1999, the company reported record
revenues of $165.3 million, an increase of 70 percent compared with
revenues of $97.0 million the previous year. Net income for the year
reached a record $7.3 million, or $1.20 per diluted common share, a 26
percent increase over net income of $5.8 million, or $1.16 per diluted
share, the year before. The current year earnings per share level
reflects the issuance through a public stock offering of an additional 2
million common shares in April of this year. Our consistent progress is
clearly reflected in a five-year compounded growth rate of 24 percent
for net revenues and 57 percent for net income.
Reinforcing this pattern of steady growth, our acquisition and
consolidation strategy has positioned the company for exceptional
results. In the 20-month period from February 1998 to September 1999, we
successfully completed four significant acquisitions, as well as several
smaller acquisitions. As a result, Engineered Support Systems has
greatly strengthened its position as a leading military supplier, while
increasing annualized revenues to more than $350 million and employment
to 2,500 people at 10 facilities with a combined total of nearly 2
million square feet.
In February 1999, we acquired the Fermont Division of Dynamics
Corporation of America for $10.1 million. Fermont is a leading supplier
of electric generator sets to the military, producing more than 100
different types ranging in size from 3 kilowatts to 1 megawatt. Then, in
September 1999, we added Systems & Electronics Inc. (SEI), the defense
subsidiary of ESCO Electronics Corporation, in an $81.7 million
acquisition. With roots reaching back more than 75 years, they are a
leading manufacturer of military support equipment including high-
technology aircraft cargo loading and heavy transportation systems,
fire-control support systems and avionics test equipment, as well as
commercial electronic and material handling equipment. With more than 80
percent of revenues derived from defense contracts, this acquisition
significantly strengthens our position and product line within the
military support industry.
Acquisition and Consolidation Strategy >>
These key acquisitions are part of a long-range strategy designed to
grow the company and build shareholder value by consolidating second-
and third-tier defense companies. This rationale is supported by trends
in Department of Defense (DoD) procurement policy and higher defense
spending levels. Thus, it enables us to acquire competitors and other
attractive companies in the military support industry. Entrepreneurial
by nature and design, we can react quickly and decisively to
opportunities as they emerge. And, importantly, we have the financial
capacity to continue this growth strategy.
The acquired companies deliver a number of substantial benefits:
extended or complementary product lines, new market opportunities,
broadened skills, experienced management, leading positions in product
categories, increased overall capabilities and expanded facilities. In
addition to the operational synergies achieved and
[PHOTO] [PHOTO] [PHOTO]
2
<PAGE>
<PAGE>
the cost savings derived by eliminating duplicate marketing, procurement
and administrative functions, we gain enormous potential for
collaboration and cross-fertilization. As an example, this year three of
our defense subsidiaries jointly bid and won a military contract to
develop a shipboard water purification system. Our ongoing strategy to
grow our company through the acquisition of value-added, technologically
differentiated products leads to greater customer satisfaction and the
opportunity for further business expansion.
We have employed several alternatives to help finance our continuing
growth strategy. As mentioned previously, in April 1999, we successfully
completed a follow-on public offering of 2 million shares of common
stock; net proceeds of $25.6 million were used to repay debt and to
provide flexibility to pursue opportunities like Systems & Electronics.
A $145 million senior debt facility in September 1999 was used to
finance that acquisition, to retire existing borrowings, and to fund
future growth.
In our previous acquisitions, management attention was appropriately
focused on primarily generating revenues and profits rather than
integrating back-office operations. As we more than doubled the size of
our company in terms of revenues, backlog, facilities and personnel with
the SEI acquisition, a comprehensive initiative is currently focused on
the tactical consolidation of all company-wide defense operations.
Transition teams involving members from each of our defense subsidiaries
have been formed for all major functional areas of the company including
program management, engineering, procurement, accounting and information
systems amongst others. These teams are charged with the identification
and deployment of synergy and leverage opportunities within the company.
Our management team will act quickly and decisively to improve the
structure, efficiency and profitability of our organization with an eye
on the long-term horizon.
Future Outlook >>
Today, Engineered Support Systems is solidly positioned for continued
growth - and this momentum is increasingly being recognized throughout
the investment community. In its November 1, 1999, issue, Forbes
magazine named the company to its annual listing of "America's 200 Best
Small Companies" - ranking No. 91 overall on the basis of profitability,
growth, sales, net income and market value. Our analyst research
coverage markedly increased as well in 1999 with several well-known
brokerage houses following our stock.
As you will read later in this report, major trends in military
procurement policy and a transformation of U.S. defense strategy greatly
favor the company and offer enormous growth opportunities in revenues
and earnings.
We realized a substantial year-end funded backlog of defense contracts -
three and a half times larger than the prior year. Including production
options on existing defense contracts, our backlog totaled $1.1 billion
at year-end. As existing products mature and contracts move from their
initial stages to full production, we will generate an acceleration of
cash flow.
We also will continue our aggressive acquisition strategy, exploring
opportunities to add solid companies to our roster of respected military
manufacturers. In order to meet the criteria of our strategy, an
acquisition candidate must be immediately accretive to earnings and
provide long-term value to our shareholders.
Just prior to year-end, we established the Office of the Chairman in an
effort to enhance the scope and capabilities of our executive leadership
team. Joining me in this capacity are Jerry Potthoff, newly named
president and chief operating officer of the company; Gary Gerhardt, who
has been promoted to vice chairman-administration and chief financial
officer; and Ron Davis, vice president-planning and development. Jerry
was formerly president and chief operating officer of SEI; Gary has been
with the company 17 years and most recently served as executive vice
president and chief financial officer; and Ron has served in a variety
of sales and marketing capacities with the company over the past 16
years. With their able leadership, I look forward to continued progress
for our company, particularly on the business consolidation and
integration fronts.
On behalf of Engineered Support Systems' management, directors and
employees throughout the country, we thank you for your continued
confidence and support. Together, we anticipate even greater success
ahead.
/s/ Michael F. Shanahan, Sr.
Michael F. Shanahan, Sr.
Chairman of the Board and
Chief Executive Officer
<FACT>
The $25.6 million
raised in a follow-
on stock offering
and $145 million
debt refinancing
provide greater
flexibility to
pursue additional
acquisitions.
<FACT>
Named No. 91
on Forbes list
of "America's
200 Best Small
Companies"
for 1999.
3
<PAGE>
<PAGE>
ESSI at a Glance ----------- >>
<TABLE>
<CAPTION>
COMPANY DESCRIPTION
<C> <S>
[Systems & Electronics Inc. LOGO] Systems & Electronics Inc. is a leading designer
and manufacturer of military support equipment
including aircraft loading systems, heavy
transport systems, fire-control support systems,
radar systems, specialized avionics testing
equipment and material handling equipment. It
comprises the heavy military support
and electronics and automation business
segments.
[ENGINEERED AIR SYSTEMS, INC. LOGO] Engineered Air Systems, Inc. designs and
manufactures a wide range of military support
equipment including nuclear/biological/chemical
defense systems, environmental control systems,
water storage, purification and distribution
equipment, petroleum testing labs, containers
and general support equipment. It operates in
the light military support and related
commercial/industrial business segment.
[Keco LOGO] Keco Industries, Inc. is a major producer of
military support equipment including
environmental control systems, water
purification systems, refrigeration equipment,
containers and general military support
equipment. It operates in the light military
support and related commercial/industrial
business segment.
[Marlo LOGO] Engineered Coil/Marlo Coil is a leading designer
and manufacturer of custom engineered coils,
refrigeration and air handling equipment - and
is the largest supplier of marine coils, air-
handling units, product coolers and
refrigeration plants to the U.S. Navy. It
operates in the light military support and
related commercial/industrial business segment.
[Fermont LOGO] Engineered Electric/Fermont is a leading
supplier of military generator sets and power
systems in more than 100 different types, with
outputs ranging from 3 kilowatts to 1 megawatt.
It operates in the light military support and
related commercial/industrial business segment.
[Engineered Specialty Plastics LOGO] Engineered Specialty Plastics, Inc. is a
manufacturer of injection molded plastic
products and a proprietary line of plastic
faucets. It comprises the custom molded plastic
products business segment.
</TABLE>
4
<PAGE>
<PAGE>
Through several recent acquisitions focused on the value-added
differentiation of its product lines, Engineered Support Systems
has become a leading designer and manufacturer of military support
equipment for America's armed forces, as well as a range of
specialized commercial and industrial equipment and products. [ESSI LOGO]
COMPANY
Systems & Electronics Inc.
FACILITIES AND MARKETS
Facilities: Manufacturing, engineering, testing and administrative facilities in
St. Louis and West Plains, Missouri, and Sanford, Florida, total 842,000 square
feet with a work force of 1,500.
Markets: U.S. military, U.S. Postal Service, pharmaceutical industry.
1999 MILESTONES
* Acquired for $81.7 million on September 30, 1999 from ESCO Electronics
Corporation.
* Adds over $500 million, including options, to total year-end defense contract
backlog.
* Tunner 60K Aircraft Cargo Loader/Transporter contract in full scale
production.
* Provides significant capability in heavy military support equipment and
electronics and automation systems business lines.
COMPANY
Engineered Air Systems, Inc.
FACILITIES AND MARKETS
Facilities: Manufacturing, engineering, testing and administrative facilities in
St. Louis, Missouri, encompass 196,000 square feet with a work force of 200.
Markets: U.S. military.
1999 MILESTONES
* Acquired technical data and tooling for Large Aircraft Start System (LASS)
pneumatic power unit from competitor, Libby Corporation.
* Awarded $10.1 million LASS contract for U.S. Air Force.
* Options exercised for Chemical and Biological Protected Shelter Systems
(CBPSS) totaling $27.8 million by U.S. Army.
COMPANY
Keco Industries, Inc.
FACILITIES AND MARKETS
Facilities: Manufacturing, engineering, testing and administrative facilities in
Florence, Kentucky, and Blue Ash, Ohio, comprise 306,000 square feet with a work
force of 300.
Markets: U.S. military.
1999 MILESTONES
* Production options exercised for $22.9 million on Field Deployable
Environmental Control Units (FDECU) by U.S. Air Force.
* FDECU moved from design phase to full-scale production.
COMPANY
Engineered Coil/Marlo Coil
FACILITIES AND MARKETS
Facilities: Manufacturing, engineering, testing and administrative facilities in
High Ridge, Missouri, total 185,000 square feet with a work force of 200.
Markets: U.S. military, food processing, healthcare, semiconductor and
pharmaceutical industries.
1999 MILESTONES
* Awarded $17.7 million contract for Reverse Osmosis Desalinization Unit (RODU)
for U.S. Navy's LPD-17 assault ship program.
* Received award for cooling and fan coil contract for LPD-17 program totaling
$29.2 million.
COMPANY
Engineered Electric/Fermont
FACILITIES AND MARKETS
Facilities: Manufacturing, engineering, testing and administrative facilities in
Bridgeport, Connecticut, cover 109,000 square feet and employ a work force of
150.
Markets: U.S. military, government agencies including FEMA and FAA.
1999 MILESTONES
* Net assets acquired from Dynamics Corporation of America in February 1999 for
$10.1 million.
* Broadened company's product offerings to DoD to include electrical generator
sets - a $150 million annual market to the U.S. military.
* Options exercised for $11.1 million on Tactical Quiet Generator (TQG) contract
by U.S. Army.
COMPANY
Engineered Specialty Plastics, Inc.
FACILITIES AND MARKETS
Facilities: Production, finishing, assembly and testing facilities in Hot
Springs, Arkansas, and Bossier City, Louisiana, total 206,000 square feet and
employ 150 people.
Markets: Telecommunications, food processing, office equipment, housewares,
storage systems and faucets.
1999 MILESTONES
* Acquired operations of Engineered Products, Inc.'s Bossier City, Louisiana
division for $3.1 million.
* Received ISO 9002 certification.
5
<PAGE>
<PAGE>
Today U.S. military defense strategy is focused on the rapid deployment
of troops and support equipment anywhere in the world. Through a
combination of key acquisitions, strong internal growth, and forward-
thinking management, the company is uniquely positioned to take
advantage of continuing changes in U.S. military strategy and defense
spending.
An Overview of the Military Marketplace
>> In the post-Cold War era, U.S. defense strategy and spending have
undergone a dramatic transformation. Once based on a large-scale bipolar
conflict with the Soviet Union and its allies, U.S. military strategy
today is geared toward the type of scenarios taking place in Kosovo,
East Timor and elsewhere - multiple, simultaneous regional conflicts
requiring rapid deployment of troops and equipment.
As the perceived threat and potential scope decreased, so did the
military budget - from a post-Cold War high of $303.6 billion (in
current dollars) in 1988 to a modern low of $265.2 billion in 1996.
Recently, however, this trend has reversed. The Department of Defense
(DoD) projects compounded annual growth in its procurement spending
budget of 11 percent through 2001, reaching nearly $62 billion. The
segment of the overall procurement budget covering military support
supplies and equipment - the primary market for Engineered Support
Systems - is expected to increase 8 percent annually, surpassing $15
billion by 2001.
This upswing in military spending reflects several contributing factors,
including the growing number of regional conflicts around the globe and
the need for rapid deployment capabilities, the increased threat of
chemical and biological warfare, and the growing number of nations with
the capability to deliver weapons of mass destruction.
At the same time, the DoD has initiated a number of basic changes in its
overall procurement policy - shifting from its historic "best bid"
method to a "best value" approach. Rather than awarding contracts based
solely on the lowest price, this new policy also takes into
consideration the contractors' experience, technical expertise and
ability to complete the project. Increasingly, design and engineering
functions are being outsourced to capable defense contractors like
Engineered Support Systems. Today, contract performance equals improved
profitability.
Engineered Support Systems is well-positioned to take advantage of these
changes in defense strategy and trends in procurement policy. Rapid
deployment of ground forces relies heavily on troop support and major
systems support. The increasing emphasis on combating chemical and
biological weapons requires specialized products and technical expertise
that match this focus. And in the highly fragmented military support
equipment market, the company ranks as the sole supplier of shipboard
air handling systems, the market leader in power generators and the lead
supplier of chemical and biological shelter and collective protection
systems.
6
<PAGE>
<PAGE>
Military Products
>> In its role as a major defense contractor, Engineered Support Systems
has a recognized expertise in the design, development and manufacture of
equipment to support ground forces and weapon systems in the field. The
acquisition of Systems and Electronics Inc. (SEI) brings an exciting new
dimension to the company's capabilities with the addition of
complementary expertise ranging from aircraft cargo loading systems,
heavy transportation equipment and tactical bridging to fire support
systems, automatic test equipment and radar systems.
Military product sales accounted for 79 percent of company revenues in
fiscal 1999. The record level of orders in the funded defense backlog at
year-end, representing a more than three-fold increase over the prior
year, resulted from both existing and newly awarded contracts, together
with recent acquisitions. The funded backlog of government contracts
totaling $277.2 million at year-end, coupled with government options to
purchase an additional $850.5 million in products, represent an
outstanding base of business on which to build.
[PHOTO]
<< STRIKER
Vehicle-mounted fire support systems such as Striker provide U.S. Army
field artillery units with the forward deployed "eyes and brains"
necessary to lay fast and accurate indirect fire.
TUNNER 60K AIRCRAFT CARGO LOADER/TRANSPORTER >>
A fully loaded Tunner can transport its cargo at 23 miles per hour, a 50
percent improvement over specification requirements. With the efficiency
provided by the Tunner 60K Loader, the U.S. Air Force can now transport
cargo to any hot spot in the world in a fraction of the time previously
required. Including options, total Tunner backlog of $378.0 million
means expected production through 2004-2005.
[PHOTO]
7
<PAGE>
<PAGE>
Military Products CONTINUED
The company's military products are organized along three separate
business lines that include Light Military Support Equipment, Heavy
Military Support Equipment and Electronics Systems.
Light Military Support Equipment
Light Military Support Equipment includes five basic product categories
- - chemical and biological defense systems, environmental control
systems, petroleum and water systems, containerized systems and general
military support equipment.
Chemical and biological defense systems are designed to protect military
units in forward areas from the effects of chemical and biological
weapons. One of the key products currently being manufactured for U.S.
forces includes the Chemical and Biological Protected Shelter System
(CBPSS), a self-contained, environmentally controlled and contamination-
free work area. This specially designed system can be deployed in less
than 20 minutes to serve as a mobile medical aid station, command post
or emergency facility. Including options, the backlog on CBPSS totals
$94.3 million with production expected over the next several years.
Micro-Climatic Conditioning Systems (MCS) offer on-board air filtration
and cooling for a five-man Paladin tank crew.
Company-produced environmental control systems are used to regulate or
modify conditions in ground
[PHOTO]
CPBSS >>
The Chemical and Biological Protected Shelter System can be fully
operational in less than 20 minutes, a critical characteristic, since it
is designed to be relocated as many as three times each day.
FDECU - FIELD DEPLOYABLE ENVIRONMENTAL CONTROL UNIT >>
The FDECU is a field-deployable heat pump for use in cooling, heating,
dehumidifying, filtering and circulating air for portable shelters,
tents and vans. The total backlog, including options, of $126.9 million
is scheduled for production over the next four years.
[PHOTO]
8
<PAGE>
<PAGE>
Record levels of both funded backlog and government options represent a
combined potential of three years of identifiable business for our
company. >>
enclosures and on board aircraft, ships and vehicles. Adaptable to
chemically and biologically contaminated areas, Field Deployable
Environmental Control Units (FDECU) are designed to meet climate control
requirements for both personnel and equipment. This field-deployable
heat pump can be used to heat, cool, dehumidify, filter and circulate
air in portable shelters, hospital systems, tents and fixed sites. FDECU
production is currently planned over the next four years as the total
contract backlog, including options, of $126.9 million is completed.
Refrigeration plants, cooling coils and fan coils provide shipboard
cooling for both personnel and perishable food on the U.S. Navy's combat
ships. Chemically/ Biologically Hardened Air Management Plants (CHAMP)
enable medical staff and patients to survive chemical attacks, reduce
infection and continue emergency operations in a contaminated
environment.
Petroleum and water systems manufactured by the company are designed to
pump, store, purify and test water and petroleum in the field. Current
contracts include the Reverse Osmosis Desalinization Unit (RODU)
developed for U.S. Navy vessels, which is a shipboard system designed to
provide safe, sanitary drinking water. The RODU contract, a joint
project teaming Engineered Air, Marlo Coil and Keco, has a total
contract backlog, including options, of $17.7 million, which is expected
to be realized over the next several years as the related ships are
built for the Navy. Aerial Bulk Fuel Delivery Systems (ABFDS), used to
transport fuel by aircraft to tactical and ground forces, also provide
aircraft refueling support capability at forward operating locations.
The company's containerized systems are specially designed for unique
transportation or storage applications. Quadcon connectable containers
offer multi-use capabilities for the transportation or storage of bulk
products; four units can be connected to form a 20-foot container.
Refrigerated containers are used to preserve and transport perishable
and frozen foods to military operational locations.
MARINE GRADE COILS AND AIR HANDLING UNITS >>
Fan coil units and assemblies are used to meet air conditioning and
heating needs aboard U.S. Navy ships and military sealift and Coast
Guard vessels.
[PHOTO]
9
<PAGE>
<PAGE>
Military Products CONTINUED
General military support equipment is designed to support forward-
deployed combat units. Personal hygiene equipment includes portable
field latrines, as well as laundry, shower and shaving facilities.
Tactical Quiet Generator (TQG) sets effectively combine reliable
performance with lightweight, low-noise capabilities. The company's
current 5, 10 and 15 kw TQG contract, with a total backlog, including
options, of $169.5 million, is projected to run through 2007.
The largest air conditioning units ever built for the U.S. Air Force,
B-1B/B2 Flight Line Air Conditioners are used during pre-flight and
post-flight checks to cool the avionics and electronics systems aboard
B-1 and B-2 bombers, and Talon I and Talon II gunships. Also, the
company's Large Aircraft Start System (LASS) pneumatic power unit
provides the high volumes of air needed to start jet turbine engines on
large aircraft.
Heavy Military Support Equipment
The company's Heavy Military Support Equipment segment includes aircraft
cargo loaders, transport systems and tactical bridging. The Tunner 60K
Aircraft Cargo Loader/Transporter is proving its mobility, versatility
and durability at U.S. Air Force bases around the globe. The world's
highest capacity aircraft cargo loader, the Tunner enables the Air Force
to quickly transport cargo to any hot spot around the globe in support
of U.S. military forces. With a total contract backlog of $378.0
million, including options, the Tunner contract is projected to run for
the next five to six years. M1000 Heavy Equipment Transporter trailers,
which played a key role in the deployment and resupply of American armed
forces in Bosnia, can carry tanks and armored personnel carriers
weighing more than 70 tons through the most demanding terrain and
weather conditions. The total M1000 contract backlog, including options,
of $52.3 million is expected to be realized over the remaining two-year
production period. The company also believes there may be significant
opportunities for M1000 or similar contracts with either the U.S. or
foreign militaries in the near future. Tactical bridging systems reflect
the company's proven expertise in high-strength steel and aluminum
fabrication, hydraulic system design, and mechanical and hydraulic
systems integration. Providing logistical and tactical support for
combat units, these bridges meet the U.S. military's mobility, speed and
sustainability requirements.
Electronics Systems
Electronics Systems include fire-control support systems, sophisticated
radar and electronic warfare systems, and highly specialized avionics
testing equipment. Currently, the company is the sole-source provider of
fire support systems for the U.S. Army. The Striker Fire Support System
provides enhanced surveillance, target location
TACTICAL QUIET GENERATOR SETS - TQG >>
TQG's are used by all branches of the U.S. military for electrical
power. Annual demand for military generator sets, including TQGs,
exceeds $150 million - with the acquisition of Fermont, Engineered
Support is now a leader in this market.
[PHOTO]
FLIGHT LINE AIR CONDITIONERS >>
Units like the one shown here are used to cool aircraft avionics and
electronics systems during pre-flight and post-flight checkouts and
repairs. These units utilize ozone-friendly and environmentally safe R-
134 refrigerant.
[PHOTO]
10
<PAGE>
<PAGE>
and designation, self-location and command, control and communications
capabilities. This advanced automatic system integrates with the Bradley
Fire Support Team (BFIST) mission equipment package onto the High
Mobility Multi-purpose Wheeled Vehicle (HUMVEE) chassis. The
BFIST/Striker contract is currently valued at $13.9 million with a total
potential of more than $100 million. A derivative system using enhanced,
reconfigurable sensors is being developed as the Reconnaissance,
Surveillance and Target Acquisition (RSTA) system for the Army's new
Brigade Combat Team initiative. The Manportable Surveillance and Target
Acquisition Radar (MSTAR), used to detect, locate and classify moving
personnel and vehicles, also provides automatic correction data for
friendly artillery fire. The company is also a major participant in the
U.S. Navy's Consolidated Automatic Support Systems (CASS) test equipment
program with its High Power Offload to CASS (HPOC) system used to test
essential avionics and electronics equipment. The HPOC contract is in
its early stages with projected completion expected within the next four
years. Total HPOC backlog, including options, amounts to $37.7 million.
[PHOTO]
<< M1000
The M1000 Heavy Equipment Transporter trailer carries armored vehicles
and other heavy equipment of more than 70 tons, including the M-1 Abrams
Main Battle Tank shown here.
MANPORTABLE SURVEILLANCE AND TARGET ACQUISITION RADAR - MSTAR >>
MSTAR detects, locates and classifies moving personnel, moving vehicles
and low-flying helicopters. An additional mode detects artillery shell
impacts and provides automatic correction data for friendly artillery
fire.
[PHOTO]
HDSB - HEAVY DRY SUPPORT BRIDGE >>
The company's expertise in the design and manufacture of tactical
bridging systems, like the Heavy Dry Support Bridge shown here, directly
addresses the U.S. Army's need for bridges capable of supporting the
newer, heavier tracked and wheeled armored vehicles.
[PHOTO]
11
<PAGE>
<PAGE>
Commercial/Industrial Products
>> Engineered Support Systems effectively translates its military
experience and manufacturing capabilities into a variety of collateral
products for commercial and industrial applications. For fiscal 1999,
sales in this area accounted for 21 percent of company revenues.
Capitalizing on its naval contracting experience, the company
manufactures a variety of air handling and heat transfer equipment, and
custom-made HVAC systems for the commercial sector. This specialized
equipment is used in a wide range of applications and industries -
commercial and institutional buildings; aerospace, food processing,
healthcare and civilian maritime applications; and pharmaceutical,
chemical, semiconductor and telecommunications clean rooms.
Technologies originally developed by the company for the DoD have been
modified to meet commercial applications for a variety of automation
systems. The U.S. Postal Service (USPS) utilizes the Integrated Mail
Handling System (IMHS), a heavy mechanical material handling system, in
nearly 50 of its major bulk mail centers and processing/distribution
centers across the country. The Flats Forwarding Terminal (FFT) is a
computerized work station used by the USPS to automatically print and
apply mailing labels on undeliverable letters and packages. In addition,
sophisticated, highly accurate prescription-filling machines are
produced for major pharmaceutical companies and healthcare providers.
The company custom manufactures specialty injection-molded plastic
products for use in a variety of consumer goods and commercial
applications - telecommunications, food processing, housewares and
storage containers. A proprietary line of LifeTime lead-free,
nonmetallic faucets is also manufactured and distributed by the company.
Consumer/Commercial Market
INTEGRATED MATERIAL HANDLING SYSTEM - IMHS >>
The IMHS is a heavy material handling system that the USPS has been
using at its bulk mail facilities since 1995.
[PHOTO]
FLATS FORWARDING TERMINAL - FFT >>
The FFT serves as a computerized work station used by the USPS to
automatically print and apply mailing labels to letters and packages
that are undeliverable due to address changes.
[PHOTO]
PRESCRIPTION-FILLING MACHINES >>
Automated prescription-filling machines are utilized by pharmaceutical
manufacturers and healthcare providers.
[PHOTO]
LIFETIME FAUCETS >>
The company provides quality nonmetallic faucets to many home
improvement and discount stores.
[PHOTO]
TELECOMMUNICATIONS >>
The company manufactures a variety of products including
telecommunications equipment for commercial customers.
[PHOTO]
12
<PAGE>
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Recent Developments >>
From 1997 to 1999, the Company's net revenues and net income have grown
substantially as a result of both internal growth and of several
significant acquisitions made during the past two years. In 1999, the
Company made three acquisitions - two defense contractors and an
injection molded plastics operation. Effective February 22, 1999, the
Company acquired substantially all of the net assets of the Fermont
Division of Dynamics Corporation of America (Fermont), a manufacturer of
electrical generator sets primarily for the Department of Defense (DoD),
for approximately $10.1 million. Effective July 1, 1999, the Company
acquired the inventory, fixed assets and existing injection molded
plastics operations of the Bossier City Division of Engineered Products,
Inc. (Bossier City) for approximately $3.1 million. Effective September
30, 1999, the Company acquired all of the outstanding stock of the
Systems & Electronics Inc. (SEI) defense subsidiary of ESCO Electronics
Corporation, a manufacturer of military support and electronics
equipment, for approximately $81.7 million. Each of these acquisitions
were accounted for as a purchase. After allocating the respective
purchase prices to the fair value of all identifiable tangible and
intangible assets, goodwill of $50.7 million was recorded and is being
amortized over an estimated life of 25 years. On a pro forma basis, the
Company's net revenues and net income for 1999 were $352.2 million and
$10.0 million, respectively, compared to actual net revenues and net
income for 1999 of $165.3 million and $7.3 million, respectively.
Effective February 1, 1998, the Company acquired substantially all of
the net assets of Nuclear Cooling, Inc., d/b/a Marlo Coil (Marlo Coil),
a manufacturer of heat transfer and air movement equipment, from an
investor group for approximately $25.3 million. On June 24, 1998, the
Company purchased all of the outstanding common stock of Keco
Industries, Inc. (Keco), a manufacturer of military support equipment,
from an investor group for approximately $24.1 million. In conjunction
with these two purchases, goodwill of $23.6 million was recorded and is
being amortized over an estimated life of 25 years.
<TABLE>
<CAPTION>
=======================================================================
Year Ended October 31 1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Results of Operations
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 80.7 76.7 83.3
- -----------------------------------------------------------------------
Gross profit 19.3 23.3 16.7
Selling, general and
administrative expense 10.4 12.8 8.0
- -----------------------------------------------------------------------
Income from operations 8.9 10.5 8.7
Interest expense, net (1.6) (1.5) 0.0
Gain on sale of assets 0.1 0.9 0.0
- -----------------------------------------------------------------------
Income before income taxes 7.4 9.9 8.7
Income tax provision 3.0 3.9 3.5
- -----------------------------------------------------------------------
Net income 4.4% 6.0% 5.2%
=======================================================================
=======================================================================
</TABLE>
The discussion set forth below analyzes certain factors and trends
related to the financial results for each of the three years ended
October 31, 1999, 1998 and 1997. This discussion should be read in
conjunction with the Consolidated Financial Statements and Notes to the
Consolidated Financial Statements.
The Company operates in four segments: heavy military support equipment,
electronics and automation systems, light military support and related
industrial/commercial equipment and custom molded plastic products. The
heavy military support equipment segment engineers and manufactures load
management and transport systems primarily for the U.S. Department of
Defense (DoD). Segment products include aircraft load management
equipment, tank transport systems and bridging systems. The electronics
and automation systems segment engineers and manufactures radar and
electronic warfare systems, fire support systems and avionics test
equipment primarily for the DoD. The segment also engineers and
manufactures material handling equipment primarily for the U.S. Postal
Service and for the pharmaceutical industry throughout the United
States. The light military support and related industrial/commercial
equipment segment engineers and manufactures a broad range of military
support equipment primarily for the DoD, as well as related heat
transfer and air handling equipment for domestic commercial and
industrial users. Segment products include environmental control
systems, petroleum and water systems, chemical and biological defense
systems and other multipurpose military support equipment. The custom
molded plastic products segment manufactures a broad range of injection
molded resin products, as well as a proprietary line of plastic faucets,
primarily for commercial customers in the south-central United States.
Prior to the acquisition of SEI in 1999, the Company did not operate in
the heavy military support or the electronics and automation systems
segments.
<PAGE>
1999 Compared to 1998 >>
Consolidated net revenues increased $68.3 million, or 70.4%, in 1999 to
$165.3 million from $97.0 million in 1998. Net revenues from the light
military support and related industrial/commercial equipment segment
increased by $58.5 million in 1999 to $128.4 million as compared to
$69.9 million in 1998. This increase was due to an additional $30.2
million of net revenues generated by Fermont subsequent to its
acquisition date. In addition, the inclusion of a full year's operations
for acquisitions made in 1998 comprised $29.0 million of this increase.
Net revenues from the heavy military support equipment and the
electronics and automation systems segments totaled $13.1 million and
$5.1 million, respectively, for 1999 due to the acquisition of SEI
during the year. Net revenues for the Company's custom molded plastic
products segment decreased $8.4 million to $18.7 million in 1999 as
compared to $27.1 million in 1998 due to the loss of a major customer
during the year.
Consolidated gross profit for 1999 increased 40.9% to $31.9 million
(19.3% of consolidated net revenues) from $22.6 million (23.3% of
consolidated net revenues) in 1998. Gross profit for the light military
support and related commercial/industrial equipment segment increased to
$25.2 million (19.6% of segment net revenues) from $16.7 million (23.9%
of segment net revenues) in 1998. The increase in gross profit for the
segment was primarily a result of the operations of Fermont subsequent
to its acquisition date ($1.1 million), and the inclusion in 1999 of a
full year's operations for acquisitions made in 1998 ($7.0 million). The
decline in gross margin for the segment resulted from a less profitable
product mix (generator sets) as compared to the Company's historical
defense business operations. Gross profit for the heavy military support
equipment and the electronics and automation systems segments totaled
$2.6 million (20.1% of segment net revenues) and $0.8 million (15.4% of
segment net
13
<PAGE>
<PAGE>
revenues), respectively, for 1999 due to the acquisition of SEI during
the year. Gross profit for the custom molded plastic products segment
declined to $3.3 million (17.5% of segment net revenues) from $6.0
million (22.0% of segment net revenues) in 1998. The decreases in both
gross profit and gross margin related to a decline in sales volume for
the plastics segment during 1999.
Consolidated selling, general and administrative expense increased by
$4.8 million, or 39.0%, to $17.2 million (10.4% of consolidated net
revenues) in 1999 from $12.4 million (12.8% of consolidated net
revenues) in 1998. Selling, general and administrative expense for the
light military support and related commercial/industrial equipment
segment increased to $12.6 million from $9.6 million in 1998. The
increase was primarily a result of the operations of Fermont subsequent
to its acquisition date ($1.2 million), and the inclusion of a full
year's operations for acquisitions made in 1998 ($2.2 million),
partially offset by lower expenses at other operations in this segment
of $0.4 million in 1999. Selling, general and administrative expense for
the heavy military support equipment and the electronics and automation
systems segments totaled $1.4 million and $0.5 million, respectively,
for 1999 due to the acquisition of SEI during the year. Selling, general
and administrative expense for the custom molded plastic products
segment was consistent with 1998.
Consolidated income from operations increased by $4.5 million, or 43.1%,
to $14.7 million in 1999 from $10.2 million in 1998. Income from
operations for the light military support and related
commercial/industrial equipment segment increased to $12.6 million from
$7.1 million in 1998. The increase was primarily a result of the
inclusion in 1999 of a full year's operations for acquisitions made in
1998 ($4.8 million). Income from operations for the heavy military
support equipment and the electronics and automation systems segments
totaled $1.2 million and $0.2 million, respectively, for 1999 due to the
acquisition of SEI during the year. Income from operations for the
custom molded plastic products segment declined to $0.6 million from
$3.2 million in 1998 due to significantly lower sales volume in the
current year.
Net interest expense increased by $1.1 million to $2.6 million in 1999
primarily as a result of higher outstanding borrowings on the Company's
revolving and term debt credit facilities as compared to the prior year.
Higher borrowing levels were required to finance the Company's
acquisitions over the past two years partially offset by the receipt of
net proceeds of $25.6 million in conjunction with a follow-on public
stock offering of 2.0 million shares completed in April 1999.
The effective income tax rate for 1999 and 1998 was 40.0%, resulting in
total tax expense of $4.9 million in 1999 and $3.9 million in 1998. As a
result of the foregoing, net income increased 26.3% to $7.3 million
(4.4% of consolidated net revenues) in 1999 as compared to $5.8 million
(6.0% of consolidated net revenues) in 1998.
1998 Compared to 1997 >>
Consolidated net revenues increased $8.4 million, or 9.5%, in 1998 to
$97.0 million from $88.6 million in 1997. Net revenues from the light
military support and related industrial/commercial equipment segment
increased by $5.5 million in 1998 to $69.9 million from $64.4 million in
1997. This increase was due to an additional combined $36.5 million of
net revenues generated by Marlo Coil and Keco subsequent to their
respective acquisition dates. Other operations in this segment
experienced a decrease of $31.0 million in net revenues in 1998 as
several significant DoD contracts completed, or were nearing completion
of, their production cycles during 1998. Net revenues for the custom
molded plastic products segment increased $2.9 million to $27.1 million
in 1998 from $24.2 million in 1997.
Consolidated gross profit for 1998 increased 53.4% to $22.6 million
(23.3% of consolidated net revenues) from $14.8 million (16.7% of
consolidated net revenues) in 1997. Gross profit for the light military
support and related commercial/industrial equipment segment increased to
$16.7 million (23.9% of segment net revenues) from $9.6 million (14.9%
of segment net revenues) in 1997. The increase in gross profit for the
segment was primarily a result of the additions of Marlo Coil and Keco
($10.2 million) in 1998, partially offset by lower gross profit at other
operations in this segment ($3.2 million) resulting from a significant
decline in net revenues in 1998. The improvement in gross margin for the
segment resulted from an improved mix of contracts, and the addition of
Marlo Coil and Keco, which generated gross margins above those provided
by the Company's historical defense operations. Gross profit for the
custom molded plastic products segment increased to $6.0 million (22.0%
of segment net revenues) from $5.1 million (21.3% of segment net
revenues) in 1997. An increase in sales volume for the plastics segment
during 1998 drove the improvement in both gross profit and gross margin.
Consolidated selling, general and administrative expense increased by
$5.3 million, or 74.8%, to $12.4 million (12.8% of consolidated net
revenues) in 1998 from $7.1 million (8.0% of consolidated net revenues)
in 1997. Selling, general and administrative expense for the light
military support and related commercial/industrial equipment segment
increased to $9.6 million from $4.0 million in 1997. The increase was
primarily due to addition of selling, general and administrative expense
generated by Marlo Coil and Keco ($5.6 million) during 1998, including
additional goodwill amortization of $0.6 million. Selling, general and
administrative expense for the custom molded plastic products segment
declined $0.3 million in 1998.
<PAGE>
Consolidated income from operations increased by $2.5 million, or 33.6%,
to $10.2 million in 1998 from $7.7 million in 1997. Income from
operations for the light military support and related commercial/
industrial equipment segment increased to $7.1 million from $5.6 million
in 1997. The increase was primarily due to the acquisitions of Marlo
Coil and Keco ($4.6 million), partially offset by a reduction from other
segment operations of $3.1 million with their decline in net revenues
from 1997. Income from operations for the custom molded plastic products
segment increased to $3.2 million from $2.1 million in 1997 due to
higher sales volume in 1998.
Net interest expense increased by $1.5 million to $1.5 million in 1998
as a result of term debt incurred in conjunction with the Marlo Coil and
Keco acquisitions.
In 1998, the Company 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.
The effective income tax rate for 1998 and 1997 was 40.0%, resulting in
total tax expense of $3.9 million in 1998 and $3.1 million in 1997. As a
result of the foregoing, net income increased 24.8% to $5.8 million
(6.0% of consolidated net revenues) in 1998 from $4.6 million (5.2% of
consolidated net revenues) in 1997.
Outlook for 2000 and Future Years >>
Primarily due to the acquisitions of Fermont and SEI, the Company's
funded backlog of defense orders increased to $277.2 million at October
31, 1999 from $80.8 million at October 31, 1998. In addition, government
options on existing defense contracts (unfunded backlog) increased to
$850.5 million at October 31, 1999 from $319.6 million at October 31,
1998. The Company expects the majority of these options to be converted
into funded backlog.
14
<PAGE>
<PAGE>
The Company anticipates that consolidated net revenues and net income
will increase in 2000. Increases in the light military support and
related commercial/industrial equipment segment are expected in 2000
primarily as a result of the inclusion of the operations of Fermont for
the entire period, as well as the transition of several major contracts
from development to the production phase. Likewise, increases in net
revenues and net income will occur in the heavy military support
equipment and the electronics and automation systems segments due to the
inclusion of the operations of SEI for the entire period. The Company
will derive the most significant portion of its 2000 defense revenues
for these three segments from the Tunner 60K Aircraft Cargo Loader,
Field Deployable Environmental Control Units, M1000 Heavy Equipment
Transporters, Tactical Quiet Generator sets, and Chemical and Biological
Protected Shelter System contracts. These contracts represent $831.6
million, or 73.7%, of the Company's total funded and unfunded defense
backlog of defense orders at October 31, 1999, and, therefore, provide a
significant base of revenues through their respective contract lives.
The Company's custom molded plastic products segment experienced a
significant decline in net revenues and net income in 1999 due to the
loss of a major customer during the year. The Company anticipates that
this segment's results will improve in 2000 with the inclusion of the
Bossier City operation for a full year and as the existing revenue base
is expanded.
The Company continues to believe that significant consolidation
opportunities exist within the military support and electronics segments
of the defense industry in response to (i) the current fragmentation
within the industry; (ii) the DoD's emphasis on awarding contracts on
the basis of "best value"; and (iii) the DoD's increasing reliance on
the engineering and design capabilities of contractors. The Company's
major emphasis for 2000 includes the continuing integration of its
acquired defense operations and consolidation initiatives aimed at
leveraging its infrastructure and identifying operational synergies.
Although the Company believes additional acquisitions may occur in 2000,
any such transaction must be immediately accretive to earnings, must
bring significant increases in revenues and backlog, and must provide
long-term value to its shareholders.
Liquidity and Capital Resources >>
In April 1999, the Company issued an additional 2.0 million shares of
common stock through a public offering, resulting in net proceeds of
$25.6 million. A portion of the proceeds was used to repay borrowings
under the Company's revolving line of credit agreement with the
remainder used to repay a portion of the Company's term debt.
In conjunction with the acquisition of SEI in September 1999, the
Company entered into a new credit agreement to provide a $90.0 million
term loan and a $55.0 million revolving credit facility. The Company's
primary sources of short-term financing are from cost reimbursements
under contracts with the U.S. government via receipt of progress
payments, billings for delivered products and borrowings under the
revolving line of credit. As of October 31, 1999, the Company had $23.9
million outstanding against the revolving line of credit, remaining
availability under the revolving line of credit of $22.7 million, and a
cash balance of $0.3 million.
The Company's working capital needs are generally funded through cash
flow from operations and the revolving line of credit. At October 31,
1999, the Company's working capital and ratio of current assets to
current liabilities were $14.3 million and 1.17 to 1 as compared with
$18.2 million and 1.83 to 1 a year ago. The Company used $4.6 million in
1999 and generated $5.4 million in 1998 in cash flow from operations.
Investment in property, plant and equipment totaled $1.6 million and
$1.3 million for 1999 and 1998. The Company anticipates that capital
expenditures in 2000 should not exceed $6.0 million. Management believes
that cash flow generated from operations, together with the available
line of credit, will provide the necessary resources to meet the needs
of the Company in the foreseeable future.
Inflation >>
Since substantially all of the Company's contracts with the DoD are at
fixed prices, inflation can affect the ultimate profit to be realized on
them. Some contracts have price adjustment provisions that limit the
impact of inflation on profits. In addition, the Company's volume
purchasing and forward purchasing policies serve to limit the effects of
inflation. The Company considers potential inflation in preparation of
contract proposals and bids. In addition, the Company's commercial and
industrial products are predominantly custom-made. Therefore, the impact
of inflation on operating results is typically not significant. The
Company attempts to alleviate inflationary pressures on commercial and
industrial products by increasing selling prices to help offset rising
costs (subject to competitive conditions), increasing productivity and
improving manufacturing techniques. Because of these factors, management
does not believe that inflation has had, or that anticipated inflation
will have, a significant effect on the Company's operations.
Year 2000 Readiness Disclosure >>
The Company is dependent upon computer hardware and software for
internal operations and for processing product orders with its customers
and suppliers. The Company relies on computerized systems for nearly
every component of its 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.
<PAGE>
The Company has developed and implemented a plan to address Year 2000
issues, which may impact its business. This plan included: (i) surveys
of information technology systems, non-information technology or non-IT
systems and product categories, (ii) assessment of required replacement
or other Year 2000 remediation, (iii) implementation and subsequent
testing of systems for Year 2000 compliance, and (iv) review of material
suppliers' and customers' Year 2000 status or impact on the Company's
ability to avoid business interruption.
The Company has completed Year 2000 compliance testing on all of its
information technology systems. Such testing has not revealed any
material noncompliance. The Company has upgraded or replaced those
systems which were noncompliant.
With respect to non-IT systems such as security/alarm, fire control and
telephone systems, the Company has surveyed and evaluated these systems
for Year 2000 problems. In some instances, this evaluation has included
communications with the original manufacturers or suppliers for
representations regarding the equipment. The Company believes that the
majority of these non-IT systems do not function on date-sensitive
software or hardware. Therefore, it is not anticipated that Year 2000
poses a significant risk to non-IT systems.
15
<PAGE>
<PAGE>
Any of the Company's products that contain date-sensitive computerized
components are tested for Year 2000 compliance at the time of
installation. Accordingly, no significant Year 2000 risks are
anticipated associated with the Company's products.
The Company may be affected by the Year 2000 readiness of its major
suppliers and customers, over which it has no direct control. The
Company believes that there is no single supplier that is critical to
its business as a whole or that could cause a significant disruption in
its production, although some of its business could be affected if a
particular supplier on a particular contract were to fail to perform due
to a Year 2000 failure within that supplier's business at a critical
time. The Company has contacted its 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. To the best of its knowledge,
the Company anticipates Year 2000 compliance of its significant
suppliers.
Approximately 80% of the Company's revenues come directly or indirectly
from the DoD. A disruption in the day-to-day functions of the DoD or
other government agencies (and more particularly, a disruption in
ability to pay accounts payable) could have a material adverse impact on
the Company's business. In December 1999, the U.S. government announced
that its major computer systems were Year 2000 compliant.
The Company expects to expend a total of approximately $0.5 million on
Year 2000 compliance, of which substantially all had been expended
through October 31, 1999.
In addition to the risks identified in the foregoing discussion, the
Company faces material risks that (i) automated business functions could
falter due to undetected or unaddressed Year 2000 issues which, for
instance, could increase the cost of operations and cause delays in
product shipment, and (ii) interruption in utilities could cause plant
shutdowns. Any one of these scenarios could have a material adverse
impact on the Company's operations, liquidity and financial condition.
Through January 15, 2000, the Company has yet to experience any
significant problems as a result of the Year 2000 issue. While the
Company cannot provide assurances that Year 2000 related problems
affecting its business will not occur in the future, the Company
believes that certain factors partially mitigate the potential adverse
consequences of either an internal or external Year 2000 problem. These
factors include, for instance: (i) the adequacy of funding sources to
cover the Company's cash needs in the event it suffers payment delays
from a major customer, and (ii) the availability of alternative supply
sources in the event significant suppliers are unable to deliver
products on a timely basis.
Recently Issued Accounting Pronouncements >>
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), 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. Changes in the fair value of a derivative must be
recognized in earnings in the period of change unless the derivative
qualifies as a hedge in accordance with SFAS 133. The Company is
required to adopt this statement in the fourth quarter 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 have any derivative instruments.
Forward-looking Statements >>
In addition to historical information, this Annual Report includes
certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. The forward-looking
statements involve certain risks and uncertainties, including but not
limited to acquisitions, additional financing requirements, the decision
of any of the Company's key customers (including the U.S. government) to
reduce or terminate orders with the Company, cutbacks in defense
spending by the U.S. government, increased competition in the Company's
markets and the impact of any Year 2000 problems, which could cause the
Company's actual results to differ materially from those projected in,
or inferred by, the forward-looking statements.
<PAGE>
Revenues by Product Classification >>
The following table sets forth net revenues for the years ended October
31, 1999, 1998 and 1997 from each of the Company's major product
classifications within each segment:
<TABLE>
<CAPTION>
====================================================================================================================
Year Ended October 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Light Military Support and
Related Industrial/
Commercial Equipment:
Environmental control
systems $ 77.1 46.6% $43.4 44.7% $22.8 25.7%
Generator sets and
related items 30.2 18.3
Petroleum and water
systems 4.9 3.0 4.5 4.6 8.2 9.3
Chemical and biological
defense systems 6.3 3.8 4.8 4.9 5.0 5.6
General support
equipment 9.9 6.0 17.2 17.7 28.4 32.1
- --------------------------------------------------------------------------------------------------------------------
128.4 77.7 69.9 72.1 64.4 72.7
Heavy military support
equipment 13.1 7.9
Electronics and automation
systems 5.1 3.1
Custom molded plastic
products 18.7 11.3 27.1 27.9 24.2 27.3
- --------------------------------------------------------------------------------------------------------------------
Total $165.3 100.0% $97.0 100.0% $88.6 100.0%
====================================================================================================================
====================================================================================================================
</TABLE>
Fluctuations in 1999 revenues by segment and product classification are
due, in part, to the acquisitions made over the past two years. Other
fluctuations between periods result primarily from changes in DoD
requirements. As a result, year-to-year comparisons of revenue by
product may not be meaningful.
16
<PAGE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
====================================================================================================
October 31 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 310,446 $ 5,773,529
Accounts receivable, net 23,594,040 14,036,184
Contracts in process and inventories, net 68,350,836 18,686,810
Refundable income taxes 971,925
Deferred income taxes 3,516,039 112,685
Due from related party (Note B) 4,223,737
Prepaid expenses and other assets 554,531 458,363
- ----------------------------------------------------------------------------------------------------
Total Current Assets 100,549,629 40,039,496
Property, Plant and Equipment
Land 4,884,410 1,833,320
Buildings and improvements 34,258,499 15,330,883
Machinery and equipment 34,722,289 20,580,343
Furniture and fixtures 2,817,008 1,215,762
- ----------------------------------------------------------------------------------------------------
76,682,206 38,960,308
Less accumulated depreciation 16,667,784 13,895,326
- ----------------------------------------------------------------------------------------------------
60,014,422 25,064,982
Goodwill, less accumulated
amortization of $2,320,084 and $1,073,176 74,354,061 25,835,892
Deferred income taxes 385,867
Other assets 4,092,163 1,219,852
- ----------------------------------------------------------------------------------------------------
Total Assets $239,396,142 $92,160,222
====================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 23,900,000
Current maturities of long-term debt 10,037,500 $ 7,204,172
Accounts payable 27,876,474 7,285,396
Income taxes payable 1,065,480
Accrued employee compensation 14,110,634 2,503,745
Other liabilities 9,254,045 3,642,852
Due to related party (Note B) 1,193,797
- ----------------------------------------------------------------------------------------------------
Total Current Liabilities 86,244,133 21,829,962
Long-term debt 80,075,000 36,779,160
Deferred income taxes 2,659,699
ESOP guaranteed bank loan 578,100 725,700
Other liabilities 9,077,211
Commitments and contingencies (Note J)
Shareholders' Equity
Common Stock, par value $.01 per share; 10,000,000 shares
authorized; 7,503,854 and 5,490,604 shares issued 75,039 54,906
Additional paid-in capital 37,032,274 11,082,278
Retained earnings 30,780,853 23,682,931
- ----------------------------------------------------------------------------------------------------
67,888,166 34,820,115
Less ESOP guaranteed bank loan 578,100 725,700
Less treasury stock at cost, 614,896 and 638,702 shares 3,888,368 3,928,714
- ----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 63,421,698 30,165,701
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $239,396,142 $92,160,222
====================================================================================================
====================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
17
<PAGE>
<PAGE>
<TABLE>
Consolidated Statements of Income
<CAPTION>
=====================================================================================================
Year Ended October 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $165,255,849 $96,972,886 $88,570,970
Cost of revenues 133,377,116 74,343,103 73,816,030
- -----------------------------------------------------------------------------------------------------
Gross profit 31,878,733 22,629,783 14,754,940
Selling, general and administrative expense 17,222,982 12,387,419 7,087,026
- -----------------------------------------------------------------------------------------------------
Income from operations 14,655,751 10,242,364 7,667,914
Interest expense (2,729,510) (1,767,640) (221,987)
Interest income 129,647 293,379 286,019
Gain on sale of assets 124,403 879,278
- -----------------------------------------------------------------------------------------------------
Income before income taxes 12,180,291 9,647,381 7,731,946
Income tax provision 4,871,000 3,858,000 3,093,000
- -----------------------------------------------------------------------------------------------------
Net income $ 7,309,291 $ 5,789,381 $ 4,638,946
=====================================================================================================
Earnings per share:
Basic $ 1.23 $ 1.21 $ .98
Diluted $ 1.20 $ 1.16 $ .94
=====================================================================================================
=====================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
Consolidated Statements of Shareholders' Equity
<CAPTION>
=============================================================================================================================
Additional ESOP
Common Paid-in Retained Guaranteed Treasury
Stock Capital Earnings Bank Loan Stock Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 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
Net income 7,309,291 7,309,291
Cash dividends (211,369) (211,369)
Issuance of common stock 20,000 25,530,000 25,550,000
Exercise of stock options 133 124,039 124,172
Reduction of ESOP
guaranteed bank loan 147,600 147,600
Purchase of treasury stock (65,052) (65,052)
Issuance of treasury stock
to ESOP 295,957 105,398 401,355
- -----------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1999 $75,039 $37,032,274 $30,780,853 $ (578,100) $(3,888,368) $63,421,698
=============================================================================================================================
=============================================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
18
<PAGE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
=====================================================================================================
Year Ended October 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flow from Operating Activities
Net income $ 7,309,291 $ 5,789,381 $ 4,638,946
Adjustments to reconcile net income
to net cash provided by (used in) operations:
Depreciation and amortization 4,325,381 2,812,585 1,897,832
Deferred income taxes (1,157,000) 967,000 (385,000)
Gain on sale of assets (124,403) (879,278)
- -----------------------------------------------------------------------------------------------------
Cash provided before changes in operating
assets and liabilities, excluding the effects
of acquisitions 10,353,269 8,689,688 6,151,778
Changes in operating assets and liabilities:
Accounts receivable 16,697 (1,543,761) 1,456,357
Contracts in process and inventories (13,223,269) (1,169,062) 2,942,250
Accounts payable 3,060,910 (698,894) (237,694)
Current income taxes 2,037,405 (795,936) (87,503)
Net changes in other assets and liabilities (6,801,613) 870,462 522,524
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations (4,556,601) 5,352,497 10,747,712
- -----------------------------------------------------------------------------------------------------
Cash Flow from Investing Activities
Purchase of SEI, net of cash acquired (81,699,092)
Purchase of Fermont, net of cash acquired (10,091,736)
Purchase of Bossier City division of Engineered
Products, Inc. (3,096,514)
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 (1,593,503) (1,331,147) (1,987,322)
Proceeds from sale of property, plant and equipment 147,444 2,578,027
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (96,333,401) (49,702,148) (1,987,322)
- -----------------------------------------------------------------------------------------------------
Cash Flow from Financing Activities
Net borrowings (payments) under line-of-credit agreement 23,900,000 (1,075,961)
Proceeds of long-term debt 90,000,000 45,000,000
Payments of long-term debt (43,870,832) (2,443,749) (1,456,901)
Issuance of common stock 25,550,000
Exercise of stock options 124,172 1,264,724 629,434
Purchase of treasury stock (65,052) (802,349) (957,091)
Cash dividends (211,369) (132,645) (78,445)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 95,426,919 41,810,020 (1,863,003)
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,463,083) (2,539,631) 6,897,387
Cash and cash equivalents at beginning of year 5,773,529 8,313,160 1,415,773
- -----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 310,446 $ 5,773,529 $ 8,313,160
=====================================================================================================
=====================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
19
<PAGE>
<PAGE>
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, Systems & Electronics
Inc. (SEI), Engineered Air Systems, Inc. (Engineered Air), Keco
Industries, Inc. (Keco), Engineered Coil Company, d/b/a Marlo Coil
(Marlo Coil), Engineered Electric Company, d/b/a Fermont (Fermont) 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.
Cash and Cash Equivalents: Cash equivalents include temporary
investments with original maturities of three months or less.
Revenue Recognition: Revenues on long-term contracts performed by SEI,
Engineered Air, Keco and Fermont, 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 $264,000 and $273,000 at October 31,
1999 and 1998, 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, 1999 and 1998, 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, 1999 and 1998, 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 64% and 52%, respectively, of accounts
receivable at October 31, 1999 and 1998 are due from the U.S. government
and its agencies.
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 SEI,
Engineered Air, Keco and Fermont. 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 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 of 15 to 40 years for buildings and improvements,
5 to 15 years for machinery and equipment, and 3 to 10 years for
furniture and fixtures.
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.
Goodwill: Goodwill recorded in connection with purchase transactions is
being amortized on a straight-line basis over approximately 25 years.
Earnings Per Share: Basic earnings per share for 1999, 1998 and 1997 is
based on average basic common shares outstanding, after the effect of
the stock split described in Note K, of 5,926,234, 4,785,335 and
4,753,265, respectively. Diluted earnings per share for 1999, 1998 and
1997 is based on average diluted common shares outstanding, after the
effect of the stock split described in Note K, of 6,081,644, 4,991,453
and 4,954,787, respectively. Average diluted common shares outstanding
include common stock equivalents, which represent common stock options
as computed using the treasury stock method.
<PAGE>
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: SEI, Engineered Air, Keco and Fermont design and
manufacture military support equipment and substantially all revenues
for these subsidiaries are related to contracts with the U.S.
government. Marlo Coil 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 faucets.
20
<PAGE>
<PAGE>
Recently Issued Accounting Pronouncements: The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS130), in June 1997. The
Company has adopted SFAS 130 which requires disclosure of comprehensive
income and its components. Comprehensive income includes net income,
foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and equity
securities. For the three years ending October 31, 1999, the Company had
no components of comprehensive income other than net income.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131), was
issued in June 1997. The Company has adopted SFAS 131 which establishes
standards for the reporting of information about operating segments.
Operating segments are defined as components of an enterprise for which
separate financial information is available that is evaluated regularly
by the chief operating decision makers in deciding how to allocate
resources and in assessing performance. SFAS 131 also requires
disclosures about products and services, geographic areas and major
customers.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits" (SFAS 132),
was issued in February 1998. The Company adopted the provisions of SFAS
132 in 1999, which revises employers' disclosures about pension and
other postretirement benefits.
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
in the fourth quarter of fiscal year 2000.
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 $25.3 million. The fair value of the assets acquired,
including goodwill of $17.1 million, was $31.0 million and liabilities
assumed totaled $5.7 million. The purchase price was financed with
approximately $2.8 million of available cash resources and bank term
debt of $22.5 million. The operating results of Engineered Coil Company
(Marlo Coil) are included in the Company's consolidated results of
operations from the date of acquisition.
On May 29, 1998, Marlo Coil purchased the exclusive rights to
manufacture and distribute the U.S. Navy/Marine products of Edge
Electronics Corporation, d/b/a McIntyre Engineering, for approximately
$1.5 million. The fair value of the assets acquired was $1.5 million,
including goodwill of $1.4 million and a seven-year covenant not to
compete of $0.1 million. The purchase price was financed with available
cash resources.
On June 24, 1998, the Company acquired all of the outstanding common
stock of Keco Industries, Inc. (Keco), a manufacturer of military
support equipment, from an investor group for approximately $24.1
million. ($1.2 million of this amount relates to consideration paid to
Keco's previous shareholders in order for the Company to elect treatment
of the transaction as an asset purchase pursuant to Section 338(h)(10)
of the Internal Revenue Code. This election allows the Company to
generate deductions for goodwill amortization and additional
depreciation for federal income tax purposes. 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 $6.5 million, was $27.0
million and liabilities assumed totaled $2.9 million. The purchase price
was financed with approximately $1.6 million of available cash resources
and bank term debt of $22.5 million. The operating results of Keco are
included in the Company's consolidated results of operations from the
date of acquisition.
On February 22, 1999, Engineered Electric Company, a wholly owned
subsidiary of the Company, acquired substantially all of the net assets
of the Fermont division of Dynamics Corporation of America, a
manufacturer of electrical generator sets primarily for the Department
of Defense, for approximately $10.1 million. The fair value of assets
acquired was $14.4 million and liabilities assumed totaled $4.3 million.
The purchase price was financed with available cash resources and short-
term borrowings under the Company's revolving credit facility. The
operating results of Engineered Electric Company (Fermont) are included
in the Company's consolidated results of operations from the date of
acquisition.
Effective July 1, 1999, Engineered Specialty Plastics, Inc., a wholly
owned subsidiary of the Company, acquired the inventory, fixed assets,
existing operations and customer base of the Bossier City division of
Engineered Products, Inc. (Bossier City) for approximately $3.1 million.
The fair value of assets acquired was $3.1 million. The purchase price
was financed with short-term borrowings under the Company's revolving
credit facility. The operating results of Bossier City are included in
the Company's consolidated results of operations from the date of
acquisition.
<PAGE>
Effective September 30, 1999, Engineered Systems and Electronics Inc., a
wholly owned subsidiary of the Company, acquired all of the outstanding
stock of Systems & Electronics Inc. (SEI), a manufacturer of military
support equipment, from ESCO Electronics Corporation for approximately
$81.7 million. (The purchase price is net of $4.2 million of cash
acquired, which is reflected on the October 31, 1999 Consolidated
Balance Sheet as Due from Related Party. The transaction will be treated
as an asset purchase pursuant to Section 338 (h)(10) of the Internal
Revenue Code.) The fair value of the assets acquired, including goodwill
of $50.7 million, was $126.5 million and liabilities assumed totaled
$44.8 million. The purchase price was financed with term debt as
provided under the Company's credit agreement discussed in Note E. The
operating results of SEI are included in the Company's consolidated
results of operations from the date of acquisition.
The following unaudited pro forma summary presents the combined
historical results of operations for the years ended October 31, 1999
and 1998 as adjusted to reflect the purchase transactions assuming the
acquisitions had occurred at November 1, 1997. These pro forma results
are not necessarily indicative of the combined results that would have
occurred had the acquisitions actually taken place on November 1, 1997,
nor are they necessarily indicative of the combined results that may
occur in the future.
<TABLE>
<CAPTION>
=======================================================================
Year Ended October 31 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Net revenues $352,174,000 $346,523,000
=======================================================================
Net income $ 10,020,000 $ 7,804,000
=======================================================================
Basic earnings per share $ 1.69 $ 1.63
=======================================================================
Diluted earnings per share $ 1.65 $ 1.56
=======================================================================
=======================================================================
</TABLE>
21
<PAGE>
<PAGE>
Note C >> Accounts Receivable.
Accounts receivable includes amounts due from the U.S. government of
$15,001,000 and $7,388,000 at October 31, 1999 and 1998, respectively.
Note D >> Contracts in Process and Inventories.
Contracts in process and inventories are comprised of the following:
<TABLE>
<CAPTION>
=========================================================================================
October 31 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 4,579,038 $ 4,578,766
Work-in-process 990,727 1,397,593
Finished goods 1,357,946 845,607
Inventories substantially applicable
to government contracts in process,
reduced by progress payments of
$63,041,677 and $15,932,239 61,423,125 11,864,844
- -----------------------------------------------------------------------------------------
$68,350,836 $18,686,810
=========================================================================================
=========================================================================================
</TABLE>
Contracts in process and inventories at October 31, 1999 and 1998
include estimated revenue of $45,678,000 and $18,256,000, respectively,
representing accumulated contract costs and related estimated earnings
on uncompleted government contracts.
Note E >> Notes Payable and Long-term Debt.
Effective September 30, 1999, the Company entered into a new bank credit
agreement, which provided a $90 million term loan and a $55 million
revolving credit facility. Quarterly principal payments on the term loan
begin on December 31, 1999, with final payment due in September 2004.
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 plus an applicable margin. The margin applicable to LIBOR varies
from 1.0% to 2.25% and the margin applicable to the prime rate varies
from 0.0% to 1.0% depending upon the Company's ratio of total
indebtedness to earnings before interest, taxes, depreciation and
amortization (leverage ratio). At October 31, 1999, the effective
interest rate under the credit agreement was 7.68%, and the Company had
$22.7 million of availability under the revolving credit facility, which
carries an unused commitment fee of 0.3% to 0.5% depending on the
Company's leverage ratio. The credit agreement contains certain
covenants, including maintaining net worth of at least $55 million plus
50% of quarterly net income after July 31, 1999 and maintaining a
leverage ratio no greater than 3.75 to 1 through April 30, 2000, no
greater than 3.25 to 1 from May 1, 2000 to October 31, 2000, no greater
than 2.75 to 1 from November 1, 2000 to October 31, 2001 and no greater
than 2.50 to 1 subsequent to October 31, 2001. Pursuant to the terms of
the 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 fixed charge coverage. At October 31, 1999, 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.
Long-term debt consists of:
<TABLE>
<CAPTION>
===============================================================================================
October 31 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Term loan, variable rate equal to the
lesser of LIBOR plus applicable margin
or prime rate plus applicable margin,
payable in quarterly installments, with
a final payment of $5,250,000 in 2004 $90,000,000
Term loan, variable rate equal to the
lesser of LIBOR plus applicable margin
or prime rate less 0.5%, payable in
monthly installments $43,833,332
Industrial revenue bonds, variable
rate, payable in quarterly installments
of $9,375 plus interest, due 2002 112,500 150,000
- -----------------------------------------------------------------------------------------------
90,112,500 43,983,332
Less current maturities 10,037,500 7,204,172
- -----------------------------------------------------------------------------------------------
$80,075,000 $36,779,160
===============================================================================================
===============================================================================================
</TABLE>
<PAGE>
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.
Average borrowings under the revolving credit facility totaled $5.5
million for the year ended October 31, 1999. 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>
2000 $10,037,500
2001 17,037,500
2002 21,037,500
2003 21,000,000
2004 21,000,000
- -----------------------------------------------------------------
$90,112,500
=================================================================
=================================================================
</TABLE>
Interest paid was $2,013,000, $1,828,000 and $158,000 in 1999, 1998 and
1997, respectively.
Note F >> Income Taxes.
The income tax provision is comprised of the following:
<TABLE>
<CAPTION>
=========================================================================================
Year Ended October 31 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 5,284,000 $2,526,000 $3,170,000
State 744,000 365,000 308,000
- -----------------------------------------------------------------------------------------
6,028,000 2,891,000 3,478,000
- -----------------------------------------------------------------------------------------
Deferred:
Federal (997,000) 874,000 (327,000)
State (160,000) 93,000 (58,000)
- -----------------------------------------------------------------------------------------
(1,157,000) 967,000 (385,000)
- -----------------------------------------------------------------------------------------
$ 4,871,000 $3,858,000 $3,093,000
=========================================================================================
=========================================================================================
</TABLE>
22
<PAGE>
<PAGE>
The deferred income tax provision (benefit) results from the following
temporary differences:
<TABLE>
<CAPTION>
===============================================================================================
Year Ended October 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Uncompleted contracts $(1,988,000) $ 813,000 $ (23,000)
Depreciation 106,000 (328,000) (229,000)
Goodwill amortization 337,000 143,000
Contributions to employee
benefit plans 109,000 222,000 (60,000)
Other, net 279,000 117,000 (73,000)
- -----------------------------------------------------------------------------------------------
$(1,157,000) $ 967,000 $(385,000)
===============================================================================================
===============================================================================================
</TABLE>
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
===============================================================================================
Year Ended October 31 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ 2,538,000 $2,740,000
Contract revenue (1,523,000) 393,000
Employee benefits (4,993,000) (124,000)
Goodwill 480,000 143,000
Asset reserves (150,000) (182,000)
Net operating loss and tax
credit carryforwards (112,000) (195,000)
Other (142,000) (228,000)
- -----------------------------------------------------------------------------------------------
$(3,902,000) $2,547,000
===============================================================================================
===============================================================================================
</TABLE>
Deferred tax liabilities (assets) are presented on the Consolidated
Balance Sheets as follows:
<TABLE>
<CAPTION>
===============================================================================================
Year Ended October 31 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $(3,516,000) $ (113,000)
Non-current assets (386,000)
Non-current liabilities 2,660,000
- -----------------------------------------------------------------------------------------------
$(3,902,000) $2,547,000
===============================================================================================
===============================================================================================
</TABLE>
A reconciliation between the income tax provision and the annual amount
computed by applying the statutory federal income tax rate to income
before income taxes is as follows:
<TABLE>
<CAPTION>
===============================================================================================
Year Ended October 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at
statutory federal rate $4,163,000 $3,280,000 $2,629,000
State income taxes and
other, net 708,000 578,000 464,000
- -----------------------------------------------------------------------------------------------
$4,871,000 $3,858,000 $3,093,000
===============================================================================================
===============================================================================================
</TABLE>
Income taxes paid were $3,929,000, $3,081,000, and $3,228,000 in 1999,
1998 and 1997, respectively.
As of October 31, 1999, the Company had net operating loss carryforwards
of approximately $10,000 available to offset future taxable income, and
investment and targeted jobs tax credit carryforwards of approximately
$109,000 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.
<PAGE>
NOTE G >> Shareholders' Equity.
On April 23, 1999, the Company sold, pursuant to an underwritten public
offering, 2,000,000 shares of its common stock resulting in net proceeds
of $25,550,000. A portion of the proceeds was used to repay borrowings
under the Company's line-of-credit with the remainder used to repay a
portion of the Company's long-term debt.
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, 1999, shares of unissued common stock
were authorized and reserved for outstanding options, which had a
weighted average remaining contractual life of 3.6 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 $964,000, or $.16 per average diluted common share
outstanding, in 1999 and $825,000, or $.17 per average diluted common
share outstanding, in 1998. The fair value of options at the grant date
was estimated using the Black-Scholes model with the following weighted
average assumptions for 1999 and 1998, respectively: an expected life of
3.4 years and 3.2 years, volatility of 48% and 50%, a dividend yield of
0.47% and 0.30%, and a risk-free interest rate of 5.60% and 4.67%.
The weighted average fair value of options granted in 1999 and 1998 was
$4.69 and $5.13, respectively. Transactions involving the stock option
plans are as follows:
<TABLE>
<CAPTION>
===============================================================================================
Shares Price per share
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
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
Options granted 342,750 $11.75 to $16.75
Options exercised (13,250) $ 2.37 to $ 8.25
- -----------------------------------------------------------------------------------------------
Outstanding at October 31, 1999 788,800 $ 2.83 to $16.75
===============================================================================================
===============================================================================================
</TABLE>
The following table summarizes information for stock options
outstanding at October 31, 1999:
<TABLE>
<CAPTION>
===============================================================================================
Weighted Weighted
Average Average
Options Remaining Exercise
Range of Exercise Prices Outstanding Life Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 2.83 to $ 4.58 78,300 1.01 years $ 3.93
$ 5.75 to $ 6.50 119,250 2.09 years $ 6.49
$ 8.25 to $11.75 364,500 4.55 years $11.60
$13.50 to $16.75 226,750 3.78 years $13.90
===============================================================================================
===============================================================================================
</TABLE>
23
<PAGE>
<PAGE>
Note H >> Pension and Other Postretirement Benefits.
Substantially all employees of SEI are covered by defined benefit or
defined contribution pension plans. In addition, certain retirees of SEI
are eligible for postretirement health and life insurance benefits.
Effective September 30, 1999, the Company acquired SEI and assumed the
pension and other postretirement benefit plans related to SEI's
employees and non-employee participants. As a result, a net pension
liability of $4,860,000 was assumed as of the acquisition date,
representing a $68,822,000 benefit obligation net of $63,962,000 in the
fair value of related plan assets. The Company also assumed an unfunded
postretirement benefit liability of $9,077,000 as of the acquisition
date. All full-time employees of Engineered Air who are covered by a
collective bargaining agreement are also covered by a defined benefit
plan. Benefits are provided under defined benefit pay-related and flat-
dollar plans, which are primarily non-contributory. Annual Company
contributions to retirement plans equal or exceed the minimum funding
requirements of the Employee Retirement Income Security Act or other
applicable regulations.
To qualify for postretirement health and life insurance benefits an SEI
employee must retire at age 55 or later and the employee's age plus
service must equal or exceed 75. Retiree contributions are defined as a
percentage of medical premiums. Consequently, retiree contributions
increase with increases in the medical premiums. The life insurance
plans are noncontributory and provide coverage of a flat dollar amount
for qualifying retired SEI employees.
The components of pension benefit costs are presented below for 1999,
1998 and 1997. Because the Company had no other postretirement benefits
prior to the acquisition of SEI, the components of other postretirement
benefit costs are presented below for 1999 only.
<TABLE>
<CAPTION>
===============================================================================================
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pension Benefits
Service cost $ 430,000 $ 131,000 $ 140,000
Interest cost 790,000 335,000 306,000
Expected return on plan
assets (999,000) (425,000) (365,000)
Amortization of prior service
cost 51,000 39,000 39,000
Amortization of transitional
obligation 8,000 14,000
Recognized actuarial
loss 18,000
- -----------------------------------------------------------------------------------------------
Net pension costs $ 290,000 $ 88,000 $ 134,800
===============================================================================================
Other Postretirement Benefits
Service cost $ 91,000
Interest cost 59,000
- -----------------------------------------------------------
Net other benefit costs $ 150,000
===========================================================
===========================================================
</TABLE>
<PAGE>
A reconciliation of the changes in the plans' benefit obligations and
fair value of assets over the two-year period ending October 31, 1999,
and a statement of the funded status at October 31, 1999 and 1998
follows.
<TABLE>
<CAPTION>
=====================================================================================================
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Pension Benefits
Reconciliation of benefit obligation:
Benefit obligation at beginning of year $ 5,199,000 $4,601,000
Service cost 430,000 131,000
Interest cost 790,000 335,000
Plan amendments 195,000
Actuarial loss 1,951,000 379,000
Acquisition of SEI 68,822,000
Benefit payments (502,000) (247,000)
- -----------------------------------------------------------------------------------------------------
Benefit obligation at October 31 $76,885,000 $5,199,000
- -----------------------------------------------------------------------------------------------------
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year $ 5,366,000 $4,893,000
Actual return on plan assets 2,376,000 (180,000)
Employer contributions 553,000 900,000
Acquisition of SEI 63,962,000
Benefit payments (502,000) (247,000)
- -----------------------------------------------------------------------------------------------------
Fair value of plan assets at October 31 $71,755,000 $5,366,000
- -----------------------------------------------------------------------------------------------------
Funded status:
Funded status at October 31 $(5,130,000) $167,000
Unrecognized prior service cost 378,000 235,000
Unrecognized actuarial loss 1,349,000 792,000
- -----------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $(3,403,000) $1,194,000
=====================================================================================================
Other Postretirement Benefits
Reconciliation of benefit obligation:
Benefit obligation at beginning of year $
Service cost 91,000
Interest cost 59,000
Plan amendments
Actuarial loss 110,000
Acquisition of SEI 9,077,000
Benefit payments (150,000)
- ------------------------------------------------------------------------------------
Benefit obligation at October 31 $ 9,187,000
- ------------------------------------------------------------------------------------
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year $
Employer contributions 150,000
Benefit payments (150,000)
- ------------------------------------------------------------------------------------
Fair value of plan assets at October 31 $
- ------------------------------------------------------------------------------------
Funded status:
Funded status at October 31 (9,187,000)
Unrecognized actuarial loss 110,000
- ------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $(9,077,000)
====================================================================================
====================================================================================
</TABLE>
24
<PAGE>
<PAGE>
The amounts recognized in the Company's Consolidated Balance Sheets as
of October 31 were as follows:
<TABLE>
<CAPTION>
=============================================================================
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Pension Benefits
Prepaid benefit cost $ 4,885,000 $1,194,000
Accrued benefit liability (8,288,000)
- -----------------------------------------------------------------------------
Net amount recognized $(3,403,000) $1,194,000
=============================================================================
Other Postretirement Benefits
Accrued benefit liability $(9,077,000)
- -----------------------------------------------------------
Net amount recognized $(9,077,000)
===========================================================
===========================================================
</TABLE>
Assumptions used in accounting for the defined benefit plans in 1999,
1998 and 1997 were a discount rate of 7.75%, 6.75% and 7.5%,
respectively, and an expected long-term rate of return on assets of
9.0%.
Assumptions used in accounting for other postretirement benefits in 1999
were a discount rate of 7.75% and a health care cost trend of 6.5% for
fiscal 2000 gradually grading down to an ultimate rate of 5.5% by 2002.
A 1% increase in the health care cost trend rate for each year would
increase the October 31, 1999 net benefit obligation by approximately
$200,000, while a 1% decrease in the health care cost trend rate for
each year would decrease the October 31, 1999 net benefit obligation by
approximately $250,000.
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), Keco (effective January 1, 1999) and
Fermont (effective April 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% vested. The Company has recorded expenses based on contributions to
the ESOP for the years ended October 31, 1999, 1998 and 1997 of
$1,129,000, $481,000 and $377,000, respectively. Interest payments on
the ESOP bank loan were $49,000, $62,000 and $81,000 in 1999, 1998 and
1997, 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 the Company of 50% of each
employee's contributions up to a maximum of 4% of the employee's
earnings. The Company also made discretionary contributions to the Marlo
Plan. The Company 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 the Company of 100% of each
employee's contributions up to a maximum of 3% of the employee's
earnings. The Company also made additional contributions in an amount
equal to 2% of the employee's earnings to the Keco Plan. The Company
recorded expenses based on contributions to the Keco Plan for the year
ended October 31, 1998 of $128,000. The Keco Plan was terminated
effective February 28, 1999 and all assets were transferred to the ESOP.
Note I >> Segment Information.
The Company operates in four segments: heavy military support equipment,
electronics and automation systems, light military support and related
industrial/commercial equipment and custom molded plastic products. The
heavy military support equipment segment engineers and manufactures load
management and transport systems primarily for the U.S. Department of
Defense (DoD). Segment products include aircraft load management
equipment, tank transport systems and bridging systems. The electronics
and automation systems segment engineers and manufactures radar and
electronic warfare systems, fire support systems and avionics test
equipment primarily for the DoD. The segment also engineers and
manufactures material handling equipment primarily for the U.S. Postal
Service and for the pharmaceutical industry throughout the United
States. The light military support and related industrial/commercial
equipment segment engineers and manufactures a broad range of military
support equipment primarily for the DoD, as well as related heat
transfer and air handling equipment for domestic commercial and
industrial users. Segment products include environmental control
systems, petroleum and water systems, chemical and biological defense
systems and other multipurpose military support equipment. The custom
molded plastic products segment manufactures a broad range of injection
molded resin products, as well as a proprietary line of plastic faucets,
primarily for commercial customers in the south-central United States.
<PAGE>
Management utilizes more than one measurement and multiple views of data
to measure segment performance and to allocate resources to the
segments. However, the dominant measurements are consistent with the
Company's consolidated financial statements and, accordingly, are
reported on the same basis herein. Management evaluates the performance
of its segments and allocates resources to them primarily based on
income from operations, along with cash flows and overall economic
returns. The Company's export net revenues and intersegment net revenues
are not significant. All corporate expenses and assets have been
allocated to the segments. In 1999, approximately 68% of consolidated
net revenues were from the U.S. government. Approximately 55% and 82%,
respectively, of 1998 and 1997 consolidated net revenues were from two
customers - 45% and 71%, respectively, from the U.S. government and 10%
and 11%, respectively, from another customer.
25
<PAGE>
<PAGE>
Information by industry segment is summarized as follows:
<TABLE>
<CAPTION>
===============================================================================================
Year Ended October 31 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues:
Light military support and
related industrial/
commercial equipment $128,341,269 $69,912,976 $64,397,161
Heavy military support
equipment 13,060,900
Electronics and automation
systems 5,124,269
Custom molded plastic
products 18,729,411 27,059,910 24,173,809
- -----------------------------------------------------------------------------------------------
Total $165,255,849 $96,972,886 $88,570,970
===============================================================================================
Income from Operations:
Light military support and
related industrial/
commercial equipment $ 12,617,176 $ 7,051,192 $ 5,577,402
Heavy military support
equipment 1,221,960
Electronics and automation
systems 241,100
Custom molded plastic
products 575,515 3,191,172 2,090,512
- -----------------------------------------------------------------------------------------------
Total $ 14,655,751 $10,242,364 $ 7,667,914
===============================================================================================
Identifiable Assets:
Military support and
related industrial/
commercial equipment $ 91,573,509 $76,871,245 $24,255,029
Heavy military support
equipment 77,312,902
Electronics and automation
systems 55,454,599
Custom molded plastic
products 15,055,132 15,288,977 12,829,025
- -----------------------------------------------------------------------------------------------
Total $239,396,142 $92,160,222 $37,084,054
===============================================================================================
Depreciation and Amortization:
Military support and
related industrial/
commercial equipment $ 2,912,995 $ 1,905,378 $ 833,008
Heavy military support
equipment 369,413
Electronics and automation
systems 163,804
Custom molded plastic
products 879,169 907,207 1,064,824
- -----------------------------------------------------------------------------------------------
Total $ 4,325,381 $ 2,812,585 $ 1,897,832
===============================================================================================
Capital Expenditures:
Military support and
related industrial/
commercial equipment $ 1,380,897 $ 332,030 $ 583,561
Heavy military support
equipment 5,454
Electronics and automation
systems 34,149
Custom molded plastic
products 173,003 999,117 1,403,761
- -----------------------------------------------------------------------------------------------
Total $ 1,593,503 $ 1,331,147 $ 1,987,322
===============================================================================================
===============================================================================================
</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 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 three-for-two 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.
26
<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,
1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended October 31, 1999, in
conformity with accounting principles generally accepted in the United
States. 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 auditing standards generally accepted in
the United States, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
December 10, 1999
Report of Management Responsibilities
The Company's management is responsible for the fair presentation and
consistency of all financial data included in the Annual Report. Where
necessary, the data reflects management estimates. The Company's Audit
Committee consists of three non-employee directors. This Committee meets
with financial officers and PricewaterhouseCoopers LLP personnel to
review internal controls, financial reporting and accounting practices.
PricewaterhouseCoopers LLP meets with the Audit Committee, with and
without management present, to discuss their examinations, the adequacy
of internal controls and the quality of financial reporting.
27
<PAGE>
<PAGE>
Supplemental Information
The table below presents unaudited quarterly financial information in
thousands, except for per share data, for the years ended October 31,
1999 and 1998:
<TABLE>
<CAPTION>
===================================================================================================================================
Quarter Ended
- -----------------------------------------------------------------------------------------------------------------------------------
January 31 April 30 July 31 October 31
1999 1998 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $28,237 $16,238 $40,697 $23,012 $37,900 $24,927 $58,422 $32,796
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 6,581 3,304 7,711 5,648 7,265 5,880 10,322 7,798
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 1,388 919 1,792 1,324 1,867 1,447 2,262 2,099
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share .29 .19 .35 .28 .27 .30 .33 .43
Diluted earnings per share .28 .19 .34 .27 .27 .29 .32 .42
- -----------------------------------------------------------------------------------------------------------------------------------
===================================================================================================================================
</TABLE>
Earnings per share calculations for each of the quarters is based on the
average basic and diluted common shares outstanding for each period and,
therefore, the sum of the quarters may not necessarily be equal to the
full year basic and diluted earnings per share amounts. All per share
amounts reflect a three-for-two stock split effected by the Company on
June 26, 1998.
Market Data
The Company's common stock trades on the NASDAQ Stock Market under the
symbol EASI. As of December 31, 1999, the approximate number of common
shareholders was 2,000. The following table sets forth the high and low
stock prices for each quarter as provided by the NASDAQ Stock Market.
<TABLE>
<CAPTION>
===============================================================================================
1999 1998
- -----------------------------------------------------------------------------------------------
High Low High Low
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Quarter Ended:
January 31 $17.63 $14.25 $16.00 $ 9.67
April 30 17.50 12.88 16.75 10.46
July 31 14.25 11.25 20.83 15.83
October 31 14.25 11.31 18.50 13.25
- -----------------------------------------------------------------------------------------------
===============================================================================================
</TABLE>
Dividends
The Board of Directors initiated a semi-annual dividend program in 1995.
The most recently declared dividend was in the amount of $.018 per share
payable January 31, 2000 to shareholders of record on December 31, 1999.
Corporate Information
Transfer Agent and Registrar
ChaseMellon Shareholder Services
200 North Broadway
St. Louis, MO 63102
Independent Accountants
PricewaterhouseCoopers LLP
800 Market Street
St. Louis, MO 63101
Legal Counsel
David Douglas Mattern
7700 Bonhomme Avenue
St. Louis, MO 63105
Annual Meeting
March 7, 2000
10:00 A.M.
Systems & Electronics Inc.
201 Evans Lane
St. Louis, MO 63121
Form 10-K
A copy of the Company's Annual Report
on Form 10-K filed with the Securities and
Exchange Commission is available upon
written request to:
Investor Relations
Engineered Support Systems, Inc.
1270 North Price Road
St. Louis, MO 63132
28
<PAGE>
<PAGE>
Directors and Officers
Directors
Michael F. Shanahan, Sr.
Chairman and Chief Executive Officer
Engineered Support Systems, Inc.
Gary C. Gerhardt
Vice Chairman - Administration and
Chief Financial Officer
Engineered Support Systems, Inc.
Gerald A. Potthoff
President and Chief Operating Officer
Engineered Support Systems, Inc.
R. Bruce Earls
President and Chief Executive Officer
Engineered Coil Company, d/b/a Marlo Coil
John J. Wichlenski
President and Chief Executive Officer
Engineered Air Systems, Inc.
MG George E. Friel
U.S. Army, Retired
Thomas J. Guilfoil
Partner
Guilfoil, Petzall & Shoemake
LTG Kenneth E. Lewi
U.S. Army, Retired
Michael F. Shanahan, Jr.
Lockton Companies
Earl E. Walker
President
Carr Lane Company
Earl W. Wims
President
Marketing Horizons, Inc.
Officers
Michael F. Shanahan, Sr.
Chairman and Chief Executive Officer
Gary C. Gerhardt
Vice Chairman - Administration and
Chief Financial Officer
Gerald A. Potthoff
President and Chief Operating Officer
Ronald W. Davis
Vice President - Planning and Development
Steven J. Landmann
Vice President - Controller
David D. Mattern
Secretary and General Counsel
R. Bruce Earls
President and Chief Executive Officer
Engineered Coil Company, d/b/a Marlo Coil
John J. Wichlenski
President and Chief Executive Officer
Engineered Air Systems, Inc.
John E. Capeless
President
Engineered Specialty Plastics, Inc.
Daniel A. Rodrigues
Senior Vice President and General Manager
Systems & Electronics Inc.
Thomas C. Santoro
President and Chief Executive Officer
Engineered Electric Company, d/b/a Fermont
Marvin L. Smith
President and Chief Executive Officer
Keco Industries, Inc.
<PAGE>
<PAGE>
[ESSI LOGO]
Engineered Support Systems, Inc.
1270 North Price Road
St. Louis, Missouri 63132
314.993.5880
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-14504) of the Engineered Support Systems,
Inc. Employee Stock Ownership Plan and the Registration Statements on
Form S-8 (Nos. 33-77340, 33-77342, 333-27695 and 333-52753) of the 1992
Stock Option Plan for Nonemployee Directors, the 1993 Stock Option Plan,
the 1997 Stock Option Plan for Nonemployee Directors, and the 1998 Stock
Option Plan, respectively, of our report dated December 10, 1999,
appearing on page 27 of the 1999 Annual Report to Shareholders of
Engineered Support Systems, Inc. which is incorporated by reference in
Engineered Support Systems, Inc.'s Annual Report on Form 10-K for the
year ended October 31, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
January 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT AS INCORPORATED BY REFERENCE IN FORM 10-K FOR THE YEAR ENDED OCTOBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 310,446
<SECURITIES> 0
<RECEIVABLES> 23,858,312
<ALLOWANCES> 264,272
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0
0
<OTHER-SE> 63,346,659
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<LOSS-PROVISION> (53,571)
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<INCOME-TAX> 4,871,000
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<CHANGES> 0
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<EPS-BASIC> 1.23
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</TABLE>
