-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D1+qge/bUkfW9ffJfcFh11LaBkErH4T+3/wXajNMb8xl0NA9LxwP4500lQW+SuIz 4NUd07o07pSD6zsr4yYTmA== 0001068800-99-000263.txt : 19990615 0001068800-99-000263.hdr.sgml : 19990615 ACCESSION NUMBER: 0001068800-99-000263 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENGINEERED SUPPORT SYSTEMS INC CENTRAL INDEX KEY: 0000772891 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 431313242 STATE OF INCORPORATION: MO FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13880 FILM NUMBER: 99645472 BUSINESS ADDRESS: STREET 1: 1270 N PRICE RD CITY: ST LOUIS STATE: MO ZIP: 63132 BUSINESS PHONE: 3149935880 MAIL ADDRESS: STREET 1: 1270 N PRICE RD CITY: ST LOUIS STATE: MO ZIP: 63132 10-Q 1 ENGINEERED SUPPORT SYSTEMS, INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q Quarterly Report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the six months ended April 30, 1999 Commission file number 0-13880 ENGINEERED SUPPORT SYSTEMS, INC. (Exact name of Registrant as specified in its charter) Missouri 43-1313242 (State of Incorporation) (IRS Employer Identification Number) 1270 North Price Road, St. Louis, Missouri 63132 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (314) 993-5880 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the Registrant's common stock, $.01 par value, outstanding at May 31, 1999 was 6,879,546. ENGINEERED SUPPORT SYSTEMS, INC. INDEX
Page ---- Part I - Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of April 30, 1999 and October 31, 1998 3 Condensed Consolidated Statements of Income for the three and six months ended April 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the three and six months ended April 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II - Other Information Items 1-6 14 Signatures 15 Exhibits 16
2 ENGINEERED SUPPORT SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
April 30 October 31 1999 1998 ------------ ----------- (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 182,670 $ 5,773,529 Accounts receivable 18,394,236 14,036,184 Contracts in process and inventories 28,791,000 18,686,810 Other current assets 1,402,119 1,542,973 ------------ ----------- Total Current Assets 48,770,025 40,039,496 Property, plant and equipment, less accumulated depreciation of $15,180,382 and $13,895,326 25,822,146 25,064,982 Cost in excess of net assets acquired, less accumulated amortization of $1,596,460 and $1,073,176 24,392,608 25,835,892 Other assets 1,148,646 1,219,852 ------------ ----------- Total Assets $100,133,425 $92,160,222 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 7,704,164 $ 7,204,172 Accounts payable 10,075,454 7,285,396 Other current liabilities 9,999,770 7,340,394 ------------ ----------- Total Current Liabilities 27,779,388 21,829,962 Long-term debt 9,810,414 36,779,160 Deferred income taxes 2,659,699 2,659,699 ESOP guaranteed bank loan 651,900 725,700 Shareholders' Equity Common stock, par value $.01 per share; 10,000,000 shares authorized; 7,503,854 and 5,490,604 shares issued 75,039 54,906 Additional paid-in capital 36,956,379 11,082,278 Retained earnings 26,776,169 23,682,931 ------------ ----------- 63,807,587 34,820,115 Less ESOP guaranteed bank loan 651,900 725,700 Less treasury stock at cost, 624,308 and 638,702 shares 3,923,663 3,928,714 ------------ ----------- 59,232,024 30,165,701 ------------ ----------- Total Liabilities and Shareholders' Equity $100,133,425 $92,160,222 ============ =========== See notes to condensed consolidated financial statements.
3 ENGINEERED SUPPORT SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended April 30 April 30 ----------------------------- ----------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net revenues $40,697,195 $23,011,706 $68,934,170 $39,249,845 Cost of revenues 32,986,319 17,363,247 54,641,948 30,297,617 ----------- ----------- ----------- ----------- Gross profit 7,710,876 5,648,459 14,292,222 8,952,228 Selling, general and administrative expense 4,140,063 3,214,711 7,776,028 5,059,171 ----------- ----------- ----------- ----------- Income from operations 3,570,813 2,433,748 6,516,194 3,893,057 Interest expense (671,423) (428,181) (1,365,184) (451,577) Interest income 34,651 47,387 91,417 143,635 Gain on sale of assets 54,193 151,125 56,209 151,125 ----------- ----------- ----------- ----------- Income before income taxes 2,988,234 2,204,079 5,298,636 3,736,240 Income tax provision 1,196,000 880,000 2,118,000 1,493,000 ----------- ----------- ----------- ----------- Net income $ 1,792,234 $ 1,324,079 $ 3,180,636 $ 2,243,240 =========== =========== =========== =========== Basic earnings per share $.35 $.28 $.64 $.47 =========== =========== =========== =========== Diluted earnings per share $.34 $.27 $.62 $.45 =========== =========== =========== =========== See notes to condensed consolidated financial statements.
4 ENGINEERED SUPPORT SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended April 30 ------------------------------ 1999 1998 ------------ ------------ From operating activities: Net income $ 3,180,636 $ 2,243,240 Depreciation and amortization 1,766,084 1,155,657 Gain on sale of assets (56,209) (151,125) ------------ ------------ Cash provided (used) before changes in operating assets and liabilities 4,890,511 3,247,772 Net (increase) decrease in non-cash current assets (584,173) (1,015,931) Net increase (decrease) in non-cash current liabilities 679,756 (110,579) (Increase) decrease in other assets 1,239,771 1,042,612 ------------ ------------ Net cash provided by (used in) operating activities 6,225,865 3,163,874 ------------ ------------ From investing activities: Purchase of Marlo Coil, net of cash acquired (25,297,717) Purchase of Fermont, net of cash acquired (9,907,238) Additions to property, plant and equipment (1,041,704) (157,041) Proceeds from sale of property, plant and equipment 79,249 151,125 ------------ ------------ Net cash provided by (used in) investing activities (10,869,693) (25,303,633) ------------ ------------ From financing activities: Net payments under line-of-credit agreement (1,075,961) Payments of long-term debt (26,468,754) (1,267,706) Proceeds of long-term debt 22,500,000 Net proceeds from issuance of common stock 25,550,000 Purchase of treasury stock (65,052) (495,652) Exercise of stock options 124,172 270,352 Cash dividends (87,397) (43,115) ------------ ------------ Net cash provided by (used in) financing activities (947,031) 19,887,918 ------------ ------------ Net increase (decrease) in cash and cash equivalents (5,590,859) (2,251,841) Cash and cash equivalents at beginning of period 5,773,529 8,313,160 ------------ ------------ Cash and cash equivalents at end of period $ 182,670 $ 6,061,319 ============ ============ See notes to condensed consolidated financial statements.
5 ENGINEERED SUPPORT SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) APRIL 30, 1999 NOTE A - BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended April 30, 1999 are not necessarily indicative of the results to be expected for the entire fiscal year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report to shareholders for the year ended October 31, 1998. NOTE B - EARNINGS PER SHARE All earnings per share amounts have been computed after giving effect to the stock split described in Note E. Average diluted common shares outstanding include common stock equivalents, which represent common stock options as computed based on the treasury stock method. Basic earnings per share for the three months ended April 30, 1999 and 1998 is based on average basic common shares outstanding of 5,052,423 and 4,747,826, respectively. Diluted earnings per share for the three months ended April 30, 1999 and 1998 is based on average diluted common shares outstanding of 5,230,602 and 4,970,508, respectively. Basic earnings per share for the six months ended April 30, 1999 and 1998 is based on average basic common shares outstanding of 4,950,724 and 4,755,098, respectively. Diluted earnings per share for the six months ended April 30, 1999 and 1998 is based on average diluted common shares outstanding of 5,129,827 and 4,968,911, respectively. 6 NOTE C - CONTRACTS IN PROCESS AND INVENTORIES Contracts in process and inventories of Engineered Air Systems, Inc., Keco Industries, Inc. and Engineered Electric Company represent accumulated contract costs, estimated earnings thereon based upon the percentage of completion method and contract inventories reduced by the contract value of delivered items. Inventories of Engineered Specialty Plastics, Inc. and Engineered Coil Company are valued at the lower of cost or market using the first-in, first-out method. Contracts in process and inventories are comprised of the following:
April 30, 1999 October 31, 1998 -------------- ---------------- Raw materials $ 4,351,086 $ 4,578,766 Work-in-process 1,339,746 1,397,593 Finished goods 661,231 845,607 Inventories substantially applicable to government contracts in process, less progress payments of $13,894,955 and $15,932,239 22,438,937 11,864,844 ----------- ----------- $28,791,000 $18,686,810 =========== ===========
NOTE D - ACQUISITIONS Effective February 1, 1998, Engineered Coil Company, a wholly-owned subsidiary of Engineered Support Systems, Inc., acquired substantially all of the net assets of Nuclear Cooling, Inc., d/b/a Marlo Coil, a manufacturer of heat transfer and air movement equipment, from an investor group for approximately $25.4 million. The fair value of assets acquired, including goodwill of $17.1 million, was $31.0 million and liabilities assumed totaled $5.6 million. The purchase price was financed with approximately $2.9 million of available cash resources and bank term debt of $22.5 million. The operating results of Engineered Coil Company (Marlo Coil) are included in the Company's consolidated results of operations from the date of acquisition. On May 29, 1998, Marlo Coil purchased the exclusive rights to manufacture and distribute the U.S. Navy/Marine products of Edge Electronics Corporation, d/b/a McIntyre Engineering, for approximately $1.5 million. The fair value of the assets acquired was $1.5 million, including goodwill of $1.4 million and a seven-year covenant not to compete of $0.1 million. The purchase price was financed with available cash resources. On June 24, 1998, the Company acquired all of the outstanding stock of Keco Industries, Inc. (Keco), a manufacturer of military ground support equipment, from an investor group for approximately $26.7 million. ($1.2 million of this amount relates to consideration paid to Keco's previous shareholders in order for the Company to elect treatment of the transaction as an asset purchase pursuant to Section 338(h)(10) of the Internal Revenue Code. This election allows the Company to generate deductions for goodwill amortization and additional depreciation for federal income tax purposes.) The fair value of the assets acquired, including goodwill of $6.5 million, was $29.6 million and liabilities assumed totaled $2.9 million. The purchase price was financed with 7 approximately $4.2 million of available cash resources and bank term debt of $22.5 million. The operating results of Keco are included in the Company's consolidated results of operations from the date of acquisition. On February 22, 1999, Engineered Electric Company, a wholly-owned subsidiary of the Company, acquired substantially all of the net assets of the Fermont division of Dynamics Corporation of America, a manufacturer of electrical generator sets primarily for the Department of Defense, for approximately $9.9 million. The fair value of assets acquired was $14.7 million and liabilities assumed totaled $4.8 million. The purchase price was financed with available cash resources and short-term borrowings under the Company's revolving credit facility. The operating results of Engineered Electric Company (Fermont) are included in the Company's consolidated results of operations from the date of acquisition. The following unaudited pro forma summary presents the combined historical results of operations for the six months ended April 30, 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.
Six Months Ended April 30 -------- 1999 1998 ----------- ----------- Net revenues $81,498,848 $94,652,533 =========== =========== Net income $ 2,775,281 $ 1,799,057 =========== =========== Basic earnings per share $.56 $.38 =========== =========== Diluted earnings per share $.54 $.36 =========== ===========
NOTE E - STOCK SPLIT On June 26, 1998, the Company effected a 3-for-2 stock split in the form of a 50% stock dividend. All earnings per share amounts in this Form 10-Q have been restated to reflect this stock split. NOTE F - PUBLIC OFFERING OF COMMON STOCK On April 23, 1999, the Company issued an additional 2,000,000 shares of common stock through a public offering, resulting in net proceeds of $25,550,000. A portion of the proceeds was used to repay borrowings under the Company's line-of-credit agreement with the remainder used to repay a portion of the Company's long-term debt. Shares outstanding at April 30, 1999 and October 31, 1998 were 6,879,546 and 4,851,902, respectively. 8 ENGINEERED SUPPORT SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Revenues. Net revenues increased 76.9% in the second quarter of 1999 to $40.7 million from $23.0 million in the second quarter of 1998. Net revenues from military support and related industrial/commercial equipment increased by $20.6 million to $36.1 million in the second quarter of 1999 from $15.5 million in the second quarter of 1998. This increase was due to an additional $19.1 million of net revenues generated by the acquisitions of Keco Industries, Inc. (Keco) and of Fermont. (See Note D of the April 30, 1999 condensed consolidated financial statements for further discussion). Net revenues from sales of custom molded plastic products through Engineered Specialty Plastics, Inc. (ESP) decreased $2.9 million to $4.6 million in the second quarter of 1999 from $7.5 million in the second quarter of 1998. This decrease was the result of an anticipated decrease in orders from a significant customer which the Company expects will return to more normalized levels in the fourth quarter of 1999. Net revenues increased 75.6% in the first six months of 1999 to $68.9 million from $39.2 million in the first six months of 1998. Net revenues from military support and related industrial/commercial equipment increased by $31.6 million to $58.5 million in the first half of 1999 from $26.9 million in the comparable 1998 period. This increase was due to an additional $34.1 million of net revenues generated by the acquisitions of Marlo Coil, Keco and Fermont. Net revenues from the sales of custom molded plastic products through ESP decreased $1.9 million in the six months ended April 30, 1999 compared to the prior year period as a result of the decrease in orders described above. Gross Profit. Gross profit for the second quarter of 1999 increased 36.5% to $7.7 million (18.9% of net revenues) from $5.6 million (24.5% of net revenues) in the second quarter of 1998. Gross profit for the six months ended April 30, 1999 increased 59.6% to $14.3 million (20.7% of net revenues) from $9.0 million (22.8% of net revenues) in the first half of 1998. The increases in gross profit were primarily a result of the businesses acquired, net of a volume-driven decrease in gross profit at ESP. The decreases in gross margins were primarily due to lower gross margins generated by Keco and Fermont as compared to those experienced by historical operations, as well as to a gross margin decrease at ESP. Selling, General and Administrative Expense. Selling, general and administrative expense increased by $0.9 million to $4.1 million (10.2% of net revenues) for the quarter ended April 30, 1999 from $3.2 million (14.0% of net revenues) for the second quarter of 1998. Selling general and administrative expense increased by $2.7 million to $7.8 million (11.3% of net revenues) for the six months ended April 30, 1999 from $5.1 million (12.9% of net revenues) in 1998. These increases were due to the addition of selling, general and administrative expense generated by the businesses acquired, including additional goodwill amortization of $0.1 million for the second quarter of 1999 compared to the second quarter of 1998 and $0.3 million for the first half of 1999 compared to the same period in 1998. 9 Interest Expense and Interest Income. Interest expense increased by $0.2 million to $0.7 million for the quarter ended April 30, 1999 as compared to the prior year period as a result of debt incurred in conjunction with the Keco and Fermont acquisitions. Interest expense increased $0.9 million to $1.4 million for the first half of 1999 as compared to the same period in 1998 as a result of debt incurred in conjunction with the Marlo Coil, Keco and Fermont acquisitions. Interest income was comparable for all periods presented. Income Tax Provision. The effective income tax rate was 40.0% for the quarter ended April 30, 1999 and 39.9% for the quarter ended April 30, 1998. The effective income tax rate for the six month periods ended April 30, 1999 and 1998 was 40.0% Net Income. As a result of the foregoing, net income of the Company increased by 35.4% to $1.8 million (4.4% of net revenues) for the quarter ended April 30, 1999 from $1.3 million (5.8% of net revenues) for the second quarter of 1998, and increased by 41.8% to $3.2 million (4.6% of net revenues) for the first half of 1999 from $2.2 million (5.7% of net revenues) for the first half of 1998. LIQUIDITY AND CAPITAL RESOURCES In March 1998, the Company restated and amended its credit facility to provide a $45.0 million term loan to finance the Marlo Coil and Keco acquisitions and to provide a $10.0 million revolving credit facility. (The revolving credit facility was subsequently increased to $15.0 million as of April 13, 1999). Principal payments on the term loan began September 1, 1998, with the final payment due May 1, 2003. The Company may choose an interest rate calculated at either LIBOR plus an applicable margin or at the prime rate less 0.5%. The margin applicable to LIBOR varies from 0.5% to 1.5% depending upon the Company's ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (leverage ratio). Pursuant to the terms of the restated and amended credit facility, the Company is subject to various financial and operating covenants. Although the Company is currently in compliance with all such covenants, the failure of the Company to comply with any of these covenants would constitute a default which, if not timely corrected or waived, could result in an acceleration of the maturity of certain of the debt obligations of the Company. On April 23, 1999, the Company issued an additional 2,000,000 shares of common stock through a public offering, resulting in net proceeds of $25,550,000. A portion of the proceeds were used to repay outstanding borrowings under the Company's line-of-credit agreement with the remainder used to repay a portion of the Company's long-term debt. The Company ultimately expects that funds generated through the public offering will provide additional flexibility as it continues to pursue strategic acquisitions within the defense industry. 10 The Company's primary sources of short-term financing are from cost reimbursements under contracts with the U.S. government via receipt of progress payments, billings for delivered products and bank borrowings under its revolving line of credit. On April 30, 1999, the Company's working capital and ratio of current assets to current liabilities were $21.0 million and 1.76 to 1 as compared to $18.2 million and 1.83 to 1, respectively, at October 31, 1998. During 1998, the Company purchased Marlo Coil, net of cash acquired, for $25.3 million and purchased Keco, net of cash acquired, for $24.1 million. During 1999, the Company purchased Fermont, net of cash acquired, for $9.9 million. These acquisitions were financed with term loan borrowings under the restated and amended credit facility and with available cash resources. See Note D of the April 30, 1999 condensed consolidated financial statements for further discussion. The Company invested $1.0 million in property, plant and equipment during the six months ended April 30, 1999 and anticipates that capital expenditures will not exceed $2.0 million for the year ended October 31, 1999. Management believes that cash flow generated by existing operations, together with the available line of credit, will provide the necessary resources to meet the existing needs of the Company in the foreseeable future. BUSINESS AND MARKET CONSIDERATIONS Approximately 74% of consolidated net revenues for the six months ended April 30, 1999 were directly or indirectly derived from defense orders by the U.S. government and its agencies. As of April 30, 1999, the Company's combined backlog of defense orders at Engineered Air, Keco, Fermont and Marlo Coil totaled $172.2 million, with related government options of an additional $455.7 million. Management continues to pursue potential acquisitions, primarily of those companies providing strategic consolidation within the defense industry. YEAR 2000 READINESS DISCLOSURE We are dependent upon computer hardware and software for internal operations and for processing product orders with our customers and suppliers. We rely on computerized systems for nearly every component of our business operations including: production scheduling and control; purchasing and receiving; inventory control; sales orders and invoicing; accounting (including accounts payable, accounts receivable, general ledger and payroll); engineering; quality control and inspection; word processing; and, in some cases, product testing. We have developed and are implementing a plan to address Year 2000 issues which may impact our business. This plan includes: (a) surveys of information technology systems, non-information technology or non-IT systems and product categories; (b) assessment of required replacement or other Year 2000 remediation; (c) implementation and subsequent testing of systems for Year 2000 compliance; and (d) review of material suppliers' and customers' Year 2000 status or impact on our ability to avoid business interruption. 11 We have completed Year 2000 compliance testing on substantially all of our information technology systems and expect to have such testing completed by September 30, 1999. Such testing to date has not revealed any material noncompliance. We are in the process of upgrading or replacing those systems we believe may be noncompliant and expect to have such work completed by September 30, 1999. With respect to non-IT systems such as security/alarm, fire control and telephone systems, we have surveyed and evaluated these systems for Year 2000 problems. In some instances, this evaluation has included communications with the original manufacturers or suppliers for representations regarding the equipment. We believe that the majority of these non-IT systems do not function on date-sensitive software or hardware. We therefore do not anticipate that Year 2000 poses a significant risk to non-IT systems. We do not generally manufacture products which contain date-sensitive computerized components other than control units for some air handling units manufactured by Marlo. We obtain these control units from third- party suppliers and test them for Year 2000 compliance at the time of installation. Accordingly, we do not anticipate significant Year 2000 risks associated with our products. We may be affected by the Year 2000 readiness of our major suppliers and customers, over which we have no direct control. We believe that there is no single supplier which is critical to our business as a whole or which could cause a significant disruption in our production, although some of our business could be affected if a particular supplier on a particular contract were to fail to perform due to a Year 2000 failure within that supplier's business at a critical time. We have contacted some of our significant suppliers with Year 2000 surveys designed to assess supplier Year 2000 readiness and may contact other significant suppliers we conclude present a material Year 2000 risk. Of the suppliers responding, a significant number have indicated that they consider themselves Year 2000 compliant. We anticipate Year 2000 compliance of our significant suppliers by September 30, 1999 and may replace any such suppliers who have failed to respond to surveys or who cannot provide reasonable Year 2000 assurances. Approximately 75% of our revenues come directly or indirectly from the Department of Defense. Year 2000 compliance by government agencies is difficult to assess. However, according to published reports, which we have not verified, the government may not be fully Year 2000 compliant on a timely basis. A disruption in the day-to-day functions of the Department of Defense or other government agencies (and more particularly, a disruption in the ability to pay accounts payable) could have a material adverse impact on our business. We expect to expend a total of approximately $0.3 million on Year 2000 compliance, of which approximately $0.2 million had been expended through April 30, 1999. 12 In addition to the risks identified in the foregoing discussion, we face material risks that (i) automated business functions could falter due to undetected or unaddressed Year 2000 issues which, for instance, could increase the cost of operations and cause delays in product shipment, and (ii) interruption in utilities could cause plant shutdowns. Any one of these scenarios could have a material adverse impact on our operations, liquidity and financial condition. To date, we have not developed a formal Year 2000 contingency plan. During the first half of calendar 1999, we will continue our Year 2000 compliance efforts as described above and, in conjunction therewith, intend to research and develop alternative plans designed to mitigate the potential adverse consequences of either an internal or external Year 2000 problem. These plans will include, for instance: (i) securing funding sources to cover our cash needs in the event we suffer payment delays from a major customer, and (ii) identifying alternative supply sources in the event significant suppliers are unable to deliver products on a timely basis. FORWARD-LOOKING STATEMENTS In addition to historical information, this report includes certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. The forward-looking statements involve certain risks and uncertainties, including, but not limited to acquisitions, additional financing requirements, the decision of any of the Company's key customers (including the U.S. government) to reduce or terminate orders with the Company, cutbacks in defense spending by the U.S. government, increased competition in the Company's markets 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. 13 PART II OTHER INFORMATION Items 1-3 Not applicable. Item 4 Submission of Matters to a Vote of Security Holders (a) The Company's annual shareholders meeting was held on March 8, 1999. (b) The following individuals were nominated and elected to the Board of Directors for a term of three years (2002): MG George E. Friel (Retired) Thomas J. Guilfoil The following directors continued in service of their terms following the meeting: Michael F. Shanahan Sr. Gary C. Gerhardt R. Bruce Earls John J. Wichlenski LTG Kenneth E. Lewi (Retired) Michael F. Shanahan Jr. Earl E. Walker Earl W. Wims Item 5 Not applicable. Item 6 (a) Exhibits 11. Statement Re: Computation of Earnings Per Share. 27. Statement Re: Financial Data Schedule (b) Form 8-K was filed on March 8, 1999 related to the acquisition by Engineered Electric Company, a wholly-owned subsidiary of the Company, on February 22, 1999 of substantially all of the net assets of the Fermont division of Dynamics Corporation of America. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENGINEERED SUPPORT SYSTEMS, INC. Date: June 14, 1999 By: Michael F. Shanahan Sr. ------------------ -------------------------------- Michael F. Shanahan Sr. Chairman of the Board, President and Chief Executive Officer Date: June 14, 1999 By: Gary C. Gerhardt ------------------ -------------------------------- Gary C. Gerhardt Executive Vice President and Chief Financial Officer 15 EX-11 2 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 ENGINEERED SUPPORT SYSTEMS, INC. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended April 30 April 30 ---------------------------- ---------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- NET INCOME $1,792,234 $1,324,079 $3,180,636 $2,243,240 ========== ========== ========== ========== BASIC EARNINGS PER SHARE Average basic shares outstanding 5,052,423 4,747,826 4,950,724 4,755,098 ========== ========== ========== ========== $.35 $.28 $.64 $.47 ========== ========== ========== ========== DILUTED EARNINGS PER SHARE Average basic shares outstanding 5,052,423 4,747,826 4,950,724 4,755,098 Net effect of dilutive stock options 178,179 222,682 179,103 213,813 ---------- ---------- ---------- ---------- 5,230,602 4,970,508 5,129,827 4,968,911 ========== ========== ========== ========== $.34 $.27 $.62 $.45 ========== ========== ========== ========== Based on the treasury stock method. Note: On June 26, 1998, the Company effected a 3-for-2 stock split in the form on a 50% stock dividend. All share and per share amounts included on this schedule reflect this stock split.
16 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE SIX MONTHS ENDED APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS OCT-31-1999 NOV-01-1998 APR-30-1999 182,670 0 18,485,376 91,140 28,791,000 48,770,025 41,002,528 15,180,382 100,133,425 27,779,388 10,462,314 75,039 0 0 59,156,985 100,133,425 68,934,170 68,934,170 54,641,948 54,641,948 7,885,498 (53,261) 1,273,767 5,298,636 2,118,000 3,180,636 0 0 0 3,180,636 .64 .62
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