<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 11-K
Annual Report Pursuant to Section 15 (d)
of the Securities Exchange Act of 1934
For the year ended December 31, 1997 Commission file number 0-13880
A. Full title of the Plan
ENGINEERED SUPPORT SYSTEMS, INC. EMPLOYEE STOCK OWNERSHIP PLAN
B. Name of the issuer of the securities held pursuant to the plan and the
address of its principle executive office:
ENGINEERED SUPPORT SYSTEMS, INC.
1270 NORTH PRICE ROAD
ST. LOUIS, MISSOURI 63132
(314) 993-5880
<PAGE> 2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan
Administrator has duly caused this Annual Report to be signed by the
undersigned, thereunto duly authorized.
ENGINEERED SUPPORT SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
Date: 6/19/98 /s/ Gary C. Gerhardt
--------------------- ----------------------------------------
Gary C. Gerhardt
Executive Vice President and
Chief Financial Officer of
Engineered Support Systems, Inc.
and Member of the Administrative
Committee of the Plan
<PAGE> 3
PRICE WATERHOUSE LLP
June 12, 1998
To the Participants and Administrator of
Engineered Support Systems, Inc.
Employee Stock Ownership Plan
In our opinion, the accompanying statements of net assets available for plan
benefits with fund information and the related statements of changes in net
assets available for plan benefits with fund information present fairly, in
all material respects, the net assets available for plan benefits of the
Engineered Support Systems, Inc. Employee Stock Ownership Plan at December
31, 1997 and 1996, and the changes in the net assets available for plan
benefits for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Plan Administrator; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by the Plan
Administrator, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion
expressed above.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Fund Information in the
statements of net assets available for plan benefits with fund information
and the statements of changes in net assets available for plan benefits with
fund information is presented for purposes of additional analysis rather than
to present the net assets available for plan benefits and changes in net
assets available for plan benefits of each fund. Such information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ PRICE WATERHOUSE LLP
<PAGE> 4
<TABLE>
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION
ENGINEERED SUPPORT SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
<CAPTION>
December 31, 1997
Fund Information
--------------------------------------------------------------------------------
ESSI Strategic Overseas Target Balanced Guaranteed
Stock Growth Equity Value Asset Investment Loan
Total Fund Portfolio Portfolio Portfolio Portfolio Portfolio Fund
----- ---- --------- --------- --------- --------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 32,006 $ 3,553 $ 7,055 $ 4,418 $ 6,245 $ 5,857 $ 4,878
Investments, at fair value 12,756,735 7,564,565 977,657 523,433 1,463,893 1,089,939 931,683 $205,565
Contributions receivable:
Employer 6,212 6,212
----------- ---------- -------- -------- ---------- ---------- -------- --------
12,794,953 7,574,330 984,712 527,851 1,470,138 1,095,796 936,561 205,565
Liabilities:
Accrued interest 6,212 6,212
Long-term debt 848,700 848,700
----------- ---------- -------- -------- ---------- ---------- -------- --------
854,912 854,912
----------- ---------- -------- -------- ---------- ---------- -------- --------
Net Assets Available
for Plan Benefits $11,940,041 $6,719,418 $984,712 $527,851 $1,470,138 $1,095,796 $936,561 $205,565
=========== ========== ======== ======== ========== ========== ======== ========
See notes to financial statements.
</TABLE>
<PAGE> 5
<TABLE>
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION
ENGINEERED SUPPORT SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
<CAPTION>
December 31, 1996
Fund Information
---------------------------------------------------------------------------
ESSI Strategic Target Balanced Guaranteed
Stock Growth Value Asset Investment Loan
Total Fund Portfolio Portfolio Portfolio Portfolio Fund
----- ---- --------- --------- --------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 101,511 $ (2,563) $ 33,827 $ 13,293 $(12,518) $ 69,472
Investments, at fair value 10,814,801 6,860,063 633,152 1,048,754 997,866 1,072,276 $202,690
Contributions receivable:
Employer 7,078 7,078
----------- ---------- -------- ---------- -------- ---------- --------
10,923,390 6,864,578 666,979 1,062,047 985,348 1,141,748 202,690
Liabilities:
Accrued interest 7,078 7,078
Long-term debt 996,300 996,300
----------- ---------- -------- ---------- -------- ---------- --------
1,003,378 1,003,378
----------- ---------- -------- ---------- -------- ---------- --------
Net Assets Available
for Plan Benefits $ 9,920,012 $5,861,200 $666,979 $1,062,047 $985,348 $1,141,748 $202,690
=========== ========== ======== ========== ======== ========== ========
See notes to financial statements.
</TABLE>
<PAGE> 6
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION
ENGINEERED SUPPORT SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
<CAPTION>
December 31, 1997
Fund Information
-------------------------------------------
ESSI Strategic Overseas
Stock Growth Equity
Total Fund Portfolio Portfolio
----- ---- --------- ---------
<S> <C> <C> <C> <C>
Additions:
Employee contributions $ 417,918 $ 61,739 $ 94,102 $ 39,320
Employer contributions 366,957 366,957
Realized and unrealized
gains, net 1,602,288 1,602,288
Net gain from common/
collective trusts 660,722 136,409 31,916
Interest & dividend income 59,188 37,449 1,992 62
Transfers (to) from
other funds (587,289) 135,682 458,210
----------- ---------- -------- --------
3,107,073 1,481,144 368,185 529,508
----------- ---------- -------- --------
Deductions:
Participant withdrawals 1,019,523 555,405 50,452 1,657
Interest expense 67,521 67,521
----------- ---------- -------- --------
1,087,044 622,926 50,452 1,657
----------- ---------- -------- --------
Net increase (decrease) 2,020,029 858,218 317,733 527,851
Net Assets Available for
Plan Benefits at
Beginning of Year 9,920,012 5,861,200 666,979 0
----------- ---------- -------- --------
Net Assets Available for
Plan Benefits at
End of Year $11,940,041 $6,719,418 $984,712 $527,851
=========== ========== ======== ========
<CAPTION>
December 31, 1997
Fund Information
-------------------------------------------------------------
Target Balanced Guaranteed
Value Asset Investment Loan
Portfolio Portfolio Portfolio Fund
--------- --------- --------- ----
<S> <C> <C> <C> <C>
Additions:
Employee contributions $ 90,560 $ 80,992 $ 51,205
Employer contributions
Realized and unrealized
gains, net
Net gain from common/
collective trusts 265,352 162,878 64,167
Interest & dividend income 627 (365) 478 $ 18,945
Transfers (to) from
other funds 147,710 (9,704) (142,345) (2,264)
---------- ---------- ---------- --------
504,249 233,801 (26,495) 16,681
---------- ---------- ---------- --------
Deductions:
Participant withdrawals 96,158 123,353 178,692 13,806
Interest expense
---------- ---------- ---------- --------
96,158 123,353 178,692 13,806
---------- ---------- ---------- --------
Net increase (decrease) 408,091 110,448 (205,187) 2,875
Net Assets Available for
Plan Benefits at
Beginning of Year 1,062,047 985,348 1,141,748 202,690
---------- ---------- ---------- --------
Net Assets Available for
Plan Benefits at
End of Year $1,470,138 $1,095,796 $ 936,561 $205,565
========== ========== ========== ========
See notes to financial statements.
</TABLE>
<PAGE> 7
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION
ENGINEERED SUPPORT SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
<CAPTION>
December 31, 1996
Fund Information
-------------------------------------------------------------------------------
ESSI Strategic Target Balanced Guaranteed
Stock Growth Value Asset Investment Loan
Total Fund Portfolio Portfolio Portfolio Portfolio Fund
----- ---- --------- --------- --------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Additions:
Employee contributions $ 379,447 $ 49,992 $ 80,418 $ 89,482 $ 91,622 $ 67,933
Employer contributions 288,870 288,870
Realized and unrealized
gains, net 3,734,272 3,734,272
Net gain from common/
collective trusts 431,307 81,421 168,682 106,380 74,824
Interest & dividend income 28,944 7,352 472 699 645 858 $ 18,918
Transfers (to) from
other funds (82,433) 209,105 12,714 218,474 (306,837) (51,023)
---------- ---------- -------- ---------- -------- ---------- --------
4,862,840 3,998,053 371,416 271,577 417,121 (163,222) (32,105)
---------- ---------- -------- ---------- -------- ---------- --------
Deductions:
Participant withdrawals 262,776 156,017 5,899 35,108 42,662 23,090
Interest expense 83,377 83,377
---------- ---------- -------- ---------- -------- ---------- --------
346,153 239,394 5,899 35,108 42,662 23,090
---------- ---------- -------- ---------- -------- ---------- --------
Net increase (decrease) 4,516,687 3,758,659 365,517 236,469 374,459 (186,312) (32,105)
Net Assets Available for
Plan Benefits at
Beginning of Year 5,403,325 2,102,541 301,462 825,578 610,889 1,328,060 234,795
---------- ---------- -------- ---------- -------- ---------- --------
Net Assets Available for
Plan Benefits at
End of Year $9,920,012 $5,861,200 $666,979 $1,062,047 $985,348 $1,141,748 $202,690
========== ========== ======== ========== ======== ========== ========
See notes to financial statements.
</TABLE>
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
ENGINEERED SUPPORT SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
December 31, 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Engineered Support Systems, Inc. Employee
Stock Ownership Plan (the Plan) are presented on the accrual basis of
accounting. Benefits due to former participants are recorded as a reduction
in net assets available for Plan benefits when paid. At December 31, 1997
and 1996, undistributed withdrawals to former participants totaled $732,956
and $428,811, respectively, representing allocations of net assets available
for Plan benefits.
Investments in the ESSI Stock Fund are stated at fair value based on the last
reported sales price of Engineered Support Systems, Inc. (the Company) common
stock on December 31, 1997 and 1996, respectively. Investments in the
Strategic Growth Portfolio (managed by Nicholas-Applegate Capital
Management), the Overseas Equity Portfolio (managed by Brandes Investment
Partners), the Target Value Portfolio (managed by Jurika & Voyles, Inc.
Investment Management), the Balanced Asset Portfolio (managed by Avatar
Associates Investment Counsel) and the Guaranteed Investment Portfolio
(managed by Mitchell Hutchins Asset Management) are stated at the fair value
of the underlying portfolio of securities, as determined by the respective
manager.
Investment income is recorded as earned. Net realized gains or losses on
security transactions represent the difference between proceeds received and
cost. In accordance with the policy of stating investments at fair value,
net unrealized appreciation or depreciation is reflected in the Statements of
Net Assets Available for Plan Benefits and the change in net unrealized
appreciation or depreciation is reflected in the Statements of Changes in Net
Assets Available for Plan Benefits.
Notes receivable, which represent all investments in the Loan Fund, are
valued at their outstanding principal amount. These notes bear interest at a
rate equal to the prime interest rate plus one percentage point.
Administrative expenses of the Plan are paid by the Company.
NOTE B--DESCRIPTION OF THE PLAN
The Plan is a combined 401(k) savings plan and a payroll-based employee stock
ownership plan covering the salaried employees and all non-salaried employees
not otherwise covered by a collective bargaining agreement of the Company and
its wholly-owned subsidiaries, Engineered Air Systems, Inc. and Engineered
Specialty Plastics, Inc. Eligible employees age 21 or older who have
attained one year of service may enroll in the Plan. Upon enrollment,
participants may elect to defer from 1% to 15% of their compensation in the
Plan, up to a maximum of $9,500 for the year ended December 31, 1997. Under
current Internal Revenue Service regulations, this maximum amount is adjusted
annually for cost of living increases.
<PAGE> 9
Contributions under the Plan consist of the following:
1. The amount of the salary reduction elections of all Plan
participants (the employee contribution).
2. The Company's discretionary contribution of an amount no less
than the amount sufficient to pay the monthly installments of the
bank loan (the employer discretionary contribution).
3. The Company's matching contribution of no less than 25% of each
employee's contribution up to a maximum of 6% of the employee's
earnings (the employer matching contribution).
Employee contributions and employer matching contributions are 100% vested.
Participants vested at a rate of 20% per year in employer discretionary
contributions prior to January 1, 1997 at which point these contributions
also became 100% vested.
At December 31, 1997, the following investment options existed with respect
to employee contributions:
ESSI Stock Fund, which invests in the Company's common stock.
Strategic Growth Portfolio, which invests in equity securities of
growth companies as defined by the manager.
Overseas Equity Portfolio, which invests in equity securities of non-
U.S. companies in both mature and emerging economies around the world.
Target Value Portfolio, which invests in equity securities of companies
which the manager believes sell at a discount to actual value.
Balanced Asset Portfolio, which invests in both equity and fixed income
securities.
Guaranteed Investment Portfolio, which invests in fixed income
securities, primarily insurance and bank investment contracts.
All contributions by the Company are made to the ESSI Stock Fund.
The Plan also maintains a Loan Fund, which represents participant borrowings
from existing balances in other Plan funds. These loans are to be repaid
over a period not to exceed five years.
The Plan Administrator is Engineered Air Systems, Inc. acting through its
Chairman, Michael F. Shanahan Sr. Mr. Shanahan has appointed an
Administrative Committee to administer the Plan. The Company bears all
expenses of administering the Plan, including any compensation of the
trustee, PW Trust Company. No trustee fees or other administrative expenses
were paid from Plan assets during the years ended December 31, 1997 or 1996.
Information about the Plan, including provisions for vesting, allocation of
earnings, withdrawal provisions and the impact of Plan termination is
contained in the Summary Plan Description. Copies of the Summary Plan
Description are available from the Company.
<PAGE> 10
At December 31, 1997, Plan participants had elective account balances in the
following funds:
ESSI Stock Fund 73
Strategic Growth Portfolio 101
Overseas Equity Portfolio 72
Target Value Portfolio 103
Balanced Asset Portfolio 90
Guaranteed Investment Portfolio 73
<PAGE> 11
NOTE C--INVESTMENTS
The following schedule presents information regarding assets held for
investment:
<TABLE>
<CAPTION>
Shares Cost Fair Value
------ ---- ----------
<S> <C> <C> <C>
Balance at December 31, 1997:
- -----------------------------
ESSI Stock Fund
Engineered Support Systems, Inc. common stock 411,677 $2,404,261 $ 7,564,565
Strategic Growth Portfolio, managed by
Nicholas-Applegate Capital Management 55,297 737,674 977,657
Overseas Equity Portfolio, managed by
Brandes Investment Partners 39,309 491,546 523,433
Target Value Portfolio, managed by
Jurika & Voyles, Inc. Investment Management 82,431 955,638 1,463,893
Balanced Asset Portfolio, managed by
Avatar Associates Investment Counsel 64,970 766,676 1,089,939
Guaranteed Investment Contract Portfolio,
managed by Mitchell Hutchins Asset Management 46,249 791,240 931,683
Loan Fund
Notes receivable from participants bearing
interest rates ranging from 7.0% to 9.75%
with remaining maturities of 1 month to 5 years N/A 205,565 205,565
---------- -----------
$6,352,600 $12,756,735
========== ===========
Balance at December 31, 1996
- ----------------------------
ESSI Stock Fund
Engineered Support Systems, Inc. common stock 465,089 $3,221,849 $ 6,860,063
Strategic Growth Portfolio, managed by
Nicholas-Applegate Capital Management 43,036 505,074 633,152
Target Value Portfolio, managed by
Jurika & Voyles, Inc. Investment Management 74,338 776,595 1,048,754
Balanced Asset Portfolio, managed by
Avatar Associates Investment Counsel 69,402 801,883 997,866
Guaranteed Investment Contract Portfolio,
managed by Mitchell Hutchins Asset Management 56,770 957,599 1,072,276
Loan Fund
Notes receivable from participants bearing
interest rates ranging from 7.0% to 10.0%
with remaining maturities of 1 month to 5 years N/A 202,690 202,690
---------- -----------
$6,465,690 $10,814,801
========== ===========
</TABLE>
<PAGE> 12
NOTE D--CHANGES IN THE PLAN
The Plan has pledged shares of the Company's common stock, purchased with
bank loan proceeds, as collateral for its loan with NationsBank. Each year,
NationsBank releases a proportionate number of shares equal to the ratio of
principal and interest paid during the year to the total of principal and
interest paid and to be paid on the loan. The shares released are allocated
to the participant accounts in relation to each participant's compensation to
total participant compensation for the year. At December 31, 1997, 52,511
shares of the Company's common stock with a fair value of $965,000 are held
in suspense and are pledged as collateral for the bank loan. 11,118 and
11,631 shares of the Company's common stock were released from suspense and
allocated to participant accounts for the years ended December 31, 1997 and
1996, respectively.
NOTE E--INCOME TAX STATUS
The Plan received a favorable letter of determination from the Internal
Revenue Service dated September 20, 1996 indicating compliance with section
401(a) of the Internal Revenue Code and exemption under the provisions of
section 501(a). Therefore, it is the opinion of the Plan Administrator that,
as of December 31, 1997, the Plan is in compliance with section 401(a) of the
Internal Revenue Code and is exempt under the provisions of section 501(a).
Thus, provision for federal income taxes is not required in the accompanying
financial statements.
Participants are not subject to federal income tax on amounts contributed to
their accounts under the 401(k) provisions of the Plan, or on earnings
attributable to such contributions, until such time as these amounts are
distributed to or withdrawn by the participants.
NOTE F--SUBSEQUENT EVENT
Effective February 1, 1998, the Company acquired substantially all of the net
assets of Nuclear Cooling, Inc., d/b/a Marlo Coil. Marlo Coil had previously
sponsored the Marlo Coil Employees Retirement Plan, a qualified defined
contribution plan which last received a favorable determination letter from
the Internal Revenue Service on October 16, 1996. As of June 30, 1997, the
Marlo Coil Employees Retirement Plan had net assets available for plan
benefits totaling $5,629,000. Effective July 1, 1998, this plan will be
merged into the Engineered Support Systems, Inc. Employee Stock Ownership
Plan.
