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, 2003 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 principal executive offices:
ENGINEERED SUPPORT SYSTEMS, INC.
201 EVANS LANE
ST. LOUIS, MISSOURI 63121
(314) 553-4000
1
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: June 28, 2004 /s/ Gary C. Gerhardt
-------------------- --------------------------------------------
Gary C. Gerhardt
Vice Chairman and Chief Financial Officer of
Engineered Support Systems, Inc.
and Member of the Administrative
Committee of the Plan
2
Report, Financial Statements and Schedules
ENGINEERED SUPPORT SYSTEMS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
December 31, 2003
Report of Independent Registered Public Accounting Firm.................... 4
Statements of Net Assets Available for Plan Benefits....................... 5
Statements of Changes in Net Assets Available for Plan Benefits............ 6
Notes to Financial Statements ............................................. 7
Supplemental Schedules *
Schedule of Assets (Held at End of Year)................................... 12
Schedule of Reportable Transactions........................................ 13
Consent of Independent Registered Public Accounting Firm................... 14
* Other schedules required by 29 CFR 2520.103-10 of the Department of
Labor's Rules and Regulations for Reporting and Disclosure under ERISA
have been omitted because they are not applicable.
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 and the related statements of changes in net assets available for
plan benefits present fairly, in all material respects, the net assets
available for plan benefits of the Engineered Support Systems, Inc. Employee
Stock Ownership Plan (the "Plan") at December 31, 2003 and 2002, and the
changes in net assets available for plan benefits for the years then ended
in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (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 our
opinion.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of Assets
(Held at End of Year) and Reportable Transactions are presented for the
purpose of additional analysis and are not a required part of the basic
financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure
under the Employee Retirement Income Security Act of 1974. These
supplemental schedules are the responsibility of the Plan's management. The
supplemental schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
June 28, 2004
4
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
Engineered Support Systems, Inc.
Employee Stock Ownership Plan
December 31
-----------------------------------
2003 2002
----------- -----------
Assets:
Investments, at fair value (Note C) $87,766,840 $47,936,473
Employer contributions receivable 1,719,663 1,300,330
----------- -----------
Net Assets Available for Plan Benefits $89,486,503 $49,236,803
=========== ===========
The accompanying notes are an integral part of the financial statements.
5
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
Engineered Support Systems, Inc.
Employee Stock Ownership Plan
Year Ended December 31
-------------------------------------
2003 2002
----------- -----------
Additions:
Investment income:
Net realized and unrealized gain on Engineered
Support Systems, Inc. common stock $26,946,263 $12,223,737
Net gain from common collective trusts 389,959 99,172
Net gain (loss) from registered investment companies 4,765,227 (3,784,204)
Interest and dividend income 381,092 646,291
----------- -----------
32,482,541 9,184,996
----------- -----------
Contributions:
Participant 2,463,296 1,630,962
Employer 2,214,705 1,653,019
----------- -----------
4,678,001 3,283,981
----------- -----------
Transfers:
Transfer in from Radian Inc.
401(K) Employee Retirement Plan 10,431,395 --
Transfer in from Universal Power Systems, Inc.
401(K) Retirement Plan 635,561 --
----------- -----------
11,066,956 --
----------- -----------
Deductions:
Benefits paid to participants (7,977,798) (8,966,873)
----------- -----------
Total deductions (7,977,798) (8,966,873)
----------- -----------
Net increase 40,249,700 3,502,104
Net Assets Available for Plan Benefits:
Beginning of Year 49,236,803 45,734,699
----------- -----------
End of Year $89,486,503 $49,236,803
=========== ===========
The accompanying notes are an integral part of the financial statements.
6
NOTES TO FINANCIAL STATEMENTS
Engineered Support Systems, Inc.
Employee Stock Ownership Plan
December 31, 2003
NOTE A - SUMMARY OF 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, except that benefits due to participants are recorded as a
reduction in net assets available for Plan benefits when paid.
Investments in the Engineered Support Systems, Inc. (the "Company") common
stock are stated at fair value based on the last reported sales price on
December 31, 2003 and 2002, respectively. Investments in registered
investment companies, including the Dreyfus Premier Core Bond Fund-Class A,
the EuroPacific Growth Fund, the Alliance Bern Growth & Income Fund-Class A,
the Janus Twenty Fund, the Jennison Growth Fund-Class A, the Dryden Stock
Index Fund-Class Z, the INVESCO Technology Fund II-Investor Shares, the
Franklin Small Cap Growth Fund II, and the Jennison US Emerging Growth
Fund-Class A, are stated at the fair value of the underlying portfolio of
securities, as determined by the respective manager. Investments in common
collective trusts including the Prudential Stable Value Fund (managed by
Wells Fargo Bank Minnesota, N.A.) are stated at the fair value of the
underlying portfolio of securities, as determined by the respective manager.
Interest income is recorded on the accrual basis. Dividend income is
recorded on the ex-dividend date. 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.
Investments are exposed to various risks, such as interest rate, market and
credit risk. Due to the level of risk associated with certain investments
and the level of uncertainty related to changes in the value of investments,
it is at least reasonably possible that changes in risks in the near-term
could materially affect the amounts reported in the Statement of Net Assets
Available for Plan Benefits.
Notes receivable, representing loans to participants, are valued at their
outstanding principal amount. These notes bear interest at a rate equal to
the prime interest rate as of the effective date of the loan plus one
percentage point.
Administrative expenses of the Plan are paid by the Company or are taken
from balances available in the Plan forfeiture account.
The preparation of these financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of net assets and changes in net assets during the reporting period.
Actual results could differ from these estimates.
7
NOTE B - DESCRIPTION OF THE PLAN
The Plan is a combined 401(k) savings plan and a payroll-based employee
stock ownership plan covering salaried employees and all non-salaried
employees not otherwise covered by a collective bargaining agreement of the
Company's following wholly-owned subsidiaries: Engineered Air Systems, Inc.,
Engineered Specialty Plastics, Inc., Engineered Coil Company, d/b/a Marlo
Coil, Keco Industries, Inc., Engineered Electric Company, d/b/a Fermont,
Radian, Inc. and Universal Power Systems, Inc. Eligible employees age 21 who
have completed 90 days of employment may enroll in the Plan. Upon
enrollment, participants may elect to defer from 1% to 50% of their
compensation in the Plan, up to a maximum of $12,000 for the year ended
December 31, 2003 and $11,000 for the year ended December 31, 2002 based
upon an amendment effective July 1, 2002. Under current Internal Revenue
Service regulations, this maximum amount is adjusted annually. For the years
ended December 31, 2003 and 2002, additional catch up contributions in the
amounts of $2,000 and $1,000, respectively, could be made by participants
age 50 or older.
Contributions under the Plan consist of the following:
1. The amount of the salary deferrals of all Plan participants (the
participant contribution).
2. The Company's discretionary contribution (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).
All participant contributions are invested at the participant's discretion
in the investment funds offered by the Plan and selected by the participant.
Employee and employer contributions are 100% vested.
All contributions by the Company are made in the form of Engineered Support
Systems, Inc. common stock.
The Plan allows participants to borrow from existing balances in their Plan
investments. Participant loan balances must not exceed 50% of the
participants vested account balance at the date the loan was processed with
a minimum borrowing of $1,000 up to a maximum of $50,000. These loans are to
be repaid with interest over a period not to exceed five years.
The Plan Administrator is Engineered Support Systems, Inc. acting through an
Administrative Committee to administer the Plan. The Company bears all
expenses of administering the Plan, including any compensation of the
trustee, Prudential Trust Company. No trustee fees or other administrative
expenses were paid from Plan assets during the years ended December 31, 2003
or 2002.
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.
8
NOTE C--INVESTMENTS
The following schedule presents information regarding assets held for
investments:
December 31, 2003 December 31, 2002
----------------------------- -----------------------------
Fair Value Cost Fair Value Cost
----------- ----------- ----------- -----------
Engineered Support Systems, Inc.
common stock, 871,554 and 627,719
shares, respectively *$47,987,741 $ 8,511,989 $23,012,178 $ 5,395,313
Alliance Bern Growth & Income (formerly
Alliance Growth & Income) Fund-Class A,
2,158,001 and 1,427,083 shares, respectively *7,294,042 6,966,172 3,710,417 4,932,041
Janus Twenty Fund, 94,432 and 75,278
shares, respectively *3,415,606 3,780,388 2,183,805 3,241,119
Dreyfus Premier Core Bond Fund-Class A,
239,337 and 247,483 shares, respectively *3,554,161 3,520,616 3,566,231 3,599,396
EuroPacific Growth Fund,
101,574 and 82,000 shares, respectively *3,068,556 2,798,081 1,883,548 2,345,293
Franklin Small Cap Growth Fund II,
320,548 and 221,263 shares, respectively *3,417,038 3,005,250 1,588,670 2,134,202
Jennison (formerly Prudential)
US Emerging Growth Fund-Class A,
192,630 and 75,759 shares, respectively *2,762,318 2,652,181 759,109 1,162,965
Jennison (formerly Prudential Jennison)
Growth Fund-Class A, 95,044 and
36,073 shares, respectively 1,241,931 1,142,266 362,895 481,406
Dryden (formerly Prudential)
Stock Index Fund-Class Z,
35,223 and 17,092 shares, respectively 873,188 770,253 335,003 373,218
INVESCO Technology Fund II,
45,790 and 23,238 shares, respectively 1,126,896 1,008,466 399,458 652,042
Prudential Stable Value Fund
327,872 and 268,219 shares, respectively *11,167,161 10,757,310 8,777,983 8,681,228
Notes receivable from participants with remaining
maturities of 1 month to 5 years bearing interest
rates ranging from 5.00% to 10.50% at December 31,
2003 and from 5.75% to 10.50% at December 31, 2002 1,858,202 1,858,202 1,357,176 1,357,176
----------- ----------- ----------- -----------
Total $87,766,840 $46,771,174 $47,936,473 $34,355,399
=========== =========== =========== ===========
* Represents investments that are greater than 5% of plan assets at the
beginning of the plan year.
Engineered Support Systems, Inc. common stock includes both
participant-directed and nonparticipant-directed investments. The
nonparticipant-directed portion has a cost of $6,463,097 and a current value
of $36,423,556. All other investments are solely participant-directed. (See
Note D)
9
During 2003 and 2002, the Plan's investments (including investments bought,
sold, and held during the year) appreciated (depreciated) in value as
follows:
2003 2002
---- ----
Engineered Support Systems, Inc. Common Stock 26,946,263 12,223,737
Common Collective Trust 389,959 99,172
Registered Investment Companies 4,765,227 (3,784,204)
---------- ----------
32,101,449 8,538,705
========== ==========
NOTE D - NONPARTICIPANT-DIRECTED INVESTMENTS
Information about the net assets and the significant components of the
changes in net assets relating to nonparticipant-directed investments, all of
which represent investments in Engineered Support Systems, Inc. common
stock, at and for the year ended December 31, 2003 and 2002 is as follows:
Year Ended December 31
----------------------
2003 2002
---- ----
Net Assets at Beginning of Year $18,604,226 $18,213,163
Contributions 2,214,705 1,653,019
Investment Income 20,437,071 8,885,894
Benefits Paid to Participants (3,151,844) (1,527,644)
Transfers (to) from Participant-Directed Investments 39,061 (8,620,206)
----------- -----------
Net Assets at End of Year $38,143,219 $18,604,226
=========== ===========
2003 2002
---- ----
Engineered Support Systems, Inc. Common Stock $36,423,556 $17,303,896
Employer Contribution Receivable 1,719,663 1,300,330
----------- -----------
Net Assets at End of Year $38,143,219 $18,604,226
=========== ===========
NOTE E - CHANGES IN THE PLAN
Effective July 1, 2002, the Plan was amended to allow Plan participants to
defer from 0% - 50% of their compensation. Effective April 10, 2003, the
Plan was amended to allow forfeitures to offset administrative expenses of
the Plan in addition to reducing employer contributions. Effective January
1, 2004, the Plan was amended to provide eligibility for those employees age
21 or older without any waiting period, previously a ninety (90) day period
of service was required. Also effective January 31, 2004, the Plan was
amended to allow Plan participants with two (2) years of service as a
participant to direct company contributed Engineered Support System, Inc.
common stock into other investment choices within the Plan. Effective May 1,
2004, the Plan was amended to allow for hardship withdrawals.
On May 10, 2002, the Company acquired all of the outstanding common stock of
Radian, Inc. (Radian). Radian had previously sponsored the Radian Inc.
401(k) Employment Retirement Plan, a qualified defined contribution plan
which last received a favorable determination letter from the Internal
Revenue Service in June 2002. As of June 30, 2003, the Radian, Inc. 401(k)
Employee Retirement Plan had net assets available for plan benefits totaling
$10,431,395. Effective July 1, 2003, the Radian Inc. 401(k) Employment
Retirement Plan was merged into the Plan.
10
On June 27, 2002, the Company acquired all of the outstanding common stock
of Universal Power Systems, Inc. (UPSI). UPSI had previously sponsored the
Universal Power Systems, Inc. 401(k) Retirement Plan, a qualified defined
contribution plan which last received a favorable determination letter from
the Internal Revenue Service in September 2001. As of June 30, 2003, the
Universal Power Systems, Inc. 401(k) Retirement Plan had net assets
available for plan benefits totaling $635,561. Effective July 1, 2003, the
Universal Power Systems, Inc. 401(k) Retirement Plan was merged into the
Plan.
Plan mergers of qualified defined contribution plans associated with the
acquisitions of Technical and Management Corporation (TAMSCO) and Engineered
Environments, Inc. (EEi) are occurring during the 2004 Plan year.
On April 15, 2003, Engineered Specialty Plastics, Inc. was sold to a private
equity group and that subsidiary's participation in the Plan ceased at that
time.
NOTE F - FEDERAL INCOME TAX STATUS
The Plan received a favorable letter of determination from the Internal
Revenue Service dated May 23, 2002 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, 2003, 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 a federal income tax 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 G - RELATED PARTY AND PARTY-IN-INTEREST
The Company, as Plan administrator and sponsor, is a related party to the
Plan. At December 31, 2003 and 2002, the Plan held shares of Company common
stock with a market value of $47,987,741 and $23,012,178, respectively. For
the year ended December 31, 2003, the Plan purchased $4,397,354 and sold
$6,368,052 of Company common stock. For the year ended December 31, 2002,
the Plan purchased $2,726,032 and sold $16,129,602 of Company common stock.
Prudential Trust Company as Trustee of the Plan's assets is a
party-in-interest as defined by ERISA. For Plan assets managed by
Prudential, the Plan held $4,877,437 of investment funds and short-term
investments at December 31, 2003 and $1,457,007 of investment funds and
short-term investments at December 31, 2002.
These transactions are exempt party-in-interest transactions under Section
408 (b) (8) of the ERISA statutes.
11
Engineered Support Systems, Inc.
Employee Stock Ownership Plan
Schedule I
Schedule of Assets (Held at End of Year)
At December 31, 2003
(c)
Description of
Investment Including
(b) Maturity Date,
Identity of Issue, Rate of Interest,
Borrower, Lessor or Collateral, Par, (d) (e)
(a) Similar Party or Maturity Value Cost Current Value
-----------------------------------------------------------------------------------------------------------------------
* Engineered Support Systems, Inc. (1) Common Stock $.01 par value $ 8,511,989 $47,987,741
Prudential Stable Value Fund Money market fund 10,757,310 11,167,161
Alliance Bern Growth & Income Fund- Large-cap value equity mutual
Class A fund 6,966,172 7,294,042
Janus Twenty Fund Large-cap growth equity mutual
fund 3,780,388 3,415,606
Dreyfus Premier Core Bond Intermediate-term bond mutual
Fund - Class A fund 3,520,616 3,554,161
EuroPacific Growth Fund Non-U.S. equity mutual fund 2,798,081 3,068,556
Franklin Small Cap Growth Small-cap growth equity fund
Fund II 3,005,250 3,417,038
* Jennison US Emerging Growth Mid-cap growth equity mutual
Fund-Class A fund 2,652,181 2,762,318
* Jennison Growth Fund- Large-cap growth equity mutual
Class A fund 1,142,266 1,241,931
* Dryden Stock Index Fund Z Large-cap blend equity mutual
Fund 770,253 873,188
INVESCO Technology Fund II Technology equity mutual fund 1,008,466 1,126,896
* Participant Loans Loans to Plan participants bearing
interest rates from 5.00% to 10.50%
with remaining maturities of 1
month to 5 years 1,858,202 1,858,202
----------- -----------
Total 46,771,174 87,766,840
=========== ===========
* Investments represent allowable transactions with a party-in-interest.
(1) The nonparticipant-directed portion has a cost of $6,463,097 and a
current value of $36,423,556.
12
Engineered Support
Employee Stock Ownership Plan
Schedule II
Schedule of Reportable Transactions (1)
Year Ended December 31, 2003
(f) Expense (h) Current value (i) Net
(a) Identity of (b) Description (c) Purchase (d) Selling (e) Lease incurred with (g) Cost of asset on gain or
party involved of asset price price rental transaction of asset transaction date (loss)
------------------------------------------------------------------------------------------------------------------------------------
Individual
Transactions:
None
Series of
Transactions:
Engineered Common stock, $4,397,354 $ - $ - $ - $4,397,354 $4,397,354 $ -
Support $.01 par value
Systems, Inc. per share
Engineered Common stock, $ - $6,368,052 $ - $ - $1,280,676 $6,368,052 $5,087,376
Support $.01 par value
Systems, Inc. per share
(1) Transactions or series of transactions in excess of five percent of the
current value of the Plan's assets as of the beginning of the Plan Year, as
defined in 29 CFR Section 2520.103-6 of the Department of Labor Rules &
Regulations for Reporting and Disclosure under ERISA.
13
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-14504) of Engineered Support Systems, Inc. of
our report dated June 28, 2004 relating to the financial statements and
supplemental schedules of the Engineered Support Systems, Inc. Employee
Stock Ownership Plan, which appears in this Form 11-K.
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
June 28, 2004
14