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, 2002 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
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 27, 2003 /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
Report of Independent Auditors
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 benefits of the Engineered Support Systems, Inc. Employee
Stock Ownership Plan (the "Plan") at December 31, 2002 and 2001, and the
changes in the 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 auditing standards generally accepted in
the United States of America, 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
PricewaterhouseCoopers LLP
June 27, 2003
St. Louis, Missouri
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
Engineered Support Systems, Inc.
Employee Stock Ownership Plan
December 31
-----------------------------------
2002 2001
----------- -----------
Assets:
Investments, at fair value $47,936,473 $44,518,294
Employer contributions receivable 1,300,330 1,216,405
----------- -----------
Net Assets Available for Plan Benefits $49,236,803 $45,734,699
=========== ===========
The accompanying notes are an integral part of the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
Engineered Support Systems, Inc.
Employee Stock Ownership Plan
Year Ended December 31
-------------------------------------
2002 2001
----------- -----------
Additions:
Investment income:
Net realized and unrealized gain on Engineered
Support Systems, Inc. common stock $12,223,737 $16,338,384
Net gain (loss) from common collective trusts 99,172 (1,230,447)
Net loss from registered investment companies (3,784,204) (1,280,814)
Interest and dividend income 646,291 420,501
----------- -----------
9,184,996 14,247,624
----------- -----------
Contributions:
Participant 1,630,962 1,603,637
Employer 1,653,019 1,564,691
----------- -----------
3,283,981 3,168,328
----------- -----------
Deductions:
Benefits paid to participants (8,966,873) (5,431,792)
----------- -----------
Total deductions (8,966,873) (5,431,792)
----------- -----------
Net increase 3,502,104 11,984,160
Net Assets Available for Plan Benefits:
Beginning of Year 45,734,699 33,750,539
----------- -----------
End of Year $49,236,803 $45,734,699
=========== ===========
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
Engineered Support Systems, Inc.
Employee Stock Ownership Plan
December 31, 2002
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, 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, 2002 and 2001, respectively. Investments in registered
investment companies, including the Dreyfus Premier Core Bond Fund-Class A,
the Prudential Short-Term Corporate Bond Fund-Class A, the American Funds
EuroPacific Growth Fund, the Alliance Growth & Income Fund-Class A, the
Janus Twenty Fund, the Prudential Jennison Growth Fund-Class A, the
Prudential Stock Index Fund-Class Z, the INVESCO Technology Fund-Investor
Shares, the Franklin Small Cap Growth Fund II, and the Prudential 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.
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.
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.
The preparation of these financial statements 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.
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
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's following wholly-owned subsidiaries: Engineered Air Systems, Inc.,
Engineered Specialty Plastics, Inc., Engineered Coil Company, d/b/a Marlo
Coil, Keco Industries, Inc. and Engineered Electric Company, d/b/a Fermont.
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 $11,000 for the
year ended December 31, 2002 based upon an amendment effective July 1, 2002
and 1% to 15% of their compensation up to a maximum of $10,500 for the year
ended December 31, 2001. Under current Internal Revenue Service regulations,
this maximum amount is adjusted annually. For the year ended December 31,
2002, an additional $1,000 catch up contribution 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
employee 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. 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, 2002
or 2001.
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.
NOTE C--INVESTMENTS
The following schedule presents information regarding assets held for
investments:
December 31, 2002 December 31, 2001
----------------------------- -----------------------------
Fair Value Cost Fair Value Cost
----------- ----------- ----------- ----------
Engineered Support Systems, Inc.
common stock, 627,719 and 707,162
shares, respectively * $23,012,178 $ 5,395,313 $24,192,007 $5,394,529
Prudential Short-Term Corporate Bond
Fund-Class A, 464,968 shares - - 5,277,386 5,328,158
Alliance Growth & Income Fund-Class A,
1,427,083 and 965,367 shares, respectively * 3,710,417 4,932,041 3,465,667 3,638,182
Janus Twenty Fund, 75,278 and 67,733
shares, respectively 2,183,805 3,241,119 2,605,007 3,113,701
Dreyfus Premier Core Bond Fund-Class A,
247,483 and 160,526 shares, respectively * 3,566,231 3,599,396 2,301,945 2,380,512
American Funds EuroPacific Growth Fund,
82,000 and 76,041 shares, respectively 1,883,548 2,345,293 2,043,221 2,267,841
Franklin Small Cap Growth Fund II,
221,263 and 179,992 shares, respectively 1,588,670 2,134,202 1,776,517 1,791,751
Prudential US Emerging Growth Fund-Class A,
75,759 and 82,321 shares, respectively 759,109 1,162,965 1,240,578 1,349,207
Prudential Jennison Growth Fund-Class A,
36,073 and 12,461 shares, respectively 362,895 481,406 182,175 180,309
Prudential Stock Index Fund-Class Z,
17,092 and 6,786 shares, respectively 335,003 373,218 173,374 173,496
INVESCO Technology Fund - Investor Shares,
23,238 and 1,633 shares, respectively 399,458 652,042 53,182 53,802
Prudential Stable Value Fund
268,219 shares * 8,777,983 8,681,228
Notes receivable from participants with remaining
maturities of 1 month to 5 years bearing
interest rates ranging from 5.75% to 10.50% at
December 31, 2002 and from 7.50% to 10.50%
at December 31, 2001 1,357,176 1,357,176 1,207,235 1,207,235
----------- ----------- ----------- -----------
Total $47,936,473 $34,355,399 $44,518,294 $26,878,723
=========== =========== =========== ===========
* 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. All other
investments are solely participant-directed.
NOTE D - NONPARTICIPANT-DIRECTED INVESTMENTS
Information about the net assets and the significant components of the
changes in net assets relating to nonparticpant-directed investments,
primarily all of which represent investments in Engineered Support Systems,
Inc. common stock, is as follows:
Year Ended December 31
----------------------
2002 2001
---- ----
Net Assets at Beginning of Year $ 18,213,163 $ 11,046,956
Contributions 1,653,019 1,564,691
Investment Earnings 8,885,894 9,999,774
Benefits Paid to Participants (1,527,644) (2,793,654)
Transfers to Participant Directed Investments (8,620,206) (1,604,604)
------------ ------------
Net Assets at End of Year $ 18,604,226 $ 18,213,163
============ ============
NOTE E - CHANGES IN THE PLAN
Effective April 1, 2001, the Plan was amended to provide eligibility for
those employees age 21 or older who have attained ninety (90) days of
service, formerly one year of service. In addition, Prudential Trust Company
was named Plan trustee. Effective December 14, 2001, the Plan was amended to
allow Plan participants with five (5) years of service as a participant to
direct Company-contributed Engineered Support Systems, Inc. common stock
into other investment choices within the Plan. Effective July 1, 2002 the
Plan was amended to allow Plan participants to defer from 0% - 50% of their
compensation.
NOTE F - 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, 2002, 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, 2002 and 2001, the Plan held shares of Company common
stock with a market value of $23,012,178 and $24,192,007, respectively. For
the year ended December 31, 2002, the Plan purchased $2,726,036 and sold
$16,129,602 of Company common stock. For the year ended December 31, 2001,
the Plan purchased $1,764,084 and sold $11,627,292 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 $1,457,007 of investment funds and short-term
investments at December 31, 2002 and $6,873,513 of investment funds and
short-term investments at December 31, 2001.
These transactions are exempt party-in-interest transactions under Section
408(b)(8) of the ERISA statutes.
Engineered Support Systems, Inc.
Employee Stock Ownership Plan
Schedule I
Schedule of Assets (Held at End of Year)
At December 31, 2002
(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. Common Stock $.01 par value $5,395,313 $23,012,178
Prudential Stable Value Fund Money market fund 8,681,228 8,777,983
Alliance Growth & Income Fund- Large-cap value equity mutual
Class A fund 4,932,041 3,710,417
Janus Twenty Fund Large-cap growth equity mutual
fund 3,241,119 2,183,805
Dreyfus Premier Core Bond Intermediate-term bond mutual
Fund - Class A fund 3,599,396 3,566,231
American Funds EuroPacific Non-U.S. equity mutual fund
Growth Fund 2,345,293 1,883,548
Franklin Small Cap Growth Small-cap growth equity fund
Fund II 2,134,202 1,588,670
* Prudential US Emerging Growth Mid-cap growth equity mutual
Fund-Class A fund 1,162,965 759,109
* Prudential Jennison Growth Fund- Large-cap growth equity mutual
Class A fund 481,406 362,895
* Prudential Stock Index Fund-Class Z Large-cap blend equity mutual
fund 373,218 335,003
INVESCO Technology Fund - Technology equity mutual fund
Investor Shares 652,042 399,458
Participant Loans Loans to Plan participants bearing
interest rates from 5.75% to 10.50%
with remaining maturities of 1
month to 5 years 1,357,176 1,357,176
* Investments represent allowable transactions with a party-in-interest.
Engineered Support
Employee Stock Ownership Plan
Schedule II
Schedule of Reportable Transactions (1)
Year Ended December 31, 2002
(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:
Engineered Common stock, $ - $ 3,006,429 $ - $ - $ 508,364 $ 3,006,429 $ 2,498,065
Support $.01 par value
Systems, Inc. per share
Series of
Transactions:
Engineered Common stock, $ 2,726,036 $ - $ - $ - $2,726,036 $ 2,726,036 $ -
Support $.01 par value
Systems, Inc. per share
Engineered Common stock, $ - $16,129,602 $ - $ - $2,725,252 $16,129,602 $13,404,350
Support $.01 par value
Systems, Inc. per share
(1) Transactions or series of transaction 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.
CONSENT OF INDEPENDENT ACCOUNTANTS
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 27, 2003 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
PricewaterhouseCoopers LLP
St. Louis, Missouri
June 27, 2003