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, 1996 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 N. PRICE ROAD ST. LOUIS, MISSOURI 63132 (314)993-5880 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: 6/20/97 /s/ Gary C. Gerhardt ------------- ----------------------------- Gary C. Gerhardt Executive Vice President and Chief Financial Officer Engineered Support Systems, Inc. and Member of the Administrative Committee of the Plan -2- 3 Price Waterhouse LLP June 13, 1997 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, 1996 and 1995, and the changes in the net assets available for plan benefits for the years ended December 31, 1996 and 1995, 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 -3- 4 STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION ENGINEERED SUPPORT SYSTEMS, INC. EMPLOYEE STOCK OWNERSHIP PLAN December 31, 1996 Fund Information -------------------------------------------------------------------------- ESSI Strategic Target Balanced Guaranteed Stock Growth Value Asset Investment Loan Total Fund Portfolio Portfolio Portfolio Portfolio Fund ----------- ---------- --------- --------- --------- ---------- -------- 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. -4- 5 STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION ENGINEERED AIR SYSTEMS, INC. EMPLOYEE STOCK OWNERSHIP PLAN December 31, 1995 Fund Information -------------------------------------------------------------------------- ESSI Strategic Target Balanced Guaranteed Stock Growth Value Asset Investment Loan Total Fund Portfolio Portfolio Portfolio Portfolio Fund ---------- ---------- --------- --------- --------- ---------- -------- Assets: Cash and cash equivalents $ 109,117 $ 6,806 $ 10,023 $ 24,269 $ 37,751 $ 30,268 Investments, at fair value 6,438,108 3,239,635 291,439 801,309 573,138 1,297,792 $234,795 Contributions receivable: Employer 10,258 10,258 ---------- ---------- -------- -------- -------- ---------- -------- 6,557,483 3,256,699 301,462 825,578 610,889 1,328,060 234,795 Liabilities: Accrued interest 10,258 10,258 Long-term debt 1,143,900 1,143,900 ---------- ---------- -------- -------- -------- ---------- -------- 1,154,158 1,154,158 ---------- ---------- -------- -------- -------- ---------- -------- Net Assets Available for Plan Benefits $5,403,325 $2,102,541 $301,462 $825,578 $610,889 $1,328,060 $234,795 ========== ========== ======== ======== ======== ========== ======== See notes to financial statements. -5- 6 STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION ENGINEERED AIR SYSTEMS, INC. EMPLOYEE STOCK OWNERSHIP PLAN December 31, 1996 Fund Information -------------------------------------------------------------------------- ESSI Strategic Target Balanced Guaranteed Stock Growth Value Asset Investment Loan Total Fund Portfolio Portfolio Portfolio Portfolio Fund ---------- ---------- --------- --------- --------- ---------- -------- 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. -6- 7 STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS WITH FUND INFORMATION ENGINEERED SUPPORT SYSTEMS, INC. EMPLOYEE STOCK OWNERSHIP PLAN Year Ended December 31, 1995 Fund Information -------------------------------------------------------------- ESSI Strategic Target Balanced Guaranteed Stock Growth Value Asset Investment Total Fund Portfolio Portfolio Portfolio Portfolio ---------- ---------- --------- --------- --------- ----------- Additions: Employee contributions $ 396,909 $ 61,273 $ 42,032 $100,411 $ 77,161 $ 116,032 Employer Contributions 323,095 323,095 Realized and unrealized gains, net 1,327,376 1,327,376 Net gain from common/ collective trusts 363,622 51,250 121,316 103,372 87,684 Interest & dividend income 41,224 7,740 962 2,943 2,299 6,435 Transfers (to) from other funds 37,098 211,732 613,736 432,447 1,283,684 ---------- ---------- -------- -------- -------- ---------- 2,452,226 1,756,582 305,976 838,406 615,279 1,493,835 ---------- ---------- -------- -------- -------- ---------- Deductions: Participant withdrawals 496,896 167,850 4,514 12,828 4,390 165,775 Interest expense 129,937 129,937 ---------- ---------- -------- -------- -------- ---------- 626,833 297,787 4,514 12,828 4,390 165,775 ---------- ---------- -------- -------- -------- ---------- Net increase (decrease) 1,825,393 1,458,795 301,462 825,578 610,889 1,328,060 Net Assets Available for Plan Benefits at Beginning of Year 3,577,932 643,746 ---------- ---------- -------- -------- -------- ---------- Net Assets Available for Plan Benefits at End of Year $5,403,325 $2,102,541 $301,462 $825,578 $610,889 $1,328,060 ========== ========== ======== ======== ======== ========== See notes to financial statements. Fund Information ---------------------------------------------------------- Government Guaranteed Equity Mutual Income Loan Fund Fund Fund Fund -------- ---------- ---------- -------- Additions: Employee contributions Employer contributions Realized and unrealized gains, net Net gain from common/ collective trusts Interest & dividend income 20,845 Transfers (to) from other funds (617,200) (60,866) (1,854,487) (46,144) -------- ------- ---------- -------- (617,200) (60,866) (1,854,487) (25,299) -------- ------- ---------- -------- Deductions: Participant withdrawals 3,878 105,985 31,676 Interest expense -------- ------- ---------- -------- 3,878 105,985 31,676 -------- ------- ---------- -------- Net increase (decrease) (621,078) (60,866) (1,960,472) (56,975) Net Assets Available for Plan Benefits at Beginning of Year 621,078 60,866 1,960,472 291,770 -------- ------- ---------- -------- Net Assets Available for Plan Benefits at End of Year $0 $0 $0 $234,795 ======== ======= ========== ======== See notes to financial statements. -7- 8 NOTES TO FINANCIAL STATEMENTS ENGINEERED SUPPORT SYSTEMS, INC. EMPLOYEE STOCK OWNERSHIP PLAN December 31, 1996 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, 1996 and 1995 undistributed withdrawals to former participants totaled $428,811 and $4,346, 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, 1996 and 1995, respectively. Investments in the Strategic Growth Portfolio (managed by Nicholas-Applegate Capital Management), 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 plus any accrued 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, 1996. Under current Internal Revenue Service regulations, this maximum amount is adjusted annually for cost increases. -8- 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, 1996, 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. 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, 1995 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. At December 31, 1996, Plan participants had elective account balances in the following funds: ESSI Stock Fund 54 Strategic Growth Portfolio 78 Target Value Portfolio 88 Balanced Asset Portfolio 97 Guaranteed Investment Portfolio 77 -9- 10 NOTE C--INVESTMENTS The following schedule presents information regarding assets held for investment: Shares Cost Fair Value ------- ---------- ----------- 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 ========== =========== Balance at December 31, 1995: - ----------------------------- ESSI Stock Fund Engineered Support Systems, Inc. common stock 479,946 $3,291,840 $3,239,635 Strategic Growth Portfolio, managed by Nicholas-Applegate Capital Management 23,426 240,837 291,439 Target Value Portfolio, managed by Jurika & Voyles, Inc. Investment Management 67,908 682,581 801,309 Balanced Asset Portfolio, managed by Avatar Associates Investment Counsel 45,257 472,713 573,138 Guaranteed Investment Contract Portfolio, managed by Mitchell Hutchins Asset Management 73,144 1,220,726 1,297,792 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 234,795 234,795 ---------- ---------- $6,143,492 $6,438,108 ========== ========== -10- 11 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 Boatmen's National Bank of St. Louis (Boatmen's). Each year, Boatmen's 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, 1996, 63,629 shares of the Company's common stock with a fair value of $939,000 are held in suspense and are pledged as collateral for the bank loan. 11,631 and 13,180 shares of the Company's common stock were released from suspense and allocated to participant accounts for the years ended December 31, 1996 and 1995, respectively. Effective January 1, 1995, the Company amended the Plan to allow the participation of all eligible employees of Engineered Specialty Plastics, Inc. and all eligible non-salaried employees of Engineered Air not covered by a collective bargaining agreement. The Plan was amended to provide for a matching contribution by the Company of no less than 25% of each eligible employee's contributions up to a maximum of 6% of the employee's earnings. The current investment options also became effective at this time. 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, 1996, 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. -11- 12 CONSENT OF INDEPENDENT ACCOUNTANTS June 20, 1997 We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-14504) of our report dated June 13, 1997 appearing on page 3 of the Annual Report of the Engineered Support Systems, Inc. Employee Stock Ownership Plan on Form 11-K for the year ended December 31, 1996. /s/ Price Waterhouse LLP -12-