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, 1999 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 office: 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: 6/28/00 Gary C. Gerhardt ------------- ----------------------------------------- Gary C. Gerhardt Vice Chairman-Administration and Chief Financial Officer of Engineered Support Systems, Inc. and Member of the Administrative Committee of the Plan REPORT OF INDEPENDENT ACCOUNTANTS 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 benefits and the related statements of changes in net assets available for 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, 1999 and 1998, and the changes in net assets available for benefits for the years then ended in conformity with accounting principles generally accepted in the United States. 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 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 management, 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 supplemental schedules of Assets Held for Investment Purposes 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 23, 2000 STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS Engineered Support Systems, Inc. Employee Stock Ownership Plan December 31 -------------------------- 1999 1998 ----------- ----------- Assets: Cash and cash equivalents $ 99,037 $ 246,879 Investments, at fair value 26,855,829 18,811,177 Contributions receivable: Employer 3,813 4,377 ----------- ----------- Total assets 26,958,679 19,062,433 ----------- ----------- Liabilities: Accrued interest 3,813 4,377 Long-term debt 553,500 701,100 ----------- ----------- Total liabilities 557,313 705,477 ----------- ----------- Net Assets Available for Plan Benefits $26,401,366 $18,356,956 =========== =========== See notes to financial statements STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS Engineered Support Systems, Inc. Employee Stock Ownership Plan Year Ended December 31 -------------------------- 1999 1998 ----------- ----------- Additions: Investment income: Net realized and unrealized gain (loss) on Engineered Support Systems, Inc. common stock $(2,108,837) $ 1,455,290 Net gain from common collective trusts 2,008,826 746,488 Interest and dividend income 92,485 51,785 ----------- ----------- (7,526) 2,253,563 ----------- ----------- Contributions: Participant 1,748,625 594,884 Employer 1,335,079 513,240 ----------- ----------- 3,083,704 1,108,124 ----------- ----------- Transfer from Marlo Coil Employees Retirement Plan 5,999,140 Transfer from Keco Industries 401(k) Profit Sharing Plan 6,633,179 ----------- ----------- Total additions 9,709,357 9,360,827 ----------- ----------- Deductions: Benefits paid to participants 1,617,877 2,882,640 Interest expense 47,070 61,272 ----------- ----------- Total deductions 1,664,947 2,943,912 ----------- ----------- Net increase 8,044,410 6,416,915 Net Assets Available for Plan Benefits at Beginning of Year 18,356,956 11,940,041 ----------- ----------- Net Assets Available for Plan Benefits at End of Year $26,401,366 $18,356,956 =========== =========== See notes to financial statements NOTES TO FINANCIAL STATEMENTS Engineered Support Systems, Inc. Employee Stock Ownership Plan December 31, 1999 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 participants are recorded as a reduction in net assets available for Plan benefits when paid. At December 31, 1999 and 1998, undistributed withdrawals to participants totaled $932,744 and $206,053, respectively, representing allocations of net assets available for Plan benefits. Investments in Engineered Support Systems, Inc. (the Company) common stock are stated at fair value based on the last reported sales price on December 31, 1999 and 1998, respectively. Investments in common collective trusts, including the Overseas Equity Portfolio (managed by Brandes Investment Partners), the Mid-Cap Value Portfolio, formerly the Target Value Portfolio (managed by Ariel Capital Management Inc.), the Small Company Growth Portfolio, formerly the Emerging Growth Portfolio (managed by Credit Suisse Asset Management), the Large Company Value Portfolio, formerly the Value Equity Portfolio (managed by Scudder Kemper Investments), the Capital Growth Portfolio (managed by Montag & Caldwell), the Strategic Bond Portfolio (managed by Lazard Asset Management) and the Guaranteed Investment Contract 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. Investments are exposed to various risks, such as interest rate, market, and credit. 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 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. NOTE B - DESCRIPTION OF THE PLAN The Plan is a combined 401(k) savings plan and a payroll-based employee stock ownership plan covering all salaried employees and the 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 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 $10,000 for the years ended December 31, 1999 and 1998, respectively. Under current Internal Revenue Service regulations, this maximum amount is adjusted annually for cost of living increases. 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 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 and employer contributions are 100% vested. At December 31, 1999, the following investment options existed with respect to employee contributions: Engineered Support Systems, Inc. common stock. Small Company Growth Portfolio, which invests in equity securities of small market capitalization companies that the manager believes have significant growth potential. Capital Growth Portfolio, which invests in equity securities of large market capitalization companies which the manager believes have significant growth potential. Overseas Equity Portfolio, which invests in equity securities of non-U.S. companies in both mature and emerging economies around the world. Mid-Cap Value Portfolio, which invests in equity securities of medium market capitalization companies which the manager believes sell at a discount to actual value. Large Company Value Portfolio, which invests in equity securities of large market capitalization companies which the manager believes sell at a discount to actual value. Strategic Bond Portfolio, which invests in a diversified range of bonds and other fixed income securities. Guaranteed Investment Contract Portfolio, which invests in fixed income securities, primarily insurance and bank investment contracts. 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 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, 1999 or 1998. 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, 1999, Plan participants had elective account balances in the following investments: Engineered Support Systems, Inc. common stock 380 Small Company Growth Portfolio 178 Capital Growth Portfolio 469 Overseas Equity Portfolio 379 Mid-Cap Value Portfolio 179 Large Company Value Portfolio 400 Strategic Bond Portfolio 140 Guaranteed Investment Contract Portfolio 163 NOTE C - INVESTMENTS The following schedule presents information regarding Plan investments: December 31, 1999 December 31, 1998 -------------------------- ------------------------- Fair Value Cost Fair Value Cost ----------- ----------- ----------- ----------- Engineered Support Systems, Inc. common stock, 766,249 and 638,512 shares, respectively $ 9,194,988 $ 4,606,842 $ 9,497,866 $ 2,891,817 Capital Growth Portfolio, managed by Montag & Caldwell, 146,903 and 70,204 shares, respectively 5,312,592 4,245,621 2,055,934 1,912,524 Large Company Value Portfolio, managed by Scudder Kemper Investments, 75,525 and 39,720 shares, respectively 3,758,746 4,032,518 2,219,888 2,086,605 Overseas Equity Portfolio, managed by Brandes Investment Partners, 123,089 and 72,437 shares, respectively 2,980,350 2,027,925 1,111,479 1,046,802 Guaranteed Investment Contract Portfolio, managed by Mitchell Hutchins Asset Management, 75,350 and 44,604 shares, respectively 1,710,434 1,540,553 955,409 833,853 Small Company Growth Portfolio, managed by Credit Suisse Asset Management, 17,553 and 15,777 shares, respectively 1,330,782 889,741 779,017 808,705 Mid-Cap Value Portfolio, managed by Ariel Capital Management, Inc., 57,968 and 48,397 shares, respectively 1,116,005 877,064 919,342 684,098 Strategic Bond Portfolio, managed by Lazard Asset Management, 53,913 and 59,024 shares, respectively 774,833 771,277 866,943 839,865 Notes receivable from participants with remaining maturities of 1 month to 5 years bearing interest rates ranging from 8.75% to 10.00% at December 31, 1999 and from 8.25% to 10.00% at December 31, 1998 677,099 677,099 405,299 405,299 ----------- ----------- ----------- ----------- Total $26,855,829 $19,668,640 $18,811,177 $11,509,568 =========== =========== =========== =========== 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 nonparticipant-directed investments, primarily all of which represent investments in Engineered Support Systems, Inc. common stock, is a follows: Year Ended December 31 ---------------------- 1999 1998 ---------- ---------- Net Assets at Beginning of Year $5,666,823 $5,012,504 Contributions 1,335,079 513,240 Realized and unrealized gain (loss), net (1,212,353) 1,270,714 Transfers to participant-directed investments (25,949) Benefits paid to participants (298,805) (1,042,414) Interest expense (47,070) (61,272) ---------- ---------- Net Assets at End of Year $5,443,674 $5,666,823 ========== ========== NOTE E - CHANGES IN THE PLAN 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 in October 1996. As of June 30, 1998, the Marlo Coil Employees Retirement Plan had net assets available for plan benefits totaling $5,999,140. Effective July 1, 1998, this plan was merged into the Engineered Support Systems, Inc. Employee Stock Ownership Plan. Effective June 24, 1998, the Company acquired all of the outstanding stock of Keco Industries, Inc. (Keco). Keco had previously sponsored the Keco Industries 401(k) Profit Sharing Plan, a qualified defined contribution plan which last received a favorable determination letter from the Internal Revenue Service in August 1993. As of February 28, 1999, the Keco Industries 401(k) Profit Sharing Plan had net assets available for plan benefits totaling $6,633,179. Effective March 1, 1999, this plan was merged into the Engineered Support Systems, Inc. Employee Stock Ownership Plan. The Plan has pledged shares of the Company's common stock, purchased with bank loan proceeds, as collateral for the loan. Each year, the bank 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, 1999, 48,176 shares of the Company's common stock with a fair value of $578,112 are held in suspense and are pledged as collateral for the bank loan. 14,707 and 15,883 shares of the Company's common stock were released from suspense and allocated to participant accounts for the years ended December 31, 1999 and 1998, respectively. NOTE F - 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, 1999, 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. Engineered Support Systems, Inc. Employee Stock Ownership Plan Schedule I Schedule of Assets Held for Investment Purposes Year Ended December 31, 1999 (a) (b) (c) Description of Asset (d) Cost (e) Current Value - ----------------------------------------------------------------------------------------------------------------------------------- <F*> Engineered Support Systems, Inc. Common Stock, $.01 par value $4,606,842 $9,194,988 Small Company Growth Portfolio Equity Fund managed by Credit Suisse Asset Management 889,741 1,330,782 Capital Growth Portfolio Equity Fund managed by Montag & Caldwell 4,245,621 5,312,592 Overseas Equity Portfolio Non-U.S. Equity Fund managed by Brandes Investment Partners 2,027,925 2,980,350 Mid-Cap Value Portfolio Equity Fund managed by Ariel Capital Management, Inc. 877,064 1,116,005 Large Company Value Portfolio Equity Fund managed by Scudder Kemper Investments 4,032,518 3,758,746 Strategic Bond Portfolio Fixed Income Fund managed by Lazard Asset Management 771,277 774,833 Guaranteed Investment Fund investing in fixed income securities, Contract Portfolio primarily insurance and bank investment contracts, and managed by Mitchell Hutchins Asset Management 1,540,553 1,710,434 Participant Loans Loans to Plan participants bearing interest rates from 8.75% to 10.00% with remaining maturities of 1 month to 5 years. 677,099 677,099 <FN> <F*> Investments in securities of parties-in-interest to the Plan Engineered Support Systems, Inc. Employee Stock Ownership Plan Schedule II Schedule of Reportable Transactions<F1> Year Ended December 31, 1999 (h) Current (f) Expense value of asset (i) Net (a) Identity of (b) Description (c) Purchase (d) Selling (e) Lease incurred with (g) Cost on transaction gain or party involved of Asset Price Price Rental transaction of asset date (loss) - ------------------------ --------------- -------------------------------------------------------------------------------------- Series of Transactions - ------------------------ Engineered Support Engineered Systems, Inc. Support Systems, Inc. common stock $1,140,398 $ - $ - $ - $1,140,398 $1,140,398 $ - <FN> <F1> Transactions or series of transaction in excess of five percent of the current value of the Plan's assets as of December 31, 1998 as defined in 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 our report dated June 23, 2000 relating to the financial statements and schedules of Engineered Support Systems, Inc. Employee Stock Ownership Plan, which appears in this Form 11-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP St. Louis, Missouri June 28, 2000