EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A to the Registrant's Annual
report on Form 10-K for the fiscal year ended December 31, 1996 is being filed
via EDGAR solely to correct an error in footnote 18 to the Consolidated
Financial Statements included as part of Item 8 thereto. The disseminated
paper version of the Form 10-K did not include this error.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is contained in the
Company's Consolidated Financial Statements and Financial
Statement Schedules included elsewhere in this Annual Report on
Form 10-K.
Report of Independent Public Accountants
To DynCorp:
We have audited the accompanying consolidated balance sheets of
DynCorp (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of
operations, permanent stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996.
These consolidated financial statements and the schedules
referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform an 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. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of DynCorp and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedules I and II
listed in Item 14 of the Form 10-K are presented for purposes of
complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules
have been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial
statements taken as a whole.
Washington, D.C.,
March 21, 1997
ARTHUR ANDERSEN LLP
DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
Assets 1996 1995
Current Assets:
Cash and cash equivalents (Notes 1 and 5) $ 25,877 $ 31,151
Accounts receivable and contracts in process
(Notes 3, 4 and 5) 187,679 179,706
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 1,030 1,383
Prepaid income taxes (Note 14) 2,804 -
Other current assets 7,205 8,095
Total Current Assets 224,595 220,335
Property and Equipment, at cost (Notes 1 and 19):
Land 1,621 1,621
Buildings and leasehold improvements 9,324 9,773
Machinery and equipment 24,876 30,234
35,821 41,628
Accumulated depreciation and amortization (16,737) (22,600)
Net property and equipment 19,084 19,028
Intangible Assets, net of accumulated amortization
(Notes 1, 13 and 20) 48,927 50,689
Other Assets (Notes 5 and 21) 76,146 85,438
Total Assets $368,752 $375,490
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
December 31,
Liabilities and Stockholders' Equity 1996 1995
Current Liabilities:
Notes payable and current portion of long-term debt
(Notes 3 and 5) $ 628 $ 1,260
Accounts payable (Note 3) 42,716 38,007
Deferred revenue and customer advances (Note 1) 6,002 4,814
Accrued income taxes (Notes 1, 3 and 14) 354 11,374
Accrued expenses (Note 6) 99,145 100,152
Total Current Liabilities 148,845 155,607
Long-term Debt (Notes 3, 5 and 24) 103,555 104,112
Deferred Income Taxes (Notes 1 and 14) 4,079 2,917
Other Liabilities and Deferred Credits (Notes 3 and 21) 75,434 86,992
Contingencies and Litigation (Note 21) - -
Temporary Equity:
Redeemable Common Stock at Redemption Value (Notes 7 and 24)
ESOP Shares, 6,165,957 and 6,051,997 shares issued
and outstanding in 1996 and 1995, respectively,
subject to restrictions 136,343 100,481
Management Investors, 2,082,078 shares issued and
outstanding in 1995, subject to restrictions - 33,138
Other, 125,714 shares issued and outstanding in 1996
and 1995 2,979 2,275
Permanent Stockholders' Equity:
Preferred Stock, Class C 18% cumulative, convertible,
$24.25 liquidation value (liquidation value including
unrecorded dividends of $14,147 in 1996 and $11,863
in 1995), 123,711 shares authorized, issued and
outstanding (Notes 8 and 24) 3,000 3,000
Common Stock, par value ten cents per share, authorized
20,000,000 shares; issued 3,315,673 shares in 1996
and 1,588,587 shares in 1995 (Note 9) 332 159
Common Stock Warrants (Note 10) 11,139 11,305
Paid-in Surplus 148,234 148,089
Reclassification to temporary equity for redemption value (138,694) (135,110)
Deficit (101,259) (115,888)
Common Stock Held in Treasury, at cost; 1,514,482 shares
and 170,716 warrants in 1996 and 1,235,509 shares
and 173,988 warrants in 1995 (25,235) (21,084)
Unearned ESOP Shares (Note 12) - (503)
Total Liabilities and Stockholders' Equity $368,752 $375,490
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Statements of OperationsFor the Years Ended December 31
(Dollars in thousands, except per share data)
1996 1995 1994(a)
Revenues (Note 1):
Information and Engineering Technology $ 271,538 $271,133 $192,062
Aerospace Technology 383,252 319,335 300,856
Enterprise Management 366,663 318,257 325,765
Total revenues 1,021,453 908,725 818,683
Costs and expenses:
Cost of services 970,163 871,317 783,121
Corporate selling and administrative 18,241 18,705 16,887
Interest expense 10,220 14,856 14,903
Interest income (1,752) (3,804) (2,398)
Other (Note 13) 5,474 10,212 7,628
Total costs and expenses 1,002,346 911,286 820,141
Earnings (loss) from continuing operations
before income taxes, minority interest
and extraordinary item 19,107 (2,561) (1,458)
Provision (benefit) for income taxes (Note 14) 5,893 (9,090) (2,236)
Earnings from continuing operations before
minority interest and extraordinary item 13,214 6,529 778
Minority interest (Note 1) 1,265 1,255 1,130
Earnings (loss) from continuing operations before
extraordinary item 11,949 5,274 (352)
Loss from discontinued operations, net of
income taxes (Note 2) - (1,416) (12,479)
Gain on sale of discontinued operations, net
of income taxes (Note 2) 2,680 1,396 -
Earnings (loss) before extraordinary item 14,629 5,254 (12,831)
Extraordinary loss from early extinguishment of
debt, net of income taxes (Note 5) - (2,886) -
Net earnings (loss) 14,629 $ 2,368 $(12,831)
Preferred Stock Class C dividends not declared
or recorded (Notes 8 and 24) (2,284) (1,915) (1,606)
Common stockholders' share of earnings (loss) $ 12,345 $ 453 $(14,437)
Earnings (Loss) Per Common Share (EPS) (Note 16)
Primary and fully diluted:
Continuing operations before extraordinary item$ 0.82 $ 0.29 $ (0.29)
Discontinued operations 0.23 0.00 (1.83)
Extraordinary item - (0.25) -
Common stockholders' share of earnings (loss) $ 1.05 $ 0.04 $ (2.12)
Supplementary EPS (b):
Continuing operations before extraordinary item $ 1.00
Discontinued operations 0.26 N/A N/A
Supplemental earnings per share $ 1.26
(a) Restated for the discontinuance of the Commercial Aviation business
(see Note 2).
(b) Supplementary EPS presented to reflect the conversion of the Class C
Preferred stock and repurchase of common stock and warrants (see
Notes 16 and 24).
See accompanying notes.
<TABLE>
DynCorp and Subsidiaries
Consolidated Statements of Permanent Stockholders' Equity
For the Years Ended December 31
(Dollars in thousands)
<CAPTION>
Reclassification
to Temporary
Equity for
Redemption
Common Value
Preferred Common Stock Paid-in greater than
Stock Stock(a) Warrants Surplus(a)Par Value (a)
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993 $3,000 $ 61 $15,119 $108,578 $(100,189)
Stock issued under Restricted Stock Plan (Note 10) 10 (10)
Treasury stock purchased (Notes 7 and 9) (57) (276)
Stock issued under the Management Employees
Stock Purchase Plan (Note 7) (2)
Warrants exercised (Note 10) 147 (3,576) 3,796
Accrued compensation (Note 10) 1,222
Contribution of stock to Employee Stock Ownership Plan (Note 12) 131 16,969
Accrued interest on note receivable (Note 11)
Net loss
Reclassification to Redeemable Common Stock (Note 7) (268) (29,929)
Balance, December 31, 1994 3,000 81 11,486 130,277 (130,118)
Stock issued under Restricted Stock Plan (Note 10) 26 (242)
Treasury stock purchased (Notes 7 and 9)
Warrants exercised or canceled (Note 10) 7 (181) 175
Contribution of stock to Employee Stock Ownership Plan (Note 12) 121 17,879
Payment received on Employee Stock Ownership Plan note (Note 12)
Accrued interest on note receivable (Note 11)
Collection of note receivable (Note 11)
Net earnings
Reclassification to Redeemable Common Stock (Note 7) (76) (4,992)
Balance, December 31, 1995 3,000 159 11,305 148,089 (135,110)
Stock issued under Restricted Stock Plan (Note 10) 11 (124)
Treasury stock purchased (Notes 7 and 9)
Warrants and stock options exercised (Notes 10 and 18) 7 (166) 185
Reclassification from Temporary Equity (Note 7) 166 32,972
Shares purchased by Employee Stock Ownership Plan
on Internal Market (Note 7) (13) (1,874)
Payment received on Employee Stock Ownership Plan note (Note 12)
Other 84
Net earnings
Reclassification to Redeemable Common Stock (Note 7) 2 (34,682)
Balance, December 31, 1996 $3,000 $332 $11,139 $148,234 $(138,694)
</TABLE>
<TABLE>
<CAPTION>
Employee
Stock Cummings
Ownership Point
Plan Loan Industries
Treasury and Unearned Note
Deficit Stock ESOP Shares Receivable
<S> <C> <C> <C> <C>
Balance December 31, 1993 $(105,425) $ (5,840) $ - $ (7,568)
Stock issued under Restricted Stock Plan (Note 10)
Treasury stock purchased (Notes 7 and 9) (2,690)
Stock issued under the Management Employees
Stock Purchase Plan (Note 7) 32
Warrants exercised (Note 10) (319)
Accrued compensation (Note 10)
Contribution of stock to Employee Stock Ownership Plan (Note 12)
Accrued interest on note receivable (Note 11) (1,375)
Net loss (12,831)
Reclassification to Redeemable Common Stock (Note 7)
Balance, December 31, 1994 (118,256) (8,817) - (8,943)
Stock issued under Restricted Stock Plan (Note 10)
Treasury stock purchased (Notes 7 and 9) (12,267)
Warrants exercised or canceled (Note 10)
Contribution of stock to Employee Stock Ownership Plan (Note 12) (13,750)
Payment received on Employee Stock Ownership Plan note (Note 12) 13,247
Accrued interest on note receivable (Note 11) (951)
Collection of note receivable (Note 11) 9,894
Net earnings 2,368
Reclassification to Redeemable Common Stock (Note 7)
Balance, December 31, 1995 (115,888) (21,084) (503) -
Stock issued under Restricted Stock Plan (Note 10) 75
Treasury stock purchased (Notes 7 and 9) (4,226)
Warrants and stock options exercised (Notes 10 and 18)
Reclassification from Temporary Equity (Note 7)
Shares purchased by Employee Stock Ownership Plan
on Internal Market (Note 7)
Payment received on Employee Stock Ownership Plan note (Note 12) 503
Other
Net earnings 14,629
Reclassification to Redeemable Common Stock (Note 7)
Balance, December 31, 1996 $(101,259) $(25,235) $ - $ -
(a) Restated to conform to the balance sheet presentation (see Note 1).
See accompanying notes.
</TABLE>
DynCorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31
(Dollars in thousands)
1996 1995 1994(a)
Cash Flows from Operating Activities:
Net earnings (loss) $ 14,629 $ 2,368 $(12,831)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization (Note 1) 9,467 11,348 16,340
Pay-in-kind interest on Junior Subordinated
Debentures (Note 5) - - 8,787
Loss, before tax, on purchase of Junior
Subordinated Debentures (Note 5) - 4,786 -
Payment of income taxes on gain on sale of the
Commercial Aviation business (13,990) - -
(Earnings) loss from discontinued operations
(Note 2) (2,680) 20 12,479
Deferred income taxes 1,478 4,959 (2,258)
Accrued compensation under Restricted Stock Plan - - 1,222
Noncash interest income - - (1,375)
Change in reserves of businesses divested in 1988 825 7,700 2,318
Other (848) (1,124) 604
Change in assets and liabilities, net of
acquisitions and dispositions:
Increase in accounts receivable and contracts
in process (6,864) (6,975) (22,502)
Decrease (increase) in inventories 353 (340) (466)
(Increase) decrease in other current assets (1,867) (1,222) 5,648
Increase (decrease) in current liabilities
except notes payable and current portion of
long-term debt 4,345 (7,756) (8,896)
Cash provided (used) by continuing operations 4,848 13,764 (930)
Cash (used) provided by operating activities of
discontinued operations - (3,375) 10,291
Cash provided by operating activities 4,848 10,389 9,361
Cash Flows from Investing Activities:
Sale of property and equipment 1,093 16,294 1,944
Proceeds received from notes receivable 3 8,950 6
Purchase of property and equipment (5,310) (4,789) (3,742)
Deferred income taxes from "safe harbor"
leases (Note 14) (316) (554) (499)
Assets and liabilities of acquired businesses
(excluding cash acquired) (Notes 1 and 20) (2,801) (1,092) (14,312)
Proceeds from sale of discontinued operations
(Note 2) 3,050 135,700 -
Decrease (increase) in cash on deposit for
letters of credit (Note 5) 6,244 (3,307) (21)
Investing activities of discontinued operations - (11,439) (4,781)
Other (282) 176 (830)
Cash provided (used) by investing activities 1,681 139,939 (22,235)
Cash Flows from Financing Activities:
Treasury stock purchased (Note 7) (9,712) (12,267) (3,182)
Payment on indebtedness (1,264) (25,172) (4,499)
Redemption of Junior Subordinated Debentures (Note 5) - (105,971) -
Stock released to Employee Stock Ownership Plan
(Note 12) 503 17,497 17,100
Treasury stock sold - - 159
Deferred financing expenses (Note 5) (1,310) (864) -
Financing activities of discontinued operations - (228) (697)
Other (20) 90 (41)
Cash (used) provided by financing activities (11,803) (126,915) 8,840
Net (Decrease) Increase in Cash and Cash Equivalents (5,274) 23,413 (4,034)
Cash and Cash Equivalents at Beginning of the Year 31,151 7,738 11,772
Cash and Cash Equivalents at End of the Year $ 25,877 $ 31,151 $ 7,738
(a) Restated for the discontinuance of the Commercial Aviation business
(see Note 2).
See accompanying notes.
DynCorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(1) Summary of Significant Accounting Policies
Principles of Consolidation -- All majority-owned subsidiaries have
been included in the financial statements and all significant
intercompany accounts and transactions have been eliminated (see Note
2). Outside investors' interest in the majority-owned subsidiaries
is reflected as minority interest. Investments less than 50% owned
are accounted for using the equity method of accounting.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period.
Contract Accounting -- Contracts in process are stated at the lower
of actual cost incurred plus accrued profits or net estimated
realizable value of incurred costs, reduced by progress billings.
The Company records income from major fixed-price contracts,
extending over more than one accounting period, using the percentage-
of-completion method. During performance of such contracts,
estimated final contract prices and costs are periodically reviewed
and revisions are made as required. The effects of these revisions
are included in the periods in which the revisions are made. On
cost-plus-fee contracts, revenue is recognized to the extent of costs
incurred plus a proportionate amount of fee earned, and on time-and-
material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable
costs incurred. Losses on contracts are recognized when they become
known. Disputes arise in the normal course of the Company's business
on projects where the Company is contesting with customers for
collection of funds because of events such as delays, changes in
contract specifications and questions of cost allowability or
collectibility. Such disputes, whether claims or unapproved change
orders in the process of negotiation, are recorded at the lesser of
their estimated net realizable value or actual costs incurred and
only when realization is probable and can be reliably estimated.
Claims against the Company are recognized where loss is considered
probable and reasonably determinable in amount.
It is the Company's policy to provide reserves for the
collectibility of accounts receivable when it is determined that it
is probable that the Company will not collect all amounts due and the
amount of reserve requirement can be reasonably estimated.
It is the Company's policy to defer labor and related costs
incurred in connection with the phase-in/start-up of new contracts
(after the award of the contract) when such costs are significant to
the contract and are not reimbursed separately by the customer.
These deferred costs for contracts awarded through 1995 are generally
amortized over the original contract period and option years which
are considered probable to be exercised. Phase-in/start-up costs
deferred on contracts awarded after 1995 are amortized over the
original contract period only, excluding option years.
Property and Equipment -- The Company computes depreciation and
amortization using both straight-line and accelerated methods. The
estimated useful lives used in computing depreciation and
amortization on a straight-line basis are: building, 15-33 years;
machinery and equipment, 3-20 years; and leasehold improvements, the
lesser of the useful life or the term of the lease. Accelerated
depreciation is based on a 150% declining balance method with light-
duty vehicles assigned a three-year life and machinery and equipment
assigned a five-year life. Depreciation and amortization expense was
$4,310,000 for 1996, $5,100,000 for 1995 and $4,978,000 for 1994.
Cost of property and equipment sold or retired and the related
accumulated depreciation or amortization is removed from the accounts
in the year of disposal, and any gains or losses are reflected in the
consolidated statements of operations. Expenditures for maintenance
and repairs are charged to expense as incurred, and major additions
and improvements are capitalized. During 1996, approximately
$3,200,000 of machinery and equipment assigned to a contract which
was lost in recompetition early in 1996 was either sold or retired.
The net book value of the equipment, $520,000, netted with the
proceeds received, has been reported in Cost of Services in the
Consolidated Statement of Operations.
Intangible Assets -- Intangible assets principally consist of the
excess of the acquisition cost over the fair value of the net
tangible assets of businesses acquired. In accordance with the
guidance provided in APB No. 16, the Company assesses and allocates,
to the extent possible, excess acquisition price to identifiable
intangible assets and any residual is considered goodwill. A large
portion of the intangible assets is goodwill which resulted from the
1988 LBO and merger, accounted for as a purchase, and represents the
existing technical capabilities, customer relationships and ongoing
business reputation that had been developed over a significant period
of time. The Company believes that these relationships and the value
of the Company's business reputation were and continue to be long-
term intangible assets with an almost infinite life. Since the APB
No. 17 limitation is 40 years, this period is used for amortization
purposes for the majority of the goodwill. The value assigned to
identifiable intangible assets at the time of the LBO and merger in
1988 was amortized over applicable estimated useful lives and was
fully amortized as of December 31, 1994.
At December 31, 1996, intangible assets consist of $46,700,000
of unamortized goodwill and $2,227,000 of value assigned to
contracts. Goodwill is being amortized on a straight-line basis over
periods up to forty years ($44,735,000 forty years, $152,000 thirty
years, $1,619,000 fifteen years and $194,000 ten years).
Amortization expense was $2,814,000 (see Note 13 (a)), $2,081,000 and
$4,343,000 (see Note 13(a)) in 1996, 1995 and 1994, respectively.
Amounts allocated to contracts are being amortized over the lives of
the contracts for periods up to ten years. Amortization of amounts
allocated to contracts was $617,000, $624,000 and $2,051,000 in 1996,
1995 and 1994, respectively. Cumulative amortization of $16,599,000
and $30,512,000 has been recorded through December 31, 1996, of
goodwill and value assigned to contracts, respectively.
The Company assesses potential impairment of intangible assets,
including goodwill, when events or circumstances indicate the carrying.
amount of an asset may not be recoverable. The
Company uses an estimate of its future undiscounted cash flows to
evaluate whether the intangible assets, including goodwill, are
recoverable. The amount of impairment, if any, is measured based on
projected discounted cash flows using a discount rate reflecting the
Company's average cost of funds.
Income Taxes -- As prescribed by Statement of Financial Accounting
Standards (SFAS) No. 109 "Accounting for Income Taxes," the Company
utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for
the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of
existing assets and liabilities, less valuation allowances, if
required.
Environmental Liabilities -- The Company accrues environmental costs
when it is probable that a liability has been incurred and the amount
can be reasonably estimated. Recorded liabilities have not been
discounted.
Contingent Liabilities -- The Company's accounting policy is to
accrue an estimated loss from a loss contingency when it is probable
that an asset has been impaired or a liability has been incurred at
the date of the financial statements and the amount of the loss can
be reasonably estimated. The accrual for a loss contingency may
include such costs as legal costs, settlement and compensating
amounts, estimated punitive damages and penalties.
Treasury Stock -- The Company records the purchase of treasury stock
at the lower of acquired cost or fair value. The amount in excess of
fair value, as in the case of shares acquired from ESOP participants,
is recorded as compensation expense (see Note 7).
Employee Stock Ownership Plan -- The Company has adopted Statement of
Position (SOP) 93-6, "Employers Accounting for Employee Stock
Ownership Plans."
Postretirement Health Care Benefits -- The Company provides no
significant postretirement health care or life insurance benefits to
its retired employees other than allowing them to continue as a
participant in the Company's plans with the retiree paying the full
cost of the premium. The Company has determined, based on an
actuarial study, that it has no liability under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions."
Postemployment Benefits -- The Company has no liability under SFAS
No. 112, "Employers' Accounting for Postemployment Benefits," as it
provides no benefits as defined.
Long-Lived Assets -- SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain intangibles be reviewed
for impairment when events or circumstances indicate the carrying
amount of an asset may not be recoverable. The Company's practice is
consistent with the guidelines as set forth in the Statement.
Stock Options -- SFAS No. 123, "Accounting for Stock-Based
Compensation," is effective for fiscal years beginning after December
15, 1995. The Statement encourages, but does not require, adoption
of the fair value based method of accounting for employee stock
options and other stock compensation plans. The Company has opted to
account for its stock option plan in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees." By doing so, the
Company will make proforma disclosure of net earnings and earnings per
share as if the fair value based method for accounting defined in
Statement 123 had been applied (see Note 18).
New Accounting Pronouncements -- SFAS No. 128, "Earnings per Share,"
was issued in February 1997 and is effective for financial statements
issued after December 15, 1997. The statement establishes new
standards for computing and presenting earnings per share ("EPS") and
will require restatement of prior years. This statement simplifies
the standards for computing EPS previously found in APB Opinion 15.
It replaces the presentation of primary and fully diluted EPS with a
presentation of basic and diluted EPS, requires a dual presentation
on the face of the income statement and requires a reconciliation of
basic EPS computation to diluted EPS. Had SFAS No. 128 been
effective for financial statements issued December 31, 1996, basic
and diluted EPS would have been $1.46 and $1.05, respectively.
Consolidated Statements of Cash Flows -- For purposes of these
statements, short-term investments which consist of government
treasury bills and time deposits with a maturity of ninety
days or less are considered cash equivalents. Cash and short-term
investments at December 31, 1996 exclude $3,000,000 of restricted
cash which is classified as Other Assets.
Classification -- Consistent with industry practice, assets and
liabilities relating to long-term contracts and programs are
classified as current although a portion of these amounts is not
expected to be realized within one year.
Cash paid for income taxes was $20,680,000 for 1996, $3,140,000 for
1995 and $1,145,000 for 1994.
Cash paid for interest, excluding the interest paid under the
Employee Stock Ownership Plan term loan, was $9,485,000 for 1996,
$14,150,000 for 1995 and $10,984,000 for 1994. The increase in 1995
over prior years resulted from the payment in cash (as opposed to
payment-in-kind) of interest on the Company's 16% Junior Subordinated
Debentures (see below).
Noncash investing and financing activities consist of the
following (in thousands):
1996 1995 1994
Acquisitions of businesses:
Assets acquired $ 4,998 $ 2,772 $30,302
Liabilities assumed (1,498) (1,680) (15,990)
Cash acquired (699) - -
Net cash 2,801 $ 1,092 $14,312
Pay-in-kind interest on Junior
Subordinated Debentures (Note 5) $ - $ - $ 8,787
Unissued common stock under
restricted stock plan (Note 10) $ - $ - $ 1,222
Capitalized equipment leases and
notes secured by property and equipment $ - $ - $ 121
Change in Presentation of Stockholders' Accounts -- The presentation
of the stockholders' accounts in the balance sheets has been revised
as a result of classifying the management investor shares as
Permanent Equity due to the establishment of the Internal Market,
thus ending the Company's obligation to purchase these shares upon an
employee's termination (see Note 7).
Change in Presentation of Consolidated Statement of Operations --
Certain deminimus items have been reclassified from Other Expense to
Cost of Services in the Consolidated Statement of Operations and the
prior year data has been changed to conform with this presentation.
(2) Discontinued Operations
During 1995, the Company sold all of its subsidiaries engaged in
the commercial aircraft maintenance and ground handling activities,
i.e., the Commercial Aviation business. At December 31, 1995,
certain contingencies existed regarding the final sales prices of
both the maintenance and ground handling businesses. Additionally,
the Company retained certain contingent liabilities which included
general warranties and representations and certain specific issues
regarding environmental, insurance and tax matters. During 1996, the
Company recorded a net gain of $2,680,000 related to the resolution
of some of these outstanding issues as well as the adjustment of
estimated reserves recorded at disposition.
The components of discontinued operations on the statements of
operations are as follows (in thousands):
Years Ended December 31,
1996 1995(a) 1994
Revenues $ - $130,709 $203,389
Cost of services (b) - 123,698 195,109
Interest expense and other (d) - 7,236 14,237
Asset impairment (c) - - 9,492
Pre-tax gain on sale of discontinued operations (3,448) (29,998) -
Income tax provision (benefit) 768 29,793 (2,970)
Gain (loss) from discontinued operations $ 2,680 $ (20) $(12,479)
(a) The results of operations for 1995 are not comparable to
1994 due to the interim divestitures of the maintenance and
ground handling operations.
(b) During 1994, the Company revised its estimate of the useful
lives of certain machinery and equipment to conform to its
actual experience with fixed asset lives. It was determined
the useful lives of these assets ranged from three to ten
years as compared to the two to seven year lives previously
utilized. The effect of this change was to reduce
depreciation expense and net loss from discontinued
operations for the year ended December 31, 1994, by
approximately $2,115,000 or $0.31 per share.
(c) After posting four consecutive years of operating losses at
its Aircraft Maintenance unit, the Company concluded it had
suffered a partial impairment of its investment in this
unit. Accordingly, it recorded an estimate of the
applicable goodwill ($5,242,000) and other assets
($4,250,000) that would be written down in the event the
consolidation or shut-down of one of the facilities became
necessary. The amount of goodwill represents the
unamortized balance as of December 31, 1994, of the goodwill
allocated to the maintenance unit in Florida at the time of
the Company's 1988 LBO and merger. The amount of write-down
of other assets consists of estimated losses to dispose of
the inventory, property and equipment and to otherwise
reserve for shut-down/consolidation of facilities.
(d) The Company has charged interest expense to discontinued
operations of $7,950,000 and $10,715,000 in 1995 and 1994,
respectively. The interest expense charged is the sum of
the interest on the debt of the discontinued operations
assumed by the buyers plus an allocation of other
consolidated interest that was not directly attributable to
the continuing operations of the Company. The amount
allocated was based on the ratio of net assets of the
discontinued operations to the sum of total net assets of
the Company plus consolidated debt other than debt of the
discontinued operations that was assumed by the buyer and
debt that was not directly attributed to any other
operations of the Company. Subsequent to the
discontinuance, the allocated interest (and applicable debt)
was substantially eliminated by using the proceeds of the
sale to pay off DynCorp debt in amounts substantially equal
to the amounts used to allocate interest to the discontinued
business activities.
The sale of the subsidiaries resulted in a partial termination
of the ESOP and termination of all active participants of the
subsidiaries. These employees were entitled to put their ESOP shares
(approximately 493,000 shares) sooner than had been previously
anticipated. These shares have been included in the estimated annual
repurchase commitment reported in Note 7, Redeemable Common Stock.
(3) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate the value:
Accounts Receivable, Accounts Payable and Accrued Income Taxes -
The carrying amount approximates the fair value due to the short
maturity of these instruments.
Long-term debt and other liabilities - The fair value of the
Company's long-term debt is based on the current rate as if the issue
date were December 31, 1996 and 1995 for its Collateralized Notes.
For the remaining long-term debt (see Note 5) and other liabilities,
the carrying amount approximates the fair value.
The estimated fair values of the Company's financial instruments at
December 31, are as follows (in thousands):
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term investments $ 25,877 $ 25,877 $ 31,151 $ 31,151
Accounts receivable 187,679 187,679 179,706 179,706
Accounts payable 42,716 42,716 38,007 38,007
Accrued income taxes 354 354 11,374 11,374
Long-term debt and other liabilities 103,855 103,855 104,112 105,584
(4) Accounts Receivable and Contracts in Process
The components of accounts receivable and contracts in process were
as follows at December 31 (in thousands):
1996 1995
U.S. Government:
Billed and billable $108,301 $109,937
Recoverable costs and accrued profit on progress
completed but not billed 26,473 26,130
Retainage due upon completion of contracts 2,343 1,901
137,117 137,968
Other Customers (primarily subcontracts from
U.S. Government prime contractors and other state,
local and quasi-government agencies):
Billed and billable (less allowance for doubtful
accounts of $229 in 1996 and $9 in 1995) 42,689 32,479
Recoverable costs and accrued profit on progress
completed but not billed 7,873 9,259
50,562 41,738
$187,679 $179,706
Billed and billable include amounts earned and contractually
billable at year-end but which were not billed because customer
invoices had not yet been prepared at year-end. Recoverable costs
and accrued profit not billed is composed primarily of amounts
recognized as revenues, but which are not contractually billable at
the balance sheet dates. It is expected that all amounts at December
31, 1996 will be collected within one year except for approximately
$10,794,000.
(5) Long-term Debt
At December 31, 1996 and 1995, long-term debt consisted of (in
thousands):
1996 1995
Contract Receivable Collateralized Notes,
Series 1992-1 $100,000 $100,000
Mortgages payable 3,461 3,802
Notes payable, due in installments through
2002, 11.43% weighted average interest rate 722 1,570
104,183 105,372
Less current portion 628 1,260
$103,555 $104,112
Debt maturities as of December 31, 1996, were as follows (in thousands):
1997 $ 628
1998 494
1999 297
2000 50,328
2001 218
Thereafter 52,218
$ 104,183
On January 23, 1992, the Company's wholly owned subsidiary, Dyn
Funding Corporation (DFC), completed a private placement of
$100,000,000 of 8.54% Contract Receivable Collateralized Notes,
Series 1992-1 (the "Notes"). The Notes are collateralized by the
right to receive proceeds from certain U.S. Government contracts and
certain eligible accounts receivable of commercial customers of the
Company and its subsidiaries. Credit support for the Notes is
provided by overcollateralization in the form of additional
receivables. The Company retains an interest in the excess balance
of receivables through its ownership of the common stock of DFC.
Interest payments are made monthly with monthly principal payments
originally scheduled to begin February 28, 1997 but extended to May
30, 1997. (The period between January 23, 1992 and January 30, 1997
is referred to as the Non-Amortization Period.) The Company has secured
financing (9 1/2% Senior Notes) and also has available its revolving
credit facility to satisfy the maturity obligations of the debt.
At December 31, 1996, the debt remains classified as long-term.
On an ongoing basis, cash receipts from the collection of the
receivables are used to make interest payments on the Notes, pay a
servicing fee to the Company, and purchase additional receivables
from the Company. During the Non-Amortization Period, cash in excess
of the amount required to purchase additional receivables and meet
payments on the Notes is to be paid to the Company subject to certain
collateral coverage tests. The receivables pledged as security for
the Notes are valued at a discount from their stated value for
purposes of determining adequate credit support. DFC is required to
maintain receivables, at their discounted values, plus cash on
deposit at least equal to the outstanding balance of the Notes.
At December 31, 1996, $122,786,000 of accounts receivable are
restricted as collateral for the Notes. Additionally, $3,000,000 of
cash is restricted as collateral for the Notes and has been included
in Other Assets on the balance sheet at December 31, 1996 and
December 31, 1995. Also classified as Other Assets on the balance
sheet at December 31, 1995 is $6,244,000 of cash restricted as
collateral for letters of credit. During 1996, these letters of
credit had expired or were replaced by letters of credit with no
collateral requirements and the funds were subsequently released.
In March 1996, the Company amended and restated its existing
$20,000,000 line of credit with Citicorp North America, Inc. to
provide for a $50,000,000 revolving credit facility to meet working
capital and capital expenditure requirements and fund acquisitions.
The facility matures in four years, with no payments required until
the end of the second year. As of December 31, 1996, the Company
had incurred $1,310,000 of deferred debt expense related to the
amended credit facility. The agreement contains customary
restrictions on the ability of the Company to undertake certain
activities, such as the incurrence of additional debt, the payment
of dividends on or the repurchase of the Company's common stock, the
merger of the Company into another company, the sale of
substantially all of the Company's assets, and the acquisition of
the stock or substantially all of the assets of another company.
The agreement also stipulates that the Company must maintain certain
financial ratios, including specified ratios of earnings to interest
expense, earnings to fixed charges, and debt to earnings. The
Company utilized this credit facility sporadically throughout 1996,
never exceeding $5,000,000 in borrowings at any given point in time.
There were no borrowings under this line of credit at December 31,
1996.
During 1995, the Company repurchased or called all of the
outstanding 16% Junior Subordinated Debentures. The Company has
recorded an extraordinary loss of $2,886,000, net of an income tax
benefit of $1,900,000 consisting primarily of the write-off of
unamortized discount or deferred financing costs and also various
transaction costs. The Debentures were scheduled to mature on June
30, 2003, and bore interest at 16% per annum, payable semi-annually.
The Company could, at its option, prior to September 9, 1995, pay
the interest either in cash or issue additional Debentures. During
1994, $15,329,000 of additional Debentures were issued in lieu of
cash interest payments (includes $6,542,000 allocated to
discontinued operations).
The Company obtained title to its corporate office building on
July 31, 1992 by assuming a mortgage of $19,456,000. The mortgage
maturity date was May 27, 1993; however, as provided, the Company
extended the mortgage to March 27, 1995 with an increase in the
interest rate of 1/2% per annum plus an extension fee. On February
7, 1995, the Company sold the building to RREEF America Reit Corp. C
and entered into a 12-year lease with RREEF as the landlord. The
facility was sold for $13,780,000 and the proceeds were applied to
the mortgage. A net gain of $3,430,000 was realized on the
transaction and is being amortized over the life of the lease.
The Company acquired the Alexandria, VA headquarters of Technology
Applications, Inc. ("TAI") on November 12, 1993, in conjunction with
the acquisition of TAI. A mortgage of $3,344,000 bearing interest
at 8% per annum was assumed. Payments are made monthly and the
mortgage matures in April 2003. Additionally, a $1,150,000
promissory note was issued. The note bears interest at 7% per
annum. Payments under the note shall be made quarterly through
October 1998.
Deferred debt issuance costs are being amortized using the
effective interest rate method over the terms of the related debt.
At December 31, 1996, unamortized deferred debt issuance costs were
$1,271,000 and amortization for 1996, 1995 and 1994 was $829,000,
$743,000 and $324,000, respectively.
(6) Accrued Expenses
At December 31, 1996 and 1995, accrued expenses consisted of the
following (in thousands):
1996 1995
Salaries and wages $ 44,044 $ 42,063
Insurance 14,768 14,921
Interest 4,447 4,541
Payroll and miscellaneous taxes 8,508 9,402
Accrued contingent liabilities and
operating reserves (see Note 21) 19,969 24,015
Other 7,409 5,210
$ 99,145 $100,152
(7) Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary
Equity at the redeemable value at each balance sheet date and
consists of the following:
Balance at Balance at
RedeemableDecember 31, Redeemable December 31,
Shares Value 1996 Shares Value 1995
ESOP Shares 3,520,037 $23.70 83,424,877 3,535,195 $18.10 63,987,030
2,645,920 20.00 52,918,400 2,516,802 14.50 36,493,629
6,165,957 136,343,277 6,051,997 100,480,659
Management 21,287 109.64 2,333,907
Investor Shares 256,196 18.10 4,637,148
1,804,595 14.50 26,166,628
2,082,078 33,137,683
Other Shares 125,714 23.70 2,979,422 125,714 18.10 2,275,423
ESOP Shares
In accordance with ERISA regulations and the Employee Stock
Ownership Plan (the Plan) documents, the ESOP Trust or the Company is
obligated to purchase vested common stock shares from ESOP
participants (see Note 12) at the fair value (as determined by an
independent appraiser) as long as the Company's common stock is not
publicly traded. The shares initially bought by the ESOP in 1988
were bought at a "control price," reflecting the higher price that
buyers typically pay when they buy an entire company (as the ESOP and
other investors did in 1988). A special provision in the ESOP's 1988
agreement permits participants to receive a "control price" when they
sell these shares back to the Company under the ESOP's "put option"
provisions. This "control price," determined by the appraiser as of
December 31, 1996, was $23.70 per share. The additional shares
received by the ESOP in 1993 through 1995 were at a "minority
interest price," reflecting the lower price that buyers typically pay
when they are buying only a small piece of a company (as the ESOP did
in these years). Participants do not have the right to sell these
shares at the "control price." The minority interest price
determined by the independent appraiser as of December 31, 1996 was
$20.00 per share. Participants receive their vested shares upon
retirement, becoming disabled, or death, over a period of one to five
years and for other reasons of termination over a period of one to
ten years, all as set forth in the Plan documents. In the event the
fair value of a share is less than $27.00, the Company was committed
to pay, through December 31, 1996, up to an aggregate of $16,000,000,
the difference (Premium) between the fair value and $27.00 per share.
The Company estimated a total Premium of $8,500,000 and recorded the
Premium as Other Expense in the Consolidated Statements of Operations
in 1989 through 1994 (see Note 13). As of December 31, 1996, the
Company had expended $6,976,000 of the $8,500,000 Premium. In the
fourth quarter of 1996, the Company reversed $1,250,000, revising its
estimated ESOP Premium. The remaining liability represents the
Company's obligation to honor the Premium commitment to ESOP
participants who were grandfathered in due to minor administrative
changes in the plan in 1995. From October 1990 through May 1996, the
Company had purchased 633,453 shares from participants. In June
1996, the ESOP Trust began purchasing participants' shares at fair
value, utilizing the cash available from the Company's 1996
contribution (see Note 12), while the Company continued to pay the
premium. Based on the fair values of $23.70 and $20.00 per share at
December 31, 1996, the estimated aggregate annual commitment to
repurchase shares from the ESOP participants upon death, disability,
retirement and termination is as follows: $4,814,000 in 1997, $7,326,000
in 1998, $6,750,000 in 1999, $7,757,000 in 2000, $10,795,000 in 2001
and $98,901,000 thereafter. Under the Subscription Agreement with
the ESOP dated September 9, 1988, the Company is permitted to defer
put options if, under Delaware law, the capital of the Company would
be impaired as a result of such repurchase. At December 31, 1996 and
1995, 6,165,957 and 6,051,997 shares, respectively, were outstanding
and included in Redeemable Common Stock.
Management Investors Shares
Redeemable common stock held by management investors includes those
shares acquired by management investors pursuant to the merger in
1988, shares earned through the Restricted Stock Plan (see Note 10)
and shares issued through the Management Employees Stock Purchase
Plan (the Stock Purchase Plan). The Stock Purchase Plan allowed
employees in management, supervisory or senior administrative
positions to purchase shares of the Company's common stock along with
warrants at current fair value. The Board of Directors was
responsible for establishing the fair value for purposes of the
Stockholders Agreement and the Stock Purchase Plan. The Stock
Purchase Plan was discontinued in 1994. Treasury stock, which the
Company acquired from terminated employees who had previously
purchased shares from the Company, was issued to employees purchasing
stock under the Stock Purchase Plan. Under the DynCorp Stockholders
Agreement adopted in March 1994 and which expires in March 1999, the
Company was committed, upon an employee's termination of employment,
to purchase common stock shares held by employees pursuant to the
merger, through the Stock Purchase Plan or through the Restricted
Stock Plan. In May 1995, the Board of Directors, with the consent of
the Class C Preferred stockholder, approved the establishment of an
Internal Market as a replacement for the resale procedures included
in the DynCorp Stockholders Agreement. In May 1996, the Securities
and Exchange Commission approved the registration of shares for
trading on the Internal Market, thus releasing the Company from its
obligation to repurchase any management or restricted stock shares.
Therefore, the management investor shares have been reclassified from
Temporary Equity (at the redemption value) to Permanent Equity (at
par value) as of December 31, 1996.
The share price at December 31, 1995 for the Management Investor
and Stock Purchase shares was $14.50 per common share and $109.64 for
each share for which warrants had not been exercised (one share of
common stock at $14.50 per share plus 6.6767 warrants at $14.25 per
warrant). At December 31, 1995, 2,082,078 shares were outstanding
and included in Redeemable Common Stock.
Other Shares
In conjunction with the acquisition of Technology Applications,
Inc. in November 1993, the Company issued put options on 125,714
shares of common stock. The holder may, at any time commencing on
December 31, 1998 and ending on December 31, 2000, sell these shares
to the Company at a price per share equal to the greater of $17.50;
or, if the stock is publicly traded, the market value at a specified
date; or, if the Company's stock is not publicly traded, the fair
value at the time of exercise. At December 31, 1996 and 1995,
125,714 shares of common stock were outstanding and included in
Redeemable Common Stock.
Following are the changes in Redeemable Common Stock for the three
years ended December 31, 1996 (in thousands):
Redeemable Common Stock
Management
Other ESOP Investors Total
Balance, December 31, 1993 $ 2,200 $ 68,745 $ 29,685 $100,630
Treasury stock purchased (2,344) (301) (2,645)
Stock issued under Management Employee
Stock Purchase Plan 37 37
Warrants exercised (Note 10) 3,944 3,944
Contribution of stock to ESOP (Note 12) 17,100 17,100
Adjustment of shares to fair value 88 2,837 8,837 11,762
Balance, December 31, 1994 2,288 86,338 42,202 130,828
Treasury stock purchased (2,904) (9,336) (12,240)
Warrants exercised (Note 10) 179 179
Contribution of stock to ESOP (Note 12) 18,000 18,000
Adjustment of shares to fair value (13) (953) 93 (873)
Balance, December 31, 1995 2,275 100,481 33,138 135,894
Reclassification to permanent equity (33,138) (33,138)
Treasury Stock purchased (290) (290)
Shares purchased on Internal Market 1,887 1,887
Adjustment of shares to fair value 704 34,265 34,969
Balance, December 31, 1996 $ 2,979 $136,343 $ - $139,322
(8) Preferred Stock Class C
Class C Preferred Stock is convertible, at the option of the
holder, into one share of common stock, adjusted for any stock
splits, stock dividends or redemption. At conversion, the holder of
Class C Preferred Stock is also entitled to receive such warrants as
have been distributed to the holders of the common stock. Dividends
accrue at an annual rate of 18%, compounded quarterly. At December
31, 1996, cumulative dividends of $11,147,000 have not been recorded
or paid. Dividends will be payable only in the event of a
liquidation of the Company or when cash dividends are declared with
respect to common stock and only in an aggregate amount equal to the
aggregate amount of dividends that such holder would have been
entitled to receive if such Class C Preferred Stock had been
converted into common stock. The holder of Class C Preferred Stock
is entitled to one vote per share on any matter submitted to the
holders of common stock for stockholder approval. In addition, so
long as any Class C Preferred Stock is outstanding, the Company is
prohibited from engaging in certain significant transactions without
the affirmative vote of the holder of the outstanding Class C
Preferred Stock. In February 1997, the ESOP purchased all of the
Class C Preferred Stock which was immediately converted into Common
Stock (see Note 24).
(9) Common Stock
At December 31, 1996, Common Stock includes those shares issued to
outside investors, management investor shares (i.e. shares issued
through the Restricted Stock Plan and Management Employees Stock
Purchase Plan) and any ESOP shares which have been purchased by the
Company and are being held as treasury stock. This differs from the
December 31, 1995 classification of Common Stock which excluded the
management investor shares outstanding (see Note 7).
(10) Common Stock Warrants and Restricted Stock
The Company initially issued warrants on September 9, 1988 to the
Class C Preferred stockholder and to certain common stockholders to
purchase a maximum of 5,891,987 shares of common stock of the
Company. The warrants issued to Class C Preferred stockholder and to
certain common stockholders were recorded at their fair value of
$2.43 per warrant and warrants issued to a lender were recorded at
$3.28 per warrant. Each warrant is exercisable to obtain one share
of common stock. The stockholder may exercise the warrant and pay in
cash the exercise price of $0.25 for one share of common stock or may
sell back to the Company a sufficient number of the exercised shares
to equal the value of the warrants to be exercised. During 1996,
68,253 warrants were exercised and 4,254,196 warrants were
outstanding at December 31, 1996. Rights under the warrants lapse no
later than September 9, 1998. In February 1997, the ESOP purchased
all the Class C Preferred Stock which was immediately converted into
Common Stock (see Note 24).
The Company had a Restricted Stock Plan (the Plan) under which
management and key employees could be awarded shares of common stock
based on the Company's performance. The Company initially reserved
1,023,037 shares of common stock for issuance under the Plan. Under
the Plan, Restricted Stock Units (Units) were granted to participants
who were selected by the Compensation Committee of the Board of
Directors. Each Unit entitled the participant upon achievement of
the performance goals (all as defined) to receive one share of the
Company's common stock. Units could not be converted into shares of
common stock until the participant's interest in the Units had
vested. Vesting occurred upon completion of the specified periods as
set forth in the Plan. In 1994, the Company accrued as compensation
expense $1,222,000 under the Plan which was charged to Cost of
Services and Corporate Selling and Administrative Expenses. At
December 31, 1995, 417,265 shares were unissued and were included in
Redeemable Common Stock-Management Investors (see Note 7).
(11) Cummings Point Industries, Inc. Note Receivable
The Company loaned $5,500,000 (the "Note") to Cummings Point
Industries, Inc., of which Capricorn Investors, L.P. ("Capricorn")
owns more than 10%. By separate agreement and as security to the
Company, Capricorn agreed to purchase the Note from the Company upon
three months' notice, for the amount of outstanding principal plus
accrued interest. As additional security, Capricorn's purchase
obligation was collateralized by certain common stock and warrants
issued by the Company and owned by Capricorn. The Note, which had
previously been reflected as a reduction in stockholders' equity,
was paid in full in August, 1995.
(12) Employee Stock Ownership Plan
In September 1988, the Company established an Employee Stock
Ownership Plan (the Plan). The Company borrowed $100 million and
loaned the proceeds, on the same terms as the Company's borrowings,
to the Plan to purchase 4,123,711 shares of common stock of the
Company (the ESOP loan). The common stock purchased by the Plan
was held in a collateral account as security for the ESOP loan from
the Company. The Company was obligated to make contributions to the
Plan in at least the same amount as required to pay the principal and
interest installments under the Plan's borrowings. The Plan used the
Company contributions to repay the principal and interest on the ESOP
loan. As the ESOP loan was liquidated, shares of the Company's
common stock were released from the collateral account and allocated
to participants of the Plan. As of December 31, 1993, the loan was
fully repaid.
In accordance with subsequent amendments to the Plan,
the Company contributed an additional 25,000 shares
of common stock in December 1993 and in 1994 contributed cash of
$17,435,000 which the ESOP used to acquire 1,312,459 shares and to
pay interest and administrative expenses. In 1995, the Company sold
1,208,059 additional shares of common stock to the ESOP for
$4,250,000 cash and $13,750,000 in the form of a note receivable.
Payments on the note through December 31, 1995 were $13,247,000. The
unpaid balance on the note receivable from the ESOP has been
reflected as a reduction in stockholders' equity at December 31,
1995. In 1996, the Company contributed $13,670,000 in cash to the
ESOP. Utilizing the Company's 1996 contribution, the ESOP paid the
balance of the note to the Company, releasing 33,763 shares from the
collateral account, and has thus far expended $4,849,000 of the
remaining contribution to purchase 130,177 shares of the Company's
stock on the newly established Internal Market, acquire 122,117
shares put for redemption by retired and terminated participants and
to pay administrative expenses. It is the Company's intention for
the ESOP to completely satisfy its future stock purchase requirements
by way of the Internal Market or direct purchase and with shares put
by retired or terminated participants and not through the issue of
new shares by the Company.
The Plan covers a majority of the employees of the Company.
Participants in the Plan become fully vested after four years of
service. All of the 6,921,523 shares acquired by the ESOP have been
either issued or allocated to participants as of December 31, 1996.
The Company recognizes ESOP expense each year based on the fair value
of the shares committed to be released. In 1996, 1995 and 1994, cash
contributions to the ESOP were $13,670,000, $17,497,000 and
$17,435,000, respectively. These amounts were charged to Cost of
Services and Corporate Selling and Administrative Expenses.
(13) Other Expenses
Years Ended December 31,
(in thousands)
1996 1995 1994
Amortization of costs in excess
of net assets acquired (see Note 1) $ 1,560 $ 2,143 $ 2,347
ESOP Repurchase Premium (see Note 7) (1,250) 1,323
Write-off of investment in
unconsolidated subsidiary (a) 1,286 3,250
Legal and other expense accruals
associated with an acquired business (b) (1,830)
Costs associated with businesses discontinued
in 1988 and prior years
- Asbestos liability issues (c) 5,300
- Subcontractor suit (d) 750 2,400 2,665
- Environmental costs (see Note 21(b)) 75 (347)
Termination costs (e) 3,299
Miscellaneous (246) 369 220
Total Other $ 5,474 $10,212 $ 7,628
(a) In June 1994 the Company paid $3,000,000 for a 25% interest in
Composite Technology, Inc. ("CTI") and recorded $1,375,000 of
goodwill in conjunction with the investment. The investment
in CTI allowed the Company to receive the unrestricted North
American license for a particular aircraft repair technology
which was fundamental to several existing contracts and bids
in process. Since 1994, the volume of business in this area
has declined and the Company has determined the goodwill
associated with this investment has been impaired.
Accordingly, the unamortized balance at December 31, 1996,
$1,286,000, has been charged to Other Expense. At this time,
the Company does not believe the underlying equity in the 25%
investment in CTI has been impaired.
The Company initially invested in Business Mail Express, Inc.
("BME") in April 1992. In June 1994, the Company paid an
additional $1,250,000 to increase its holdings in the
subsidiary from 40% to 50.1% and the subsidiary concurrently
borrowed $6,000,000 from another investor. The total
acquisition cost exceeded the underlying equity in net assets
by $2,582,000. The subsidiary's stockholders' agreement
defined certain trigger events which, upon their occurrence,
transferred control of the subsidiary from DynCorp to the
other shareholders. These trigger events occurred in the
fourth quarter of 1994 and the subsidiary's lenders called the
loans in 1995. These actions, coupled with financial and cash
flow projections provided by the subsidiary's management, led
the Company to determine that its investment had been
permanently impaired. As such, $3,250,000 representing the
investment and excess purchase price was charged to Other
Expenses in 1994. The investment was disposed of in 1995 for
book value.
(b) In 1993, expenses were incurred and an accrual was established
for estimated future legal costs and possible fines and
penalties associated with a federal investigation of an
allegation that false statements were made in connection with
a pricing proposal submitted by an acquired business prior to
its acquisition in 1991. The investigation was concluded in
1994 with the government finding no basis for prosecution. As
a consequence, the Company not only recovered a portion of its
prior expenses, but also avoided any fines and penalties;
consequently, the unused portion of the accrual was reversed
in 1994.
(c) Reserves for potential uninsured costs to defend and settle future
asbestos claims against a former subsidiary (see Note 21(a)).
This adjustment was recorded in the fourth quarter 1995
because of the following events which occurred in that period.
(i) During November 1995, the subsidiary involved in the
asbestos litigation received two significant unfavorable
jury verdicts. (These cases are currently under appeal.)
(ii) During the fourth quarter, the Company became aware of
approximately 1,100 additional law suits filed immediately
prior to the September 1, 1995 effective date of the Texas Tort
Reform Act. (The Company believes this surge was attributable
to the Texas tort reform legislation as described in Note 21
(a).) The Company was not notified of these cases until the fourth
quarter of 1995 due to an administrative backlog in the Texas
court system caused by the tremendous volume of cases filed prior
to the September 1, 1995 effective date of the Texas tort reform
legislation.
(iii) During the fourth quarter, the Company received notification
from one of the subsidiary's primary insurance carriers to
the effect that the carrier considered its coverage to be
exhausted and that it was withdrawing its prior verbal
commitment to a negotiated settlement of its coverage limits
and obligations to defend.
These events precipitated a reassessment (increase) of the
estimated minimum claim liability and a greater concern as to
the full recovery of all claims from the carriers. After
consulting with its defense counsel and professional advisors
regarding its asbestos position,it was decided that it was appropriate
to record an additional $5,300,000 accrual, increasing the
overall accrual to $7,000,000.
(d) Reserves for the estimated costs (primarily legal defense)
to resolve a lawsuit filed by a subcontractor of a former
subsidiary (see Note 21(b)).
(e) During 1996, several senior executives and a member of the
Board of Directors announced their intentions to either retire
or step down from their positions with the Company. In
conjunction with this action, the Company has accrued
$3,299,000, representing commitments to these individuals for
supplemental pension benefits, consulting fees, payments due
under a covenant not to compete, remuneration for the waiver
of certain preferred stock and Board of Directors voting
rights as well as accrued life insurance premiums payable.
(14) Income Taxes
Earnings (loss) from continuing operations before income taxes and
minority interest (but including extraordinary item - see Note 5)
were derived from the following (in thousands):
Years Ended December 31,
1996 1995 1994
Domestic operations $ 19,102 $ (3,111) $ (642)
Foreign operations 5 (4,236) (816)
$ 19,107 $ (7,347) $ (1,458)
The provision (benefit) for income taxes consisted of the following
(in thousands):
Years Ended December 31,
1996 1995 1994
Current:
Federal $ 4,286 $(10,322) $ (91)
Foreign (81) (2,234) 54
State 210 (1,493) 59
4,415 (14,049) 22
Deferred:
Federal 3,939 9,749 (5,161)
Foreign 1,100 1,000 -
State (436) 2,900 (775)
4,603 13,649 (5,936)
Valuation Allowance:
Federal (4,067) (7,707) 2,962
State 942 (983) 716
(3,125) (8,690) 3,678
Total $ 5,893 $(9,090) $(2,236)
The components of and changes in deferred taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
Deferred Deferred Deferred
Dec. 31, Expense Dec. 31, Expense Dec. 31, Expense
1996 (Benefit) 1995 (Benefit) 1994 (Benefit)
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabilities:
Difference between book and tax
method of accounting for certain
employee benefits $ (2,187) $ 1,027 $ (1,160) $ 1,535 $ 375 $ 223
Difference between book and tax method
of accounting for income on U.S.
Government contracts (11,431) 1,645 (9,786) 885 (8,901) 38
Amortization of intangibles (761) (37) (798) (275) (1,073) 925
Total deferred tax liabilities (14,379) 2,635 (11,744) 2,145 (9,599) 1,186
Deferred tax assets:
Difference between book and tax
method of accounting for
depreciation and amortization 66 (413) (347) 806 459 (632)
Deferred compensation expense 2,240 191 2,431 1,621 4,052 1,346
Operating reserves and other accruals 15,751 3,234 18,985 1,290 20,275 (5,358)
Increase due to federal rate change 335 - 335 - 335 -
Deferred taxes of discontinued operations,
retained by the Company - - - 4,018 4,018 (1,517)
Other, net 75 (102) (27) (26) (53) 37
Benefit of state tax on temporary
differences and state net operating
loss carryforwards 5,533 (942) 4,591 983 5,574 (716)
Benefit of foreign, targeted jobs, R&E
and AMT tax credit carryforwards - - - 2,812 2,812 (282)
Total deferred tax assets 24,000 1,968 25,968 11,504 37,472 (7,122)
Total temporary differences before
valuation allowances 9,621 4,603 14,224 13,649 27,873 (5,936)
Federal valuation allowance (2,488) (4,067) (6,555) (7,707) (14,262) 2,962
State valuation allowance (5,533) 942 (4,591) (983) (5,574) 716
Total temporary differences affecting
tax provision 1,600 1,478 3,078 4,959 8,037 (2,258)
Deferred taxes from "safe harbor"
lease transactions (5,679) (316) (5,995) (554) (6,549) (499)
Net deferred tax asset (liability) $ (4,079) $ 1,162 $ (2,917) $ 4,405 $ 1,488 $ (2,757)
</TABLE>
The federal and state valuation allowances represent reserves for
income tax benefits which were not recognized in prior years due to
the uncertainty regarding future earnings.
The tax provision (benefit) differs from the amounts obtained by
applying the statutory U.S. Federal income tax rate to the pre-tax
earnings (loss) from continuing operations amounts. The differences
can be reconciled as follows (in thousands):
Years Ended December 31,
1996 1995 1994
Expected Federal income tax provision (benefit) $6,688 $ (896) $ (510)
Valuation allowance (4,067) (7,707) 2,962
State and local income taxes, net of
Federal income tax benefit 465 275 -
Tax benefit of discontinued operations - - (191)
Reversal of tax reserves for IRS examination - - (4,069)
Nondeductible amortization of intangibles
and other costs 1,165 (263) 635
Foreign income tax 1,016 - 54
Foreign, targeted job, R&E, AMT and fuel tax credits (16) (257) (537)
Other, net 642 (242) (580)
Tax provision (benefit) $5,893 $(9,090) $(2,236)
The Company's U.S. Federal income tax returns have been
cleared through 1993. The Internal Revenue Service (IRS) completed two
examinations of the Company's tax returns; for the period 1985-
1988 and for the period 1989-1993. The IRS proposed several
adjustments to both periods, the most significant of which
related to deductions taken by the Company for expenses incurred
in the 1988 merger. The Company and the IRS settled the proposed
adjustments for the 1985-1988 audit in 1994 and the Joint
Congressional Committee on Taxation issued its approval of the
settlement on December 7, 1995. The Company and the IRS agreed
upon the proposed adjustments of the 1989-1993 audit in 1995, and
the Joint Congressional Committee on Taxation issued its approval
of the settlement on May 30, 1996.
The provision for income taxes in 1996 is based on reported
earnings, adjusted to reflect the impact of temporary differences
between the amount of assets and liabilities recognized for
financial reporting purposes and such amounts recognized for tax
purposes, and a provision for foreign taxes related to prior
years' foreign operations. The tax benefit in 1995 reflects a
tax provision based on an estimated annual effective tax rate,
excluding expenses not deductible for tax. Additionally,
$4,067,000 and $7,707,000 of tax valuation reserves were reversed
in 1996 and 1995, respectively. These deferred taxes have been
realized primarily as offsets against the current year's earnings
and the gain on the sale of the Commercial Aviation business in
1995. The 1994 federal tax benefit resulted from the reversal of
tax reserves from settlement of the above noted IRS examination
and the tax benefit for operating losses, net of a valuation
allowance, less the federal tax provision of a majority owned
subsidiary required to file a separate return.
The Company has state net operating loss carryforwards
available to offset future taxable income. Following are the net
operating losses by year of expiration (in thousands):
Year of State Net
Expiration Operating Losses
1999 $ 4,798
2001 6,959
2003 199
2006 24
2011 41,437
$53,417
(15) Pension Plans
Union employees who are not participants in the ESOP are covered
by multiemployer pension plans under which the Company pays fixed
amounts, generally per hours worked, according to the provisions of
the various labor contracts. In 1996, 1995 and 1994, the Company
expensed $2,837,000, $2,514,000 and $2,367,000, respectively, for
these plans. Under the Employee Retirement Income Security Act of
1974 as amended by the Multiemployer Pension Plan Amendments Act of
1980, an employer is liable upon withdrawal from or termination of a
multiemployer plan for its proportionate share of the plan's
unfunded vested benefits liability. Based on information provided
by the administrators of the majority of these multiemployer plans,
the Company does not believe there is any significant amount of
unfunded vested liability under these plans.
(16) Earnings (Loss) Per Common Share
Primary and fully diluted earnings or loss per share from
continuing operations before extraordinary item is computed by
dividing earnings (loss), after deducting the effect of the unpaid
dividends on the Class C Preferred Stock ($2,284,000 in 1996,
$1,915,000 in 1995 and $1,606,000 in 1994), by the weighted average
number of common and dilutive common equivalent shares outstanding
during the period. In addition, shares earned and vested but
unissued under the Restricted Stock Plan are included as outstanding
common stock. In 1994, warrants outstanding have been excluded from
the calculation of loss per share as their effect is antidilutive
because of the losses incurred during the period (see also Note 10).
For years 1996, 1995 and 1994, shares which would be issued under
the assumed conversion of Class C Preferred Stock have been excluded
from the calculation of earnings per share as their effect is
antidilutive. The average number of shares used in determining
primary earnings or loss per share was 11,736,271 in 1996,
11,745,251 in 1995 and 6,802,012 in 1994.
Supplementary earnings per share has been presented to reflect the
conversion of the Class C Preferred Stock and the repurchase of other common
stock and stock warrants, all as if these
transactions had occurred at the beginning of the period. The
unpaid Class C dividends have been added back to net earnings for
the period and interest and deferred debt amortization have been
adjusted (net of tax) to reflect the terms of the borrowings required
to effect the above mentioned conversion and repurchase.
The weighted average number of common shares outstanding has been
adjusted to reflect the conversion of the Class C Preferred Stock
and exercise of the attached warrants as well as the repurchase of
certain other common stock and stock warrants, all of which served
to decrease the weighted average shares outstanding to 10,231,319
(see Note 24).
(17) Incentive Compensation Plans
The Company has several formal incentive compensation plans which
provide for incentive payments to officers and key employees.
Incentive payments under these plans are based upon operational
performance, individual performance, or a combination thereof, as
defined in the plans. Incentive compensation expense was $6,367,000
for 1996, $6,692,000 for 1995 and $7,067,000 for 1994.
(18) Stock Option Plan
The Company adopted an incentive stock option plan in December
1995, whereby options may be granted to officers and other key
employees to purchase a maximum of 1,250,000 common shares at an
option price not less than the most recently determined fair market
value as of the grant date. Options issued under the plan may be
exercised only when vested and vest proportionately over a period of
five years. Options which are not exercised within seven years from
the date of the grant shall expire. Changes in stock options
outstanding were as follows:
Exercise Price
or Range of Weighted Average
Shares Exercise Prices Exercise Price
Outstanding at December 31,1995 318,000 $14.90 $14.90
Granted 518,000 14.50-19.00 17.66
Canceled or terminated (15,500) 14.90 14.90
Exercised (600) 14.90 14.90
Outstanding at December 31,1996 819,900 $14.50-19.00 $16.64
Exercisable at year-end 64,900
The Company has opted to account for its stock option plan in
accordance with APB Opinion 25, "Accounting for Stock Issued to
Employees." Accordingly, under the intrinsic value based method
of accounting for options, no compensation cost has been
recognized. SFAS 123, "Accounting for Stock Based Compensation"
encourages, but does not require, adoption of the fair value based
method of accounting for employee stock options. The fair value
of each option grant is equal to the Formula Price at the date of grant
(see Item 5 "Market for the Registrant's Common Stock and Related
Stockholder Matters" included elsewhere in this Annual Report
Form 10-K). The minimum value is determined assuming a
five year expected life of the options, a risk-free interest rate
of 7% and a volatility factor of zero. Had the Company adopted
SFAS No. 123, common stockholders' share of net earnings and earnings
per share for the year ended December 31, 1996 would have been
approximately $12,065,000 and $1.03, respectively. Comparable data
has not been presented for December 31, 1995, as none of the options
had vested and therefore no additional compensation costs would be
assumed.
(19) Leases
Future minimum lease payments required under operating leases
that have remaining noncancellable lease terms in excess of one
year at December 31, 1996 are summarized below (in thousands):
Years Ending December 31,
1997 $ 7,523
1998 7,254
1999 6,423
2000 2,526
2001 2,110
Thereafter 10,508
Total minimum lease payments $36,344
Net rent expense for leases was $21,797,000 for 1996, $24,734,000 for
1995 and $14,286,000 for 1994.
(20) Acquisitions
On June 21, 1996, the Company acquired all of the outstanding
shares of stock of Data Management Design, Inc. ("DMDI") for a
cash payment of $2,400,000 and in January 1997 a final payment of
$24,000 was made to the former owners of DMDI pursuant to the
settlement of the closing balance sheet. DMDI, headquartered in
Reston, Virginia, provides automated workflow and image processing
solutions to federal agencies and the private sector. The
acquisition has been accounted for as a purchase and $1,669,000 of
goodwill, which will be amortized over 15 years, has been recorded
based on the initial allocation of the purchase price. The
Company also acquired certain assets (primarily internally
developed software) of ESG, Incorporated for $1,100,000 in cash.
These acquisitions would not have had a material impact on the results
of operations assuming the transactions had been consumated at the
beginning of the period.
(21) Contingencies and Litigation
The Company and its subsidiaries and affiliates are involved
in various claims and lawsuits, including contract disputes and
claims based on allegations of negligence and other tortious
conduct. The Company is also potentially liable for certain
personal injury, tax, environmental and contract dispute issues
related to the prior operations of divested businesses. In
addition, certain subsidiary companies are potentially liable for
environmental, personal injury and contract and dispute claims.
In most cases, the Company and its subsidiaries have denied, or
believe they have a basis to deny, liability, and in some cases
have offsetting claims against the plaintiffs, third parties or
insurance carriers. The total amount of damages currently claimed
by the plaintiffs in these cases is estimated to be approximately
$122,000,000 (including compensatory punitive damages and
penalties). The Company believes that the amount that will
actually be recovered in these cases will be substantially less
than the amount claimed. After taking into account available
insurance, the Company believes it is adequately reserved with
respect to the potential liability for such claims. The estimates
set forth above do not reflect claims that may have been incurred
but have not yet been filed. The Company has recorded such
damages and penalties that are considered to be probable
recoveries against the Company or its subsidiaries.
(a) Asbestos Claims
An acquired and inactive subsidiary, Fuller-Austin Insulation
Company ("Fuller-Austin"), which discontinued its business
activities in 1986, has been named as one of many defendants in
civil lawsuits which have been filed in certain state courts
beginning in 1986 (principally Texas) against manufacturers,
distributors and installers of asbestos products. Fuller-Austin
was a nonmanufacturer that installed or distributed industrial
insulation products. Fuller-Austin had discontinued the use of
asbestos-containing products prior to being acquired by the
Company in 1974. These claims are not part of a class action.
The claimants generally allege injuries to their health caused
by inhalation of asbestos fibers. Many of the claimants seek
punitive damages as well as compensatory damages. The amount of
damages sought is impacted by a multitude of factors. These
include the type and severity of the disease sustained by the
claimant (i.e. mesothelioma, lung cancer, other types of cancer,
asbestosis or pleural changes); the occupation of the claimant;
the duration of the claimant's exposure to asbestos-containing
products; the number and financial resources of the defendants;
the jurisdiction in which the claim is filed; the presence or
absence of other possible causes of the claimant's illness; the
availability of legal defenses such as the statute of limitations;
and whether the claim was made on an individual basis or as part
of a group claim.
Claim Exposure
As of March 1, 1997, 13,117 plaintiffs have filed claims
against Fuller-Austin and various other defendants. Of these
claims 2,599 have been dismissed, 3,561 have been resolved without
an admission of liability at an average cost of $3,667 per claim
(excluding legal defense costs) and an additional 1,274 claims
have been settled in principle (subject to future processing and
funding) at an average cost of $1,923 per claim.
Following is a summary of claims filed against Fuller-Austin
through March 1, 1997:
Years
1993
& Prior 1994 1995 1996 1997(1) Total
Claims Filed 2,728 1,134 4,429 4,093 733 13,117
Claims Dismissed (79) (21) (1,035) (1,457) (7) (2,599)
Claims Resolved (1,218) (333) (182) (1,828) - (3,561)
Settlements in process (1,274)
Claims Outstanding at March 1, 1997 5,683
(1) As of March 1, 1997
In connection with these claims, Fuller-Austin's primary
insurance carriers have incurred approximately $21,600,000
(including $8,500,000 of legal defense costs, but excluding
$2,500,000 for settlements in process) to defend and settle the
claims and, in addition, judgments have been entered against
Fuller-Austin for jury verdicts of $6,500,000 which have not been
paid and which are under appeal by Fuller-Austin. Through
December 31, 1996, the Company and Fuller-Austin have charged to
expense approximately $12,500,000 consisting of $6,200,000 of
charges under retrospectively rated insurance policies and
$6,300,000 of reserves for potential uninsured legal and
settlement costs related to these claims. These charges
substantially eliminate any further exposure for retrospectively
determined premium payments under the retrospectively rated
insurance policies.
During 1996, Fuller-Austin continued its strategy to require
direct proof that claimants had exposure to asbestos-containing
products as the result of Fuller-Austin's operations. This has
resulted in an increase in claim settlements and a decrease in
litigation defense activities. However, perceived changes in the
nature of new claims filed in 1996 have caused Fuller-Austin and
its insurers to reevaluate Fuller-Austin's approach to claims
settlement. Consequently, there is a potential for an increased
level of trial activity which Fuller-Austin believes will reduce
the overall cost of asbestos personal injury claims in the long
run by requiring claimants to present and prove clear evidence of
substantial asbestos-related impairment and exposure to Fuller-
Austin's operations, and by denying recovery to claimants who are
unimpaired or who did not have significant exposure to Fuller-
Austin's operations. Further, the level of filed claims has
become significant only since 1992, and therefore, Fuller-Austin
has a relatively brief history (compared to manufacturers and
suppliers) of claims volume and a limited data file upon which to
estimate the number or costs of claims that may be received in the
future. Also, effective September 1, 1995, the State of Texas
enacted tort reform legislation which Fuller-Austin believes will
ultimately curtail the number of unsubstantiated asbestos claims
filed against the subsidiary in Texas.
The Company and its defense counsel have analyzed the 13,117
claim filings incurred through March 1, 1997. Based on this
analysis and consultation with its professional advisors, Fuller-
Austin has estimated its cost, including legal defense costs, to
be $17,000,000 for claims filed and still unsettled and
$38,500,000 as its minimum estimate of future costs of unasserted
claims, including legal defense costs. No upper limit of exposure
can presently be reasonably estimated. The Company cautions that
these estimates are subject to significant uncertainties including
the future effect of tort reform legislation enacted in Texas and
other states, the success of Fuller-Austin's litigation strategy,
the size of jury verdicts, success of appeals in process, the
number and financial resources of future plaintiffs, and the
actions of other defendants. In addition, during 1996,
approximately 40 claims, with approximately 700 more being
prepared for filing, were filed in the State of Louisiana where
Fuller-Austin had performed a significant amount of its business.
Exposure for significant non-Texas claims has not been included in
the Company's estimates and neither the Company nor its defense
counsel are able to reasonably predict the outcome of these cases
or the incidence of future claims that may be filed. Therefore,
actual claim experience may vary significantly from such
estimates, especially if certain Texas appeals are decided
unfavorably to Fuller-Austin and/or the level of claims filed in
Louisiana increases. At December 31, 1996 and 1995, Fuller-Austin
recorded an estimated liability for future indemnity payments and
defense costs related to currently unsettled claims and minimum
estimated future claims of $55,000,000 and $60,000,000,
respectively, (recorded as long-term liability).
Insurance coverage
Defense has been tendered to and accepted by Fuller-Austin's
primary insurance carriers, and by certain of the Company's
primary insurance carriers that issued policies under which
Fuller-Austin is named as an additional insured; however, only one
such primary carrier has partially accepted defense without a
reservation of rights. The Company believes that Fuller-Austin
has at least $7,900,000 in unexhausted primary coverage (net of
deductibles and self-insured retentions but including disputed
coverage) under its liability insurance policies to cover the
unsettled claims, verdicts and future unasserted claims and
defense costs. The primary carriers also have unlimited liability
for defense costs (presently running at the annual rate of
approximately $1,500,000) until such time as the primary limits
under these policies are exhausted. When the primary limits are
exhausted, liability for both indemnity and legal defense will be
tendered to the excess coverage carriers, all of which have been
notified of the pendency of the asbestos claims. The Company and
Fuller-Austin have approximately $490,000,000 of additional excess
and umbrella insurance that is generally responsive to asbestos
claims. This amount excludes approximately $92,000,000 of
coverage issued by insolvent carriers. After the $7,900,000 of
unexhausted primary coverage, the Company has $35,700,000 of
excess coverage in place before entering a $35,000,000 layer of
insolvent coverage for policy years 1979 through 1984 (the
"Insolvent Layer"). All of the Company's and Fuller-Austin's
liability insurance policies cover indemnity payments and defense
fees and expenses subject to applicable policy terms and
conditions.
Coverage litigation
The Company and Fuller-Austin have instituted litigation in
Los Angeles Superior Court, California, against their primary and
excess insurance carriers, to obtain declaratory judgments from
the court regarding the obligations of the various carriers to
defend and pay asbestos claims. The issues in this litigation
include the aggregate liability of the carriers, the triggering
and drop-down of excess coverage to cover the Insolvent Layer and
allocation of losses covering multiple carriers and insolvent
carriers, and various other issues relating to the interpretation
of the policy contracts. All of the carrier defendants have filed
general denial answers.
Although there can be no assurances as to the outcome of this
litigation, management believes that it is probable that the
Company and Fuller-Austin will prevail in obtaining judicial
rulings confirming the availability of a substantial portion of
the coverage. Currently, the Company has excess coverage under
policies issued by solvent carriers of approximately $497,900,000
($7,900,000 in primary coverage and $490,000,000 in excess
coverage). Based on a review of the independent ratings of these
carriers, the Company believes that a substantial portion of this
coverage will continue to be available to meet the claims.
Fuller-Austin recorded in Other Assets $55,000,000 and
$60,000,000, respectively (not including reserves of $6,000,000
and $7,000,000, respectively) at December 31, 1996 and 1995,
representing the amount that it expects to recover from its
insurance carriers for the payment of currently unsettled and
estimated future claims.
The Company cautions, however, that even though the existence
and aggregate dollar amounts of insurance are not generally being
disputed, such insurance coverage is subject to interpretation by
the court and the timing of the availability of insurance payments
could, depending upon the outcome of the litigation and/or
negotiation, delay the receipt of insurance company payments and
require Fuller-Austin to assume responsibility for making interim
payment of asbestos defense and indemnity costs.
While the Company and Fuller-Austin believe that they have
recorded sufficient liability to satisfy Fuller-Austin's
reasonably anticipated costs of present and future plaintiffs'
suits, it is not possible to predict the amount or timing of
future suits or the future solvency of its insurers. In the event
that currently unsettled and future claims exceed the recorded
liability of $55,000,000, the Company believes that the judicially
determined and/or negotiated amounts of excess and umbrella
insurance coverage that will be available to cover additional
claims will be significant; however, it is unable to predict
whether or not such amounts will be adequate to cover all
additional claims without further contribution by Fuller-Austin.
(b) General Litigation
The Company has retained certain liability in connection with
its 1989 divestiture of its major electrical contracting business,
Dynalectric Company ("Dynalectric"). The Company and Dynalectric
were sued in 1988 in Bergen County Superior Court, New Jersey, by
a former Dynalectric joint venture partner/subcontractor
(subcontractor). The subcontractor has alleged that its
subcontract to furnish certain software and services in connection
with a major municipal traffic signalization project was
improperly terminated by Dynalectric and that Dynalectric
fraudulently diverted funds due, misappropriated its trade secrets
and proprietary information, fraudulently induced it to enter the
joint venture, and conspired with other defendants to commit acts
in violation of the New Jersey Racketeering Influenced and Corrupt
Organization Act. The aggregate dollar amount of these claims has
not been formally recited in the subcontractor's complaint.
Dynalectric has also filed certain counterclaims against the
former subcontractor. The Company and Dynalectric believe that
they have valid defenses, and/or that any liability would be
offset by recoveries under the counterclaims. The Company and
Dynalectric have filed motions with the Court to enforce the
arbitration provisions included in the subcontract. Discovery is
ongoing. The Company believes that it has established adequate
($2,660,000 at December 31, 1996) reserves for the contemplated
defense costs and for the cost of obtaining enforcement of
arbitration provisions contained in the contract.
In November, 1994, the Company acquired an information
technology business which was involved in various disputes with
federal and state agencies, including two contract default actions
and a qui tam suit by a former employee alleging improper billing
of a federal government agency customer. The Company has
contractual rights to indemnification from the former owner of the
acquired subsidiary with respect to the defense of all such claims
and litigation, as well as all liability for damages when and if
proven. In October, 1995, one of the federal agencies asserted a
claim against the subsidiary and gave the Company notice that it
intended to withhold payments against the contract under which the
claim arose. To date, the agency has withheld approximately
$3,300,000 allegedly due the agency under one of the
aforementioned disputes. This subsidiary has submitted a demand
for indemnification to the former owner of the subsidiary which
has been denied. The subsidiary recently received an arbitration
award confirming that it is entitled to indemnification.
As to environmental issues, neither the Company nor any of
its subsidiaries is named a Potentially Responsible Party (as
defined in the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA)) at any site. The Company, however,
did undertake, as part of the 1988 divestiture of a petrochemical
engineering subsidiary, an obligation to install and operate a
soil and water remediation system at a subsidiary research
facility site in New Jersey. The Company is required to pay the
costs of continued operation of the remediation system which are
estimated to be $100,000 (see Note 13) In addition, the Company, pursuant
to the sale of the Commercial Aviation Business, is responsible for the
costs of clean-up of environmental conditions at certain designated sites.
Such costs may include the removal and subsequent replacement of
contaminated soil, concrete, tanks, etc., that existed prior to the
sale of the Commercial Aviation Business (see Note 2).
The Company is a party to other civil and contractual
lawsuits which have arisen in the normal course of business for
which potential liability, including costs of defense, which
constitute the remainder of the $122,000,000 discussed above. The
estimated probable liability for these issues is approximately
$10,000,000 and is substantially covered by insurance. All of the
insured claims are within policy limits and have been tendered to
and accepted by the applicable carriers. The Company has recorded
an offsetting asset (Other Assets) and liability (long-term
liability) of $10,000,000 at December 31, 1996 and 1995, for these
items.
The Company has recorded its best estimate of the aggregate
liability that will result from these matters. While it is not
possible to predict with certainty the outcome of litigation and
other matters discussed above, it is the opinion of the Company's
management, based in part upon opinions of counsel, insurance in
force and the facts currently known, that liabilities in excess of
those recorded, if any, arising from such matters would not have a
material adverse effect on the results of operations, consolidated
financial position or liquidity of the Company over the long-term.
However, it is possible that the timing of the resolution of
individual issues could result in a significant impact on the
operating results and/or liquidity for one or more future
reporting periods.
The major portion of the Company's business involves
contracting with departments and agencies of, and prime
contractors to, the U.S. Government, and such contracts are
subject to possible termination for the convenience of the
government and to audit and possible adjustment to give effect to
unallowable costs under cost-type contracts or to other regulatory
requirements affecting both cost-type and fixed-price contracts.
Payments received by the Company for allowable direct and indirect
costs are subject to adjustment and repayment after audit by
government auditors if the payments exceed allowable costs.
Audits have been completed on the Company's incurred contract
costs through 1986 and are continuing for subsequent periods.
The Company has included an allowance for
excess billings and contract losses in its financial statements
that it believes is adequate based on its interpretation of
contracting regulations and past experience. There can be no
assurance, however, that this allowance will be adequate.
The Company is aware of various costs questioned by the government,
including issues related to the recoverability of its ESOP
contributions, but cannot determine the outcome of the audit
findings at this time. In addition, the Company is occasionally the subject of
investigations by the Department of Justice and other
investigative organizations, resulting from employee and other
allegations regarding business practices. In management's
opinion, there are no outstanding issues of this nature at
December 31, 1996 that will have a material adverse effect on the
Company's consolidated financial position, results of operations
or liquidity.
(22) Business Segments
The Company derived 97%, 95% and 98% of its revenues in 1996,
1995 and 1994, respectively, from contracts and subcontracts with
the U.S. Government. Prime contracts comprised 79%, 84% and 88%
of revenue of which prime contracts with the Department of Defense
represented 50%, 51% and 54% of revenue in 1996, 1995 and 1994,
respectively. In 1996, the Company's second largest customer was
the Department of Energy, comprising 18% of revenue. No other
customer accounted for more than 10% of revenues in any year.
Revenue, operating income, identifiable assets, capital
expenditures and depreciation and amortization by segment are
presented below (dollars in thousands). See Item I "Business"
included elsewhere in this Annual Report on Form 10-K for a
description of the business segments.
Years Ended December 31,
1996 1995 1994
Revenue
I&ET $ 271,538 $271,133 $192,062
AT 383,252 319,335 300,856
EM 366,663 318,257 325,765
$1,021,453 $908,725 $818,683
Operating Income(1)
I&ET $ 17,106 $ 13,272 $ 11,422
AT 9,836 8,380 9,031
EM 15,690 7,128 8,129
42,632 28,780 28,582
Equity in (earnings) loss
of affiliates (676) (154) 26
Corporate Expense 14,908 12,743 14,844
Other (a) 825 7,700 2,665
Interest (net expense) 8,468 11,052 12,505
Earnings (loss) before income
taxes, minority interest,
discontinued operations, and
extraordinary item $ 19,107 $ (2,561) $ (1,458)
(1) Operating income is the excess of operating revenues over operating
expenses including certain corporate expenses, which are allocated
to operations of the segments. In computing operating income by
segment, the effects of equity in earnings of affiliates, interest
income, interest expense, other income and expense items, and
income taxes are not included.
As of December 31,
Identifiable Assets 1996 1995 1994
I&ET $ 99,445 $ 95,084 $ 95,794
AT 80,393 64,419 69,615
EM 70,995 86,662 81,443
Other (a) 55,093 60,106 17,113
Discontinued Operations - - 85,444
Corporate 62,826 69,219 46,591
$ 368,752 $375,490 $396,000
Years Ended December 31,
Capital Expenditures 1996 1995 1994
I&ET $ 3,606 $ 2,700 $ 2,085
AT 823 640 788
EM 384 936 371
Corporate 497 513 498
$ 5,310 $ 4,789 $ 3,742
Depreciation and Amortization
I&ET $ 3,775 $ 5,223 $ 4,642
AT 2,337 1,412 1,514
EM 1,525 2,296 4,982
Corporate 1,830 2,417 5,202
$ 9,467 $ 11,348 $16,340
(a) Includes costs, expenses and assets pertaining to former
subsidiaries (see Note 13).
(23) Quarterly Financial Data (Unaudited)
A summary of quarterly financial data for 1996 and 1995
is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 Quarters 1995 Quarters
First Second Third Fourth(a) First Second Third(b) Fourth(c)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $241,726 $249,630 $246,968 $283,129 $211,636 $209,940 $244,592 $242,557
Gross profit 10,729 13,682 13,151 13,728 7,816 9,849 9,810 9,933
Earnings (loss) from continuing
operations before income taxes,
minority interest and
extraordinary item 3,737 6,892 5,965 2,513 (801) 1,522 1,120 (4,402)
Minority interest 296 326 367 275 302 355 286 312
Discontinued operations - 865 - 1,815 (347) 80 252 (5)
Net earnings (loss) 2,241 4,418 3,241 4,729 (1,549) 674 1,227 2,016
Earnings (loss) per common share:
Primary and fully diluted:
Continuing operations $ 0.14 $ 0.26 $ 0.23 $ 0.19 $ (0.19) $ 0.01 $ 0.24 $ 0.13
Discontinued operations - 0.07 - 0.16 (0.04) 0.01 0.02 -
Extraordinary item - - - - (0.02) - (0.20) (0.01)
Common stockholders' share
of earnings (loss) $ 0.14 $ 0.33 $ 0.23 $ 0.35 $ (0.25) $ 0.02 $ 0.06 $ 0.12
<FN>
Quarterly financial data may not equal annual totals due to rounding.
Quarterly earnings per share data may not equal annual total.
(a) 1996 Fourth Quarter includes:
- $3,299,000 accrual for supplemental pension and other fees payable to retiring officers and
a member of the Board of Directors (see Note 13)
- $1,286,000 write-off of cost in excess of net assets acquired of an unconsolidated affiliate (see Note 13)
- $1,250,000 reversal of overaccrued ESOP Premium (see Note 7)
- $4,067,000 reversal of income tax valuation allowance (see Note 14)
(b) 1995 Third Quarter includes:
- $3,300,000 reversal of income tax valuation allowance (see Note 14)
- $2,656,000 loss, net of tax, on extinguishment of debt (see Note 5)
(c) 1995 Fourth Quarter includes:
- $3,688,000 accrual for losses and reserves related to the Company's Mexican operations
- $2,400,000 accrual for legal fees related to the defense of a lawsuit filed by a subcontractor of a former
electrical contracting subsidiary (see Notes 13 and 21)
- $5,300,000 accrual for uninsured costs related to a former subsidiary's alleged use of asbestos products
(see Notes 13 and 21)
- $4,407,000 reversal of income tax valuation allowance (see Note 14)
</FN>
</TABLE>
(24) Subsequent Events
In February 1997, the Company and its Employee Stock Ownership
Plan purchased from the investors of Capricorn Investors,
L.P., all of the Company's Class C Preferred Stock,
a substantial portion of Common Stock and certain Common Stock
Warrants that were previously held by Capricorn and transferred to
such investors. The total purchase price for the securities was
$56,400,000, of which $28,200,000 was paid in cash, $18,900,000
was paid in notes issued by the Company ("Company Capricorn
Notes") and $9,300,000 was paid in notes issued by the ESOP and
guaranteed by the Company ("ESOP Capricorn Notes").
At December 31, 1996, the Company had $104,183,000 of debt, of
which $100,000,000 (the Contract Receivable Collateralized Notes,
Series 1992-1) is scheduled to begin principal amortization on May
30, 1997. The Company and its wholly-owned subsidiary, Dyn
Funding Corporation ("DFC"), have undertaken a series of
refinancing transactions in order to repay the Contract Receivable
Collateralized Notes, the Company Capricorn Notes, and to make a
loan to the ESOP for the repayment of the ESOP Capricorn Notes.
On March 17, 1997, the Company closed on the sale of
$100,000,000 of 9.5% Senior Subordinated Notes due 2007 (the
"Senior Subordinated Notes"). After paying transaction fees and
expenses, the Company received net proceeds of $96.3 million.
On March 19, 1997, the Company used $19,086,000 of the proceeds
to repay the Company Capricorn Notes (including $177,000 of
accrued interest) and on March 20, 1997, the Company used
$9,372,000 to make a loan to the ESOP for the repayment of the
ESOP Capricorn Notes (including $89,000 of accrued interest). The
Company intends to use the remaining proceeds to finance working
capital, to repurchase shares of common stock held by certain
outside investors, and to make a loan to DFC (the "DFC Loan") to
partially finance the repayment of the Contract Receivable
Collateralized Notes.
On January 14, 1997, the Company accepted a conditional offer
from one of the significant holders of the Contract Receivable
Collateralized Notes, Series 1992-1 to purchase from DFC, in a
private transaction, up to $140,000,000 of Contract Receivable
Collateralized Notes, Series 1997-1. As proposed, the Series
1997-1 Notes will be comprised of a $50,000,000 Class A Fixed Rate
Note and a $90,000,000 Class B Variable Rate Note, and will
contain terms and conditions substantially identical to those of
the Series 1992-1 Notes.
As of March 21, 1997, the Company believes that all of the
conditions of the offer have been satisfied, with the exception of
the completion of the documentation and legal opinions incident to
the proposed purchase, and that the sale of the 1997-1 Notes will
close on or before April 30, 1997. DFC intends to use the
proceeds of the Series 1997-1 Fixed Rate Class A Note, along with proceeds of
the DFC Loan, to repay the Series 1992-1 Notes and pay
transaction expenses. At closing, the Company and DFC do not
intend to withdraw any amounts against the Series 1997-1 Class B
Note, and in the future, intend to withdraw such amounts to
finance working capital and acquisitions.
Upon the closing of the Series 1997-1 Notes, the Company will
simultaneously close on an amendment to its existing term note
facility with Citicorp North America, Inc. to, among other things,
reduce the loan commitment from $50,000,000 to $15,000,000.
The following table sets forth the total debt and equity of the
Company on a pro forma basis giving effect to the aforementioned
transactions as if they had occurred on December 31, 1996 (dollars
in thousands).
Actual As Adjusted
(Unaudited)
Existing Securitization Facility $ 100,000 $ -
New Securitization Facility - 50,000
Senior Notes (net of discount) - 99,484
Other Debt 4,183 4,183
Total Debt 104,183 153,667
Temporary Equity 139,322 147,906
Permanent Stockholders' Equity (Deficit) (102,483) (159,842)
Total Debt and Equity $ 141,022 $ 141,731
