This Prospectus is filed under rule 424(b)(3). (File No. 33-59279)
PROSPECTUS
DynCorp logo
11,969,313 Shares of DynCorp Common Stock
(Par Value $0.10 per Share)
Of the 11,969,313 shares of DynCorp (the "Company") common stock, par
value $0.10 per share (the "Common Stock"), originally offered hereby (the
"Offering"), 20,781 shares have been offered and sold by the Company, 78,798
shares have been offered and sold by officers, directors and affiliates of the
Company, and 252,285 shares have been offered and sold by other current and
former employees and other stockholders of the Company through the Internal
Market described below. This Prospectus, as amended, relates to the offer and
sale by the Company; officers, directors and affiliates of the Company; and
other current and former employees and other stockholders of the Company of
4,256,947 shares, 2,744,808 shares and 1,667,050 shares, respectively. See
"Securities Offered by this Prospectus." The Company will not receive any
portion of the net proceeds from the sale of shares by officers, directors,
affiliates or other individual employees or stockholders.
The 4,256,947 shares of Common Stock offered by the Company (of which
approximately 1,500,000 are currently treasury shares that were acquired by the
Company pursuant to the Stockholders Agreement (as defined hereinafter) and
through the Employee Stock Ownership Plan ("ESOP") between 1989 and 1995, and
the remainder of such shares are heretofore unissued shares) are expected to be
offered as follows: (i) up to 850,000 shares may be issued and delivered by the
Company to a trustee for the benefit of employees under the DynCorp Savings and
Retirement Plan; (ii) up to 100,000 shares may be issued and delivered by the
Company to employees under the DynCorp Employee Stock Purchase Plan; (iii) up to
1,193,800 shares may be issued upon the exercise of options granted and
available to be granted to employees under the DynCorp 1995 Non-Qualified Stock
Option Plan; (iv) up to 288,364 shares may be issued and delivered to employees
under the DynCorp Executive Incentive Plan; and (v) up to 1,824,783 shares may
be offered and sold by the Company to present and future employees and directors
through one or more of the employee benefit plans listed above. The actual
number of shares offered and sold by the Company under each category may be less
than the indicated number, but will not exceed the maximum for such category.
See "Securities Offered by this Prospectus" and "Employee Benefit Plans."
All of the shares offered hereby may be offered and sold on a limited
trading market (the "Internal Market") established by the Company's wholly owned
subsidiary, DynEx, Inc. The Internal Market was established and is managed by
DynEx, Inc., in order to provide employees, directors and other stockholders of
the Company the opportunity to buy and sell shares of Common Stock. The Internal
Market generally permits eligible stockholders to buy and sell shares of Common
Stock on four predetermined days each year (each a "Trade Date"). All offers and
sales on the Internal Market by officers, directors, employees, affiliates and
other stockholders of the Company may, for purposes of the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
be attributed to the Company. The Company may also sell (through one or more of
its employee benefit plans) or buy shares of Common Stock on the Internal Market
for its own account, but will do so only to address imbalances between the
number of shares offered for sale and bid for purchase by stockholders on any
particular Trade Date. The Company will not be both a buyer and a seller on the
Internal Market on the same Trade Date. The purchases and sales of shares on the
Internal Market are carried out by Buck Investment Services, Inc. ("Buck"), a
registered broker-dealer, upon instructions from the respective buyers and
sellers. All stockholders (other than the Company and its retirement plans) will
pay a commission to Buck equal to 2% of the proceeds from the sale of any shares
of Common Stock sold by them on the Internal Market, half of which will be paid
to DynEx, Inc. to defray the costs of maintaining the Internal Market. See
"Market Information -- The Internal Market."
See "Risk Factors" on pages 5 through 9 for information concerning
certain factors that should be considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION; NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is June 20, 1997.
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There is no public market for the Common Stock, and it is not currently
anticipated that such a market will develop. To the extent that the Internal
Market does not provide sufficient liquidity for a stockholder, and the
stockholder is otherwise unable to locate a buyer for his or her shares of
Common Stock, the stockholder could effectively be subject to a total loss of
investment. See "Market Information -- The Internal Market."
All of the shares of Common Stock offered hereby will be subject to
certain restrictions (including restrictions on their transferability) set forth
in the Company's By-Laws (the "By-Laws") and may be subject to other
contingencies. Shares purchased on the Internal Market will be subject to
contractual transfer restrictions having the same effect as those contained in
the By-Laws. See "Description of Capital Stock -- Restrictions on Common Stock."
The purchase price of the shares of Common Stock offered hereby will be
determined pursuant to the formula and valuation process described below (the
"Formula Price"). The Formula Price per share of Common Stock is the product of
seven times the operating cash flow ("CF") where operating cash flow is
represented by earnings before interest, taxes, depreciation and amortization
("EBITDA") of the Company for the four fiscal quarters immediately preceding the
date on which a price revision is to occur and the market factor (the "Market
Factor" or "MF"), plus the non-operating assets at disposition value (net of
disposition costs) ("NOA"), minus the sum of interest-bearing debt adjusted to
market and other outstanding securities senior to Common Stock ("IBD") divided
by the number of shares of Common Stock outstanding at the date on which a price
revision is made, on a fully diluted basis assuming exercise of all outstanding
options and warrants ("ESO"). The Market Factor is a numerical factor which
reflects existing securities market conditions relevant to the valuation of such
stock. The Formula Price of the Common Stock, expressed as an equation (the
"Formula"), is as follows:
Formula Price = [(CF x 7)MF + NOA - IBD]
ESO
The Formula Price including the Market Factor is reviewed four times
each year, generally in conjunction with Board of Directors meetings, which are
generally scheduled for February, May, August and November. The Market Factor is
reviewed by the Board in conjunction with an appraisal that is prepared by an
independent appraisal firm for the committee administering the ESOP. The Board
of Directors believes that the valuation process results in a stock price that
reasonably reflects the value of the Company on a per share basis. See "Market
Information -- Determination of Offering Price."
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a post-effective amendment on Form S-2 to its Registration
Statement on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. As permitted by the rules and regulations of the Commission,
this Prospectus omits certain information, exhibits and undertakings contained
in the Registration Statement. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules incorporated by reference thereto.
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
Such reports and other information filed by the Company may be examined without
charge at, or copies obtained upon payment of prescribed fees from, the Public
Reference Section of the Commission at Judiciary Plaza, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and are also available for inspection and
copying at the regional offices of the Commission located at Seven World Trade
Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Electronic filings filed
through the Commission's Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR") are publicly available through the Commission's home page on
the Internet at htpp://www.sec.gov.
CERTAIN INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission by the Company
pursuant to the Exchange Act are incorporated by reference into this Prospectus:
1. Annual Report of the Company on Form 10-K for the year ended December
31, 1996 and Amendment No. 1 to Annual Report of the Company on Form
Form 10-K/A, filed June 10, 1997.
2. Quarterly Report of the Company on Form 10-Q for the quarter ended
March 27, 1997 and Amendment No. 1 to Quarterly Report of the Company
on Form 10-Q/A, filed June 13, 1997.
This Prospectus is accompanied by a copy of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, as amended by an
amendment filed on Form 10-K/A on June 10, 1997, without exhibits ("Annual
Report"), and the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 27, 1997, as amended by an amendment filed on Form 10-Q/A on June
13, 1997, without exhibits ("Quarterly Report").. The Company undertakes to
provide, without charge, to any person, including a beneficial owner, to whom a
copy of this Prospectus is delivered, upon the written or oral request of such
person, a copy of any document incorporated by reference into this Prospectus,
without exhibits (unless such exhibits are incorporated by reference into such
documents). Requests for such copies should be directed to: H. Montgomery
Hougen, Vice President and Secretary, DynCorp, 2000 Edmund Halley Drive, Reston,
Virginia 20191, (703) 264-9108.
This Prospectus includes or incorporates by reference "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such statements are identified by the use of
forward-looking words or phrases including, but not limited to, "intended,"
"will be positioned," "expects," "expected," "anticipates," and "anticipated."
These forward-looking statements are based on the Company's current
expectations. All statements other than statements of historical facts included
in this Prospectus or incorporated by reference therein, including those
regarding the Company's financial position, business strategy, projected costs
and plans and objectives of management for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. Because
forward-looking statements involve risks and uncertainties, the Company's actual
results could differ materially. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Risk Factors," and elsewhere in this
Prospectus or incorporated by reference therein including, without limitation,
in conjunction with the forward-looking statements included in this Prospectus.
These forward-looking statements represent the Company's judgment as of the date
of this Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by the Cautionary Statements. The Company
disclaims, however, any intent or obligation to update its forward-looking
statements.
THE COMPANY
DynCorp is a leading provider of diversified management, technical and
professional services to a wide range of government customers. The Company's
principal markets are information management services, software development and
system integration and analysis; facilities management; and aviation maintenance
and specialized support services. With current customers including the
Department of Defense, the Department of Energy, the National Aeronautics and
Space Administration, the Department of State, the Department of Justice and
various other U.S. Government agencies, the Company is one of the foremost
providers of services to the U.S. Government. The Company has over 250 contracts
that employ approximately 14,250 employees throughout the United States and in
numerous other countries.
The Company was incorporated in Delaware in 1946. The address of the
Company's principal executive offices is 2000 Edmund Halley Drive, Reston,
Virginia 20191-3436, telephone (703) 264-0330.
RISK FACTORS
Prior to purchasing the Common Stock offered hereby, purchasers should
carefully consider all of the information contained in and incorporated by
reference to this Prospectus and in particular should carefully consider the
following factors.
Substantial Leverage and Ability to Service and Refinance Debt
The Company is highly leveraged. As of May 1, 1997, the Company's
indebtedness was $158.7 million, net of discount of $0.5 million, (including
issued but undrawn letters of credit of $5.4 million and excluding unused
commitments available for borrowing of $69.6 million) and its Stockholders'
Equity was negative $7.7 million. Earnings for the years ended December 31,
1995, 1994, 1993, 1992 and 1991 were insufficient to cover fixed charges by
approximately $4.5 million, $3.1 million, $3.7 million, $13.9 million and $11.8
million, respectively. Subject to the restrictions in its existing financing
agreements, the Company may incur additional indebtedness from time to time to
finance acquisitions, working capital, or capital expenditures or for other
purposes.
The level of the Company's indebtedness could have important
consequences, including: (i) a substantial portion of the Company's cash flow
from operations must be dedicated to debt service and will not be available for
other purposes; (ii) the Company's ability to obtain additional debt financing
in the future for working capital, capital expenditures or acquisitions may be
limited and, if additional borrowings can be made, they may not be on terms
favorable to the Company; and (iii) the Company's level of indebtedness could
limit its flexibility in reacting to changes in the industry and economic
conditions generally.
The Company's ability to satisfy its other debt obligations will depend
upon its future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond its control. If the Company is unable to service its indebtedness, it
will be forced to adopt an alternative strategy that may include actions such as
reducing or delaying capital expenditures, selling assets, restructuring or
refinancing its indebtedness, or seeking additional equity capital. There can be
no assurance that any of these strategies could be effected on satisfactory
terms, if at all. If the Company is unable to repay its debt as it becomes due,
the stockholders could lose some or all of their investment.
Restrictions Imposed by Terms of the Company's Indebtedness
The terms of the Company's indebtedness restrict, among other things,
the Company's ability to incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, impose restrictions on
the ability of a subsidiary to pay dividends or make certain payments to the
Company, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets of
the Company.
In addition, the agreements relating to the Company's senior
subordinated notes (the "Senior Subordinated Notes"), accounts receivable
securitization facility (the "New Securitization Facility") and revolving credit
facility ("the Revolving Credit Facility") contain other restrictive covenants.
A breach of any of these covenants could result in a default under the Senior
Subordinated Notes, the New Securitization Facility and the Revolving Credit
Facility. Upon the occurrence of an event of default under the Senior
Subordinated Notes, the New Securitization Facility or the Revolving Credit
Facility, the lenders could elect to declare all amounts outstanding, together
with accrued interest, to be immediately due and payable. If the Company were
unable to repay those amounts, such lenders could proceed against the collateral
granted to them to secure that indebtedness, which indebtedness currently is
secured by substantially all of the assets of the Company. If the lenders under
the Senior Subordinated Notes, the New Securitization Facility or the Revolving
Credit Facility accelerate the payment of such indebtedness, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness and other indebtedness of the Company.
Unless the consolidated debt coverage ratio, as defined in the
indenture relating to the Senior Subordinated Notes. after giving effect to
newly incurred indebtedness, remains at least 2.0 : 1.0, the Company cannot make
additional investments or incur additional indebtedness outside the ordinary
course of business. As of March 27, 1997, the consolidated debt coverage ratio,
pro formed to reflect the effect of the New Securitization Facility and issuance
of the Senior Subordinated Notes, was approximately 2.5 : 1.0.
Under the terms of the New Securitization Facility, if the interest
coverage ratio (as defined) falls below 1.1:1.0 or if scheduled principal
payments on the Company's other indebtedness exceed $40.0 million during
the 24-month period, or $20.0 million during the 12-month period, preceding the
scheduled maturity of the Facility, the Company's ability to obtain funding
through the Facility will be suspended, and the Company's wholly owned,
bankruptcy-remote, financing subsidiary Dyn Funding Corpration, ("DFC") would
be unable to convert the Company's accounts receivable into cash prior to actual
collection thereof. As of March 27, 1997, the interest coverage ratio, pro
formed to reflect the effect of the New Securitization Facility and issuance of
the Senior Subordinated Notes, was approximately 3.25 : 1.0. Further, if the
collateral value of the receivables and cash held by DFC, falls
below the amount of outstanding borrowings under the Facility, and the Company
fails to provide sufficient receivables or cash to increase the collateral value
to such amount, the Company's ability to obtain funding through the Facility
will be suspended or terminated and collections on receivables will be used to
repay all or part of the amounts outstanding under the Facility. The
suspension or termination of the Company's ability to obtain funding through the
Facility and the use of collections to repay borrowings under the Facility
would result in additional demands on the Company's cash resources.
Past Net Losses
The Company reported net earnings of $14.6 million and $2.4 million for
the years ended December 31, 1996 and 1995, respectively, and net losses for the
years ended December 31, 1994, 1993 and 1992, of $12.8 million, $13.4 million
and $23.3 million, respectively. For the three months ended March 27, 1997 and
March 28, 1996, the Company reporting net earnings of $2.3 and $2.2,
respectively. In the future, there can be no assurance that profitable
operations will be sustained.
The Company had federal and state deferred tax assets of $8.0 million
at December 31, 1996 that have not been recognized because of the uncertainty
of achieving the future earnings in either the time frame or in the particular
state jurisdictions needed to realize the tax benefit.
Dependence on and Risks Inherent in U.S. Government Contracts
The Company derived 97.1% and 94.6% of its revenues for the years ended
December 31, 1996 and 1995, respectively, and 96.0% and 96.7% of its revenues
for the three months ended March 27, 1997 and March 28, 1996, respectively, from
contracts and subcontracts with the U.S. Government ("Government Contracts").
Contracts with the DoD represented 52.0% and 53.3% of the Company's revenues for
the years ended December 31, 1996 and 1995, respectively, and 46.9% and 54.0% of
the Company's revenues for the three months ended March 27, 1997 and March 28,
1996, respectively. Continuation and renewal of the Company's existing
Government Contracts and the acquisition by the Company of additional Government
Contracts is contingent upon, among other things, the availability of adequate
funding for various U.S. Government agencies. A further significant decline in
U.S. military expenditures, particularly in the operations and maintenance
portion of the defense budget, or a reapportioning of such expenditures reducing
the operations and maintenance segment, might materially and adversely affect
the Company's revenues and earnings. The loss or significant curtailment of the
Company's material U.S. military contracts would materially and adversely affect
the Company's future revenues and earnings.
Typically, a Government Contract has an initial term of one year
combined with two, three or four one-year renewal periods, exercisable at the
discretion of the Government. The Government is not obligated to exercise its
option to renew a Government Contract. At the time of completion of a Government
Contract, the contract in its entirety is "recompeted" against all eligible
third-party providers. Contracts between the Company and the U.S. Government or
its prime contractors usually contain standard provisions for termination at the
convenience of the Government or such prime contractors. There can be no
assurance that terminations will not occur, and such terminations could
adversely affect the Company's business and prospects.
The Company's Government Contract services are provided through three
types of contracts--fixed-price, time-and-materials and cost-reimbursement. The
Company assumes financial risk on fixed-price contracts and time-and-materials
contracts, because the Company assumes the risk of performing those contracts at
the stipulated prices or negotiated hourly rates. The failure to accurately
estimate ultimate costs or to control costs during performance of the work could
result in losses or smaller than anticipated profits. With regard to
cost-reimbursement contracts, to the extent that the actual costs incurred are
within the contract ceiling and allowable under the terms of the contract and
applicable regulations, the Company is entitled to reimbursement of its costs
plus a stipulated profit.
The Company is aware of various costs questioned by the government,
including issues related to the recoverability of certain 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 March 27, 1997 that
will have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
Government Contract 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 as defined in such
Government Contracts. 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.
As a U.S. Government contractor, the Company is subject to federal
regulations under which its right to receive future awards of new Government
Contracts, or extensions of existing Government Contracts, may be unilaterally
suspended or barred should the Company be convicted of a crime or be indicted
based on allegations of a violation of certain specific federal statutes or
other activities. The initiation of suspension or debarment hearings against the
Company or any of its affiliated entities could have a material adverse impact
upon the Company's business and prospects.
Potential for Adverse Judgments in Legal Proceedings
The Company and its subsidiaries are involved in various claims and
lawsuits, including contract disputes and claims based on allegations of
negligence and other tortious conduct. The Company and its subsidiaries are also
potentially liable for certain environmental, personal injury, tax and other
issues related to prior operations of divested businesses. In addition, an
inactive subsidiary of the Company that was acquired in 1974 has been named as
one of many defendants in many civil lawsuits in certain state courts (primarily
Texas); the alleged claims arise out of the subsidiary's installation and
distribution of industrial insulation products that allegedly contained
asbestos. Management has estimated the Company's exposure to these lawsuits on a
consolidated basis, including estimated future filings, in view of possible
recoveries and contributions from insurance, and has established reserves
therefore. It is possible that the level of filings will increase more than
management has anticipated, thereby increasing such exposure, and no upper limit
of exposure can be reasonably estimated.
Competition
The markets which the Company services are highly competitive. In each
of its businesses, the Company's competition is quite fragmented, with no single
competitor holding a significant market position. The Company experiences
vigorous competition from industrial firms, university laboratories, nonprofit
institutions and U.S. Government agencies. Some of the Company's competitors are
large, diversified firms with substantially greater financial resources and
larger technical staffs than the Company has available to it. Government
agencies also compete with and are potential competitors of the Company because
they can utilize their internal resources to perform certain types of services
that might otherwise be performed by the Company. A majority of the Company's
revenues are derived from contracts with the U.S. Government and its prime
contractors, and such contracts are awarded on the basis of negotiations or
competitive bids where price is a significant factor.
Company May Be Obligated to Repurchase Shares of Certain ESOP Participants
In the event that an employee participating in the ESOP is terminated,
retires, dies or becomes disabled while employed by the Company, the ESOP, or
the Company under certain circumstances, is obligated to repurchase shares of
common stock distributed to such former employee under the ESOP, until such time
as the common stock becomes readily tradable stock. In addition, after ten years
of participation in the ESOP, a participant who is 55 years of age may receive a
distribution of up to 25% of shares in the aggregate from his or her account,
increasing to 50% after age 60, for diversification purposes. These shares are
also subject to the repurchase obligation. To the extent that the Company
repurchases shares as described above, its availability of cash will be
adversely affected. DynCorp has the right under both the ESOP and applicable law
to defer indefinitely the repurchase of any shares if payment to the
stockholders would impair the capital of the Company.
No Payment of Cash Dividends
The Company has not paid a cash dividend since 1986. The Company does
not have a policy for the payment of regular dividends. The payment of dividends
in the future will be subject to the discretion of the Board of Directors of the
Company. Any proposed dividend payments may be subject to restrictions imposed
by financing arrangements and by legal and regulatory restrictions.
Absence of a Public Market
There is no present public market for the Common Stock, and it is not
currently anticipated that such a market will develop in the future. There can
be no assurance that the purchasers of Common Stock in this Offering will be
able to resell their shares through the Internal Market should they decide to do
so. To the extent that the Internal Market does not provide sufficient liquidity
for a stockholder, and the stockholder is otherwise unable to locate a buyer for
his or her shares, the stockholder could effectively be subject to a total loss
of investment. Accordingly, the purchase of Common Stock is suitable only for
persons who have no need for liquidity in this investment and who can afford a
total loss of investment. See "Market Information -- The Internal Market."
Right of First Refusal
All shares of Common Stock offered hereby will be subject to the
Company's right of first refusal to purchase such shares before they may be
offered to third parties (other than on the Internal Market). Shares of Common
Stock purchased on the Internal Market will be subject to contractual transfer
restrictions having the same effect as those contained in the By-Laws.
See "Description of Capital Stock -- Restrictions on Common Stock."
Offering Price Determined by Formula Not Market Forces
The offering price is, and subsequent offering prices will be,
determined by means of the Formula set forth on the cover page of this
Prospectus. The Formula takes into consideration the Company's financial
performance, the market valuation of comparable companies and the limited
liquidity of the Common Stock, as determined by the Board of Directors based on
an independent appraisal. The Formula is subject to change by the Board of
Directors in its sole discretion. See "Market Information -- Determination of
Offering Price."
Parties to Stockholders Agreement Effectively Control Appointments to the Board
of Directors
Certain individuals in the management group of the Company, Capricorn
Investors, L.P. ("Capricorn") and other outside investors who hold shares of
Common Stock are parties to a Stockholders Agreement originally dated March 11,
1988 and restated March 11, 1994 (the "Stockholders Agreement"). Under the terms
of the Stockholders Agreement, stockholders who own approximately 34% of the
fully diluted outstanding shares of Common Stock have agreed, among other
things, to vote for the election of a Board of Directors consisting of four
management group nominees, four Capricorn nominees and a joint nominee who would
be elected if needed to break a tie vote. Effective January 23, 1997, Capricorn
waived its prior right to nominate members to the Board of Directors, but not
its obligations to vote in accordance with the Stockholders Agreement. Because
the management group stockholders, directly and through ESOP holdings, and
Capricorn represent approximately 34% of the shares of Common Stock necessary to
elect the Company's Board of Directors on a fully diluted basis, it is unlikely
that other stockholders acting in concert or otherwise will be able to change
the composition of the Board of Directors. Unless extended, the Stockholder's
Agreement expires on March 10, 1999. See "Description of Capital Stock --
Stockholders Agreement."
Anti-Takeover Effects
The combined effects of management's and Capricorn's collective
ownership of a substantial portion of the outstanding shares of Common Stock,
the voting provisions of the Stockholders Agreement and the Company's right of
first refusal may discourage, delay or prevent attempts to acquire control of
the Company that are not negotiated with the Company's Board of Directors. These
may, individually or collectively, have the effect of discouraging takeover
attempts that some stockholders might deem to be in their best interests,
including tender offers in which stockholders might receive a premium for their
shares over the Formula Price available on the Internal Market, as well as
making it more difficult for individual stockholders or a group of stockholders
to elect directors. See "Description of Capital Stock."
Dilution
Because the net tangible book value of the Company on March 27, 1997
was a negative $120,938,000 or ($18.69) per share, which is substantially less
than the offering price of $20.00, purchasers of Common Stock in the Offering
will realize immediate and substantial dilution of $38.69 per share, or $34.54
per share assuming conversion of all outstanding warrants and options, and the
issuance of all restricted stock shares. The amount of dilution may vary
depending on the Formula Price.
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SECURITIES OFFERED BY THIS PROSPECTUS
Common Stock Offered by the Company
The shares of Common Stock offered by the Company may be offered
through the Internal Market or directly or contingently to present and future
employees and directors of the Company and to trustees or agents for the benefit
of employees under the Company's employee benefit plans described below.
Direct and Contingent Sales to Employees and Directors
The Company believes that its success is dependent upon the abilities
of its employees and directors. Since 1988, the Company, therefore, has pursued
a policy of offering such persons an opportunity to make an equity investment in
the Company as an inducement to such persons to become or remain employed by or
affiliated with the Company. At the discretion of the Board of Directors or the
Compensation Committee of the Board of Directors (the "Compensation Committee"),
employees and directors may be offered an opportunity to purchase a specified
number of shares of Common Stock offered hereby. All such direct and contingent
sales to employees and directors will be effected through the Internal Market or
the employee benefit plans described below, and may be attributable to the
Company. Pursuant to the By-Laws, all shares of Common Stock offered by the
Company after May 11, 1995, directly or contingently, to its employees or
directors and all shares of Common Stock purchased on the Internal Market are
subject to a right of first refusal. See "Description of Capital Stock --
Restrictions on Common Stock."
Equity Target Ownership Policy
The Company has adopted an Equity Target Ownership Policy (the "ETOP")
under which certain highly paid employees of the Company are encouraged over a
period of seven years to invest up to specified multiples of their annual
salaries in shares of the Common Stock. Under the ETOP, corporate officers,
presidents and vice presidents of strategic business units and other
participants in the Executive Incentive Plan with salaries greater than $99,999
but less than $200,000 are encouraged to invest at least 1.5 times their salary
in shares of Common Stock; those with salaries greater than $199,999 but less
than $300,000 are encouraged to invest at least two times their salary in shares
of Common Stock; and those with salaries greater than $299,999 are encouraged to
invest at least three times their salary in shares of Common Stock. Investments
under any of the employee benefit plans described below, as well as any other
holdings, including securities held prior to adoption of the ETOP, will qualify
for purposes of the ETOP. As an additional incentive to compliance with the
ETOP, individuals who directly purchase 1,000 shares of Common Stock or more on
the Internal Market on a single Trade Date are paid a special bonus by the
Company equal to 7 1/2% of the purchase price.
Savings and Retirement Plan
The Company maintains a Savings and Retirement Plan (the "SARP"), which
is intended to be qualified under Sections 401(a) and (k) of the Internal
Revenue Code of 1986, as amended (the "Code"). Generally, all employees are
eligible to participate, except for employees of divisions or other units
designated as ineligible, such as units which are subject to the terms of
collective bargaining agreements, participate in other, site-specific benefit
plans or are located in foreign countries. The SARP permits a participant to
elect to defer, for federal income tax purposes, a portion of his or her annual
compensation and to have such amount contributed directly by the Company to the
deferred fund of the SARP for his or her benefit. The Company may, but is not
obligated to, make a matching contribution to the SARP's deferred fund for the
benefit of those participants who have elected to defer a portion of their
compensation for investment in shares of Common Stock. The amount of the
matching contribution will be determined periodically by the Company's Board of
Directors based on the aggregate amounts deferred by participants. The SARP
currently provides for a Company matching contribution, in cash or Common Stock,
of 100% of the first one percent of compensation invested in a Company Common
Stock fund by a participant and 25% of the next four percent of compensation so
invested. The Company may also make additional contributions to the SARP
deferred fund in order to comply with Section 401(k) of the Code. Each
participant will be vested at all times in 100% of his or her contributions to
the deferred fund accounts. Company contributions will vest 50% after two years
of service and 100% after three years of service. Benefits are payable to a
participant within certain specified time periods following such participant's
retirement, permanent disability, death or other termination of employment.
Pursuant to the By-Laws, shares of Common Stock distributed to a participant
under the SARP will be subject to the Company's right of first refusal. See
"Employee Benefit Plans -- Savings and Retirement Plan" and "Description of
Capital Stock -- Restrictions on Common Stock."
Employee Stock Purchase Plan
The Company has established the Employee Stock Purchase Plan (the
"ESPP") for the benefit of substantially all its employees. The ESPP provides
for the purchase of Common Stock through payroll deductions by participating
employees. The ESPP is intended to qualify under Section 423(b) of the Code.
Participants contribute 95% of the purchase price of the Common Stock, and the
Company contributes the balance in the form of cash or shares of Common Stock.
Such purchases will be made through the Internal Market. All shares purchased
pursuant to the ESPP will be credited to the participant's account promptly
following the Internal Market trade day on which they were purchased and,
pursuant to the By-Laws, will be subject to the Company's right of first
refusal. See "Employee Benefit Plans -- Employee Stock Purchase Plan" and
"Description of Capital Stock -- Restrictions on Common Stock."
1995 Stock Option Plan
Pursuant to the Company's 1995 Non-Qualified Stock Option Plan (the
"1995 Option Plan"), the Company may grant stock options to certain of its
employees and directors. Stock options under the 1995 Option Plan may be granted
contingent, for example, upon an employee obtaining a certain level of contract
awards for the Company within a specified period, upon the satisfaction of other
performance criteria or a requirement that such individual also purchase a
specified number of shares of Common Stock on the Internal Market at the Formula
Price. As of April 25, 1997, 6,200 stock options have been exercised and 842,000
are outstanding. Pursuant to the By-Laws, all shares of Common Stock issued upon
the exercise of such stock options will be subject to the Company's right of
first refusal. See "Employee Benefit Plans -- 1995 Stock Option Plan" and
"Description of Capital Stock -- Restrictions on Common Stock."
Executive Incentive Plan
The Company maintains an Executive Incentive Plan (the "EIP"), which
provides for the payment of annual bonuses to certain officers and
management/executive employees and provides for payment of up to 20% of the
bonuses in the form of shares of Common Stock, valued at the then current
Formula Price. Awards of shares of Common Stock will be distributed during each
fiscal year. Pursuant to the By-Laws, all shares of Common Stock awarded
pursuant to the EIP will be subject to the Company's right of first refusal. See
"Employee Benefit Plans -- Executive Incentive Plan" and "Description of Capital
Stock -- Restrictions on Common Stock."
Employee Stock Ownership Plan
The Company maintains an ESOP, which is a stock bonus plan intended to
be qualified under Section 401(a) of the Code. Generally, all employees
participate in the ESOP, except employees of groups or units designated as
ineligible. Interests of participants in the ESOP vest in accordance with the
vesting schedule and other vesting rules set forth in the ESOP plan document.
Benefits are allocated to a participant in shares of Common Stock and are
distributable within certain specified time periods following such participant's
retirement, permanent disability, death or other termination of employment. Upon
distribution, the participant is entitled to a statutory "put" right at two
separate times, whereby the ESOP or the Company is obligated to purchase the
shares at the fair market value of the Common Stock, as determined by the ESOP's
appraisers (the "ESOP Share Price"). In the event the participant declines to
exercise the put right, such shares of Common Stock may be sold by the
participant on the Internal Market subject to the restrictions and limitations
of the Internal Market. The ESOP Share Price is not determined by the Formula,
and amounts paid to participants at the time of distribution may be different
from amounts paid to sellers on the Internal Market. See "Market Information --
The Internal Market." The amount of the Company's annual contribution to the
ESOP is determined by, and within the discretion of, the Board of Directors and
may be in the form of cash, Common Stock or other qualifying securities.
Pursuant to the ESOP plan document, any shares of Common Stock distributed out
of the ESOP will be subject to a right of first refusal on behalf of the
Company. See "Employee Benefit Plans -- Employee Stock Ownership Plan --
Distributions and Withdrawals."
Common Stock Offered by Officers, Directors and Affiliates
This Prospectus originally related to the offer and sale of up to
5,810,308 shares by certain officers, directors and affiliates of the Company.
As of April 25, 1997, such persons may, from time to time, sell up to an
aggregate of 2,744,808 shares of the Common Stock being offered hereby on the
Internal Market or otherwise. 2,744,808 shares is the total aggregate holdings
of all officers, directors and affiliates remaining available for offer and sale
hereunder. While the Company originally registered all shares owned by its
officers, directors and affiliates on a fully diluted basis, including unvested
options, the Company does not know whether some, none, or all of such shares
will be so offered or sold. However, the Company believes that the ETOP will act
as a disincentive to the officers to sell their Common Stock during 1997 and
possibly in later years as well. The officers, directors, and affiliates will
not be treated more favorably than other stockholders participating on the
Internal Market and, like all other stockholders selling shares on the Internal
Market (other than the Company and its retirement plans), will pay Buck, the
Company's designated broker-dealer, a commission equal to two percent of the
proceeds from their sales. See "Market Information -- The Internal Market."
The following table sets forth information as of April 25, 1997 with
respect to the number of shares of Common Stock owned directly or indirectly by
each of the officers, directors and affiliates (including shares issuable upon
the exercise of outstanding options and warrants, shares issuable as a result of
expiration of deferrals or otherwise under the former Restricted Stock Plan and
shares allocated to such person's accounts under the Company's employee benefit
plans), and their respective percentages of ownership of equity on a fully
diluted basis, the number of shares registered on behalf of each such person,
and the number of shares remaining for offer and sale as of April 25, 1997. Each
of the persons (other than Capricorn, which is an affiliate by reason of its
ownership of more than 10% of the Company's equity) is a director and/or officer
of the Company. Except as indicated below, all the shares are owned of record or
beneficially. The table also reflects the relative ownership of such persons in
the event of their individual sales of all the registered shares owned by them
in this Offering.
<TABLE>
<CAPTION>
Percent Percent
Ownership of Number of Ownership
Number of Fully Diluted Shares After Sale
Shares Equity(1) Originally Number of Shares of All
Beneficially Before Offering Covered Remaining(2) Covered
Name and Title of Beneficial Owner Owned (1) Hereby Shares
- ----------------------------------------------------- --------------- ----------------- ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
D. R. Bannister, Chairman of the Board & Director 549,198 4.74% 544,493 544,493 *
T. E. Blanchard, Director 259,242 2.24% 297,864 259,242 *
R. E. Dougherty, Director 5,000 * 4,000 4,000 *
P. V. Lombardi, President, Chief Executive Officer 155,355 1.34% 150,697 150,697 *
D. C. Mecum II, Director 5,000 * 4,000 4,000 *
D. L. Reichardt, Senior Vice President & Director 161,780 1.40% 199,754 161,780 *
Capricorn/H. S. Winokur, Jr., Director 1,231,952 10.66% 4,117,127 1,231,952 *
R. B. Alleger, Jr., Vice President 31,157 * 8,000 8,000
G. A. Dunn, Vice President & Controller 64,028 * 112,560 64,028 *
M. C. Filteau, Vice President 74,297 * 52,858 52,858 *
H. M. Hougen, Vice President & Secretary 33,806 * 32,684 32,684 *
M. J. Hyman, Vice President 32,696 * 32,092 31,692 *
J. A. Mackin, Vice President 5,934 * 7,243 3,183 *
M. S. Mandell, Vice President 49,616 * 47,670 47,670 *
C. H. McNair, Jr., Vice President 58,680 * 56,918 56,918 *
R. Morrel, Vice President 23,571 * 25,606 22,450 *
H. H. Philcox, Vice President 44,055 * 35,113 35,113 *
R. E. Stephenson, Vice President 7,248 * 7,535 5,485 *
R. G. Wilson, Vice President & General Auditor 29,005 * 36,036 28,563 *
------ --- -- ------ ------ -----
Total 2,821,620 24.4 5,810,308 2,744,808 *
- -----------------------
* Indicates less than one percent
<FN>
(1) Includes shares issuable upon the exercise of outstanding warrants,
shares issuable as a result of expiration of deferrals or otherwise under
the former Restricted Stock Plan, exercise of all outstanding options
whether or not vested, and shares allocated to such person's accounts
under the Company's employee benefit plans.
(2) Reflects number of shares remaining available for offer and sale as of
April 25, 1997. Certain shares originally offered hereby have been sold
through the Internal Market or otherwise.
</FN>
</TABLE>
<PAGE>
MARKET INFORMATION
The Internal Market
In 1988, following a decision by the Company's Board of Directors to
consider offers for the purchase of the Company, the Company became privately
owned through a leveraged buy-out (the "LBO") involving its management group.
Public trading of the Company's common stock ceased, and the new management
installed the ESOP as the Company's principal retirement benefit. Approximately
30,000 former and present employees are now beneficial owners of the Common
Stock through the ESOP, representing approximately 61.9% of the shares of Common
Stock outstanding on the date of this Prospectus and approximately 80.0% of the
Company's Common Stock on a fully diluted basis.
Since the LBO, the management stockholders, Capricorn and certain other
investors have relied on the Stockholders Agreement as a means of restricting
the distribution of the Company's shares of capital stock. The Stockholders
Agreement contains various provisions for the annual offering of shares of
Common Stock owned by retiring and terminated management stockholders, first to
other management stockholders, Capricorn and certain other investors and then to
the Company as purchaser of last resort. On May 10, 1995, the Board of Directors
approved the establishment of the Internal Market as a replacement for the
resale procedures set forth in the Stockholders Agreement.
The Internal Market generally permits all stockholders to sell shares
of Common Stock on four Trade Dates, subject to purchase demand. All Warrants to
be sold must first be converted into shares of Common Stock which can then be
sold on the Internal Market, subject to purchase demand.
All sales of Common Stock on the Internal Market will be made to
employees and directors of the Company who have been approved by the
Compensation Committee as being entitled to purchase Common Stock and to the
trustees of the SARP and the ESOP and the administrator of the ESPP who may
purchase shares of Common Stock for their respective trusts and plan
(collectively "Authorized Buyers"). The Compensation Committee will normally
permit direct purchases in the Internal Market only by employees who are
purchasing such stock to meet the requirements of the ETOP. Other employees will
be encouraged to participate through the various employee benefit plans.
Limitations on the number of shares that an individual can purchase directly may
be imposed where there are more buy orders than sell orders on a particular
Trade Date.
The Internal Market was established and is managed by the Company's
wholly owned subsidiary, DynEx, Inc. The purchase and sale of shares on the
Internal Market are carried out by Buck, a registered broker-dealer, upon
instructions from the respective buyers and sellers, and individual stock
ownership account records are maintained by Buck's affiliate, Buck Consultants,
Inc. Subsequent to determination of the applicable Formula Price for use on the
next Trade Date, and at least fifteen days prior to such trade date, Buck will
advise the stockholders of record by mail as to the amount of the Formula Price
and the Trade Date, inquiring whether such stockholders wish to sell shares on
the Internal Market and advising them, if they do so, how to deliver written
sell orders and stock certificates (which must be received by Buck at least two
days prior to such Trade Date) to facilitate such sale.
The Company may, but is not obligated to, purchase shares of Common
Stock on the Internal Market on any Trade Date, but only if and to the extent
that the number of shares offered for sale by stockholders exceeds the number of
shares sought to be purchased by Authorized Buyers, and the Company, in its
discretion, determines to make such purchases.
Except as provided below, in the event that the aggregate number of
shares offered for sale on the Internal Market is greater than the aggregate
number of shares sought to be purchased by Authorized Buyers and the Company,
offers to sell 500 shares or less of Common Stock or up to the first 500 shares
if more than 500 shares of Common Stock are offered by any seller will be
accepted first. If, however, there are insufficient purchase orders to support
the primary allocation of 500 shares of Common Stock, then the purchase orders
will be allocated equally among all of the proposed sellers up to the first 500
shares offered for sale by each seller. Thereafter, a similar procedure will be
applied to the next 10,000 shares offered by each remaining seller, and offers
to sell shares in excess of 10,500 shares will then be accepted on a pro-rata
basis determined by dividing the total number of shares remaining under purchase
orders by the total number of shares remaining under sell orders. To the extent
that the aggregate number of shares sought to be purchased exceeds the aggregate
number of shares offered for sale, the Company may, but is not obligated to,
sell authorized but unissued shares of Common Stock on the Internal Market. All
sellers on the Internal Market (other than the Company and its retirement plans)
will pay Buck a commission equal to two percent of the proceeds from such sales.
No commission is paid by purchasers on the Internal Market. All offers and sales
of Common Stock made on the Internal Market may be attributed to the Company.
If the aggregate purchase orders exceed the number of shares available
for sale, the following prospective purchasers will have priority, in the order
listed:
1. the administrator of the Employee Stock Purchase Plan
2. the trustees of the Savings and Retirement Plan
3. individuals approved for purchases by the Compensation Committee
of the Board of Directors, on a pro rata basis
4. the trustees of the Employee Stock Ownership Plan
There is no public market for the Common Stock. While the Company
established the Internal Market in an effort to provide liquidity to
stockholders, there can be no assurance that there will be sufficient liquidity
to permit stockholders to resell their shares on the Internal Market or that a
regular trading market will develop or be sustained in the future. The Internal
Market will be dependent on the presence of sufficient buyers to support sell
orders that will be placed through the Internal Market. Depending on the
Company's performance, potential buyers (which would include employees and
trustees under the Company's benefit plans) may elect not to buy on the Internal
Market. Moreover, although the Company may enter the Internal Market as a buyer
of Common Stock under certain circumstances, including an excess of sell orders
over buy orders, the Company has no obligation to engage in Internal Market
transactions. Consequently, there is a risk that sell orders could be prorated
as a result of insufficient buyer demand or that the Internal Market may not be
permitted to open because of the lack of buyers. To the extent that the Internal
Market does not provide sufficient liquidity for a stockholder and the
stockholder is otherwise unable to locate a buyer for his or her shares, the
stockholder could effectively be subject to a total loss of investment.
Accordingly, the purchase of Common Stock is suitable only for persons who have
no need for liquidity in this investment and who can afford a total loss of
investment. See "Risk Factors -- Absence of a Public Market."
Determination of Offering Price
The purchase price of the shares of Common Stock offered hereby will be
determined pursuant to the Formula Price. The Formula Price per share of Common
Stock is the product of seven times the operating cash flow ("CF") where
operating cash flow is represented by earnings before interest, taxes,
depreciation and amortization ("EBITDA") of the Company for the four fiscal
quarters immediately preceding the date on which a price revision is made and
the market factor (the "Market Factor" denoted MF), plus the non-operating
assets at disposition value (net of disposition costs) ("NOA"), minus the sum of
interest bearing debt adjusted to market and other outstanding securities senior
to Common Stock ("IBD") divided by the number of shares of Common Stock
outstanding at the date on which a price revision is made, on a fully diluted
basis assuming conversion of all outstanding options and warrants ("ESO"). The
Market Factor is a numerical factor which reflects existing securities market
conditions relevant to the valuation of such stock. The Formula Price of the
Common Stock, expressed as an equation (the "Formula"), is as follows:
Formula Price = [(CF x 7)MF + NOA - IBD]
ESO
"CF" is the earnings basis which is considered to be representative of
the future performance of the Company. The abbreviation stands for operating
cash flow, and the basic measurement used by the Company for operating cash flow
is Earnings Before Interest, Depreciation and Taxes ("EBITDA."). Each element of
EBITDA is measured according to generally accepted accounting principles
("GAAP"), but, before using those objective numbers in the formula, the Board of
Directors examines the details used in those earnings to see if any adjustments
are needed in order for the earnings number to be representative of the future
performance of the Company. Following are examples of situations where the Board
of Directors may feel it appropriate to make adjustments so that the earnings
used in the Formula would be representative of expected future performance: (a)
the earnings from an acquisition made late in the year may be pro-formed for a
full year, (b) the earnings from a discontinued activity may be pro-formed out
even though the discontinued activity may not qualify as a discontinued business
under GAAP; or (c) a truly unusual expenditure or windfall profit may be
pro-formed out even though it is clearly part of GAAP earnings for the current
year.
"MF" is the market factor. In the end, it is totally subjective.
Annually, the Board of Directors looks at the public market pricing for other
government service contractors which in its opinion are most comparable to the
Company. Six to eight other companies are generally considered, but there is no
set number of comparables. The pricing multiples of Net Income and of Cash Flow
for these companies are looked at on a last twelve-month basis, on a fiscal-year
basis, and, where available from analysts' reports, on a projected basis. Since
the Formula capitalizes the Company's CF at seven times, these comparables give
the Board of Directors a sense whether the public market is currently at a
higher, lower or roughly the same level as that fixed multiple. The Board of
Directors also looks at the Company's earnings trends in setting the MF, because
the stock market generally rewards an upward trend and punishes a downward
trend. On a quarterly basis, the Board of Directors will look at the Price
Earnings Multiples of its annual comparable companies to see if there are any
significant changes which might influence the Board's determination of the MF to
be used in the formula.
"NOA" are non-operating assets at disposition value (net of disposition
costs). The Company's principal non-operating asset since 1992 has been
"Restricted Cash". This is cash in its wholly owned subsidiary, DFC, which must
remain in specified short-term marketable investments (e.g., U.S. Treasury
bills) on a temporary basis, because the Company and its other subsidiaries do
not have enough eligible accounts receivable to sell to DFC at any particular
point in time to utilize the minim $50 million of capital of DFC. If the Company
discontinues a business, and the net assets of that business were recorded as
Assets Held For Sale, those assets would also be included in NOA at management's
estimate of their disposition value, net of disposition costs. (The earnings
from those assets would also be excluded from "CF" in the Formula.) If the
Company had a passive investment outside its normal operations, the earnings
from that investment would be excluded from "CF", and the lower of cost or
estimated market value would be included in "NOA". Other similar situations
could give rise to inclusion in "NOA", but an asset must be clearly
non-operating to be included.
"IBD" is interest-bearing debt and other securities senior to common
stock. Under GAAP, interest-bearing debt is to be reported net of any
unamortized discount at issuance, but in the Formula such issuance discounts are
ignored, and it is expected that the debt will be recorded at its face value. On
the other hand, if it is the intent of management in the near term to call any
portion of its long term debt, the amount used for that portion of IBD would be
at its call price. Similarly, if the debt were publicly traded at a discount,
and it was management's intent in the near term to retire debt through open
market discounted purchases, the market price would be used for that portion of
the debt in the Formula. In applying the Formula, the Board of Directors would
also look at any convertible securities and subjectively decide whether it is
likely that such securities would be converted. If, in the opinion of the Board,
they will be converted, such securities will be included in the fully diluted
common shares and not IBD. Preferred stock, or any similar security, senior to
the common stock in liquidation, would be considered as IBD.
"ESO" is the equivalent shares outstanding of common stock at the time
of the valuation. It assumes the exercise of all outstanding options (if no
greater than the current Formula Price), warrants and the conversion of any
convertible securities of which there are none at the present time.
The Formula Price, including the Market Factor, will be reviewed four
times each year, generally in conjunction with Board of Directors meetings,
which are generally scheduled for February, May, August and November. The Market
Factor is reviewed by the Board in conjunction with an appraisal which is
prepared by an independent appraisal firm for the committee administering the
ESOP. The Board of Directors believes that the valuation process results in a
stock price which reasonably reflects the value of the Company on a per share
basis. See "Risk Factors -- Offering Price Determined by Formula Not Market
Forces."
The Formula was adopted in its present form by the Board of Directors
on August 15, 1995. The Formula is subject to change by the Board of Directors.
Availability of Information
The Company intends to disseminate the current Formula Price on at
least a quarterly basis to all employees through internal communications,
including bulletins and electronic mail messages and to other stockholders by
mailed reports, including mailed notices of upcoming Trade Dates. Participants
in any of the employee benefit plans may obtain the current Formula Price by
calling the Company's Powerline system toll-free number (1-800-956-4015), which
operates 24 hours a day, seven days a week.
The Company also intends to distribute copies of its audited annual
financial statements to all stockholders, as well as other employees, and to
potential participants in the Internal Market through employee benefit plans,
either through U.S. Mail or inter-company mail. Such information is normally
distributed at the time of distribution of employee annual reports, which is
made at approximately the same time that proxy information is distributed and
solicitations are made for voting instructions from participants in the ESOP and
SARP, in May or June of each year. The Company files unaudited quarterly
financial information with the Commission, and copies of such information are
available from the Commission. See "Available Information."
USE OF PROCEEDS
The shares of Common Stock which may be offered by the Company are
principally being offered to permit the acquisition of shares by the Company's
employee benefit plans as described herein and to permit the Company to offer
shares of Common Stock to present and future employees and directors. The
Company does not intend or expect this Offering to raise significant capital.
Any net proceeds received by the Company from the sale of the Common Stock
offered (after giving effect to the payment of expenses of the Offering) will be
added to the general funds of the Company for working capital and general
corporate purposes. Currently, the Company has no specific plans for the use of
such proceeds. It is anticipated that the majority of the sales of Common Stock
on the Internal Market will be made by stockholders rather than by the Company,
and the Company will not receive any portion of the net proceeds from the sale
of such shares (other than the 1% received by DynEx, Inc. to defray the costs of
establishing and maintaining the Internal Market).
EMPLOYEE BENEFIT PLANS
The Company maintains several employee benefit plans pursuant to which
certain of the shares of Common Stock being offered hereby may be offered or
sold. The primary purpose of these plans is to motivate the Company's employees
and directors to contribute to the growth and development of the Company by
encouraging them to achieve and surpass annual goals of the Company and of the
operations for which they are responsible. The following is a summary
description of each of these plans. All capitalized terms, unless otherwise
defined, have the meanings ascribed to them in the employee benefit plan to
which they relate.
Savings and Retirement Plan
Recent amendments to the SARP (originally adopted in 1983) added a
Company match for certain investments in Common Stock were adopted on March 28,
1995 and became effective on July 1, 1995.
Trustee
Merrill Lynch Trust Company, 265 Stevenson Avenue, Somerset, NJ 08873,
serves as trustee of the SARP, except that the Company serves as trustee of the
Company Stock Fund.
Administration
The Company administers the SARP through an Administrative Committee
consisting of H. M. Hougen and J. A. Mackin officers of the Company,
whose address is 2000 Edmund Halley Drive, Reston, VA 20191.
Eligibility and Participation
Generally, all employees (as defined in the SARP) are eligible to
participate in the SARP upon commencing employment, except for employees in
groups or units designated as ineligible. As of December 31, 1996, there were
approximately 6,640 participants in the SARP.
Contributions and Allocations
The SARP permits a participant to elect to defer a portion of his or
her compensation for the Plan Year and to have such deferred amount contributed
directly by the Company to the participant's SARP account. Amounts deferred by
participants, including rollovers from qualified plans, totaled approximately
$13.5 million for the Plan Year ended December 31, 1996. Under the terms of the
SARP, deferred amounts are treated as contributions made by the Company. The
maximum amount of compensation that a participant may elect to defer is
determined by the SARP Administrative Committee, but in no event may the
deferral exceed $9,500 per year during 1997 (adjusted for cost-of-living under
rules prescribed by the Secretary of the Treasury). In addition to amounts
deferred by participants, the Company may, but is not obligated to, make a
matching contribution to the SARP accounts of those participants who have
elected to defer a portion of their compensation equal to a percentage or
percentages of the amounts which such participants have elected to defer. This
Company matching contribution is determined periodically by the Board of
Directors and is allocated to the SARP accounts of those participants who have
elected to defer a portion of their compensation. The Company intends to
contribute 100% of the first 1% of a participant's compensation deferred under
the SARP for investment in Common Stock (the "Company Stock Fund") and 25% of
the next 4% of such deferred compensation (the "Stock Match"). The Company's
Stock Match contribution to the SARP will be made in shares of Common Stock
unless the Board of Directors determines to make the contribution in cash, which
would then be used to purchase Company Stock on the Internal Market. 850,000
shares of Common Stock have been reserved for possible issuance in satisfaction
of the Company's Stock Match obligations through 2001.
Certain acquired subsidiaries of the Company previously made matching
cash contributions to separately maintained 401(k) qualified deferred savings
plans without regard to the nature of the investment of the employee's
contribution. Effective January 1, 1995, these plans were merged into the SARP,
and matching contributions are now limited to the Stock Match.
Company contributions to the SARP are made by the due date (including
extensions) for the Company's federal income tax return for the applicable year
except contributions resulting from amounts deferred by participants, which must
be made within 14 days of the first day of the calendar month following the
month in which the deferral occurred. The Company's practice has been to make
matching contributions quarterly based on current participant bi-weekly
deferrals, and the Company plans to make a Stock Match in conjunction with each
applicable Trade Date. Any additional Company contribution, if required, will be
made after the end of the Plan Year.
An Eligible Employee may transfer to the trust fund maintained for the
SARP a rollover contribution from another qualified retirement plan pursuant to
applicable regulations and SARP Administrative Committee procedures. A
participant in the SARP who has made a deferral election may terminate or alter
the rate of his or her deferrals at any time under the terms of the SARP.
Investment of Funds
The SARP Administrative Committee is authorized to establish a choice
of investment alternatives including securities of the Company, in which
contributions to the SARP (including that portion of compensation which
participants elect to defer) may be invested. The investment alternatives
currently available to participants in the SARP include a Company Stock Fund,
six Merrill Lynch & Company mutual funds and three other mutual funds. Under the
terms of the SARP, a participant's entire interest in his or her SARP account
may be invested in a mixture of Company Stock Fund and/or any of the other
mutual funds, provided that, in order to obtain the Stock Match, the matched
portion of a participant's compensation deferred under the SARP must be invested
in the Company Stock Fund that is not exchangeable for other investment
alternatives until after a period of 18 months. The Company's Stock Match will
also be invested in the Company's Stock Fund, which contribution will not be
allowed to be exchanged for another investment alternative. Participants may
elect at such time, in such manner and subject to such restrictions as the SARP
Administrative Committee may specify, to have contributions allocated or
apportioned among the different investment alternatives. Separate SARP accounts
are established for each investment alternative selected by a participant, and
each such account is valued separately. Except for restrictions on investments
in the Company Stock Fund, participants may transfer amounts from one investment
alternative to one or more other investment alternatives on a daily basis.
Investments in the Company Stock Fund (other than the non-exchangeable
Company contribution described in the preceding paragraph) may be exchanged into
other investment choices (subject to the 18-month limitation mentioned above)
only on a Trade Date. It is the current policy of the SARP Administrative
Committee to keep all amounts related to the Company's Stock Fund invested in
Common Stock, except for estimated cash-equivalent reserves which are primarily
used to provide future benefit distributions, future investment exchanges and
other cash needs as determined by the SARP Administrative Committee. Residual
cash remaining after accounting for estimated cash reserves generally will be
used to purchase Common Stock. If cash reserves in the Company Stock Fund are
insufficient at any given time to provide benefit distributions and/or
investment exchanges, shares held by the Company Stock Fund may be offered for
sale on the Internal Market. Exchanges out of the Company Stock Fund may be
deferred until such time, if ever, that sufficient cash is available to make
required benefit distributions and provide for investment exchanges.
Accordingly, investment exchanges of participants' investments held in the
Company Stock Fund may be restricted. See "Risk Factors -- Absence of a Public
Market" and "Market Information -- The Internal Market."
The following tables summarize as of the dates indicated, the
investment performance of each of the nationally traded mutual funds in which
SARP funds can be invested, since December 31, 1993. The summary is based on an
initial investment of $100.00 on each investment alternative.
Merrill Lynch Corporate Bond Fund - High Income Portfolio
% Increase
Unit Value From Prior Year
12/31/93 $100.00 --
12/31/94 $97.32 (2.68%)
12/31/95 $115.21 18.38%
12/31/96 $129.55 12.45%
Merrill Lynch Capital Fund
Unit Value % Increase
12/31/93 $100.00 --
12/31/94 $100.91 0.91%
12/31/95 $134.08 32.87%
12/31/96 $151.07 12.67%
Merrill Lynch Basic Value Fund
Unit Value % Increase
12/31/93 $100.00 --
12/31/94 $101.97 1.97%
12/31/95 $135.52 32.90%
12/31/96 $159.66 17.81%
Merrill Lynch Retirement Preservation Trust
Unit Value % Increase
12/31/93 $100.00 --
12/31/94 $106.19 6.19%
12/31/95 $113.08 6.49%
12/31/96 $120.32 6.40%
Merrill Lynch Equity Index Trust
Unit Value % Increase
12/31/93 $100.00 --
12/31/94 $101.02 1.02%
12/31/95 $138.62 37.22%
12/31/96 $169.98 22.62%
Merrill Lynch Global Allocation Fund
Unit Value % Increase
12/31/93 $100.00 --
12/31/94 $98.00 (2.00%)
12/31/95 $121.24 23.71%
12/31/96 $140.87 16.19%
Fidelity Advisor Equity Growth Fund
Unit Value % Increase
12/31/93 $100.00 --
12/31/94 $97.31 (2.69%)
12/31/95 $115.20 18.38%
12/31/96 $129.54 12.45%
AIM Constellation Fund
Unit Value % Increase
12/31/93 $100.00 --
12/31/94 $101.30 1.3%
12/31/95 $137.22 35.46%
12/31/96 $159.55 16.27%
Templeton Foreign Fund
Unit Value % Increase
12/31/93 $100.00 --
12/31/94 $100.30 0.3%
12/31/95 $111.48 11.15%
12/31/96 $131.55 18.00%
Company Stock Fund
Because the Company's Common Stock has not been publicly traded since
1988, there has not been any historical market-determined price
The average price per share figures shown below for December 31, 1993
through December 31, 1994, reflect market values established by the Board of
Directors for purposes of sales under the former Management Employees Stock
Purchase Plan and for transactions under the Stockholders Agreement. The Board's
determination was based on its review of valuations of the Common Stock made
annually by an independent appraiser for the ESOP Trust. The price per share for
December 31, 1995 and later dates is based upon the Formula Price.
From and after May 10, 1995, the Board of Directors has determined that
the price per share will equal the Formula Price described herein. There can be
no assurance that the Common Stock will in the future provide returns comparable
to historical returns, or that the Formula Price will provide returns similar to
those for past transactions that were based on prices other than the Formula
Price. Because the prices listed in the table below were developed under
differing valuation methods for differing purposes, they are not fully
comparable with the Formula Price.
Average price % Increase From Prior
Date per share Unit Value(1) Period
12/31/93 $9.35 $100.00 --
12/31/94 $11.86 $126.85 26.85%
12/31/95 $14.90 $159.36 26.12%
12/31/96 $19.00 $203.21 27.64%
2/16/97 $20.00 $213.90 5.26%
(1) Based upon an initial investment of $100.00 in DynCorp Common Stock.
Vesting
Under the SARP as currently in effect, each participant is 100% vested
in those portions of his or her SARP account which are attributable to the
participant's salary deferrals and earnings thereon. Entitlement to the Stock
Match will vest at the rate of 50% after two years of service and 100% after
three years of service, provided the underlying matched investment in the
Company Stock Fund is held the requisite 18-month period.
Loans
Loans are available from the SARP account to all participants. Loans
have a maximum limit of $50,000 reduced by the participant's highest aggregate
outstanding loan balance during the preceding 12-month period. Loans are further
limited to 50% of a participant's vested interest in his or her eligible
accounts (these loans from SARP may not exceed the vested value in the SARP less
vested amounts invested in the Company Stock Fund). Loans must (i) bear a
reasonable rate of interest, (ii) be adequately secured, (iii) state the date
upon which the loans must be repaid, which in any event may not exceed five
years from the date on which the loan is made, unless the proceeds are used for
the purchase of a principal residence, in which case repayment may not exceed 30
years, and (iv) be amortized with level payments, made not less frequently than
quarterly, over the term of the loan. The Company currently requires that loans
be repaid through payroll deductions. The loan documents provide that 50% of the
participant's vested account balances are security for the loan, and the SARP,
therefore, has a lien against such balances. A loan will result in a withdrawal
of the borrowed amounts from the participant's interest in the Funds against
which the loan is made and, to the extent that cash assets in accounts other
than the Company Stock Fund are required, a portion of the investment in the
Company Stock Fund may need to be transferred. Principal and interest payments
on the loan are allocated to the account(s) of the borrowing participant in
accordance with the current investment choices of the participant.
Distributions and Withdrawals
If a participant's employment with the Company terminates, the
participant is entitled to receive a single distribution of his or her entire
interest in his or her SARP account as soon as practicable following the date of
such termination. In the event a participant dies while employed by the Company,
the SARP Administrative Committee will direct the Trustee to make a single
distribution of the participant's entire interest in his or her SARP account to
the participant's spouse, or, if such spouse has given proper consent or if the
participant has no spouse, to the Beneficiary designated by the participant. In
the event the Company determines that the participant has suffered a permanent
disability while employed by the Company, the Company will direct the Trustee to
make a single distribution of the participant's entire interest in his or her
SARP account to the disabled participant.
Except in the case of qualifying hardship, no withdrawals may be made
from the salary deferral portion of a participant's SARP account prior to his or
her termination of employment unless and until he or she attains the age of 59
1/2. Any withdrawals made thereafter may be made only once in each Plan Year. In
the absence of a qualified court order to the contrary, a participant's interest
in the SARP may not be voluntarily or involuntarily assigned or hypothecated.
The Company has established procedures for hardship withdrawals including (i)
definition of qualifying hardships, (ii) requirements for having first withdrawn
all voluntary after-tax contributions from any other Company retirement plans
and having received the maximum loans available under such plans, and (iii)
requirement for a 12-month suspension from making elective deferrals into SARP
following the hardship withdrawal.
All distributions, including withdrawals, from the SARP are paid in
cash, except that the portion of SARP balances represented by Common Stock shall
be distributed in kind, which shares of Common Stock will be subject to the
Company's right of first refusal in the event that the participant desires to
sell such shares other than on the Internal Market. See "Description of Capital
Stock -- Restrictions on Common Stock."
Employee Stock Ownership Plan
The ESOP was established effective January 1, 1988, as the Company's
principal retirement plan. It succeeded the DynCorp defined benefit qualified
Pension Plan which was terminated in November, 1988, following the LBO.
Following termination of the Pension Plan, approximately $10 million of excess
Pension Plan assets were rolled over into the ESOP for the benefit of ESOP
participants who were also Pension Plan participants.
Trustees and Administration
The ESOP is administered by the ESOP Committee, consisting of T. E.
Blanchard, a former employee of the Company, L. A. Emmerichs and J. C. Zall,
employees of the Company. Their address is 2000 Edmund Halley Drive, Reston,
VA 20191. The members of the ESOP Committee also serve as trustees of the ESOP.
Eligibility and Participation
Generally, all employees, except groups or units designated as
ineligible, participate in the ESOP. As of December 31, 1996, there were
approximately 30,000 participants in the ESOP, including terminated, vested
participants.
Contributions, Allocations, and Forfeitures
For the Plan Year ended December 31, 1996 the Company contributed
approximately $13.7 million to the ESOP. The amount of the Company's annual
contribution to the ESOP is determined by, and within the discretion of, the
Board of Directors, subject to certain limitations. See "General Provisions of
the ESOP and SARP." The Company's annual contribution to the ESOP may be in the
form of cash, Common Stock or other qualifying securities. Participants may not
make voluntary contributions to the ESOP. The Company's current practice has
been to make pro-rata contributions quarterly.
Company contributions to the ESOP for each Plan Year are generally
allocated to the accounts of participants in the ratio which each such
participant's eligible compensation bears to the total eligible compensation of
all such participants. Forfeitures, if any, of the non-vested portion of
terminated participants' accounts are allocated to the accounts of remaining
participants who are entitled to receive an allocation of the Company
contribution. Forfeitures are allocated in the ratio which each such remaining
participant's allocation bears to the total allocation of all such remaining
participants.
Investment of Funds
Although it is generally intended that the assets of the ESOP will be
invested in Company stock, the ESOP may hold cash and liquid investments pending
purchase of Company stock and current cash needs. The exact number of shares of
Common Stock, if any, which may be purchased by the Trustee of the ESOP in the
future will depend on various factors, including any modifications to the ESOP
adopted either in response to changes or modifications in the laws and
regulations governing the ESOP or at the discretion of the Company's management.
Participants who have attained the age of 55 and have ten or more years of
participation are entitled, pursuant to the terms of the ESOP and ESOP Committee
procedures, to receive distributions of a percentage of their balances in the
ESOP. It is the current policy of the ESOP Committee to keep all amounts
invested in Common Stock, except for estimated cash reserves which are primarily
used to provide future benefit distributions, future investment exchanges and
other cash needs as determined by the ESOP Committee. If residual cash reserves
in the ESOP are insufficient to provide cash benefit distributions and/or
investment exchanges and the "put option" described below is not applicable, the
ESOP Committee may offer shares of Common Stock for sale on the Internal Market.
Exchanges out of Company stock may be deferred until such time, if ever, that
sufficient cash is available to make required benefit distributions and provide
for investment exchanges. Accordingly, investment exchanges of participant's
investments held in the ESOP may be restricted. See "Risk Factors -- Absence of
a Public Market" and "Market Information -- The Internal Market."
Vesting
The ESOP vesting schedule currently provides that a participant's
interest vests 50% after two years of service, 75% after 3 years of service, and
100% after 4 years of service, so that each participant's interest becomes fully
vested after the participant is credited with four years of service. A
participant's interest also becomes fully vested, notwithstanding the fact that
the participant has not yet been credited with four years of service, at the
time of such participant's attainment of the age of 65, permanent disability, or
death while employed by the Company.
Distributions and Withdrawals
In the event that an employee participating in the ESOP is terminated,
retires, dies or becomes disabled while employed by the Company, the Company is
obligated to repurchase shares of Common Stock distributed to such former
employee under the ESOP until such time as the Common Stock becomes "Readily
Tradable Stock," as defined in the ESOP plan documents. This "put option" gives
the holder of such shares the right to require the ESOP (or, if the ESOP is
unable to honor the put, the Company) to purchase all or a portion of such
shares at the ESOP Share Price during two limited time periods. The first of
these periods is the 60-day period following the date on which the shares are
distributed out of the ESOP, and the second is the 60-day period following
notification by the ESOP of the valuation of the Common Stock as soon as
practicable after the beginning of the Plan Year commencing after such
distribution. Such shares will also be subject to a right of first refusal by
the Company in the event that the participant desires to sell such shares other
than on the Internal Market. See "Description of Capital Stock -- Restrictions
on Common Stock."
The ESOP Share Price is actually two different prices. One price is
applicable to shares first acquired by the ESOP in 1988, incidental to the
leveraged buy-out, which constituted a controlling portion of the outstanding
Common Stock of the Company; these shares bear an "enterprise value" which, as
of December 31, 1996, was determined by the independent appraisal firm for the
committee administering the Company's qualified retirement plans to be $23.70
per share. The other price is applicable to shares acquired by the ESOP
subsequent to 1988, which carried no such controlling factor; these shares bear
a "minority value" which, as of December 31, 1996, was determined by such
appraisal firm to be $20.00 per share. Each participant's accounts tracks the
number of enterprise value shares and minority value shares allocated to such
account and distributable at any given time and distributions are made pro rata
from the two types of shares. If a share is put to the ESOP (or the Company)
pursuant to the put option, the applicable ESOP Share Price (depending upon
whether such shares bears an enterprise value or a minority value) is payable
therefor.
The Company estimates an aggregate annual commitment to repurchase
shares from the ESOP participants as follows $4.8 million in 1997, $7.3 million
in 1998, $6.8 million in 1999, $7.8 million in 2000, $10.8 million in 2001 and
$98.9 million thereafter. To the extent that the Company repurchases shares as
described above, its ability to purchase shares on the Internal Market will be
adversely affected. See "Risk Factors -- The Company May be Obligated to
Repurchase Shares of Certain ESOP Participants."
Participants are not permitted to make withdrawals under the ESOP prior
to termination of employment. In the absence of a qualified domestic relations
order to the contrary, a participant's interest in the ESOP may not be
voluntarily or involuntarily assigned or hypothecated. Any permitted designee
will be subject to the same rules and limitations applicable to the participant.
General Provisions of the ESOP and SARP
The ESOP and SARP (collectively, the "Plans") each contain the
following provisions:
Contribution Limitations
The maximum contribution for any Plan Year which the Company may make
to all Plans for the benefit of a participant (including contributions to the
SARP as a result of salary deferral elections by participants), plus
forfeitures, may not exceed the lesser of (i) $30,000 or (ii) 25% of the
participant's compensation.
Administration
The Plans are administered, respectively, by the SARP Administrative
Committee and the ESOP Committee, whose members are appointed by and serve at
the discretion of the Company's Board of Directors. The members of the
Committees who are employees of the Company receive no compensation from the
Plans for services rendered in connection therewith.
The Committees have the power to supervise administration and control
of each Plan's operations including the power and authority to (i) allocate
fiduciary responsibilities, other than trustee responsibilities, among the Named
Fiduciaries, (ii) designate agents to carry out responsibilities relating to the
Plan, other than fiduciary responsibilities, (iii) employ legal, actuarial,
medical, accounting, programming and other assistance as the Committee may deem
appropriate in carrying out the Plan, (iv) establish rules and regulations for
the conduct of the Committee's business and the administration of the Plan, (v)
administer, interpret, construe and apply the Plan and determine questions
relating to the eligibility, the amount of any participant's service and the
amount of benefits to which any participant or beneficiary is entitled, (vi)
determine the manner in which Plan assets are disbursed and (vii) direct the
Trustee regarding investment of Plan assets, subject to the directions of
participants when provided for in the Plans.
Pass Through Voting and Tendering of Common Stock
Each participant in the Plans has the right to instruct the Trustee on
a confidential basis as to how to vote his or her proportionate interest in all
shares of Common Stock held in the various Plans. The Trustee will vote all
allocated shares held in the Plans as to which no voting instructions are
received, together with all unallocated shares held in the ESOP, in the same
proportion as the allocated shares in each Plan for which voting instructions
have been received are voted. The Committees are required to notify participants
of their pass through voting rights prior to each meeting of stockholders.
In the event of a tender or exchange offer for the Company's
securities, each participant in the Plans has the right, under current Plan
procedures, to instruct the Trustee on a confidential basis whether or not to
tender or exchange his or her proportionate interest in all shares of Common
Stock held in the various Plans. The Trustee will not tender or exchange any
allocated shares with respect to which no instructions are received from
participants. Shares held in the Plans which have not yet been allocated to the
accounts of participants will be tendered or exchanged by the Trustee, on a
Plan-by-Plan basis, in the same proportion as the allocated shares held in each
Plan are tendered or exchanged.
The Trustee's duties with respect to voting and tendering of Common
Stock are governed by the fiduciary provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). These fiduciary provisions of ERISA
may require, in certain limited circumstances, that the Trustee override the
votes, or decisions whether or not to tender, of participants with respect to
Common Stock and to determine, in the Trustee's best judgment, how to vote the
shares or whether or not to tender the shares.
Trustee
Generally, the Trustee has all the rights afforded a trustee under
applicable law, although the Trustee generally may exercise those rights at the
direction of the Committee. Subject to this limitation and those set forth in
the Plans and master trust agreement, the Trustee's rights include, but are not
limited to, the right to (i) invest and reinvest the funds held in the Plans'
trust in any investment of any kind, including qualifying employer securities
and qualifying employer real property as such investments are defined in Section
407(d) of ERISA, and contracts issued by insurance companies, including
contracts under which the insurance company holds Plan assets in a separate
account or commingles separate accounts managed by the insurance company, (ii)
retain or sell the securities and other property held in the Plans' trust, (iii)
consent or participate in any reorganization or merger in regard to any
corporation whose securities are held in the Plans' trust (subject, in the case
of the Company's securities, to the participants' pass-through voting rights and
right to instruct the Trustee in the event of a tender or exchange offer) and to
pay calls or assessments imposed on the holder thereof and to consent to any
contract, lease, mortgage or purchase or sale of any property between such
corporation and any other parties, (iv) exercise all the rights of the holder of
any security held in the Plans' trust, including the right to vote such
securities (subject, in the case of the Company's securities, to the
participants' pass-through voting rights), convert such securities into other
securities, acquire additional securities and exchange such securities (subject,
in the case of the Company's securities, to the participants' right to instruct
the Trustee in the event of a tender or exchange offer), (v) vote proxies and
exercise any other similar rights of ownership, subject to the Committee's right
to instruct the Trustee as to how (or the method of determining how) the proxies
should be voted or such rights should be exercised and (vi) lend to participants
in the Plans such amounts as the Committee directs.
The Trustee's compensation and all other expenses incurred in the
establishment, administration and operation of the Plans are borne by the
respective Plans unless the Company elects to pay such expenses.
Administrative and Custodial Services
The Company has entered into an administrative services agreement with
Buck, pursuant to which Buck performs specified administrative services for the
SARP, principally related to accounting and recordkeeping. Buck's fees for these
administrative services are borne by the SARP.
Account Statements
Each participant is furnished with a statement of his or her accounts
in the respective Plans, no less than annually.
Amendment and Termination
The Company has reserved the right to amend each of the Plans at any
time and for any reason, except that no such amendment may have the effect of
(i) generally causing any assets of the Plan trusts to be used for or diverted
to any purposes other than providing benefits to participants and their
beneficiaries and defraying expenses of the Plans, except as permitted by
applicable law, (ii) depriving any participant or beneficiary, on a retroactive
basis, of any benefit to which they would otherwise be entitled had the
participant's employment with the Company terminated immediately prior to the
amendment or (iii) increasing the liabilities or responsibilities of a Trustee
or an investment manager without its written consent.
The Company has also retained the right to terminate any of the Plans
at any time and for any reason. In addition, the Company may discontinue
contributions to the Plans; provided, however, that any such discontinuation of
contributions shall not automatically terminate the Plans as to funds and assets
then held by the Trustee.
ERISA
Each of the Plans is subject to ERISA, including reporting and
disclosure obligations, fiduciary standards and the prohibited transaction rules
of Title I thereof. Since each of the Plans is an individual account plan under
ERISA, neither of the Plans is subject to the jurisdiction of the Pension
Benefit Guaranty Corporation ("PBGC") under Title IV of ERISA, and the Plans'
benefits are not guaranteed by the PBGC.
Federal Income Tax Consequences
In the Company's view, the following discussion includes a description
of all material federal income tax considerations relating to the Plans. The
Company has not received an opinion of counsel with respect to this discussion.
Each of the Plans is qualified under Section 401(a) of the Code.
Qualification of the Plans under Section 401(a) of the Code has the following
federal income tax consequences:
(a) A participant will not be subject to federal income tax on Company
contributions to the Plans at the time such contributions are made.
(b) A participant will not be subject to federal income tax on any
income or appreciation with respect to such participant's accounts under the
Plans until distributions are made (or deemed to be made) to such participant.
(c) A participant and the Company will not be subject to federal
employment taxes on Company contributions to the Plans, except as set forth
below with respect to certain Company contributions to the SARP.
(d) The Plans will not be subject to federal income tax on the
contributions to them by the Company and will not be subject to federal income
tax on any of their income or realized gains, assuming that the Plans do not
realize any unrelated business taxable income.
(e) Eligibility for participation in the Plans will preclude or
restrict an employee from making deductible contributions to an Individual
Retirement Account ("IRA"), depending on the employee's marital status and
adjusted gross income ("AGI") for the year. If an employee or his or her spouse
is covered by an employer-maintained retirement plan (such as any of the Plans),
an IRA deduction is available only if the participant's AGI does not exceed a
certain phase-out level. To the extent that the IRA deduction is limited under
these provisions, a non-deductible IRA contribution is permitted (in an amount
equivalent to the reduction in the deductible IRA amount).
(f) Subject to the contribution limitations contained in the Plans, the
Company will be able to deduct the amounts that it contributes under the Plans,
with the amount of such deduction generally equaling the amount of the
contributions.
(g) Distributions from the Plans will be subject to federal income tax
under special, complex rules that apply generally to distributions from
tax-qualified retirement plans. In general, a single distribution from any of
the Plans will be taxable in the year of receipt at regular ordinary income
rates (on the full amount of the distribution, exclusive of the amount of the
participant's voluntary, non-deductible contributions made to those Plans which
previously permitted such contributions) unless the distributee is eligible for
and elects (i) to make a qualifying "rollover" of the amount distributed to an
IRA or another qualified plan or (ii) to utilize 10-year averaging, 5-year
averaging or partial capital gains taxation of the distribution. However, the
tax on any portion of the qualifying lump sum distribution represented by "net
unrealized appreciation" in Common Stock distributed shall be deferred until a
subsequent sale or taxable disposition of the shares, unless the distributee
elects not to have this deferral apply.
A "lump sum distribution," for purposes of eligibility for deferral of
tax on net unrealized appreciation, is defined as a distribution of the
employee's entire vested interest under the Plan within one taxable year (i) on
account of the participant's death or other separation from service or (ii)
after the participant has attained age 59 1/2. For a lump sum distribution to be
eligible for 5-year averaging, the participant also must have been a participant
in the Plan from which the distribution is made for at least five years prior to
the year of distribution and must have attained age 59 1/2 when the distribution
is received. Under a special transition rule, an individual who had attained age
50 on January 1, 1986, and who would otherwise be entitled to elect 5-year
averaging (without regard to the age 59 1/2 requirement) may instead make a
one-time election of 10-year averaging (at 1986 rates) and may elect to have the
pre-1974 portion of the distribution taxed at 1986 capital gains rates. The
special 5-year or 10-year averaging treatment, as well as partial capital gains
treatment, of lump sum distributions is applicable to a lump sum distribution
from a Plan only if all other lump sum distributions (whether or not from the
same Plan or plans of a similar type) received during the same taxable year by
the participant are treated in the same manner. Hence, for example, if a
participant receives a lump sum distribution from the SARP and ESOP in the same
taxable year, he or she could not elect to use 5-year or 10-year averaging on
the SARP distributions while electing a rollover to an IRA of the distribution
from the ESOP.
"Early" distributions from the Plans will result in an additional 10%
tax on the taxable portion of the distribution, except to the extent the
distribution (i) is rolled over into an IRA or other qualified plan or (ii) is
used for deductible medical expenses. "Early" distributions are in-service
distributions (i.e., prior to termination of employment) prior to the date the
participant attains age 59 1/2 unless due to the permanent disability of the
participant, and distributions made following termination of service unless due
to the death of the participant or made to a participant who terminated
employment during or after the calendar year the participant attained the age of
55.
(h) A participant (or his or her spouse in the event of the
participant's death) who (i) receives a distribution from the Plans (other than
certain mandatory distributions after age 70 1/2) and (ii) wishes to defer
immediate tax upon receipt of such distributions, may transfer (i.e.,
"rollover") all or a portion thereof, exclusive of the amount of the
participant's voluntary nondeductible contributions (made to those Plans which
previously permitted the participant to make voluntary nondeductible
contributions) received in the distribution, to either an IRA or, in the case of
a participant, another qualified retirement plan. To be effective, the
"rollover" must be completed within 60 days of receipt of the distribution.
Alternatively, the participant or spouse may request a direct rollover from the
Plans to an IRA or, in the case of a participant, to another qualified
retirement plan.
A participant (or his or her spouse) who does not arrange a direct
rollover to an IRA or another qualified plan will be subject to mandatory
federal income tax withholding at a rate of 20% of the taxable distribution,
even if the participant or spouse later makes a rollover within the 60-day
period. However, in no event may the amount withheld exceed the amount of a
participant's distribution, excluding any Common Stock received by the
participant in the distribution.
A participant (or his or her spouse) who makes a valid "rollover" to an
IRA will defer payment of federal income tax until such time as such participant
(or his or her spouse) actually begins to receive distributions from the IRA.
IRA earnings accumulate on a tax-deferred basis until actually distributed;
however, IRA funds generally may not be withdrawn without penalty until a
participant (or his or her spouse) (i) attains the age of 59 1/2, (ii) becomes
disabled or (iii) dies. The Code requires that distributions from an IRA or a
qualified retirement plan begin no later than April 1 of the taxable year
following the year in which an individual attains the age of 70 1/2, at which
time periodic distributions may continue for the participant's lifetime or for a
lifetime of the participant and the participant's spouse.
(i) The Code imposes a 15% excise tax on "excess distributions" to an
individual from all qualified retirement plans and IRAs (whether or not plans of
the same employer). In general, an "excess distribution" is a distribution or
distributions in excess of $112,500 in any calendar year (adjusted for
cost-of-living increases). This limit is increased to $562,500 (also adjusted
for cost-of-living) in the case of a lump sum distribution as to which a
qualified recipient elects 5-year or 10-year averaging treatment. Also, an
individual was entitled to elect on his or her 1988 federal income tax return to
exclude benefits accrued as of August 1, 1986, but these benefits are considered
in determining whether additional accrued benefits are subject to the tax. For
those individuals who did not elect this special rule, the $112,500/$562,500
limit is increased to $160,000/$800,000. The excess distribution excise tax has
been suspended with respect to distributions received during the period from
January 1, 1997 to December 31, 1999.
In addition to the federal income tax consequences applicable to all of
the Plans, the Deferred Fund of the SARP is intended to be a qualified "cash or
deferred arrangement" under Section 401(k) of the Code. A participant in the
SARP who elects to defer a portion of his or her compensation and have the
Company contribute it to the SARP will not be subject to federal income tax on
the amounts contributed at the time the contributions are made. However, these
contributions will be subject to social security taxes and certain federal
unemployment taxes. Elective deferrals by a participant to his or her SARP
account is limited to $7,000 annually (adjusted for cost-of-living). This annual
limit applies on an employee-by-employee basis to all 401(k) plans (including
plans of other employers) in which the employee participates. For calendar year
1997, the adjusted limit is $9,500.
Generally, the Company will be able to deduct the amounts that it
contributes to the SARP pursuant to employee elections to defer a portion of
their compensation, as well as any matching or additional Company contributions
it makes to the Deferred Fund. The deduction will be equal to the amount of
contributions made.
With respect to loans from the SARP commencing after December 31, 1986,
any interest paid by the participant will not be deductible, regardless of the
purpose of the loan or use of the loan proceeds. Moreover, interest paid on any
loan from any of the Plans by a "key employee," as defined in Section 416(i) of
the Code, will not be deductible.
Participants should consult their own tax advisors with respect to all
federal, state and local tax effects of participation in the Plans. Moreover,
the Company does not represent that the foregoing tax consequences will apply to
any particular participant's specific circumstances or will continue to apply in
the future and makes no undertaking to maintain the tax-qualified status of the
Plans.
1995 Employee Stock Purchase Plan
General
The 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan" or
"ESPP") was adopted on May 10, 1995, and it became effective July 1, 1995. The
Stock Purchase Plan is intended to qualify under Section 423(b) of the Code. The
Stock Purchase Plan provides for the purchase of Common Stock by participating
employees through voluntary payroll deductions. At each Trade Date, the Stock
Purchase Plan will purchase for the account of each participant that whole
number of shares of Common Stock which may be acquired with the funds available
in the participant's stock purchase account, together with the Company's
contribution described below. The Stock Purchase Plan is not subject to ERISA.
Eligibility
Generally, all of the Company's employees are eligible to participate
in the Stock Purchase Plan. No employee, however, who owns capital stock of the
Company having more than five percent of the voting power or value of such
capital stock will be able to participate. An employee's eligibility to
participate in the Stock Purchase Plan will terminate immediately upon
termination of employment with the Company.
Employees may participate in the Stock Purchase Plan by completing a
payroll deduction authorization in accordance with Company policy. The minimum
payroll deduction allowed is $7.00 per week and the maximum allowable deduction
is $450 per week. Further, no employee is entitled to purchase an amount of
Common Stock having a value (measured as of its purchase date) in excess of
$25,000 in any calendar year pursuant to the Stock Purchase Plan and any other
employee stock purchase plan that may be adopted by the Company.
Purchase of Shares/Discount
Shares of Common Stock purchased under the Stock Purchase Plan will be
acquired by the ESPP on the Internal Market. See "Market Information -- The
Internal Market." Contributions by participants under the Stock Purchase Plan
will be used by the ESPP to purchase shares at a discount established from time
to time by the Compensation Committee, but not to exceed 15% of the prevailing
Formula Price. The Company will either pay the discount portion to the ESPP in
cash, or will deliver to the ESPP a sufficient number of shares having a value
equal on the applicable Trade Date to the aggregate amount of the discount. The
Board of Directors has established the discount rate at 5%. A total of 100,000
shares has been reserved for possible issuance under the ESPP in satisfaction of
this contribution obligation.
Distribution and Withdrawals
Shares of Common Stock acquired under the Stock Purchase Plan will be
allocated to each participant's account immediately following each quarterly
Trade Date in which the acquisition occurred.
Pursuant to the By-Laws, all shares of Common Stock purchased pursuant
to the Stock Purchase Plan will be subject to the Company's right of first
refusal in the event that the participant desires to sell such shares other than
on the Internal Market.
See "Description of Capital Stock -- Restrictions on Common Stock."
Participants may withdraw the money held in their stock purchase
accounts at any time prior to the acquisition of shares of Common Stock
therewith, although upon doing so the participant will not be eligible to
participate in the Stock Purchase Plan until 12 months after such withdrawal. No
interest will be paid on the money held in the stock purchase accounts of the
participants.
Amendment and Termination
The Board of Directors of the Company may suspend or amend the Stock
Purchase Plan in any respect, except that no amendment may (i) increase the
maximum number of shares authorized to be issued by the Company under the Plan,
(ii) increase the Company's contribution for each share purchased above 15% of
the applicable purchase price for such share, (iii) cause the Stock Purchase
Plan to fail to qualify under Section 423(b) of the Code or (iv) deny to
participating employees the right at any time to withdraw from the Stock
Purchase Plan and thereupon obtain all amounts then due to their credit in their
Stock Purchase Accounts. The Stock Purchase Plan will terminate on December 31,
1999, unless extended by the Board of Directors.
Administration
The Stock Purchase Plan is administered by the Compensation Committee.
Members of the Compensation Committee receive no compensation from the Stock
Purchase Plan for services rendered in connection therewith. The current
members of the Compensation Committee are H. S. Winokur, Jr., R. E. Dougherty,
and D. C. Mecum II. The address of each such person is 2000 Edmund Halley
Drive, Reston, Virginia 20191.
Federal Income Tax Consequences
In the Company's view, the following discussion includes a description
of all material federal income tax considerations relating to the Stock Purchase
Plan. The Company has not received an opinion of counsel with respect to this
discussion.
For federal income tax purposes, no taxable income will be recognized
by a participant in the Stock Purchase Plan until the taxable year of sale or
other disposition of the shares of Common Stock acquired under the ESPP. When
the shares are disposed of by a participant more than two years after the date
such shares were purchased for the participant's account by the ESPP, the
participant must recognize ordinary income for the taxable year of disposition
to the extent of the lesser of (i) excess of the fair market value of the shares
on the purchase date over the amount of the purchase price paid by the
participant (the "Discount") or (ii) the amount by which the fair market value
of the shares at disposition or death exceeds the purchase price, with any gain
in excess of such ordinary income amount being treated as a long term capital
gain, assuming that the shares are a capital asset in the hands of the
participant. In the event of a participant's death while owning shares acquired
under the Stock Purchase Plan, ordinary income must be recognized in the year of
death in the amount specified in the foregoing sentence. When the shares are
disposed of prior to the expiration of the two-year holding period (a
"disqualifying disposition"), the participant must recognize ordinary income in
the amount of the Discount, even if the disposition is by gift or is at a loss.
In the case discussed above (other than death), the amount of ordinary
income recognized by a participant is added to the purchase price paid by the
participant and this amount becomes the tax basis for determining the amount of
the capital gain or loss for the disposition of the shares.
The Company will not be entitled to a deduction at any time for the
shares issued in satisfaction of the discount obligation, if a participant
holding such shares continues to hold his or her shares or disposes of his or
her shares after the required two-year holding period or dies while holding such
shares. If, however, a participant disposes of such shares prior to the
expiration of the two-year holding period, the Company is allowed a deduction to
the extent of the amount of ordinary income includable in gross income by such
participant for the taxable year as a result of the premature disposition of the
shares.
Participants should consult their own tax advisors with respect to all
federal, state and local tax effects of participation in the Stock Purchase
Plan. Moreover, the Company does not represent that the foregoing tax
consequences will apply to any participant's specific circumstances or will
continue to apply in the future and makes no undertaking to maintain the
tax-qualified status of the Stock Purchase Plan.
1995 Stock Option Plan
General
The 1995 Option Plan was approved by the Company's Board of Directors
on February 10, 1995, and it became effective July 1, 1995. The 1995 Option Plan
authorizes the granting of non-qualified stock options with respect to an
aggregate of 1,250,000 shares of Common Stock, during the period July 1, 1995
through December 31, 1999. As of April 25, 1997, 6,200 such options have been
exercised and 842,000 are outstanding. The Plan will terminate and all
unexercised options will expire on December 31, 2007.
The exercise price of options granted under the 1995 Option Plan is
determined by the Compensation Committee and may not be less than 100% of the
most recent Formula Price of the Common Stock on the date of grant. Upon the
exercise of an option, the exercise price is fully payable, in whole or in part,
in cash or in shares of Common Stock valued at the Formula Price on the date of
exercise. Any withholding required as a result of the exercise of a
non-qualified option may, at the discretion of the Compensation Committee, be
satisfied by withholding in shares of Common Stock of the Company valued at the
Formula Price on the date of exercise. All options granted pursuant to the 1995
Option Plan are non-transferable except by will or the laws of intestate
succession.
Options granted under the 1995 Option Plan may be exercised over a
period specified in the stock option agreement (which period may not exceed
seven years), subject to vesting provisions described below. If an optionee's
employment terminates as a result of death, permanent disability, or retirement
before reaching age 65, all options may be exercised, to the extent vested at
the date of termination, during the six month period following termination, but
in no event after their respective expiration dates. If an optionee retires at
or after age 65, all options, to the extent vested at the date of retirement,
may, for up to one additional year (but in no event later than their respective
expiration dates), be exercised by the optionee or by his legal representative
or permitted assignee. Upon termination of employment for any other reason, all
options (whether or not vested) will terminate as of the date of such
termination of employment, unless otherwise authorized by the Compensation
Committee (but in no event shall the option be exercisable for a period
extending beyond 90 days following such termination).
Eligibility and Participation
The persons eligible to receive options under the 1995 Option Plan are
key employees designated by the Compensation Committee and directors. No option
may be granted to any individual who, at the time the option is granted, owns
more than 10% of the total combined voting power of all classes of capital stock
of the Company.
Vesting of Options
The right to exercise options granted under the 1995 Option Plan shall
vest at the rate of 20% per year during the five-year period following the date
of the grant. Options that are forfeited due to termination of employment or
expiration shall be available for new grants under the Plan. All options shall
expire seven years after the date of grant unless earlier exercised upon
vesting. No grant of options will be made under the 1995 Option Plan that
permits exercise after more than seven years from the date of the grant.
In the event of a change of control involving the Company, all
optionees will be guaranteed either the continuation of a comparable stock
option plan with comparable rights (including identical rights with respect to
options granted prior to such change of control), or the right within a
reasonable period of time following such change of control, not to exceed one
year, to exercise all granted options under the 1995 Option Plan, whether or not
vested.
Amendment and Termination
The 1995 Option Plan may be amended, suspended or terminated by the
Board of Directors, except that no such amendment may, without the approval of
the holders of outstanding shares of the Company having a majority of the
general voting power, (i) increase the maximum number of shares for which
options may be granted (other than by reason of changes in capitalization and
similar adjustments), (ii) change the provisions of the 1995 Option Plan
relating to the establishment of the exercise price (other than the provisions
relating to the manner of determination of fair market value of the Company's
capital stock to conform to any applicable requirements of the Code or
regulations issued thereunder) or (iii) permit the granting of options to
members of the Compensation Committee. No options will be granted under the 1995
Option Plan after December 31, 1999.
General Provisions
All shares issued upon exercise of options granted under the 1995
Option Plan are subject to (i) the Company's right of first refusal in the event
that the optionee desires to sell his or her shares other than on the Internal
Market and (ii) the Company's right of repurchase upon termination of the
optionee's employment or affiliation. See "Description of Capital Stock --
Restrictions on Common Stock. "
Grants of stock options may be contingent upon a requirement that such
individuals purchase a specified number of shares of Common Stock on the
Internal Market at the prevailing Formula Price. The Compensation Committee may
also establish other terms relating to vesting and exercise, such as a target
Formula Price.
If the outstanding shares of the Common Stock of the Company are
changed into, or exchanged for a different number or kind of shares or
securities of the Company through reorganization, merger, recapitalization,
reclassification, or similar transaction, or if the number of outstanding shares
is changed through a stock split, stock dividend, stock consolidation, or
similar transaction, an appropriate adjustment (determined by the Board of
Directors in its sole discretion) will be made in the number and kind of shares
and the exercise price per share of options which are outstanding or which may
be granted thereafter.
Administration
The 1995 Option Plan is administered by the Compensation Committee. The
Compensation Committee is appointed annually by the Board of Directors, which
may also fill vacancies or replace members of the Compensation Committee.
Subject to the express provisions of the 1995 Option Plan, the Compensation
Committee has the authority to (i) interpret the 1995 Option Plan, (ii)
prescribe, amend and rescind rules and regulations relating to the 1995 Option
Plan, (iii) determine the individuals to whom and the time or times at which
options may be granted and the number of shares to be subject to each option
granted under the 1995 Option Plan, (iv) determine the terms and conditions of
the option agreements under the 1995 Option Plan (which need not be identical)
and (v) make all other determinations necessary or advisable for the
administration of the 1995 Option Plan. In addition, the Compensation Committee
may, with the consent of the affected optionees and subject to the general
limitations of the 1995 Option Plan, make any adjustment in the exercise price,
the number of shares subject to, or the term of, any outstanding option by
cancellation of such option and a subsequent re-granting of such option, or by
amendment or substitution of such option. Options which have been so amended,
re-granted or substituted may have higher or lower exercise prices, cover a
greater or lesser number of shares of capital stock, or have longer or shorter
terms, than the prior options. The members of the Compensation Committee receive
no compensation from the 1995 Option Plan for services rendered in connection
therewith.
Federal Income Tax Consequences
In the Company's view, the following discussion includes a description
of all material federal income tax considerations relating to the 1995 Option
Plan. The Company has not received an opinion of counsel with respect to this
discussion.
All options granted under the 1995 Option Plan are non-qualified
options. Generally, the optionee will not be taxed upon grant of any
non-qualified option but rather, at the time of exercise of such option, the
optionee will recognize ordinary income for federal income tax purposes in an
amount equal to the excess of the fair market value at the time of exercise of
the capital stock purchased over the exercise price. The Company will generally
be entitled to a tax deduction at such time and in the same amount that the
optionee realizes ordinary income.
If capital stock acquired upon the exercise of a non-qualified option
is later sold or exchanged, then the difference between the sale price and the
fair market value of such capital stock on the date which governs the
determination of ordinary income is generally taxable (provided the stock is a
capital asset in the holder's hands) as long-term or short-term capital gain or
loss depending upon whether the holding period for such capital stock at the
time of disposition is more or less than one year.
If payment of the exercise price of a non-qualified option is made by
surrendering previously owned shares of capital stock, the following rules
apply:
(a) No gain or loss will be recognized as a result of the surrender of
shares in exchange for an equal number of shares subject to the non-qualified
option;
(b) The number of shares received equal to the shares surrendered will
have a basis equal to the shares surrendered and a holding period that includes
the holding period of the shares surrendered;
(c) Any additional shares received (i) will be taxed as ordinary income
in an amount equal to the fair market value of the shares at the time of
exercise, (ii) will have a basis equal to the amount included in taxable income
by the optionee, and (iii) will have a holding period that begins on the date of
the exercise.
Holders of options granted under the Option Plan should consult their
own tax advisors for specific advice with respect to all federal, state or local
tax effects before exercising any options and before disposing of any shares of
capital stock acquired upon the exercise of an option. Moreover, the Company
does not represent that the foregoing tax consequences apply to any particular
option holder's specific circumstances or will continue to apply in the future.
Executive Incentive Plan
General
The Company's current Executive Incentive Plan (the "EIP") became
effective in 1993. The EIP provides for the annual award of discretionary
bonuses based on the achievement of specific financial and individual
performance goals. The EIP was amended effective January 1, 1996, to provide for
the payment of up to 20% of each award in the form of shares of Common Stock,
based on the most recent Formula Price. 300,000 shares were reserved for
possible issuance under the EIP for calendar years 1996 through 2000. The EIP is
not subject to ERISA and is not intended to be qualified under Section 401(a) of
the Code.
Eligibility and Participation
The officers and key managerial employees of the Company designated by
the Compensation Committee are eligible to participate in and receive bonuses
under the EIP.
Awards
Each year the Company establishes bonus pools representing the
aggregate targeted bonuses negotiated in advance with EIP participants. Awards
under the EIP are generally made based upon the achievement of certain
individual and financial performance criteria. Awards under the EIP are made
based on recommendations of the CEO to the Compensation Committee. Awards of
bonuses under the EIP are generally distributed after the end of the fiscal year
to which the bonus relates. Pursuant to the By-Laws, all shares of Common Stock
awarded under the EIP will be subject to the Company's right of first refusal in
the event that the participant desires to sell such shares other than on the
Internal Market. See "Description of Capital Stock -- Restrictions on Common
Stock." Awards of bonuses, including potential shares of Common Stock may also
be subject to forfeiture, in whole or in part, in the event of the termination
of the recipient's employment or affiliation with the Company prior to the date
for payment of awards.
Pursuant to the EIP, bonuses to the Chief Executive Officer must be
approved by the Compensation Committee. Members of the Compensation Committee
are ineligible to receive awards under the EIP. For services rendered during the
fiscal year ended December 31, 1996, a total of 45 individuals received an
aggregate of 11,636 shares of Common Stock as the stock portion of bonuses under
the EIP.
Federal Income Tax Consequences
In the Company's view, the following discussion includes a description
of all material federal income tax considerations relating to the EIP. The
Company has not received an opinion of counsel with respect to this discussion.
Awards under the EIP of cash bonuses and shares of Common Stock that
are not subject to forfeiture are taxable as ordinary income to the recipient in
the year received.
Recipients of awards under the EIP should consult their own tax
advisors with respect to all federal, state, and local tax effects of
participation in the EIP. Moreover, the Company does not represent that the
foregoing tax consequences will apply to any particular participant's specific
circumstances.
Amendment and Termination
The EIP may at any time be amended or terminated by the Board of
Directors, except that no amendment or termination may, without a recipient's
consent, affect any bonus award previously made to such recipient.
Administration
The EIP is administered by the Compensation Committee.
Multiemployer 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 covering such employees. In 1995, 1994 and 1993, the Company expensed
$2,514,000, $2,367,000 and $2,321,000 respectively, for these plans. In the
event of the termination of, or withdrawal of the Company's participation in,
any such plans, the Company may be liable for its proportionate share of the
plan's unfunded vested benefits liability, if any.
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of 20 million
shares of Common Stock, par value $0.10 per share, of which 8,987,054 are
outstanding, and 123,711 shares of Class C Preferred, par value $0.10 per share,
of which none are outstanding. As of April 25, 1997, there were approximately
487 holders of record of Common Stock.
As of April 25, 1997, there were also outstanding 1,447,876 Warrants to
acquire an identical number of shares of Common Stock at an exercise price of
$0.25 per warrant. Warrants were issued at the rate of 6.6767 Warrants for each
share of Common Stock acquired by certain management and other stockholders on
March 11, 1988 prior to the LBO, and 942,563 Warrants were issued to an
affiliate of the lead bank financing the LBO. A total of 5,066,003 Warrants were
issued in 1988, of which 3,618,127 or 71% have been exercised or surrendered
through April 25, 1997.
The following is a summary of the material provisions of the
Certificate of Incorporation and By-Laws of the Company regarding the Company's
capital stock. The summary is not complete and is qualified in its entirety by
reference to the Certificate of Incorporation and to the By-Laws, copies of
which are incorporated by reference to the Registration Statement of which this
Prospectus is a part.
Common Stock
The holders of Common Stock are entitled to one vote per share held of
record in elections for directors and on all other matters required or permitted
to be approved by a vote of stockholders of the Company. Each share of Common
Stock is equal in respect of rights and liquidation and rights to dividends and
to distributions. Stockholders of the Company do not and will not have any
preferred or preemptive rights to subscribe for, purchase or receive additional
shares of any class of capital stock of the Company, or any options or warrants
for such shares, or any rights to subscribe for or purchase such shares, for any
securities convertible into or exchangeable for such shares, which may be
issued, sold or offered for sale by the Company.
Restrictions on Common Stock
The Board of Directors of the Company amended the By-Laws on May 10,
1995, to provide that, as to any share of Common Stock issued on or after May
11, 1995, such share may not be sold or transferred by the holder thereof to any
third party, other than (1) by descent or distribution, (2) by bona fide gift,
or (3) by bona fide sale after the holder thereof has first offered in writing
to sell the share to the Company at the same price and under substantially the
same terms as apply to the intended sale and the Company has failed or declined
in writing to accept such terms within 14 days of receipt of such written offer
or has refused to proceed to a closing on the transaction within a reasonable
time after such acceptance; provided, however, that the sale to the third party
following such failure, declination, or refusal must be made on the same terms
which were not previously accepted by the Company and within 60 days following
such event, or the Company must again be offered such refusal rights prior to a
sale of such share; provided further, however, that this right does not apply to
(A) any transactions made at the current Formula Price through the Internal
Market; (B) any transactions made at any time while the Common Stock is listed
for trading on a national securities exchange or on the over-the-counter market;
(C) sales to the ESOP; or (D) shares which have been reissued to the holder in
exchange for shares issued prior to May 11, 1995 to the extent such previously
issued shares were not subject to any right of first refusal by the Company or
its stockholders.
Shares of Common Stock purchased on the Internal Market will be subject
to contractual transfer restrictions having the same effect as those contained
in the By-Laws. Prior to trading on the Internal Market, each buyer will be
required to adhere to the Internal Market rules which impose such transfer
restrictions on all shares purchased on the Internal Market. Shares of Common
Stock issued prior to May 11, 1995 and not subsequently purchased on the
Internal Market are not subject to such restrictions. See "Risk Factors -- Right
of First Refusal."
Stockholders Agreement
Substantially all of the members of senior management, Capricorn and
other outside investors are parties to a Stockholders Agreement. The parties to
the Stockholders Agreement, who control approximately 34% of the voting stock on
a fully diluted basis, have agreed, among other things, to certain procedures
for making nominations to and voting on the election of the Directors and
selling shares on the Internal Stock Market or otherwise selling or transferring
DynCorp securities. Effective January 23, 1997, Capricorn waived its prior right
to nominate members to the Board of Directors, but not its obligation to vote in
accordance with the terms of the Stockholders Agreement.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for
the Company by H. Montgomery Hougen, Vice President and Secretary and Deputy
General Counsel of the Company. As of April 25, 1997, Mr. Hougen owned directly
and indirectly 25,078 shares of Common Stock and options to purchase 5,000
shares of Common Stock. Mr. Hougen is the beneficial owner of an additional
3,728 shares through the Company's benefit plans.
EXPERTS
The consolidated financial statements and schedules of the Company as
of and for the year ended December 31, 1996, incorporated by reference in this
Prospectus and elsewhere in this Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
<PAGE>
------------
PROSPECTUS
No dealer, salesperson or any other person has been
authorized to give any information or to make any
representations other than those contained in this
Prospectus in connection with the offer contained herein,
and, if given or made, information or representations 11,969,313 Shares
must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute
an offer of any securities other than those to which it
relates or an offer to sell, or a solicitation of an offer
to buy, to any person in any jurisdiction in which such
offer or solicitation is not authorized, or to any person
to whom it is not lawful to make such an offer or
solicitation. Neither delivery of this Prospectus nor any
sale made hereunder atany time implies that information
contained herein is correct as of any time subsequent to DynCorp logo
the date hereof.
------------------------------ Common Stock
par value $0.10 per share
TABLE OF CONTENTS
Available Information
Certain Information Incorporated by Reference
The Company
Risk Factors
Securities Offered by this Prospectus
Market Information
Use of Proceeds
Employee Benefit Plans
Description of Capital Stock
Validity of Common Stock
Experts
June 20, 1997
<PAGE>
