SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934
For the fiscal year ended December 31, 1997 or
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934
For the transition period from to
Commission file number: 1-3879
DynCorp
(Exact name of registrant as specified in its charter)
Delaware 36-2408747
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 Edmund Halley Drive, Reston, Virginia 20191-3436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 264-0330
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. The registrant's voting stock is not publicly traded;
therefore the aggregate market value of approximately 2% of outstanding voting
stock held by nonaffiliates is not available.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 10,092,215 shares of
common stock having a par value of $0.10 per share were outstanding March 13,
1998.
<PAGE>
TABLE OF CONTENTS
1997
FORM 10-K
Item Page
Part I
1. Business 1-3
2. Properties 3
3. Legal Proceedings 3
4. Submission of Matters to a Vote of Security Holders 3
Part II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters 4-5
6. Selected Financial Data 6-7
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
8. Financial Statements and Supplementary Data
Report of Independent Public Accountants 14
Financial Statements
Consolidated Balance Sheets
Assets 15
Liabilities and Stockholders' Equity 16
Consolidated Statements of Operations 17
Consolidated Statements of Permanent Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20-42
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 42
Part III
10.Directors and Executive Officers of the Registrant 43-44
11.Executive Compensation 45-47
12.Security Ownership of Certain Beneficial Owners and Management 47-49
13.Certain Relationships and Related Transactions 50
Part IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 51-59
<PAGE>
PART I
ITEM 1. BUSINESS
Sections of this Annual Report on Form 10-K contain forward-looking
statements that are based on management's expectations, estimates, projections
and assumptions. Words such as "expects," "anticipates," "plans," "believes,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements that include, but are not limited to,
projections of future performance, assessment of contingent liabilities and
expectations concerning liquidity, cash flow and contract awards. Such
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These statements are not
guarantees of future performance and involve certain risks and uncertainties
that are difficult to predict. Therefore, actual future results and trends may
differ materially from what is forecast in forward-looking statements due to a
variety of factors, including the Company's successful execution of internal
performance plans; the outcome of litigation in process; labor negotiations;
changing priorities or reductions in the U.S. Government defense budget; and
termination of government contracts due to unilateral government action.
General Information
The Company provides diversified management, technical and professional
services to primarily U.S. Government customers throughout the United States and
internationally. Generally, these services are provided under both prime
contracts and subcontracts, which may be fixed-price, time-and-material or
cost-type contracts depending on the work requirements and other individual
circumstances.
The Company provides services to various branches of the Department of
Defense ("DoD") and to the Department of Energy ("DoE"), NASA, the Department of
State, the Department of Justice and various other U.S., state and local
government agencies, commercial clients and foreign governments. These services
encompass a wide range of management, technical and professional services
covering the following areas:
Information and Engineering Technology ("I&ET") designs, develops,
supports and integrates software and hardware systems to provide
customers with comprehensive solutions for information management and
engineering needs. I&ET also provides software and hardware maintenance,
computer center operations, data processing and analysis, database
administration, telecommunications support and operations, maintenance
and operation of integrated electronic systems, and integration of
electronic systems in local and wide area networks. Contracts include the
design and development of a personnel records management system,
including imaging, database and client server technology, for the entire
U.S. Navy, and the provision of basic computer, software, and networking
support to all of the DoE's operations. In addition, this business area
provides services in support of nuclear safeguards and security research
and development. Revenues for 1997, 1996, and 1995 were $282.6 million,
$271.5 million and $271.1 million, respectively.
Aerospace Technology's ("AT") services include technical and evaluation
services at test and training ranges; engineering, manufacturing and
installation of aircraft system upgrades; corrosive repairs and
structural modifications that extend airframe life for the aging fleet of
military aircraft; ground based logistics support and staff augmentation;
engineering and technical services for high-technology space and missile
systems programs; and aircraft maintenance, modification, logistics and
fleet management. These services are provided to the U.S. Government as
well as the United Nations and other foreign organizations at various
locations throughout the world depending on the customer's requirements.
Revenues for 1997, 1996, and 1995 were $449.0 million, $383.3 million and
$319.3 million, respectively.
Enterprise Management ("EM") provides full service, "turn-key" solutions
for the management, operation and maintenance of federal facilities. EM
manages large-scale facilities, using computerized work management and
scheduled maintenance systems to perform roads and grounds maintenance,
civil engineering and custodial services, landfill recycling, disposal
operations, and vehicle and heavy equipment maintenance. Other services
of this business area include testing and evaluation of military hardware
systems at government test ranges, collection and processing of data,
maintenance of targets, ranges and laboratory facilities, health
services, operation of ships, developmental testing of complex weapons
systems, security systems work, and technology transfer into commercial
applications. Revenues for 1997, 1996, and 1995 were $414.3 million,
$366.7 million and $318.3 million, respectively.
<PAGE>
Industry Segments
For business segment reporting, Information and Engineering Technology,
Aerospace Technology and Enterprise Management each comprise reportable business
segments.
Backlog
The Company's backlog of business, which includes awards under both prime
contracts and subcontracts as well as the estimated value of option years on
government contracts, was $3.6 billion at the close of 1997, compared to a
year-end 1996 backlog of $3.0 billion. The backlog at December 31, 1997
consisted of $1.1 billion for both I&ET and EM and $1.4 billion for AT compared
to December 31, 1996 backlog of $0.9 billion for I&ET, $0.6 billion for AT and
$1.5 billion for EM. Of the total backlog at December 31, 1997, $2.6 billion is
expected to produce revenues after 1998: I&ET $0.9 billion, AT $1.0 billion and
EM $0.7 billion.
Contracts with the U.S. Government are generally written for periods of
three to five years. Because of appropriation limitations in the federal budget
process, firm funding is usually made for only one year at a time, and, in some
cases, for periods of less than one year, with the remainder of the years under
the contract expressed as a series of one-year options. The Company's experience
has been that the Government generally exercises these options. Amounts included
in backlog are based on the contract's total awarded value and the Company's
estimates regarding the amount of the award that will ultimately result in the
recognition of revenue. These estimates are based on the Company's experience
with similar awards and similar customers. Estimates are reviewed periodically
and appropriate adjustments are made to the amounts included in backlog and
unexercised contract options. Historically, these adjustments have not been
significant. In 1997, the Company had prime contract revenue of approximately
72% from the U.S. Government, 45% attributable to the Department of Defense.
Competition
The markets which the Company services are highly competitive. In each of
its business areas, 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, non-profit
institutions and U.S. Government agencies. Many of the Company's competitors are
large, diversified firms with substantially greater financial resources and
larger technical staffs than the Company has available. 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 is
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.
Foreign Operations
The Company has a 5% minority investment in an unaffiliated company in Saudi
Arabia, but is in the process of selling its investment to one of the
Saudi stockholders. Other activities of the Company presently include the
providing of services in foreign countries under contracts with the U.S.
Government, the United Nations, and other foreign customers. None of these
foreign operations is normally material to the Company's financial position or
results of operations; however, in 1995 the Company's Mexican operations
reported a loss of $4.4 million related to contract completion and
discontinuation of the operations (see Management's Discussion and Analysis of
Revenue and Gross Margin).
The risks associated with the Company's foreign operations in regard to
foreign currency fluctuation and political and economic conditions in foreign
countries have not been significant.
Incorporation
The Company was incorporated in Delaware in 1946.
<PAGE>
Employees
As of December 31, 1997, the Company had approximately 16,100 employees,
approximately 1,600 of which were located outside of the United States.
Approximately 2,700 of the Company's U.S. employees are covered by various
collective bargaining agreements with labor unions.
At year-end, the Company had approximately 300 vacant positions, a majority
of which were for Information Technology ("IT") professionals. The scarcity of
IT professionals is a common predicament within the industry. The Company is
actively recruiting to fill these vacancies utilizing extensive advertising,
participation in job fairs, sign-on bonuses and other recruitment incentives.
During 1997, the Company experienced turnover in several senior management
positions. The President of I&ET resigned at the end of the third quarter and
the Vice President of Business Development was named the Acting President until
a replacement can be found. This change has not had a negative impact on I&ET
operations or the Company's business development. Additionally, the Senior Vice
President and Chief Financial Officer and the Vice President and Controller
retired during the first half of 1997. The transition to the new management team
was timely and well executed.
ITEM 2. PROPERTIES
The Company is primarily a service-oriented company, and, as such, the
ownership or leasing of real property is an activity which is not material to an
understanding of the Company's operations. The Company owns two office buildings
and, in addition, leases numerous commercial facilities used in connection with
the various services rendered to its customers, including its corporate
headquarters, a 149,000 square foot facility under a 12-year lease. None of the
properties is unique. All of the Company's owned facilities are located within
the United States. In the opinion of management, the facilities employed by the
Company are adequate for the present needs of the business.
The Company has signed a lease with the developer of a to-be-constructed
building in Reston, Virginia for the 12-year lease of 154,000 square feet of
space for consolidation of several offices near the Company's corporate
headquarters and anticipates occupancy in December 1999.
Under the terms of a proposed settlement agreement related to a subsidiary's
involvement in ongoing asbestos litigation (see Item 7 "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" and Note 21(a)
to the Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-K) the Company would transfer ownership of one of the owned
office buildings to the subsidiary, the stock of which would in turn be
transferred to a trust for the benefit of asbestos claimants.
ITEM 3. LEGAL PROCEEDINGS
This item is incorporated herein by reference to Note 21 to the Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
DynCorp's common stock is not publicly traded. However, the Company has
established an Internal Market to provide liquidity for its stockholders. Shares
available for trading in the Internal Market are registered under the Securities
Act of 1933. The Internal Market generally permits stockholders to sell shares
of common stock on four predetermined days each year, subject to purchase
demand.
Sales of common stock on the Internal Market are made at established prices
for the common stock determined pursuant to the formula and valuation process
described below (the "Formula Price") to active employees and directors of the
Company and to the trustees of the Savings and Retirement Plan ("SARP") and the
Employee Stock Ownership Plan ("ESOP"), as well as the administrator of the
Employee Stock Purchase Plan ("ESPP"), who may purchase shares of common stock
for their respective trusts and plans.
If the aggregate purchase orders exceed the number of shares available for
sale, the Company may, but is not obligated to, sell authorized but unissued
shares of common stock on the Internal Market. Further, the following
prospective purchasers will have priority, in the order listed:
- the administrator of the ESPP;
- the trustees of the SARP;
- eligible employees and directors, on a pro rata basis; and
- the trustees of the ESOP.
If the aggregate number of shares offered for sale on the Internal Market is
greater than the aggregate number of shares sought to be purchased, offers by
stockholders to sell 500 shares or less, or up to the first 500 shares if more
than 500 shares are offered, will be accepted first. If, however, there are
insufficient purchase orders to support the primary allocation of 500 shares,
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 in excess of 10,500 shares will then be
accepted on a pro-rata basis. All sellers on the Internal Market (other than the
Company and its retirement plans) will pay a commission equal to two percent of
the proceeds from such sales. No commission is paid by purchasers on the
Internal Market. As an alternative to this procedure, the Company may, but is
not required to, purchase excess shares offered for sale in the Internal Market.
The market price of the common stock is established pursuant to the
valuation process described below, which uses the formula set forth below to
determine the Formula Price at which the Common Stock trades in the Internal
Market. The Formula Price is reviewed four times each year, generally in
conjunction with Board of Directors meetings, which are usually scheduled for
February, May, August and November.
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 of the Company
for the four fiscal quarters immediately preceding the date on which a price
revision is made, multiplied by a market factor ("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"), the whole 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 numeric 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, is as
follows:
[(CFx7)MF+NOA-IBD]
Formula Price = ESO
<PAGE>
The Board of Directors believes that the valuation process and Formula
result in a fair price for the common stock within a broad range of financial
criteria. Other than quarterly review and possible modification of the Market
Factor, the Board of Directors will not change the Formula unless (i) in the
good faith exercise of its fiduciary duties and after consultation with its
professional advisors, the Board of Directors determines that the formula no
longer results in a stock price which reasonably reflects the value of the
Company on a per share basis, or (ii) a change in the Formula or the method of
valuing the common stock is required under applicable law.
The following table sets forth the Formula Price for the common stock and
the Market Factor by quarter since the adoption of the Formula by the Board of
Directors in August 1995.
Quarter Ended Formula Price ($) Market Factor
------------- ----------------- -------------
December 31, 1995 14.50 2.14
March 28, 1996 15.00 1.36
June 27, 1996 16.75 1.15
September 26, 1996 19.00 1.15
December 31, 1996 20.00 1.27
March 27, 1997 20.00 1.27
June 26, 1997 20.00 1.27
September 25, 1997 20.00 1.23
December 31, 1997 20.00 1.23
For the March 26, 1998 trade, the Board of Directors approved a formula
price of $21.00 for the common stock and a market factor of 1.29. The price
determined by the ESOP's independent appraiser was also $21.00 for the March 26,
1998 trade.
Prior to August 1995, the market value of the common stock was established
periodically by the Board of Directors for purposes of repurchases under a
former stockholders agreement. Based on the Board's review of valuations set by
the ESOP Trust, the price per share by quarter was as follows:
March 30, 1995 $14.90
June 29, 1995 $14.90
September 28, 1995 $14.90
<PAGE>
There were approximately 581 record holders of DynCorp common stock at
December 31, 1997. In addition, the DynCorp Employee Stock Ownership Plan Trust
owns stock on behalf of approximately 30,400 present and former employees of the
Company. Cash dividends have not been paid on the common stock since 1988.
On March 30, 1995, the Company sold 1,208,059 shares of common stock to the
ESOP, the Company's retirement plan. The shares were sold for cash which the
ESOP obtained from the Company in a combination of Company contributions and
funds borrowed by the ESOP from the Company. The portion of shares purchased
with loan proceeds was pledged to the Company until the loan was repaid from
subsequent Company contributions. The sale is believed to be exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary selected historical financial data
derived from the audited Consolidated Financial Statements of the Company for
each of the five years. During the periods presented, the Company paid no cash
dividends on its Common Stock. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited Consolidated Financial Statements and
related notes thereto, included elsewhere in this Annual Report on Form 10-K.
(Dollars in thousands, except per share data.)
<TABLE>
<CAPTION>
Years Ended December 31,
1997(b) 1996(c) 1995(d) 1994(a)(f) 1993(a)(g)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 1,145,937 $ 1,021,453 $ 908,725 $ 818,683 $ 777,216
Cost of services $ 1,096,246 $ 970,163 $ 871,317 $ 783,121 $ 742,460
Corporate selling and administrative $ 17,785 $ 18,241 $ 18,705 $ 16,887 $ 17,547
Interest expense $ 12,432 $ 10,220 $ 14,856 $ 14,903 $ 14,777
Earnings (loss) from continuing operations
before extraordinary item and certain
other expenses (h) $ 15,579 $ 12,774 $ 12,974 $ 1,966 $ (4,192)
Earnings (loss) from continuing operations
before extraordinary item (e) $ 7,422 $ 11,949 $ 5,274 $ (352) $ (4,485)
Net earnings (loss) $ 7,422 $ 14,629 $ 2,368 $ (12,831) $ (13,414)
Common stockholders' share of earnings (loss) $ 7,422 $ 12,345 $ 453 $ (14,437) $ (14,761)
EBITDA (i) $ 29,274 $ 34,948 $ 17,841 $ 25,933 $ 21,976
Earnings (loss) per share from continuing
operations before extraordinary
item for common stockholders
Basic $ 0.83 $ 1.14 $ 0.40 $ (0.29) $ (1.13)
Diluted $ 0.70 $ 0.82 $ 0.29 $ (0.29) $ (1.13)
Common stockholders' share of earnings (loss)
Basic $ 0.83 $ 1.46 $ 0.05 $ (2.12) $ (2.87)
Diluted $ 0.70 $ 1.05 $ 0.04 $ (2.12) $ (2.87)
Balance Sheet Data:
Total assets $ 382,584 $ 368,752 $ 375,490 $ 396,000 $ 360,103
Long-term debt excluding current maturities $ 152,239 $ 103,555 $ 104,112 $ 230,444 $ 215,939
Redeemable common stock $ 154,840 $ 139,322 $ 135,894 $ 130,828 $ 100,630
<FN>
(a) Restated for the discontinuance of the Commercial Aviation business.
(b) 1997 includes $7,800 of costs related to asbestos litigation (see Notes 14
and 21(a)), $2,488 reversal of income tax valuation allowance and $2,055
reversal of accrued interest related to IRS examinations and potential
disallowance of deductions (see Note 15).
(c) 1996 includes $3,299 accrual for supplemental pension and other fees
payable to retiring officers and a member of the Board of Directors (see
Note 14), $1,286 write-off of cost in excess of net assets acquired of an
unconsolidated subsidiary (see Note 14), $1,250 credit for a revised
estimate of the ESOP Put Premium (see Notes 7 and 14) and $4,067 reversal
of income tax valuation allowance (see Note 15).
(d) 1995 includes $7,707 reversal of income tax valuation allowance (see Note
15), $4,362 accrued for losses and reserves related to the Company's
Mexican operation, $2,400 accrual of legal fees related to the defense of a
lawsuit filed by a subcontractor of a former electrical contracting
subsidiary (see Notes 14 and 21(b)) and $5,300 accrued for uninsured costs
related to claims against a former subsidiary for alleged use of asbestos
containing products (see Notes 14 and 21(a)).
(e) The extraordinary loss in 1995 of $2,886 resulted from the early
extinguishment of debt (see Note 5).
(f) 1994 includes $3,250 write-off of investment in unconsolidated subsidiary, $2,665 accrual of legal fees
related to the defense of a lawsuit filed by a subcontractor of a former
electrical contracting subsidiary (see Note 21), $1,830 credit for reversal
of legal costs associated with an acquired business and $4,069 reversal of
income tax reserves (see Note 15).
(g) 1993 includes $2,000 of legal and other expenses associated with an acquired business,
$988 accelerated amortization of costs in excess of net assets of an acquired business, for assets that were
subsequently determined to have been overvalued at the time of acquisition.
(h) Certain other expenses includes costs and expenses associated with divested
businesses of $8,157 in 1997, $825 in 1996, $7,700 in 1995, $2,318 in 1994
and $293 in 1993 (see Note 14).
(i) EBITDA (earnings from continuing operations before extraordinary item and before interest, taxes,
depreciation and amortization), while not a measure under generally accepted accounting principles ("GAAP"),
is a standard measure of financial performance in industry. EBITDA should not be considered in isolation or
as an alternative to net earnings (loss), earnings (loss) from operations, cash flows from operating
activities, or any other measure of performance under GAAP. EBITDA has been adjusted for the amortization
of deferred debt expense and debt issuance discount which are
included in "interest expense" in the Consolidated Statements of Operations and included in "amortization and
depreciation" in the Consolidated Statements of Cash Flows. Amortization of deferred debt expense was $706
in 1997, $829 in 1996, $743 in 1995, $324 in 1994 and $328 in 1993. Amortization of debt issuance discount
was $26 in 1997.
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company provides diversified management, technical and professional
services to primarily U.S. Government customers throughout the United States and
internationally. The Company's customers include various branches of the
Department of Defense and to the Department of Energy, NASA, the Department of
State, the Department of Justice and various other U.S., state and local
government agencies, commercial clients and foreign governments. The following
discussion should be read in conjunction with the audited Consolidated Financial
Statements.
Revenue and Gross Margin
Consolidated revenues continued to increase annually, to $1,145.9 million in
1997, from $1,021.5 million in 1996 and $908.7 million in 1995; however, gross
margin fluctuated from year to year (4.3% in 1997, 5.0% in 1996, and 4.1% in
1995).
Aerospace Technology ("AT") reported the best performance of the three
business areas in 1997. Revenues were $449.0 million in 1997 as compared to
$383.3 million in 1996, a 17% increase. Gross margin increased from 3.5% in 1996
to 4.0% in 1997. Increased level of effort on State Department contracts in
support of the government's drug eradication program and the Haitian
peacekeeping initiative, which were awarded late in 1996 but were fully
operational in 1997, contributed significantly to the increase in both revenues
and gross margin. Additionally, numerous smaller contract awards further added
to AT's increased revenues and improved gross margin. Other existing contracts,
one with the Air Force to provide maintenance and repair work on DoD weapons
systems and equipment at various locations worldwide, and another with the Army
to maintain a fleet of rotary-wing aircraft, further augmented AT's revenues;
however, lower indirect expense ceilings and increased proposal costs,
respectively, resulted in lower profits on these contracts in 1997 as compared
to 1996.
The AT business area increased backlog by 133% at December 31, 1997 over
that of 1996, primarily due to the aforementioned Air Force contract won in
recompetition. Management believes the growth experienced in the AT business
area in 1997 will continue into 1998. However, the nature of the procurement
process and the volume of the Company's business which is subject to
recompetition annually can have a dramatic impact on revenues and gross margin.
Additionally, the U.S. Government has the right to terminate contracts for
convenience or may reduce the volume of services provided.
AT revenues increased in 1996, up $64.0 million from $319.3 million in 1995,
but gross margin deteriorated slightly, down from 3.6% in 1995 to 3.5% in 1996.
Increases in revenues and gross margin were attributable to increased level of
effort on certain Department of State contracts as well as a newly formed joint
venture. However, several contract losses diminished gross margin in 1996,
offsetting any increases attributable to the increased level of effort or new
business.
Enterprise Management ("EM") also reported increased revenues, $414.3
million in 1997 as compared to $366.7 million in 1996, up 13%; however, gross
margin remained flat at 5.2% for both 1997 and 1996. A large Department of
Energy subcontract to provide facility and infrastructure support at the DoE's
Hanford, Washington site, as well as other new business and contract wins all
contributed significantly to EM's revenues and gross margin. Unfortunately, the
loss of a large contract with the Army as well as residual losses recorded in
conjunction with the closure of the Company's Mexican operations (see below)
more than offset any increases in gross margin attributable to contract wins and
new business.
Both EM's revenues and gross margin increased in 1996 over 1995. Revenue was
$366.7 million, up 15% over $318.3 million in 1995 and gross margin was 5.2% in
1996, up from 3.4% in 1995. Another large DoE contract at the Rocky Flats
Environmental Technology Site in Colorado, awarded in 1995 but not fully
operational until 1996, and the contract at the Hanford facility, which was
phased in during August 1996 and fully operational by October 1996, contributed
significantly to the increases in EM's revenues and gross margin. Partially
offsetting this was the loss of a large contract with the Department of Health
and Human Services. Significantly improving EM's 1996 gross margin was the
closure in 1995 of the Company's Mexican operations. Approximately $4.4 million
was charged to Cost of Services in 1995 for the following: estimated loss at
completion, plus currency devaluation losses, on a contract to install a
security system, severance costs associated with the reduction of the local
workforce and reserves for closing the operation.
In keeping with its plan to continue growth in the EM business area, the
Company acquired the assets of FMAS Corporation ("FMAS") in February 1998. FMAS
is a medical outcome measurement and data extraction services company which is
projected to add $17.0 million to EM's revenues in 1998 (see Note 24,
"Subsequent Events", to the Consolidated Financial Statements). Additionally, EM
was awarded a large contract with the Department of Defense in the first quarter
of 1998 which is projected to generate an additional $17.0 million in revenue in
1998. However, the nature of the procurement process and the volume of the
Company's business which is subject to recompetition annually can have a
dramatic impact on revenues and gross margin. Additionally, the U.S. Government
has the right to terminate contracts for convenience or may reduce the volume of
services provided.
Information and Engineering Technology's ("I&ET") revenues were $282.6
million in 1997, a 4% increase over 1996 revenues of $271.5 million, however,
gross margin declined to 3.5% in 1997, down from 6.8% in 1996. Increases in
revenue attributable to numerous Indefinite Delivery/Indefinite Quantity("IDIQ")
contract awards, the acquisition of Data Management Design, Inc. ("DMDI") in
June of 1996 and other new business ventures were partially offset by the
phase-out of a large contract with the U.S. Postal Service. Gross margin was
adversely impacted by a number of factors including contract losses, start-up
costs and software development costs incurred in support of new businesses,
poor performance attributable to the DMDI business as well as other
contracts acquired late in 1996 and fee disputes. Further eroding gross margin
was the write-off of software, which the Company acquired late in 1996 in order
to bid a contract which was not subsequently awarded to the Company.
Additionally, many of the new IDIQ contracts awarded require increased
administrative oversight and sales effort and yield lower profit margins than
sole source direct contract awards which have historically comprised the
majority of the Company's business.
I&ET's 1996 revenues were $271.5 million, up marginally from $271.1 million
in 1995, however, gross margin improved significantly, up from 5.7% in 1995 to
6.8% in 1996. Increased revenues attributable to the acquisition of DMDI in June
of 1996 and a contract with the General Services Administration which was
awarded and phased in during 1995 but which was fully operational in 1996 were
offset by the mid-year phase-out of a large contract with the Postal Service.
Gross margin was similarly affected, however, additional profits resulting from
greater absorption of overhead on existing contracts which were under performing
in 1995 further contributed to I&ET's improved gross margin.
Management believes I&ET's revenues will grow slightly in 1998. However,
there are no assurances because the contract base is comprised of many IDIQ
contracts which require continuous marketing. Additionally, the U.S. Government
has the right to terminate contracts (including orders under IDIQ contracts) for
convenience.
Corporate Selling and Administrative
Corporate selling and administrative expenses continued to decrease both in
dollar amount and as a percentage of revenue. Corporate selling and
administrative expenses were $17.8 million in 1997, $18.2 million in 1996 and
$18.7 million in 1995, or, as a percentage of revenue, 1.6%, 1.8% and 2.1%
respectively. This trend is not expected to continue, however, as the Company
has embarked on a comprehensive resystemization effort (see "Year 2000") which
is projected to add approximately $3.0 million to corporate selling and
administrative expense in 1998.
Interest Expense and Interest Income
Interest expense was $12.4 million in 1997, up from $10.2 million in 1996.
The increase is due to greater levels of indebtedness in 1997 at a slightly
higher effective rate of interest. The Company issued $100.0 million of 9 1/2%
Senior Notes in March 1997 and $50.0 million of 7.486% Contract Receivable
Collateralized Notes in April 1997, utilizing the proceeds to retire the
maturing $100.0 million of 8.54% Contract Receivable Collateralized Notes and to
repurchase certain of the Company's common stock and warrants. Offsetting the
increase in interest expense attributable to the newly issued debt was the
reversal of $2.1 million of interest related to the Internal Revenue Service's
examination and the potential disallowance of certain deductions.
Interest expense in 1996 was $10.2 million, down from $14.9 million in 1995,
primarily due to the redemption of the Company's 16% Junior Subordinated
Debentures in 1995. Also contributing to the decrease was the liquidation in
1995 of the mortgage on the corporate headquarters which was sold and leased
back.
Interest income was $2.0 million, $1.8 million and $3.8 million in 1997,
1996 and 1995, respectively. The fluctuations are attributable to the balance of
cash and short-term investments throughout any given year. In early 1997, after
issuance of the Senior Notes but before retiring the maturing debt or subsequent
stock purchases, the Company had significant cash balances. In 1995, the Company
had significant cash after the sale of the Commercial Aviation business, the
sale and lease-back of the Company's corporate headquarters and the collection
of the Cummings Point Industries, Inc. note receivable but before calling the 16
% Junior Subordinated Debentures. The twelve-month average balance of cash and
short-term investments was $25.0 million in 1997, $20.0 million in 1996 and
$32.0 million in 1995, resulting in higher interest yields in 1997 and 1995 than
in 1996.
Other
Other Expense increased to $10.3 million in 1997, up from $5.5 million in
1996. The most significant factor was a $7.8 million increase in reserves for
asbestos litigation resulting from a subsidiary's agreement in principle to
globally settle approximately 11,000 pending asbestos personal injury claims and
unknown future claims pursuant to Section 524(g) of the U.S. Bankruptcy Code and
a related contingent settlement agreement between the Company and the subsidiary
for the release of the Company from any subsidiary asbestos liability (see Notes
14 and 21(a) to the Consolidated Financial Statements and the discussion of
"Liquidity and Capital Resources" which follows). Offsetting this increase,
however, is the absence in 1997 of any additional significant nonrecurring
charges such as costs related to the retirement of several of the Company's
officers as well as the write-off of cost in excess of assets acquired of a
minority owned investment, both of which adversely impacted 1996.
Other Expense decreased in 1996 to $5.5 million from $10.2 million in 1995.
This reduction resulted from the fact that previously established reserves were
charged for costs incurred in 1996 to enforce insurance policies beneficial to
the subsidiary against which asbestos claims had been asserted and the 1996
defense costs associated with a lawsuit filed by a subcontractor of a former
subsidiary (see Note 21 (a) and (b) to the Consolidated Financial Statements).
In addition, a credit recognized for a revised estimate of the Company's ESOP
Put liability also reduced Other Expense. Offsetting these reductions were
costs related to the retirement of several of the Company's officers as well as
the write-off of cost in excess of assets associated with a minority investment
(see Note 14 to the Consolidated Financial Statements).
Income Taxes
The provision for income taxes in 1997 and 1996 is based on reported
earnings, adjusted to reflect the impact of temporary differences between the
book value of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes. Also included in 1996 is a
provision for foreign taxes related to prior years' foreign operations. The tax
benefit in 1995 reflects a tax provision based on an estimated annual effective
tax rate, excluding expenses not deductible for tax. Additionally, $2.5 million,
$4.1 million and $7.7 million of tax valuation reserves were reversed in 1997,
1996 and 1995, respectively. These deferred taxes have been realized primarily
as an offset against earnings, and in 1995, the gain on the sale of the
Commercial Aviation business. Based on current projections, management estimates
tax payments, net of tax refunds, of $3.7 million in 1998.
No valuation allowance for deferred federal tax assets was deemed necessary
at December 31, 1997. The Company has provided a valuation allowance for
deferred state tax assets of $5.0 million at December 31, 1997 due to the
uncertainty of achieving future earnings in either the time frame or in the
particular state jurisdiction needed to realize the tax benefit.
Working Capital and Cash Flows
Working capital at December 31, 1997, was $84.2 million, up from $75.8
million at December 31, 1996. The ratio of current assets to current liabilities
at December 31, 1997 was 1.54 compared to 1.51 at December 31, 1996.
Cash provided from operations was $9.9 million in 1997 compared to $4.8
million in 1996. Although net earnings decreased, $8.2 million of this decrease
was attributable to the accrual of reserves for divested businesses which did
not use any cash in 1997. Further improving operating cash flows was the absence
in 1997 of any tax payments related to the gain on the 1995 sale of the
Commercial Aviation business. Offsetting these items was an increase in accounts
receivable, primarily due to delayed collections on certain subcontracts. Cash
provided from continuing operations was $4.8 million in 1996 compared to $13.9
million in 1995. Decreases in operating cash flows were due to the payment in
1996 of $14.0 million of federal and state taxes related to the gain on the 1995
sale of the Commercial Aviation business and an increase in accounts receivable,
partially offset by increased earnings.
Investing activities used funds of $8.3 million in 1997, principally for the
purchase of property and equipment and also to fund the Company's 47% interest
in a minority owned investee and to make a loan to the same investee. In 1996,
cash of $1.7 million was provided, with additional proceeds from the sale of the
Commercial Aviation business, as well as the release of cash on deposit as
collateral for letters of credit partially offset by acquisitions and capital
expenditures. In 1995, the proceeds from the sale of the Commercial Aviation
business, the sale and leaseback of the corporate headquarters and the
collection of the Cummings Point Industries, Inc. note receivable contributed to
the $139.8 million of funds provided from investing activities.
In 1997, financing activities utilized funds of $3.0 million. The proceeds
from the issuance of the 9 1/2% Senior Notes and the 7.486% Contract Receivable
Collateralized Notes were used to retire the maturing 8.54% Contract Receivable
Collateralized Notes, to make a loan to the ESOP to fund the purchase of the
Class C Preferred Stock, to fund the Company's purchase of common stock and
warrants from certain investors and to pay transaction fees associated with the
placement of the Senior Notes and amendments to the terms of the Company's
revolving line of credit. In 1996, $11.8 million of cash was used for financing
activities, principally the purchase of treasury shares, but also payment on
indebtedness and fees associated with securing a line of credit. In 1995, the
$126.9 million use of funds from financing activities consisted primarily of the
utilization of the proceeds from the sale of the Commercial Aviation business to
redeem the 16% Junior Subordinated Debentures, the pay-off of the mortgage on
the corporate headquarters, and the purchase of treasury shares. These uses were
partially offset by funds provided from the sale of stock to the ESOP.
Liquidity and Capital Resources
The Company's primary source of cash and cash equivalents is from
operations. The Company's principal customer is the U.S. Government. This
provides for a dependable flow of cash from the collection of accounts
receivable. Additionally, many of the contracts with the U.S. Government provide
for progress billings based on costs incurred. These progress billings reduce
the amount of cash that would otherwise be required during the performance of
these contracts.
At the close of 1996, the Company's debt totaled $104.2 million. The 8.54%
Contract Receivable Collateralized Notes, Series 1992-1, constituted $100.0
million of this total and were scheduled to mature in May 1997. Due to the
maturity of these notes, the Company embarked on a comprehensive plan to
refinance the maturing debt and to recapitalize the Company.
On January 23, 1997, the Company entered into an agreement with Capricorn
Investors, L.P. ("Capricorn") in which Capricorn agreed to waive its rights to
nominate directors of the Company and also waived certain voting rights of the
Company's then outstanding Class C Preferred Stock. In return for these waivers,
the Company paid a fee and authorized Capricorn to distribute a substantial
portion of the shares of common stock and warrants and all of the outstanding
shares of Class C Preferred Stock to its investors. On February 5, 1997, the
Employee Stock Ownership Trust purchased from certain of these investors all of
the Company's Class C Preferred Stock. The ESOP subsequently converted the Class
C Preferred Stock into common shares and common share warrants, and exercised
the related warrants. Concurrently with the ESOP's purchase, the Company
acquired a sizable number of its outstanding common shares and common stock
warrants from other Capricorn investors. The purchase price of these securities
was $56.4 million ($19.55 per common share or warrant), of which half, $28.2
million, was paid in cash ($9.3 million and $18.9 million , was paid by the ESOP
and the Company, respectively) and short-term notes were issued for the balance
(notes issued by the ESOP and the Company were $9.3 million and $18.9 million,
respectively).
The Company engaged in the aforementioned equity repurchases in order to
eliminate the potential effect of certain preferential voting rights given the
Class C Preferred Stock in the Company's certificate of incorporation; to reduce
the outstanding and fully diluted equity of the Company; to provide treasury
shares for future issuance to employees under the Company's various compensation
and benefit plans without the need for issuance of new shares; and to provide
additional shares for the ESOP, which can only acquire shares by purchase from
the Company or other stockholders. The ESOP's purpose for engaging in the
aforementioned transaction was to acquire shares for the allocation to
participants' accounts in 1997 and 1998. In addition to converting a portion of
the Company's total capitalization from equity capitalization to debt
capitalization, the transactions reduced the Company's fully diluted equity,
thus improving the Company's earnings per share.
On March 17, 1997, the Company closed on the issuance of $100.0 million of 9
1/2% Senior Subordinated Notes due 2007 (see Note 5 to the Consolidated
Financial Statements). On April 18, 1997, the Company's wholly-owned subsidiary
Dyn Funding Corporation ("DFC") entered into agreements with Prudential
Insurance Company of America and Columbine Life Insurance Company, Inc. to
purchase from DFC up to $140.0 million of Contract Receivable Collateralized
Notes, Series 1997-1. A five year $50.0 million Class A Fixed Rate Note, bearing
interest at 7.486% was issued at closing and a $90.0 million Class B Variable
Rate Note, which was also issued, had yet to be utilized at December 31, 1997
(see Notes 5 and 24 to the Consolidated Financial Statements). The proceeds from
these transactions were used to retire the maturing Contract Receivable
Collateralized Notes, to pay the Company's short term notes and make a loan to
the ESOP to enable it to pay the short-term notes (plus accrued interest) issued
to certain Capricorn investors and to pay various transaction fees.
At December 31, 1997, the Company's debt totaled $152.7 million compared to
$104.2 million at December 31, 1996 and $105.4 million at December 31, 1995. In
addition to the aforementioned financings, debt servicing requirements and the
liquidation of certain notes reduced the Company's debt by $1.0 million. The
decrease in debt from December 31, 1995 to December 31, 1996, reflects only the
Company's minimum debt servicing requirements.
At December 31, 1997, $60.5 million of accounts receivable were restricted
as collateral for the 7.486 % Contract Receivable Collateralized Notes (the
"Notes") and $1.5 million of cash was restricted as collateral for the Notes and
has been included in Other Assets on the accompanying Consolidated Balance
Sheet.
The Company has a $15.0 million line of credit which it utilized throughout
1997, never exceeding $8.0 million in borrowings at any given point in time. At
December 31, 1997, there were no borrowings under this line of credit, however,
the facility does provide credit support for letters of credit and at December
31, 1997, the amount available for borrowing was reduced by $10.0 million due to
the collateralization of outstanding letters of credit.
The Company also has available up to $90.0 million of Floating Rate Contract
Receivable Collateralized Notes, Series 1997-1, Class B (the "Class B Notes")
under the April 1997 indenture. At December 31, 1997, the Company had sufficient
unused receivable collateral to draw down approximately $60.0 million. The
notes, when drawn, bear interest at the LIBOR rate plus 70 basis points and two
business days are required to access the funds. In February 1998, the Company
drew down $10.0 million of the Class B Notes to fund the acquisition of the
assets of FMAS Corporation (see Note 24 to the Consolidated Financial
Statements).
The Company has embarked on a comprehensive resystemization effort (see
"Year 2000") and is projecting expenditures in conjunction with this effort of
$10.4 million in 1998 and $1.0 million in 1999. The resystemization will
necessitate replacing most of the Company's desktop workstations over the next
three years, at a cost of approximately $4.0 million annually through 2000.
The Board of Directors has issued an enabling resolution which provides for
the repurchase of up to 500,000 shares of the Company's common stock at a price
not to exceed $22.50 per share, subject to all applicable financial covenants.
Management continuously reviews alternative uses of excess cash and debt
capacity in terms of acquisitions, dividends, repurchase of shares and other
financial matters.
The Company anticipates contributing approximately $13.0 million in cash to
the ESOP in 1998. 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. In accordance
with ERISA requirements and the ESOP documents, in the event that an employee
participating in the ESOP is terminated, retires, dies or becomes disabled while
employed by the Company, the ESOP Trust or the Company is obligated to
repurchase shares of common stock distributed to such former employee under the
ESOP ("ESOP Participant Puts"), until such time as the common stock becomes
"Readily Tradable Stock," as defined in the ESOP documents. (See Note 7 to the
Consolidated Financial Statements.)
To the extent the ESOP Participant Puts, debt service, administrative
expenses and interest exceed the Company's 1998 contribution, the Company will
fund the ESOP Participant Puts by former employees to prevent the ESOP from
incurring additional debt. The Company projects these payments to be $1.0 to
$2.0 million in 1998.
During the first quarter 1998, the Company's Delaware subsidiary,
Fuller-Austin Insulation Company ("Fuller-Austin"), reached an agreement in
principle with the proposed but unconfirmed representative of certain future
asbestos claimants, and counsel representing more than 75% of the present 10,740
claimants who have asserted asbestos bodily injury claims against Fuller-Austin,
regarding a global settlement of all such claims (see Note 21(a) to the
Consolidated Financial Statements for the history of the Fuller-Austin asbestos
claims). Under the terms of the proposed settlement, Fuller-Austin, the future
claimants' representative and at least 75% of the presently existing claimants
would consent to the filing of a Fuller-Austin Chapter 11 bankruptcy petition
under Section 524(g) of the U.S. Bankruptcy Code ("Code"). Section 524(g),
adopted by the Congress as an amendment to the Code in 1994, deals specifically
with reorganizations of debtors that are the subject of asbestos claims.
If filed in and confirmed by the cognizant bankruptcy and U.S. district
courts, the Fuller-Austin plan of reorganization ("the Plan") will result in the
stock of Fuller-Austin being transferred irrevocably to a post-bankruptcy trust
for the sole benefit of asbestos claimants, present and future. In furtherance
of the proposed global settlement, representatives of Fuller-Austin, its parent
and sole stockholder DynCorp, the present asbestos claimants, and the
representative of the future unknown claimants have reached a separate agreement
in principle ("Release Agreement"), contingent on approval of the Plan by the
bankruptcy court, under which the Company would be released from any and all
present and future liability for Fuller-Austin asbestos liability in
consideration of the transfer of certain Company property and insurance rights
to the Fuller-Austin bankruptcy trust (the "Trust"), and the payment to the
trust of certain cash consideration. The total amount of all such consideration
and related costs is approximately $14.0 million, a portion of which was
recorded in prior years and the balance, $7.8 million, was reserved by the
Company in 1997 in anticipation of the settlement under the Release Agreement.
There can be no assurance at this time that the global settlement will be
concluded. Also, it is impossible to determine whether it will be necessary for
Fuller-Austin to otherwise seek protection from its creditors (including
asbestos claimants) under the Code.
Year 2000
The "Year 2000" issue ("Y2K") concerns the inability of some computer
software and hardware to accommodate "00" in the two digit data field used to
identify the year. During 1997 the Company completed a thorough analysis of its
core financial and other systems and began a preliminary analysis of the
Company's equipment infrastructure to identify issues related to Y2K
functionality.
The Company's analysis of the core systems included all financial, payroll
and human resources software products. The Company has identified solutions to
Y2K functionality issues where problems were identified and has established
deadlines for initiating action to correct any deficiencies. Certain potentially
non-compliant systems are scheduled to be replaced commencing in 1998 through a
resystemization effort that will replace existing software systems with new, Y2K
fully functional systems (see below).
A preliminary analysis of the Company's network and equipment infrastructure
has revealed no major issues related to Y2K compliance, however, a complete
inventory and analysis is underway, and a plan has been developed to complete
the assessment in 1998. An employee awareness program will be launched in 1998
to educate and inform users of potential problems (particularly with so-called
"home grown" systems), actions required to assess each component of the
infrastructure and to correct, upgrade or replace such components as necessary
to achieve full Y2K functionality.
During 1997, the Company began to assess the Company's general information
technology ("IT") needs, identify new IT systems criteria and establish a
timetable for implementing a replacement IT system. The Company has selected a
new software vendor and implementation is expected to begin in the first half of
1998 and span approximately 15 months. The successful completion of this
resystemization effort will obviate the need to correct deficiencies with the
current financial and human resources systems; however, the Company has
developed a plan for initiating corrective action on the current system in the
unlikely event the resystemization cannot be completed on time.
The Company has projected expenditures in conjunction with the
resystemization of $10.4 million in 1998 and $1.0 million in 1999. Additionally,
the Company anticipates replacing most of its desktop workstations over the next
three years, and estimates this cost at approximately $4.0 million annually
through 2000. The annual expenditures for the new desktop work stations are not
significantly above the levels which can be expected in the normal course of
business. The depreciation and amortization expenses for the resystemization and
new desktop workstations are allowable costs under government contracts.
Environmental Matters
Neither the Company nor any of its subsidiaries has been named as a
Potentially Responsible Party (as defined in the Comprehensive Response,
Compensation and Liability Act) at any site. The Company has incurred costs for
the installation and operation of a soil and water remediation system and for
the clean up of environmental conditions at certain other sites (see Note 21(b)
to the Consolidated Financial Statements). The Company's liability, in the
aggregate, with respect to these matters is not deemed to be material to the
Company's results of operations or financial condition.
Derivative Financial Instruments
The Company's policy is to use derivative financial instruments to manage
its exposures to fluctuations in interest rates and foreign exchange rates. The
Company does not hold or issue financial instruments for trading purposes. At
December 31, 1997, the amounts of such financial instruments, as well as the
amounts of gains and losses recorded during the year, were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is contained in the Company's
Consolidated Financial Statements and Financial Statement Schedules included
elsewhere in this Annual Report on Form 10-K.
<PAGE>
Report of Independent Public Accountants
To DynCorp:
We have audited the accompanying consolidated balance sheets of DynCorp (a
Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, permanent stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These consolidated financial statements and the schedules referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DynCorp and subsidiaries as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedules I and II, listed in Item 14 of
the Form 10-K, are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
Washington, D.C., Arthur Andersen LLP
March 13, 1998
<PAGE>
DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
1997 1996
Assets
Current Assets:
Cash and cash equivalents (Notes 1 and 5) $ 24,602 $ 25,877
Accounts receivable and contracts in process, net
(Notes 3, 4 and 5) 202,758 187,679
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 1,090 1,030
Prepaid income taxes (Notes 3 and 15) 5,289 2,804
Other current assets 5,844 7,205
---------- ----------
Total Current Assets 239,583 224,595
Property and Equipment, at cost (Notes 1 and 20):
Land 1,621 1,621
Buildings and leasehold improvements 11,659 9,324
Machinery and equipment 28,752 24,876
---------- ----------
42,032 35,821
Accumulated depreciation and amortization (22,412) (16,737)
---------- ----------
Net property and equipment 19,620 19,084
---------- ----------
Intangible Assets, net of accumulated amortization
(Notes 1 and 14) 46,750 48,927
Other Assets (Notes 5 and 21) 76,631 76,146
---------- ----------
Total Assets $382,584 $368,752
========== ==========
See accompanying notes.
<PAGE>
DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
December 31,
Liabilities and Stockholders' Equity 1997 1996
Current Liabilities:
Notes payable and current portion of long-term
debt (Notes 3 and 5) $ 450 $ 628
Accounts payable (Note 3) 46,109 42,716
Deferred revenue and customer advances 2,947 6,002
Accrued income taxes (Notes 3 and 15) 206 354
Accrued expenses (Note 6) 105,627 99,145
Total Current Liabilities 155,339 148,845
Long-term Debt (Notes 3 and 5) 152,239 103,555
Deferred Income Taxes (Note 15) 7,935 4,079
Other Liabilities and Deferred Credits (Notes 3 and 21) 69,845 75,434
Contingencies and Litigation (Note 21) - -
Temporary Equity:
Redeemable Common Stock at Redemption Value (Note 7)
ESOP Shares, 6,887,119 and 6,165,957 shares issued
and outstanding in 1997 and 1996, respectively,
subject to restrictions 151,823 136,343
Other, 125,714 shares issued and outstanding in 1997
and 1996 3,017 2,979
Permanent Stockholders' Equity:
Preferred Stock, Class C 18% cumulative, convertible,
$24.25 liquidation value (liquidation value including
unrecorded dividends of $14,147 in 1996), 123,711
shares authorized, issued and outstanding (Note 8) - 3,000
Common Stock, par value ten cents per share, authorized
20,000,000 shares; issued 4,784,770 shares in 1997
and 3,315,673 shares in 1996 (Note 9) 478 332
Common Stock Warrants (Note 10) 1,259 11,139
Paid-in Surplus 125,412 148,234
Reclassification to temporary equity for redemption
value (154,138) (138,694)
Deficit (93,837) (101,259)
Common Stock Held in Treasury, at cost; 1,677,511
shares and 170,716 warrants in 1997 and 1,514,482
shares and 170,716 warrants in 1996 (28,703) (25,235)
Unearned ESOP Shares (Note 12) (8,085) -
---------- ----------
Total Liabilities and Stockholders' Equity $382,584 $368,752
========== ==========
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
DynCorp and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31
(Dollars in thousands, except per share data)
1997 1996 1995
<S> <C> <C> <C>
Revenues (Note 1):
Information and Engineering Technology $ 282,634 $ 271,538 $ 271,133
Aerospace Technology 448,963 383,252 319,335
Enterprise Management 414,340 366,663 318,257
---------- ---------- ---------
Total revenues 1,145,937 1,021,453 908,725
---------- ---------- ---------
Costs and expenses:
Cost of services 1,096,246 970,163 871,317
Corporate selling and administrative 17,785 18,241 18,705
Interest expense 12,432 10,220 14,856
Interest income (2,018) (1,752) (3,804)
Other expense (Note 14) 10,349 5,474 10,212
---------- ---------- ---------
Total costs and expenses 1,134,794 1,002,346 911,286
---------- ---------- ---------
Earnings (loss) from continuing operations before income taxes,
minority interest and extraordinary item 11,143 19,107 (2,561)
Provision (benefit) for income taxes (Note 15) 2,282 5,893 (9,090)
---------- ---------- ---------
Earnings from continuing operations before minority interest
and extraordinary item 8,861 13,214 6,529
Minority interest (Note 1) 1,439 1,265 1,255
---------- ---------- ---------
Earnings from continuing operations before extraordinary item 7,422 11,949 5,274
Loss from discontinued operations, net of income taxes (Note 2) - - (1,416)
Gain on sale of discontinued operations, net of income taxes (Note 2) - 2,680 1,396
---------- ---------- ---------
Earnings before extraordinary item 7,422 14,629 5,254
Extraordinary loss from early extinguishment of debt,
net of income taxes (Note 5) - - (2,886)
---------- ---------- ---------
Net earnings $ 7,422 $ 14,629 $ 2,368
========== ========== =========
Preferred Stock Class C dividends not declared or recorded (Note 8) - (2,284) (1,915)
---------- ---------- ---------
Common stockholders' share of earnings $ 7,422 $ 12,345 $ 453
========== ========== =========
Earnings Per Common Share (Note 17)
Basic Earnings Per Share:
Continuing operations before extraordinary item $ 0.83 $ 1.14 $ 0.40
Discontinued operations - 0.32 0.00
Extraordinary item - - (0.35)
---------- ---------- ---------
Common stockholders' share of earnings $ 0.83 $ 1.46 $ 0.05
========== ========== =========
Diluted Earnings Per Share:
Continuing operations before extraordinary item $ 0.70 $ 0.82 $ 0.29
Discontinued operations - 0.23 0.00
Extraordinary item - - (0.25)
---------- ---------- ---------
Common stockholders' share of earnings $ 0.70 $ 1.05 $ 0.04
========== ========== =========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
DynCorp and Subsidiaries
Consolidated Statements of Permanent Stockholders' Equity
For the Years Ended December 31
(Dollars in thousands)
<CAPTION>
Reclassification
to Temporary
Equity for
Redemption
Common Value
Preferred Common Stock Paid-in greater than
Stock Stock Warrants Surplus Par Value Deficit
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $3,000 $ 81 $11,486 $130,277 $ (130,118) $(118,256)
Stock issued under Restricted Stock Plan (Note 10) 26 (242)
Treasury stock purchased (Notes 7 and 9)
Warrants exercised or canceled (Note 10) 7 (181) 175
Contribution of stock to Employee Stock Ownership Plan (Note 12) 121 17,879
Payment received on Employee Stock Ownership Plan note (Note 12)
Accrued interest on note receivable (Note 11)
Collection of note receivable (Note 11)
Net earnings 2,368
Reclassification to Redeemable Common Stock (Note 7) (76) (4,992)
------ ------ ------ ------- -------- --------
Balance, December 31, 1995 3,000 159 11,305 148,089 (135,110) (115,888)
Stock issued under Restricted Stock Plan (Note 10) 11 (124)
Treasury stock purchased (Notes 7 and 9)
Warrants and stock options exercised (Notes 10 and 19) 7 (166) 185
Reclassification from Temporary Equity (Note 7) 166 32,972
Shares purchased by Employee Stock Ownership Plan
on Internal Market (Note 7) (13) (1,874)
Payment received on Employee Stock Ownership Plan note (Note 12)
Other 84
Net earnings 14,629
Reclassification to Redeemable Common Stock (Note 7) 2 (34,682)
------ ------ ------ ------- -------- --------
Balance, December 31, 1996 3,000 332 11,139 148,234 (138,694) (101,259)
Stock issued under Restricted Stock Plan (Note 10) 13 (802)
Treasury stock issued
Treasury stock purchased (Notes 7 and 9)
Warrants and stock options exercised (Notes 10 and 19) 111 (2,683) 2,981
Class C Preferred Stock converted and warrants exercised (3,000) 95 (2,007) 5,119
Common stock purchased and warrants exercised (5,190) (30,120)
Loans to Employee Stock Ownership Plan (Note 12)
Payment received on Employee Stock Ownership Plan note (Note 12)
Net Earnings 7,422
Reclassification to Redeemable Common Stock (Note 7) (73) (15,444)
------ ------ ------ -------- --------- --------
Balance, December 31, 1997 $ - $ 478 $1,259 $125,412 $(154,138) $(93,837)
====== ====== ====== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Employee
Stock Cummings
Ownership Point
Plan Loan Industries
Treasury and Unearned Note
Stock ESOP Shares Receivable
<S> <C> <C> <C>
Balance, December 31, 1994 $(8,817) $ - $ (8,943)
Stock issued under Restricted Stock Plan (Note 10)
Treasury stock purchased (Notes 7 and 9) (12,267)
Warrants exercised or canceled (Note 10)
Contribution of stock to Employee Stock Ownership Plan (Note 12) (13,750)
Payment received on Employee Stock Ownership Plan note (Note 12) 13,247
Accrued interest on note receivable (Note 11) (951)
Collection of note receivable (Note 11) 9,894
Net earnings
Reclassification to Redeemable Common Stock (Note 7)
-------- ------- -------
Balance, December 31, 1995 (21,084) (503) -
Stock issued under Restricted Stock Plan (Note 10) 75
Treasury stock purchased (Notes 7 and 9) (4,226)
Warrants and stock options exercised (Notes 10 and 19)
Reclassification from Temporary Equity (Note 7)
Shares purchased by Employee Stock Ownership Plan
on Internal Market (Note 7)
Payment received on Employee Stock Ownership Plan note (Note 12) 503
Other
Net earnings
Reclassification to Redeemable Common Stock (Note 7)
-------- ------- -------
Balance, December 31, 1996 (25,235) - -
Stock issued under Restricted Stock Plan (Note 10)
Treasury stock issued 233
Treasury stock purchased (Notes 7 and 9) (907)
Warrants and stock options exercised (Notes 10 and 19)
Class C Preferred Stock converted and warrants exercised
Common stock purchased and warrants exercised (2,794)
Loans to Employee Stock Ownership Plan (Note 12) (13,274)
Payment received on Employee Stock Ownership Plan note (Note 12) 5,189
Net Earnings
Reclassification to Redeemable Common Stock (Note 7)
-------- -------- -----------
Balance, December 31, 1997 $(28,703) $ (8,085) $ -
======== ======== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
DynCorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31
(Dollars in thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 7,422 $ 14,629 $ 2,368
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization (Note 1) 9,888 9,467 11,348
Loss, before tax, on purchase of Junior Subordinated Debentures (Note 5) - - 4,786
Payment of income taxes on gain on sale of the
Commercial Aviation business - (13,990) -
(Earnings) loss from discontinued operations (Note 2) - (2,680) 20
Deferred income taxes (Note 15) 4,165 1,478 4,959
Proceeds from insurance settlement for asbestos claims 1,488 - -
Change in reserves for divested businesses (Note 14) 8,157 825 7,700
Other (882) (848) (1,031)
Change in assets and liabilities, net of acquisitions and dispositions:
Increase in accounts receivable and contracts
in process (15,311) (6,864) (6,975)
(Increase) decrease in inventories (60) 353 (340)
Increase in other current assets (1,245) (1,867) (1,222)
(Decrease) increase in current liabilities except notes payable
and current portion of long-term debt (3,685) 4,345 (7,756)
-------- -------- --------
Cash provided by continuing operations 9,937 4,848 13,857
Cash used by operating activities of discontinued operations - - (3,375)
-------- -------- --------
Cash provided by operating activities 9,937 4,848 10,482
-------- -------- --------
Cash Flows from Investing Activities:
Sale of property and equipment 318 1,093 16,294
Proceeds received from notes receivable 4 3 8,950
Purchase of property and equipment (5,110) (5,310) (4,789)
Deferred income taxes from "safe harbor" leases (Note 15) (309) (316) (554)
Increase in investment in unconsolidated subsidiaries (2,038) (169) (93)
Increase in notes receivable to equity investee (867) - -
Assets and liabilities of acquired businesses
(excluding cash acquired) (Note 1) - (2,801) (1,092)
Proceeds from sale of discontinued operations (Note 2) - 3,050 135,700
Decrease (increase) in cash on deposit for letters of credit (Note 5) - 6,244 (3,307)
Investing activities of discontinued operations - - (11,439)
Other (255) (113) 176
-------- -------- --------
Cash (used) provided by investing activities (8,257) 1,681 139,846
-------- -------- --------
Cash Flows from Financing Activities:
Treasury stock purchased (Note 7) (923) (9,712) (12,267)
Payment on indebtedness (1,708) (1,264) (25,172)
Retirement of Contract Receivable Collateralized Notes 1992-1 (98,500) - -
Proceeds from Contract Receivable Collateralized Notes 1997-1 50,000 - -
Proceeds from issuance of Senior Notes 99,484 - -
Common stock and warrants purchased from investors (37,819) - -
Redemption of Junior Subordinated Debentures (Note 5) - - (105,971)
Stock released to Employee Stock Ownership Plan (Note 12) 5,189 503 17,497
Loans to Employee Stock Ownership Plan (Note 12) (13,274) - -
Deferred financing expenses (Note 5) (5,080) (1,310) (864)
Financing activities of discontinued operations - - (228)
Other (324) (20) 90
-------- -------- --------
Cash used by financing activities (2,955) (11,803) (126,915)
-------- -------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (1,275) (5,274) 23,413
Cash and Cash Equivalents at Beginning of the Year 25,877 31,151 7,738
-------- -------- --------
Cash and Cash Equivalents at End of the Year $24,602 $ 25,877 $ 31,151
======== ======== ========
See accompanying notes.
</TABLE>
<PAGE>
DynCorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
(Dollars in thousands, except per share amounts or where otherwise noted)
(1) Summary of Significant Accounting Policies
Organization -- The Company provides diversified management, technical and
professional services to primarily U.S. Government customers throughout United
States and internationally.
Principles of Consolidation -- All majority-owned subsidiaries have been
included in the financial statements and all significant intercompany accounts
and transactions have been eliminated. Outside investors' interest in the
majority-owned subsidiaries is reflected as minority interest. Investments less
than 50% owned are accounted for using the equity method of accounting.
Accounting Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from these estimates.
Contract Accounting -- Contracts in process are stated at the lower of actual
cost incurred plus accrued profits or net estimated realizable value of incurred
costs, reduced by progress billings. The Company records income from major
fixed-price contracts, extending over more than one accounting period, using the
percentage-of-completion method. During performance of such contracts, estimated
final contract prices and costs are periodically reviewed and revisions are made
as required. The effects of these revisions are included in the periods in which
the revisions are made. On cost-plus-fee contracts, revenue is recognized to the
extent of costs incurred plus a proportionate amount of fee earned, and on
time-and-material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable costs incurred.
Losses on contracts are recognized when they become known. Disputes arise in the
normal course of the Company's business on projects where the Company is
contesting with customers for collection of funds because of events such as
delays, changes in contract specifications and questions of cost allowability or
collectibility. Such disputes, whether claims or unapproved change orders in the
process of negotiation, are recorded at the lesser of their estimated net
realizable value or actual costs incurred and only when realization is probable
and can be reliably estimated. Claims against the Company are recognized where
loss is considered probable and reasonably determinable in amount.
Accounts Receivable -- It is the Company's policy to provide reserves for the
collectibility of accounts receivable when it is determined that it is probable
that the Company will not collect all amounts due and the amount of reserve
requirement can be reasonably estimated.
Property and Equipment -- The Company computes depreciation and amortization
using the straight-line method. The estimated useful lives used in computing
depreciation and amortization are: buildings, 15-33 years; machinery and
equipment, 3-20 years; and leasehold improvements, the lesser of the useful life
or the term of the lease. Depreciation and amortization expense was $4,881 for
1997, $4,310 for 1996 and $5,100 for 1995.
Cost of property and equipment sold or retired and the related accumulated
depreciation or amortization is removed from the accounts in the year of
disposal, and any gains or losses are reflected in the consolidated statements
of operations. Expenditures for maintenance and repairs are charged to expense
as incurred, and major additions and improvements are capitalized.
Intangible Assets -- At December 31, 1997, intangible assets consist of $45,140
of unamortized goodwill and $1,610 of value assigned to contracts. Goodwill is
being amortized on a straight-line basis over periods up to forty years ($43,330
forty years, $147 thirty years, $1,502 fifteen years and $161 ten years).
Amortization expense was $1,560, $2,814 (see Note 14 (d)) and $2,081 in 1997,
1996 and 1995, respectively. Amounts allocated to contracts are being amortized
over the lives of the contracts for periods up to ten years. Amortization of
amounts allocated to contracts was $617 in 1997 and 1996 and $624 in 1995.
Cumulative amortization of $18,159 and $31,129 has been recorded through
December 31, 1997, of goodwill and value assigned to contracts, respectively.
<PAGE>
Environmental Liabilities -- The Company accrues environmental costs in
accordance with Statement of Position ("SOP") 96-1, "Environmental Remediation
Liabilities", when it is probable that a liability has been incurred and the
amount can be reasonably estimated. Recorded liabilities have not been
discounted.
Postretirement Health Care Benefits -- The Company provides no significant
postretirement health care or life insurance benefits to its retired employees
other than allowing them to continue as participants in the Company's plans with
the retiree paying the full cost of the premium. The Company has determined,
based on an actuarial study, that it has no liability under Statement of
Financial Accounting Standard ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions".
Postemployment Benefits -- SFAS No. 112, "Employers' Accounting for
Postemployment Benefits", requires employers to accrue for the estimated cost of
benefits provided by an employer to former or inactive employees after
employment, but before retirement. The Company does provide limited
post-employment benefits such as severance pay and outplacement services,
however, the Company cannot reasonably estimate its liability and thus the
accrual of any such post-employment benefits is accounted for in accordance with
SFAS No. 5, "Accounting for Contingencies".
Long-Lived Assets -- SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," requires that long-lived
assets and certain intangibles be reviewed for impairment when events or
circumstances indicate the carrying amount of an asset may not be recoverable.
The Company's practice is consistent with the guidelines as set forth in the
statement.
Stock Options -- SFAS No. 123, "Accounting for Stock-Based Compensation," is
effective for fiscal years beginning after December 15, 1995. The statement
encourages, but does not require, adoption of the fair value based method of
accounting for employee stock options and other stock compensation plans. The
Company accounts for its stock option plan in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and has made the required proforma disclosure of net earnings and
earnings per share as if the fair value based method for accounting defined in
SFAS 123 had been applied (see Note 19).
Earnings per Common Share -- The Company has adopted SFAS No. 128, "Earnings per
Share," and has restated all prior periods presented to conform to the new
standard.
Segment Reporting -- SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", was issued in June 1997, and is effective for fiscal
years beginning after December 15, 1997, with early application encouraged. The
Company has chosen to adopt this statement in 1997 and the required disclosures
are contained either in Part I, Item 1, "Business" included elsewhere in this
Annual Report on Form 10-K, or in Note 22, "Business Segments" to the
consolidated financial statements.
Derivative Financial Instruments -- The Company's policy is to use derivative
financial instruments to manage its exposures to fluctuations in interest rates
and foreign exchange rates. The Company does not hold or issue financial
instruments for trading purposes. At December 31, 1997, the amounts of such
financial instruments, as well as the amounts of gains and losses recorded
during the year, were not material.
New Accounting Pronouncements -- SFAS No. 130, "Reporting Comprehensive Income",
was issued in June 1997, and becomes effective for fiscal years beginning after
December 15, 1997. The statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. At present, the Company does not report
any transactions which would be deemed to be included in comprehensive income,
therefore, SFAS No. 130, will not materially impact the Company's financial
statements.
Consolidated Statements of Cash Flows -- For purposes of these statements,
short-term investments which consist of government treasury bills and time
deposits with a maturity of ninety days or less are considered cash equivalents.
Cash and cash equivalents at the balance sheet date are net of checks
outstanding. Cash and short-term investments at December 31, 1997 and 1996,
excludes $1.5 million and $3.0 million, respectively, of restricted cash which
is classified as Other Assets.
Depreciation and amortization is comprised of property and equipment,
amortization of intangible assets and other items such as the amortization of
deferred debt expense, covenants not to compete and deferred organizational
cost. Amortization in 1997 included a charge of $1.0 million for the write-off
of software which the Company acquired late in 1996 in order to bid a contract
which was subsequently awarded to another company.
Classification -- Consistent with industry practice, assets and liabilities
relating to long-term contracts and programs are classified as current although
a portion of these amounts is not expected to be realized within one year.
Noncash investing and financing activities consist of the following:
1997 1996 1995
---- ---- ----
Acquisitions of businesses:
Assets acquired $ - $ 4,998 $ 2,772
Liabilities assumed - (1,498) (1,680)
Cash acquired - (699) -
--------- ------- --------
Net cash $ - $ 2,801 $ 1,092
--------- ------- -------
Capitalized equipment leases and
notes secured by property and equipment $ 626 $ - $ -
(2) Discontinued Operations
During 1995, the Company sold all of its subsidiaries engaged in the
commercial aircraft maintenance and ground handling activities, i.e., the
Commercial Aviation business. At December 31, 1995, certain contingencies
existed regarding the final sales prices of both the maintenance and ground
handling businesses. Additionally, the Company retained certain contingent
liabilities which included general warranties and representations and certain
specific issues regarding environmental, insurance and tax matters. During 1996,
the Company recorded a net gain of $2,680 related to the resolution of some of
these outstanding issues as well as the adjustment of estimated reserves
recorded at disposition.
The components of discontinued operations on the statements of operations are as
follows:
Years Ended December 31,
1996 1995
Revenues $ - $130,709
Cost of services - 123,698
Interest expense and other (a) - 7,236
Pre-tax gain on sale of discontinued operations (3,448) (29,998)
Income tax provision 768 29,793
------- --------
Gain (loss) from discontinued operations $ 2,680 $ (20)
======= =========
(a) The Company has charged interest expense to discontinued operations of
$7,950 in 1995. The interest expense charged is the sum of the interest
on the debt of the discontinued operations assumed by the buyers plus an
allocation of other consolidated interest that was not directly
attributable to the continuing operations of the Company.
The sale of the subsidiaries resulted in a partial termination of the ESOP
and termination of all active participants of the subsidiaries. These employees
were entitled to put their ESOP shares (approximately 493,000 shares) sooner
than had been previously anticipated. These shares have been included in the
estimated annual repurchase commitment reported in Note 7, Redeemable Common
Stock.
(3) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate the value:
Accounts Receivable, Prepaid Income Taxes, Accounts Payable and Accrued
Income Taxes - The carrying amount approximates the fair value due to the short
maturity of these instruments.
Long-term debt and other liabilities and deferred credits - The fair value
of the Company's 7.486% Contract Receivable Collateralized Notes and the Senior
Notes, based on the current rate as if the issue date were December 31, 1997, is
$153.4 million as compared to a book value of $149.5 million. The fair value of
the 8.54% Contract Receivable Collateralized notes at December 31, 1996, was
equal to the book value, $100.0 million, due to the short maturity of the notes.
For the remaining long-term debt (see Note 5) and other liabilities and
deferred credits, the carrying amount approximates the fair value.
(4) Accounts Receivable and Contracts in Process
The components of accounts receivable and contracts in process were as
follows at December 31:
1997 1996
-------- ---------
U.S. Government:
Billed and billable $119,538 $108,301
Recoverable costs and accrued profit on progress
completed but not billed 25,462 26,473
Retainage due upon completion of contracts 2,034 2,343
---------- ----------
147,034 137,117
-------- --------
Other Customers (primarily subcontracts from
U.S. Government prime contractors and other state,
local and quasi-government agencies):
Billed and billable (less allowance for doubtful
accounts of $476 in 1997 and $229 in 1996) 37,104 42,689
Recoverable costs and accrued profit on progress
completed but not billed 18,620 7,873
---------- ----------
55,724 50,562
---------- ----------
$202,758 $187,679
======== ========
Billed and billable include amounts earned and contractually billable at
year-end but which were not billed because customer invoices had not yet been
prepared at year-end. Recoverable costs and accrued profit not billed is
composed primarily of amounts recognized as revenues, but which are not
contractually billable at the balance sheet dates. It is expected that all
amounts at December 31, 1997, will be collected within one year except for
approximately $6,580.
(5) Long-term Debt
At December 31, 1997 and 1996, long-term debt consisted of:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
9 1/2% Senior Notes $99,510 $ -
7.486% Contract Receivable Collateralized Notes, Series 1997-1 50,000 -
8.540% Contract Receivable Collateralized Notes, Series 1992-1 - 100,000
Mortgages payable 3,100 3,461
Notes payable, 8.5% demand note in 1997, due in installments
through 2002, 11.43% weighted average interest rate in 1996 79 722
-------- --------
152,689 104,183
Less current portion 450 628
-------- --------
$152,239 $103,555
======== ========
</TABLE>
Debt maturities as of December 31, 1997, were as follows:
1998 $ 450
1999 153
2000 166
2001 180
2002 50,212
Thereafter 101,528
---------
$152,689
=========
On March 17, 1997, the Company closed on the issuance of $100.0 million of
9 1/2% Senior Subordinated Notes ("Senior Notes") with a scheduled maturity in
2007. Interest is payable semi-annually, in arrears, on March 1 and September 1
of each year. The Senior Notes are redeemable, in whole or in part, at the
option of the Company, on or after March 1, 2002 at a redemption price which
ranges from 104.75% in 2000 to 100.00% in 2005 and thereafter. In addition, at
any time prior to March 1, 2000, the Company may redeem up to 35% of the
aggregate principal amount of the Senior Notes (at a redemption price of
109.50%) with proceeds generated from a public offering of equity, provided at
least 65% of the original aggregate amount of the Senior Notes remains
outstanding. The Senior Notes are general unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future senior
debt of the Company.
On April 18, 1997, the Company's wholly owned subsidiary Dyn Funding
Corporation ("DFC"), completed a private placement of $50 million of 7.486%
Fixed Rate Contract Receivable Collateralized Notes, Series 1997-1, Class A (the
"Class A Notes"). The Class A Notes are collateralized by the right to receive
proceeds from certain U.S. Government contracts and certain eligible commercial
accounts receivable of the Company and its subsidiaries. Credit support for the
Class A Notes is provided by overcollateralization in the form of additional
receivables. The Company retains an interest in the excess balance of the
receivables through its ownership of the common stock of DFC. Interest payments
are made monthly with principal payments scheduled to begin March 31, 2002 (the
"Amortization Date"). The period between April 18, 1997 and February 28, 2002 is
referred to as the "Non-Amortization Period".
On an ongoing basis, cash receipts from the collection of the receivables
are used to make interest payments on the Class A Notes, pay a servicing fee to
the Company, and purchase additional receivables from the Company. During the
Non-Amortization period, cash in excess of the amount required to purchase
additional receivables and meet payments on the Class A Notes is to be paid to
the Company subject to certain collateral coverage tests. The receivables
pledged as security for the Class A Notes are valued at a discount from their
stated value for purposes of determining proper credit support. DFC is required
to maintain receivables, at their discounted values, plus cash on deposit at
least equal to the outstanding balance of the Class A Notes.
The Class A Notes may be redeemed in whole, but not in part, at the option
of DFC at a price equal to the principal, plus accrued interest, plus a premium
(as defined). The indenture also provides for special redemption of the Class A
Notes in the event the collateral value ratio is less than 1.00 and mandatory
redemption in the event the collateral value ratio is less than 0.95 on two
consecutive determination dates and the Company has not substituted receivables
or deposited cash to bring the collateral value ratio to 1.00. Mandatory
redemption is also required in the event three special redemptions are required
within any twelve month period or the aggregate stated value of all ineligible
receivables which have been ineligible for more than 30 days exceed 7% of the
aggregate collateral balance and the collateral value ratio is less than 1.00.
Also issued at closing were $90 million of Floating Rate Contract Receivable
Collateralized Notes, Series 1997-1, Class B (the "Class B Notes"). The Class B
Notes, when drawn, will be subject to the same terms as the Class A Notes. At
December 31, 1997, the Class B Notes had yet to be utilized. (See Note 24).
The proceeds from the issuance of the Senior Notes, net of a discount, and
from the issuance of the Class A Notes were used to retire the maturing 8.54%
Contract Receivable Collateralized Notes, Series 1992-1, to fund the Company's
purchase of common stock and warrants, to make a loan to the ESOP to enable it
to repay notes issued for the purchase of the Company's Class C Preferred Stock
and to pay various transaction fees (see Note 12).
At December 31, 1997, $60,478 of accounts receivable are restricted as
collateral for the Class A Notes. Additionally, $1.5 million of cash (3% of the
balance of the Class A Notes) is restricted and has been included in Other
Assets in the balance sheet. Similarly $3 million, or 3% of the previously
outstanding 8.54% Collateralized Notes, had been classified as restricted cash
and included in Other Assets on the balance sheet on December 31, 1996.
Upon the closing of the Senior Notes and the Class A Notes, the Company
reduced its revolving credit facility with Citicorp North America, Inc. from $50
million to $15 million. The facility provides funds for working capital and
capital expenditure requirements and also provides for letters of credit for the
Company and its subsidiaries. The agreement contains customary restrictions on
the ability of the Company to undertake certain activities, such as the
incurrance of additional debt, the payment of dividends on or the repurchase of
the Company's common stock, the merger of the Company into another Company, the
sale of substantially all the Company's assets, and the acquisition of the stock
or substantially all the assets of another company. The agreement also
stipulates that the Company must maintain certain financial ratios, including
specified ratios of earnings to fixed charges and debt to earnings. The Company
utilized this credit facility throughout 1997, never exceeding $8.0 million in
borrowings at any given period in time. At December 31, 1997, there were no
borrowings under this line of credit, however, the amount available was reduced
by $10 million due to outstanding letters of credit.
During 1995, the Company repurchased or called all of the outstanding 16%
Junior Subordinated Debentures. The Company recorded an extraordinary loss of
$2,886, net of an income tax benefit of $1,900 consisting primarily of the
write-off of unamortized discount or deferred financing costs and also various
transaction fees.
The Company acquired the Alexandria, VA headquarters of Technology
Applications, Inc. ("TAI") on November 12, 1993, in conjunction with the
acquisition of TAI. A mortgage of $3,344 bearing interest at 8% per annum was
assumed. Payments are made monthly and the mortgage matures in April 2003.
Additionally, a $1,150 promissory note was issued. The note bears interest at 7%
per annum. Payments under the note shall be made quarterly through October 1998.
The Company obtained title to its corporate office building on July 31, 1992
by assuming a mortgage of $19,456. On February 7,1995, the Company sold the
building to RREEF America REIT Corp. C and entered into a twelve year lease with
RREEF as the landlord. The facility was sold for $13,780 and the proceeds were
applied to the mortgage. A net gain of $3,430 was realized on the transaction
and is being amortized over the life of the lease.
Deferred debt issuance costs are being amortized using the effective
interest rate method over the term of the related debt. At December 31, 1997,
unamortized deferred debt issuance costs were $5,645 and amortization for 1997,
1996 and 1995 was $706, $829 and $743, respectively.
Cash paid for interest was $13,076 for 1997, $9,485 for 1996 and $14,150 for
1995.
(6) Accrued Expenses
At December 31, 1997 and 1996, accrued expenses consisted of the following:
1997 1996
---- ----
Salaries and wages $ 42,804 $ 44,044
Insurance 19,878 14,768
Interest 3,103 4,447
Payroll and miscellaneous taxes 10,650 8,508
Accrued contingent liabilities and operating
reserves (see Note 21) 24,017 19,969
Other 5,175 7,409
--------- ---------
$105,627 $99,145
========= =========
(7) Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary Equity at
the redeemable value at each balance sheet date and consists of the following:
<TABLE>
<CAPTION>
Balance at Balance at
Redeemable December 31, Redeemable December 31,
Shares Value 1997 Shares Value 1996
<S> <C> <C> <C> <C> <C> <C>
ESOP Shares 3,520,037 $24.00 $ 84,480,888 3,520,037 $23.70 $ 83,424,877
3,367,082 $20.00 67,341,640 2,645,920 $20.00 52,918,400
--------- ----------- --------- -----------
6,887,119 $151,822,528 6,165,957 $136,343,277
========= =========== ========= ===========
Other Shares 125,714 $24.00 $ 3,017,136 125,714 $23.70 $ 2,979,422
========= ============ ========= ===========
</TABLE>
ESOP Shares
In accordance with ERISA regulations and the Employee Stock Ownership Plan
(the "Plan") documents, the ESOP Trust or the Company is obligated to purchase
vested common stock shares from ESOP participants (see Note 12) at the fair
value (as determined by an independent appraiser) as long as the Company's
common stock is not publicly traded. The shares initially bought by the ESOP in
1988 were bought at a "control price," reflecting the higher price that buyers
typically pay when they buy an entire company (as the ESOP and other investors
did in the 1988 LBO). A special provision in the ESOP's 1988 agreement permits
participants to receive a "control price" when they sell these shares back to
the Company under the ESOP's "put option" provisions. This "control price,"
determined by the appraiser as of December 31, 1997, was $24.00 per share. The
additional shares received by the ESOP in 1994 through 1997 were at a "minority
interest price," reflecting the lower price that buyers typically pay when they
are buying only a small piece of a company. Participants do not have the right
to sell these shares at the "control price". The minority interest price
determined by the independent appraiser as of December 31, 1997 was $20.00 per
share. Participants receive their vested shares upon retirement, becoming
disabled, or death, over a period of one to five years and for other reasons of
termination over a period of one to ten years, all as set forth in the Plan
documents. In the event the fair value of a share is less than $27.00, the
Company was committed to pay, through December 31, 1996, up to an aggregate of
$16 million, the difference (Premium) between the fair value and $27.00 per
share. The Company estimated a total Premium of $8.5 million and recorded the
Premium as Other Expense in the Consolidated Statements of Operations in 1989
through 1994 (see Note 14). As of December 31, 1996, the Company had expended
$6,976 of the Premium. In 1996, the Company reversed $1,250, revising its
estimated ESOP Premium. The remaining liability represents the Company's
obligation to honor the Premium commitment to ESOP participants who were
grandfathered due to minor administrative changes in the plan in 1995. From
October 1990 through May 1996, the Company had purchased 633,453 shares from
participants. In June 1996, the ESOP Trust began purchasing participants' shares
at fair value, utilizing the cash available from the Company's contributions
(see Note 12), while the Company continues to pay the premium, if any. Based on
the fair values of $24.00 and $20.00 per share at December 31, 1997, the
estimated aggregate annual commitment to repurchase shares from the ESOP
participants upon death, disability, retirement and termination is as follows:
$7,178 in 1998, $6,606 in 1999, $7,970 in 2000, $10,764 in 2001, $13,743 in 2002
and $105,562 thereafter. Under the Subscription Agreement with the ESOP dated
September 9, 1988, the Company is permitted to defer put options if, under
Delaware law, the capital of the Company would be impaired as a result of such
repurchase. At December 31, 1997 and 1996, 6,887,119 and 6,165,957 shares,
respectively, were outstanding and included in Redeemable Common Stock.
Management Investors Shares
Redeemable common stock held by management investors includes those shares
acquired by management investors pursuant to the merger in 1988, shares earned
through the Restricted Stock Plan (see Note 10) and shares issued through the
Management Employees Stock Purchase Plan (the "Stock Purchase Plan"). The Stock
Purchase Plan allowed employees in management, supervisory or senior
administrative positions to purchase shares of the Company's common stock along
with warrants at current fair value. The Board of Directors was responsible for
establishing the fair value for purposes of the Stockholders Agreement and the
Stock Purchase Plan. The Stock Purchase Plan was discontinued in 1994. Treasury
stock, which the Company acquired from terminated employees who had previously
purchased shares from the Company, was issued to employees purchasing stock
under the Stock Purchase Plan. Under the DynCorp Stockholders Agreement adopted
in March 1994 and which expires in March 1999, the Company was committed, upon
an employee's termination of employment, to purchase common stock shares held by
employees pursuant to the merger, through the Stock Purchase Plan or through the
Restricted Stock Plan. In May 1995, the Board of Directors, with the consent of
the Class C Preferred stockholder, approved the establishment of an Internal
Market as a replacement for the resale procedures included in the DynCorp
Stockholders Agreement. In May 1996, the Securities and Exchange Commission
approved the registration of shares for trading on the Internal Market, thus
releasing the Company from its obligation to repurchase any management or
restricted stock shares. Therefore, the management investor shares were
reclassified from Temporary Equity (at the redemption value) to Permanent Equity
(at par value) in 1996.
Other Shares
In conjunction with the acquisition of Technology Applications, Inc. in
November 1993, the Company issued put options on 125,714 shares of common stock.
The holder may, at any time commencing on December 31, 1998 and ending on
December 31, 2000, sell these shares to the Company at a price per share equal
to the greater of $17.50; or, if the stock is publicly traded, the market value
at a specified date; or, if the Company's stock is not publicly traded, the ESOP
control price at the time of exercise. At December 31, 1997 and 1996, 125,714
shares of common stock were outstanding and included in Redeemable Common Stock.
<PAGE>
<TABLE>
Following are the changes in Redeemable Common Stock for the three years
ended December 31, 1997:
<CAPTION>
Redeemable Common Stock
Management
Other ESOP Investors Total
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 2,288 $ 86,338 $ 42,202 $ 130,828
Treasury stock purchased (2,904) (9,336) (12,240)
Warrants exercised (Note 10) 179 179
Contribution of stock to ESOP (Note 12) 18,000 18,000
Adjustment of shares to fair value (13) (953) 93 (873)
--------- --------- --------- ---------
Balance, December 31, 1995 2,275 100,481 33,138 135,894
Reclassification to permanent equity (33,138) (33,138)
Treasury stock purchased (290) (290)
Shares purchased on Internal Market 1,887 1,887
Adjustment of shares to fair value 704 34,265 34,969
--------- --------- --------- ---------
Balance, December 31, 1996 2,979 136,343 - 139,322
Shares purchased on Internal Market 205 205
Shares purchased by ESOP not
collateralized by notes 13,371 13,371
Adjustment of shares to fair value 38 1,904 1,942
--------- --------- --------- ---------
Balance, December 31, 1997 $3,017 $151,823 $ - $ 154,840
========= ========= ========= =========
</TABLE>
(8) Preferred Stock, Class C
Dividends on the Class C Preferred Stock accrued at an annual rate of 18%,
compounded quarterly. At December 31, 1996, cumulative dividends of $11,147 had
not been recorded or paid. In February 1997, the ESOP purchased all of the Class
C Preferred Stock which was immediately converted into Common Stock.
(9) Common Stock
At December 31, 1997, Common Stock includes those shares issued to outside
investors, management investor shares (i.e. shares issued through the Restricted
Stock Plan and Management Employees Stock Purchase Plan) and any ESOP shares
which have been purchased by the Company and are being held as treasury stock.
(10) Common Stock Warrants and Restricted Stock
The Company initially issued warrants on September 9, 1988 to the Class C
Preferred stockholder and to certain common stockholders to purchase a maximum
of 5,891,987 shares of common stock of the Company. The warrants issued to the
Class C Preferred stockholder and to certain common stockholders were recorded
at their fair value of $2.43 per warrant and warrants issued to a lender were
recorded at $3.28 per warrant. Each warrant is exercisable to obtain one share
of common stock. The stockholder may exercise the warrant and pay in cash the
exercise price of $0.25 for one share of common stock or may sell back to the
Company a sufficient number of the exercised shares to equal the value of the
warrants to be exercised. During 1997, 3,736,113 warrants were exercised or
cancelled and 347,367 warrants were outstanding at December 31, 1997. Rights
under the warrants lapse no later than September 9, 1998. Included in the
warrants exercised in 1997 are those associated with the Class C Preferred Stock
which was purchased by the ESOP in February 1997 and was immediately converted
into Common Stock.
The Company had a Restricted Stock Plan (the "Plan") under which management
and key employees could be awarded shares of common stock based on the Company's
performance. The Company initially reserved 1,023,037 shares of common stock for
issuance under the Plan. Under the Plan, Restricted Stock Units ("Units") were
granted to participants who were selected by the Compensation Committee of the
Board of Directors. Each Unit entitled the participant upon achievement of the
performance goals (all as defined) to receive one share of the Company's common
stock. Units could not be converted into shares of common stock until the
participant's interest in the Units had vested. Vesting occurred upon completion
of the specified periods as set forth in the Plan.
<PAGE>
(11) Cummings Point Industries, Inc. Note Receivable
The Company loaned $5.5 million (the "Note") to Cummings Point Industries,
Inc., of which Capricorn Investors, L.P. ("Capricorn") owns more than 10%. By
separate agreement and as security to the Company, Capricorn agreed to purchase
the Note from the Company upon three months' notice for the amount of
outstanding principal plus accrued interest. As additional security, Capricorn's
purchase obligation was collateralized by certain common stock and warrants
issued by the Company and owned by Capricorn. The Note, which had previously
been reflected as a reduction in stockholders' equity was paid in full in
August, 1995.
(12) Employee Stock Ownership Plan
In September 1988, the Company established an Employee Stock Ownership Plan
(the "Plan"). The Company borrowed $100 million and loaned the proceeds, on the
same terms as the Company's borrowings, to the Plan to purchase 4,123,711 shares
of common stock of the Company ("the ESOP loan"). In accordance with subsequent
amendments to the plan, the ESOP acquired 2,797,812 additional shares, from 1993
through 1996 either through contributions of stock from the Company, or
contributions of cash from the Company with which the ESOP then purchased shares
either from the Company, on the Internal Market or directly from retired or
terminated participants.
At the beginning of 1997, the ESOP had considerable cash on hand. Utilizing
this cash and loans from the Company, the ESOP purchased all of the Company's
Class C Preferred Stock. The ESOP subsequently converted the Class C Preferred
Stock and exercised the related warrants, at which time the Company issued
949,642 shares of common stock to the ESOP. The purchase price for the Class C
Preferred Stock was $18,566 ($19.55 per share, after exercise of warrants) of
which half was paid in cash ($8,277 on hand and $1,006 loaned from the Company)
and notes were issued for the balance. The notes, plus $89 of accrued interest,
were paid in full by April 2, 1997, with the proceeds of another loan from the
Company. The unpaid balance on these notes from the ESOP, $5,189, representing
260,272 shares, is reflected as a reduction of stockholders' equity at December
31, 1997.
Utilizing the Company's 1997 contribution as well as subsequent loans, the
ESOP made the required principal and interest payments on the aforementioned
notes, paid administrative fees, purchased 230,320 shares of stock either from
retired or terminated participants or on the Internal Market and purchased
150,434 shares of stock from retired officers of the Company in a transaction
that allowed the ESOP to acquire shares at a below market price. At December 31,
1997, the unpaid balance on these subsequent loans, $2,896, representing 128,958
shares, is also reflected as a reduction in stockholders' equity.
The Plan covers a majority of the employees of the Company. Participants in
the Plan become fully vested after four years of service. Of the 8,251,919
shares acquired by the ESOP, 7,862,689 have been either issued or allocated to
participants as of December 31, 1997. The Company recognizes ESOP expense each
year based on the cash contribution for the year. In 1997, 1996 and 1995, cash
contributions to the ESOP were $11,200, $13,670 and $17,497, respectively. These
amounts were charged to Cost of Services and Corporate Selling and
Administrative Expenses.
(13) Savings Plan
The Company has a Savings and Retirement Plan which qualifies under section
401(k) of the Internal Revenue Code. The plan allows eligible employees to
contribute from 1% to 15% of their income on a pretax basis. In 1996, the
Company began matching 100% of the first 1% of employee contributions and 25% of
the next 4% of employee contributions, provided the employee contribution was
invested in the Company's Stock Fund. Matching contributions are invested in
additional shares of the Company's common stock. The Company has expensed
approximately $1,224 and $711 in 1997 and 1996, respectively, related to these
matching contributions.
<PAGE>
(14) Other Expenses
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Amortization of costs in excess
of net assets acquired (see Note 1) $ 1,560 $ 1,528 $2,081
Provision for non-recovery of receivables 629 120 -
ESOP Repurchase Premium (see Note 7) - (1,250) -
Write-off of investment in
unconsolidated subsidiary (d) 1,286 -
Legal and other expense accruals
associated with business discontinued in 1995 177 - -
Costs associated with businesses discontinued
in 1988 and prior years
o Asbestos liability issues (a and b) 7,800(a) - 5,300(b)
o Subcontractor suit (c) - 750 2,400
o Environmental costs (see Note 21(b)) 180 75 -
Termination costs (e) - 3,299 -
Miscellaneous 3 (334) 431
-------- -------- --------
Total Other $ 10,349 $ 5,474 $ 10,212
======== ======== ========
<FN>
(a) In connection with the proposed global settlement that would transfer
Fuller-Austin Insulation, Company ("Fuller-Austin") to a
post-Fuller-Austin bankruptcy reorganization plan trust (the "Trust")
for the benefit of present and future asbestos claimants (see Note
21(a)), the Company has reserved an additional $7.8 million for the
transfer of certain property and insurance rights to the Trust, and the
payment to the Trust of certain cash consideration.
(b) Reserves for potential uninsured costs to defend and settle future asbestos
claims against Fuller-Austin (see Note 21(a)). (c) Reserves for the estimated
(c) Reserves for the estimated costs (primarily legal defense) to resolve a lawsuit filed by a subcontractor of
a former subsidiary (see Note 21(b)).
(d) In 1994, the Company paid $3 million for a 25% interest in Composite Technology, Inc. ("CTI").
The volume of CTI's business has declined and in 1996 the
Company determined the goodwill associated with this investment had
been impaired and, accordingly, the unamortized balance at December 31,
1996, was written off.
(e) During 1996, several senior executives and a member of the Board of
Directors announced their intentions to either retire or step down from
their positions with the Company. In conjunction with this action, the
Company accrued $3.3 million, representing commitments to these
individuals for supplemental pension benefits, consulting fees,
payments due under a covenant not to compete, remuneration for the
waiver of certain preferred stock and Board of Directors voting rights,
as well as accrued life insurance premiums payable.
</FN>
</TABLE>
(15) Income Taxes
As prescribed by SFAS No. 109, "Accounting for Income Taxes," the Company
utilizes the asset and liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Valuation allowances are
provided if required.
Earnings (loss) from continuing operations before income taxes and minority
interest (but including extraordinary item - see Note 5) were derived from the
following:
Years Ended December 31,
1997 1996 1995
--------- -------- ------
Domestic operations $ 11,422 $ 19,102 $ (3,111)
Foreign operations (279) 5 (4,236)
--------- -------- ---------
$ 11,143 $ 19,107 $ (7,347)
========= ======== ========
<PAGE>
The provision (benefit) for income taxes consisted of the following:
Years Ended December 31,
1997 1996 1995
---- ---- ----
Current:
Federal $ (1,926) $ 4,286 $(10,322)
Foreign 43 (81) (2,234)
State - 210 (1,493)
-------- ---------- ---------
(1,883) 4,415 (14,049)
-------- --------- --------
Deferred:
Federal 6,653 3,939 9,749
Foreign - 1,100 1,000
State 499 (436) 2,900
-------- ---------- ---------
7,152 4,603 13,649
-------- --------- --------
Valuation Allowance:
Federal (2,488) (4,067) (7,707)
State (499) 942 (983)
-------- -------- ---------
(2,987) (3,125) (8,690)
-------- ------- ---------
Total $ 2,282 $ 5,893 $(9,090)
======== ======= =======
<PAGE>
The components of and changes in deferred taxes are as follows:
<TABLE>
<CAPTION>
Deferred Deferred Deferred
Dec. 31, Expense Dec. 31, Expense Dec. 31, Expense
1997 (Benefit) 1996 (Benefit) 1995 (Benefit)
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabilities:
Employee benefits $ (2,220) $ 33 $ (2,187) $ 1,027 $ (1,160) $ 1,535
Contracts revenue recognition (15,385) 3,954 (11,431) 1,645 (9,786) 885
Intangible amortization (549) (212) (761) (37) (798) (275)
Depreciation and other amortization (199) 265 66 (413) (347) 806
Other, net (234) 309 75 (102) (27) (26)
------- ------- ------- ------- ------- ------
Total deferred tax liabilities (18,587) 4,349 (14,238) 2,120 (12,118) 2,925
------- ------- ------- ------- ------- ------
Deferred tax assets:
Deferred compensation 1,733 507 2,240 191 2,431 1,621
Operating reserves and other accruals 13,954 1,797 15,751 3,234 18,985 1,290
Increase due to federal rate change 335 - 335 - 335 -
Deferred taxes of discontinued operations,
retained by the Company - - - - - 4,018
Benefit of state tax on temporary
differences and state net operating
loss carryforwards 5,034 499 5,533 (942) 4,591 983
Benefit of foreign, targeted jobs, R&E
and AMT tax credit carryforwards - - - - - 2,812
------- ------- ------- ------- ------- ------
Total deferred tax assets 21,056 2,803 23,859 2,483 26,342 10,724
------- ------- ------- ------- ------- ------
Total temporary differences
before valuation allowances 2,469 7,152 9,621 4,603 14,224 13,649
Valuation allowances:
Federal - (2,488) (2,488) (4,067) (6,555) (7,707)
State (5,034) (499) (5,533) 942 (4,591) (983)
------- ------- ------- ------- ------- ------
Total temporary differences
affecting tax provision (2,565) 4,165 1,600 1,478 3,078 4,959
------- ------- ------- ------- ------- ------
"Safe harbor" leases (5,370) (309) (5,679) (316) (5,995) (554)
------- ------- ------- ------- ------- ------
Net deferred tax (liability) asset $(7,935) $ 3,856 $(4,079) $ 1,162 $(2,917) $ 4,405
======= ======= ======= ======= ======= ======
</TABLE>
The federal and state valuation allowances represent reserves for income tax
benefits which were not recognized in prior years due to the uncertainty
regarding future earnings.
The tax provision (benefit) differs from the amounts obtained by applying
the statutory U.S. Federal income tax rate to the pre-tax earnings (loss) from
continuing operations. The differences can be reconciled as follows:
Years Ended December 31,
1997 1996 1995
Expected Federal income tax provision (benefit) $3,900 $6,688 $ (896)
Valuation allowance (2,488) (4,067) (7,707)
State and local income taxes, net of
Federal income tax benefit - 465 275
Nondeductible amortization of intangibles
and other costs 726 1,165 (263)
Foreign income tax 43 1,016 -
Foreign, targeted job, R&E, AMT and fuel tax credits (31) (16) (257)
Other, net 132 642 (242)
------- ------- --------
Tax provision (benefit) $2,282 $5,893 $(9,090)
======= ======= ========
<PAGE>
The Company has state net operating loss carryforwards available to offset
future taxable income. Following are the net operating losses by year of
expiration:
Year of State Net
Expiration Operating Losses
1997 $ 587
1998 689
1999 1,474
2000 2,471
2001 942
Through 2011 48,453
--------
$54,616
========
The Company's U.S. Federal income tax returns have been cleared through
1993.
Cash paid for income taxes was $2,676 for 1997, $20,680 for 1996 ($14.0
million of which related to the gain on the sale of the Commercial Aviation
business) and $3,140 for 1995.
(16) Pension Plans
Union employees who are not participants in the ESOP are covered by
multiemployer pension plans under which the Company pays fixed amounts,
generally per hours worked, according to the provisions of the various labor
contracts. In 1997, 1996 and 1995, the Company expensed $3,451, $2,837 and
$2,514, respectively, for these plans. Under the Employee Retirement Income
Security Act of 1974 as amended by the Multiemployer Pension Plan Amendments Act
of 1980, an employer is liable upon withdrawal from or termination of a
multiemployer plan for its proportionate share of the plan's unfunded vested
benefits liability. Based on information provided by the administrators of the
majority of these multiemployer plans, the Company does not believe there is any
significant amount of unfunded vested liability under these plans.
(17) Earnings Per Common Share
The Company has adopted SFAS No. 128, "Earnings per Share" which became
effective for financial statements for periods ended after December 15, 1997.
The statement establishes new standards for computing and presenting earnings
per share ("EPS") and requires restatement of prior periods. Specifically, the
statement replaces the presentation of primary and fully diluted EPS with a
presentation of basic and diluted EPS and requires a dual presentation on the
face of the income statement and a reconciliation of basic EPS to diluted EPS.
Basic EPS is computed by dividing earnings, after deducting the effect of
unpaid dividends on the Class C Preferred Stock, by the weighted average number
of common shares outstanding and contingently issuable shares. The weighted
average number of common shares outstanding includes issued shares less shares
held in treasury and any unallocated ESOP shares. Shares earned and vested but
unissued under the Restricted Stock Plan are considered contingently issuable
and have been included in the calculation of basic EPS. Diluted EPS is computed
similarly except the denominator is increased to include the weighted average
number of stock warrants and options outstanding, assuming the treasury stock
method.
<PAGE>
The reconciliation of basic EPS to diluted EPS is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Earnings Per Share Earnings Per Share Earnings Per Share
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Income from continuing operations
before extraordinary item $ 7,422 $11,949 $ 5,274
Class C Preferred dividends - (2,284) (1,915)
--------- --------- ---------
Common stockholders' share of earnings $ 7,422 $0.83 $ 9,665 $1.14 $ 3,359 $0.40
Discontinued operations - - 2,680 0.32 (20) (0.00)
Extraordinary item - - - - (2,886) (0.35)
--------- ------ --------- ----- --------- ------
Income for basic earnings per share $ 7,422 $0.83 $12,345 $1.46 $ 453 $0.05
========= ====== ========= ===== ========= ======
Weighted average shares outstanding 8,985,420 8,461,681 8,434,715
========= ========= =========
Diluted Earnings Per Share
Common stockholders' share of earnings $ 7,422 $0.70 $ 9,665 $0.82 $ 3,359 $0.29
Discontinued operations - - 2,680 0.23 (20) (0.00)
Extraordinary item - - - - (2,886) (0.25)
--------- ------ --------- ----- --------- ------
Income for diluted earnings per share $ 7,422 $0.70 $ 12,345 $1.05 $ 453 $ 0.04
========= ====== ========= ===== ========= ======
Weighted average shares outstanding 8,985,420 8,461,681 8,434,715
Effect of dilutive securities:
Warrants 1,523,529 3,239,894 3,310,536
Stock Options 128,722 34,696 -
---------- ---------- ----------
Shares for diluted earnings per share 10,637,671 11,736,271 11,745,251
========== ========== ==========
</TABLE>
(18) Incentive Compensation Plans
The Company has several formal incentive compensation plans which provide for
incentive payments to officers and key employees. Incentive payments under these
plans are based upon operational performance, individual performance, or a
combination thereof, as defined in the plans. Incentive compensation expense of
$6,510 for 1997, $6,367 for 1996, and $6,692 for 1995 has been changed to Cost
of Services and Corporate Selling and Administrative Expenses.
(19) Stock Option Plan
The Company adopted an incentive stock option plan in December 1995, whereby
options may be granted to officers and other key employees to purchase a maximum
of 1,250,000 common shares at an option price not less than the most recently
determined fair market value as of the grant date. Options issued under the plan
may be exercised only when vested and vest proportionately over a period of five
years. Options which are not exercised within seven years from the date of the
grant shall expire. Changes in stock options outstanding were as follows:
Exercise Price
or Range of Weighted Average
Shares Exercise Prices Exercise Price
Outstanding at December 31, 1994 - N/A N/A
Granted 318,000 $14.90 $14.90
-------
Outstanding at December 31, 1995 318,000 $14.90 $14.90
Granted 488,000 $14.50-19.00 $17.57
Canceled or terminated (15,500) $14.90 $14.90
Exercised (600) $14.90 $14.90
---------
Outstanding at December 31, 1996 789,900 $14.50-19.00 $16.55
Granted 145,000 $19.00-20.00 $19.48
Canceled or terminated (47,900) $14.90-19.00 $16.61
Exercised (9,000) $14.90 $14.90
---------
Outstanding at December 31, 1997 878,000 $14.50-20.00 $17.05
=========
Exercisable at year-end 199,600
=========
The Company has opted to account for its stock option plan in accordance
with APB Opinion 25, "Accounting for Stock Issued to Employees". Accordingly,
under the intrinsic value based method of accounting for options, no
compensation cost has been recognized. SFAS No. 123, "Accounting for Stock Based
Compensation", encourages, but does not require, adoption of the fair value
based method of accounting for employee stock options. The fair value of each
option grant is equal to the Formula Price at the date of grant (see Item 5,
"Market for the Registrant's Common Stock and Related Stockholder Matters,"
included elsewhere in this Annual Report on Form 10-K). The minimum value is
determined assuming a five year expected life of the options, a risk-free
interest rate of 5 1/2% and a volatility factor of zero. Had the Company adopted
SFAS No. 123, common stockholders' share of net earnings would have been
approximately $5,851 and $12,065 for the year ended December 31, 1997 and 1996,
respectively and diluted earnings per share would have been $0.55 in 1997 and
$1.03 in 1996. Comparable data has not been presented for December 31, 1995 as
none of the options had vested and, therefore, no additional compensation cost
would be assumed.
(20) Leases
Future minimum lease payments required under operating leases that have
remaining noncancellable lease terms in excess of one year at December 31, 1997
are summarized below:
Years Ending December 31,
1998 $ 8,659
1999 8,339
2000 3,552
2001 2,400
2002 2,071
Thereafter 8,445
------
Total minimum lease payments $ 33,466
======
Net rent expense for leases of $21,577 for 1997, $21,797 for 1996,
and $24,734 for 1995 has been charged to Cost of Services and Corporate Selling
and Administrative Expense.
(21) Contingencies and Litigation
The Company and its subsidiaries and affiliates are involved in various
claims and lawsuits, including contract disputes and claims based on allegations
of negligence and other tortuous conduct. The Company is also potentially liable
for certain personal injury, tax, environmental and contract dispute issues
related to the prior operations of divested businesses. In addition, certain
subsidiary companies are potentially liable for environmental, personal injury
and contract and dispute claims. In most cases, the Company and its subsidiaries
have denied, or believe they have a basis to deny, liability, and in some cases
have offsetting claims against the plaintiffs, third parties or insurance
carriers. The total amount of damages currently claimed by the plaintiffs in
these cases is estimated to be approximately $101.0 million (including
compensatory punitive damages and penalties). The Company believes that the
amount that will actually be recovered in these cases will be substantially less
than the amount claimed. After taking into account available insurance, the
Company believes it is adequately reserved with respect to the potential
liability for such claims. The estimates set forth above do not reflect claims
that may have been incurred but have not yet been filed. The Company has
recorded such damages and penalties that are considered to be probable
recoveries against the Company or its subsidiaries.
(a) Asbestos Claims
An acquired and inactive subsidiary, Fuller-Austin, which discontinued its
business activities in 1986, has been named as one of many defendants in civil
lawsuits which have been filed in certain state courts beginning in 1986
(principally Texas) against manufacturers, distributors and installers of
products allegedly containing asbestos. Fuller-Austin was a non-manufacturer
that installed and occasionally distributed industrial insulation products.
Fuller-Austin had discontinued the use of asbestos-containing products prior to
being acquired by the Company in 1974. These claims are not part of a class
action.
The claimants generally allege injuries to their health caused by inhalation
of asbestos fibers. Many of the claimants seek punitive damages as well as
compensatory damages. The amount of damages sought is impacted by a multitude of
factors. These include the type and severity of the disease sustained by the
claimant (i.e., mesothelioma, lung cancer, other types of cancer, asbestosis or
pleural changes); the occupation of the claimant; the duration of the claimant's
exposure to asbestos-containing products; the number and financial resources of
the defendants; the jurisdiction in which the claim is filed; the presence or
absence of other possible causes of the claimant's illness; the availability of
legal defenses, such as the statute of limitations; and whether the claim was
made on an individual basis or as part of a group claim.
<PAGE>
Claim Exposure (number of plaintiffs, claims and per claim amounts not in
thousands)
As of February 13, 1998, 17,083 plaintiffs have filed claims against
Fuller-Austin and various other defendants. Of these claims, 2,218 have been
dismissed and 4,125 have been resolved without an admission of liability at an
average cost of $3,439 per claim, excluding legal defense costs.
The following is a summary of the number of claims filed against Fuller-Austin:
Years
1994
& Prior 1995 1996 1997 1998 Total
----------------------------------------------------
Claims Filed 4,056 4,523 4,122 3,784 598 17,083
Claims Dismissed (113) (51) (1,116) (931) (7) (2,218)
Claims Resolved (1,617) (182) (1,825) (460) (41) (4,125)
-------
Claims Outstanding,
as of February 13,1998 10,740
=======
In connection with these claims, Fuller-Austin's primary insurance carriers
have incurred approximately $25.8 million (including $11.6 million of legal
defense costs) to defend and settle the claims and, in addition, jury verdict
judgments have been entered against Fuller-Austin in the aggregate amount of
$4.5 million (partially reduced by appeal during 1997 by $2.0 million) which
have not been paid and which are under appeal by Fuller-Austin.
Fuller-Austin has experienced a decline in the number of claims taken to
trial. During the 15-month period ending January 31, 1998, no cases were tried
by plaintiffs although approximately 855 cases were set for trial during this
period. Plaintiffs have instead elected to enter into settlements with
Fuller-Austin for amounts ranging from $250 to $14,500 for an average during the
period of $2,632 per claim. In addition, in connection with these settlements, a
significant number of claims filed against Fuller-Austin were dismissed with no
payment by Fuller-Austin or its insurers. Fuller-Austin and its carriers will
continue to evaluate settlement proposals, but will be prepared to try cases
that cannot be settled in a manner consistent with recent settlement trends.
During the first quarter of 1998, Fuller-Austin agreed in principle to
settle with approximately 660 non-Texas claimants who were threatening to amend
pending law suits to add Fuller-Austin as a defendant. The settlement, if
concluded, will aggregate approximately $4.0 million which is included in the
estimate of future claims set forth below. Fuller-Austin considers the entire
settlement to be covered by insurance.
The number of claims filed against Fuller-Austin has become significant only
since 1992, and therefore, Fuller-Austin has a relatively brief history
(compared to manufacturers and suppliers) of claims volume and a limited data
file upon which to estimate the number or costs of claims that may be received
in the future. Also, effective September 1, 1995, the State of Texas (where most
of these claims have been filed) enacted tort reform legislation which
Fuller-Austin believes has curtailed the number of unsubstantiated asbestos
claims filed against the subsidiary in Texas.
Fuller-Austin's defense counsel has analyzed the 10,740 claims outstanding
as of February 13, 1998. Based on this analysis and consultation with its other
professional advisors, Fuller-Austin has estimated its cost, including legal
defense costs, to be $11.5 million for claims filed and still unsettled and
$38.7 million as its minimum estimate of future costs of claims and settlements,
including legal defense costs. No upper limit of exposure can presently be
reasonably estimated. The Company cautions that these estimates are subject to
significant uncertainties, including the future effect of tort reform
legislation enacted in Texas and other states, the success of Fuller-Austin's
litigation strategy, the size of jury verdicts, success of appeals in process,
the number and financial resources of future plaintiffs, and the actions of
other defendants. Therefore, actual claim experience may vary significantly from
such estimates, especially if certain Texas appeals are decided unfavorably to
Fuller-Austin and/or the level of claims filed in other states increases. At
December 31, 1997 and 1996, Fuller-Austin recorded an estimated liability for
future indemnity payments and defense costs related to currently unsettled
claims and minimum estimated future claims of $50.2 million and $55.0 million,
respectively (recorded as long-term liability).
Insurance Coverage
Defense has been tendered to and accepted by Fuller-Austin's primary
insurance carriers, and by certain of the Company's primary insurance carriers
that issued policies under which Fuller-Austin is named as an additional
insured; however, only one such primary carrier has partially accepted defense
without a reservation of rights. The Company believes that Fuller-Austin has at
least $4.4 million in unexhausted primary coverage (net of deductibles and
self-insured retentions, but including disputed coverage) under its liability
insurance policies to cover the unsettled claims, verdicts and future unasserted
claims and defense costs. The primary carriers also have unlimited liability for
defense costs (presently running at an average annual rate of approximately $1.3
million) until such time as the primary limits under these policies are
exhausted. When the primary limits are exhausted, liability for both indemnity
and legal defense will be tendered to the excess coverage carriers, all of which
have been notified of the pendency of the asbestos claims. The Company and
Fuller-Austin have approximately $390.0 million of additional excess and
umbrella insurance that is generally responsive to asbestos claims after taking
into consideration certain pending carrier settlements that are discussed below.
This amount excludes approximately $92.0 million of coverage issued by insolvent
carriers. After the $4.4 million of unexhausted primary coverage, the Company
has first tier excess coverage of $35.0 million excluding a $35.0 million first
tier excess segment of insolvent coverage for policy years 1979 through 1984
(the "Insolvent Segment"). All of the Company's and Fuller-Austin's liability
insurance policies cover indemnity payments and defense fees and expenses
subject to applicable policy terms and conditions.
Coverage Litigation
The Company and Fuller-Austin have instituted litigation in Los Angeles
Superior Court, California, against their primary and excess insurance carriers
to obtain declaratory judgments from the court regarding the obligations of the
various carriers to defend and pay asbestos claims. The issues in this
litigation include the aggregate liability of the carriers, the triggering and
drop-down of excess coverage to cover the Insolvent Segment and allocation of
losses among multiple carriers including insolvent carriers and various other
issues related to the interpretation of the policy contracts. All of the carrier
defendants have filed general denial answers.
Although there can be no assurances as to the outcome of this litigation,
management believes that it is probable that Fuller-Austin will prevail in
obtaining judicial rulings confirming the availability of a substantial portion
of the coverage. Based on a review of the independent ratings of these carriers,
the Company and Fuller-Austin believe that a substantial portion of this
coverage will continue to be available to meet the claims. Fuller-Austin
recorded in Other Assets $50.2 million and $55.0 million at December 31, 1997
and 1996, respectively, representing the amount that it expects to recover from
its insurance carriers for the payment of currently unsettled and estimated
future claims.
The Company cautions, however, that even though the existence and aggregate
dollar amounts of insurance are not generally being disputed, such insurance
coverage is subject to interpretation by the court and the timing of the
availability of insurance payments could, depending upon the outcome of the
litigation and/or carrier settlement negotiations, delay the receipt of
insurance company payments and require Fuller-Austin to assume responsibility
for making interim payment of asbestos defense and indemnity costs at a time
when it may not have adequate cash funds.
While the Company believes that Fuller-Austin has recorded sufficient
liability to satisfy Fuller-Austin's reasonably anticipated costs of present and
future asbestos claimants' suits, it is not possible to predict the amount or
timing of future suits or the future solvency of Fuller-Austin's insurers. In
the event that currently unresolved and future claims exceed the recorded
liability of $50.2 million, the Company and Fuller-Austin believe that the
judicially determined and /or negotiated amounts of excess and umbrella
insurance coverage that will be available to cover additional claims will be
significant; however, it is impossible to predict whether or not such amounts
will be adequate to cover all additional claims without further contribution by
Fuller-Austin.
Possible Global Settlement/Bankruptcy Filing
Representatives of Fuller-Austin are currently in discussions with
representatives of more than 75% of the asbestos claimants and a designated but
not confirmed representative of potential future asbestos claimants regarding
the possibility of a global settlement of all present and future asbestos claims
against Fuller-Austin. If successful, these discussions could lead to the
preparation and filing by Fuller-Austin of a bankruptcy proceeding under the
U.S. Bankruptcy Code (the "Code") that has been previously approved by the
asbestos claimants. It is contemplated that presently negotiated settlements
with certain of the carrier-defendants in the coverage litigation would also be
achieved by Fuller-Austin concurrently with the confirmation of the
Fuller-Austin reorganization plan as part of the bankruptcy proceeding. The
contemplated plan would call for Fuller-Austin and certain of its insurance
proceeds and rights to be placed in a bankruptcy trust to be administered by
unrelated parties for the benefit of present and future asbestos claimants.
In furtherance of the proposed global settlement, representatives of
Fuller-Austin, its parent and sole stockholder, the Company, the present
asbestos claimants, and the representative of the future unknown claimants have
reached a separate agreement in principle ("Release Agreement"), contingent on
approval of the Plan by the Bankruptcy Court, under which the Company would be
released from any and all present and future liability for Fuller-Austin
asbestos liability in consideration of the transfer of certain Company property
and insurance rights to the Fuller-Austin bankruptcy trust, and the payment to
the trust of certain cash consideration. The total amount reserved for this
purpose is approximately $14.0 million, a portion of which was recorded in prior
years and the balance, $7.8 million, was reserved by the Company in the fourth
quarter of 1997 in anticipation of the settlement under the Release Agreement.
In the event Fuller-Austin is unsuccessful in concluding such negotiations
for a global settlement of all present and future asbestos claims, and depending
on the progress of the coverage litigation, the extent to which carriers agree
to voluntarily pay Fuller-Austin asbestos claims pending the resolution of the
coverage litigation, and the interim cash demands on Fuller-Austin in connection
with pending and future asbestos claims, Fuller-Austin may seek protection under
the Code without a global or other settlement with the asbestos claimants.
Fuller-Austin has been advised by its bankruptcy counsel that, upon filing for
such protection under the Code, all pending claims against Fuller-Austin
(including all asbestos claims) would be stayed, and the disposition of such
claims and all Fuller-Austin assets, including its insurance assets, would be
subject to the jurisdiction of the U.S. Bankruptcy Court in which
Fuller-Austin's petition is filed.
There can be no assurance at this time that the global settlement will be
concluded. Also, it is impossible to determine whether it will be necessary for
Fuller-Austin to otherwise seek protection from its creditors (including
asbestos claimants) under the Code.
(b) General Litigation
The Company has retained certain liability in connection with its 1989
divestiture of its major electrical contracting business, Dynalectric Company
("Dynalectric"). The Company and Dynalectric were sued in 1988 in Bergen County
Superior Court, New Jersey, by a former Dynalectric joint venture
partner/subcontractor (subcontractor). The subcontractor has alleged that its
subcontract to furnish certain software and services in connection with a major
municipal traffic signalization project was improperly terminated by Dynalectric
and that Dynalectric fraudulently diverted funds due, misappropriated its trade
secrets and proprietary information, fraudulently induced it to enter the joint
venture, and conspired with other defendants to commit acts in violation of the
New Jersey Racketeering Influenced and Corrupt Organization Act. The aggregate
dollar amount of these claims has not been formally recited in the
subcontractor's complaint. Dynalectric has also filed certain counterclaims
against the former subcontractor. The Company and Dynalectric believe that they
have valid defenses, and/or that any liability would be offset by recoveries
under the counterclaims. The Company and Dynalectric were found to have
committed certain discovery abuses, but no monetary amount of sanctions has yet
been assessed. The Company and Dynalectric expect to file an appeal with respect
to this finding. After nine years of seeking arbitration of this matter, the
Company and Dynalectric have finally prevailed. Arbitration will take place in
Washington, D.C. later in 1998. The Company believes that it has established
adequate ($1.3 million at December 31, 1997) reserves for the contemplated
defense costs and for the cost of obtaining enforcement of arbitration
provisions contained in the contract.
In November, 1994, the Company acquired an information technology business
which was involved in various disputes with federal and state agencies,
including two contract default actions and a qui tam suit by a former employee
alleging improper billing of a federal government agency customer. The Company
has contractual rights to indemnification from the former owner of the acquired
subsidiary with respect to the defense of all such claims and litigation, as
well as all liability for damages when and if proven. In October, 1995, one of
the federal agencies asserted a claim against the subsidiary and gave the
Company notice that it intended to withhold payments against the contract under
which the claim arose. To date, the agency has withheld approximately $3.0
million due the Company under one of the aforementioned disputes. This
subsidiary has submitted a demand for indemnification to the former owner of the
subsidiary which has been denied. The subsidiary recently received an
arbitration award confirming that it is entitled to indemnification.
As to environmental issues, neither the Company, nor any of its
subsidiaries, is named a Potentially Responsible Party (as defined in the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA))
at any site. The Company, however, did undertake, as part of the 1988
divestiture of a petrochemical engineering subsidiary, an obligation to install
and operate a soil and water remediation system at a subsidiary research
facility site in New Jersey and also is required to pay the costs of continued
operation of the remediation system. In addition, the Company, pursuant to the
sale of the Commercial Aviation Business, is responsible for the costs of
clean-up of environmental conditions at certain designated sites. Such costs may
include the removal and subsequent replacement of contaminated soil, concrete,
tanks, etc., that existed prior to the sale of the Commercial Aviation Business
(see Note 2).
The Company is a party to other civil and contractual lawsuits which have
arisen in the normal course of business for which potential liability, including
costs of defense,constitute the remainder of the $101.0 million discussed above.
The estimated probable liability for these issues is approximately $10.0 million
and is substantially covered by insurance. All of the insured claims are within
policy limits and have been tendered to and accepted by the applicable carriers.
The Company has recorded an offsetting asset (Other Assets) and liability
(long-term liability) of $10.0 million at December 31, 1997 and 1996, for these
items.
The Company has recorded its best estimate of the aggregate liability that
will result from these matters. While it is not possible to predict with
certainty the outcome of litigation and other matters discussed above, it is the
opinion of the Company's management, based in part upon opinions of counsel,
insurance in force and the facts currently known, that liabilities in excess of
those recorded, if any, arising from such matters would not have a material
adverse effect on the results of operations, consolidated financial position or
liquidity of the Company over the long-term. However, it is possible that the
timing of the resolution of individual issues could result in a significant
impact on the operating results and/or liquidity for one or more future
reporting periods.
The major portion of the Company's business involves contracting with
departments and agencies of, and prime contractors to, the U.S. Government, and
such contracts are subject to possible termination for the convenience of the
government and to audit and possible adjustment to give effect to unallowable
costs under cost-type contracts or to other regulatory requirements affecting
both cost-type and fixed-price contracts. Payments received by the Company for
allowable direct and indirect costs are subject to adjustment and repayment
after audit by government auditors if the payments exceed allowable costs.
Audits have been completed on the Company's incurred contract costs through 1986
and are continuing for subsequent periods. The Company has included an allowance
for excess billings and contract losses in its financial statements that it
believes is adequate based on its interpretation of contracting regulations and
past experience. There can be no assurance, however, that this allowance will be
adequate. The Company is aware of various costs questioned by the government,
but cannot determine the outcome of the audit findings at this time. In
addition, the Company is occasionally the subject of investigations by the
Department of Justice and other investigative organizations, resulting from
employee and other allegations regarding business practices. In management's
opinion, there are no outstanding issues of this nature at December 31, 1997
that will have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
(22) Business Segments
The Company has three reportable segments, Information and Engineering
Technology (I&ET), Aerospace Technology (AT) and Enterprise Management (EM).
These three reportable segments are strategic business areas which provide
distinctly different services to a variety of customers. I&ET designs, develops,
supports and integrates software and systems to provide customers with
comprehensive solutions for information management and engineering needs. AT
provides services ranging from aviation maintenance to multifaceted aerospace
sciences, technology and avionics engineering. EM offers a full range of
technical services from facilities management to security systems, ship
operations, the development of work management and maintenance systems and
engineering and logistics services. See also Item I, "Business," included
elsewhere in this Annual Report on Form 10-K for a description of the business
segments.
The accounting policies of the segments are the same as those described in
Note 1, "Summary of Significant Accounting Policies". The Company evaluates
performance based primarily on operating profit, but also evaluates return on
net assets and days' sales outstanding. Operating profit is the excess of
revenues over operating expenses and certain nonoperating expenses.
The Company derived 97% of its revenues in 1997 and 1996 and 95% of its
revenues in 1995 from contracts and subcontracts with the U.S. Government. Prime
contracts comprised 72%, 79% and 84% of revenue of which prime contracts with
the Department of Defense ("DoD") represented 45%, 50% and 51% of revenue in
1997, 1996 and 1995, respectively. In 1997, the Company's second largest
customer was the Department of Energy, comprising 22% of revenue. No other
customer accounted for more than 10% of revenues in any year.
<PAGE>
Revenue, operating profit, identifiable assets, capital expenditures and
depreciation and amortization by segment are presented below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Revenue
I&ET $ 282,634 $ 271,538 $ 271,133
AT 448,963 383,252 319,335
EM 414,340 366,663 318,257
---------- ---------- ---------
$1,145,937 $1,021,453 $908,725
========== ========== =========
Operating Profit
I&ET $ 11,095 $ 20,237 $ 18,139
AT 16,804 13,451 11,425
EM 20,690 17,485 9,866
---------- ---------- ----------
48,589 51,173 39,430
---------- ---------- ----------
Corporate selling and administrative 17,785 18,241 18,705
Interest (net expense) 10,414 8,468 11,052
Goodwill amortization 1,560 2,814 2,081
Costs associated with divested businesses 8,157 825 7,700
Minority interest included in operating profit (1,439) (1,265) (1,255)
Termination costs (Note 14) - 3,299 -
Acquisition costs 2,203 1,241 2,075
ESOP put premium - (1,250) -
Other miscellaneous (1,234) (307) 1,633
---------- ---------- ----------
Earnings (loss) from continuing operations
before income taxes, minority interest and
and extraordinary item $ 11,143 $ 19,107 $ (2,561)
========== ========== ==========
As of December 31,
1997 1996 1995
Identifiable Assets
I&ET $ 118,016 $ 105,363 $ 99,032
AT 75,239 76,681 60,275
EM 70,026 64,637 82,333
Other (a) 51,575 55,093 60,106
Corporate 67,728 66,978 73,744
---------- ---------- ----------
$ 382,584 $ 368,752 $ 375,490
========== ========== ==========
(a) Includes assets related to probable insurance indemnification recoveries pertaining
to a former subsidiary (see Note 21(a)).
Years Ended December 31,
1997 1996 1995
Capital Expenditures
I&ET $ 1,976 $ 3,606 $ 2,700
AT 885 823 640
EM 740 384 936
Corporate 1,509 497 513
---------- ---------- ----------
$ 5,110 $ 5,310 $ 4,789
========== ========== ==========
Depreciation and Amortization
I&ET $ 5,651 $ 3,775 $ 5,223
AT 1,349 2,337 1,412
EM 1,432 1,525 2,296
Corporate 1,456 1,830 2,417
---------- ---------- ----------
$ 9,888 $ 9,467 $ 11,348
========== ========== ==========
The equity in net income of investees accounted for by the equity method
included in operating profit and the amount of investment in equity method
investees included in identifiable assets for each segment is presented below:
Years Ended December 31,
1997 1996 1995
Equity Investees Earnings
I&ET $ - $ - $ -
AT 92 17 14
EM 1,038 659 141
---------- ---------- ----------
$ 1,130 $ 676 $ 155
========== ========== ==========
As of December 31,
1997 1996 1995
Investment in Equity Investees
I&ET $ - $ - $ -
AT 1,568 1,566 1,486
EM 2,266 230 142
---------- ---------- ----------
$ 3,834 $ 1,796 $ 1,628
========== ========== ==========
</TABLE>
(23) Quarterly Financial Data (Unaudited)
A summary of quarterly financial data for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 Quarters 1996 Quarters
First Second Third(a) Fourth(b) First Second Third Fourth(c)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $271,137 $288,695 $283,832 $302,273 $241,726 $249,630 $246,968 $283,129
Gross profit 11,343 12,321 13,981 12,045 10,729 13,682 13,151 13,728
Earnings (loss) from continuing
operations before income
taxes, minority interest and
extraordinary item 4,005 3,680 6,097 (2,639) 3,737 6,892 5,965 2,513
Minority interest 408 203 387 441 296 326 367 275
Discontinued operations - - - - - 865 - 1,815
Net earnings (loss) 2,311 2,035 4,087 (1,011) 2,241 4,418 3,241 4,729
Earnings (loss) per common share:
Basic earnings per share:
Continuing operations $ 0.27 $ 0.23 $ 0.46 $ ( 0.11) $ 0.20 $ 0.36 $ 0.32 $ 0.28
Discontinued operations - - - - - 0.10 - 0.21
Common stockholders' share
of earnings (loss) $ 0.27 $ 0.23 $ 0.46 $ ( 0.11) $ 0.20 $ 0.46 $ 0.32 $ 0.49
Diluted earnings (loss) per share
Continuing operations $ 0.21 $ 0.20 $ 0.39 $ ( 0.11) $ 0.14 $ 0.26 $ 0.23 $ 0.19
Discontinued operations - - - - - 0.07 - 0.16
Common stockholders' share
of earnings (loss) $ 0.21 $ 0.20 $ 0.39 $ ( 0.11) $ 0.14 $ 0.33 $ 0.23 $ 0.35
<FN>
Quarterly financial data may not equal annual totals due to rounding. Quarterly earnings per share data may not equal annual total.
(a) 1997 Third Quarter includes:
- $2,488 reversal of income tax valuation allowance (see Note 15)
(b) 1997 Fourth Quarter includes:
- $7,800 of costs related to asbestos litigation (see Notes 14 and 21(a))
- $2,055 reversal of accrued interest related to IRS examinations and potential disallowance of deductions (see Note 15)
(c) 1996 Fourth Quarter includes:
- $3,299 accrual for supplemental pension and other fees payable to retiring
officers and a member of the Board of Directors (see Note 14)
- $1,286 write-off of cost in excess of net assets acquired of an unconsolidated affiliate (see Note 14)
- $1,250 reversal of overaccrued ESOP Premium (see Note 7)
- $4,067 reversal of income tax valuation allowance (see Note 15)
</FN>
</TABLE>
(24) Subsequent Event
On February 2, 1998, the Company acquired the assets of FMAS Corporation
("FMAS"), a medical outcome measurement and data abstraction services company
headquartered in Rockville, MD. FMAS is a leading provider of proprietary
outcome performance measurement systems to all DoD treatment facilities as well
as a number of other facilities under contract with the DoD.
The Company financed the acquisition of FMAS by drawing $10.0 million of the
$90 million of the Class B Notes available under the April 1997 indenture (see
Note 5). The Class B Notes were issued at 6.325% through March 1, 1998, adjusted
to 6.372% through March 29, 1998, and will be adjusted monthly until redeemed.
After drawing down the $10.0 million of Class B Notes the Company had sufficient
unused receivable collateral to support an additional $50.0 million of
borrowings.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are:
Name Age Position
Dan R. Bannister 67 Director and Chairman of the Board
T. Eugene Blanchard 67 Director
Russell E. Dougherty 77 Director
Paul G. Kaminski 55 Director
Paul V. Lombardi 56 Director, President and Chief Executive Officer*
Dudley C. Mecum II 63 Director
David L. Reichardt 55 Director, Senior Vice President and General
Counsel *
Herbert S.Winokur, Jr. 54 Director and Chairman of the Executive Committee
Robert B. Alleger, Jr. 52 Vice President, Aerospace Technology *
John J. Fitzgerald 44 Vice President and Controller *
Patrick C. FitzPatrick 58 Senior Vice President and Chief Financial
Officer *
Paul T. Graham 31 Vice President and Treasurer
H. Montgomery Hougen 62 Vice President and Secretary and Deputy General
Counsel
Roxane P. Kerr 49 Senior Vice President, Human Resources *
Marshall S. Mandell 55 Vice President, Business Development *
Carl H. McNair, Jr. 64 Vice President, Enterprise Management *
Ruth Morrel 43 Vice President, Law and Compliance
Henry H. Philcox 58 Vice President, Chief Information Officer
Richard E. Stephenson 62 Vice President, Technology and Government Relations
Robert G. Wilson 56 Vice President and General Auditor
* Officers designated by an asterisk are deemed to be "officers" for
purposes of Rule 16a-1(f), as promulgated in Release No. 34-28869.
DIRECTORS
Dan R. Bannister Director since 1985
Mr. Bannister, age 67, is Chairman of the Board. He served as President of the
Company from 1984 until 1997 and as Chief Executive Officer from 1985 until
1997. In February, 1997, he was elected Chairman of the Board; he is an active
employee of the Company. He is a director of ITC Training Corporation. His
term as a director expires in 1998.
T. Eugene Blanchard Director since 1988
Mr. Blanchard, age 67, served as Senior Vice President and Chief Financial
Officer from 1979 to February, 1997, when he retired as an employee of the
Company. He is the Chairman of the Company's Employee Stock Ownership Plan
Committee. He is a director of Landmark Systems Corporation. His term as a
director expires in 2000.
Russell E. Dougherty Director since 1989
General Dougherty, age 77, is an attorney with the law firm of McGuire, Woods,
Battle & Boothe. He is a retired General, United States Air Force, who served
as Commander-in-Chief, Strategic Air Command and Chief of Staff, Allied Comand
Europe. From 1980 to 1986, he served as Executive Director of the Air Force
Association and Publisher of Air Force Magazine. He was formerly a member of
the Defense Science Board; trustee of the Institute for Defense Analysis; and
trustee of The Aerospace Corp. His term as a director expires in 1999.
Paul G. Kaminski Director since July, 1997
Mr. Kaminski, age 55, also served as a director of the Company from 1988 until
1994. He is President and Chief Executive Officer of Technovation, Inc.
(consulting and investment banking). He served in the United States Department
of Defense as Under Secretary of Defense for Acquisition and Technology from
1994 to 1997. He was Chairman and Chief Executive Officer of Technology
Strategies & Alliances (strategic partnership consulting) from 1993 to 1994.
His term as a director expires in 1998.
Paul V. Lombardi Director since 1994
Mr. Lombardi, age 56, has served as President and Chief Executive Officer since
February, 1997. He served as Chief Operating Officer from 1995 to February,
1997; as Executive Vice President from 1994 to February, 1997; as Vice President
1992 to 1994; as President of Federal Sector 1994 to 1995, and as President of
Government Services Group 1992 to 1994. He was Senior Vice President and Group
General Manager, Planning Research Corporation from 1990 to 1992. His term as a
director expires in 2000.
Dudley C. Mecum II Director since 1988
Mr. Mecum, age 63, is a Managing Director of Capricorn Holdings LLC (an
investment company). He was a partner, G. L. Ohrstrom & Co., an investment
firm, from 1989 to 1997. He served as Group Vice President and Director,
Combustion Engineering, Inc. from 1985 to 1988, and previously as Vice
Chairman, Peat, Marwick & Mitchell. He is a director of The Travelers Group,
Travelers Property and Casualty Inc., Lyondell Petrochemical Company, Vicorp
Restaurants Inc., Fingerhut Companies, Inc., Metris Companies Inc., and Suburban
Propane Partners LLP. His term as a director expires in 2000.
David L. Reichardt Director since 1988
Mr. Reichardt, age 55, has served as Senior Vice President and General Counsel
of the Company since 1986. He served as President of Dynalectric Company,
a former subsidiary of the Company, from 1984 to 1986 and as Vice President and
General Counsel of DynCorp from 1977 to 1984. His term as a director expires in
1998.
Herbert S. Winokur, Jr. Director since 1988
Mr. Winokur, age 54, served as Chairman of the Board from 1988 to February,
1997. He is President, Winokur Holdings, Inc. (an investment company), which is
the Managing Partner of Capricorn Investors, L.P. and Capricorn Investors II,
L.P. He was formerly Senior Executive Vice President, Member, Office of the
President, and Director, Penn Central Corporation. He is a director of ENRON
Corporation; NAC Re Corp.; Mrs. Fields Holdings, Inc.; and the WMF Group Ltd.
His term as a director expires in 1999.
OTHER EXECUTIVE OFFICERS
In addition to the above-named directors who are also officers of the Company,
the Company's executive officers are:
Robert B. Alleger, Jr., age 52, Vice President, Aerospace Technology, has served
in that capacity and as President of the Aerospace Technology Strategic Business
Unit ("SBU") since 1996. He was Vice President, Systems Support Services,
Lockheed Martin Services, Inc. from 1992 to February, 1996 and Vice President,
Business Development, GE Government Services, General Electric Company from 1989
to 1992.
John J. Fitzgerald, age 44, Vice President and Controller, has served in that
capacity since July, 1997. He was Vice President and Controller, PRC, Inc. from
1992 to 1997.
Patrick C. FitzPatrick, age 58, Senior Vice President and Chief Financial
Officer, has served as Senior Vice President and Chief Financial
Officer since February, 1997. He also served as Treasurer from March to
November, 1997. He was Chief Financial Officer, American Mobile Satellite
Corporation from 1996 to February, 1997; Senior Vice President and Chief
Financial Officer of PRC Inc. from 1992 to 1996; and President and Chief
Operating Officer of Oxford Real Estate Management Services from 1990 to 1992.
Paul T. Graham, age 31, Vice President and Treasurer, has served in that
capacity since November, 1997. He was Finance Manager of the Company from 1992
to 1994, Assistant Treasurer from 1994 to 1997, and Director of Finance from
1995 to 1997.
H. Montgomery Hougen, age 62, Vice President and Secretary and Deputy General
Counsel, has served as a Vice President since 1994 and as Corporate Secretary
and Deputy General Counsel since 1984.
Roxane P. Kerr, age 49, Senior Vice President, Human Resources, has served in
that capacity since March, 1998. She was Vice President, Human Resources,
LucasVerity Plc from 1993 to 1998 and a private human resources consultant from
1992 to 1993.
Marshall S. Mandell, age 55, Vice President, Business Development, has served in
that capacity since 1994. He has also served as Acting President of the
Information and Engineering Technology SBU since September, 1997. He served as
Vice President, Business Development, Applied Science Group from 1992 to 1994.
He was Senior Vice President, Eastern Computers, Inc. from 1991 to 1992 and
President, Systems Engineering Group, Ogden/Evaluation Research Corporation from
1984 to 1991.
Carl H. McNair, Jr. age 64, Vice President, Enterprise Management, has served in
that capacity and as President of the Enterprise Management SBU since 1994. He
served as President, Support Services Division from 1990 to 1994. He is a
director of Air Methods Corporation.
Ruth Morrel, age 43, Vice President, Law and Compliance, has served in that
capacity since 1994. She served as Group General Counsel from 1984 to 1994.
Henry H. Philcox, age 58, Vice President and Chief Information Officer, has
served in that capacity since August, 1995. He was Chief Information Officer of
the Internal Revenue Service from 1990 to June, 1995.
Richard E. Stephenson, age 62, Vice President, Technology and Government
Relations, has served in that capacity since 1994. He served as Vice President
Strategic Planning, Government Services Group from 1991 to 1994.
Robert G. Wilson, age 56, Vice President and General Auditor, has served in that
capacity since 1985.
STOCKHOLDERS AGREEMENT
Under the terms of the New Stockholders Agreement (the "Stockholders
Agreement") which was adopted by substantially all management stockholders and
expires on March 10, 1999, the management stockholders and outside investors who
control approximately 32% of the voting stock on a fully diluted basis agreed to
the following procedure for election of directors. Capricorn Investors, LP
("Capricorn"), an entity under the control of Mr. Winokur, on behalf of itself
and the other outside investors, was entitled to nominate four of the total
number of directors; Company management was entitled to nominate four directors;
and the two groups would agree on a ninth director, for whom all of the parties
have agreed to vote. All of the current directors and the nominees listed above
were initially selected by this process. Effective January 23, 1997, Capricorn
waived its right to nominate directors, but not its obligation to vote in
accordance with the Shareholders Agreement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes that all required persons filed all required
reports under Section 16 of the Securities Exchange Act in a timely manner.
Item 11. Executive Compensation
The following table sets forth information regarding annual and
long-term compensation for the chief executive officer and the other four most
highly compensated executive officers of the Company. The table does not include
information for any fiscal year during which a named executive officer did not
hold such a position with the Company.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual compensation Awards
Other Securities
annual underlying All other
Name and principal Salary Bonus compen- options/SARs compensation
position Year ($) ($)(1) sation (#) ($) (2)
(a) (b) (c) (d) ($)(c) (f) (i)
Paul V. Lombardi 1997 332,789 160,000 177 -- 45,395
President & Chief 1996 279,614 148,000 -- 90,000 50,974
Executive Officer 1995 257,071 105,900 -- 40,000 47,749
Dan R. Bannister 1997 275,481 -- 174 -- 55,698
Chairman of the Board 1996 326,105 235,000 -- 100,000 66,132
(formerly President & 1995 325,853 165,000 -- 65,000 67,060
Chief Executive Officer)
David L. Reichardt 1997 245,082 90,000 244 -- 41,515
Senior Vice President & 1996 219,464 99,000 -- 75,000 41,780
General Counsel 1995 206,008 88,300 -- 25,000 40,497
Patrick C. FitzPatrick 1997 241,933 90,000 -- 100,000 33,493
Senior Vice President & 1996 -- -- -- -- --
Chief Financial Officer 1995 -- -- -- -- --
Marshall S. Mandell 1997 204,248 73,300 364 -- 24,129
Vice President, Business 1996 179,246 80,000 30,000 9,182
Development 1995 157,705 65,000 12,500 7,066
(1) Column (d) reflects bonuses earned and expensed during year, whether
paid during or after such year. Since 1996, 20% of executive bonuses
have been paid in shares of Common Stock, valued at then-current market
value.
(2) Column (i) includes individual's pro rata share of the Company's
contribution to the Company's Employee Stock Ownership Plan ("ESOP")
and Savings and Retirement Plan ("SARP") and the Company-paid portion
of group term and supplemental executive retirement plan insurance
premiums. These amounts are:
ESOP contributions SARP contributions Insurance Premiums
($) ($) ($) (1)
Name 1997(2) 1996 1995 1997 1996 1995 1997 1996 1995
Mr.Lombardi 5,075 4,632 2,850 900 -- 42,545 44,999 43,117
Mr.Bannister 5,075 4,632 3,800 1,250 -- 51,898 59,807 62,428
Mr.Reichardt 5,075 4,632 1,269 913 -- 40,246 35,792 35,865
Mr.FitzPatrick -- -- 1,267 -- -- 32,227 -- --
Mr.Mandell 5,075 4,632 2,361 1,306 -- 21,768 2,801 2,434
(1) Includes supplemental executive retirement plan insurance and term life
insurance premium, the premium for which is computed according to
Internal Revenue Service tables.
(2) Individual allocation of 1997 ESOP contribution has not been calculated
as of this date.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential realizable
value at assumed
annual rates of stock
price appreciation
Individual Grants for option term
Number of Percent of total
securities options/ SARs
underlying granted to Exercise or
options/SARs employees in base price Expiration
Name granted (#) fiscal year ($/Share) date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
Mr. Lombardi 0 n/a n/a n/a n/a n/a
Mr. Bannister 0 n/a n/a n/a n/a n/a
Mr. Reichardt 0 n/a n/a n/a n/a n/a
Mr. FitzPatrick 50,000 }69% 19.00 2/3/04 386,745 901,281
50,000 20.00 11/24/04 407,100 848,717
Mr. Mandell 0 n/a n/a n/a n/a n/a
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of securities
underlying unexercised Value of unexercised
options/SARs at fiscal in-the-money options/ SARs
year-end (#) at fiscal year-end ($)
Shares
acquired on Value Exercisable/ Exercisable/
Name exercise(#) realized Unexercisable Unexercisable
(a) (b) ($) (c) (d) (e)
Mr. Lombardi -- -- 34,000 96,000 126,600 302,400
Mr. Bannister -- -- 46,000 119,000 182,600 398,900
Mr. Reichardt -- -- 25,000 75,000 88,500 226,500
Mr. FitzPatrick -- -- 0 100,000 0 50,000
Mr. Mandell -- -- 11,000 31,500 40,500 98,250
COMPENSATION OF DIRECTORS
Non-employee directors of the Company receive an annual retainer fee of
$16,500 as directors and $2,750 for each committee on which they serve. The
Company also pays non-employee directors a meeting fee of $1,000 for attendance
at each Board meeting and $500 for attendance at committee meetings. Directors
are reimbursed for expenses incurred in connection with attendance at meetings
and other Company functions.
DIRECTORS AND OFFICERS LIABILITY INSURANCE
The Company has purchased and paid the premium for insurance in respect
of claims against its directors and officers and in respect of losses for which
the Company may be required or permitted by law to indemnify such directors and
officers. The directors insured are the directors named herein and all directors
of the Company's subsidiaries. The officers insured are all officers and
assistant officers of the Company and its subsidiaries. There is no allocation
or segregation of the premium as regards specific subsidiaries or individual
directors and officers.
CHANGE-IN-CONTROL AGREEMENTS
The Company has entered into change-in-control agreements with Messrs.
Lombardi, Reichardt, and FitzPatrick (the "Severance Agreements"). Each
Severance Agreement provides that certain benefits, including a lump-sum
payment, will be triggered if the executive is terminated following a change in
control of the Company, unless termination occurs under those circumstances set
forth in the Severance Agreements. A change in control would occur if the
Company were to be substantially acquired by a new owner or if a majority of the
Board of Directors were replaced. The Severance Agreements currently expire on
December 31, 1998 but are subject to annual automatic renewal unless terminated
by the Board of Directors. The amount of such lump sum payment would be 2.99
times the sum of the executive's annual salary and the average incentive
compensation for the three prior years. Other benefits include payment of
incentive compensation not yet paid for the prior year and a pro rata portion of
incentive compensation awards for the current year. Each Severance Agreement
also provides a reduction if the payments exceeds the amount the Company is
entitled to deduct on its federal income tax return. The Severance Agreements
also provide that the Company will reimburse the individual for legal fees and
expenses incurred by the executive as a result of termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee are current or former
employees of or have a business or other relationship with the Company, except
for Mr. Winokur. (See Item 13. "Certain Relationships and Related Information"
for a discussion of a series of transactions involving Mr. Winokur and the
Company.) No executive officer of the Company serves on the board of directors
or compensation committee of any entity (other than subsidiaries of the Company)
whose directors or executive officers served on the Board of Directors or
Compensation Committee of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 10, 1998, the Company had [10,078,200] shares of Common
Stock outstanding, which constituted all the outstanding voting securities of
the Company. If all shares issuable upon exercise of outstanding warrants,
shares issuable upon exercise of all vested and unvested options, and shares
issuable as a result of expiration of deferrals under a former Restricted Stock
Plan were to be issued, the outstanding voting securities following such events
(the "fully diluted shares") would consist of [11,612,202] shares of Common
Stock. The following tables show beneficial ownership of outstanding voting
shares as a percentage of currently outstanding stock and beneficial ownership
of issued and issuable shares as a percentage of common stock on a fully diluted
basis assuming all such exercises and issuances.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table presents information as of March 10, 1998,
concerning the only beneficial owners of five percent or more of the outstanding
shares of the Company's common stock.
Name and address of Amount & nature of Percent of
beneficial owner ownership shares
DynCorp Employee Stock Ownership Plan Trust 7,282,581 72.3%
c/o DynCorp Direct (1)
2000 Edmund Halley Dr.
Reston, VA 20191-3436
Capricorn Investors, L.P. (2) 1,231,952 12.2%
30 East Elm Street Direct
Greenwich, CT 06830
(1) The Trust holds these shares for the accounts of approximately
30,400 participants. The Trustees vote the shares in accordance
with instructions received from participants.
(2) H. S. Winokur, Jr., a director of the Company, is the President of
Winokur Holdings, Inc., which is the managing partner of Capricorn
Holdings, G.P., which in turn is the general partner of Capricorn.
SECURITY OWNERSHIP OF MANAGEMENT
The following table presents information as of March 10, 1998,
concerning the beneficial ownership of the Company's common stock by directors
and named executive officers and all directors and officers as a group.
Shares include those held on behalf of the individuals in the ESOP and SARP.
Amount & nature of ownership
Name and title of Outstanding Obtainable within Percent of
beneficial owner shares 60 days (1) Total shares (2)
D. R. Bannister 258,605 131,711 90,316 Direct }3.8%
Chairman of the Board 9,098 9,098 Indirect
T. E. Blanchard 91,281 31,200 122,481 Direct }1.3%
Director 13,702 Indirect
R.E. Dougherty 4,000 0 4,000 Direct } *
Director
P. C. FitzPatrick 184 10,000 10,184 Direct } *
Senior Vice President 3,098 3,098 Indirect
& Chief Financial Officer
P. G. Kaminski 0 0 0 *
Director
P. V. Lombardi 17,133 52,000 69,133 Direct }*
President, Chief 2,218 2,218 Indirect
Executive Officer &
Director
M. S. Mandell 3,772 17,000 20,772 Direct }*
Vice President, 2,193 2,193 Indirect
Business Development
D. C. Mecum II 0 0 0 *
Director
D. L. Reichardt 37,137 40,000 77,137 Direct }*
Senior Vice President 6,759 6,759 Indirect
& Director
H. S. Winokur, Jr. 1,231,952 0 1,231,952 Indirect 10.9%
Director (3)
All directors and 482,747 325,511 808,257 Direct }17.3%
officers as a 1,298,573 1,298,894 Indirect
group
(1) Column reflect shares issuable upon exercise of vested option and
expiration of deferral periods under former Restricted Stock Plan.
(2) Percentages include aggregate direct and indirect shares. An asterisk
indicates that beneficial ownership is less than one percent of the
class.
(3) Includes securities owned by Capricorn. See preceding table for
relationship of Mr. Winokur to Capricorn.
Item 13. Certain Relationships and Related Information
Mr. Winokur is the President of Winokur Holdings, Inc., which is the
managing partner of Capricorn Holdings, G.P., which in turn is the general
partner of Capricorn. On January 23, 1997, the Company entered into an agreement
with Capricorn. Under the agreement Capricorn waived its rights to nominate
directors of the Company under the Stockholders Agreement and certain class
voting rights of the Company's then-outstanding Class C Preferred stock. As
consideration, the Company paid Capricorn $1,175,000, and the Company authorized
Capricorn to distribute a substantial portion of the shares of common stock and
warrants and all of the formerly outstanding shares of Class C Preferred stock,
to its several individual investors (the "Investors"). Following the
distribution, the Company and the ESOP entered into a series of transactions
with the individual Investors, and, during February through April 1997, the
Company and the ESOP purchased the distributed securities, which were the
equivalent of 2,884,178 shares of common stock in the aggregate, at a price of
$19.55 per share. Except for the entities under the control of Mr. Winokur, none
of the Investors were affiliates of the Company.
On February 5, 1997, the Company also entered into a consulting
agreement with Capricorn Management, G.P., an entity controlled by Mr. Winokur.
Under that agreement, the Company paid an aggregate amount of $1,050,000 for
consulting services during the period from 1995 through 1997 and for a covenant
against competition; the payment was assigned to Capricorn. Capricorn also
received a right of first offer under certain circumstances in the event the
Company seeks additional growth capital.
General Dougherty is an attorney with the law firm of McGuire Woods,
Battle & Boothe, which firm is retained by the Company from time to time to
provide various legal services.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. All financial statements.
2. Financial statement Schedules.
Schedule I - Condensed Financial Information of Registrant
DynCorp (Parent Company)
Balance Sheets
Assets
Liabilities and Stockholders' Equity
Statements of Operations
Statements of Cash Flows
Notes to Condensed Financial Statements
Schedule II - Valuation and Qualifying Accounts for the Years Ended December
31, 1997, 1996 and 1995.
All other financial schedules not listed have been omitted since the required
information is included in the Consolidated Financial Statements or the notes
thereto, or is not applicable or required.
3. Exhibits
Exhibit Description
3.1 Certificate of Incorporation, as currently in effect, consisting of
Amended and Restated Certification of Incorporation (incorporated
by reference to Registrant's Form 10-K/A for 1995, File No. 1-3879)
3.2 Registrant's By-laws as amended to date (incorporated by reference to
Registrant's Form 10-K/A for 1995, File No. 1-3879)
4.1 Indenture and supplement, dated April 18, 1997 between Dyn Funding
Corporation (a wholly owned subsidiary of the Registrant) and
Bankers Trust Company relating to Contract Receivable
Collateralized Notes (incorporated by reference to Registrant's
Form S-2, File No. 33-59279)
4.2 Registration Rights Agreement, dated as of March 17, 1997, among the
Registrant, and BT Securities Corporation and Citicorp Securities,
Inc (incorporated by reference to Registrant's Form S-4 for
1997, File No. 333-25355)
4.3 Indenture, dated March 17, 1997, between the Registrant and United
States Trust Company of New York relating to the 9 1/2% Senior
Subordinated Notes due 2007 (incorporated by reference to
Registrant's Form S-4 for 1997, File No. 333-25355)
4.4 Specimen Common Stock Certificate (incorporated by reference to
Registrant's Form 10-K for 1988, File No. 1-3879)
4.5 Statement Respecting Warrants and Lapse of Certain Restrictions
(incorporated by reference to Registrant's Form 10-K for 1988,
File No. 1-3879)
4.6 Amendment (effective March 26, 1991) to Statement Respecting
Warrants and Lapse of Certain Restrictions (incorporated by
reference to Registrant's Form 10-K for 1990, File No.
1-3879)
4.7 Article Fourth of the Amended and Restated Certificate of Incorporation
(incorporated by reference to Registrant's Form 10-K for 1992,
File No. 1-3879)
4.8 Second Amended and Restated Credit Agreement by and among Citicorp
North America, Inc., certain Lenders, and the Registrant dated
May 15, 1997 (incorporated by reference to Registrant's Form
S-4 for 1997, File No. 333-25355)
4.9 Stockholders Agreement (incorporated by reference to Registrant's
Form S-1 for 1995, File No. 33-59279)
10.1 Deferred Compensation Plan (incorporated by reference to Registrant's
Form 10-K for 1987, File No. 1-3879)
10.2 Management Incentive Plan (filed herewith)
10.3 DynCorp Executive Incentive Plan (filed herewith)
10.4 Management Severance Agreements (incorporated by reference to Exhibits
(c)(4) through (c)(12) to Schedule 14D-9 filed by Registrant
January 25, 1988)
10.5 Employment Agreement of Paul V. Lombardi, Vice President, Government
Services Group and currently President & Chief Executive Officer
(incorporated by reference to Registrant's Form 10-K for 1993,
File No. 1-3879)
10.6 Employment Agreement of Patrick C. FitzPatrick, Senior Vice
President and Chief Financial Officer (incorporated by
reference to Registrant's Form 10-K for 1996, File No.
1-3879)
10.7 Restricted Stock Plan (incorporated by reference to Registrant's
Form 10-K/A for 1995, File No. 1-3879)
10.8 1995 Stock Option Plan, as amended (filed herewith)
21 Subsidiaries of the Registrant (filed herewith)
23 Consent of Independent Public Accountants (filed herewith)
(b) Reports on Form 8-K
None filed during the fourth quarter
ended December 31, 1997
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DYNCORP
March 31, 1998 By: P. V. Lombardi
P. V. Lombardi
President and Chief
Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
P. V. Lombardi President and Director March 31, 1998
P. V. Lombardi (Chief Executive Officer)
P. C. FitzPatrick Senior Vice President - March 31, 1998
P. C. FitzPatrick Chief Financial Officer
D. L. Reichardt Senior Vice President - March 31, 1998
D. L. Reichardt General Counsel and Director
J. J. Fitzgerald Vice President and Controller March 31, 1998
J. J. Fitzgerald (Chief Accounting Officer)
D. R. Bannister Director March 31, 1998
D. R. Bannister
T. E. Blanchard Director March 31, 1998
T. E. Blanchard
H. S. Winokur, Jr.Director March 31, 1998
H. S. Winokur, Jr.
D. C. Mecum II Director March 31, 1998
D. C. Mecum II
R. E. Dougherty Director March 31, 1998
R. E. Dougherty
P. G. Kaminski Director March 31, 1998
P. G. Kaminski
<PAGE>
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
(Dollars in thousands)
December 31,
1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 18,591 $ 22,761
Accounts receivable and contracts in process,
net of allowance for doubtful accounts (Note 3) 40,694 23,802
Inventories of purchased products and supplies 548 911
Other current assets 10,005 8,263
------- -------
Total current assets 69,838 55,737
Investment in and advances to subsidiaries and affiliates 80,869 35,124
Property and Equipment, net of accumulated depreciation
and amortization 7,780 6,217
Intangible Assets, net of accumulated amortization 30,775 31,831
Other Assets 8,982 3,775
------- -------
Total Assets $198,244 $132,684
======== ========
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries
are an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements".
<PAGE>
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
(Dollars in thousands)
December 31,
1997 1996
------ -----
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term
debt (Note 2) $ - $ 267
Accounts payable 17,078 15,203
Advances on contracts in process 661 508
Accrued liabilities 71,304 72,758
-------- --------
Total current liabilities 89,043 88,736
Long-Term Debt (Note 2) 99,510 455
Other Liabilities and Deferred Credits 12,465 6,654
Contingencies and Litigation - -
Temporary Equity:
Redeemable Common Stock, at Redemption Value -
ESOP 151,823 136,343
Other 3,017 2,979
Permanent Stockholders' Equity:
Preferred Stock, Class C - 3,000
Common Stock 478 332
Common Stock Warrants 1,259 11,139
Paid-in Surplus 125,412 148,234
Adjustment for redemption value greater than par value (154,138) (138,694)
Deficit (93,837) (101,259)
Common Stock Held in Treasury (28,703) (25,235)
Unearned ESOP Shares (8,085) -
-------- --------
Total Liabilities and Stockholders' Equity $198,244 $132,684
======== ========
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries are
an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements."
<PAGE>
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Revenues $594,379 $588,978 $584,021
-------- -------- --------
Costs and Expenses:
Cost of services 570,324 565,582 570,808
Corporate selling and administrative 9,808 11,323 12,552
Interest expense 6,382 1,089 5,375
Interest income (2,375) (1,162) (2,759)
Other expense (Note 3) 27,773 18,373 22,583
-------- -------- --------
611,912 595,205 608,559
Loss from continuing operations before
income taxes, equity in net income of
subsidiaries and extraordinary item (17,533) (6,227) (24,538)
Benefit for income taxes (7,709) (3,994) (25,340)
-------- -------- --------
(Loss) earnings from continuing operations before
equity in net income of subsidiaries and
extraordinary item (9,824) (2,233) 802
Equity in net income of subsidiaries 17,246 14,182 4,472
-------- -------- --------
Earnings from continuing operations before
extraordinary item 7,422 11,949 5,274
Earnings (loss) from discontinued operations, net of
income taxes - 2,680 (20)
-------- -------- --------
Earnings before extraordinary item 7,422 14,629 5,254
Extraordinary loss from early extinguishment
of debt - - (2,886)
-------- -------- --------
Net earnings $7,422 $14,629 $ 2,368
======== ======== ========
Preferred Class C dividends not declared or recorded - (2,284) (1,915)
-------- -------- --------
Common stockholders' share of earnings $7,422 $12,345 $ 453
======== ======== ========
<FN>
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries are
an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements."
</FN>
</TABLE>
<PAGE>
<TABLE>
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Cash Flows
(Dollars in thousands)
For the Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 7,422 $14,629 $ 2,368
Adjustments to reconcile net earnings from operations
to net cash (used) provided by operating activities:
Depreciation and amortization 3,530 3,600 5,437
Loss, before tax, on purchase of Junior Subordinated Debentures - - 4,786
Payment of income taxes on gain on sale of
discontinued operations - (13,990) -
(Earnings) loss from discontinued operations - (2,680) 20
Deferred income taxes 1,785 787 2,707
Change in reserves of businesses divested in 1988 8,157 825 7,700
Other (323) (327) (2,021)
Change in assets and liabilities, net of acquisitions and dispositions:
(Increase) decrease in accounts receivable and
contracts in process (16,892) 4,367 4,311
Decrease (increase) in inventories 363 255 (445)
Increase in other current assets (1,808) (1,523) (1,886)
Decrease in current liabilities except notes
payable and current portion of long-term debt (7,909) (9,652) (5,994)
-------- -------- --------
Cash (used) provided by continuing operations (5,675) (3,709) 16,983
Cash used by discontinued operations - - (1,416)
-------- -------- --------
Cash (used) provided by operating activities (5,675) (3,709) 15,567
-------- -------- --------
Cash Flows from Investing Activities:
Sale of property and equipment 249 859 27
Purchase of property and equipment, net of capitalized leases (3,464) (1,452) (1,926)
Proceeds received from notes receivable - - 8,943
Assets and liabilities of acquired businesses - (1,707) -
Proceeds from sale of discontinued operations - 3,050 135,700
Investing activities of discontinued operations - - (41,669)
Increase in investments in affiliates (867) - -
Decrease (increase) in cash on deposit for letters of credit - 6,244 (3,307)
Other (276) (232) (229)
-------- -------- --------
Cash (used) provided from investing activities (4,358) 6,762 97,539
-------- -------- --------
Cash Flows from Financing Activities:
Treasury stock purchased (923) (9,712) (12,267)
Payment on indebtedness (722) (842) (6,659)
Proceeds from issuance of Senior Notes 99,484 - -
Common stock and warrants purchased from investors (37,819) - -
Redemption of Junior Subordinated Debentures - - (105,971)
Stock released to Employee Stock Ownership Plan 5,189 503 17,497
Loans to Employee Stock Ownership Plan (13,274) - -
Deferred financing expenses (4,120) (1,310) (864)
Other financing transactions (209) (20) -
Change in intercompany balances, net (41,743) 737 19,152
-------- -------- --------
Cash provided (used) from financing activities 5,863 (10,644) (89,112)
-------- -------- --------
Net (Decrease) Increase in Cash and Short-term Investments (4,170) (7,591) 23,994
Cash and Short-term Investments at Beginning of the Year 22,761 30,352 6,358
-------- -------- --------
Cash and Short-term Investments at End of the Year $18,591 $22,761 $30,352
======== ======== ========
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries are
an integral part of these statements. See accompanying "Notes to Condensed
Financial Statements."
</TABLE>
<PAGE>
DynCorp (Parent Company)
Schedule I - Notes to Condensed Financial Statements December 31, 1997 (Dollars
in thousands except where otherwise noted)
1. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the Condensed Financial Statements of the Registrant do not include
all of the information and notes normally included with financial statements
prepared in accordance with generally accepted accounting principles. It is,
therefore, suggested that these Condensed Financial Statements be read in
conjunction with the Consolidated Financial Statements and Notes included
elsewhere in this Annual Report on Form 10-K.
2. Long-term Debt
At December 31, 1997 and 1996, long-term debt consisted of:
1997 1996
----- -----
9 1/2% Senior Notes, due 2007 $99,510 $ -
Notes payable, due in installments through 2002,
11.43% weighted average interest rate - 722
------- -------
Less current portion - 267
------- -------
$99,510 $ 455
======= =======
3. Accounts Receivable
The Company's wholly-owned subsidiary, Dyn Funding Corporation ("DFC"), was
established in January, 1992 to facilitate the issuance of $100.0 million of
8.54% Contract Receivable Collateralized Notes and to purchase eligible accounts
receivable from the Company and its subsidiaries. In April 1997, DFC completed a
private placement of $50.0 million of 7.486% Fixed Rate Contract Receivable
Collateralized Notes (the "Notes"). Utilizing the proceeds from the issuance of
the Notes and a portion of the proceeds from the 9 1/2% Senior Notes, the
Company retired the maturing 8.54% Contract Receivable Collateralized Notes. On
an ongoing basis, the cash received by DFC from collection of the receivables is
used to make interest payments on the Notes, pay a servicing fee to the Company
and purchase additional receivables from the Company (see Note 5 to Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K).
The Company receives 97% of the face value of the accounts receivable sold
to DFC. The 3% discount from the face value of the accounts receivable is
recorded as an expense by the Company at the time of sale. In 1997 and 1996, the
Company recorded as expense $16.7 million and $17.2 million which is reflected
in "Other expense" in the accompanying "Statements of Operations" (in the
"Consolidated Statements of Operations" of DynCorp and Subsidiaries this expense
is offset by the gain recognized by DFC).
<PAGE>
<TABLE>
DynCorp and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<CAPTION>
Balance at Charged to Write-off of Balance
Beginning Costs and Uncollectible at End of
Description of Period Expenses Accounts Other Period
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for doubtful accounts $ 229 $ 629 $(382) $ - $ 476
Year Ended December 31, 1996
Allowance for doubtful accounts $ 9 $ 120 $ - $ 100 (1) $ 229
Year Ended December 31, 1995
Allowance for doubtful accounts $ 9 $ - $ - $ - $ 9
(1) Balance recorded at acquisition of Data Management Design, Inc.
</TABLE>
Exhibit 10.2
DynCorp
Management Incentive Plan (MIP)
Revised March, 1997
I. PURPOSE
The purpose of the Management Incentive Plan (MIP) is to motivate and
reward key managers for their achievement of preestablished, measurable
objectives that contribute to the success of the company and/or
organizational unit.
II. GENERAL DESCRIPTION
At the beginning of the Plan Year, company and/or unit financial and
key operational objectives, individual performance objectives and
target incentive awards will be established and confirmed in writing
for each Plan participant.
At the conclusion of the Plan Year, the achievement of the specified
individual objectives will be scored and weighted for each participant
and together with the achievement level of the company and/or
organizational unit will be used to determine the actual amount of the
incentive award.
III. RESPONSIBILITIES
A. The Corporate Vice President, Human Resources is responsible
for administering the Plan.
B. Strategic Business Unit (SBU) Executives and Corporate Staff
Officers are responsible for nominating participants to be
included in the plan, recommending appropriate objectives for
participants, evaluating participant performance and
recommending individual incentive award amounts.
C. The SBU Executives and Corporate Staff Officers are
responsible for recommending the amount to be budgeted across
the group for the Plan target pool, establishing the
organizational unit operating objectives, approving managers
selected for participation, apportioning the group target pool
to the organizational units, recommending actual award pools
and approving individual incentive awards.
D. The Chief Executive Officer (CEO) is responsible for approving
the Plan target pool and actual award pools for each sector or
Corporate financial organization, and approving any exceptions
to the Plan.
E. The Compensation Committee Board of Directors (the Committee)
is responsible for amending the Plan, and approving the Plan
target pool and the actual award pool for the company.
IV. DEFINITIONS
A. Adjusted Operating Profit (AOP)
Operating profit less a Net Asset Adjustment.
B. Average Net Assets
The average of the net assets assigned to the organizational
unit at the beginning of the Plan Year and at the end of each
month during the year through November. The net asset base
will be the total assets assigned to said operation reduced by
any non-interest bearing liabilities attributable to the unit,
and exclusive of intercompany accounts, marketable securities
and other non-operating accounts assigned to the Company.
C. Base Salary
The basic annual salary rate of a participant as of January 1
of the Plan Year or, if later, the time he or she is approved
as a potential participant for a given year, exclusive of
overtime, per diem, bonuses, or any other premiums, special
payments, or allowances.
D. EBITDA
Earnings of DynCorp before deductions for interest, taxes,
depreciation, discontinued operations, and merger/acquisition
costs, as recorded on the books and records of the
Corporation.
E. Key Manager
Those employees holding management positions who are
designated as eligible under the provisions of the MIP.
F. Net Asset Adjustment
The average net assets times a Net Asset Adjustment. The
percentage adjustment shall be at least equal to the weighted
average of the company's projected cost of capital for the
Plan Year. Only under extraordinary circumstances will this
percentage be set at less than 12%. The projected cost of
capital for each year will be as established in that year's
business plan.
G. Operating Profit
Earnings of the applicable organizational unit (i.e., branch,
division, subsidiary, group, etc.,) after ESOP and after all
accruals, but before the Company's G&A Expense, Interest and
Dividend Income, Interest Expense, Net Asset Allocation and
taxes on income.
H. Plan Year
The period commencing January 1 and ending December 31 of
the year for which performance is being measured.
I. Target Award
The dollar amount that a Participant is eligible to receive if
the combined performance of the participant and the
organizational unit is at an achievement level of 100% of the
established performance objectives.
V. ELIGIBILITY
Eligibility for participation in the Plan will be limited to key
managers in the operating groups and Corporate Headquarters who have
significant impact on the overall performance and profitability of the
company and/or their organizational unit.
All participants in the Plan must be approved in advance by the SBU
President or Corporate Staff Officer.
A minimum of six months in an eligible position is required for
participation in the Plan. Participation for individuals with less than
six months must be approved by the CEO as an exception to the plan.
With the exception of retirement or death, participants must be
actively (on the payroll) employed on the date the awards are paid in
order to receive a management incentive award. At its sole discretion,
DynCorp may make an award to a former employee, or to the former
employee's estate, in such amount as the Company may deem appropriate.
Participation in the plan terminates on the date the employee
terminates employment with the Company, whether voluntary or
involuntary.
VI. TARGET POOL FUNDING
At the beginning of the Plan Year a management incentive target pool
will be established for each Corporate staff function and
organizational unit. Several factors are considered in determining the
size of each target pool. These include: the number of key managers to
be incentivized; the target award level assigned to each manager; and
the EBITDA and/or AOP objective of the company or unit. The target pool
when established should be equal to the sum of the target awards for
all participants plus the portion earmarked for key contributor awards.
A key contributor pool may be established as part of the total target
award pool to recognize the performance of other managers and employees
who are not specifically designated as participants with a target
preestablished at the beginning of the year. Key contributors are those
select employees who stand out as having made a significant
contribution to the overall performance of the unit during the Plan
Year.
As a general rule, the sum of the individual target pools for all
incentive plans within a Corporate staff function or a SBU or major P&L
center will not exceed twelve percent of the group AOP objective. The
CEO will approve the amount to be apportioned to each of the unit MIP
target pools. At year end the actual award pool will be adjusted upward
or downward proportionate to the achievement level of the company or
operating unit against budgeted EBITDA and/or AOP and other key
operational objectives.
VII. TARGET AWARDS
At the beginning of the Plan Year, a target award, expressed in the
form of a dollar amount, will be established for each participant based
on the employee's position level and degree of impact on the overall
results of the organizational unit. Target awards will typically range
from 5% to 25% (in 5% increments) of the participant's base salary, or
target may be expressed in dollar amount ($100 increments). For
employees who are not employed for the entire plan year due to death,
disability, retirement or being a new hire the Target Award will be
prorated based upon the number of months employed by the Company as a
percentage of the full Plan Year. Target awards at or above 30% of base
salary require CEO approval subject to the provisions of Section V.
VIII. ESTABLISHMENT OF COMPANY OBJECTIVES
At the beginning of the Plan Year an EBITDA objective will be
established and will account for 50% of the individual target bonus.
IX. ESTABLISHMENT OF ORGANIZATIONAL UNIT OBJECTIVES
At the beginning of the Plan Year an AOP objective will be set for each
organizational unit along with key operational performance objectives.
The AOP objective, for purposes of the plan, should be set at an
achievement probability of approximately 80%. At this level an above
average performance from the management team will be required in order
to achieve the objective.
The SBU or major P&L center will have a financial weighting of 60% and
individual performance will have a weighting of 40%.
The operational performance objectives should address the four to six
key areas of performance that are critically important to the continued
success of the organizational unit. The objectives must be quantitative
in nature to permit an accurate and objective measurement of the degree
to which they were achieved. Categories to consider for operational
objectives include, but are not limited to, the following: quality and
process improvement; overhead efficiency; direct labor utilization;
business expansion; award fee evaluations; and safety performance.
A weighting factor is placed on both the AOP objective and the
operational objectives. The weightings should help focus management on
the areas of performance that most need to be emphasized during the
Plan Year. The AOP objective will typically be weighted at 60% or
higher. However, in some organizational units the financial performance
may not be subject to much risk, nor can it be greatly influenced by
management. In this case, a higher weighting may be placed on the
operational objectives.
X. ESTABLISHMENT AND MEASUREMENT OF INDIVIDUAL PERFORMANCE OBJECTIVES
At the beginning of each Plan Year, specific individual performance
objectives will be established and confirmed in writing for each
participant. At year end, the individual's performance will be measured
in relation to these preestablished objectives to produce an individual
performance achievement level.
Individual performance objectives should be established according to
the following guidelines:
1. Each MIP participant will have six to eight written objectives
that have been jointly agreed to by the participant and his or
her supervisor.
2. Performance objectives should be aligned with company and/or
SBU objectives established and communicated by the CEO as well
as objectives established for the participant's immediate
organization. Objectives covering each of the following areas
will typically be included in the objectives established by
each line executive:
o Financial and operational performance
o Human resources management
o Quality and process improvement
o Business development
o Customer satisfaction
3. Objectives will be both quantitative and qualitative in nature
and will include non financial as well as appropriate
financial related goals.
4. Objectives will be highly measurable.
5. Objectives will have performance criteria thoroughly
established in advance to enable individuals to monitor their
own performance in relation to their objectives, and to
provide an objective measurement at year-end.
6. Up to 1/2 of the individual performance assessment
may be discretionary.
At the conclusion of the Plan Year, the participant's achievements in
relation to each objective will be evaluated, with a rating of 100%
indicating that the individual fully met the objective. The scores are
then totaled to yield an overall individual performance percentage.
XI. AWARD POOL DETERMINATION
The actual award pool that is authorized for distribution to
participants within an organizational unit is determined by measuring
the achievement level of the preestablished EBITDA and/or AOP and key
operational objectives.
The EBITDA and/or AOP achievement level is calculated by dividing the
actual EBITDA and/or AOP, by the EBITDA and/or AOP target objective.
Each of the operational objectives are evaluated and scored and equated
to a preestablished target achievement level. The sum of the
achievement level percentages for the operational objectives is then
multiplied by a predetermined weighting factor. The AOP achievement
level percentage is likewise weighted. The two weighted scores are then
added together and the resulting Organizational Unit Award percentage
is applied to the target pool to derive the actual award pool.
The size of the actual award pool at Corporate will be based solely on
the EBITDA achievement level of the company overall.
A threshold achievement level of 75% of the target AOP or EBITDA
objective is required in order for formula awards to be made within a
unit or a company level. The CEO approval may on a discretionary basis
authorize the payment of awards where unusual or extraordinary
circumstances contributed to the below threshold performance. The award
for any participant may range from 0 to 150% of the established target
amount.
The CEO reserves the right to adjust the size of the actual award pools
at the unit level to reflect extraordinary or unusual circumstances.
However, the sum total of such adjustments cannot exceed the amount
that would have otherwise been awarded within the SBU through the
formula calculation without CEO approval.
XII. INDIVIDUAL AWARD DETERMINATION
The determination of individual awards is carried out in three steps.
First, the target award for each individual is multiplied by the
Company or Organizational Unit Award percentage. This step spreads the
performance results proportionately across all participants to produce
an Adjusted Target Award.
Second, the degree to which the participant achieved each of his/her
individual objectives is evaluated and scored. The achievement
percentages for each objective are then totaled to produce a composite
individual performance factor. This factor is then applied against the
adjusted target award from step one to yield a formula award.
Third, if the sum of the individual formula awards are less than or
greater than the authorized award pool, a uniform prorata adjustment is
applied against the individual formula awards. The maximum award for
any participant will be 150% of the established target amount.
Awards to key contributors are set at the discretion of the unit
managers. The key contributor pool is factored by the same
organizational unit award percentage to derive the payout pool.
The following table summarizes the weighting of each of the three
performance measurement components:
TABLE 1
Weighting of Performance Measurement Components
PERFORMANCE MEASUREMENT &
ORGANIZATIONAL WEIGHTING
Company Organizational
Financial Unit's Financial Individual
MIP PARTICIPANT Performance Performance Performance
Corporate Staff
Executives 50% 50%
SBU & Major
P&L Executives 60% 40%
XIII. ADMINISTRATION
Individual awards will be consolidated and the actual award pool
recommended for allocation to participants will be submitted to the
Corporate Vice President Human Resources by the end of January for
approval by the CEO.
Payments will be made in cash as soon as practical after the conclusion
of the Plan Year, typically early to mid March.
Any exceptions to the plan must be approved by the CEO and the Vice
President-Human Resources. Nothing in the plan or in any action taken
hereunder shall affect the Company's right to terminate at any time and
for any reason the employment of any employee who is a participant in
the plan.
XIV. SAMPLE AWARD CALCULATION
The example on the attached pages illustrates how the Plan formula is
applied to calculate the incentive award for a operational or staff
participant.
ASSUMPTIONS:
o Target Pool $250,000
o Manager's Target Award $ 8,000
o Manager's Individual Performance Factor 103%
o EBITDA and/or AOP Objective $5.0M
o EBITDA and/or AOP Weighting 60%
o Key Operational Objectives Weighting 40%
o Actual EBITDA and/or AOP $4.8M
o Actual Key Operational Objectives 84%
Composite Average
DETERMINATION OF AWARD POOL:
Actual EBITDA divided EBITDA and/or EBITDA and/or AOP
and/or AOP by AOP Objective = Achievement Level
$4.8M divided $5.0M = 96%
by
EBITDA and/or EBITDA and/or
AOP Achieve Level x Weighting = AOP Percentage
96% x 60% = 57.6%
Key Operational
Objectives Composite Key Operational
Average x Weighting = Objectives Percentage
84% x 40% = 33.6%
EBITDA and/or Key Operating Organizational Unit
AOP Percentage + Obj. Percentage = Award Percentage
57.6% + 33.6% = 91.2%
Organizational Unit
Target Pool x Award Percentage = Actual Award Pool
$250,000 x 91.2% = $228,000
DETERMINATION OF INDIVIDUAL AWARDS:
Organizational Unit Adjusted
Target Award x Award Percentage = Target Award
$8,000 x 91.2% = $7,296
Adjusted Individual
Target Award x Performance Factor = Formula Award
$7,296 x 103% = $7,515
PRORATA ADJUSTMENT = 102%
FINAL AWARD = $7,666
Exhibit 10.3
DynCorp
Executive Incentive Plan (EIP)
Revised March, 1997
I. PURPOSE
The purpose of the Executive Incentive Plan (the Plan) is to motivate
and reward key executives for their achievement of preestablished,
measurable objectives that have significant and direct impact on the
overall success of the company and its business.
II. GENERAL DESCRIPTION
At the beginning of the Plan year, company and unit financial
objectives, individual objectives, and target incentive award level
will be established and confirmed in writing for each Plan participant.
At the conclusion of the Plan year, the achievement of the specified
financial objectives and individual objectives will be scored and
weighted for each participant according to established formulae to
determine the actual incentive amount to be awarded.
III. RESPONSIBILITIES
A. The Corporate Vice President Human Resources is responsible
for administering the Plan.
B. Strategic Business Unit (SBU) Executives and Corporate Staff
Officers are responsible for nominating Plan participants,
recommending appropriate individual performance objectives for
Plan participants from their respective organizations or
functions, evaluating participant performance and recommending
individual incentive award amounts.
C. The Chief Executive Officer (CEO) is responsible for approving
Plan participants, approving group financial and individual
objectives, approving individual target award levels,
recommending actual incentive payments, and recommending any
deviations from the Plan.
D. The Compensation Committee of the Board of Directors (the
Committee) is responsible for amending the Plan, approving
plan participants, establishing company financial objectives,
and approving actual incentive payments.
IV. DEFINITIONS
A. Adjusted Operating Profit (AOP)
Operating profit less a Net Asset Adjustment.
B. Average Net Assets
The average of the net assets assigned to the organizational
unit at the beginning of the Plan Year and at the end of each
month during the year through November. The net asset base
will be the total assets assigned to said operation reduced by
any non-interest bearing liabilities attributable to the unit,
and exclusive of intercompany accounts, marketable securities
and other non-operating accounts assigned to the Company.
C. Base Salary
The base annual salary rate of a participant as of January 1
of the Plan year or, if later, the time he or she is approved
as a potential participant for a given year, exclusive of
overtime, per diem, bonuses, or any other premiums, special
payments, or allowances.
D. EBITDA
Earnings of DynCorp before deductions for interest, taxes,
depreciation, discontinued operations, and merger/acquisition
costs, as recorded on the books and records of the
Corporation.
E. Net Asset Adjustment
The average net assets times a Net Asset Adjustment. The
percentage adjustment shall be at least equal to the weighted
average of the company's projected cost of capital for the
Plan Year. Only under extraordinary circumstances will this
percentage be set at less than 12%. The projected cost of
capital for each year will be as established in that year's
business plan.
F. Operating Profit
Earnings of the applicable organizational unit (i.e., branch,
division, subsidiary, group, etc.,) after ESOP and after all
accruals, but before the Company's G&A Expense, Interest and
Dividend Income, Interest Expense, Net Asset Allocation and
taxes on income.
G. Plan Year
The period commencing January 1 and ending December 31
of the year for which performance is being measured.
H. Target Award
The dollar amount that a participant is eligible to receive if
the combined weighted performance against company,
organizational unit and individual objectives equals an
overall achievement level of 100%.
V. ELIGIBILITY
Eligibility for participation in the Plan will be limited to key
executives in Corporate Headquarters and in the strategic business
units or major P&L Centers who have significant impact on company
strategy, performance and profitability and who hold selected positions
as senior line executives at the SBU or major P&L Center level, or as a
major staff functional head at the Corporate, SBU level, or major
project site.
All participants in the Plan must be approved by the Committee upon
recommendation by the CEO.
A minimum of six months in an eligible position is required for
participation in the Plan. Participation for individuals with less than
six months must be approved by the CEO as an exception to the plan.
With the exception of disability, retirement or death, participants
must be actively (on the payroll) employed on the date the awards are
paid in order to receive an incentive award. At its sole discretion,
DynCorp may make an award to a former employee, or to the former
employee's estate, in such amount as the Company may deem appropriate.
Participation in the Plan terminates on the date the employee
terminates employment with the Company, whether voluntary or
involuntary.
Participation in the Plan precludes eligibility for participation in
any other annual incentive plan provided by the company.
VI. FUNDING
At the beginning of each Plan year, a target pool, equal to 100% of the
target award amounts for all participants, will be established and
accrued for during the year. The target pool represents the maximum
amount that can be awarded unless overall company EBITDA achievement
exceeds the plan objective. Payment of an amount greater than or less
than the target pool will be at the sole discretion of the Committee.
VII. TARGET AWARDS
At the beginning of each Plan year, a target award, expressed in the
form of a dollar amount, will be established for each participant based
on the percentage of base salary applicable to the salary grade to
which he or she has been assigned. Target awards range from
approximately 30% to 60% (in 5% increments) of the participant's base
salary. For employees who are not employed for the entire plan year due
to death, disability, retirement or being a new hire the Target Award
will be prorated based upon the number of months employed by the
Company as a percentage of the full Plan Year. Target awards that
deviate from the standard for a given position require CEO approval,
subject to the provisions of Section V.
VIII. PERFORMANCE MEASUREMENT COMPONENTS
In order to reinforce the need for DynCorp executives to achieve a
balanced performance against financial and non-financial criteria,
incentive awards under the EIP will be based on team and individual
achievements in the following three areas:
A. The Financial Performance of DynCorp:
DynCorp will reward participants for the results of their team
efforts, as measured by the financial performance of the
company in relation to established financial objectives. This
component seeks to reinforce the need for participants to
support achievement of the company's objectives by sharing
people, technology, information, and resources across
organizations.
The financial performance of the company will have a weighting
of 60% for Corporate Staff participants and 20% for all other
participants.
B. The Financial Performance of the Organizational Unit:
The financial performance of the appropriate SBU or major P&L
Center will be given the heaviest weighting in the
determination of incentive awards for participants from those
organizations in order to motivate and reward participants for
financial achievements over which they have the most direct
control and accountability.
The financial performance of the appropriate organizational
unit (i.e., SBU or major P&L Center) will have a weighting of
40% for Plan participants at that organization level.
C. The Individual Performance of the Participant:
The individual performance of the Plan participant against
pre-established objectives is an important measurement
component that reinforces and rewards executives for their
performance and achievements in areas such as human resources
management, process/quality improvement, customer satisfaction
and business development. The Individual Performance factor
will have a weighting of 40% of which up to 1/2 (20%) may be
discretionary and the balance must be applied against
pre-established objectives.
The following table summarizes the weighting of each of three
performance measurement components:
TABLE 1
Weighting of Performance Measurement Components
Company Organizational
Financial Unit's Financial Individual
EIP PARTICIPANT Performance Performance Performance
Corporate Staff
Executives 60% 40%
SBU & Major
P&L Executives 20% 40% 40%
IX. PERFORMANCE MEASUREMENT CRITERIA
A. Establishment and Measurement of Financial Objectives
At the beginning of each Plan year, specific financial
objectives will be established for company EBITDA and for AOP
at the SBU and major P&L Center level. At the conclusion of
the Plan year, the financial performance of the company and of
each organizational unit will be measured in relation to the
applicable preestablished objectives. Performance will be
expressed as a percentage of the objective that was achieved.
In setting the financial objectives for purposes of the Plan,
the target for EBITDA and AOP should reflect an achievement
probability of approximately 80%. At this level of probability
an above average performance from the management team is
required in order to achieve the objectives A threshold
achievement level of 75% of the target objective for EBITDA
and AOP will be required in order for a formula award to be
made relative to each of these factors.
B. Establishment and Measurement of Individual Performance
Objectives
At the beginning of each Plan year, specific individual
performance objectives will be established and documented for
each participant. At year end, the individual's performance
will be measured in relation to these preestablished
objectives to produce an individual performance achievement
level.
Individual performance objectives should be established
according to the following guidelines:
1. Each participant will have 6-8 written objectives
that have been jointly agreed to by the participant
and his or her supervisor.
2. Objectives will evolve from, respond to, and/or
reflect the company objectives established and
communicated by the CEO. Objectives covering each of
the following areas will typically be included:
o Key operational objectives
o Human resources management
o Quality and process improvement
o Business development
o Customer satisfaction
3. Objectives will be both quantitative and qualitative
in nature and will include non financial as well as
appropriate financial related goals.
4. Objectives will be highly measurable.
5. Objectives will have performance criteria thoroughly
established in advance to enable individuals to
monitor their own performance in relation to their
objectives, and to provide an objective measurement
at year-end.
At least 50% of the Individual Performance factor must be tied
to specific objectives which are documented and agreed upon.
X. AWARD DETERMINATION
Awards will be determined by weighting the Company's financial
performance percentage, the Organizational Unit's financial performance
percentage, and the individual performance percentage by the
percentages indicated in Table 1 above, adding the resulting
percentages together and then multiplying the target award by the
composite percentage. To illustrate, the formula for determining the
incentive award for an individual participant at the SBU or major P&L
Center level is as follows:
Actual Award Amount =
[(Company Financial Performance Factor x .20) +
(Organizational Unit Financial Performance Factor x .40) +
(Individual Performance Factor x .40)]
x Target Award Amount
The award for any participant may range from 0 to 150% of the
established target amount. Actual award amounts will be rounded to
the nearest $100.00.
If the performance achievement level on either of the two financial
performance factors falls below the 75% threshold, the participant will
not generally receive an award for that component. However, the CEO may
on a discretionary basis recommend the payment of awards where unusual
or extraordinary circumstances contributed to the below-threshold
performance. If the combined weighted achievement level for EBITDA and
AOP does not meet the stated threshold of 75%, the award for the
individual performance component shall also be at the discretion of the
CEO and the Committee.
Should a participant transfer to another organization during the plan
year, the final award will be jointly determined and prorated for the
time spent in each organization.
All incentive awards proposed under the Plan are subject to the
approval of the CEO and the Committee, who may at their discretion
adjust the amounts to be awarded in order to reflect exceptional
performance, performance that falls below objectives, or other
performance factors that affect or potentially affect the ability of
the company or any of its units to meet its business and financial
goals.
XI. ADMINISTRATION
Bonus awards will be calculated at the strategic business unit and
Corporate staff function level and submitted to the Corporate Vice
President Human Resources by the end of January for company level
consolidation and approval by the CEO and the Committee. Documentation
of objectives, accomplishments and individual evaluations will be
required to be submitted along with the individual award
recommendations.
Effective with the Plan Year beginning 1996 and thereafter, payments
will be made in the form of 80% cash and 20% DynCorp Common Stock;
payments will be made as soon as practical after the Compensation
Committee meeting in early March following final year end closing.
Any exceptions to the Plan must be approved by the CEO.
Nothing in the plan or in any action taken hereunder shall affect the
Company's right to terminate at any time and for any reason the
employment of any employee who is a participant in the plan.
XII. SAMPLE AWARD CALCULATIONS
The examples on the following pages illustrate how the Plan formula
will be applied to calculate the incentive award for a Corporate Staff
executive and for a Strategic Business Unit line executive.
A. Sample Award Calculation: Corporate Staff Executive
ASSUMPTIONS:
Base Salary $108,000
Target Award Percentage 30%
Target Award $ 32,400
Company Financial Performance Factor 80%
(EBITDA Act. $36M / EBITDA Obj. $45M)
Individual Performance Factor 90%
AWARD CALCULATION:
Company Financial Performance Individual Performance
(80% x .60) (90% x .40) =
48% + 36.0% = 84.0%
Actual Award Amount (.84 x $32,400) = $ 27,216
B. Sample Award Calculation: Strategic Business Unit or major P&L
center manager.
ASSUMPTIONS:
Base Salary $ 108,000
Target Award Percentage 30%
Target Award $ 32,400
Company Financial Performance 80%
Operational Unit Financial Performance 105%
(AOP Act. $10.5M / AOP Obj. $10.0M)
Individual Performance Factor 75%
AWARD CALCULATION:
Company Financial Organizational Unit Individual
Performance Financial Performance Performance
(80% x 20%) + (105% x 40%) + (75% x 40%) =
16% + 42% + 30% = 88%
Actual Award Amount (88% x $32,400) = $ 28,512
Exhibit 10.8
DYNCORP 1995 STOCK OPTION PLAN
(Effective July 1, 1995, as revised January 30 and May 15, 1997
and March 5, 1998)
1. PURPOSE OF PLAN
(a) The Board of Directors of DynCorp hereby adopts the DynCorp 1995
Stock Option Plan as of the effective date specified above to provide a means to
encourage exceptional performance by key members of the company's management
team, and to provide a mechanism for use in furtherance of the DynCorp Equity
Target Ownership Plan ("ETOP") which has been adopted concurrently with this
Plan.
(b) Equity ownership of DynCorp common stock ("Stock" or "Shares") by
key members of management is considered by the Board to be an important element
in securing superior performance by management on behalf of all of the
stockholders. While management compensation is important, equity participation
and equity ownership provide additional valuable incentives to achieve
outstanding management performance which translates into enhanced share value.
(c) Under the Plan, the Compensation Committee of the Board of
Directors (the "Committee" ) is authorized to approve periodic grants of options
to acquire Stock to key members of the management organizations of the company
and its various wholly owned subsidiaries, divisions and strategic business
units (the "Company"). All grants under this Plan shall be made in strict
accordance with the terms of the Plan.
2. NAME AND TERM OF THE PLAN
The name of the Plan shall be the "DynCorp 1995 Stock Option Plan"
which shall be referred to herein as the "Plan". The term of the Plan shall
commence as of the effective date and continue through a date which is ten (10)
years from the date of the last grant of options under the Plan; provided that
all options must be granted under the Plan by June 30, 2000.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee which shall have the
sole authority in its complete discretion to interpret the Plan and carry out
its intent and purpose. The Committee shall also have the right from time to
time to amend the Plan. See miscellaneous provisions below.
4. ELIGIBILITY - PARTICIPATION UNDER THE PLAN
(a) All full-time employees of the Company who are participants under
any Company-sponsored bonus or incentive compensation plan, all members of the
Board of Directors, and other employees as approved by the Committee shall be
eligible to become participants under the Plan; provided, however, that the
granting of options under the Plan shall be within the sole discretion of the
Committee. In approving the granting of options under this Plan, the Committee
shall act on recommendations of the DynCorp Chief Executive Officer who shall in
turn act on recommendations of the Company's Sector Presidents. Specific
recommendations by the Sector Presidents shall be reviewed by the CEO who shall
forward such recommendations as he deems appropriate together with
recommendations for awards to non-operating participants to the Committee for
approval.
(b) In the granting of options under the Plan, consideration may be
given to the following nonexclusive factors:
The obligations of the proposed optionee under the ETOP;
The ability of the proposed optionee to have a significant
positive impact on the Company's business success and improved
Stock value;
The potential for the proposed optionee to accept increased
responsibility within the Company;
The need to offer a competitive compensation and benefit package
in order to attract and retain qualified and highly motivated key
personnel; and
Performance and results
5. SHARES AUTHORIZED FOR ISSUANCE
A total of 1,250,000 shares of DynCorp Common Stock, par value $0.10
per share, shall be authorized for issuance under the Plan. When issued upon the
valid exercise of options granted under the Plan, such Shares shall be fully
paid, non-assessable shares of DynCorp's common stock. Options shall not be
granted for more than the total number of Shares authorized for issuance
hereunder from time to time; provided, that Shares represented by forfeited
options will be considered authorized again for issuance hereunder.
6. MAKING OF GRANTS - PRICE
(a) Grants of options under the Plan shall be made only in writing and
shall only be valid if signed by the President or any Senior Vice President of
DynCorp. Recipients of grants shall be entitled to receive same only upon the
execution of an Optionee's Agreement in the form appended as Attachment A to
this Plan, under which the optionee will agree to hold and exercise options
hereunder in accordance with the Plan. Among other things, the Agreement will
provide that upon termination of employment for certain reasons, all unexercised
options will be forfeited.
(b) Grants will be made in the following way, and in accordance with
the following guidelines:
Grants will be made only in increments of 100 Shares;
All grants will be subject to the vesting requirements of the
Plan described below;
The exercise price contained in all options issued under the Plan
shall be no less than the most recently determined fair market value
of the Stock as of the date of grant as determined in connection
with trading on the DynCorp Internal Stock Market (the "Market
Price");
Grants will be non-transferable except as specifically provided
and permitted under the Plan, and shall be exercisable only during
the specified term of the Plan;
Grants may be made without conditions (other than the execution of
the Optionee's Agreement) or with conditions approved by the
Committee -- such as a condition that the proposed optionee
acquire additional Shares in the DynCorp Internal Stock Market
("Internal Market"); and
Grants of options under the Plan may also be made conditional
upon a proposed optionee becoming an employee of the Company.
7. VESTING OF OPTIONS
(a) (1) For options issued prior to March 5, 1998: Options
issued under the Plan may be exercised only when the right to exercise
vests under the Plan terms, and only then to the extent of the vesting
percentage. The right to exercise options granted under the Plan prior
to March 5, 1998 shall vest over a period of five (5) years following
the grant of the option at the annual rate of 20% of the options
granted. For example, if an optionee receives the grant of an option to
purchase 1,000 Shares on June 30, 1995, he or she could exercise the
option to the extent of 200 Shares after June 30, 1996, and to the
extent of an additional 200 Shares after each successive June 30th
through June 30, 2000.
(2) For options issued on or after March 5, 1998:
Options issued under the Plan may be exercised only when the right to
exercise vests under the Plan terms, and only then to the extent of the
vesting percentage. The right to exercise options granted under the
Plan on or after March 5, 1998 shall vest over a period of four (4)
years following the grant of the option at the annual rate of 25% of
the options granted. For example, if an optionee receives the grant of
an option to purchase 1,000 Shares on June 30, 1998, he or she could
exercise the option to the extent of 250 Shares after June 30, 1999,
and to the extent of an additional 250 Shares after each successive
June 30th through June 30, 2002.
(b) (1) For options issued prior to March 5, 1998: Options
granted prior to March 5, 1998 which are not exercised within seven (7)
years from the date of grant shall expire, and the optionee shall have
no further rights with respect to such options under the Plan or
otherwise.
(2) For options issued on or after March 5, 1998:
Options granted on or after March 5, 1998 which are not exercised
within ten (10) years from the date of grant shall expire, and the
optionee shall have no further rights with respect to such options
under the Plan or otherwise.
(c) The Committee shall have the authority under this Plan to grant
options hereunder that are subject to special performance vesting provisions.
For example, notwithstanding the fact that options hereunder are vested,
exercise may be conditioned upon any of the following additional performance
criteria:
The achievement of a specified stock price; or
The achievement of a specified percentage stock price increase
over the option price--e.g., vested options can only be exercised
in the event the price as of the exercise date is at least 25%
higher than the grant price.
Moreover, the Committee shall have the authority to grant special
vesting period reductions, contingent on the Company's achievement of a
specified stock price or percentage of increase over the grant price. For
example, options might be granted with the understanding that in the event the
stock price rose to some specified price per share for at least two quarters,
all of some portion of unvested options should immediately vest.
8. MECHANICS FOR EXERCISING OPTIONS
An optionee may exercise a vested option by sending a completed and
signed Optionee Exercise Form (as prescribed by DynCorp) to the DynCorp
Corporate Secretary together with his or her personal check in the amount of the
exercise price times the number of vested-option Shares that are being
purchased. Subject to the restrictions of any current financial covenants, the
optionee may pay the exercise price, in whole or in part, by surrendering
previously owned Shares, which shall be applied at the Market Price toward
payment of the exercise price. The Corporate Secretary will either cause the
Company to issue Shares in the name of the optionee for each option exercised or
will cause such Shares to be purchased in the Internal Market and recorded on
the Optionee's Stock account within 10 days following the next scheduled
Internal Market trade day. Under the terms of the Optionee Agreement, the
optionee will specify whether the Company shall withhold taxes as required upon
the exercise of the option from the Optionee's compensation, whether the
optionee shall pay such required amount in cash, or whether such withholding
shall be satisfied in Shares (at the Market Price). See discussion below
concerning taxation."
9. FORFEITURE OF CERTAIN UNEXERCISED OPTIONS - SHORTENING OF OPTION PERIOD
The right to exercise vested options, and all interests in unvested
options, shall terminate and be forfeited in the event an Optionee's employment
is terminated for any reason except retirement, death or disability; provided
that the Committee in its sole discretion may permit a terminated optionee a
period of no more than 30 days after termination of employment within which to
exercise previously vested options. In the event of the death of an optionee,
all unvested options shall immediately become vested, and his or her estate or
legal representative shall be entitled to exercise any unexercised options;
provided, that such exercise must be made prior to the earliest to occur of the
expiration date of such options, or the 180th day after the Optionee's death. An
optionee who is permanently and totally disabled as established by evidence
satisfactory to the Committee may exercise all options which are vested as of
his or her termination date; provided such exercise is made within the same
period described in the immediately preceding sentence. In the event of an
Optionee's retirement at age 65 or older, all options shall immediately become
vested, and the optionee shall have a period of 360 days from his or her
retirement date in which to exercise such options. All other optionees who
retire prior to achieving the age of 65 years shall be entitled for a period of
180 days after retirement to exercise those options which were vested as of his
or her retirement date. All Shares obtained pursuant to the exercise of options
under these circumstances following termination of employment due to death,
disability or retirement shall be subject to the Company's right of first
refusal to purchase such Shares at the prevailing Market Price, which right
shall be exercised by the Company in accordance with the procedures set forth in
the Optionee Agreement.
For purposes of clarification, if an optionee is serving as a member of the
Board of Directors as well as being an employee, such optionee shall not be
deemed to have been terminated from employment until the later of termination as
an employee and termination as a Director, and an optionee who is terminated by
reason of disability at age 65 or older shall be deemed to have retired as of
his termination date.
10. TAX INFORMATION
The Company will withhold from the Optionee's compensation, or require
as a condition of option exercise that the optionee pay to the Company, an
amount sufficient to comply with applicable federal and state withholding
statutes. DynCorp may, however, permit optionees to satisfy withholding
requirements, to the extent permitted by law, through the transfer to the
Company of Shares having a fair market value equal to the withholding
requirement.
11. MISCELLANEOUS PROVISIONS
(a) The granting of an option shall impose no obligation upon the
optionee to exercise such option.
(b) Options shall not be transferable other than by will or by the laws
of descent and distribution and during an Optionee's lifetime shall be
exercisable only by such Optionee.
(c) The aggregate number of Shares available for options under the
Plan, the Shares subject to any option, and the price per share shall all be
proportionately adjusted for any increase or decrease in the number of issued
Shares subsequent to the effective date of the Plan resulting from (1) a
subdivision or consolidation of Shares or any other capital adjustment, (2) the
payment of a Stock dividend. If DynCorp shall be the surviving corporation in
any merger or consolidation, any option shall pertain, apply, and relate to the
securities to which a holder of the number of Shares subject to the option would
have been entitled after the merger or consolidation. Upon dissolution or
liquidation of DynCorp, or upon a merger or consolidation in which DynCorp is
not the surviving corporation, this Plan or an identical successor plan shall
continue in force, or, should such successor plan not be adopted or this Plan
continued, all options outstanding under the Plan shall immediately vest and
each optionee (and each other person entitled under the Plan to exercise an
option) shall have the right, immediately prior to such dissolution or
liquidation, or such merger or consolidation, to exercise such Optionee's
options in whole or in part. Upon the consummation of any such dissolution,
liquidation, merger, or consolidation, all unexercised options shall terminate.
(d) The Board or Committee, by resolution, may terminate, amend, or
revise the Plan with respect to any Shares as to which options have not been
granted. Neither the Board nor the Committee may, without the consent of the
holder of an option, alter or impair any option previously granted under the
Plan, except as authorized herein. Unless sooner terminated, the Plan shall
remain in effect for a period of five (5) years from the date of the Plan's
adoption by the Board. Termination of the Plan shall not affect any option
previously granted.
(e) As a condition to the exercise of any portion of an option, DynCorp
may require the person exercising such option to represent and warrant at the
time of such exercise that any Shares acquired at exercise are being acquired
only for investment and without any present intention to sell or distribute such
Shares, if, in the opinion of counsel for DynCorp, such a representation is
required under the Securities Act of 1933 or any other applicable law,
regulation, or rule of any governmental agency.
(f) DynCorp, during the term of this Plan, will at all times reserve
and keep available, and will seek or obtain from any regulatory body having
jurisdiction any requisite authority necessary to issue and to sell, the number
of Shares that shall be sufficient to satisfy the requirements of this Plan. The
inability of DynCorp to obtain from any regulatory body having jurisdiction the
authority deemed necessary by counsel for DynCorp for the lawful issuance and
sale of its Stock hereunder shall relieve the Company of any liability in
respect of the failure to issue or sell Stock as to which the requisite
authority has not been obtained.
(g) This Plan shall be governed by the laws of the Commonwealth of
Virginia, without regard to the conflicts-of-law provisions thereof.
(h) Nothing herein shall be implied to constitute a contract of
employment for any person.
(i) The plan shall become effective as of the effective date upon
approval by the DynCorp Board of Directors.
EXHIBIT 21
MARCH 1998
SUBSIDIARIES OF DYNCORP
Name of Subsidiary Domicile
(Active)
Aerotherm Corporation California
AT/Mexico Holdings, Inc. Delaware
Data Management Design, Inc. Virginia
Dyn Funding Corporation Delaware
Dyn Marine Services, Inc. California
Dyn Marine Services of Virginia, Inc. Virginia
Dyn Network Management, Inc. Virginia
Dyn Pacific Aerospace Services, Inc. Delaware
Dyn Realty Corporation Virginia
Dyn Systems Technology, Inc. Virginia
Dyn Trade Systems, Inc. Virginia
DynCIS, Inc. Delaware
DynCorp Advanced Repair Technology, Inc. Virginia
DynCorp Aerospace Operations, Inc. Delaware
DynCorp Aerospace Operations (UK) Ltd. United Kingdom
DynCorp Aviacion de Mexico S.A. de C.V. Mexico
DynCorp Aviation Services, Inc. Virginia
DynCorp Biotechnology and Health Services, Inc. Virginia
DynCorp de Honduras S. De R.L. Honduras
DynCorp Environmental, Energy & National Security Virginia
Programs, Inc.
DynCorp Information & Engineering Technology, Inc. Delaware
DynCorp International Services GmbH Germany
DynCorp International Services Inc. Virginia
DynCorp International Services Ltd. Cayman Is.
DynCorp of Colorado, Inc. Delaware
DynCorp Panama, Inc. Panama
DynCorp Postal Operations, Inc. Virginia
DynCorp Procurement Systems, Inc. Virginia
DynCorp Property Management, Inc. Delaware
DynCorp Tri-Cities Services, Inc. Washington
DynCorp Viar Inc. Virginia
DynEDRS, Inc. Virginia
DynEx, Inc. Virginia
DynMet Corporation Delaware
DynSolutions, Inc. Virginia
DynTel Corporation Virginia
FMAS Corporation Virginia
TAI Realty Corporation Virginia
Other Affiliated Companies
Advanced Repair Technology, Int'l Ltd. Texas LLC
DynBorg Security Management LLC Virginia
DynCorp Management Resources LLC Virginia
DynKePRO L.L.C. Delaware LLC
DynMcDermott Petroleum Operations Company Louisiana
DynPort LLC Virginia LLC
DynPRI, LLC Virginia LLC
DynStar LLC Virginia LLC
TechServ LLC Virginia LLC
Name of Subsidiary
(Inactive)
Anedyn, Inc. Georgia
Anedyn Power Company Florida
Dyn Logistics Services Inc. California
DynAir Technical Services, Inc. Delaware
Dynalectron Corporation Delaware
Dynalectron Systems Inc. Nevada
DynCorp Aviation Services, Inc. Virginia
DynCorp of New Mexico, Inc. New Mexico
DynCorp West Virginia Inc. West Virginia
DynEagle Inc. Delaware
Dyn/Mexico Holdings, Inc. Virginia
Electric Utility Construction, Inc. Kentucky
Fuller-Austin Insulation Company Delaware
Grupo DynCorp de Mexico S.A. de C.V. Mexico
Grupo DynCorp Satcom S.A. de C.V. Mexico
Kwajalein Services, Inc. Virginia
OLDHD Systems, Inc. Texas
Pacific TSD Corporation California
Sea Mobility Inc. Delaware
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 13, 1998, included in this Form 10-K, into the
Company's previously filed Amendment No. 1 to Form S-4 Registration Statement
No. 333-25355 and post effective Amendment No.1 on Form S-2 to Form S-1
Registration Statement No. 33-59279.
Washington, D.C., Arthur Andersen LLP
March 31, 1998
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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