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 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (I.R.S. Identification No.)
of incorporation or organization)
2000 Edmund Halley Drive, Reston, VA 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 the 2.4% 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. 8,975,655 shares of common stock having a par value of $0.10
per share were outstanding March 10, 1997.
TABLE OF CONTENTS
1996 FORM 10-K
Item
Part I
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
Part II
5. Market for the Registrant's Common Stock and Related Stockholder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
8. Financial Statements and Supplementary Data Report of Independent
Public Accountants
Financial Statements
Consolidated Balance Sheets
Assets
Liabilities and Stockholders' Equity
Consolidated Statements of Operations
Consolidated Statements of Permanent Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Part III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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 forcast 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 and subcontracts,
which may be fixed-price, time-and-material or cost-type
depending on the work requirements and other individual
circumstances.
The Company provides services to 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. 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 systems to
provide customers with comprehensive solutions for
information management and engineering needs. Also included
are software development and 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. This
business area also provides services in support of nuclear
safeguards and security research and development. Revenues
for 1996, 1995, and 1994 were $271.5 million, $271.1 million
and $192.1 million, respectively.
Aerospace Technology (AT) activities 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; and
engineering and technical services for high-technology space
and missile systems programs. 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
1996, 1995 and 1994 were $383.3 million, $319.3 million and
$300.9 million, respectively.
Enterprise Management (EM) provides full service, "turn-key"
solutions for the management, operation and maintenance of
federal and commercial facilities. This unit 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 activities 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 1996, 1995 and 1994 were $366.7
million, $318.3 million and $325.8 million, respectively.
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 and subcontracts as well as the estimated value of
option years on government contracts was $3,002 million at the
close of 1996, compared to a year-end 1995 backlog of $2,887
million. The backlog at December 31, 1996 consisted of $960
million for I&ET, $579 million for AT and $1,463 million for EM
compared to December 31, 1995 backlog of $904 million for I&ET,
$764 million for AT and $1,219 million for EM. Of the total
backlog at December 31, 1996, $2,015 million is expected to
produce revenues after 1997: I&ET $694 million, AT $271 million
and EM $1,050 million.
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, 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 1996, the Company had prime
contract revenue of approximately 79% from the U.S. Government,
50% attributable to the Department of Defense.
Competition
The markets which the Company services are highly
competitive. 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. Management does not believe any
one competitor or a small number of competitors is dominant in
any of the business areas of the Company.
Foreign Operations
The Company has a 5% minority investment in an unaffiliated
company in Saudi Arabia. Discussions are underway regarding the
sale of the Company's minority interest to one or more of the
other 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
incurred a loss of $4.4 million (see Management's Discussion and
Analysis of Cost of Services/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.
Employees
As of December 31, 1996, the Company had approximately 14,250
employees, approximately 830 of which are located outside of the
United States. Approximately 4,200 of the Company's U.S.
employees are covered by various collective bargaining agreements
with labor unions.
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.
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 1996.
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. 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 the
prevailing fair value of the common stock determined pursuant to
the formula and valuation process described below (the "Formula
Price") to employees and directors of the Company who have been
approved by the Compensation Committee of the Board of Directors
as being entitled to purchase common stock 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
- individuals approved for purchases by the Compensation Committee
of the Board of Directors, on a pro rata basis
- 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 and offers to sell shares in
excess of 500 shares will then be accepted on pro rata basis.
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. 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.
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 nonoperating 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 conversion of
all Class C Preferred Stock and 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:
Formula Price = [(CFx7)MF+NOA-IBD] / ESO
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, including
a majority of the directors who are not employees of the Company,
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.
Formula Price Market Factor
December 31, 1995 14.50 2.136
March 28, 1996 15.00 1.362
June 27, 1996 16.75 1.148
September 26, 1996 19.00 1.152
December 31, 1996 20.00 1.267
Prior to August 1995, the market value of the common stock
was established by the Board of Directors. The Board's
determination was based on its review of valuations performed
annually by an independent appraiser of the ESOP Trust. The
price per share by quarter is as follows:
December 31, 1994 14.60
March 30, 1995 14.90
June 29, 1995 14.90
September 28, 1995 14.90
There were approximately 478 record holders of DynCorp common
stock at December 31, 1996. In addition, the DynCorp Employee
Stock Ownership Plan Trust owns stock on behalf of approximately
29,100 present and former employees of the Company. Cash
dividends have not been paid on the common stock since 1988.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary selected historical
financial data derived from the Consolidated Financial Statements
of the Company, which have been audited by Arthur Andersen LLP
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 Consolidated Financial Statements
and related notes thereto, included elsewhere in this Annual
Report on Form 10-K. (Dollars in thousands except per share
data.)
Years Ended December 31,
1996(b) 1995(c) 1994(a)(e) 1993(a)(f) 1992(a)(g)
Statement of Operations Data:
Revenues $1,021,453 $908,725 $818,683 $777,216 $728,244
Cost of services $ 970,163 $871,317 $783,121 $742,460 $707,803
Gross Profit $ 51,290 $ 37,408 $ 35,562 $ 34,756 $ 20,441
Corporate selling and administrative $ 18,241 $ 18,705 $ 16,887 $ 17,547 $ 18,503
Interest expense $ 10,220 $ 14,856 $ 14,903 $ 14,777 $ 14,629
Earnings (loss) from continuing
operations before extraordinary
item (d) $ 11,949 $ 5,274 $ (352) $ (4,485) $(14,112)
Net earnings (loss) $ 14,629 $ 2,368 $(12,831) $(13,414) $(23,342)
Common stockholders' share of
earnings (loss) $ 12,345 $ 453 $(14,437) $(14,761) $(25,430)
Earnings (loss) per share from
continuing operations before
extraordinary item for common
stockholders $ 0.82 $ 0.29 $ (0.29) $ (1.13) $ (3.18)
Common stockholders' share of
earnings (loss) $ 1.05 $ 0.04 $ (2.12) $ (2.87) $ (4.98)
Supplementary earnings per
share data (h) $ 1.26 N/A N/A N/A N/A
Balance Sheet Data:
Total assets $ 368,752 $375,490 $396,000 $360,103 $338,135
Long-term debt excluding current
maturities $ 103,555 $104,112 $230,444 $215,939 $198,770
Redeemable common stock $ 139,322 $135,894 $130,828 $100,630 $ 95,391
<FN>
(a) Restated for the discontinuance of the Commercial Aviation business.
(b) 1996 includes $3,299,000 accrual for supplemental pension and other fees payable to retiring
officers and a member of the Board of Directors (see Note 13), $1,286,000 write-off
of cost in excess of net assets acquired of an unconsolidated subsidiary (see Note 13),
$1,250,000 credit for a revised estimate of the ESOP Put Premium (see Notes 7 and 13) and $4,067,000
reversal of income tax valuation allowance (see Note 14).
(c) 1995 includes $7,707,000 reversal of income tax valuation allowance (see Note 14), $4,362,000
accrued for losses and reserves related to the Company's Mexican operation, $2,400,000 accrual
of legal fees related to the defense of a lawsuit filed by a subcontractor of a former
electrical contracting subsidiary (see Notes 13 and 21) and $5,300,000 accrued for uninsured
costs related to claims against a former subsidiary for alleged useof asbestos containing
products (see Notes 13 and 21).
(d) The extraordinary loss in 1995 of $2,886,000 and in 1992 of $2,526,000 results from the early
extinguishment of debt.
(e) 1994 includes $3,250,000 write-off of investment in unconsolidated subsidiary (see Note 13),
$2,665,000 accrual of legal fees related to the defense of a lawsuit filed by a subcontractor
of a former electrical contracting subsidiary (see Notes 13 and 21), $1,830,000 credit for reversal
of legal costs associated with an acquired business (see Note 13) and $4,069,000 reversal
of income tax reserves (see Note 14).
(f) 1993 includes $2,000,000 of legal and other expenses associated with an acquired business
(see Note 13), $988,000 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 (see Note 13).
(g) 1992 Cost of Services includes approximately $6,000,000 for settlement of claims against the
Company related to prior years.
(h) Supplementary data has been presented to reflect the conversion of the Class C
Preferred Stock and the repurchase of other common shares and stock warrants (see Notes
16 and 24).
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In 1996, the Company realized a quantum improvement in
earnings. Specifically, earnings before income taxes reached
$19.1 million compared to a loss of $2.6 million in 1995 and
losses in the previous nine years. This significant break
through was achieved primarily as a result of the following:
- The current year benefit of the extinguishment of
approximately $128.0 million of above market debt in 1995,
utilizing the proceeds from the divestiture of the
Commercial Aviation business, the sale of the Corporate
headquarters building and the collection of a sizable note
receivable. As a result of these actions, the Company's
debt service cost was significantly reduced.
- An across the board improvement in earnings achieved as a
result of new business procurement in excess of contract
losses, curtailment of loss operations (primarily Mexico)
and the reduction of indirect costs as a result of recent
restructuring actions.
Following is a summary of operations, cash flow and long-
term debt (in thousands):
Years Ended December 31,
1996 1995 1994
Operations
Revenues $1,021,453 $ 908,725 $818,683
Gross profit 51,290 37,408 35,562
Corporate selling and administrative (18,241) (18,705) (16,887)
Interest, net (8,468) (11,052) (12,505)
Other (5,474) (10,212) (7,628)
Earnings (loss) from continuing operations
before income taxes, minority interest and
extraordinary item 19,107 (2,561) (1,458)
Provision (benefit) for income taxes 5,893 (9,090) (2,236)
Earnings from continuing operations
before minority interest
and extraordinary item $ 13,214 $ 6,529 $ 778
Cash Flow
Net earnings (loss) $ 14,629 $ 2,368 $(12,831)
Depreciation and amortization 9,467 11,348 16,340
Pay-in-kind interest - - 8,787
Tax on gain on sale of
Commercial Aviation business (13,990) - -
Working capital items (4,033) (16,293) (26,216)
Other 1,455 16,321 511
Discontinued operations (2,680) (3,355) 22,770
Cash provided by operating
activities 4,848 10,389 9,361
Investing activities 1,681 139,939 (22,235)
Financing activities (11,803) (126,915) 8,840
(Decrease) increase in cash and
cash equivalents $ (5,274) $ 23,413 $ (4,034)
December 31,
1996 1995 1994
Long-term Debt (including
current maturities)
Contract Receivable Collateralized
Notes $ 100,000 $ 100,000 $100,000
Junior Subordinated Debentures - - 102,658
Mortgages payable 3,461 3,802 22,285
Other notes payable and
capitalized leases 722 1,570 8,505
$ 104,183 $ 105,372 $233,448
Revenues - Revenues from continuing operations were $1,021.5
million in 1996 compared to $908.7 million in 1995, an increase
of $112.8 million. Revenues for each of the business areas
increased over those of 1995. Information and Engineering
Technology's (I&ET) revenues increased to $271.5 million from
$271.1 million in 1995, Aerospace Technology's (AT) revenues
increased to $383.3 million from $319.3 million and Enterprise
Management's (EM) revenues increased to $366.7 million from
$318.3 million. In I&ET, revenues attributable to an acquisition
in June 1996, increased level of effort on existing contracts and
a contract which was being phased in during the last half of 1995
but was fully operational during 1996 were offset by the decrease
in revenue due to the completion and phaseout of a large contract
with the Postal Service. The increase in AT's revenues were
primarily the result of increased level of effort on existing
contracts, new contract awards in support of the Bosnian
peacekeeping initiative and a contract which was being phased in
during the latter half of 1995 but was fully operational in 1996.
In EM, reductions in revenue due to contract losses were more
than offset by revenues from two new large Department of Energy
contracts, one of which was awarded in 1995 but not operational
for the entire year and the other which was phased-in beginning
in August 1996 and fully operational by October.
Revenues from continuing operations were $908.7 million in
1995 compared to $818.7 million in 1994, an increase of $90.0
million. I&ET revenues increased to $271.1 million from $192.1
million in 1994, AT revenues increased to $319.3 million from
$300.9 million in 1994, and EM revenues decreased to $318.3
million from $325.8 million in 1994. The increase in I&ET was
primarily attributable to a business acquired in October 1994 and
new contract awards; the increase in AT was primarily the result
of increased level of effort on existing contracts while new
contract awards were offset substantially by contracts lost in
recompetition; the decrease in EM was the result of contracts
lost in recompetition offset partially by contracts which were in
the start-up phase in 1994 but were fully operational in 1995.
Both I&ET and EM were affected by the shutdown of the Federal
Government in November and December 1995, and the subsequent
furloughs resulting from the stalled federal budget negotiations.
The shutdown affected revenue by approximately $1.0 million.
Cost of Services/Gross Margins - Cost of services from continuing
operations was 95.0% of revenue in 1996, 95.9% in 1995 and 95.7%
in 1994, which resulted in gross margins of $51.3 million (5.0%),
$37.4 million (4.1%) and $35.6 million (4.3%), respectively. The
same factors which contributed to the increase in revenues in
1996 over 1995 contributed to the improvement in gross margin.
Additionally, the losses for the Company's Mexican operations
were fully reserved in 1995, and therefore did not affect the
1996 gross margin. Finally, greater absorption of overhead costs
resulting from increased revenues and improved contract
performance and efficiency on some contracts which were under-
performing in 1995 also contributed to the improved gross margin.
The 1995 gross margin was adversely affected by losses of $4.4
million in connection with the Company's efforts to further
expand its Mexican operations and to complete a contract for the
design and installation of a large security system in Mexico.
These losses included such expenses as business development and
marketing expenses, recognition of an estimated loss at
completion including currency devaluation losses for a security
system contract, severance costs associated with the reduction
and realignment of the local workforce, and a reserve for closing
the operation. The contract loss resulted primarily from labor
overruns to install the security systems and the customer
refusing to pay the contract price in U.S. dollars as originally
agreed. Approximately $3.1 million of costs, consisting
primarily of labor and costs to complete the contract, severance
costs and operations closeout costs were accrued at December 31,
1995. The loss incurred by the Mexican operations, along with
the effect of the shutdown of the Federal Government in November
and again in December 1995, reduced revenue by $1.0 million and
gross margin by $120,000, substantially offsetting increased
earnings from an acquisition which was consummated in October
1994 and new contract awards net of contract losses.
Corporate Selling and Administrative - Corporate selling and
administrative expenses as a percentage of revenue was 1.8% in
1996 and 2.1% in 1995 and 1994. There were both increases and
decreases in 1996 over 1995 of the various elements of corporate
selling and administrative expenses, however, the most
significant factors were a decrease in bid and proposal costs
over those incurred in 1995, offset partially by increased costs
in support of the Company's Business Process Reengineering
project, initiated in 1996. Even though corporate selling and
administrative expenses as a percentage of revenue remained the
same in 1995 as in 1994, the dollar amount increased $1.8 million
over 1994. This increase is primarily attributable to increased
facility costs resulting from the sale and leaseback of the
Corporate headquarters building at a cost in excess of the
previous cost of ownership.
Interest - Interest expense in 1996 was $10.2 million, down from
$14.9 million in 1995, primarily due to the redemption of the 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 expense in 1995 was $14.9 million, virtually
unchanged from 1994. However, there were different factors
affecting the amount of interest expense for these years. 1995
included the effect of the declining balance and eventual
redemption of all the 16% Junior Subordinated Debentures and the
liquidation of the mortgage on the Corporate office building,
which was sold and leased back; 1994 included nonrecurring
credits resulting from the reversal of interest accruals due to a
favorable settlement with the Internal Revenue Service of the
Company's tax liability for the period 1985-1988.
Interest income was $1.7 million in 1996 as compared to $3.8
million in 1995. The decrease is attributable to lower cash and
short-term investment balances throughout 1996 and, consequently,
a lower interest yield.
Interest income was $3.8 million in 1995, up from $2.4 million
in 1994. The increase, due to greater interest yields on higher
cash and short-term investment balances, was partially offset by
the collection of the 17% Cummings Point Industries, Inc. note
receivable in August, 1995.
Other - Decreases in Other Expense in 1996 as compared to 1995
are attributable to significantly reduced or no additional
reserve requirements related to (a) a lawsuit filed by a
subcontractor of a former subsidiary and (b) uninsured costs to
defend and settle asbestos claims against an inactive subsidiary
(see Note 21(a) and (b) to the Consolidated Financial Statements)
as well as a credit recognized in 1996 for a revised estimate of
ESOP Premium. Partially offsetting these decreases were charges
for 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 (see Note 13 to the
Consolidated Financial Statements).
The increase in other expense in 1995 as compared to 1994 is
due to several different factors (see Note 13 to the Consolidated
Financial Statements). In 1995, the Company recorded a charge of
$5.3 million to increase its reserve for the estimated future
uninsured cost to defend and settle asbestos claims against an
inactive subsidiary. In addition, in 1995 and 1994, the Company
recorded charges of $2.4 million and $2.7 million to increase its
reserves for the estimated costs (primarily legal defense) to
resolve a lawsuit filed by a subcontractor to a former
subsidiary. The determination of these reserves is subject to
numerous uncertainties and judgments which are described in Note
21(a) and (b).
Income Taxes - The provision for income taxes in 1996 is based on
reported earnings, adjusted to reflect the impact of temporary
differences between the amount of assets and liabilities
recognized for financial reporting purposes and such amounts
recognized for tax purposes and a provision for foreign taxes
related to prior years' foreign operations. The tax benefit in
1995 reflects a tax provision based on an estimated annual
effective tax rate, excluding expenses not deductible for tax.
Additionally, $4.1 million and $7.7 million of tax valuation
reserves were reversed in 1996 and 1995, respectively. These
deferred taxes have been realized primarily as offsets against
the current year's earnings and the gain on the sale of the
Commercial Aviation business in 1995. The 1994 federal tax
benefit resulted from the reversal of tax reserves for the IRS
examination and the tax benefit for operating losses, net of a
valuation allowance, less the federal tax provision of a majority
owned subsidiary required to file a separate return.
Intangible Assets -- Intangible assets principally consist of the
excess of the acquisition cost over the fair value of the net
tangible assets of businesses acquired. In accordance with the
guidance provided in APB No. 16, the Company assesses and
allocates, to the extent possible, excess acquisition price to
identifiable intangible assets and any residual is considered
goodwill. A large portion of the intangible assets is goodwill
which resulted from the 1988 LBO and merger, accounted for as a
purchase, and represents the existing technical capabilities,
customer relationships and ongoing business reputation that had
been developed over a significant period of time. The Company
believes that these relationships and the value of the Company's
business reputation were and continue to be long-term intangible
assets with an almost infinite life. Since the APB No. 17
limitation is 40 years, this period is used for amortization
purposes for the majority of the goodwill. The value assigned to
other identifiable intangible assets at the time of the LBO and
merger in 1988 was amortized over applicable estimated useful
lives and was fully amortized as of December 31, 1994.
Working Capital and Cash Flow
Working capital at December 31, 1996 was $75.8 million
compared to $64.7 million at December 31, 1995; the increase was
primarily the result of expanded business volume. The ratio of
current assets to current liabilities at December 31, 1996 was
1.51 compared to 1.42 at December 31, 1995.
At December 31, 1996, $122.8 million of accounts receivable
are restricted as collateral for the Contract Receivable
Collateralized Notes (the "Notes"). Additionally, $3.0 million
of cash is restricted as collateral for the Notes and has been
included in Other Assets on the balance sheet.
Cash provided by continuing operations was $4.8 million
compared to $13.8 million in 1995. This decrease was caused by
the $14.0 million payment of federal and state income taxes on
the gain on the sale of the Commercial Aviation business and a
$6.9 million increase in accounts receivable which offset a
significant increase in earnings in 1996 over 1995. Cash
provided by continuing operations was $13.8 million in 1995
compared to cash used of $1.0 million in 1994. Numerous factors
contributed to the change: (i) payment in cash of accrued
interest on the 16% Subordinated Debentures in 1995 as opposed to
payment in kind in 1994, (ii) a $15.2 million increase in
earnings and (iii) a $6.9 million increase in accounts
receivable. Current liabilities increased due to the accrual of
income tax liability resulting from the gain on the sale of the
Commercial Aviation business.
Investing activities provided cash of $1.7 million in 1996.
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 were partially offset by acquisitions and
capital expenditures. In 1995, the proceeds from the sale of the
Commercial Aviation business, the sale/leaseback of the Corporate
headquarters facility and the collection of the Cummings Point
Industries, Inc. note receivable all contributed to the $139.9
million of funds provided from investing activities. For the
year 1994, investing activities used $22.2 million of cash, of
which $14.3 million was used for the acquisition of businesses
and another $3.7 million was used for the purchase of property
and equipment.
In 1996, financing activities utilized $11.8 million of cash,
$9.7 million for the purchase of treasury shares, $1.3 million
towards payment on indebtedness and $1.3 million expended to
secure a $50.0 million line of credit. These uses were offset by
the $0.5 million received on the loan to the ESOP. 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 $106.0 million of 16%
Junior Subordinated Debentures, the extinguishment of the
mortgage on the Corporate headquarters, and the purchase of
treasury shares. These uses were partially offset by funds
provided from sale of stock to the ESOP of $17.5 million. For
the year 1994, financing activities provided cash of $8.8
million. The sale of stock to the ESOP contributed $17.1 million
of cash of which $4.5 million was used for payments on
indebtedness, and $3.2 million was used to purchase treasury
stock.
Liquidity and Capital Resources
At December 31, 1996, the Company's debt totaled $104.2
million compared to $105.4 million at December 31, 1995, and
$233.4 million at December 31, 1994. The decrease in debt from
December 31, 1995 to December 31, 1996 reflects the minimum debt
servicing requirements. The decrease in debt from December 31,
1994 to December 31, 1995 resulted from the redemption of $106.0
million of Junior Subordinated Debentures and the liquidation of
the $18.2 million mortgage on the Company's headquarters
building. The funds used for the liquidation of debt were
obtained from the sale of the Commercial Aviation business, the
sale/leaseback of the Company's headquarters building and the
collection of the Cummings Point Industries, Inc. note
receivable. The increase in debt for 1994 resulted principally
from the pay-in-kind interest on the Junior Subordinated
Debentures.
Cash and short-term investments, down $5.3 million, totaled
$25.9 million at December 31, 1996 as compared to $31.2 million
at December 31, 1995. Income taxes paid on the gain on the sale
of the Commercial Aviation business, $14.0 million, were offset
by increases in cash flow resulting from increased profits. The
increase in cash and short-term investments of $23.4 million from
December 31, 1994 to December 31, 1995, resulted from the
proceeds received on the sale of the Commercial Aviation
business, funds obtained upon the sale/leaseback of the Corporate
headquarters, and also from the collection of the Cummings Point
Industries, Inc. note receivable. All of the aforementioned were
offset by the Company's payment in cash of the June 1995 interest
payment on its 16% Junior Subordinated Debentures and the
redemption of the balance of the debentures outstanding in
October 1995. The Company had a net decrease in cash and short-
term investments of $4.0 million in 1994. The decrease for 1994
was caused to a large degree by net investments in acquired
businesses of $14.3 million and an increase in accounts
receivable and contracts in process of $22.5 million. The latter
increase was largely attributable to a delay in finalizing the
terms of a new contract and delays in a government finance
office, both of which occurred in the fourth quarter of 1994.
The Company's cash flow was favorably impacted by $32.4 million
in 1994 through the utilization of pay-in-kind interest on the
Junior Subordinated Debentures and the sale of stock to the ESOP.
The Company anticipates contributing up to $12.3 million in
cash to the ESOP to satisfy funding obligations for 1997. 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 plan 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, until such
time as the Common Stock becomes "Readily Tradable Stock," as
defined in the ESOP plan documents. (See Note 7 to the
Consolidated Financial Statements.) Through December 31, 1996,
the Company was obligated to pay the higher of $27.00 per share
or the fair market value at the time of repurchase for any such
shares. To the extent the fair market value of a share was less
than $27.00, the Company was committed to pay through December
31, 1996, up to an aggregate of $16.0 million, the difference
("Premium") between the fair market value and $27.00 per share.
As of December 31, 1996, the Company had paid a total of $7.0
million of the premium to such former employees. As of December
31, 1996, fair market value was determined to be $23.70 per share
(for shares with a control premium) for shares allocated in the
years 1988 through 1993, and $20.00 per share (for shares without
a control premium) for shares allocated in 1994 and 1995. Based
on these values, the estimated aggregate annual commitment to
repurchase shares from the ESOP participants as follows: $4.8
million in 1997, $7.3 million in 1998, $6.8 million in 1999, $7.7
million in 2000, $10.8 million in 2001 and $98.9 million
thereafter. These amounts are subject to change based on the
fair market value of the common stock and the actual number of
retirements and terminating ESOP participants.
The Company and its subsidiaries are involved in various
claims and lawsuits, including contract disputes and claims based
on allegations of negligence and other tortious conduct. The
Company 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
subsidiaries are potentially liable for environmental, personal
injury and contract 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 has offsetting claims against
the plaintiffs, third parties or insurance carriers. The total
amount of damages currently claimed by the plaintiffs in these
cases, a portion of which is expected to be covered by insurance,
is estimated to be approximately $122.0 million (including
compensatory and punitive damages and penalties). The Company
has estimated additional costs for unasserted claims related to
these matters to be $38.5 million. The Company believes that the
amount that will actually be recovered in these cases will be
substantially less than the amounts claimed. After taking into
account available insurance, the Company believes it is
adequately reserved with respect to the potential liability for
such claims. The Company has recorded $75.4 million at December
31, 1996, representing its best estimate of the minimum probable
liability that will result from these matters. While it is not
possible to predict with certainty the outcome of the litigation
and other matters mentioned 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 an individual future reporting period. (See
Note 21 to the Consolidated Financial Statements.)
At December 31, 1996, the Company had $104.2 million of debt,
of which $100.0 million (the Contract Receivable Collateralized
Notes, Series 1992-1) is scheduled to begin principal
amortization on May 30, 1997. The Company and its wholly owned
subsidiary, Dyn Funding Corporation ("DFC") have undertaken a
series of refinancing transactions in order to repay the Series
1992-1 Notes, purchase all of the Company's Class C Preferred
stock, approximately 128,000 shares of common stock and 1,806,000
stock warrants and also to provide funding for acquisitions. On
March 17, 1997, the Company closed on the sale of $100.0 million
of 9.5% Senior Subordinated Notes due 2007 (the "Senior
Subordinated Notes"). On January 14, 1997, the Company accepted
a conditional offer from one of the significant holders of the
Series 1992-1 Notes to purchase from DFC, in a private
transaction, up to $140.0 million of Contract Receivable
Collateralized Notes, Series 1997-1. As proposed, the Series
1997-1 Notes will comprise a $50.0 million Class A Fixed Rate
Note and a $90.0 million Class B Variable Rate Note, and will
contain terms and conditions substantially identical to those of
the Series 1992-1 Notes. Upon the closing of the Series 1997-1
Notes, the Company will simultaneously close on an amendment to
its existing term note facility with Citicorp North America, Inc.
to, among other things, reduce the loan commitment from $50.0
million to $15.0 million.
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 its 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.
Although the Company has made some progress toward
diversification into non-defense business activities, the
Company's largest single customer continues to be the Department
of Defense representing 52% of revenue (both prime and
subcontract) in 1996. Due to the procurement cycles of its
customers (generally three to five years), the Company's revenues
and margins are subject to continual recompetition. In a typical
annual cycle approximately 20% to 30% of the Company's business
will be recompeted and the Company will bid on several new
contracts. Existing contracts can be lost or rewon at lower
margins at any time and new contracts can be won. The net
outcome of this bidding process, which in any one year can have a
dramatic impact on future revenues and earnings, is impossible to
predict. Also, if the U.S. Government budget is reduced or
spending shifts away from locations or contracts for which the
Company provides services, the Company's ability to retain
current contracts or obtain new contracts could be significantly
reduced.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is contained in the
Company's Consolidated Financial Statements and Financial
Statement Schedules included elsewhere in this Annual Report on
Form 10-K.
Report of Independent Public Accountants
To DynCorp:
We have audited the accompanying consolidated balance sheets of
DynCorp (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of
operations, permanent stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996.
These consolidated financial statements and the schedules
referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of DynCorp and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedules I and II
listed in Item 14 of the Form 10-K are presented for purposes of
complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules
have been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial
statements taken as a whole.
Washington, D.C.,
March 21, 1997
ARTHUR ANDERSEN LLP
DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
Assets 1996 1995
Current Assets:
Cash and cash equivalents (Notes 1 and 5) $ 25,877 $ 31,151
Accounts receivable and contracts in process
(Notes 3, 4 and 5) 187,679 179,706
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 1,030 1,383
Prepaid income taxes (Note 14) 2,804 -
Other current assets 7,205 8,095
Total Current Assets 224,595 220,335
Property and Equipment, at cost (Notes 1 and 19):
Land 1,621 1,621
Buildings and leasehold improvements 9,324 9,773
Machinery and equipment 24,876 30,234
35,821 41,628
Accumulated depreciation and amortization (16,737) (22,600)
Net property and equipment 19,084 19,028
Intangible Assets, net of accumulated amortization
(Notes 1, 13 and 20) 48,927 50,689
Other Assets (Notes 5 and 21) 76,146 85,438
Total Assets $368,752 $375,490
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
December 31,
Liabilities and Stockholders' Equity 1996 1995
Current Liabilities:
Notes payable and current portion of long-term debt
(Notes 3 and 5) $ 628 $ 1,260
Accounts payable (Note 3) 42,716 38,007
Deferred revenue and customer advances (Note 1) 6,002 4,814
Accrued income taxes (Notes 1, 3 and 14) 354 11,374
Accrued expenses (Note 6) 99,145 100,152
Total Current Liabilities 148,845 155,607
Long-term Debt (Notes 3, 5 and 24) 103,555 104,112
Deferred Income Taxes (Notes 1 and 14) 4,079 2,917
Other Liabilities and Deferred Credits (Notes 3 and 21) 75,434 86,992
Contingencies and Litigation (Note 21) - -
Temporary Equity:
Redeemable Common Stock at Redemption Value (Notes 7 and 24)
ESOP Shares, 6,165,957 and 6,051,997 shares issued
and outstanding in 1996 and 1995, respectively,
subject to restrictions 136,343 100,481
Management Investors, 2,082,078 shares issued and
outstanding in 1995, subject to restrictions - 33,138
Other, 125,714 shares issued and outstanding in 1996
and 1995 2,979 2,275
Permanent Stockholders' Equity:
Preferred Stock, Class C 18% cumulative, convertible,
$24.25 liquidation value (liquidation value including
unrecorded dividends of $14,147 in 1996 and $11,863
in 1995), 123,711 shares authorized, issued and
outstanding (Notes 8 and 24) 3,000 3,000
Common Stock, par value ten cents per share, authorized
20,000,000 shares; issued 3,315,673 shares in 1996
and 1,588,587 shares in 1995 (Note 9) 332 159
Common Stock Warrants (Note 10) 11,139 11,305
Paid-in Surplus 148,234 148,089
Reclassification to temporary equity for redemption value (138,694) (135,110)
Deficit (101,259) (115,888)
Common Stock Held in Treasury, at cost; 1,514,482 shares
and 170,716 warrants in 1996 and 1,235,509 shares
and 173,988 warrants in 1995 (25,235) (21,084)
Unearned ESOP Shares (Note 12) - (503)
Total Liabilities and Stockholders' Equity $368,752 $375,490
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Statements of OperationsFor the Years Ended December 31
(Dollars in thousands, except per share data)
1996 1995 1994(a)
Revenues (Note 1):
Information and Engineering Technology $ 271,538 $271,133 $192,062
Aerospace Technology 383,252 319,335 300,856
Enterprise Management 366,663 318,257 325,765
Total revenues 1,021,453 908,725 818,683
Costs and expenses:
Cost of services 970,163 871,317 783,121
Corporate selling and administrative 18,241 18,705 16,887
Interest expense 10,220 14,856 14,903
Interest income (1,752) (3,804) (2,398)
Other (Note 13) 5,474 10,212 7,628
Total costs and expenses 1,002,346 911,286 820,141
Earnings (loss) from continuing operations
before income taxes, minority interest
and extraordinary item 19,107 (2,561) (1,458)
Provision (benefit) for income taxes (Note 14) 5,893 (9,090) (2,236)
Earnings from continuing operations before
minority interest and extraordinary item 13,214 6,529 778
Minority interest (Note 1) 1,265 1,255 1,130
Earnings (loss) from continuing operations before
extraordinary item 11,949 5,274 (352)
Loss from discontinued operations, net of
income taxes (Note 2) - (1,416) (12,479)
Gain on sale of discontinued operations, net
of income taxes (Note 2) 2,680 1,396 -
Earnings (loss) before extraordinary item 14,629 5,254 (12,831)
Extraordinary loss from early extinguishment of
debt, net of income taxes (Note 5) - (2,886) -
Net earnings (loss) 14,629 $ 2,368 $(12,831)
Preferred Stock Class C dividends not declared
or recorded (Notes 8 and 24) (2,284) (1,915) (1,606)
Common stockholders' share of earnings (loss) $ 12,345 $ 453 $(14,437)
Earnings (Loss) Per Common Share (EPS) (Note 16)
Primary and fully diluted:
Continuing operations before extraordinary item$ 0.82 $ 0.29 $ (0.29)
Discontinued operations 0.23 0.00 (1.83)
Extraordinary item - (0.25) -
Common stockholders' share of earnings (loss) $ 1.05 $ 0.04 $ (2.12)
Supplementary EPS (b):
Continuing operations before extraordinary item $ 1.00
Discontinued operations 0.26 N/A N/A
Supplemental earnings per share $ 1.26
(a) Restated for the discontinuance of the Commercial Aviation business
(see Note 2).
(b) Supplementary EPS presented to reflect the conversion of the Class C
Preferred stock and repurchase of common stock and warrants (see
Notes 16 and 24).
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Statements of Permanent Stockholders' Equity
For the Years Ended December 31
(Dollars in thousands)
Reclassification
to Temporary
Equity for
Redemption
Common Value
Preferred Common Stock Paid-in greater than
Stock Stock(a) Warrants Surplus(a)Par Value (a)
Balance December 31, 1993 $3,000 $ 61 $15,119 $108,578 $(100,189)
Stock issued under Restricted Stock Plan (Note 10) 10 (10)
Treasury stock purchased (Notes 7 and 9) (57) (276)
Stock issued under the Management Employees
Stock Purchase Plan (Note 7) (2)
Warrants exercised (Note 10) 147 (3,576) 3,796
Accrued compensation (Note 10) 1,222
Contribution of stock to Employee Stock Ownership Plan (Note 12) 131 16,969
Accrued interest on note receivable (Note 11)
Net loss
Reclassification to Redeemable Common Stock (Note 7) (268) (29,929)
Balance, December 31, 1994 3,000 81 11,486 130,277 (130,118)
Stock issued under Restricted Stock Plan (Note 10) 26 (242)
Treasury stock purchased (Notes 7 and 9)
Warrants exercised or canceled (Note 10) 7 (181) 175
Contribution of stock to Employee Stock Ownership Plan (Note 12) 121 17,879
Payment received on Employee Stock Ownership Plan note (Note 12)
Accrued interest on note receivable (Note 11)
Collection of note receivable (Note 11)
Net earnings
Reclassification to Redeemable Common Stock (Note 7) (76) (4,992)
Balance, December 31, 1995 3,000 159 11,305 148,089 (135,110)
Stock issued under Restricted Stock Plan (Note 10) 11 (124)
Treasury stock purchased (Notes 7 and 9)
Warrants and stock options exercised (Notes 10 and 18) 7 (166) 185
Reclassification from Temporary Equity (Note 7) 166 32,972
Shares purchased by Employee Stock Ownership Plan
on Internal Market (Note 7) (13) (1,874)
Payment received on Employee Stock Ownership Plan note (Note 12)
Other 84
Net earnings
Reclassification to Redeemable Common Stock (Note 7) 2 (34,682)
Balance, December 31, 1996 $3,000 $332 $11,139 $148,234 $(138,694)
Employee
Stock Cummings
Ownership Point
Plan Loan Industries
Treasury and Unearned Note
Deficit Stock ESOP Shares Receivable
Balance December 31, 1993 $(105,425) $ (5,840) $ - $ (7,568)
Stock issued under Restricted Stock Plan (Note 10)
Treasury stock purchased (Notes 7 and 9) (2,690)
Stock issued under the Management Employees
Stock Purchase Plan (Note 7) 32
Warrants exercised (Note 10) (319)
Accrued compensation (Note 10)
Contribution of stock to Employee Stock Ownership Plan (Note 12)
Accrued interest on note receivable (Note 11) (1,375)
Net loss (12,831)
Reclassification to Redeemable Common Stock (Note 7)
Balance, December 31, 1994 (118,256) (8,817) - (8,943)
Stock issued under Restricted Stock Plan (Note 10)
Treasury stock purchased (Notes 7 and 9) (12,267)
Warrants exercised or canceled (Note 10)
Contribution of stock to Employee Stock Ownership Plan (Note 12) (13,750)
Payment received on Employee Stock Ownership Plan note (Note 12) 13,247
Accrued interest on note receivable (Note 11) (951)
Collection of note receivable (Note 11) 9,894
Net earnings 2,368
Reclassification to Redeemable Common Stock (Note 7)
Balance, December 31, 1995 (115,888) (21,084) (503) -
Stock issued under Restricted Stock Plan (Note 10) 75
Treasury stock purchased (Notes 7 and 9) (4,226)
Warrants and stock options exercised (Notes 10 and 18)
Reclassification from Temporary Equity (Note 7)
Shares purchased by Employee Stock Ownership Plan
on Internal Market (Note 7)
Payment received on Employee Stock Ownership Plan note (Note 12) 503
Other
Net earnings 14,629
Reclassification to Redeemable Common Stock (Note 7)
Balance, December 31, 1996 $(101,259) $(25,235) $ - $ -
(a) Restated to conform to the balance sheet presentation (see Note 1).
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31
(Dollars in thousands)
1996 1995 1994(a)
Cash Flows from Operating Activities:
Net earnings (loss) $ 14,629 $ 2,368 $(12,831)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization (Note 1) 9,467 11,348 16,340
Pay-in-kind interest on Junior Subordinated
Debentures (Note 5) - - 8,787
Loss, before tax, on purchase of Junior
Subordinated Debentures (Note 5) - 4,786 -
Payment of income taxes on gain on sale of the
Commercial Aviation business (13,990) - -
(Earnings) loss from discontinued operations
(Note 2) (2,680) 20 12,479
Deferred income taxes 1,478 4,959 (2,258)
Accrued compensation under Restricted Stock Plan - - 1,222
Noncash interest income - - (1,375)
Change in reserves of businesses divested in 1988 825 7,700 2,318
Other (848) (1,124) 604
Change in assets and liabilities, net of
acquisitions and dispositions:
Increase in accounts receivable and contracts
in process (6,864) (6,975) (22,502)
Decrease (increase) in inventories 353 (340) (466)
(Increase) decrease in other current assets (1,867) (1,222) 5,648
Increase (decrease) in current liabilities
except notes payable and current portion of
long-term debt 4,345 (7,756) (8,896)
Cash provided (used) by continuing operations 4,848 13,764 (930)
Cash (used) provided by operating activities of
discontinued operations - (3,375) 10,291
Cash provided by operating activities 4,848 10,389 9,361
Cash Flows from Investing Activities:
Sale of property and equipment 1,093 16,294 1,944
Proceeds received from notes receivable 3 8,950 6
Purchase of property and equipment (5,310) (4,789) (3,742)
Deferred income taxes from "safe harbor"
leases (Note 14) (316) (554) (499)
Assets and liabilities of acquired businesses
(excluding cash acquired) (Notes 1 and 20) (2,801) (1,092) (14,312)
Proceeds from sale of discontinued operations
(Note 2) 3,050 135,700 -
Decrease (increase) in cash on deposit for
letters of credit (Note 5) 6,244 (3,307) (21)
Investing activities of discontinued operations - (11,439) (4,781)
Other (282) 176 (830)
Cash provided (used) by investing activities 1,681 139,939 (22,235)
Cash Flows from Financing Activities:
Treasury stock purchased (Note 7) (9,712) (12,267) (3,182)
Payment on indebtedness (1,264) (25,172) (4,499)
Redemption of Junior Subordinated Debentures (Note 5) - (105,971) -
Stock released to Employee Stock Ownership Plan
(Note 12) 503 17,497 17,100
Treasury stock sold - - 159
Deferred financing expenses (Note 5) (1,310) (864) -
Financing activities of discontinued operations - (228) (697)
Other (20) 90 (41)
Cash (used) provided by financing activities (11,803) (126,915) 8,840
Net (Decrease) Increase in Cash and Cash Equivalents (5,274) 23,413 (4,034)
Cash and Cash Equivalents at Beginning of the Year 31,151 7,738 11,772
Cash and Cash Equivalents at End of the Year $ 25,877 $ 31,151 $ 7,738
(a) Restated for the discontinuance of the Commercial Aviation business
(see Note 2).
See accompanying notes.
DynCorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(1) Summary of Significant Accounting Policies
Principles of Consolidation -- All majority-owned subsidiaries have
been included in the financial statements and all significant
intercompany accounts and transactions have been eliminated (see Note
2). Outside investors' interest in the majority-owned subsidiaries
is reflected as minority interest. Investments less than 50% owned
are accounted for using the equity method of accounting.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period.
Contract Accounting -- Contracts in process are stated at the lower
of actual cost incurred plus accrued profits or net estimated
realizable value of incurred costs, reduced by progress billings.
The Company records income from major fixed-price contracts,
extending over more than one accounting period, using the percentage-
of-completion method. During performance of such contracts,
estimated final contract prices and costs are periodically reviewed
and revisions are made as required. The effects of these revisions
are included in the periods in which the revisions are made. On
cost-plus-fee contracts, revenue is recognized to the extent of costs
incurred plus a proportionate amount of fee earned, and on time-and-
material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable
costs incurred. Losses on contracts are recognized when they become
known. Disputes arise in the normal course of the Company's business
on projects where the Company is contesting with customers for
collection of funds because of events such as delays, changes in
contract specifications and questions of cost allowability or
collectibility. Such disputes, whether claims or unapproved change
orders in the process of negotiation, are recorded at the lesser of
their estimated net realizable value or actual costs incurred and
only when realization is probable and can be reliably estimated.
Claims against the Company are recognized where loss is considered
probable and reasonably determinable in amount.
It is the Company's policy to provide reserves for the
collectibility of accounts receivable when it is determined that it
is probable that the Company will not collect all amounts due and the
amount of reserve requirement can be reasonably estimated.
It is the Company's policy to defer labor and related costs
incurred in connection with the phase-in/start-up of new contracts
(after the award of the contract) when such costs are significant to
the contract and are not reimbursed separately by the customer.
These deferred costs for contracts awarded through 1995 are generally
amortized over the original contract period and option years which
are considered probable to be exercised. Phase-in/start-up costs
deferred on contracts awarded after 1995 are amortized over the
original contract period only, excluding option years.
Property and Equipment -- The Company computes depreciation and
amortization using both straight-line and accelerated methods. The
estimated useful lives used in computing depreciation and
amortization on a straight-line basis are: building, 15-33 years;
machinery and equipment, 3-20 years; and leasehold improvements, the
lesser of the useful life or the term of the lease. Accelerated
depreciation is based on a 150% declining balance method with light-
duty vehicles assigned a three-year life and machinery and equipment
assigned a five-year life. Depreciation and amortization expense was
$4,310,000 for 1996, $5,100,000 for 1995 and $4,978,000 for 1994.
Cost of property and equipment sold or retired and the related
accumulated depreciation or amortization is removed from the accounts
in the year of disposal, and any gains or losses are reflected in the
consolidated statements of operations. Expenditures for maintenance
and repairs are charged to expense as incurred, and major additions
and improvements are capitalized. During 1996, approximately
$3,200,000 of machinery and equipment assigned to a contract which
was lost in recompetition early in 1996 was either sold or retired.
The net book value of the equipment, $520,000, netted with the
proceeds received, has been reported in Cost of Services in the
Consolidated Statement of Operations.
Intangible Assets -- Intangible assets principally consist of the
excess of the acquisition cost over the fair value of the net
tangible assets of businesses acquired. In accordance with the
guidance provided in APB No. 16, the Company assesses and allocates,
to the extent possible, excess acquisition price to identifiable
intangible assets and any residual is considered goodwill. A large
portion of the intangible assets is goodwill which resulted from the
1988 LBO and merger, accounted for as a purchase, and represents the
existing technical capabilities, customer relationships and ongoing
business reputation that had been developed over a significant period
of time. The Company believes that these relationships and the value
of the Company's business reputation were and continue to be long-
term intangible assets with an almost infinite life. Since the APB
No. 17 limitation is 40 years, this period is used for amortization
purposes for the majority of the goodwill. The value assigned to
identifiable intangible assets at the time of the LBO and merger in
1988 was amortized over applicable estimated useful lives and was
fully amortized as of December 31, 1994.
At December 31, 1996, intangible assets consist of $46,700,000
of unamortized goodwill and $2,227,000 of value assigned to
contracts. Goodwill is being amortized on a straight-line basis over
periods up to forty years ($44,735,000 forty years, $152,000 thirty
years, $1,619,000 fifteen years and $194,000 ten years).
Amortization expense was $2,814,000 (see Note 13 (a)), $2,081,000 and
$4,343,000 (see Note 13(a)) in 1996, 1995 and 1994, respectively.
Amounts allocated to contracts are being amortized over the lives of
the contracts for periods up to ten years. Amortization of amounts
allocated to contracts was $617,000, $624,000 and $2,051,000 in 1996,
1995 and 1994, respectively. Cumulative amortization of $16,599,000
and $30,512,000 has been recorded through December 31, 1996, of
goodwill and value assigned to contracts, respectively.
The Company assesses potential impairment of intangible assets,
including goodwill, when events or circumstances indicate the carrying.
amount of an asset may not be recoverable. The
Company uses an estimate of its future undiscounted cash flows to
evaluate whether the intangible assets, including goodwill, are
recoverable. The amount of impairment, if any, is measured based on
projected discounted cash flows using a discount rate reflecting the
Company's average cost of funds.
Income Taxes -- As prescribed by Statement of Financial Accounting
Standards (SFAS) No. 109 "Accounting for Income Taxes," the Company
utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for
the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of
existing assets and liabilities, less valuation allowances, if
required.
Environmental Liabilities -- The Company accrues environmental costs
when it is probable that a liability has been incurred and the amount
can be reasonably estimated. Recorded liabilities have not been
discounted.
Contingent Liabilities -- The Company's accounting policy is to
accrue an estimated loss from a loss contingency when it is probable
that an asset has been impaired or a liability has been incurred at
the date of the financial statements and the amount of the loss can
be reasonably estimated. The accrual for a loss contingency may
include such costs as legal costs, settlement and compensating
amounts, estimated punitive damages and penalties.
Treasury Stock -- The Company records the purchase of treasury stock
at the lower of acquired cost or fair value. The amount in excess of
fair value, as in the case of shares acquired from ESOP participants,
is recorded as compensation expense (see Note 7).
Employee Stock Ownership Plan -- The Company has adopted Statement of
Position (SOP) 93-6, "Employers Accounting for Employee Stock
Ownership Plans."
Postretirement Health Care Benefits -- The Company provides no
significant postretirement health care or life insurance benefits to
its retired employees other than allowing them to continue as a
participant in the Company's plans with the retiree paying the full
cost of the premium. The Company has determined, based on an
actuarial study, that it has no liability under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions."
Postemployment Benefits -- The Company has no liability under SFAS
No. 112, "Employers' Accounting for Postemployment Benefits," as it
provides no benefits as defined.
Long-Lived Assets -- SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain intangibles be reviewed
for impairment when events or circumstances indicate the carrying
amount of an asset may not be recoverable. The Company's practice is
consistent with the guidelines as set forth in the Statement.
Stock Options -- SFAS No. 123, "Accounting for Stock-Based
Compensation," is effective for fiscal years beginning after December
15, 1995. The Statement encourages, but does not require, adoption
of the fair value based method of accounting for employee stock
options and other stock compensation plans. The Company has opted to
account for its stock option plan in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees." By doing so, the
Company will make proforma disclosure of net earnings and earnings per
share as if the fair value based method for accounting defined in
Statement 123 had been applied (see Note 18).
New Accounting Pronouncements -- SFAS No. 128, "Earnings per Share,"
was issued in February 1997 and is effective for financial statements
issued after December 15, 1997. The statement establishes new
standards for computing and presenting earnings per share ("EPS") and
will require restatement of prior years. This statement simplifies
the standards for computing EPS previously found in APB Opinion 15.
It replaces the presentation of primary and fully diluted EPS with a
presentation of basic and diluted EPS, requires a dual presentation
on the face of the income statement and requires a reconciliation of
basic EPS computation to diluted EPS. Had SFAS No. 128 been
effective for financial statements issued December 31, 1996, basic
and diluted EPS would have been $1.46 and $1.05, respectively.
Consolidated Statements of Cash Flows -- For purposes of these
statements, short-term investments which consist of government
treasury bills and time deposits with a maturity of ninety
days or less are considered cash equivalents. Cash and short-term
investments at December 31, 1996 exclude $3,000,000 of restricted
cash which is classified as Other Assets.
Classification -- Consistent with industry practice, assets and
liabilities relating to long-term contracts and programs are
classified as current although a portion of these amounts is not
expected to be realized within one year.
Cash paid for income taxes was $20,680,000 for 1996, $3,140,000 for
1995 and $1,145,000 for 1994.
Cash paid for interest, excluding the interest paid under the
Employee Stock Ownership Plan term loan, was $9,485,000 for 1996,
$14,150,000 for 1995 and $10,984,000 for 1994. The increase in 1995
over prior years resulted from the payment in cash (as opposed to
payment-in-kind) of interest on the Company's 16% Junior Subordinated
Debentures (see below).
Noncash investing and financing activities consist of the
following (in thousands):
1996 1995 1994
Acquisitions of businesses:
Assets acquired $ 4,998 $ 2,772 $30,302
Liabilities assumed (1,498) (1,680) (15,990)
Cash acquired (699) - -
Net cash 2,801 $ 1,092 $14,312
Pay-in-kind interest on Junior
Subordinated Debentures (Note 5) $ - $ - $ 8,787
Unissued common stock under
restricted stock plan (Note 10) $ - $ - $ 1,222
Capitalized equipment leases and
notes secured by property and equipment $ - $ - $ 121
Change in Presentation of Stockholders' Accounts -- The presentation
of the stockholders' accounts in the balance sheets has been revised
as a result of classifying the management investor shares as
Permanent Equity due to the establishment of the Internal Market,
thus ending the Company's obligation to purchase these shares upon an
employee's termination (see Note 7).
Change in Presentation of Consolidated Statement of Operations --
Certain deminimus items have been reclassified from Other Expense to
Cost of Services in the Consolidated Statement of Operations and the
prior year data has been changed to conform with this presentation.
(2) Discontinued Operations
During 1995, the Company sold all of its subsidiaries engaged in
the commercial aircraft maintenance and ground handling activities,
i.e., the Commercial Aviation business. At December 31, 1995,
certain contingencies existed regarding the final sales prices of
both the maintenance and ground handling businesses. Additionally,
the Company retained certain contingent liabilities which included
general warranties and representations and certain specific issues
regarding environmental, insurance and tax matters. During 1996, the
Company recorded a net gain of $2,680,000 related to the resolution
of some of these outstanding issues as well as the adjustment of
estimated reserves recorded at disposition.
The components of discontinued operations on the statements of
operations are as follows (in thousands):
Years Ended December 31,
1996 1995(a) 1994
Revenues $ - $130,709 $203,389
Cost of services (b) - 123,698 195,109
Interest expense and other (d) - 7,236 14,237
Asset impairment (c) - - 9,492
Pre-tax gain on sale of discontinued operations (3,448) (29,998) -
Income tax provision (benefit) 768 29,793 (2,970)
Gain (loss) from discontinued operations $ 2,680 $ (20) $(12,479)
(a) The results of operations for 1995 are not comparable to
1994 due to the interim divestitures of the maintenance and
ground handling operations.
(b) During 1994, the Company revised its estimate of the useful
lives of certain machinery and equipment to conform to its
actual experience with fixed asset lives. It was determined
the useful lives of these assets ranged from three to ten
years as compared to the two to seven year lives previously
utilized. The effect of this change was to reduce
depreciation expense and net loss from discontinued
operations for the year ended December 31, 1994, by
approximately $2,115,000 or $0.31 per share.
(c) After posting four consecutive years of operating losses at
its Aircraft Maintenance unit, the Company concluded it had
suffered a partial impairment of its investment in this
unit. Accordingly, it recorded an estimate of the
applicable goodwill ($5,242,000) and other assets
($4,250,000) that would be written down in the event the
consolidation or shut-down of one of the facilities became
necessary. The amount of goodwill represents the
unamortized balance as of December 31, 1994, of the goodwill
allocated to the maintenance unit in Florida at the time of
the Company's 1988 LBO and merger. The amount of write-down
of other assets consists of estimated losses to dispose of
the inventory, property and equipment and to otherwise
reserve for shut-down/consolidation of facilities.
(d) The Company has charged interest expense to discontinued
operations of $7,950,000 and $10,715,000 in 1995 and 1994,
respectively. The interest expense charged is the sum of
the interest on the debt of the discontinued operations
assumed by the buyers plus an allocation of other
consolidated interest that was not directly attributable to
the continuing operations of the Company. The amount
allocated was based on the ratio of net assets of the
discontinued operations to the sum of total net assets of
the Company plus consolidated debt other than debt of the
discontinued operations that was assumed by the buyer and
debt that was not directly attributed to any other
operations of the Company. Subsequent to the
discontinuance, the allocated interest (and applicable debt)
was substantially eliminated by using the proceeds of the
sale to pay off DynCorp debt in amounts substantially equal
to the amounts used to allocate interest to the discontinued
business activities.
The sale of the subsidiaries resulted in a partial termination
of the ESOP and termination of all active participants of the
subsidiaries. These employees were entitled to put their ESOP shares
(approximately 493,000 shares) sooner than had been previously
anticipated. These shares have been included in the estimated annual
repurchase commitment reported in Note 7, Redeemable Common Stock.
(3) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate the value:
Accounts Receivable, Accounts Payable and Accrued Income Taxes -
The carrying amount approximates the fair value due to the short
maturity of these instruments.
Long-term debt and other liabilities - The fair value of the
Company's long-term debt is based on the current rate as if the issue
date were December 31, 1996 and 1995 for its Collateralized Notes.
For the remaining long-term debt (see Note 5) and other liabilities,
the carrying amount approximates the fair value.
The estimated fair values of the Company's financial instruments at
December 31, are as follows (in thousands):
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term investments $ 25,877 $ 25,877 $ 31,151 $ 31,151
Accounts receivable 187,679 187,679 179,706 179,706
Accounts payable 42,716 42,716 38,007 38,007
Accrued income taxes 354 354 11,374 11,374
Long-term debt and other liabilities 103,855 103,855 104,112 105,584
(4) Accounts Receivable and Contracts in Process
The components of accounts receivable and contracts in process were
as follows at December 31 (in thousands):
1996 1995
U.S. Government:
Billed and billable $108,301 $109,937
Recoverable costs and accrued profit on progress
completed but not billed 26,473 26,130
Retainage due upon completion of contracts 2,343 1,901
137,117 137,968
Other Customers (primarily subcontracts from
U.S. Government prime contractors and other state,
local and quasi-government agencies):
Billed and billable (less allowance for doubtful
accounts of $229 in 1996 and $9 in 1995) 42,689 32,479
Recoverable costs and accrued profit on progress
completed but not billed 7,873 9,259
50,562 41,738
$187,679 $179,706
Billed and billable include amounts earned and contractually
billable at year-end but which were not billed because customer
invoices had not yet been prepared at year-end. Recoverable costs
and accrued profit not billed is composed primarily of amounts
recognized as revenues, but which are not contractually billable at
the balance sheet dates. It is expected that all amounts at December
31, 1996 will be collected within one year except for approximately
$10,794,000.
(5) Long-term Debt
At December 31, 1996 and 1995, long-term debt consisted of (in
thousands):
1996 1995
Contract Receivable Collateralized Notes,
Series 1992-1 $100,000 $100,000
Mortgages payable 3,461 3,802
Notes payable, due in installments through
2002, 11.43% weighted average interest rate 722 1,570
104,183 105,372
Less current portion 628 1,260
$103,555 $104,112
Debt maturities as of December 31, 1996, were as follows (in thousands):
1997 $ 628
1998 494
1999 297
2000 50,328
2001 218
Thereafter 52,218
$ 104,183
On January 23, 1992, the Company's wholly owned subsidiary, Dyn
Funding Corporation (DFC), completed a private placement of
$100,000,000 of 8.54% Contract Receivable Collateralized Notes,
Series 1992-1 (the "Notes"). The Notes are collateralized by the
right to receive proceeds from certain U.S. Government contracts and
certain eligible accounts receivable of commercial customers of the
Company and its subsidiaries. Credit support for the Notes is
provided by overcollateralization in the form of additional
receivables. The Company retains an interest in the excess balance
of receivables through its ownership of the common stock of DFC.
Interest payments are made monthly with monthly principal payments
originally scheduled to begin February 28, 1997 but extended to May
30, 1997. (The period between January 23, 1992 and January 30, 1997
is referred to as the Non-Amortization Period.) The Company has secured
financing (9 1/2% Senior Notes) and also has available its revolving
credit facility to satisfy the maturity obligations of the debt.
At December 31, 1996, the debt remains classified as long-term.
On an ongoing basis, cash receipts from the collection of the
receivables are used to make interest payments on the Notes, pay a
servicing fee to the Company, and purchase additional receivables
from the Company. During the Non-Amortization Period, cash in excess
of the amount required to purchase additional receivables and meet
payments on the Notes is to be paid to the Company subject to certain
collateral coverage tests. The receivables pledged as security for
the Notes are valued at a discount from their stated value for
purposes of determining adequate credit support. DFC is required to
maintain receivables, at their discounted values, plus cash on
deposit at least equal to the outstanding balance of the Notes.
At December 31, 1996, $122,786,000 of accounts receivable are
restricted as collateral for the Notes. Additionally, $3,000,000 of
cash is restricted as collateral for the Notes and has been included
in Other Assets on the balance sheet at December 31, 1996 and
December 31, 1995. Also classified as Other Assets on the balance
sheet at December 31, 1995 is $6,244,000 of cash restricted as
collateral for letters of credit. During 1996, these letters of
credit had expired or were replaced by letters of credit with no
collateral requirements and the funds were subsequently released.
In March 1996, the Company amended and restated its existing
$20,000,000 line of credit with Citicorp North America, Inc. to
provide for a $50,000,000 revolving credit facility to meet working
capital and capital expenditure requirements and fund acquisitions.
The facility matures in four years, with no payments required until
the end of the second year. As of December 31, 1996, the Company
had incurred $1,310,000 of deferred debt expense related to the
amended credit facility. The agreement contains customary
restrictions on the ability of the Company to undertake certain
activities, such as the incurrence of additional debt, the payment
of dividends on or the repurchase of the Company's common stock, the
merger of the Company into another company, the sale of
substantially all of the Company's assets, and the acquisition of
the stock or substantially all of the assets of another company.
The agreement also stipulates that the Company must maintain certain
financial ratios, including specified ratios of earnings to interest
expense, earnings to fixed charges, and debt to earnings. The
Company utilized this credit facility sporadically throughout 1996,
never exceeding $5,000,000 in borrowings at any given point in time.
There were no borrowings under this line of credit at December 31,
1996.
During 1995, the Company repurchased or called all of the
outstanding 16% Junior Subordinated Debentures. The Company has
recorded an extraordinary loss of $2,886,000, net of an income tax
benefit of $1,900,000 consisting primarily of the write-off of
unamortized discount or deferred financing costs and also various
transaction costs. The Debentures were scheduled to mature on June
30, 2003, and bore interest at 16% per annum, payable semi-annually.
The Company could, at its option, prior to September 9, 1995, pay
the interest either in cash or issue additional Debentures. During
1994, $15,329,000 of additional Debentures were issued in lieu of
cash interest payments (includes $6,542,000 allocated to
discontinued operations).
The Company obtained title to its corporate office building on
July 31, 1992 by assuming a mortgage of $19,456,000. The mortgage
maturity date was May 27, 1993; however, as provided, the Company
extended the mortgage to March 27, 1995 with an increase in the
interest rate of 1/2% per annum plus an extension fee. On February
7, 1995, the Company sold the building to RREEF America Reit Corp. C
and entered into a 12-year lease with RREEF as the landlord. The
facility was sold for $13,780,000 and the proceeds were applied to
the mortgage. A net gain of $3,430,000 was realized on the
transaction and is being amortized over the life of the lease.
The Company acquired the Alexandria, VA headquarters of Technology
Applications, Inc. ("TAI") on November 12, 1993, in conjunction with
the acquisition of TAI. A mortgage of $3,344,000 bearing interest
at 8% per annum was assumed. Payments are made monthly and the
mortgage matures in April 2003. Additionally, a $1,150,000
promissory note was issued. The note bears interest at 7% per
annum. Payments under the note shall be made quarterly through
October 1998.
Deferred debt issuance costs are being amortized using the
effective interest rate method over the terms of the related debt.
At December 31, 1996, unamortized deferred debt issuance costs were
$1,271,000 and amortization for 1996, 1995 and 1994 was $829,000,
$743,000 and $324,000, respectively.
(6) Accrued Expenses
At December 31, 1996 and 1995, accrued expenses consisted of the
following (in thousands):
1996 1995
Salaries and wages $ 44,044 $ 42,063
Insurance 14,768 14,921
Interest 4,447 4,541
Payroll and miscellaneous taxes 8,508 9,402
Accrued contingent liabilities and
operating reserves (see Note 21) 19,969 24,015
Other 7,409 5,210
$ 99,145 $100,152
(7) Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary
Equity at the redeemable value at each balance sheet date and
consists of the following:
Balance at Balance at
RedeemableDecember 31, Redeemable December 31,
Shares Value 1996 Shares Value 1995
ESOP Shares 3,520,037 $23.70 83,424,877 3,535,195 $18.10 63,987,030
2,645,920 20.00 52,918,400 2,516,802 14.50 36,493,629
6,165,957 136,343,277 6,051,997 100,480,659
Management 21,287 109.64 2,333,907
Investor Shares 256,196 18.10 4,637,148
1,804,595 14.50 26,166,628
2,082,078 33,137,683
Other Shares 125,714 23.70 2,979,422 125,714 18.10 2,275,423
ESOP Shares
In accordance with ERISA regulations and the Employee Stock
Ownership Plan (the Plan) documents, the ESOP Trust or the Company is
obligated to purchase vested common stock shares from ESOP
participants (see Note 12) at the fair value (as determined by an
independent appraiser) as long as the Company's common stock is not
publicly traded. The shares initially bought by the ESOP in 1988
were bought at a "control price," reflecting the higher price that
buyers typically pay when they buy an entire company (as the ESOP and
other investors did in 1988). A special provision in the ESOP's 1988
agreement permits participants to receive a "control price" when they
sell these shares back to the Company under the ESOP's "put option"
provisions. This "control price," determined by the appraiser as of
December 31, 1996, was $23.70 per share. The additional shares
received by the ESOP in 1993 through 1995 were at a "minority
interest price," reflecting the lower price that buyers typically pay
when they are buying only a small piece of a company (as the ESOP did
in these years). Participants do not have the right to sell these
shares at the "control price." The minority interest price
determined by the independent appraiser as of December 31, 1996 was
$20.00 per share. Participants receive their vested shares upon
retirement, becoming disabled, or death, over a period of one to five
years and for other reasons of termination over a period of one to
ten years, all as set forth in the Plan documents. In the event the
fair value of a share is less than $27.00, the Company was committed
to pay, through December 31, 1996, up to an aggregate of $16,000,000,
the difference (Premium) between the fair value and $27.00 per share.
The Company estimated a total Premium of $8,500,000 and recorded the
Premium as Other Expense in the Consolidated Statements of Operations
in 1989 through 1994 (see Note 13). As of December 31, 1996, the
Company had expended $6,976,000 of the $8,500,000 Premium. In the
fourth quarter of 1996, the Company reversed $1,250,000, revising its
estimated ESOP Premium. The remaining liability represents the
Company's obligation to honor the Premium commitment to ESOP
participants who were grandfathered in due to minor administrative
changes in the plan in 1995. From October 1990 through May 1996, the
Company had purchased 633,453 shares from participants. In June
1996, the ESOP Trust began purchasing participants' shares at fair
value, utilizing the cash available from the Company's 1996
contribution (see Note 12), while the Company continued to pay the
premium. Based on the fair values of $23.70 and $20.00 per share at
December 31, 1996, the estimated aggregate annual commitment to
repurchase shares from the ESOP participants upon death, disability,
retirement and termination is as follows: $4,814,000 in 1997, $7,326,000
in 1998, $6,750,000 in 1999, $7,757,000 in 2000, $10,795,000 in 2001
and $98,901,000 thereafter. Under the Subscription Agreement with
the ESOP dated September 9, 1988, the Company is permitted to defer
put options if, under Delaware law, the capital of the Company would
be impaired as a result of such repurchase. At December 31, 1996 and
1995, 6,165,957 and 6,051,997 shares, respectively, were outstanding
and included in Redeemable Common Stock.
Management Investors Shares
Redeemable common stock held by management investors includes those
shares acquired by management investors pursuant to the merger in
1988, shares earned through the Restricted Stock Plan (see Note 10)
and shares issued through the Management Employees Stock Purchase
Plan (the Stock Purchase Plan). The Stock Purchase Plan allowed
employees in management, supervisory or senior administrative
positions to purchase shares of the Company's common stock along with
warrants at current fair value. The Board of Directors was
responsible for establishing the fair value for purposes of the
Stockholders Agreement and the Stock Purchase Plan. The Stock
Purchase Plan was discontinued in 1994. Treasury stock, which the
Company acquired from terminated employees who had previously
purchased shares from the Company, was issued to employees purchasing
stock under the Stock Purchase Plan. Under the DynCorp Stockholders
Agreement adopted in March 1994 and which expires in March 1999, the
Company was committed, upon an employee's termination of employment,
to purchase common stock shares held by employees pursuant to the
merger, through the Stock Purchase Plan or through the Restricted
Stock Plan. In May 1995, the Board of Directors, with the consent of
the Class C Preferred stockholder, approved the establishment of an
Internal Market as a replacement for the resale procedures included
in the DynCorp Stockholders Agreement. In May 1996, the Securities
and Exchange Commission approved the registration of shares for
trading on the Internal Market, thus releasing the Company from its
obligation to repurchase any management or restricted stock shares.
Therefore, the management investor shares have been reclassified from
Temporary Equity (at the redemption value) to Permanent Equity (at
par value) as of December 31, 1996.
The share price at December 31, 1995 for the Management Investor
and Stock Purchase shares was $14.50 per common share and $109.64 for
each share for which warrants had not been exercised (one share of
common stock at $14.50 per share plus 6.6767 warrants at $14.25 per
warrant). At December 31, 1995, 2,082,078 shares were outstanding
and included in Redeemable Common Stock.
Other Shares
In conjunction with the acquisition of Technology Applications,
Inc. in November 1993, the Company issued put options on 125,714
shares of common stock. The holder may, at any time commencing on
December 31, 1998 and ending on December 31, 2000, sell these shares
to the Company at a price per share equal to the greater of $17.50;
or, if the stock is publicly traded, the market value at a specified
date; or, if the Company's stock is not publicly traded, the fair
value at the time of exercise. At December 31, 1996 and 1995,
125,714 shares of common stock were outstanding and included in
Redeemable Common Stock.
Following are the changes in Redeemable Common Stock for the three
years ended December 31, 1996 (in thousands):
Redeemable Common Stock
Management
Other ESOP Investors Total
Balance, December 31, 1993 $ 2,200 $ 68,745 $ 29,685 $100,630
Treasury stock purchased (2,344) (301) (2,645)
Stock issued under Management Employee
Stock Purchase Plan 37 37
Warrants exercised (Note 10) 3,944 3,944
Contribution of stock to ESOP (Note 12) 17,100 17,100
Adjustment of shares to fair value 88 2,837 8,837 11,762
Balance, December 31, 1994 2,288 86,338 42,202 130,828
Treasury stock purchased (2,904) (9,336) (12,240)
Warrants exercised (Note 10) 179 179
Contribution of stock to ESOP (Note 12) 18,000 18,000
Adjustment of shares to fair value (13) (953) 93 (873)
Balance, December 31, 1995 2,275 100,481 33,138 135,894
Reclassification to permanent equity (33,138) (33,138)
Treasury Stock purchased (290) (290)
Shares purchased on Internal Market 1,887 1,887
Adjustment of shares to fair value 704 34,265 34,969
Balance, December 31, 1996 $ 2,979 $136,343 $ - $139,322
(8) Preferred Stock Class C
Class C Preferred Stock is convertible, at the option of the
holder, into one share of common stock, adjusted for any stock
splits, stock dividends or redemption. At conversion, the holder of
Class C Preferred Stock is also entitled to receive such warrants as
have been distributed to the holders of the common stock. Dividends
accrue at an annual rate of 18%, compounded quarterly. At December
31, 1996, cumulative dividends of $11,147,000 have not been recorded
or paid. Dividends will be payable only in the event of a
liquidation of the Company or when cash dividends are declared with
respect to common stock and only in an aggregate amount equal to the
aggregate amount of dividends that such holder would have been
entitled to receive if such Class C Preferred Stock had been
converted into common stock. The holder of Class C Preferred Stock
is entitled to one vote per share on any matter submitted to the
holders of common stock for stockholder approval. In addition, so
long as any Class C Preferred Stock is outstanding, the Company is
prohibited from engaging in certain significant transactions without
the affirmative vote of the holder of the outstanding Class C
Preferred Stock. In February 1997, the ESOP purchased all of the
Class C Preferred Stock which was immediately converted into Common
Stock (see Note 24).
(9) Common Stock
At December 31, 1996, Common Stock includes those shares issued to
outside investors, management investor shares (i.e. shares issued
through the Restricted Stock Plan and Management Employees Stock
Purchase Plan) and any ESOP shares which have been purchased by the
Company and are being held as treasury stock. This differs from the
December 31, 1995 classification of Common Stock which excluded the
management investor shares outstanding (see Note 7).
(10) Common Stock Warrants and Restricted Stock
The Company initially issued warrants on September 9, 1988 to the
Class C Preferred stockholder and to certain common stockholders to
purchase a maximum of 5,891,987 shares of common stock of the
Company. The warrants issued to Class C Preferred stockholder and to
certain common stockholders were recorded at their fair value of
$2.43 per warrant and warrants issued to a lender were recorded at
$3.28 per warrant. Each warrant is exercisable to obtain one share
of common stock. The stockholder may exercise the warrant and pay in
cash the exercise price of $0.25 for one share of common stock or may
sell back to the Company a sufficient number of the exercised shares
to equal the value of the warrants to be exercised. During 1996,
68,253 warrants were exercised and 4,254,196 warrants were
outstanding at December 31, 1996. Rights under the warrants lapse no
later than September 9, 1998. In February 1997, the ESOP purchased
all the Class C Preferred Stock which was immediately converted into
Common Stock (see Note 24).
The Company had a Restricted Stock Plan (the Plan) under which
management and key employees could be awarded shares of common stock
based on the Company's performance. The Company initially reserved
1,023,037 shares of common stock for issuance under the Plan. Under
the Plan, Restricted Stock Units (Units) were granted to participants
who were selected by the Compensation Committee of the Board of
Directors. Each Unit entitled the participant upon achievement of
the performance goals (all as defined) to receive one share of the
Company's common stock. Units could not be converted into shares of
common stock until the participant's interest in the Units had
vested. Vesting occurred upon completion of the specified periods as
set forth in the Plan. In 1994, the Company accrued as compensation
expense $1,222,000 under the Plan which was charged to Cost of
Services and Corporate Selling and Administrative Expenses. At
December 31, 1995, 417,265 shares were unissued and were included in
Redeemable Common Stock-Management Investors (see Note 7).
(11) Cummings Point Industries, Inc. Note Receivable
The Company loaned $5,500,000 (the "Note") to Cummings Point
Industries, Inc., of which Capricorn Investors, L.P. ("Capricorn")
owns more than 10%. By separate agreement and as security to the
Company, Capricorn agreed to purchase the Note from the Company upon
three months' notice, for the amount of outstanding principal plus
accrued interest. As additional security, Capricorn's purchase
obligation was collateralized by certain common stock and warrants
issued by the Company and owned by Capricorn. The Note, which had
previously been reflected as a reduction in stockholders' equity,
was paid in full in August, 1995.
(12) Employee Stock Ownership Plan
In September 1988, the Company established an Employee Stock
Ownership Plan (the Plan). The Company borrowed $100 million and
loaned the proceeds, on the same terms as the Company's borrowings,
to the Plan to purchase 4,123,711 shares of common stock of the
Company (the ESOP loan). The common stock purchased by the Plan
was held in a collateral account as security for the ESOP loan from
the Company. The Company was obligated to make contributions to the
Plan in at least the same amount as required to pay the principal and
interest installments under the Plan's borrowings. The Plan used the
Company contributions to repay the principal and interest on the ESOP
loan. As the ESOP loan was liquidated, shares of the Company's
common stock were released from the collateral account and allocated
to participants of the Plan. As of December 31, 1993, the loan was
fully repaid.
In accordance with subsequent amendments to the Plan,
the Company contributed an additional 25,000 shares
of common stock in December 1993 and in 1994 contributed cash of
$17,435,000 which the ESOP used to acquire 1,312,459 shares and to
pay interest and administrative expenses. In 1995, the Company sold
1,208,059 additional shares of common stock to the ESOP for
$4,250,000 cash and $13,750,000 in the form of a note receivable.
Payments on the note through December 31, 1995 were $13,247,000. The
unpaid balance on the note receivable from the ESOP has been
reflected as a reduction in stockholders' equity at December 31,
1995. In 1996, the Company contributed $13,670,000 in cash to the
ESOP. Utilizing the Company's 1996 contribution, the ESOP paid the
balance of the note to the Company, releasing 33,763 shares from the
collateral account, and has thus far expended $4,849,000 of the
remaining contribution to purchase 130,177 shares of the Company's
stock on the newly established Internal Market, acquire 122,117
shares put for redemption by retired and terminated participants and
to pay administrative expenses. It is the Company's intention for
the ESOP to completely satisfy its future stock purchase requirements
by way of the Internal Market or direct purchase and with shares put
by retired or terminated participants and not through the issue of
new shares by the Company.
The Plan covers a majority of the employees of the Company.
Participants in the Plan become fully vested after four years of
service. All of the 6,921,523 shares acquired by the ESOP have been
either issued or allocated to participants as of December 31, 1996.
The Company recognizes ESOP expense each year based on the fair value
of the shares committed to be released. In 1996, 1995 and 1994, cash
contributions to the ESOP were $13,670,000, $17,497,000 and
$17,435,000, respectively. These amounts were charged to Cost of
Services and Corporate Selling and Administrative Expenses.
(13) Other Expenses
Years Ended December 31,
(in thousands)
1996 1995 1994
Amortization of costs in excess
of net assets acquired (see Note 1) $ 1,560 $ 2,143 $ 2,347
ESOP Repurchase Premium (see Note 7) (1,250) 1,323
Write-off of investment in
unconsolidated subsidiary (a) 1,286 3,250
Legal and other expense accruals
associated with an acquired business (b) (1,830)
Costs associated with businesses discontinued
in 1988 and prior years
- Asbestos liability issues (c) 5,300
- Subcontractor suit (d) 750 2,400 2,665
- Environmental costs (see Note 21(b)) 75 (347)
Termination costs (e) 3,299
Miscellaneous (246) 369 220
Total Other $ 5,474 $10,212 $ 7,628
(a) In June 1994 the Company paid $3,000,000 for a 25% interest in
Composite Technology, Inc. ("CTI") and recorded $1,375,000 of
goodwill in conjunction with the investment. The investment
in CTI allowed the Company to receive the unrestricted North
American license for a particular aircraft repair technology
which was fundamental to several existing contracts and bids
in process. Since 1994, the volume of business in this area
has declined and the Company has determined the goodwill
associated with this investment has been impaired.
Accordingly, the unamortized balance at December 31, 1996,
$1,286,000, has been charged to Other Expense. At this time,
the Company does not believe the underlying equity in the 25%
investment in CTI has been impaired.
The Company initially invested in Business Mail Express, Inc.
("BME") in April 1992. In June 1994, the Company paid an
additional $1,250,000 to increase its holdings in the
subsidiary from 40% to 50.1% and the subsidiary concurrently
borrowed $6,000,000 from another investor. The total
acquisition cost exceeded the underlying equity in net assets
by $2,582,000. The subsidiary's stockholders' agreement
defined certain trigger events which, upon their occurrence,
transferred control of the subsidiary from DynCorp to the
other shareholders. These trigger events occurred in the
fourth quarter of 1994 and the subsidiary's lenders called the
loans in 1995. These actions, coupled with financial and cash
flow projections provided by the subsidiary's management, led
the Company to determine that its investment had been
permanently impaired. As such, $3,250,000 representing the
investment and excess purchase price was charged to Other
Expenses in 1994. The investment was disposed of in 1995 for
book value.
(b) In 1993, expenses were incurred and an accrual was established
for estimated future legal costs and possible fines and
penalties associated with a federal investigation of an
allegation that false statements were made in connection with
a pricing proposal submitted by an acquired business prior to
its acquisition in 1991. The investigation was concluded in
1994 with the government finding no basis for prosecution. As
a consequence, the Company not only recovered a portion of its
prior expenses, but also avoided any fines and penalties;
consequently, the unused portion of the accrual was reversed
in 1994.
(c) Reserves for potential uninsured costs to defend and settle future
asbestos claims against a former subsidiary (see Note 21(a)).
This adjustment was recorded in the fourth quarter 1995
because of the following events which occurred in that period.
(i) During November 1995, the subsidiary involved in the
asbestos litigation received two significant unfavorable
jury verdicts. (These cases are currently under appeal.)
(ii) During the fourth quarter, the Company became aware of
approximately 1,100 additional law suits filed immediately
prior to the September 1, 1995 effective date of the Texas Tort
Reform Act. (The Company believes this surge was attributable
to the Texas tort reform legislation as described in Note 21
(a).) The Company was not notified of these cases until the fourth
quarter of 1995 due to an administrative backlog in the Texas
court system caused by the tremendous volume of cases filed prior
to the September 1, 1995 effective date of the Texas tort reform
legislation.
(iii) During the fourth quarter, the Company received notification
from one of the subsidiary's primary insurance carriers to
the effect that the carrier considered its coverage to be
exhausted and that it was withdrawing its prior verbal
commitment to a negotiated settlement of its coverage limits
and obligations to defend.
These events precipitated a reassessment (increase) of the
estimated minimum claim liability and a greater concern as to
the full recovery of all claims from the carriers. After
consulting with its defense counsel and professional advisors
regarding its asbestos position,it was decided that it was appropriate
to record an additional $5,300,000 accrual, increasing the
overall accrual to $7,000,000.
(d) Reserves for the estimated costs (primarily legal defense)
to resolve a lawsuit filed by a subcontractor of a former
subsidiary (see Note 21(b)).
(e) During 1996, several senior executives and a member of the
Board of Directors announced their intentions to either retire
or step down from their positions with the Company. In
conjunction with this action, the Company has accrued
$3,299,000, representing commitments to these individuals for
supplemental pension benefits, consulting fees, payments due
under a covenant not to compete, remuneration for the waiver
of certain preferred stock and Board of Directors voting
rights as well as accrued life insurance premiums payable.
(14) Income Taxes
Earnings (loss) from continuing operations before income taxes and
minority interest (but including extraordinary item - see Note 5)
were derived from the following (in thousands):
Years Ended December 31,
1996 1995 1994
Domestic operations $ 19,102 $ (3,111) $ (642)
Foreign operations 5 (4,236) (816)
$ 19,107 $ (7,347) $ (1,458)
The provision (benefit) for income taxes consisted of the following
(in thousands):
Years Ended December 31,
1996 1995 1994
Current:
Federal $ 4,286 $(10,322) $ (91)
Foreign (81) (2,234) 54
State 210 (1,493) 59
4,415 (14,049) 22
Deferred:
Federal 3,939 9,749 (5,161)
Foreign 1,100 1,000 -
State (436) 2,900 (775)
4,603 13,649 (5,936)
Valuation Allowance:
Federal (4,067) (7,707) 2,962
State 942 (983) 716
(3,125) (8,690) 3,678
Total $ 5,893 $(9,090) $(2,236)
The components of and changes in deferred taxes are as follows (in
thousands):
Deferred Deferred Deferred
Dec. 31, Expense Dec. 31, Expense Dec. 31, Expense
1996 (Benefit) 1995 (Benefit) 1994 (Benefit)
Deferred tax liabilities:
Difference between book and tax
method of accounting for certain
employee benefits $ (2,187) $ 1,027 $ (1,160) $ 1,535 $ 375 $ 223
Difference between book and tax method
of accounting for income on U.S.
Government contracts (11,431) 1,645 (9,786) 885 (8,901) 38
Amortization of intangibles (761) (37) (798) (275) (1,073) 925
Total deferred tax liabilities (14,379) 2,635 (11,744) 2,145 (9,599) 1,186
Deferred tax assets:
Difference between book and tax
method of accounting for
depreciation and amortization 66 (413) (347) 806 459 (632)
Deferred compensation expense 2,240 191 2,431 1,621 4,052 1,346
Operating reserves and other accruals 15,751 3,234 18,985 1,290 20,275 (5,358)
Increase due to federal rate change 335 - 335 - 335 -
Deferred taxes of discontinued operations,
retained by the Company - - - 4,018 4,018 (1,517)
Other, net 75 (102) (27) (26) (53) 37
Benefit of state tax on temporary
differences and state net operating
loss carryforwards 5,533 (942) 4,591 983 5,574 (716)
Benefit of foreign, targeted jobs, R&E
and AMT tax credit carryforwards - - - 2,812 2,812 (282)
Total deferred tax assets 24,000 1,968 25,968 11,504 37,472 (7,122)
Total temporary differences before
valuation allowances 9,621 4,603 14,224 13,649 27,873 (5,936)
Federal valuation allowance (2,488) (4,067) (6,555) (7,707) (14,262) 2,962
State valuation allowance (5,533) 942 (4,591) (983) (5,574) 716
Total temporary differences affecting
tax provision 1,600 1,478 3,078 4,959 8,037 (2,258)
Deferred taxes from "safe harbor"
lease transactions (5,679) (316) (5,995) (554) (6,549) (499)
Net deferred tax asset (liability) $ (4,079) $ 1,162 $ (2,917) $ 4,405 $ 1,488 $ (2,757)
The federal and state valuation allowances represent reserves for
income tax benefits which were not recognized in prior years due to
the uncertainty regarding future earnings.
The tax provision (benefit) differs from the amounts obtained by
applying the statutory U.S. Federal income tax rate to the pre-tax
earnings (loss) from continuing operations amounts. The differences
can be reconciled as follows (in thousands):
Years Ended December 31,
1996 1995 1994
Expected Federal income tax provision (benefit) $6,688 $ (896) $ (510)
Valuation allowance (4,067) (7,707) 2,962
State and local income taxes, net of
Federal income tax benefit 465 275 -
Tax benefit of discontinued operations - - (191)
Reversal of tax reserves for IRS examination - - (4,069)
Nondeductible amortization of intangibles
and other costs 1,165 (263) 635
Foreign income tax 1,016 - 54
Foreign, targeted job, R&E, AMT and fuel tax credits (16) (257) (537)
Other, net 642 (242) (580)
Tax provision (benefit) $5,893 $(9,090) $(2,236)
The Company's U.S. Federal income tax returns have been
cleared through 1993. The Internal Revenue Service (IRS) completed two
examinations of the Company's tax returns; for the period 1985-
1988 and for the period 1989-1993. The IRS proposed several
adjustments to both periods, the most significant of which
related to deductions taken by the Company for expenses incurred
in the 1988 merger. The Company and the IRS settled the proposed
adjustments for the 1985-1988 audit in 1994 and the Joint
Congressional Committee on Taxation issued its approval of the
settlement on December 7, 1995. The Company and the IRS agreed
upon the proposed adjustments of the 1989-1993 audit in 1995, and
the Joint Congressional Committee on Taxation issued its approval
of the settlement on May 30, 1996.
The provision for income taxes in 1996 is based on reported
earnings, adjusted to reflect the impact of temporary differences
between the amount of assets and liabilities recognized for
financial reporting purposes and such amounts recognized for tax
purposes, and a provision for foreign taxes related to prior
years' foreign operations. The tax benefit in 1995 reflects a
tax provision based on an estimated annual effective tax rate,
excluding expenses not deductible for tax. Additionally,
$4,067,000 and $7,707,000 of tax valuation reserves were reversed
in 1996 and 1995, respectively. These deferred taxes have been
realized primarily as offsets against the current year's earnings
and the gain on the sale of the Commercial Aviation business in
1995. The 1994 federal tax benefit resulted from the reversal of
tax reserves from settlement of the above noted IRS examination
and the tax benefit for operating losses, net of a valuation
allowance, less the federal tax provision of a majority owned
subsidiary required to file a separate return.
The Company has state net operating loss carryforwards
available to offset future taxable income. Following are the net
operating losses by year of expiration (in thousands):
Year of State Net
Expiration Operating Losses
1999 $ 4,798
2001 6,959
2003 199
2006 24
2011 41,437
$53,417
(15) Pension Plans
Union employees who are not participants in the ESOP are covered
by multiemployer pension plans under which the Company pays fixed
amounts, generally per hours worked, according to the provisions of
the various labor contracts. In 1996, 1995 and 1994, the Company
expensed $2,837,000, $2,514,000 and $2,367,000, respectively, for
these plans. Under the Employee Retirement Income Security Act of
1974 as amended by the Multiemployer Pension Plan Amendments Act of
1980, an employer is liable upon withdrawal from or termination of a
multiemployer plan for its proportionate share of the plan's
unfunded vested benefits liability. Based on information provided
by the administrators of the majority of these multiemployer plans,
the Company does not believe there is any significant amount of
unfunded vested liability under these plans.
(16) Earnings (Loss) Per Common Share
Primary and fully diluted earnings or loss per share from
continuing operations before extraordinary item is computed by
dividing earnings (loss), after deducting the effect of the unpaid
dividends on the Class C Preferred Stock ($2,284,000 in 1996,
$1,915,000 in 1995 and $1,606,000 in 1994), by the weighted average
number of common and dilutive common equivalent shares outstanding
during the period. In addition, shares earned and vested but
unissued under the Restricted Stock Plan are included as outstanding
common stock. In 1994, warrants outstanding have been excluded from
the calculation of loss per share as their effect is antidilutive
because of the losses incurred during the period (see also Note 10).
For years 1996, 1995 and 1994, shares which would be issued under
the assumed conversion of Class C Preferred Stock have been excluded
from the calculation of earnings per share as their effect is
antidilutive. The average number of shares used in determining
primary earnings or loss per share was 11,736,271 in 1996,
11,745,251 in 1995 and 6,802,012 in 1994.
Supplementary earnings per share has been presented to reflect the
conversion of the Class C Preferred Stock and the repurchase of other common
stock and stock warrants, all as if these
transactions had occurred at the beginning of the period. The
unpaid Class C dividends have been added back to net earnings for
the period and interest and deferred debt amortization have been
adjusted (net of tax) to reflect the terms of the borrowings required
to effect the above mentioned conversion and repurchase.
The weighted average number of common shares outstanding has been
adjusted to reflect the conversion of the Class C Preferred Stock
and exercise of the attached warrants as well as the repurchase of
certain other common stock and stock warrants, all of which served
to decrease the weighted average shares outstanding to 10,231,319
(see Note 24).
(17) Incentive Compensation Plans
The Company has several formal incentive compensation plans which
provide for incentive payments to officers and key employees.
Incentive payments under these plans are based upon operational
performance, individual performance, or a combination thereof, as
defined in the plans. Incentive compensation expense was $6,367,000
for 1996, $6,692,000 for 1995 and $7,067,000 for 1994.
(18) Stock Option Plan
The Company adopted an incentive stock option plan in December
1995, whereby options may be granted to officers and other key
employees to purchase a maximum of 1,250,000 common shares at an
option price not less than the most recently determined fair market
value as of the grant date. Options issued under the plan may be
exercised only when vested and vest proportionately over a period of
five years. Options which are not exercised within seven years from
the date of the grant shall expire. Changes in stock options
outstanding were as follows:
Exercise Price
or Range of Weighted Average
Shares Exercise Prices Exercise Price
Outstanding at December 31,1995 318,000 $14.90 $14.90
Granted 518,000 14.50-19.00 17.66
Canceled or terminated (15,500) 14.90 14.90
Exercised (600) 14.90 14.90
Outstanding at December 31,1996 819,900 $14.50-19.00 $16.64
Exercisable at year-end 64,900
The Company has opted to account for its stock option plan in
accordance with APB Opinion 25, "Accounting for Stock Issued to
Employees." Accordingly, under the intrinsic value based method
of accounting for options, no compensation cost has been
recognized. SFAS 123, "Accounting for Stock Based Compensation"
encourages, but does not require, adoption of the fair value based
method of accounting for employee stock options. The fair value
of each option grant is equal to the Formula Price at the date of grant
(see Item 5 "Market for the Registrant's Common Stock and Related
Stockholder Matters" included elsewhere in this Annual Report
Form 10-K). The minimum value is determined assuming a
five year expected life of the options, a risk-free interest rate
of 7% and a volatility factor of zero. Had the Company adopted
SFAS No. 123, common stockholders' share of net earnings and earnings
per share for the year ended December 31, 1996 would have been
approximately $9,385,000 and $0.80, respectively. Comparable data
has not been presented for December 31, 1995, as none of the options
had vested and therefore no additional compensation costs would be
assumed.
(19) Leases
Future minimum lease payments required under operating leases
that have remaining noncancellable lease terms in excess of one
year at December 31, 1996 are summarized below (in thousands):
Years Ending December 31,
1997 $ 7,523
1998 7,254
1999 6,423
2000 2,526
2001 2,110
Thereafter 10,508
Total minimum lease payments $36,344
Net rent expense for leases was $21,797,000 for 1996, $24,734,000 for
1995 and $14,286,000 for 1994.
(20) Acquisitions
On June 21, 1996, the Company acquired all of the outstanding
shares of stock of Data Management Design, Inc. ("DMDI") for a
cash payment of $2,400,000 and in January 1997 a final payment of
$24,000 was made to the former owners of DMDI pursuant to the
settlement of the closing balance sheet. DMDI, headquartered in
Reston, Virginia, provides automated workflow and image processing
solutions to federal agencies and the private sector. The
acquisition has been accounted for as a purchase and $1,669,000 of
goodwill, which will be amortized over 15 years, has been recorded
based on the initial allocation of the purchase price. The
Company also acquired certain assets (primarily internally
developed software) of ESG, Incorporated for $1,100,000 in cash.
These acquisitions would not have had a material impact on the results
of operations assuming the transactions had been consumated at the
beginning of the period.
(21) Contingencies and Litigation
The Company and its subsidiaries and affiliates are involved
in various claims and lawsuits, including contract disputes and
claims based on allegations of negligence and other tortious
conduct. The Company is also potentially liable for certain
personal injury, tax, environmental and contract dispute issues
related to the prior operations of divested businesses. In
addition, certain subsidiary companies are potentially liable for
environmental, personal injury and contract and dispute claims.
In most cases, the Company and its subsidiaries have denied, or
believe they have a basis to deny, liability, and in some cases
have offsetting claims against the plaintiffs, third parties or
insurance carriers. The total amount of damages currently claimed
by the plaintiffs in these cases is estimated to be approximately
$122,000,000 (including compensatory punitive damages and
penalties). The Company believes that the amount that will
actually be recovered in these cases will be substantially less
than the amount claimed. After taking into account available
insurance, the Company believes it is adequately reserved with
respect to the potential liability for such claims. The estimates
set forth above do not reflect claims that may have been incurred
but have not yet been filed. The Company has recorded such
damages and penalties that are considered to be probable
recoveries against the Company or its subsidiaries.
(a) Asbestos Claims
An acquired and inactive subsidiary, Fuller-Austin Insulation
Company ("Fuller-Austin"), which discontinued its business
activities in 1986, has been named as one of many defendants in
civil lawsuits which have been filed in certain state courts
beginning in 1986 (principally Texas) against manufacturers,
distributors and installers of asbestos products. Fuller-Austin
was a nonmanufacturer that installed or distributed industrial
insulation products. Fuller-Austin had discontinued the use of
asbestos-containing products prior to being acquired by the
Company in 1974. These claims are not part of a class action.
The claimants generally allege injuries to their health caused
by inhalation of asbestos fibers. Many of the claimants seek
punitive damages as well as compensatory damages. The amount of
damages sought is impacted by a multitude of factors. These
include the type and severity of the disease sustained by the
claimant (i.e. mesothelioma, lung cancer, other types of cancer,
asbestosis or pleural changes); the occupation of the claimant;
the duration of the claimant's exposure to asbestos-containing
products; the number and financial resources of the defendants;
the jurisdiction in which the claim is filed; the presence or
absence of other possible causes of the claimant's illness; the
availability of legal defenses such as the statute of limitations;
and whether the claim was made on an individual basis or as part
of a group claim.
Claim Exposure
As of March 1, 1997, 13,117 plaintiffs have filed claims
against Fuller-Austin and various other defendants. Of these
claims 2,599 have been dismissed, 3,561 have been resolved without
an admission of liability at an average cost of $3,667 per claim
(excluding legal defense costs) and an additional 1,274 claims
have been settled in principle (subject to future processing and
funding) at an average cost of $1,923 per claim.
Following is a summary of claims filed against Fuller-Austin
through March 1, 1997:
Years
1993
& Prior 1994 1995 1996 1997(1) Total
Claims Filed 2,728 1,134 4,429 4,093 733 13,117
Claims Dismissed (79) (21) (1,035) (1,457) (7) (2,599)
Claims Resolved (1,218) (333) (182) (1,828) - (3,561)
Settlements in process (1,274)
Claims Outstanding at March 1, 1997 5,683
(1) As of March 1, 1997
In connection with these claims, Fuller-Austin's primary
insurance carriers have incurred approximately $21,600,000
(including $8,500,000 of legal defense costs, but excluding
$2,500,000 for settlements in process) to defend and settle the
claims and, in addition, judgments have been entered against
Fuller-Austin for jury verdicts of $6,500,000 which have not been
paid and which are under appeal by Fuller-Austin. Through
December 31, 1996, the Company and Fuller-Austin have charged to
expense approximately $12,500,000 consisting of $6,200,000 of
charges under retrospectively rated insurance policies and
$6,300,000 of reserves for potential uninsured legal and
settlement costs related to these claims. These charges
substantially eliminate any further exposure for retrospectively
determined premium payments under the retrospectively rated
insurance policies.
During 1996, Fuller-Austin continued its strategy to require
direct proof that claimants had exposure to asbestos-containing
products as the result of Fuller-Austin's operations. This has
resulted in an increase in claim settlements and a decrease in
litigation defense activities. However, perceived changes in the
nature of new claims filed in 1996 have caused Fuller-Austin and
its insurers to reevaluate Fuller-Austin's approach to claims
settlement. Consequently, there is a potential for an increased
level of trial activity which Fuller-Austin believes will reduce
the overall cost of asbestos personal injury claims in the long
run by requiring claimants to present and prove clear evidence of
substantial asbestos-related impairment and exposure to Fuller-
Austin's operations, and by denying recovery to claimants who are
unimpaired or who did not have significant exposure to Fuller-
Austin's operations. Further, the level of filed claims has
become significant only since 1992, and therefore, Fuller-Austin
has a relatively brief history (compared to manufacturers and
suppliers) of claims volume and a limited data file upon which to
estimate the number or costs of claims that may be received in the
future. Also, effective September 1, 1995, the State of Texas
enacted tort reform legislation which Fuller-Austin believes will
ultimately curtail the number of unsubstantiated asbestos claims
filed against the subsidiary in Texas.
The Company and its defense counsel have analyzed the 13,117
claim filings incurred through March 1, 1997. Based on this
analysis and consultation with its professional advisors, Fuller-
Austin has estimated its cost, including legal defense costs, to
be $17,000,000 for claims filed and still unsettled and
$38,500,000 as its minimum estimate of future costs of unasserted
claims, including legal defense costs. No upper limit of exposure
can presently be reasonably estimated. The Company cautions that
these estimates are subject to significant uncertainties including
the future effect of tort reform legislation enacted in Texas and
other states, the success of Fuller-Austin's litigation strategy,
the size of jury verdicts, success of appeals in process, the
number and financial resources of future plaintiffs, and the
actions of other defendants. In addition, during 1996,
approximately 40 claims, with approximately 700 more being
prepared for filing, were filed in the State of Louisiana where
Fuller-Austin had performed a significant amount of its business.
Exposure for significant non-Texas claims has not been included in
the Company's estimates and neither the Company nor its defense
counsel are able to reasonably predict the outcome of these cases
or the incidence of future claims that may be filed. Therefore,
actual claim experience may vary significantly from such
estimates, especially if certain Texas appeals are decided
unfavorably to Fuller-Austin and/or the level of claims filed in
Louisiana increases. At December 31, 1996 and 1995, Fuller-Austin
recorded an estimated liability for future indemnity payments and
defense costs related to currently unsettled claims and minimum
estimated future claims of $55,000,000 and $60,000,000,
respectively, (recorded as long-term liability).
Insurance coverage
Defense has been tendered to and accepted by Fuller-Austin's
primary insurance carriers, and by certain of the Company's
primary insurance carriers that issued policies under which
Fuller-Austin is named as an additional insured; however, only one
such primary carrier has partially accepted defense without a
reservation of rights. The Company believes that Fuller-Austin
has at least $7,900,000 in unexhausted primary coverage (net of
deductibles and self-insured retentions but including disputed
coverage) under its liability insurance policies to cover the
unsettled claims, verdicts and future unasserted claims and
defense costs. The primary carriers also have unlimited liability
for defense costs (presently running at the annual rate of
approximately $1,500,000) until such time as the primary limits
under these policies are exhausted. When the primary limits are
exhausted, liability for both indemnity and legal defense will be
tendered to the excess coverage carriers, all of which have been
notified of the pendency of the asbestos claims. The Company and
Fuller-Austin have approximately $490,000,000 of additional excess
and umbrella insurance that is generally responsive to asbestos
claims. This amount excludes approximately $92,000,000 of
coverage issued by insolvent carriers. After the $7,900,000 of
unexhausted primary coverage, the Company has $35,700,000 of
excess coverage in place before entering a $35,000,000 layer of
insolvent coverage for policy years 1979 through 1984 (the
"Insolvent Layer"). All of the Company's and Fuller-Austin's
liability insurance policies cover indemnity payments and defense
fees and expenses subject to applicable policy terms and
conditions.
Coverage litigation
The Company and Fuller-Austin have instituted litigation in
Los Angeles Superior Court, California, against their primary and
excess insurance carriers, to obtain declaratory judgments from
the court regarding the obligations of the various carriers to
defend and pay asbestos claims. The issues in this litigation
include the aggregate liability of the carriers, the triggering
and drop-down of excess coverage to cover the Insolvent Layer and
allocation of losses covering multiple carriers and insolvent
carriers, and various other issues relating to the interpretation
of the policy contracts. All of the carrier defendants have filed
general denial answers.
Although there can be no assurances as to the outcome of this
litigation, management believes that it is probable that the
Company and Fuller-Austin will prevail in obtaining judicial
rulings confirming the availability of a substantial portion of
the coverage. Currently, the Company has excess coverage under
policies issued by solvent carriers of approximately $497,900,000
($7,900,000 in primary coverage and $490,000,000 in excess
coverage). Based on a review of the independent ratings of these
carriers, the Company believes that a substantial portion of this
coverage will continue to be available to meet the claims.
Fuller-Austin recorded in Other Assets $55,000,000 and
$60,000,000, respectively (not including reserves of $6,000,000
and $7,000,000, respectively) at December 31, 1996 and 1995,
representing the amount that it expects to recover from its
insurance carriers for the payment of currently unsettled and
estimated future claims.
The Company cautions, however, that even though the existence
and aggregate dollar amounts of insurance are not generally being
disputed, such insurance coverage is subject to interpretation by
the court and the timing of the availability of insurance payments
could, depending upon the outcome of the litigation and/or
negotiation, delay the receipt of insurance company payments and
require Fuller-Austin to assume responsibility for making interim
payment of asbestos defense and indemnity costs.
While the Company and Fuller-Austin believe that they have
recorded sufficient liability to satisfy Fuller-Austin's
reasonably anticipated costs of present and future plaintiffs'
suits, it is not possible to predict the amount or timing of
future suits or the future solvency of its insurers. In the event
that currently unsettled and future claims exceed the recorded
liability of $55,000,000, the Company believes that the judicially
determined and/or negotiated amounts of excess and umbrella
insurance coverage that will be available to cover additional
claims will be significant; however, it is unable to predict
whether or not such amounts will be adequate to cover all
additional claims without further contribution by Fuller-Austin.
(b) General Litigation
The Company has retained certain liability in connection with
its 1989 divestiture of its major electrical contracting business,
Dynalectric Company ("Dynalectric"). The Company and Dynalectric
were sued in 1988 in Bergen County Superior Court, New Jersey, by
a former Dynalectric joint venture partner/subcontractor
(subcontractor). The subcontractor has alleged that its
subcontract to furnish certain software and services in connection
with a major municipal traffic signalization project was
improperly terminated by Dynalectric and that Dynalectric
fraudulently diverted funds due, misappropriated its trade secrets
and proprietary information, fraudulently induced it to enter the
joint venture, and conspired with other defendants to commit acts
in violation of the New Jersey Racketeering Influenced and Corrupt
Organization Act. The aggregate dollar amount of these claims has
not been formally recited in the subcontractor's complaint.
Dynalectric has also filed certain counterclaims against the
former subcontractor. The Company and Dynalectric believe that
they have valid defenses, and/or that any liability would be
offset by recoveries under the counterclaims. The Company and
Dynalectric have filed motions with the Court to enforce the
arbitration provisions included in the subcontract. Discovery is
ongoing. The Company believes that it has established adequate
($2,660,000 at December 31, 1996) reserves for the contemplated
defense costs and for the cost of obtaining enforcement of
arbitration provisions contained in the contract.
In November, 1994, the Company acquired an information
technology business which was involved in various disputes with
federal and state agencies, including two contract default actions
and a qui tam suit by a former employee alleging improper billing
of a federal government agency customer. The Company has
contractual rights to indemnification from the former owner of the
acquired subsidiary with respect to the defense of all such claims
and litigation, as well as all liability for damages when and if
proven. In October, 1995, one of the federal agencies asserted a
claim against the subsidiary and gave the Company notice that it
intended to withhold payments against the contract under which the
claim arose. To date, the agency has withheld approximately
$3,300,000 allegedly due the agency under one of the
aforementioned disputes. This subsidiary has submitted a demand
for indemnification to the former owner of the subsidiary which
has been denied. The subsidiary recently received an arbitration
award confirming that it is entitled to indemnification.
As to environmental issues, neither the Company nor any of
its subsidiaries is named a Potentially Responsible Party (as
defined in the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA)) at any site. The Company, however,
did undertake, as part of the 1988 divestiture of a petrochemical
engineering subsidiary, an obligation to install and operate a
soil and water remediation system at a subsidiary research
facility site in New Jersey. The Company is required to pay the
costs of continued operation of the remediation system which are
estimated to be $100,000 (see Note 13) In addition, the Company, pursuant
to the sale of the Commercial Aviation Business, is responsible for the
costs of clean-up of environmental conditions at certain designated sites.
Such costs may include the removal and subsequent replacement of
contaminated soil, concrete, tanks, etc., that existed prior to the
sale of the Commercial Aviation Business (see Note 2).
The Company is a party to other civil and contractual
lawsuits which have arisen in the normal course of business for
which potential liability, including costs of defense, which
constitute the remainder of the $122,000,000 discussed above. The
estimated probable liability for these issues is approximately
$10,000,000 and is substantially covered by insurance. All of the
insured claims are within policy limits and have been tendered to
and accepted by the applicable carriers. The Company has recorded
an offsetting asset (Other Assets) and liability (long-term
liability) of $10,000,000 at December 31, 1996 and 1995, for these
items.
The Company has recorded its best estimate of the aggregate
liability that will result from these matters. While it is not
possible to predict with certainty the outcome of litigation and
other matters discussed above, it is the opinion of the Company's
management, based in part upon opinions of counsel, insurance in
force and the facts currently known, that liabilities in excess of
those recorded, if any, arising from such matters would not have a
material adverse effect on the results of operations, consolidated
financial position or liquidity of the Company over the long-term.
However, it is possible that the timing of the resolution of
individual issues could result in a significant impact on the
operating results and/or liquidity for one or more future
reporting periods.
The major portion of the Company's business involves
contracting with departments and agencies of, and prime
contractors to, the U.S. Government, and such contracts are
subject to possible termination for the convenience of the
government and to audit and possible adjustment to give effect to
unallowable costs under cost-type contracts or to other regulatory
requirements affecting both cost-type and fixed-price contracts.
Payments received by the Company for allowable direct and indirect
costs are subject to adjustment and repayment after audit by
government auditors if the payments exceed allowable costs.
Audits have been completed on the Company's incurred contract
costs through 1986 and are continuing for subsequent periods.
The Company has included an allowance for
excess billings and contract losses in its financial statements
that it believes is adequate based on its interpretation of
contracting regulations and past experience. There can be no
assurance, however, that this allowance will be adequate.
The Company is aware of various costs questioned by the government,
including issues related to the recoverability of its ESOP
contributions, but cannot determine the outcome of the audit
findings at this time. In addition, the Company is occasionally the subject of
investigations by the Department of Justice and other
investigative organizations, resulting from employee and other
allegations regarding business practices. In management's
opinion, there are no outstanding issues of this nature at
December 31, 1996 that will have a material adverse effect on the
Company's consolidated financial position, results of operations
or liquidity.
(22) Business Segments
The Company derived 97%, 95% and 98% of its revenues in 1996,
1995 and 1994, respectively, from contracts and subcontracts with
the U.S. Government. Prime contracts comprised 79%, 84% and 88%
of revenue of which prime contracts with the Department of Defense
represented 50%, 51% and 54% of revenue in 1996, 1995 and 1994,
respectively. In 1996, the Company's second largest customer was
the Department of Energy, comprising 18% of revenue. No other
customer accounted for more than 10% of revenues in any year.
Revenue, operating income, identifiable assets, capital
expenditures and depreciation and amortization by segment are
presented below (dollars in thousands). See Item I "Business"
included elsewhere in this Annual Report on Form 10-K for a
description of the business segments.
Years Ended December 31,
1996 1995 1994
Revenue
I&ET $ 271,538 $271,133 $192,062
AT 383,252 319,335 300,856
EM 366,663 318,257 325,765
$1,021,453 $908,725 $818,683
Operating Income(1)
I&ET $ 17,106 $ 13,272 $ 11,422
AT 9,836 8,380 9,031
EM 15,690 7,128 8,129
42,632 28,780 28,582
Equity in (earnings) loss
of affiliates (676) (154) 26
Corporate Expense 14,908 12,743 14,844
Other (a) 825 7,700 2,665
Interest (net expense) 8,468 11,052 12,505
Earnings (loss) before income
taxes, minority interest,
discontinued operations, and
extraordinary item $ 19,107 $ (2,561) $ (1,458)
(1) Operating income is the excess of operating revenues over operating
expenses including certain corporate expenses, which are allocated
to operations of the segments. In computing operating income by
segment, the effects of equity in earnings of affiliates, interest
income, interest expense, other income and expense items, and
income taxes are not included.
As of December 31,
Identifiable Assets 1996 1995 1994
I&ET $ 99,445 $ 95,084 $ 95,794
AT 80,393 64,419 69,615
EM 70,995 86,662 81,443
Other (a) 55,093 60,106 17,113
Discontinued Operations - - 85,444
Corporate 62,826 69,219 46,591
$ 368,752 $375,490 $396,000
Years Ended December 31,
Capital Expenditures 1996 1995 1994
I&ET $ 3,606 $ 2,700 $ 2,085
AT 823 640 788
EM 384 936 371
Corporate 497 513 498
$ 5,310 $ 4,789 $ 3,742
Depreciation and Amortization
I&ET $ 3,775 $ 5,223 $ 4,642
AT 2,337 1,412 1,514
EM 1,525 2,296 4,982
Corporate 1,830 2,417 5,202
$ 9,467 $ 11,348 $16,340
(a) Includes costs, expenses and assets pertaining to former
subsidiaries (see Note 13).
(23) Quarterly Financial Data (Unaudited)
A summary of quarterly financial data for 1996 and 1995
is as follows (in thousands, except per share data):
1996 Quarters 1995 Quarters
First Second Third Fourth(a) First Second Third(b) Fourth(c)
Revenues $241,726 $249,630 $246,968 $283,129 $211,636 $209,940 $244,592 $242,557
Gross profit 10,729 13,682 13,151 13,728 7,816 9,849 9,810 9,933
Earnings (loss) from continuing
operations before income taxes,
minority interest and
extraordinary item 3,737 6,892 5,965 2,513 (801) 1,522 1,120 (4,402)
Minority interest 296 326 367 275 302 355 286 312
Discontinued operations - 865 - 1,815 (347) 80 252 (5)
Net earnings (loss) 2,241 4,418 3,241 4,729 (1,549) 674 1,227 2,016
Earnings (loss) per common share:
Primary and fully diluted:
Continuing operations $ 0.14 $ 0.26 $ 0.23 $ 0.19 $ (0.19) $ 0.01 $ 0.24 $ 0.13
Discontinued operations - 0.07 - 0.16 (0.04) 0.01 0.02 -
Extraordinary item - - - - (0.02) - (0.20) (0.01)
Common stockholders' share
of earnings (loss) $ 0.14 $ 0.33 $ 0.23 $ 0.35 $ (0.25) $ 0.02 $ 0.06 $ 0.12
<FN>
Quarterly financial data may not equal annual totals due to rounding.
Quarterly earnings per share data may not equal annual total.
(a) 1996 Fourth Quarter includes:
- $3,299,000 accrual for supplemental pension and other fees payable to retiring officers and
a member of the Board of Directors (see Note 13)
- $1,286,000 write-off of cost in excess of net assets acquired of an unconsolidated affiliate (see Note 13)
- $1,250,000 reversal of overaccrued ESOP Premium (see Note 7)
- $4,067,000 reversal of income tax valuation allowance (see Note 14)
(b) 1995 Third Quarter includes:
- $3,300,000 reversal of income tax valuation allowance (see Note 14)
- $2,656,000 loss, net of tax, on extinguishment of debt (see Note 5)
(c) 1995 Fourth Quarter includes:
- $3,688,000 accrual for losses and reserves related to the Company's Mexican operations
- $2,400,000 accrual for legal fees related to the defense of a lawsuit filed by a subcontractor of a former
electrical contracting subsidiary (see Notes 13 and 21)
- $5,300,000 accrual for uninsured costs related to a former subsidiary's alleged use of asbestos products
(see Notes 13 and 21)
- $4,407,000 reversal of income tax valuation allowance (see Note 14)
</FN>
(24) Subsequent Events
In February 1997, the Company and its Employee Stock Ownership
Plan purchased from the investors of Capricorn Investors,
L.P., all of the Company's Class C Preferred Stock,
a substantial portion of Common Stock and certain Common Stock
Warrants that were previously held by Capricorn and transferred to
such investors. The total purchase price for the securities was
$56,400,000, of which $28,200,000 was paid in cash, $18,900,000
was paid in notes issued by the Company ("Company Capricorn
Notes") and $9,300,000 was paid in notes issued by the ESOP and
guaranteed by the Company ("ESOP Capricorn Notes").
At December 31, 1996, the Company had $104,183,000 of debt, of
which $100,000,000 (the Contract Receivable Collateralized Notes,
Series 1992-1) is scheduled to begin principal amortization on May
30, 1997. The Company and its wholly-owned subsidiary, Dyn
Funding Corporation ("DFC"), have undertaken a series of
refinancing transactions in order to repay the Contract Receivable
Collateralized Notes, the Company Capricorn Notes, and to make a
loan to the ESOP for the repayment of the ESOP Capricorn Notes.
On March 17, 1997, the Company closed on the sale of
$100,000,000 of 9.5% Senior Subordinated Notes due 2007 (the
"Senior Subordinated Notes"). After paying transaction fees and
expenses, the Company received net proceeds of $96.3 million.
On March 19, 1997, the Company used $19,086,000 of the proceeds
to repay the Company Capricorn Notes (including $177,000 of
accrued interest) and on March 20, 1997, the Company used
$9,372,000 to make a loan to the ESOP for the repayment of the
ESOP Capricorn Notes (including $89,000 of accrued interest). The
Company intends to use the remaining proceeds to finance working
capital, to repurchase shares of common stock held by certain
outside investors, and to make a loan to DFC (the "DFC Loan") to
partially finance the repayment of the Contract Receivable
Collateralized Notes.
On January 14, 1997, the Company accepted a conditional offer
from one of the significant holders of the Contract Receivable
Collateralized Notes, Series 1992-1 to purchase from DFC, in a
private transaction, up to $140,000,000 of Contract Receivable
Collateralized Notes, Series 1997-1. As proposed, the Series
1997-1 Notes will be comprised of a $50,000,000 Class A Fixed Rate
Note and a $90,000,000 Class B Variable Rate Note, and will
contain terms and conditions substantially identical to those of
the Series 1992-1 Notes.
As of March 21, 1997, the Company believes that all of the
conditions of the offer have been satisfied, with the exception of
the completion of the documentation and legal opinions incident to
the proposed purchase, and that the sale of the 1997-1 Notes will
close on or before April 30, 1997. DFC intends to use the
proceeds of the Series 1997-1 Fixed Rate Class A Note, along with proceeds of
the DFC Loan, to repay the Series 1992-1 Notes and pay
transaction expenses. At closing, the Company and DFC do not
intend to withdraw any amounts against the Series 1997-1 Class B
Note, and in the future, intend to withdraw such amounts to
finance working capital and acquisitions.
Upon the closing of the Series 1997-1 Notes, the Company will
simultaneously close on an amendment to its existing term note
facility with Citicorp North America, Inc. to, among other things,
reduce the loan commitment from $50,000,000 to $15,000,000.
The following table sets forth the total debt and equity of the
Company on a pro forma basis giving effect to the aforementioned
transactions as if they had occurred on December 31, 1996 (dollars
in thousands).
Actual As Adjusted
(Unaudited)
Existing Securitization Facility $ 100,000 $ -
New Securitization Facility - 50,000
Senior Notes (net of discount) - 99,484
Other Debt 4,183 4,183
Total Debt 104,183 153,667
Temporary Equity 139,322 147,906
Permanent Stockholders' Equity (Deficit) (102,483) (159,842)
Total Debt and Equity $ 141,022 $ 141,731
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None
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 66 Chairman of the Board and Director
T. Eugene Blanchard 66 Nominee; Director
Russell E. Dougherty 76 Director
Paul V. Lombardi 55 Nominee; Director, President * and Chief
Executive Officer
Dudley C. Mecum II 62 Nominee; Director
David L. Reichardt 54 Director, Senior Vice President * and
General Counsel
Herbert S. Winokur, Jr. 53 Director and Chairman of the Executive Committee
Robert B. Alleger, Jr. 51 Vice President, Aerospace Technology *
Gerald A. Dunn 63 Vice President and Controller *
Mark C. Filteau 46 Vice President, Information and Engineering
Technology *
Patrick C. FitzPatrick 57 Senior Vice President and Chief Financial Officer *
and Treasurer
Charles L. Hendershot 38 Vice President, Operational Finance
H. Montgomery Hougen 61 Vice President and Secretary and Deputy General
Counsel
Marshal J. Hyman 51 Vice President, Director of Taxes
James A. Mackin 49 Vice President, Labor Relations and Employee
Benefits and Acting Vice President, Human
Resources
Marshall S. Mandell 54 Vice President, Business Development
Carl H. McNair, Jr. 63 Vice President, Enterprise Management *
Ruth Morrel 42 Vice President, Law and Compliance
Henry H. Philcox 56 Vice President, Chief Information Officer
Richard E. Stephenson 61 Vice President, Technology and Government Relations
Robert G. Wilson 55 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 has been a Director since 1985; his term expires in
1998. He has been Chairman of the Board since February, 1997. He served as Chief
Executive Officer from 1985 to February, 1997 and as President from 1984 until
February, 1997. He is a Director of Industrial Training Corporation.
T. Eugene Blanchard has been a Director since 1988; his term expires
in 1997. He served as Senior Vice President and Chief Financial Officer
from 1979 to February, 1997. He is the Chairman of the Company's Employee
Stock Ownership Plan Committee.
Russell E. Dougherty has been a Director since 1989; his term expires
in 1999. He 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 Command,
Europe. From 1980 to 1986, he served as Executive Director of the Air Force
Association and Publisher of Air Force Magazine. He is a former member of the
Defense Science Board; trustee of the Institute for Defense Analysis; and
trustee of The Aerospace Corp.
Paul V. Lombardi has been a Director since July, 1994; his term expires
1997. He has been 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.
Dudley C. Mecum II has been a Director since 1988; his term expires
1997. He is Chairman of Mecum Associates, Inc., an investment firm. He was a
partner, G.L. Ohrstrom & Co., an investment firm, from 1989 to 1996. He served
as Group Vice President and Director, Combustion Engineering, Inc. from 1985 to
1988. He is a Director of The Travelers Group, Travelers/Aetna Property and
Casualty Inc., Lyondell Petrochemical Company, Vicorp Restaurants Inc.,
Fingerhut Companies, Inc., Metris Companies Inc., and Suburban Propane Partners
LLP.
David L. Reichardt has been a Director since 1988; his term expires
1998. He has been Senior Vice President and General Counsel since 1986. He
served as President of Dynalectric Company, a subsidiary of DynCorp, from 1984
to 1986 and as Vice President and General Counsel of DynCorp from 1977 to 1984.
Herbert S. Winokur, Jr. has been a Director and Chairman of the
Executive Committee since 1988; his term expires 1999. He served as Chairman of
the Board from 1988 to February, 1997. He is President, Winokur Holdings,
Inc. (investment company), 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; NacRe Corp.; and NHP,
Inc.
Other Executive Officers
Robert B. Alleger, Jr. has been Vice President since
February, 1996. He has served as President of the Aerospace Technology Strategic
Business Unit ("SBU") since February, 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.
Gerald A. Dunn has been Vice President since 1973 and Controller since
1967.
Mark C. Filteau has been Vice President since 1994. President of
Information and Engineering Technology SBU since 1994. President of Planning
Research Corporation, Public Sector from 1992 to 1994. Vice President and Senior
Vice President of BDM International from 1986 to 1992.
Patrick C. FitzPatrick has been Senior Vice President and Chief
Financial Officer since February, 1997 and Treasurer since March, 1997. He was
Chief Financial Officer, American Mobile Satellite Corporation from 1996 to
February, 1997 and Senior Vice President and Chief Financial Officer of PRC
Inc. from 1992 to 1996.
Charles L. Hendershot has been Vice President, Operational Finance
since February 1996. He served as Vice President and Controller, Federal Sector
from 1995 to 1996, and Vice President and Controller, Government Services Group
from 1990 to 1995.
H. Montgomery Hougen has been Vice President and Secretary since 1994
and Corporate Secretary and Deputy General Counsel since 1984.
Marshal J. Hyman has been Vice President since 1993 and Director of
Taxes since 1986.
James A. Mackin has been Vice President, Labor Relations and Employee
Benefits since February, 1996 and Acting Vice President, Human Resources since
March, 1996. He served as Vice President, Human Resources, Federal Sector from
1995 to 1996 and Vice President, Human Resources, Government Services Group from
1986 to 1995.
Marshall S. Mandell has been Vice President, Business
Development since 1994. 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. has
been Vice President since 1994 and 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 has been Vice President, Law and Compliance since 1994.
She served as Group General Counsel from 1984 to 1994.
Henry H. Philcox has been Vice President and Chief Information Officer
since August, 1995. He was Chief Information Officer of the Internal Revenue
Service from 1990 to June, 1995.
Richard E. Stephenson has been Vice President, Technology and
Government Relations since 1994. He served as Vice President Strategic Planning,
Government Services Group from 1991 to 1994.
Robert G. Wilson has been Vice President and General Auditor since
1985.
Stockholders Agreement
Under the terms of the New Stockholders Agreement ("Stockholders
Agreement"), which expires on March 10, 1999, which has been adopted by
substantially all management stockholders, including the officers named above,
the management stockholders and outside investors who control approximately 36%
of the voting stock on a fully diluted basis agreed to the following procedure
for election of directors. Capricorn Investors, LP, discussed below, on behalf
of itself and certain outside investors would nominate four directors; Company
management nominates 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 were selected by this process. On January 23, 1997, Capricorn
Investors waived the right to nominate directors but not the obligation to vote
according to such Agreement.
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
(a) (b) (c) (d) (f) (g) (i)
Securities
Restricted underlying All other
stock options/ compensation
Name and principal position Year Salary ($) Bonus ($) (1) award(s) ($) SARs (#) (3) ($) (4)
(2)
Dan R. Bannister 1996 326,105 235,000 100,000 16,147
Chairman of the Board 1995 325,853 165,000 65,000 18,167
(formerly President & Chief 1994 325,000 165,000 24,996
Executive Officer)
Paul V. Lombardi 1996 279,614 148,000 90,000 10,226
President & Chief 1995 257,071 105,900 40,000 7,860
Executive Officer 1994 240,405 95,000 17,231
T. Eugene Blanchard 1996 215,271 98,000 60,000 12,214
(formerly Senior Vice 1995 207,866 88,300 18,000 10,799
President 1994 196,915 95,000 17,713
& Chief Financial Officer)
David L. Reichardt 1996 219,464 99,000 75,000 8,646
Senior Vice President & 1995 206,008 88,300 25,000 7,504
General Counsel 1994 190,547 95,000 15,743
Mark C. Filteau 1996 196,889 82,000 50,000 7,745
Vice President & President, 1995 185,016 83,500 145,600 12,500 6,390
Information & Engineering 1994 7,116 40,000 221
Technology
<FN>
(1) Column (d) reflects bonuses earned and expensed during year, whether paid
during or after such year. Commencing with the 1996 bonus year, 20% of
executive bonuses, after tax withholdings, are paid in the form of shares
of common stock, valued at then-current market value.
(2) Restricted stock awards valued at market value of shares at time of award.
8,000 shares awarded in 1995 vested 50% on December 31, 1995 and 50% on
December 31, 1996. There is no provision to pay dividends on restricted
stock units. The following table reflects the number of restricted stock
units in the respective accounts of the named individuals, whether vested
and deferred or unvested, and the aggregate valuation as of March 26, 1997.
Name No. of Units Value ($)
Dan R. Bannister 65,711 1,314,220
Paul V. Lombardi 6,759 135,180
T. Eugene Blanchard 0 0
David L. Reichardt 18,028 360,560
Mark C. Filteau 4,877 97,540
(3) No SARs granted.
(4) Column (i) includes individual's pro rata share of the Company's
contribution to the Employee Stock Ownership Plan ("ESOP") Trust, a
contributory pension plan in which substantially all of the Company's
employees participate and the Company-paid portion of group
term-life insurance and split-premium life insurance premiums covering the
individual, as reflected in the following table. Also includes $1,265 in
special payment to Mr. Filteau upon his purchase of 1,000 shares or more on
the Company's Internal Market.
ESOP Contributions ($) Insurance Premiums ($)
Name 1996 1995 1994 1996 1995 1994
Dan R. Bannister 5,075 4,632 4,669 11,072 13,535 20,327
Paul V. Lombardi 5,075 4,632 4,669 5,151 3,228 12,562
T. Eugene Blanchard 5,075 4,632 4,669 7,139 6,167 13,044
David L. Reichardt 5,075 4,632 4,669 3,571 2,872 11,074
Mark C. Filteau 5,075 4,632 221 1,405 1,758 --
</FN>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Potential realizable
value at assumed
annual rates of stock
Individual Grants price appreciation for
option term
Number of Percent of
securities total options/
underlying SARs granted Exercise
options/SARs to employees or base Expiration
Name granted (#) in fiscal year price date 5% ($) 10% ($)
(a) (b) (c) ($/Sh)(d) (e) (f) (g)
Dan R. Bannister 100,000 20.5% 17.50 2/20/03 612,500 1,225,000
Paul V. Lombardi 90,000 18.4% 17.50 2/20/03 551,250 1,102,500
T. Eugene Blanchard 60,000 12.3% 17.50 2/20/03 367,500 735,000
David L. Reichardt 75,000 15.4% 17.50 2/20/03 459,375 918,750
Mark C. Filteau 30,000 6.1% 17.50 2/20/03 183,750 367,500
Mark C. Filteau 20,000 4.1% 19.00 11/15/03 133,000 266,000
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 ($)
Shares Value realized Exercisable/ Exercisable/
Name acquired on ($) Unexercisable Unexercisable
(a) exercise (#) (c) (d) (e)
(b)
Dan R. Bannister -- -- 13,000 152,000 53,300 363,500
Paul V. Lombardi -- -- 8,000 122,000 32,800 266,200
T. Eugene Blanchard -- -- 3,600 74,400 14,760 149,040
David L. Reichardt -- -- 5,000 95,000 20,500 194,500
Mark C. Filteau -- -- 2,500 60,000 10,250 86,000
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.
Employment-Type Contracts
The Company has entered into change-in-control severance agreements
with Messrs. Bannister, Lombardi, Reichardt, FitzPatrick, and Dunn (the
"Severance Agreements"). Each Severance Agreement provides that certain
benefits, including a lump-sum payment, will be triggered if such executive is
terminated following a change in control during the term of that executive's
Severance Agreement, unless such termination occurs under certain circumstances
set forth in the Severance Agreements. The Severance Agreements currently expire
on December 31, 1997 but are subject to annual automatic renewal unless
terminated by the Board of Directors. The amount of such lump sum payment would
be equal to 2.99 times the sum of the executive's annual salary and the average
annual amount paid to the executive pursuant to certain applicable
compensation-type plans in the three years preceding the year in which the
termination occurs. Other benefits include payment of any incentive compensation
which has been allocated or awarded but not yet paid to the executive for a
fiscal year or other measuring period preceding termination and a pro rata
portion to the date of termination of the aggregate value of incentive
compensation awards for uncompleted periods under such plans. Each Severance
Agreement also provides that, if the aggregate of the lump sum payment to the
executive and any other payment or benefit included in the calculation of
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code exceeds the amount the Company is entitled to deduct on its federal income
tax return, the severance payments shall be reduced until no portion of the
aggregate termination payments to the executive is not so deductible or the
severance payment is reduced to zero. The Severance Agreements also provide that
the Company will reimburse the executive for legal fees and expenses incurred by
the executive as a result of termination except to the extent that the payment
of such fees and expenses would not be, or would cause any other portion of the
aggregate termination payments not to be, deductible by reason of Section 280G
of the Code.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Board of Directors
during 1996 were: Herbert S. Winokur, Jr., Chairman of the Committee; Russell E.
Dougherty; and Dudley C. Mecum II. None of the members are, or were, current or
former employees of or have a business or other relationship with the Company,
except for Mr. Winokur. 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 Investors, L.P. ("Capricorn"). On January 23, 1997,
the Company entered into an agreement with Capricorn, whereby Capricorn waived
its rights to nominate directors of the Company under the Stockholders Agreement
and the separate class voting rights of the Company's then-outstanding Class C
Preferred stock on certain corporate matters, 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"), and the Company paid Capricorn
$1,175,000. Following the distribution, the Company and the ESOP entered into a
series of transactions with the individual Investors on February 5, 1997,
purchasing such distributed securities, which were convertible into 2,884,178
shares of common stock, at $19.55 per share. Except for the entities under the
control of Mr.
Winokur, none of the Investors were affiliated with the Company.
Separately, on February 5, 1997, the Company entered into a consulting
agreement with Capricorn Management, G.P., an entity controlled by Mr. Winokur,
whereby the Company will, by April 4, 1997, have paid an aggregate amount of
$1,050,000 to that entity for consulting services during the period from 1995
through 1997 and for a covenant against competition.
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 26, 1997, the Company had 8,987,054 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 the Restricted Stock Plan were to
be issued, the outstanding voting securities following such dilution would
consist of 11,559,984 shares of Common Stock. The following tables show
beneficial ownership of issued 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
conversions, exercises, and issuances.
Security Ownership of Certain Beneficial Owners
The following table presents information as of March 26, 1997,
concerning the only known beneficial owners of five percent or more of the
Company's Common Stock.
Amount & Amount &
Nature of Nature of
Ownership of Ownership of Percent of
Name and Address of Title of Outstanding Percent Diluted Diluted
Beneficial Owner Class Shares of Class Shares (3) Shares (3)
Trustees of the DynCorp Employee Common 7,159,290 79.7% 7,159,290 61.9%
Stock Ownership Plan Trust Direct (1) Direct (1)
c/o DynCorp
2000 Edmund Halley Dr.
Reston, VA 20191
Capricorn Investors, L.P. (2) Common 163,027 1.8% 1,231,952 10.7%
30 East Elm Street Direct Direct
Greenwich, CT 06830
<FN>
(1) Shares are held for the accounts of participants in the ESOP. Shares are
voted by the Trustees in accordance with instructions received from
participants. Shares for which no instructions are received are also voted
in the same proportions.
(2) Herbert 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
Investors, L.P.
(3) Assumes exercise of all outstanding warrants, exercise of all vested and
unvested options, and distribution of all deferred units under Restricted
Stock Plan.
</FN>
Security Ownership of Management (1)
Beneficial ownership of the Company's equity securities by directors
and nominees, the named executive officers, and all current officers and
directors as a group, is set forth below:
Amount & Nature Amount & Nature Percent
of Ownership of Ownership of
Name and Title of Title of of Outstanding Percent of Diluted Diluted
Beneficial Owner Class Shares(2) of Class Shares (4) Shares (3)
(3) (4)
D. R. Bannister Common 308,278 Direct} 3.5% 538,989 Direct} 4.7%
Chairman of the Board & 8,717 Indirect} 8,717 Indirect}
Director
T. E. Blanchard Common 165,583 Direct} 2.0% 243,583 Direct} 2.2%
Director 15,659 Indirect} 15,659 Indirect}
R. E. Dougherty Common 5,000 Direct * 5,000 Direct *
Director
M. C. Filteau Common 5,641 Direct} * 73,018 Direct} *
Vice President 1,279 Indirect} 1,279 Indirect}
P. V. Lombardi Common 16,644 Direct} * 153,403 Direct} 1.3%
President & Director 1,953 Indirect} 1,953 Indirect}
D. C. Mecum II Common -- -- -- 5,000 Direct *
Director
D. L. Reichardt Common 37,137 Direct} * 155,165 Direct} 1.4%
Senior Vice President 6,615 Indirect} 6,615 Indirect}
& Director
H. S. Winokur, Jr.(5) Common 163,027 Indirect 1.8% 1,231,952 Indirect 10.7%
Director
All officers and Common 671,082 Direct} 10.2% 1,567,110 Direct} 24.9%
directors as a group 247,444 Indirect} 1,316,369 Indirect}
<FN>
(1) Includes information as of March 26, 1997. Shares held by the ESOP trustees
and allocated to the participant accounts of officers and directors are
included in the table.
(2) Restricted stock units which are vested but deferred and not distributed
pursuant to the Company's Restricted Stock Plan as of March 26, 1997 are
not transferable by or within the voting control of the participants. Such
units are not included in outstanding shares but are included in fully
diluted shares.
(3) An asterisk indicates that beneficial ownership is less than one percent of
the class.
(4) Assumes exercise of all outstanding warrants, exercise of all vested and
unvested options, and distribution of all deferred units under Restricted
Stock Plan.
(5) Includes securities owned by Capricorn. See preceding table for relation-
ship of Mr. Winokur thereto.
</FN>
Item 13. Certain Relationships and Related Information
See Item 11, "Compensation Committee Interlocks and Insider
Participation" for a discussion of a series of transactions among Capricorn, its
Investors, the Company, and the ESOP.
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' Accounts
Statements of Operations
Statements of Cash Flows
Notes to Condensed Financial Statements
Schedule II - Valuation and Qualifying Accounts for the
Years Ended December 31, 1996, 1995 and 1994.
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 3
(1) Certificate of Incorporation, as currently in effect,
consisting of Restated Certification of Incorporation
(incorporated by reference to Registrant's
Form 10-K/A for 1995, File No. 1-3879)
(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)
Exhibit 4
(1) Indenture for $100,000,000 of 8.54% Contract Receivables
Collateralized Notes, Series 1992-1, Due 1997, dated
as of January 1, 1992, between Dyn Funding Corporation
(wholly owned subsidiary of the Registrant) and Bankers
Trust Company, as trustee (incorporated by reference to
Registrant's Form 8-K filed February 7, 1992, File No. 1-3879)
(2) Specimen 18% Class C Preferred Stock Certificate.
(incorporated by reference to Registrant's
Form 10-K for 1988, File No. 1-3879)
(3) Specimen Common Stock Certificate.
(incorporated by reference to Registrant's
Form 10-K for 1988, File No. 1-3879)
(4) Statement Respecting Warrants and Lapse of Certain Restrictions
(incorporated by reference to Registrant's
Form 10-K for 1988, File No. 1-3879)
(5) 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)
(6) 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)
(7) Amended and Restated Credit Agreement by and among
Citicorp North America, Inc. and DynCorp dated March 14, 1996
(incorporated by reference to Registrant's Form 10-K/A for 1995,
File No. 1-3879)
The Registrant, by signing this Report, agrees to furnish the Securities and
Exchange Commission, upon its request, a copy of any instrument which
defines the rights of holders of long-term debt of the Registrant.
Exhibit 10
(1) Deferred Compensation Plan
(incorporated by reference to Registrant's Form 10-K for 1987,
File No. 1-3879)
(2) Management Incentive Plan (MIP)
(3) DynCorp Executive Incentive Plan (EIP)
(4) Maaagement Severance Agreements
(incorporated by reference to Exhibits (c)(4) through (c)(12)
to Schedule 14D-9 filed by Registrant January 25, 1988.)
(5) Employment agreement of Paul V. Lombardi,
Vice President, Government Services Group
(incorporated by reference to Registrant's Form 10-K for 1993,
File No. 1-3879)
(6) Restricted Stock Plan
(incorporated by reference to Registrant's Form 10-K for 1993,
File No. 1-3879)
(7) 1995 Stock Option Plan
(incorporated by reference to Registrant's Form 10-K/A for 1995,
File No. 1-3879)
(8) Employment agreement of Patrick C. FitzPatrick,
Senior Vice President and Chief Financial Officer
Exhibit 11
(1) Computations of Earnings Per Common Share for the
Years Ended December 31, 1996, 1995 and 1994
Exhibit 21
(1) Subsidiaries of the Registrant
Exhibit 24
(1) Consent of Independent Public Accountants
(b) Reports on Form 8-K
None filed during the fourth quarter
ended December 31, 1996
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, 1997 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, 1997
P. V. Lombardi (Principal Executive Officer)
P. C. FitzPatrick Senior Vice President - March 31, 1997
P. C. FitzPatrick Chief Financial Officer
D. L. Reichardt Senior Vice President - March 31, 1997
D. L. Reichardt General Counsel and Director
G. A. Dunn Vice President and Controller March 31, 1997
G. A. Dunn (Principal Accounting Officer)
D. R. Bannister Director March 31, 1997
D. R. Bannister
T. E. Blanchard Director March 31, 1997
T. E. Blanchard
H. S. Winokur, Jr. Director March 31, 1997
H. S. Winokur, Jr.
D. C. Mecum II Director March 31, 1997
D. C. Mecum II
R. E. Dougherty Director March 31, 1997
R. E. Dougherty
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
(Dollars in Thousands)
December 31,
1996 1995
Assets
Current Assets:
Cash and cash equivalents $ 22,761 $ 30,352
Accounts receivable and contracts in process,
net of allowance for doubtful accounts (Note 3) 23,802 28,170
Inventories of purchased products and supplies 911 1,166
Other current assets 8,263 6,674
Total current assets 55,737 66,362
Investment in and advances to subsidiaries and affiliates 35,124 34,154
Property and Equipment, net of accumulated depreciation
and amortization 6,217 7,340
Intangible Assets, net of accumulated amortization 31,831 32,887
Other Assets 3,775 8,690
Total Assets $132,684 $149,433
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries
are an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements".
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
(Dollars in Thousands)
December 31,
1996 1995
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt (Note 2)$ 267 $ 902
Accounts payable 15,203 24,614
Advances on contracts in process 508 1,033
Accrued liabilities 72,758 80,836
Total current liabilities 88,736 107,385
Long-Term Debt (Note 2) 455 662
Other Liabilities and Deferred Credits 6,654 15,524
Contingencies and Litigation - -
Temporary Equity:
Redeemable Common Stock, at Redemption Value -
ESOP 136,343 100,481
Management Investors - 33,138
Other 2,979 2,275
Permanent Stockholders' Equity:
Preferred Stock, Class C 3,000 3,000
Common Stock 332 159
Common Stock Warrants 11,139 11,305
Paid-in Surplus 148,234 148,089
Adjustment for redemption value greater than par value (138,694) (135,110)
Deficit (101,259) (115,888)
Common Stock Held in Treasury (25,235) (21,084)
Unearned ESOP Shares - (503)
Total Liabilities and Stockholders' Equity $132,684 $149,433
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries
are an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements."
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Operations
(Dollars in Thousands)
For the Years Ended
December 31,
1996 1995 1994(a)
Revenues $588,978 $584,021 $536,836
Costs and Expenses:
Cost of services 565,582 570,808 514,711
Corporate and selling administrative 11,323 12,552 11,894
Interest expense 1,089 5,375 4,643
Interest income (1,162) (2,759) (1,945)
Other (Note 3) 18,373 22,583 29,732
595,205 608,559 559,035
Loss from continuing operations before
income taxes, equity in net income of
subsidiaries and extraordinary item (6,227) (24,538) (22,199)
Benefit for income taxes (3,994) (25,340) (8,952)
Earnings (loss) from continuing operations before
equity in net income of subsidiaries and
extraordinary item (2,233) 802 (13,247)
Equity in net income of subsidiaries 14,182 4,472 12,895
Earnings (loss) from continuing operations before
extraordinary item 11,949 5,274 (352)
Earnings (loss) from discontinued operations,
net of income taxes 2,680 (20) (12,479)
Earnings (loss) before extraordinary item 14,629 5,254 (12,831)
Extraordinary loss from early extinguishment
of debt - (2,886) -
Net earnings (loss) $ 14,629 $ 2,368 $(12,831)
Preferred Class C dividends not declared
or recorded (2,284) (1,915) (1,606)
Common stockholders' share of earnings (loss) $ 12,345 $ 453 $(14,437)
(a) Restated for the discontinuance of the Commercial Aviation business.
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries
are an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements."
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Cash Flows
(Dollars in Thousands)
For the Years Ended
December 31,
1996 1995 1994(a)
Cash Flows from Operating Activities:
Net earnings (loss) $14,629 $ 2,368 $(12,831)
Adjustments to reconcile net earnings (loss)
from operations to net cash (used) provided
by operating activities:
Depreciation and amortization 3,600 5,437 5,911
Pay-in-kind interest on Junior Subordinated
Debentures - - 15,329
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 12,479
Deferred income taxes 787 2,707 (59)
Accrued compensation under Restricted Stock Plan - - (329)
Noncash interest income - - (1,375)
Change in reserves of businesses divested in 1988 825 7,700 2,318
Other (327) (2,021) (923)
Change in assets and liabilities, net of
acquisitions and dispositions:
Decrease (increase) in accounts receivable and
contracts in process 4,367 4,311 (11,758)
Decrease (increase) in inventories 255 (445) (209)
Decrease (increase) in other current assets (1,523) (1,886) (1,069)
Decrease in current liabilities except notes
payable and current portion of long-term debt (9,652) (5,994) (10,003)
Cash (used) provided by continuing operations (3,709) 16,983 (2,519)
Cash used by discontinued operations - (1,416) (2,946)
Cash (used) provided by operating activities (3,709) 15,567 (5,465)
Cash Flows from Investing Activities:
Sale of property and equipment 859 27 660
Purchase of property and equipment, net of
capitalized leases (1,452) (1,926) 1,734
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 - - 1,500
Decrease (increase) in cash on deposit for
letters of credit 6,244 (3,307) (21)
Other (232) (229) (617)
Cash provided from investing activities 6,762 97,539 3,256
Cash Flows from Financing Activities:
Treasury stock purchased (9,712) (12,267) (3,182)
Payment on indebtedness (842) (6,659) (3,349)
Treasury stock sold - - 159
Redemption of Junior Subordinated Debentures - (105,971) -
Stock released to Employee Stock Ownership Plan 503 17,497 17,100
Deferred financing expenses (1,310) (864) -
Financing activities of discontinued operations - - (652)
Other financing transactions (20) - 49
Change in intercompany balances, net 737 19,152 (5,536)
Cash (used) provided from financing activities (10,644) (89,112) 4,589
Net (Decrease) Increase in Cash and Short-term
Investments (7,591) 23,994 2,380
Cash and Short-term Investments at Beginning
of the Year 30,352 6,358 3,978
Cash and Short-term Investments at End of the Year $22,761 $30,352 $ 6,358
(a) Restated for the discontinuance of the Commercial Aviation business.
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries
are an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements."
DynCorp (Parent Company)
Schedule I - Notes to Condensed Financial Statements
December 31, 1996
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, 1996 and 1995, long-term debt consisted of (in thousands):
1996 1995
Notes payable, due in installments through 2002,
11.43% weighted average interest rate $ 722 $ 1,564
Less current portion 267 902
$ 455 $ 662
Maturities of long-term debt as of December 31, 1996, were as follows
(in thousands):
1997 $ 267
1998 121
1999 143
2000 161
2001 30
$ 722
3. Accounts Receivable
At December 31, 1992, the Company had sold $63,682,000 of
its accounts receivable to Dyn Funding Corporation (DFC), a
wholly owned subsidiary of the Company. DFC was established
in January, 1992 to issue $100,000,000 of Contract Receivable
Collateralized Notes (Notes) and to purchase eligible accounts
receivable from the Company and its subsidiaries. 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 1996 and 1995, the Company
recorded as expense $17,238,000 and $16,406,000 which is
reflected in "Other" 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).
DynCorp and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands)
Balance at Charged to Charged Balance
Beginning Costs and to Other at End of
Description of Period Expenses Accounts Other Period
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
Year Ended December 31, 1994
Allowance for doubtful accounts (2) $ 9 $ - $ - $ - $ 9
(1) Balance recorded at acquisition of Data Management Design, Inc. (see Note 20).
(2) Restated for discontinuance of the Commercial Aviation business (see Note 2).