File No. 33-59279
As filed with the Securities and Exchange Commission on May 13, 1998
Securities and Exchange Commission
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 3 ON FORM S-2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DynCorp
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
4581
(Primary Standard Industrial Classification Code Number)
36-2408747
(I.R.S. Employer Identification Number)
2000 Edmund Halley Drive, Reston, Virginia 20191-3436
(703) 264-0330
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
David L. Reichardt
Senior Vice President & General Counsel
DynCorp
2000 Edmund Halley Drive
Reston, Virginia 20191-3436
(703) 264-9106
(Name, address, including zip code and telephone number,
including area code, of agent for service)
Copies to:
Robert B. Ott
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004-1202
(202) 942-5008
SUBJECT TO COMPLETION, DATED __________, 1998
Information contained herein is subject to completion or amendment. A
post-effective amendment to a registration statement relating to these
securities has been filed with the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy be accepted prior to the time
the amendment to the registration statement becomes effective. This prospectus
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
PROSPECTUS
DynCorp
11,969,313 Shares of DynCorp Common Stock
(Par Value $0.10 per Share)
Of the 11,969,313 shares of DynCorp (the "Company") Common Stock, par
value $0.10 per share (the "Common Stock"), originally offered by this
Prospectus (the "Offering"), 45,391 shares have been offered and sold by the
Company, 111,067shares have been offered and sold by officers, directors and
affiliates of the Company, and 483,368 shares have been offered and sold by
other current and former employees and other stockholders of the Company through
the Internal Market described below. This Prospectus, as amended, relates to the
offer and sale by the Company; officers, directors and affiliates of the
Company; and other current and former employees and other stockholders of the
Company of 4,232,337 shares, 5,476,436 shares and 1,620,714 shares,
respectively. See "Securities Offered by this Prospectus." The Company will not
receive any portion of the net proceeds from the sale of shares by officers,
directors, affiliates or other individual employees or stockholders.
The 4,232,337 shares of Common Stock offered by the Company (of which
approximately 1,400,000 are currently treasury shares that were acquired by the
Company pursuant to the Stockholders Agreement (as hereinafter defined(, through
the Employee Stock Ownership Plan and in various other transactions between 1989
and 1998, and the remainder of such shares are unissued shares) are expected to
be offered as follows: (i) up to 850,000 shares may be issued and delivered by
the Company to a trustee for the benefit of employees under the DynCorp Savings
and Retirement Plan; (ii) up to 100,000 shares may be issued and delivered by
the Company to employees under the DynCorp Employee Stock Purchase Plan; (iii)
up to 1,178,800 shares may be issued upon the exercise of options granted and
available to be granted to employees under the DynCorp 1995 Non-Qualified Stock
Option Plan; (iv) up to 278,754 shares may be issued and delivered to employees
under the DynCorp Executive Incentive Plan and (v) up to 1,824,783 shares may be
offered and sold by the Company to current and future employees and directors
through one or more of the employee benefit plans listed above. The actual
number of shares offered and sold by the Company under each category may be less
than the indicated number, but will not exceed the maximum for such category.
See "Securities Offered by this Prospectus" and "Employee Benefit Plans."
All of the shares offered by this Prospectus may be offered and sold on
a limited trading market (the "Internal Market") established by the Company's
wholly owned subsidiary, DynEx, Inc. The Internal Market was established and is
managed by DynEx, Inc., in order to provide employees, directors and other
stockholders of the Company the opportunity to buy and sell shares of Common
Stock. The Internal Market generally permits individual stockholders and benefit
plans to buy and sell shares of Common Stock on four predetermined days each
year (each a "Trade Date"). All offers and sales on the Internal Market by
officers, directors, employees, affiliates and other stockholders of the Company
may, for purposes of the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), be attributed to the Company. The
Company may also sell (through one or more of its employee benefit plans) or buy
shares of Common Stock on the Internal Market for its own account, but will do
so only to address imbalances between the number of shares offered for sale and
bid for purchase by stockholders on any particular Trade Date. The Company will
not be both a buyer and a seller on the Internal Market on the same Trade Date.
The purchases and sales of shares on the Internal Market are carried out by Buck
Investment Services, Inc. ("Buck"), a registered broker-dealer, upon
instructions from the respective buyers and sellers. All stockholders (other
than the Company and its benefit plans) will pay a commission to Buck equal to
2% of the proceeds from the sale of any shares of Common Stock sold by them on
the Internal Market, half of which will be paid to DynEx, Inc. to defray the
costs of maintaining the Internal Market. See "Market Information -- The
Internal Market."
See "Risk Factors" on pages 5 through 9 for information concerning
certain factors that should be considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION; NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is _______, 1998.
There is no public market for the Common Stock, and it is not currently
anticipated that such a market will develop. If the Internal Market does not
give a stockholder a ready means for selling shares, and the stockholder is
otherwise unable to locate a buyer for his or her shares of Common Stock, the
stockholder could effectively be subject to a total loss of investment.
See "Market Information -- The Internal Market."
All of the shares of Common Stock offered by this Prospectus will be
subject to certain restrictions (including restrictions on their
transferability) set forth in the Company's By-Laws (the "By-Laws") and may be
subject to other contingencies. Shares purchased on the Internal Market will be
subject to contractual transfer restrictions having the same effect as those
contained in the By-Laws. See "Description of Capital Stock -- Restrictions on
Common Stock."
The purchase price (the "Formula Price") of the shares of Common Stock
offered by this Prospectus will be determined pursuant to the formula and
valuation process described below. The Formula Price per share of Common Stock
is the product of seven times the operating cash flow ("CF") where operating
cash flow is represented by earnings before interest, taxes, depreciation and
amortization ("EBITDA") of the Company for the four fiscal quarters immediately
preceding the date on which a price revision is to occur and the market factor
(the "Market Factor" or "MF"), plus the non-operating assets at disposition
value (net of disposition costs) ("NOA"), minus the sum of interest-bearing debt
adjusted to market and other outstanding securities senior to Common Stock
("IBD") divided by the number of shares of Common Stock outstanding at the date
on which a price revision is made, on a fully diluted basis assuming exercise of
all outstanding options and warrants ("ESO"). The Market Factor is a numerical
factor which reflects existing securities market conditions relevant to the
valuation of such stock. The Formula Price of the Common Stock, expressed as an
equation (the "Formula"), is as follows:
Formula Price = [(CF x 7)MF + NOA - IBD]
ESO
The Formula Price, including the Market Factor, is reviewed by the
Board of Directors on a quarterly basis, in preparation for Internal Market
Trade Dates. The Market Factor is reviewed by the Board in conjunction with an
appraisal that is prepared by an independent appraisal firm for the committee
administering the ESOP. The Board of Directors believes that the valuation
process results in a stock price that reasonably reflects the value of the
Company on a per share basis. See "Market Information -- Determination of
Purchase Price."
AVAILABLE INFORMATION
The Company has filed, with the Securities and Exchange Commission (the
"Commission"), Post-Effective Amendment No. 3 on Form S-2 to its Registration
Statement on Form S-1 under the Securities Act with respect to the Common Stock
offered by this Prospectus. As permitted by the rules and regulations of the
Commission, this Prospectus omits certain information, exhibits and undertakings
contained in the Registration Statement. For further information with respect to
the Company and the Common Stock offered by this Prospectus, see the
Registration Statement, including listed exhibits and financial statements,
notes and schedules referred to in the Registration Statement.
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and it files
reports and other information with the Commission as required by the Exchange
Act. Such reports, proxy and information statements and other information filed
by the Company may be examined without charge at, or copies obtained upon
payment of prescribed fees from, the Public Reference Section of the Commission
at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and are also available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Electronic filings filed through the Commission's Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR") are publicly available
through the Commission's home page on the Internet at htpp://www.sec.gov.
CERTAIN INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the Commission by the Company
pursuant to the Exchange Act are made a part of this Prospectus:
Annual Report of the Company on Form 10-K for the year ended
December 31, 1997, filed March 31, 1998.
This Prospectus is accompanied by a copy of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997, without exhibits (the
"Annual Report"). The Company will provide a copy of any document incorporated
by reference into this Prospectus, without exhibits (unless such exhibits are
incorporated by reference into such documents), without charge, to any person,
including a beneficial owner, to whom a copy of this Prospectus is delivered,
upon written or oral request. Requests for such copies should be directed to: H.
Montgomery Hougen, Vice President and Secretary, DynCorp, 2000 Edmund Halley
Drive, Reston, Virginia 20191, telephone: (703) 264-9112.
This Prospectus includes or incorporates by reference "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such statements are identified by the use of
forward-looking words or phrases including, but not limited to, "intended,"
"will be positioned," "expects," "expected," "anticipates," and "anticipated."
These forward-looking statements are based on the Company's current
expectations. All statements other than statements of historical facts included
in this Prospectus or incorporated by reference therein, including those
regarding the Company's financial position, business strategy, projected costs
and plans and objectives of management for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. Because
forward-looking statements involve risks and uncertainties, the Company's actual
results could differ materially. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Risk Factors," and elsewhere in this
Prospectus or incorporated by reference therein including, without limitation,
in conjunction with the forward-looking statements included in this Prospectus.
These forward-looking statements represent the Company's judgment as of the date
of this Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on behalf of the Company are
expressly qualified in their entirety by the Cautionary Statements. The Company
does not, however, claim any intent or obligation to update its forward-looking
statements.
THE COMPANY
DynCorp is a leading provider of diversified management, technical and
professional services to a wide range of government customers. The Company's
principal markets are information management services, software development and
system integration and analysis; facilities management; and aviation maintenance
and specialized support services. The Company is one of the foremost providers
of services to the U.S. Government. Current customers include the Department of
Defense, the Department of Energy, the National Aeronautics and Space
Administration, the Department of State, the Department of Justice and various
other U.S. Government agencies. The Company has over 250 contracts that employ
approximately 16,100 employees throughout the United States and in several
foreign countries.
The Company was incorporated in Delaware in 1946. The address of the
Company's principal executive offices is 2000 Edmund Halley Drive, Reston,
Virginia 20191-3436, telephone (703) 264-0330.
RISK FACTORS
Prior to purchasing the Common Stock offered by this Prospectus,
purchasers should carefully consider all of the information contained in and
incorporated by reference to this Prospectus and in particular should carefully
consider the following factors.
Substantial Leverage and Ability to Service and Refinance Debt
The Company is highly leveraged. As of December 31, 1997, the Company's
indebtedness was $162.7 million, net of discount of $0.5 million, (including
issued but undrawn letters of credit of $10.0 million and excluding unused
commitments available for borrowing of $65.0 million) and its Stockholders'
Equity was negative $2.8 million. Earnings for the years ended December 31,
1995, 1994 and 1993 were insufficient to cover fixed charges by approximately
$4.5 million, $3.1 million, and $3.7 million, respectively. For the years ended
December 31, 1997 and 1996, earnings were greater than fixed charges by ratios
of 1.5 : 1.0 and 2.0 : 1.0, respectively. Subject to the restrictions in its
existing financing agreements, the Company may incur additional indebtedness
from time to time to finance acquisitions, working capital or capital
expenditures or for other purposes.
The level of the Company's indebtedness could have important
consequences, including: (i) a substantial portion of the Company's cash flow
from operations must be dedicated to debt service and will not be available for
other purposes; (ii) the Company's ability to obtain additional debt financing
in the future for working capital, capital expenditures or acquisitions may be
limited and, if additional borrowings can be made, they may not be on terms
favorable to the Company and (iii) the Company's level of indebtedness could
limit its flexibility in reacting to changes in the industry and economic
conditions generally.
The Company's ability to satisfy its other debt obligations will depend
upon its future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, many of which are
beyond its control. If the Company is unable to service its indebtedness, it
will be forced to adopt an alternative strategy that may include actions such as
reducing or delaying capital expenditures, selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital. There can be
no assurance that any of these strategies could be effected on satisfactory
terms, if at all. If the Company is unable to repay its debt as it becomes due,
the stockholders could lose some or all of their investment.
Restrictions Imposed by Terms of the Company's Indebtedness
The terms of the Company's indebtedness restrict, among other things,
the Company's ability to incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments, sell certain asset, enter
into some kinds of transactions with affiliates, impose restrictions on the
ability of a subsidiary to pay dividends or make certain payments to the
Company, merge or consolidate with another company or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets of
the Company.
In addition, the agreements relating to the Company's senior
subordinated notes (the "Senior Subordinated Notes"), accounts receivable
securitization facility (the "New Securitization Facility") and revolving credit
facility (the "Revolving Credit Facility") contain other restrictive covenants.
A breach of any of these covenants could result in a default under the Senior
Subordinated Notes, the New Securitization Facility and the Revolving Credit
Facility. Upon the occurrence of an event of default under the Senior
Subordinated Notes, the New Securitization Facility or the Revolving Credit
Facility, the lenders could elect to declare all amounts outstanding, together
with accrued interest, to be immediately due and payable. If the Company were
unable to repay those amounts, such lenders could proceed against the collateral
granted to them to secure that indebtedness, which indebtedness currently is
secured by substantially all of the assets of the Company. If the lenders under
the Senior Subordinated Notes, the New Securitization Facility or the Revolving
Credit Facility accelerate the payment of such indebtedness, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness and other indebtedness of the Company.
Unless the consolidated debt coverage ratio (as defined in the
indenture relating to the Senior Subordinated Notes) after giving effect to
newly incurred indebtedness, remains at least 2.0 : 1.0, the Company could not
make certain types of additional investments or incur additional indebtedness
outside the ordinary course of business. As of December 31, 1997, the
consolidated debt coverage ratio exceeded 2.0 : 1.0.
Under the terms of the New Securitization Facility, if the interest
coverage ratio (as defined in the related documents) falls below 1.1 : 1.0, or
if scheduled principal payments on the Company's other indebtedness exceed $40.0
million during the 24-month period, or $20.0 million during the 12-month period,
preceding the scheduled maturity of the Facility, the Company's ability to
obtain funding through the Facility will be suspended, and the Company's wholly
owned financing subsidiary, Dyn Funding Corporation ("DFC") would be unable to
convert the Company's accounts receivable into cash prior to actual collection
thereof. As of December 31, 1997, the interest coverage ratio was approximately
2.6 : 1.0. Further, if the collateral value of the receivables and cash held by
DFC falls below the amount of outstanding borrowings under the facilities, and
the Company fails to provide sufficient receivables or cash to increase the
collateral value to such amount, the Company's ability to obtain funding through
the facilities will be suspended or terminated, and collections on receivables
will be used to repay all or part of the amounts outstanding under the
facilities. The suspension or termination of the Company's ability to obtain
funding through the facilities and the use of collections to repay borrowings
under the facilities would result in additional demands on the Company's cash
resources.
Past Net Losses
The Company reported net earnings of $7.4 million, $14.6 million and
$2.4 million for the years ended December 31, 1997, 1996 and 1995, respectively,
and net losses for the years ended December 31, 1994 and 1993, of $12.8 million
and $13.4 million, respectively. In the future, there can be no assurance that
profitable operations will be sustained.
Dependence on U.S. Government Contracts
The Company derived 97%, 97% and 95% of its revenues for the years
ended December 31, 1997, 1996 and 1995 from contracts and subcontracts with the
U.S. Government ("Government Contracts"). Contracts with the DoD represented
45%, 50% and 51% of the Company's revenues for the years ended December 31,
1997, 1996 and 1995, respectively. Continuation and renewal of the Company's
existing Government Contracts and the acquisition by the Company of additional
Government Contracts is contingent upon, among other things, the availability of
adequate funding for various U.S. Government agencies. A further significant
decline in U.S. military expenditures, particularly in the operations and
maintenance portion of the defense budget, or a reapportioning of such
expenditures reducing the operations and maintenance segment, might materially
and adversely affect the Company's revenues and earnings. The loss or
significant curtailment of the Company's material Government Contracts would
materially and adversely affect the Company's future revenues and earnings.
Possible Termination of Government Contracts
Typically, a Government Contract has an initial term of one year
combined with two, three or four one-year renewal periods, exercisable at the
discretion of the Government. The Government is not obligated to exercise its
option to renew a Government Contract. At the time of completion of a Government
Contract, the contract is "recompeted" against all eligible third-party
providers. Contracts between the Company and the U.S. Government or its prime
contractors also contain standard provisions for termination at the convenience
of the Government or such prime contractors. There can be no assurance that
terminations will not occur, and such terminations could adversely affect the
Company's business and prospects.
No Assurance of Revenues under Indefinite Quantity Contracts
Many Government Contracts, particularly those involving information
technology, are indefinite delivery, indefinite quantity ("IDIQ") contracts. An
agency awards an IDIQ contract to one or more contractors, but the award does
not represent any firm orders for services. Instead the contractor(s) may then
identify specific projects and propose to perform the service for a potential
customer covered by the IDIQ contract, and the customer may or may not decide to
order the services. Thus, having such a contract does not assure that any
revenues will be generated.
Risks Associated with Costs of Performance
The Company's Government Contract services are provided through three
types of contracts: fixed-price, time-and-materials and cost-reimbursement. The
Company assumes financial risk on fixed-price contracts and time-and-materials
contracts, because the Company assumes the risk of performing those contracts at
the stipulated prices or negotiated hourly rates. The failure to accurately
estimate ultimate costs or to control costs during performance of the work could
result in losses or smaller-than-anticipated profits. With cost-reimbursement
contracts, so long as actual costs incurred are within the contract ceiling and
allowable under the terms of the contract, the Company is entitled to
reimbursement of the costs plus a stipulated profit.
The Company is aware of various costs believed to be payable under
contracts but questioned by the Government, but it cannot determine the outcome
of the audit findings at this time. In addition, the Company is occasionally the
subject of investigations by the Department of Justice and other investigative
organizations, resulting from employee and other allegations regarding business
practices. In management's opinion, there are no outstanding issues of this
nature at March 31, 1998 that will have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Government Contract payments received by the Company for allowable
direct and indirect costs are subject to adjustment after audit by Government
auditors and repayment to the Government, if the payments exceed allowable costs
as defined in such Government Contracts. Audits have been completed on the
Company's incurred contract costs through 1986 and are continuing for subsequent
periods. The Company has included an allowance for excess billings and contract
losses in its financial statements which 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.
Potential for Suspension or Debarment
As a U.S. Government contractor, the Company is subject to federal
regulations under which its right to receive future awards of new Government
Contracts, or extensions of existing Government Contracts, may be unilaterally
suspended or barred, if the Company should be convicted of a crime or be
indicted based on allegations of a violation of certain specific federal
statutes or other activities. The initiation of suspension or debarment hearings
against the Company or any of its affiliated entities could have a material
adverse impact upon the Company's business and prospects.
Potential for Adverse Judgments in Legal Proceedings
The Company and its subsidiaries 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 most cases, the
Company and its subsidiaries have denied, or believe they have a basis to deny,
liability, and in some cases have offsetting claims against the plaintiffs,
third parties or insurance carriers. The total amount of damages currently
claimed by the plaintiffs in these cases is estimated to be approximately $101.0
million (including compensatory punitive damages and penalties). The Company
believes that the amount that will actually be recovered in these cases will be
substantially less than the amount claimed. After taking into account available
insurance, the Company believes it is adequately reserved with respect to the
potential liability for such claims. The estimates set forth above do not
reflect claims that may have been incurred but have not yet been filed. The
Company has recorded such damages and penalties that are considered to be
probable recoveries against the Company or its subsidiaries. It is possible that
the level of filings will increase more than management has anticipated,
increasing such exposures, and no upper limit of exposure can be reasonably
estimated.
Competition
The markets which the Company serves are highly competitive. In each of
its businesses, the Company's competition is quite fragmented, with no single
competitor holding a significant market position. The Company experiences
vigorous competition from industrial firms, university laboratories and
nonprofit institutions. Some of the Company's competitors are large, diversified
firms with substantially greater financial resources and larger technical staffs
than the Company has available to it. Government agencies also compete with the
Company, because they can utilize internal resources to perform certain types of
services that might otherwise be performed by the Company. A majority of the
Company's revenues are derived from contracts with the U.S. Government and its
prime contractors, and such contracts are awarded on the basis of negotiations
or competitive bids where price is a significant factor.
Company May Be Obligated to Repurchase Shares of Certain ESOP Participants
In the event that a participant in the ESOP receives a distribution of
Common Stock from the ESOP, the ESOP, or the Company under certain
circumstances, is obligated to repurchase such shares until such time as the
Common Stock becomes readily tradable stock. To the extent that the Company
repurchases those shares, its availability of cash will be adversely affected.
The Company has the right under both the ESOP and applicable law to defer
indefinitely the repurchase of any shares if payment to the stockholders would
impair the capital of the Company. See "Employee Benefit Plans -- Employee Stock
Ownership Plan -- Distributions and Withdrawals."
No Payment of Cash Dividends
The Company has not paid a cash dividend since 1986. The Company does
not have a policy for the payment of regular dividends. Any payment of dividends
in the future will be subject to the discretion of the Board of Directors of the
Company and may be subject to restrictions imposed by financing arrangements and
by legal and regulatory restrictions.
Absence of a Public Market
There is no current public market for the Common Stock, and it is not
currently anticipated that such a market will develop in the future. There can
be no assurance that the purchasers of Common Stock in this Offering will be
able to resell their shares through the Internal Market should they decide to do
so. To the extent that the Internal Market does not provide sufficient liquidity
for a stockholder, and the stockholder is otherwise unable to locate a buyer for
his or her shares, the stockholder could effectively be subject to a total loss
of investment. Accordingly, the purchase of Common Stock is suitable only for
persons who have no need for liquidity in this investment and who can afford a
total loss of investment. See "Market Information -- The Internal Market."
Right of First Refusal
All shares of Common Stock offered by this Prospectus will be subject
to the Company's right of first refusal to purchase such shares before they may
be offered to third parties (other than on the Internal Market). Shares of
Common Stock purchased on the Internal Market will be subject to contractual
transfer restrictions having the same effect as those contained in the By-Laws.
See "Description of Capital Stock -- Restrictions on Common Stock."
Offering Price Determined by Formula, Not Market Forces
The offering price is, and subsequent offering prices will be,
determined by means of the Formula set forth on the cover page of this
Prospectus. The Formula takes into consideration the Company's financial
performance, the market valuation of comparable companies and the limited
liquidity of the Common Stock, as determined by the Board of Directors based on
an independent appraisal. The Formula is subject to change by the Board of
Directors in its sole discretion. See "Market Information -- Determination of
Purchase Price."
Parties to Stockholders Agreement Effectively Control Appointments to the
Board of Directors
Certain individuals in the management group of the Company, Capricorn
Investors, L.P. ("Capricorn") and other outside investors who hold shares of
Common Stock are parties to a Stockholders Agreement originally dated March 11,
1988 and restated March 11, 1994 (the "Stockholders Agreement"). Under the terms
of the Stockholders Agreement, stockholders who own approximately 32% of the
fully diluted outstanding shares of Common Stock have agreed, among other
things, to vote for the election of a Board of Directors consisting of four
management group nominees, four Capricorn nominees and a joint nominee who would
be elected if needed to break a tie vote. Effective January 23, 1997, Capricorn
waived its prior right to nominate members to the Board of Directors, but not
its obligations to vote in accordance with the Stockholders Agreement. Because
the management group stockholders, directly and through ESOP holdings, and
Capricorn represent a large portion of the shares of Common Stock necessary to
elect the Company's Board of Directors, other stockholders acting in concert or
otherwise are not likely be able to change the composition of the Board of
Directors. Unless extended, the Stockholder's Agreement expires on March 10,
1999. See "Description of Capital Stock -- Stockholders Agreement."
Anti-Takeover Effects
The combined effects of management's and Capricorn's collective
ownership of a substantial portion of the outstanding shares of Common Stock,
the voting provisions of the Stockholders Agreement and the Company's right of
first refusal may discourage, delay or prevent attempts to acquire control of
the Company that are not negotiated with the Company's Board of Directors. These
may, individually or collectively, have the effect of discouraging takeover
attempts that some stockholders might deem to be in their best interests,
including tender offers in which stockholders might receive a premium for their
shares over the Formula Price available on the Internal Market, as well as
making it more difficult for individual stockholders or a group of stockholders
to elect directors. See "Description of Capital Stock."
Dilution
Because the net tangible book value of the Company on December 31, 1997
was a negative $115.5 million or ($15.73) per share, which is substantially less
than the current Formula Price of $21.00, purchasers of Common Stock in the
Offering will realize immediate and substantial dilution of $36.73 per share
(175%), or $35.35 per share (168%) assuming conversion of all outstanding
warrants and options, and the issuance of all restricted stock shares. The
amount of dilution may vary, depending on the Formula Price.
SECURITIES OFFERED BY THIS PROSPECTUS
Common Stock Offered by the Company
The shares of Common Stock offered by the Company may be offered
through the Internal Market or directly or contingently to current and future
employees and directors of the Company and to trustees or agents for the benefit
of employees under the Company's employee benefit plans described below.
Direct and Contingent Sales to Employees and Directors
The Company believes that its success is dependent upon the abilities
of its employees and directors. Since 1988, the Company, therefore, has pursued
a policy of offering such persons an opportunity to make an equity investment in
the Company as an inducement to such persons to become or remain employed by or
affiliated with the Company. At the discretion of the Board of Directors or the
Compensation Committee of the Board of Directors (the "Compensation Committee"),
and subject to applicable state securities laws, employees and directors may be
offered an opportunity to purchase a specified number of shares of Common Stock
offered by this Prospectus. All such direct and contingent sales to employees
and directors will be effected through the Internal Market or the employee
benefit plans described below and may be attributable to the Company. Pursuant
to the By-Laws, all shares of Common Stock offered by the Company after May 11,
1995, directly or contingently, to its employees or directors and all shares of
Common Stock purchased on the Internal Market are subject to a right of first
refusal. See "Description of Capital Stock -- Restrictions on Common Stock."
Equity Target Ownership Policy
The Company has adopted an Equity Target Ownership Policy (the "ETOP"),
under which certain highly paid employees of the Company are encouraged over a
period of seven years to invest specified multiples of their annual salaries in
shares of the Common Stock. Under the ETOP, corporate officers, presidents and
vice presidents of strategic business units and other participants in the
Executive Incentive Plan are encouraged to invest an amount related to their
annual salary rate in shares of Common Stock as follows:
Base salary rate of: recommended value of holdings:
$300,000 or more 3.0 times base salary
$200,000 to $299,999 2.5 times base salary
$100,000 to $199,999 1.5 times base salary
less than $100,000 0.75 times base salary
Investments under any of the employee benefit plans described below, as well as
any other holdings, including securities held prior to adoption of the ETOP,
will qualify for purposes of the ETOP. As an additional incentive to compliance
with the ETOP, individuals who are subject to the ETOP and directly purchase
1,000 shares of Common Stock or more on the Internal Market on a single Trade
Date are paid a special bonus by the Company equal to 7 1/2% of the purchase
price.
Savings and Retirement Plan
The Company maintains a Savings and Retirement Plan (the "SARP"), which
is intended to be qualified under Sections 401(a) and (k) of the Internal
Revenue Code of 1986, as amended (the "Code"). Generally, all employees are
eligible to participate, except for employees of divisions or other units
designated as ineligible, such as units which are subject to the terms of
collective bargaining agreements, participate in other, site-specific benefit
plans or are located in foreign countries. The SARP permits a participant to
elect to defer, for federal income tax purposes, a portion of his or her annual
compensation and to have such amount contributed directly by the Company to the
deferred fund of the SARP for his or her benefit. The Company may, but is not
obligated to, make a matching contribution to the SARP's trust for the benefit
of those participants who have elected to defer a portion of their compensation
for investment in shares of Common Stock. The amount of any matching
contribution is determined periodically by the Company's Board of Directors
based on the aggregate amounts deferred by participants. The SARP currently
provides for a Company matching contribution, in cash (to be used to purchase
Common Stock on the Internal Market) or in shares of Common Stock, of 100% of
the first one percent of compensation invested in a Company Common Stock fund by
a participant and 25% of the next four percent of compensation so invested. The
Company may also make additional contributions to the SARP deferred fund in
order to comply with Section 401(k) of the Code. Each participant is vested at
all times in 100% of his or her personal contributions to the deferred fund
accounts. Company contributions vest 100% after one year of service. Benefits
are payable to a participant within certain specified time periods following
such participant's retirement, permanent disability, death or other termination
of employment. Pursuant to the By-Laws, shares of Common Stock distributed to a
participant under the SARP are subject to the Company's right of first refusal.
See "Employee Benefit Plans -- Savings and Retirement Plan" and "Description of
Capital Stock -- Restrictions on Common Stock."
Employee Stock Purchase Plan
The Company has established an Employee Stock Purchase Plan (the
"ESPP") for the benefit of substantially all its employees. The ESPP provides
for the purchase of Common Stock through payroll deductions by participating
employees. The ESPP is intended to qualify as a stock purchase plan under
Section 423(b) of the Code. Participants designate a certain amount to be
withheld from their regular pay for the purchase of Common Stock, and the
Company contributes an additional 5% of that amount in the form of cash or
shares of Common Stock for each participant. Purchases on behalf of
participating employees are made through the Internal Market. All shares
purchased pursuant to the ESPP are credited to the participant's account
promptly following the Internal Market trade day on which they were purchased
and, pursuant to the By-Laws, are subject to the Company's right of first
refusal. See "Employee Benefit Plans -- Employee Stock Purchase Plan" and
"Description of Capital Stock -- Restrictions on Common Stock."
1995 Stock Option Plan
Pursuant to the Company's 1995 Non-Qualified Stock Option Plan (the
"1995 Option Plan"), the Company may grant stock options to certain of its
employees and directors. Stock options under the 1995 Option Plan may be granted
contingent, for example, upon an employee obtaining a certain level of contract
awards for the Company within a specified period, upon the satisfaction of other
performance criteria or a requirement that such individual also purchase a
specified number of shares of Common Stock on the Internal Market at the Formula
Price. As of April 3, 1998, 21,200 stock options have been exercised and 995,400
are outstanding. Pursuant to the By-Laws, all shares of Common Stock issued upon
the exercise of such stock options will be subject to the Company's right of
first refusal. See "Employee Benefit Plans -- 1995 Stock Option Plan" and
"Description of Capital Stock -- Restrictions on Common Stock."
Executive Incentive Plan
The Company's Executive Incentive Plan (the "EIP") provides for the
payment of annual bonuses to certain officers and management/executive employees
and provides for payment of up to 20% of the bonuses in the form of shares of
Common Stock, valued at the then current Formula Price. The shares of Common
Stock are distributed following each fiscal year. As of April 15, 1998, 21,246
shares have been distributed under the EIP. Pursuant to the By-Laws, all shares
of Common Stock awarded pursuant to the EIP will be subject to the Company's
right of first refusal. See "Employee Benefit Plans -- Executive Incentive Plan"
and "Description of Capital Stock -- Restrictions on Common Stock."
Employee Stock Ownership Plan
The ESOP is a stock bonus plan intended to be qualified under Section
401(a) of the Code. Generally, all employees participate in the ESOP, except
employees of groups or units designated as ineligible. Interests of participants
in the ESOP vest in accordance with a four-year vesting schedule. Benefits are
normally allocated to a participant in shares of Common Stock and are
distributable within certain specified time periods following such participant's
retirement, permanent disability, death or other termination of employment. Upon
distribution, the participant is entitled to a statutory "put option" at two
separate times, whereby the ESOP, or the Company if the ESOP does not do so, is
obligated to purchase the shares at the fair market value of the Common Stock,
as determined upon advice from the ESOP's appraisers (the "ESOP Share Price").
In the event the participant declines to exercise the put option, such shares of
Common Stock may be sold by the participant on the Internal Market, subject to
the restrictions and limitations of the Internal Market. The ESOP Share Price is
not determined by the Formula, and amounts paid to participants at the time of
distribution may be different from amounts paid to sellers on the Internal
Market. See "Market Information -- The Internal Market." The amount of the
Company's annual contribution to the ESOP is determined by, and within the
discretion of, the Board of Directors and may be in the form of cash or Common
Stock. Pursuant to the ESOP plan document, any shares of Common Stock
distributed out of the ESOP will be subject to a right of first refusal on
behalf of the ESOP and the Company. See "Employee Benefit Plans -- Employee
Stock Ownership Plan -- Distributions and Withdrawals."
Common Stock Offered by Officers, Directors and Affiliates
This Prospectus originally related to the offer and sale of up to
5,810,308 shares by certain officers, directors and affiliates of the Company.
Such persons may, from time to time, sell shares of the Common Stock being
offered by this Prospectus on the Internal Market or otherwise. The total
aggregate shares remaining available for offer and sale by officers, directors
and affiliates under this Prospectus as of April 3, 1998, is 5,476,436 shares.
While the Company originally registered all shares owned by its officers,
directors and affiliates on a fully diluted basis, including unvested options,
the Company does not know whether some, none or all of such shares will be so
offered or sold. However, the Company believes that the ETOP acts as a
disincentive to some officers and other affiliates to sell their Common Stock at
this time. The officers, directors and affiliates will not be treated more
favorably than other stockholders participating as sellers on the Internal
Market and, like all other stockholders selling shares on the Internal Market
(other than the Company and its benefit plans), will pay Buck, the Company's
designated broker-dealer, a commission equal to two percent of the proceeds from
their sales. See "Market Information -- The Internal Market."
The following table sets forth information as of April 3, 1998 with
respect to the number of shares of Common Stock owned directly or indirectly by
each of the officers, directors and affiliates (including shares issuable upon
the exercise of outstanding options and warrants, shares issuable as a result of
expiration of deferrals or otherwise under the former Restricted Stock Plan and
shares allocated to such person's accounts under the Company's employee benefit
plans) and their respective percentages of ownership of equity on a fully
diluted basis. Each of the persons (other than Capricorn, which is an affiliate
by reason of its ownership of more than 10% of the Company's equity as well as
an entity under the control of Mr. Winokur) is a director and/or officer of the
Company. Except as indicated below, all the shares are owned of record or
beneficially. The table also reflects the relative ownership of such persons in
the event of, and after, their individual sales of all the registered shares
owned by them in this Offering.
Percent Number of
Ownership Shares Percent
of Fully Remaining Ownership
Number of Diluted After Sale After Sale
Shares Equity(1) of All of All
Beneficially Before Covered Covered
Name and Title of Beneficial Owner Owned (1) Offering Shares Shares
- ----------------------------------------------------- --------------- ----------
D. R. Bannister, Chairman of the Board 500,017 4.29% 0 *
& Director
T. E. Blanchard, Director 183,100 1.58% 0 *
R. E. Dougherty, Director 4,000 * 0 *
P. G. Kaminski, Director 5,000 * 0 *
P. V. Lombardi, President & Chief 158,553 1.36% 0 *
Executive Officer
D. C. Mecum II, Director 5,000 * 0 *
D. L. Reichardt, Senior Vice President 162,754 1.40% 0 *
& General Counsel & Director
Capricorn/H. S. Winokur, Jr., Director 1,231,952 10.56% 0 *
R. B. Alleger, Jr., Vice President 31,919 * 0 *
J. J. Fitzgerald, Vice President & 11,172 * 0 *
Controller
P. C. FitzPatrick, Senior Vice President 104,280 * 0 *
& Chief Financial Officer
P. T. Graham, Vice President & Treasurer 6,381 * 0 *
H. M. Hougen, Vice President & Secretary 34,419 * 0 *
R. P. Kerr, Senior Vice President 30,000 * 0 *
M. S. Mandell, Vice President 49,249 * 0 *
C. H. McNair, Jr., Vice President 60,030 * 0 *
R. Morrel, Vice President 23,602 * 0 *
H. H. Philcox, Vice President 45,873 * 0 *
R. E. Stephenson, Vice President 5,762 * 0 *
R. G. Wilson, Vice President & 28,155 * 0 *
General Auditor
Total 2,681,219 22.98% 0 *
- -----------------------
* Indicates less than one percent
(1) Includes shares issuable upon the exercise of outstanding
warrants, shares issuable as a result of expiration of
deferrals under the former Restricted Stock Plan, exercise of
all outstanding options whether or not vested, and shares
allocated to such person's accounts under the Company's
employee benefit plans.
MARKET INFORMATION
The Internal Market
In 1988, following a decision by the Company's Board of Directors to
consider offers for the purchase of the Company, the Company became privately
owned through a leveraged buy-out (the "LBO") involving its management group.
Public trading of the Company's Common Stock ceased, and the new management
installed the ESOP as the Company's principal retirement benefit. Approximately
30,400 current and former employees are now beneficial owners of the Common
Stock through the ESOP, representing approximately 72.1% of the shares of Common
Stock outstanding on April 3, 1998 and approximately 62.4% of the Company's
Common Stock on a fully diluted basis.
Following the LBO, the management stockholders, Capricorn and certain
other investors relied on the Stockholders Agreement as a means of restricting
the distribution and permitting limited sales of Common Stock. The Stockholders
Agreement contains various provisions for the annual offering of shares of
Common Stock owned by retiring and terminated management stockholders, first to
other management stockholders, Capricorn and certain other investors and then to
the Company as purchaser of last resort. On May 10, 1995, the Board of Directors
approved the establishment of the Internal Market as a means of trading Common
Stock on a regular basis to replace the resale procedures of the Stockholders
Agreement.
The Internal Market generally permits all stockholders to sell shares
of Common Stock on one Trade Date each calendar quarter, subject to purchase
demand. All sales of Common Stock on the Internal Market are made to active
employees and directors of the Company and the trustees of the SARP and the ESOP
and the administrator of the ESPP, who may purchase shares of Common Stock for
their respective trusts and plans (collectively "Authorized Buyers"), to the
extent permitted under applicable state securities laws. Limitations on the
number of shares that an individual can purchase directly may be imposed where
there are more buy orders than sell orders on a particular Trade Date.
The Internal Market was established and is managed by the Company's
wholly owned subsidiary, DynEx, Inc. The purchase and sale of shares on the
Internal Market are carried out by Buck, a registered broker-dealer, upon
instructions from the respective buyers and sellers. Following determination of
the applicable Formula Price for use on the next Trade Date, and at least
fifteen days prior to such trade date, Buck advises the stockholders of record
by mail as to the amount of the Formula Price and the Trade Date, inquiring
whether such stockholders wish to sell shares on the Internal Market and
advising them, if they do so, how to deliver written sell orders and stock
certificates (which must be received by Buck at least two days prior to such
Trade Date) to facilitate such sale. Such information is also provided through
the Company's internal communications systems to participants in the various
benefit plans.
The Company may, but is not obligated to, purchase shares of Common
Stock on the Internal Market on any Trade Date, but only if and to the extent
that the number of shares offered for sale by stockholders exceeds the number of
shares sought to be purchased by Authorized Buyers and the Company, in its
discretion, determines to make such purchases. If the number of shares sought to
be purchased exceeds the number offered for sale, the Company may, but again is
not obligated to, sell sufficient shares to make up such shortfall. The Company
will only enter the Internal Market to correct such imbalance, and it cannot be
both a buyer and a seller on the same Trade Date.
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 by
Authorized Buyers and the Company, offers to sell up to the first 500 shares
offered by any seller will be accepted first. If, however, there are
insufficient purchase orders to support the primary allocation of 500 shares of
Common Stock, then the purchase orders will be allocated equally among all of
the proposed sellers up to the first 500 shares offered for sale by each seller.
Thereafter, a similar procedure will be applied to the next 10,000 shares
offered by each remaining seller, and offers to sell shares in excess of 10,500
shares will then be accepted on a pro-rata basis determined by dividing the
total number of shares remaining under purchase orders by the total number of
shares remaining under sell orders. To the extent that the aggregate number of
shares sought to be purchased exceeds the aggregate number of shares offered for
sale, the Company may, but is not obligated to, sell authorized but unissued
shares of Common Stock on the Internal Market. All sellers on the Internal
Market (other than the Company and its benefit plans) will pay Buck a commission
equal to two percent of the proceeds from such sales. No commission is paid by
purchasers on the Internal Market. All offers and sales of Common Stock made on
the Internal Market may be attributed to the Company.
If the aggregate purchase orders exceed the number of shares available
for sale, the following prospective purchasers will have priority, in the order
listed:
1. the administrator of the ESPP;
2. the trustee of the SARP;
3. eligible employees and directors, on a pro rata basis; and
4. the trustees of the ESOP.
There is no public market for the Common Stock, and it is not currently
anticipated that such a market will develop. While the Company established the
Internal Market in an effort to provide liquidity to stockholders, there can be
no assurance that there will be sufficient liquidity to permit stockholders to
resell their shares on the Internal Market or that a regular trading market will
develop or be sustained in the future. The Internal Market will be dependent on
the presence of sufficient buyers to support sell orders that will be placed
through the Internal Market. Depending on the Company's performance, potential
buyers (which would include employees and trustees under the Company's benefit
plans) may elect not to buy on the Internal Market. Moreover, although the
Company may enter the Internal Market as a buyer of Common Stock under certain
circumstances, including an excess of sell orders over buy orders, the Company
has no obligation to engage in Internal Market transactions. Consequently, there
is a risk that sell orders could be prorated as a result of insufficient buyer
demand or that the Internal Market may not be permitted to open on a Trade Date
because of the lack of buyers. If the Internal Market does not give a
stockholder a ready means for selling shares, and the stockholder is otherwise
unable to locate a buyer for his or her shares of Common Stock, the stockholder
could effectively be subject to a total loss of investment.. Accordingly, the
purchase of Common Stock is suitable only for persons who have no need for
liquidity in this investment and who can afford a total loss of investment. See
"Risk Factors -- Absence of a Public Market."
Determination of Purchase Price
The purchase price for the shares of Common Stock offered by this
Prospectus will be determined pursuant to the formula and valuation process
described below. The Formula Price per share of Common Stock is the product of
seven times the operating cash flow ("CF") where operating cash flow is
represented by earnings before interest, taxes, depreciation and amortization
("EBITDA") of the Company for the four fiscal quarters immediately preceding the
date on which a price revision is made and the market factor (the "Market
Factor" denoted MF), plus the non-operating assets at disposition value (net of
disposition costs) ("NOA"), minus the sum of interest bearing debt adjusted to
market and other outstanding securities senior to Common Stock ("IBD") divided
by the number of shares of Common Stock outstanding at the date on which a price
revision is made, on a fully diluted basis assuming conversion of all
outstanding options and warrants ("ESO"). The Market Factor is a numerical
factor which reflects existing securities market conditions relevant to the
valuation of such stock. The Formula Price of the Common Stock, expressed as an
equation (the "Formula"), is as follows:
Formula Price = [(CF x 7)MF + NOA - IBD]
ESO
"CF" is the earnings basis which is considered to be representative of
the future performance of the Company. The abbreviation stands for operating
cash flow, and the basic measurement used by the Company for operating cash flow
is EBITDA. Each element of EBITDA is measured according to generally accepted
accounting principles ("GAAP"), but, before using those objective numbers in the
formula, the Board of Directors examines the details used in those earnings to
see if any adjustments are needed in order for the earnings number to be
representative of the future performance of the Company. Following are examples
of situations where the Board of Directors may feel it appropriate to make
adjustments so that the earnings used in the Formula would be representative of
expected future performance: (a) the earnings from an acquisition made late in
the year may be pro-formed for a full year, (b) the earnings from a discontinued
activity may be pro-formed out even though the discontinued activity may not
qualify as a discontinued business under GAAP or (c) a truly unusual expenditure
or windfall profit may be pro-formed out even though it is clearly part of GAAP
earnings for the current year.
"MF" is the market factor. In the end, it is totally subjective.
Annually, the Board of Directors looks at the public market pricing for other
government service contractors which in its opinion are most comparable to the
Company. Six to eight other companies are generally considered, but there is no
set number of comparable companies. The pricing multiples of Net Income and of
Cash Flow for these companies are looked at on a last twelve-month basis, on a
fiscal-year basis, and, where available from analysts' reports, on a projected
basis. Since the Formula capitalizes the Company's CF at seven times, these
comparable companies give the Board of Directors a sense whether the public
market is currently at a higher, lower or roughly the same level as that fixed
multiple. The Board of Directors also looks at the Company's earnings trends in
setting the MF, because the stock market generally rewards an upward trend and
punishes a downward trend. On a quarterly basis, the Board of Directors will
look at the Price Earnings Multiples of its annual comparable companies to see
if there are any significant changes which might influence the Board's
determination of the MF to be used in the formula.
"NOA" are non-operating assets at disposition value (net of disposition
costs). The Company's principal non-operating asset since 1992 has been
"Restricted Cash". This is cash in its wholly owned subsidiary, DFC, which must
remain in specified short-term marketable investments (e.g., U.S. Treasury
bills) on a temporary basis, because the Company and its other subsidiaries may
not have enough eligible accounts receivable to sell to DFC at any particular
point in time to utilize the minimum $50 million of capital of DFC. If the
Company discontinues a business, and the net assets of that business were
recorded as Assets Held For Sale, those assets would also be included in NOA at
management's estimate of their disposition value, net of disposition costs. (The
earnings from those assets would also be excluded from "CF" in the Formula.) If
the Company had a passive investment outside its normal operations, the earnings
from that investment would be excluded from "CF", and the lower of cost or
estimated market value would be included in "NOA". Other similar situations
could give rise to inclusion in "NOA", but an asset must be clearly
non-operating to be included.
"IBD" is interest-bearing debt and other securities senior to Common
Stock. Under GAAP, interest-bearing debt is to be reported net of any
unamortized discount at issuance, but in the Formula such issuance discounts are
ignored, and it is expected that the debt will be recorded at its face value. On
the other hand, if it is the intent of management in the near term to call any
portion of its long term debt, the amount used for that portion of IBD would be
at its call price. Similarly, if the debt were publicly traded at a discount,
and it was management's intent in the near term to retire debt through open
market discounted purchases, the market price would be used for that portion of
the debt in the Formula. In applying the Formula, the Board of Directors would
also look at any convertible securities and subjectively decide whether it is
likely that such securities would be converted. If, in the opinion of the Board,
they will be converted, such securities will be included in the fully diluted
common shares and not IBD. Preferred stock, or any similar security, senior to
the Common Stock in liquidation, would be considered as IBD.
"ESO" is the equivalent shares outstanding of Common Stock at the time
of the valuation. It assumes the exercise of all outstanding options (if no
greater than the current Formula Price), warrants and the conversion of any
convertible securities of which there are none at the current time.
The Formula Price, including the Market Factor, is reviewed by the
Board of Directors on a quarterly basis, in preparation for Internal Market
Trade Dates. The Market Factor is reviewed by the Board in conjunction with an
appraisal that is prepared by an independent appraisal firm for the committee
administering the ESOP. The Board of Directors believes that the valuation
process results in a stock price which reasonably reflects the value of the
Company on a per share basis. See "Risk Factors -- Offering Price Determined by
Formula Not Market Forces."
The Formula was adopted in its current form by the Board of Directors
on August 15, 1995. The Formula is subject to change by the Board of Directors.
Availability of Information
The Company intends to disseminate the current Formula Price on at
least a quarterly basis to all employees through internal communications,
including bulletins and electronic mail messages and to other stockholders by
mailed reports, including mailed notices of upcoming Trade Dates. Participants
in any of the employee benefit plans may obtain the current Formula Price by
calling the Company's Powerline system toll-free number (1-800-956-4015), which
operates 24 hours a day, seven days a week.
The Company also intends to distribute copies of its audited annual
financial statements to all stockholders, as well as other active employees, and
to potential participants in the Internal Market through employee benefit plans,
either through U.S. mail or inter-company mail. Such information is normally
distributed at the time that proxy information is distributed and solicitations
are made for voting instructions from participants in the ESOP and SARP,
normally in May of each year. The Company files unaudited quarterly financial
information with the Commission, and copies of such information are available
from the Commission. See "Available Information."
USE OF PROCEEDS
The shares of Common Stock which may be offered by the Company are
principally being offered to permit the acquisition of shares by the Company's
employee benefit plans as described herein and to permit the Company to offer
shares of Common Stock to current and future employees and directors. The
Company does not intend or expect this Offering to raise significant capital.
Any net proceeds received by the Company from the sale of the Common Stock
offered (after giving effect to the payment of expenses of the Offering) will be
added to the general funds of the Company for working capital and general
corporate purposes. Currently, the Company has no specific plans for the use of
such proceeds. It is anticipated that the majority of the sales of Common Stock
on the Internal Market will be made by stockholders rather than by the Company,
and the Company will not receive any portion of the net proceeds from the sale
of such shares (other than the 1% received by DynEx, Inc. to defray the costs of
establishing and maintaining the Internal Market).
EMPLOYEE BENEFIT PLANS
The Company maintains several employee benefit plans pursuant to which
some of the shares of Common Stock being offered by this Prospectus may be
offered or sold. The primary purpose of these plans is to motivate the Company's
employees and directors to contribute to the growth and development of the
Company by encouraging them to achieve and surpass annual goals of the Company
and of the operations for which they are responsible. The following is a summary
description of each of these plans. All capitalized terms, unless otherwise
defined, have the meanings ascribed to them in the employee benefit plan to
which they relate.
SAVINGS AND RETIREMENT PLAN
Trustee
Merrill Lynch Trust Company, 400 Atrium Drive, Somerset, NJ 08873,
serves as trustee of the SARP, except that the Company serves as trustee of the
Company Stock Fund.
Administration
The Company administers the SARP through an Administrative Committee
consisting of P. T. Graham, H. M. Hougen and R. P. Kerr, officers of the
Company, whose address is 2000 Edmund Halley Drive, Reston, VA 20191.
Eligibility and Participation
Generally, all employees (as defined in the plan document) are eligible
to participate in the SARP upon commencing employment, except for employees in
groups or units designated as ineligible. As of April 3, 1998, there were
approximately 4,080 active participants in the SARP, of which approximately
2,076 participated in the Company Stock Fund.
Contributions and Allocations
The SARP permits a participant to elect to defer a portion of his or
her compensation for the Plan Year and to have such deferred amount contributed
directly by the Company to the participant's SARP account. Amounts deferred by
participants, including rollovers from qualified plans, totaled approximately
$15.2 million for the Plan Year ended December 31, 1997. Under the terms of the
SARP, deferred amounts are treated for tax purposes as contributions made by the
Company. The maximum amount of compensation that a participant may elect to
defer is determined by the SARP Administrative Committee, but in no event may
the deferral exceed $10,000 per year during 1998 (adjusted for cost-of-living
under rules prescribed by the Secretary of the Treasury). In addition to amounts
deferred by participants, the Company may, but is not obligated to, make a
matching contribution to the SARP accounts of those participants who have
elected to defer a portion of their compensation equal to a percentage or
percentages of the amounts which such participants have elected to defer. This
Company matching contribution is determined periodically by the Board of
Directors and is allocated to the SARP accounts of those participants who have
elected to defer a portion of their compensation. The Company intends to
contribute 100% of the first 1% of a participant's compensation deferred under
the SARP for investment in Common Stock (the "Company Stock Fund") and 25% of
the next 4% of such compensation so deferred (the "Stock Match"). The Company's
Stock Match contribution to the SARP could be made in shares of Common Stock or
in cash, which would then be used to purchase Company Stock on the Internal
Market. 850,000 shares of Common Stock were reserved in 1995 for possible
issuance in satisfaction of the Company's Stock Match obligations through 2001,
but the Company has not issued any such shares to date.
Company contributions to the SARP are made by the due date (including
extensions) for the Company's federal income tax return for the applicable year,
except contributions resulting from amounts deferred by participants, which must
be made within 14 days of the first day of the calendar month following the
month in which the deferral occurred. The Company's practice has been to make
matching contributions quarterly, based on current participant deferrals, and
the Company plans to make a Stock Match in kind or a contribution of cash to
purchase Common Stock for the Stock Match, in conjunction with each applicable
Trade Date.
An Eligible Employee may transfer a rollover contribution from another
qualified retirement plan to the trust fund maintained for the SARP, pursuant to
applicable regulations and SARP Administrative Committee procedures. A
participant in the SARP who has made a deferral election may terminate or alter
the rate of his or her deferrals at any time under the terms of the SARP. Such
transferred funds may be invested in the Company Stock Fund but are not eligible
for a Stock Match.
Investment of Funds
The SARP Administrative Committee has established a choice of
investment alternatives including securities of the Company, in which
contributions to the SARP (including that portion of compensation which
participants elect to defer) may be invested. The investment alternatives
currently available to participants in the SARP include the Company Stock Fund,
six Merrill Lynch & Company mutual funds and three other mutual funds. Under the
terms of the SARP, a participant's entire interest in his or her SARP account
may be invested in a mixture of Company Stock Fund and/or any of the other
mutual funds, provided that, in order to obtain the Stock Match, the matched
portion of a participant's compensation deferred under the SARP must be invested
in the Company Stock Fund that is not exchangeable for other investment
alternatives until after a period of 18 months. The Company's Stock Match will
also be invested in the Company's Stock Fund, which contribution will not be
allowed to be exchanged for another investment alternative. Participants may
elect at such time, in such manner and subject to such restrictions as the SARP
Administrative Committee may specify, to have contributions allocated or
apportioned among the different investment alternatives. Separate SARP accounts
are established for each investment alternative selected by a participant, and
each such account is valued separately. Except for restrictions on investments
in the Company Stock Fund, participants may transfer amounts from one investment
alternative to one or more other investment alternatives on a daily basis.
Investments in the Company Stock Fund (other than the non-exchangeable
Company contribution described in the preceding paragraph) may be exchanged into
other investment choices (subject to the 18-month limitation mentioned above)
only on a Trade Date. It is the current policy of the SARP Administrative
Committee to keep all amounts related to the Company's Stock Fund invested in
Common Stock, except for estimated cash-equivalent reserves which are primarily
used to provide future benefit distributions, future investment exchanges and
other cash needs as determined by the SARP Administrative Committee. Residual
cash remaining after accounting for estimated cash reserves generally will be
used to purchase Common Stock. If cash reserves in the Company Stock Fund are
insufficient at any given time to provide benefit distributions and/or
investment exchanges, shares held by the Company Stock Fund may be offered for
sale on the Internal Market. Exchanges out of the Company Stock Fund may be
deferred until such time, if ever, that sufficient cash is available to make
required benefit distributions and provide for investment exchanges.
Accordingly, investment exchanges of participants' investments held in the
Company Stock Fund may be restricted. See "Risk Factors -- Absence of a Public
Market" and "Market Information -- The Internal Market."
The following tables summarize as of the dates indicated, the
investment performance of each of the nationally traded mutual funds in which
SARP funds can be invested, since December 31, 1994. The summary is based on an
initial investment of $100.00 on each investment alternative.
Merrill Lynch Corporate Bond Fund - High Income Portfolio
% Increase
Unit Value From Prior Year
12/31/94 $100.00 --
12/31/95 $118.38 18.38%
12/31/96 $133.12 12.45%
12/31/97 $148.35 11.44%
Merrill Lynch Capital Fund
Unit Value % Increase
12/31/94 $100.00 --
12/31/95 $132.87 32.87%
12/31/96 $149.70 12.67%
12/31/97 $181.75 21.41%
Merrill Lynch Basic Value Fund
Unit Value % Increase
12/31/94 $100.00 --
12/31/95 $132.90 32.90%
12/31/96 $156.57 17.81%
12/31/97 $202.73 29.48%
Merrill Lynch Retirement Preservation Trust
Unit Value % Increase
12/31/94 $100.00 --
12/31/95 $106.06 6.06%
12/31/96 $112.39 5.97%
12/31/97 $119.28 6.13%
Merrill Lynch Equity Index Trust
Unit Value % Increase
12/31/94 $100.00 --
12/31/95 $137.22 37.22%
12/31/96 $168.26 22.62%
12/31/97 $223.75 32.98%
Merrill Lynch Global Allocation Fund
Unit Value % Increase
12/31/94 $100.00 --
12/31/95 $123.71 23.71%
12/31/96 $143.74 16.19%
12/31/97 $160.08 11.37%
Fidelity Advisor Equity Growth Fund
Unit Value % Increase
12/31/94 $100.00 --
12/31/95 $118.38 18.38%
12/31/96 $133.11 12.45%
12/31/97 $157.04 23.93%
AIM Constellation Fund
Unit Value % Increase
12/31/94 $100.00 --
12/31/95 $135.46 35.46%
12/31/96 $157.50 16.27%
12/31/97 $177.85 12.92%
Templeton Foreign Fund
Unit Value % Increase
12/31/94 $100.00 --
12/31/95 $111.15 11.15%
12/31/96 $131.57 18.00%
12/31/97 $140.32 6.65%
Company Stock Fund
Because the Company's Common Stock has not been publicly traded since
1988, there has not been any historical market-determined price.
The average price per share figures shown below for December 31, 1994
through December 31, 1995, reflect market values established by the Board of
Directors for purposes of sales under the former Management Employees Stock
Purchase Plan and for transactions under the Stockholders Agreement. The Board's
determination was based on its review of valuations of the Common Stock made
annually by an independent appraiser for the ESOP Trust. The price per share for
December 31, 1996 and later dates is based upon the Formula Price. There can be
no assurance that the Common Stock will in the future provide returns comparable
to historical returns, or that the Formula Price will provide returns similar to
those for past transactions that were based on prices other than the Formula
Price. Because the prices listed in the table below were developed under
differing valuation methods for differing purposes, they are not fully
comparable with the Formula Price.
Average price % Increase From Prior
per share Unit Value (1) Period
12/31/94 $11.86 $100.00 --
12/31/95 $14.90 $125.60 25.6%
12/31/96 $19.00 $160.14 27.5%
12/31/97 $20.00 $168.56 5.26%
(1) Based upon an initial investment of $100.00 in DynCorp Common Stock.
However, investments in the Company Stock Fund were first possible at
the time of the first Internal Market Trade Date, June 12, 1996, and were
immediately enhanced by the applicable Stock Match. Assuming that a participant
had elected to defer 1% of salary toward an investment in the Company Stock Fund
for that Trade Date and that the Company had made the appropriate 100% Stock
Match, the investment of $100.00 would have grown as follows:
Average price % Increase From
per share Unit Value (1) Prior Period
initial investment 6/12/96 $15.00 $100.00 --
Stock Match 6/12/96 $15.00 $200.00 100.0%
12/31/96 $19.00 $253.20 26.6%
12/31/97 $20.00 $266.52 5.26%
(1) Based upon an initial investment of $100.00 in DynCorp Common Stock.
Vesting
Under the SARP as currently in effect, each participant is 100% vested
in those portions of his or her SARP account which are attributable to the
participant's salary deferrals and earnings thereon. The Stock Match and any
other discretionary employer contributions will be fully vested after one year
of service.
Loans
Loans from their SARP account are available to all participants. Loans
have a maximum limit of $50,000, reduced by the participant's highest aggregate
outstanding loan balance during the preceding 12-month period. Loans are further
limited to 50% of a participant's vested interest in his or her eligible
accounts, excluding amounts invested in the Company Stock Fund. Loans must (i)
bear a reasonable rate of interest, (ii) be adequately secured, (iii) state the
date upon which the loans must be repaid, which in any event may not exceed five
years from the date on which the loan is made, unless the proceeds are used for
the purchase of a principal residence, in which case repayment may not exceed 30
years and (iv) be amortized with level payments, made not less frequently than
quarterly, over the term of the loan. The Company currently requires that active
employees' loans be repaid through payroll deductions. The loan documents
provide that up to 50% of the participant's vested account balances are security
for the loan, and the SARP, therefore, has a lien against such balances. A loan
will result in a withdrawal of the borrowed amounts from the participant's
interest in the Funds against which the loan is made. Principal and interest
payments on the loan are allocated to the account(s) of the borrowing
participant in accordance with the current investment choices of the
participant.
Distributions and Withdrawals
If a participant's employment with the Company terminates, the
participant is entitled to receive a distribution of his or her entire interest
in his or her SARP account as soon as practicable following the date of such
termination. In the event a participant dies while employed by the Company, the
SARP Administrative Committee will direct the Trustee to make a distribution of
the participant's entire interest in his or her SARP account to the
participant's spouse, or, if such spouse has given proper consent or if the
participant has no spouse, to the Beneficiary designated by the participant. In
the event the Company determines that the participant has suffered a permanent
disability while employed by the Company, the Company will direct the Trustee to
make a distribution of the participant's entire interest in his or her SARP
account to the disabled participant.
Except in the case of qualifying hardship, no withdrawals may be made
from the salary deferral portion of a participant's SARP account prior to his or
her termination of employment unless and until he or she attains the age of 59
1/2. Any withdrawals made thereafter may be made only once in each Plan Year. In
the absence of a qualified court order to the contrary, a participant's interest
in the SARP may not be voluntarily or involuntarily assigned or hypothecated.
The Company has established procedures for hardship withdrawals including (i)
definition of qualifying hardships, (ii) requirements for having first withdrawn
all voluntary after-tax contributions from any other Company retirement plans
and having received the maximum loans available under such plans and (iii)
requirement for a 12-month suspension from making elective deferrals into the
SARP following the hardship withdrawal.
All distributions, including withdrawals, from the SARP are paid in
cash, except that the portion of SARP balances represented by Common Stock may
be distributed in kind or in cash, at the participant's election. Shares which
the Trustee is unable to liquidate in time for a timely distribution shall be
distributed in kind; shares of Common Stock distributed in kind will be subject
to the Company's right of first refusal in the event that the participant
desires to sell such shares other than on the Internal Market. See "Description
of Capital Stock -- Restrictions on Common Stock."
EMPLOYEE STOCK OWNERSHIP PLAN
The ESOP was established effective January 1, 1988, as the Company's
principal retirement plan. It succeeded the DynCorp defined benefit qualified
Pension Plan which was terminated in November, 1988, following the LBO.
Following termination of the Pension Plan, approximately $10 million of excess
Pension Plan assets were rolled over into the ESOP for the benefit of ESOP
participants who were also Pension Plan participants.
Trustees and Administration
The ESOP is administered by the ESOP Committee, consisting of T. E.
Blanchard, a director and former employee of the Company, and L. A. Emmerichs
and J. C. Zall, employees of the Company. Their address is 2000 Edmund Halley
Drive, Reston, VA 20191. The members of the ESOP Committee also serve as
trustees of the ESOP.
Eligibility and Participation
Generally, all employees, except groups or units designated as
ineligible, participate in the ESOP. As of December 31, 1997, there were
approximately 30,400 participants in the ESOP, including terminated, vested
participants.
Contributions, Allocations and Forfeitures
For the Plan Year ended December 31, 1997 the Company contributed
approximately $11.2 million to the ESOP. The amount of the Company's annual
contribution to the ESOP is determined by, and within the discretion of, the
Board of Directors, subject to certain limitations. See "General Provisions of
the ESOP and SARP." The Company's annual contribution to the ESOP may be in the
form of cash or Common Stock. Participants may not make voluntary contributions
to the ESOP. The Company's current practice has been to make contributions
quarterly.
Company contributions to the ESOP for each Plan Year are generally
allocated to the accounts of participants in the ratio which each such
participant's eligible compensation bears to the total eligible compensation of
all such participants, except in the case of employees covered by collective
bargaining agreements, which may specify another allocation ratio. Forfeitures,
if any, of the non-vested portion of terminated participants' accounts were
previously allocated to the accounts of remaining participants who were entitled
to receive an allocation of the Company contribution, in the ratio which each
such remaining participant's allocation bore to the total allocation of all such
remaining participants. Since 1996, forfeitures have not been so allocated but
are retained in the trust for possible future corrections to participant
accounts.
Investment of Funds
Although it is generally intended that the assets of the ESOP will be
invested in Company stock, the ESOP may hold cash and liquid investments pending
purchase of Company stock and current cash needs. The exact number of shares of
Common Stock, if any, which may be purchased by the Trustee of the ESOP in the
future will depend on various factors, including any modifications to the ESOP
adopted either in response to changes or modifications in the laws and
regulations governing the ESOP or at the discretion of the Company's management.
Participants who have attained the age of 55 and have ten or more years of
participation are entitled, pursuant to the terms of the ESOP and ESOP Committee
procedures, to receive distributions of a percentage of their balances in the
ESOP for diversification purposes. It is the current policy of the ESOP
Committee to keep all amounts invested in Common Stock, except for estimated
cash reserves which are primarily used to provide future benefit distributions,
future investment exchanges and other cash needs as determined by the ESOP
Committee. If residual cash reserves in the ESOP are insufficient to provide
cash benefit distributions and/or investment exchanges and the "put option"
described below is not applicable, the ESOP Committee may offer shares of Common
Stock for sale on the Internal Market. Exchanges out of Company stock may be
deferred until such time, if ever, that sufficient cash is available to make
required benefit distributions and provide for investment exchanges.
Accordingly, investment exchanges of participant's investments held in the ESOP
may be restricted. See "Risk Factors -- Absence of a Public Market" and "Market
Information -- The Internal Market."
Vesting
The ESOP vesting schedule currently provides that a participant's
interest vests 50% after two years of service, 75% after three years of service
and 100% after four years of service, so that each participant's interest
becomes fully vested after the participant is credited with four years of
service. A participant's interest also becomes fully vested, notwithstanding the
fact that the participant has not yet been credited with four years of service,
at the time of such participant's attainment of the age of 65, permanent
disability or death while employed by the Company.
Distributions and Withdrawals
In the event that a participant in the ESOP is terminated, retires,
dies, becomes disabled while employed by the Company or receives a
diversification distribution, the ESOP or the Company is obligated to repurchase
shares of Common Stock distributed to such participant under the ESOP until such
time as the Common Stock becomes "readily tradable stock," as defined in the
ESOP plan documents. This "put option" gives the holder of such shares the right
to require the ESOP (or, if the ESOP does not honor the put, the Company) to
purchase all or a portion of such shares at the ESOP Share Price during two
limited time periods. The first of these periods is the 60-day period following
the date on which the shares are distributed out of the ESOP, and the second is
the 60-day period following notification by the ESOP of the valuation of the
Common Stock as soon as practicable after the beginning of the Plan Year
commencing after such distribution. Such shares will also be subject to a right
of first refusal by the ESOP and a subsequent right of first refusal by the
Company if the participant desires to sell such shares other than on the
Internal Market. See "Description of Capital Stock -- Restrictions on Common
Stock."
The ESOP Share Price is actually two different prices. One price is
applicable to shares first acquired by the ESOP in 1988, incidental to the LBO,
which constituted a controlling portion of the outstanding Common Stock of the
Company; these shares bear an "enterprise value" which, for purposes of the
December 31, 1997 valuation, was determined by the ESOP Committee, upon the
advice of its independent appraisal firm, to be $24.00 per share. The other
price is applicable to shares acquired by the ESOP subsequent to 1988, which
carried no such controlling factor; these shares bear a "minority value" which,
for purposes of the December 31, 1997 valuation, was determined by the Committee
to be $20.00 per share. Each participant's account tracks the number of
enterprise value shares and minority value shares allocated to such account and
distributable at any given time, and distributions are made pro rata from the
two types of shares. If a share is put to the ESOP (or the Company) pursuant to
the put option, the applicable ESOP Share Price (depending upon whether such
shares bears an enterprise value or a minority value) is payable therefor.
The Company estimates an aggregate annual commitment to repurchase
shares from the ESOP participants as follows: $7.2 million in 1998, $6.6 million
in 1999, $8.0 million in 2000, $10.8 million in 2001, $13.7 in 2002 and $105.6
million thereafter. To the extent that the Company repurchases shares as
described above, its ability to purchase shares on the Internal Market will be
adversely affected. See "Risk Factors -- The Company May be Obligated to
Repurchase Shares of Certain ESOP Participants."
Participants are not permitted to make withdrawals under the ESOP prior
to termination of employment. In the absence of a qualified domestic relations
order to the contrary, a participant's interest in the ESOP may not be
voluntarily or involuntarily assigned or hypothecated. Any permitted designee
will be subject to the same rules and limitations applicable to the participant.
GENERAL PROVISIONS OF THE ESOP AND SARP
The following provisions are applicable to each of the ESOP and SARP
(collectively, the "Plans"):
Contribution Limitations
The maximum contribution for any Plan Year which the Company may make
to all Plans for the benefit of a participant (including contributions to the
SARP as a result of salary deferral elections by participants), plus
forfeitures, may not exceed the lesser of (i) $30,000 or (ii) 25% of the
participant's compensation.
Administration
The Plans are administered, respectively, by the SARP Administrative
Committee and the ESOP Committee, whose members are appointed by and serve at
the discretion of the Company's Board of Directors. The members of the
Committees who are employees of the Company receive no compensation from the
Plans for services rendered in connection therewith.
The Committees have the power to supervise administration and control
of each Plan's operations including the power and authority to (i) allocate
fiduciary responsibilities, other than trustee responsibilities, among the Named
Fiduciaries, (ii) designate agents to carry out responsibilities relating to the
Plan, other than fiduciary responsibilities, (iii) employ legal, actuarial,
medical, accounting, programming and other assistance as the Committee may deem
appropriate in carrying out the Plan, (iv) establish rules and regulations for
the conduct of the Committee's business and the administration of the Plan, (v)
administer, interpret, construe and apply the Plan and determine questions
relating to the eligibility, the amount of any participant's service and the
amount of benefits to which any participant or beneficiary is entitled, (vi)
determine the manner in which Plan assets are disbursed and (vii) direct the
Trustee regarding investment of Plan assets, subject to the directions of
participants when provided for in the Plans.
Pass-Through Voting and Tendering of Common Stock
Each participant in the Plans is a "named fiduciary" under the Plan and
has the right to instruct the Trustee on a confidential basis as to how to vote
his or her proportionate interest in all shares of Common Stock held in the
various Plans. The Trustee will vote all allocated shares held in the Plans as
to which no voting instructions are received, together with all unallocated
shares held in the ESOP, in the same proportion as the allocated shares in each
Plan for which voting instructions have been received are voted. The Committees
are required to notify participants of their pass-through voting rights prior to
each meeting of stockholders.
In the event of a tender or exchange offer for the Company's
securities, each participant in the Plans has the right, under current Plan
procedures, to instruct the Trustee on a confidential basis whether or not to
tender or exchange his or her proportionate interest in all shares of Common
Stock held in the various Plans. The Trustee will not tender or exchange any
allocated shares with respect to which no instructions are received from
participants. Shares held in the Plans which have not yet been allocated to the
accounts of participants will be tendered or exchanged by the Trustee, on a
Plan-by-Plan basis, in the same proportion as the allocated shares held in each
Plan are tendered or exchanged.
The Trustee's duties with respect to voting and tendering of Common
Stock are governed by the fiduciary provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). These fiduciary provisions of ERISA
may require, in certain limited circumstances, that the Trustee override the
voting instructions, or decisions whether or not to tender, of participants with
respect to Common Stock and to determine, in the Trustee's best judgment, how to
vote the shares or whether or not to tender the shares.
Trustee
Generally, the Trustee has all the rights afforded a trustee under
applicable law, although the Trustee generally may exercise those rights at the
direction of the Committee. Subject to this limitation and those set forth in
the Plans and master trust agreement, the Trustee's rights include, but are not
limited to, the right to (i) invest and reinvest the funds held in the Plan's
trust in any investment of any kind, including qualifying employer securities
and qualifying employer real property as such investments are defined in Section
407(d) of ERISA, and contracts issued by insurance companies, including
contracts under which the insurance company holds Plan assets in a separate
account or commingles separate accounts managed by the insurance company, (ii)
retain or sell the securities and other property held in the Plans' trust, (iii)
consent or participate in any reorganization or merger in regard to any
corporation whose securities are held in the Plans' trust (subject, in the case
of the Company's securities, to the participants' pass-through voting rights and
right to instruct the Trustee in the event of a tender or exchange offer) and to
pay calls or assessments imposed on the holder thereof and to consent to any
contract, lease, mortgage or purchase or sale of any property between such
corporation and any other parties, (iv) exercise all the rights of the holder of
any security held in the Plans' trust, including the right to vote such
securities (subject, in the case of the Company's securities, to the
participants' pass-through voting rights), convert such securities into other
securities, acquire additional securities and exchange such securities (subject,
in the case of the Company's securities, to the participants' right to instruct
the Trustee in the event of a tender or exchange offer), (v) vote proxies and
exercise any other similar rights of ownership, subject to the Committee's right
to instruct the Trustee as to how (or the method of determining how) the proxies
should be voted or such rights should be exercised and (vi) lend to participants
in the Plans such amounts as the Committee directs.
The Trustee's compensation and all other expenses incurred in the
establishment, administration and operation of the Plans are borne by the
respective Plans unless the Company elects to pay such expenses.
Administrative and Custodial Services
Administrative services for the SARP, principally related to accounting
and recordkeeping, are performed by a commercial service provider. The costs of
these administrative services are borne by the SARP.
Account Statements
Each participant is furnished with a statement of his or her accounts
in the respective Plans, no less than annually.
Amendment and Termination
The Company has reserved the right to amend each of the Plans at any
time and for any reason, except that no such amendment may have the effect of
(i) generally causing any assets of the Plan trusts to be used for or diverted
to any purposes other than providing benefits to participants and their
beneficiaries and defraying expenses of the Plans, except as permitted by
applicable law, (ii) depriving any participant or beneficiary, on a retroactive
basis, of any benefit to which they would otherwise be entitled had the
participant's employment with the Company terminated immediately prior to the
amendment or (iii) increasing the liabilities or responsibilities of a Trustee
or an investment manager without its written consent.
The Company has also retained the right to terminate any of the Plans
at any time and for any reason. In addition, the Company may discontinue
contributions to the Plans; provided, however, that any such discontinuation of
contributions shall not automatically terminate the Plans as to funds and assets
then held by the Trustee.
ERISA
Each of the Plans is subject to ERISA, including reporting and
disclosure obligations, fiduciary standards and the prohibited transaction rules
of Title I thereof. Since each of the Plans is an individual account plan under
ERISA, neither of the Plans is subject to the jurisdiction of the Pension
Benefit Guaranty Corporation ("PBGC") under Title IV of ERISA, and the Plans'
benefits are not guaranteed by the PBGC.
Federal Income Tax Consequences
In the Company's view, the following discussion includes a description
of all material federal income tax considerations relating to the Plans. The
Company has not received an opinion of counsel with respect to this discussion.
Each of the Plans is intended to be qualified under Section 401(a)of
the Code. Qualification of the Plans under Section 401(a) of the Code has the
following federal income tax consequences:
(a) A participant will not be subject to federal income tax on Company
contributions to the Plans at the time such contributions are made.
(b) A participant will not be subject to federal income tax on any
income or appreciation with respect to such participant's accounts under the
Plans until distributions are made (or deemed to be made) to such participant.
(c) A participant and the Company will not be subject to federal
employment taxes on Company contributions to the Plans, except as set forth
below with respect to certain Company contributions to the SARP.
(d) The Plans will not be subject to federal income tax on the
contributions to them by the Company and will not be subject to federal income
tax on any of their income or realized gains, assuming that the Plans do not
realize any unrelated business taxable income.
(e) Eligibility for participation in the Plans will preclude or
restrict an employee from making deductible contributions to an Individual
Retirement Account ("IRA"), depending on the employee's marital status and
adjusted gross income ("AGI") for the year. If an employee or his or her spouse
is covered by an employer-maintained retirement plan (such as any of the Plans),
an IRA deduction is available only if the participant's AGI does not exceed a
certain phase-out level. To the extent that the IRA deduction is limited under
these provisions, a non-deductible IRA contribution is permitted (in an amount
equivalent to the reduction in the deductible IRA amount).
(f) Subject to the contribution limitations contained in the Plans, the
Company will be able to deduct the amounts that it contributes under the Plans
as compensation expense, with the amount of such deduction generally equaling
the amount of the contributions.
(g) Distributions from the Plans will be subject to federal income tax
under special, complex rules that apply generally to distributions from
tax-qualified retirement plans. In general, a single distribution from any of
the Plans will be taxable in the year of receipt at regular ordinary income
rates (on the full amount of the distribution, exclusive of the amount of the
participant's voluntary, non-deductible contributions made to those Plans which
previously permitted such contributions) unless the distributee is eligible for
and elects (i) to make a qualifying "rollover" of the amount distributed to an
IRA or another qualified plan or (ii) to utilize ten-year averaging, five-year
averaging or partial capital gains taxation of the distribution. However, the
tax on any portion of the qualifying lump sum distribution represented by "net
unrealized appreciation" in Common Stock distributed shall be deferred until a
subsequent sale or taxable disposition of the shares, unless the distributee
elects not to have this deferral apply.
A "lump sum distribution," for purposes of eligibility for deferral of
tax on net unrealized appreciation, is defined as a distribution of the
employee's entire vested interest under the Plan within one taxable year (i) on
account of the participant's death or other separation from service or (ii)
after the participant has attained age 59 1/2. For a lump sum distribution to be
eligible for five-year averaging, the participant also must have been a
participant in the Plan from which the distribution is made for at least five
years prior to the year of distribution and must have attained age 59 1/2 when
the distribution is received. Under a special transition rule, an individual who
had attained age 50 on January 1, 1986, and who would otherwise be entitled to
elect five-year averaging (without regard to the age 59 1/2 requirement) may
instead make a one-time election of ten-year averaging (at 1986 rates) and may
elect to have the pre-1974 portion of the distribution taxed at 1986 capital
gains rates. The special five-year or ten-year averaging treatment, as well as
partial capital gains treatment, of lump sum distributions is applicable to a
lump sum distribution from a Plan only if all other lump sum distributions
(whether or not from the same Plan or plans of a similar type) received during
the same taxable year by the participant are treated in the same manner. Hence,
for example, if a participant receives a lump sum distribution from the SARP and
ESOP in the same taxable year, he or she could not elect to use five-year or
ten-year averaging on the SARP distributions while electing a rollover to an IRA
of the distribution from the ESOP.
"Early" distributions from the Plans will result in an additional 10%
tax on the taxable portion of the distribution, except to the extent the
distribution (i) is rolled over into an IRA or other qualified plan or (ii) is
used for deductible medical expenses. "Early" distributions are in-service
distributions (i.e., prior to termination of employment) prior to the date the
participant attains age 59 1/2 unless due to the permanent disability of the
participant and distributions made following termination of service, unless due
to the death of the participant or made to a participant who terminated
employment during or after the calendar year the participant attained the age of
55.
(h) A participant (or his or her spouse in the event of the
participant's death) who (i) receives a distribution from the Plans and (ii)
wishes to defer immediate tax upon receipt of such distributions, may transfer
(i.e., "rollover") all or portion thereof, exclusive of the amount of the
participant's voluntary nondeductible contributions (made to those Plans which
previously permitted the participant to make voluntary nondeductible
contributions) received in the distribution, to either an IRA or, in the case of
a participant, another qualified retirement plan. To be effective, the
"rollover" must be completed within 60 days of receipt of the distribution.
Alternatively, the participant or spouse may request a direct rollover from the
Plans to an IRA or, in the case of a participant, to another qualified
retirement plan.
A participant (or his or her spouse) who does not arrange a direct
rollover to an IRA or another qualified plan will be subject to mandatory
federal income tax withholding at a rate of 20% of the taxable distribution,
even if the participant or spouse later makes a rollover within the 60-day
period. However, in no event may the amount withheld exceed the amount of a
participant's distribution, excluding any Common Stock received by the
participant in the distribution.
A participant (or his or her spouse) who makes a valid "rollover" to an
IRA will defer payment of federal income tax until such time as such participant
(or his or her spouse) actually begins to receive distributions from the IRA.
IRA earnings accumulate on a tax-deferred basis until actually distributed;
however, IRA funds generally may not be withdrawn without penalty until a
participant (or his or her spouse) (i) attains the age of 59 1/2, (ii) becomes
disabled or (iii) dies. The Code requires that distributions from an IRA begin
no later than April 1 of the taxable year following the year in which an
individual attains the age of 70 1/2, at which time periodic distributions may
continue for the participant's lifetime or for a lifetime of the participant and
the participant's spouse.
(i) The Code imposes a 15% excise tax on "excess distributions" to an
individual from all qualified retirement plans and IRAs (whether or not plans of
the same employer). In general, an "excess distribution" is a distribution or
distributions in excess of $112,500 in any calendar year (adjusted for
cost-of-living increases). This limit is increased to $562,500 (also adjusted
for cost-of-living) in the case of a lump sum distribution as to which a
qualified recipient elects five-year or ten-year averaging treatment. Also, an
individual was entitled to elect on his or her 1988 federal income tax return to
exclude benefits accrued as of August 1, 1986, but these benefits are considered
in determining whether additional accrued benefits are subject to the tax. For
those individuals who did not elect this special rule, the $112,500/$562,500
limit is increased to $160,000/$800,000. The excess distribution excise tax has
been suspended with respect to distributions received during the period from
January 1, 1997 to December 31, 1999.
In addition to the federal income tax consequences applicable to all of
the Plans, the Deferred Fund of the SARP is intended to be a qualified "cash or
deferred arrangement" under Section 401(k) of the Code. A participant in the
SARP who elects to defer a portion of his or her compensation and have the
Company contribute it to the SARP will not be subject to federal income tax on
the amounts contributed at the time the contributions are made. However, these
contributions will be subject to social security taxes and certain federal
unemployment taxes. Elective deferrals by a participant to his or her SARP
account is limited to $7,000 annually (adjusted for cost-of-living). This annual
limit applies on an employee-by-employee basis to all 401(k) plans (including
plans of other employers) in which the employee participates. For calendar year
1998, the adjusted limit is $10,000.
Generally, the Company will be able to deduct the amounts that it
contributes to the SARP pursuant to employee elections to defer a portion of
their compensation, as well as any matching or additional Company contributions
it makes to the Deferred Fund. The deduction will be equal to the amount of
contributions made.
With respect to loans from the SARP commencing after December 31, 1986,
any interest paid by the participant will not be deductible, regardless of the
purpose of the loan or use of the loan proceeds. Moreover, interest paid on any
loan from any of the Plans by a "key employee," as defined in Section 416(i) of
the Code, will not be deductible.
Participants should consult their own tax advisors with respect to all
federal, state and local tax effects of participation in the Plans. Moreover,
the Company does not represent that the foregoing tax consequences will apply to
any particular participant's specific circumstances or will continue to apply in
the future and makes no undertaking to maintain the tax-qualified status of the
Plans.
EMPLOYEE STOCK PURCHASE PLAN
General
The Employee Stock Purchase Plan (the "Stock Purchase Plan" or "ESPP")
was adopted on May 10, 1995, and it became effective July 1, 1995. The Stock
Purchase Plan is intended to qualify as a stock purchase plan under Section
423(b) of the Code. The Stock Purchase Plan provides for the purchase of Common
Stock by participating employees through voluntary payroll deductions. At each
Trade Date, the Stock Purchase Plan will purchase for the account of each
participant that number of shares of Common Stock which may be acquired with the
funds available in the participant's stock purchase account, together with the
Company's contribution described below. The Stock Purchase Plan is not subject
to ERISA.
Eligibility
Generally, all of the Company's employees are eligible to participate
in the Stock Purchase Plan. No employee, however, who owns capital stock of the
Company having more than five percent of the voting power or value of such
capital stock will be able to participate. An employee's eligibility to
participate in the Stock Purchase Plan will terminate immediately upon
termination of employment with the Company.
Employees may participate in the Stock Purchase Plan by completing a
payroll deduction authorization in accordance with Company policy. The minimum
payroll deduction allowed is $7.00 per week and the maximum deduction is $450
per week. Further, no employee is entitled to purchase an amount of Common Stock
having a value (measured as of its purchase date) in excess of $25,000 in any
calendar year pursuant to the Stock Purchase Plan and any other employee stock
purchase plan that may be adopted by the Company.
Purchase of Shares/Discount
Shares of Common Stock purchased under the Stock Purchase Plan will be
acquired by the ESPP on the Internal Market. See "Market Information -- The
Internal Market." Contributions by participants under the Stock Purchase Plan
will be used by the ESPP to purchase shares at a discount established from time
to time by the Compensation Committee, but not to exceed 15% of the prevailing
Formula Price. The Company will either pay the discount portion to the ESPP in
cash, or will deliver to the ESPP a sufficient number of shares having a value
equal on the applicable Trade Date to the aggregate amount of the discount. The
Board of Directors has established the discount rate at 5%. A total of 100,000
shares was reserved in 1995 for possible issuance under the ESPP in satisfaction
of this contribution obligation, but the Company has not issued any such shares
to date.
Distribution and Withdrawals
Shares of Common Stock acquired under the Stock Purchase Plan will be
allocated to each participant's account immediately following each quarterly
Trade Date in which the acquisition occurred.
Pursuant to the By-Laws, all shares of Common Stock purchased pursuant
to the Stock Purchase Plan will be subject to the Company's right of first
refusal in the event that the participant desires to sell such shares other than
on the Internal Market.
See "Description of Capital Stock -- Restrictions on Common Stock."
Participants may withdraw the money held in their stock purchase
accounts at any time prior to the acquisition of shares of Common Stock
therewith, although upon doing so the participant will not be eligible to
participate in the Stock Purchase Plan until three months after such withdrawal.
No interest will be paid on the money held in the stock purchase accounts of the
participants.
Amendment and Termination
The Board of Directors of the Company may suspend or amend the Stock
Purchase Plan in any respect, except that no amendment may (i) increase the
maximum number of shares authorized to be issued by the Company under the Plan,
(ii) increase the Company's contribution for each share purchased above 15% of
the applicable purchase price for such share, (iii) cause the Stock Purchase
Plan to fail to qualify under Section 423(b) of the Code or (iv) deny to
participating employees the right at any time to withdraw from the Stock
Purchase Plan and thereupon obtain all amounts then due to their credit in their
Stock Purchase Accounts. The Stock Purchase Plan will terminate on December 31,
1999, unless extended by the Board of Directors.
Administration
Administrative services for the Stock Purchase Plan, principally
related to accounting and recordkeeping, are performed by a commercial service
provider. The costs of these administrative services are borne by the Company.
Federal Income Tax Consequences
In the Company's view, the following discussion includes a description
of all material federal income tax considerations relating to the Stock Purchase
Plan. The Company has not received an opinion of counsel with respect to this
discussion.
For federal income tax purposes, no taxable income will be recognized
by a participant in the Stock Purchase Plan until the taxable year of sale or
other disposition of the shares of Common Stock acquired under the ESPP. When
the shares are disposed of by a participant more than two years after the date
such shares were purchased for the participant's account by the ESPP, the
participant must recognize ordinary income for the taxable year of disposition
to the extent of the lesser of (i) excess of the fair market value of the shares
on the purchase date over the amount of the purchase price paid by the
participant (the "Discount") or (ii) the amount by which the fair market value
of the shares at disposition or death exceeds the purchase price, with any gain
in excess of such ordinary income amount being treated as a long term capital
gain, assuming that the shares are a capital asset in the hands of the
participant. In the event of a participant's death while owning shares acquired
under the Stock Purchase Plan, ordinary income must be recognized in the year of
death in the amount specified in the foregoing sentence. When the shares are
disposed of prior to the expiration of the two-year holding period (a
"disqualifying disposition"), the participant must recognize ordinary income in
the amount of the Discount, even if the disposition is by gift or is at a loss.
In the case discussed above (other than death), the amount of ordinary
income recognized by a participant is added to the purchase price paid by the
participant and this amount becomes the tax basis for determining the amount of
the capital gain or loss for the disposition of the shares.
The Company will not be entitled to a deduction at any time for the
shares issued in satisfaction of the discount obligation, if a participant
holding such shares continues to hold his or her shares or disposes of his or
her shares after the required two-year holding period or dies while holding such
shares. If, however, a participant disposes of such shares prior to the
expiration of the two-year holding period, the Company is allowed a deduction to
the extent of the amount of ordinary income includable in gross income by such
participant for the taxable year as a result of the premature disposition of the
shares.
Participants should consult their own tax advisors with respect to all
federal, state and local tax effects of participation in the Stock Purchase
Plan. Moreover, the Company does not represent that the foregoing tax
consequences will apply to any participant's specific circumstances or will
continue to apply in the future and makes no undertaking to maintain the
tax-qualified status of the Stock Purchase Plan.
1995 STOCK OPTION PLAN
General
The 1995 Option Plan was approved by the Company's Board of Directors
on February 10, 1995, and it became effective July 1, 1995. The 1995 Option Plan
authorizes the granting of non-qualified stock options with respect to an
aggregate of 1,250,000 shares of Common Stock, during the period July 1, 1995
through December 31, 1999. As of April 3, 1998, 21,200 such options have been
exercised and 995,400 are outstanding. The Plan will terminate and all
unexercised options will expire on December 31, 2007.
The exercise price of options granted under the 1995 Option Plan is
determined by the Compensation Committee and may not be less than 100% of the
most recent Formula Price of the Common Stock on the date of grant. Upon the
exercise of an option, the exercise price is fully payable, in whole or in part,
in cash or in shares of Common Stock valued at the Formula Price on the date of
exercise. Any withholding required as a result of the exercise of a
non-qualified option may, at the discretion of the Compensation Committee, be
satisfied by withholding in shares of Common Stock of the Company valued at the
Formula Price on the date of exercise. All options granted pursuant to the 1995
Option Plan are non-transferable except by will or the laws of intestate
succession.
Options granted under the 1995 Option Plan may be exercised over a
period specified in the stock option agreement, subject to vesting provisions
described below. If an optionee's employment terminates as a result of death,
permanent disability or retirement before reaching age 65, all options may be
exercised, to the extent vested at the date of termination, during the six month
period following termination, but in no event after their respective expiration
dates. If an optionee retires at or after age 65, all options, to the extent
vested at the date of retirement, may, for up to one additional year (but in no
event later than their respective expiration dates), be exercised by the
optionee or by his legal representative or permitted assignee. Upon termination
of employment for any other reason, all options (whether or not vested) will
terminate as of the date of such termination of employment, unless otherwise
authorized by the Compensation Committee (but in no event shall the option be
exercisable for a period extending beyond 90 days following such termination).
Eligibility and Participation
The persons eligible to receive options under the 1995 Option Plan
are key employees and directors designated by the Compensation Committee.
Vesting of Options
The right to exercise options granted prior to March 5, 1998 under the
1995 Option Plan vest at the rate of 20% per year during the five-year period
following the date of the grant. The right to exercise options granted on and
after such date vest at the rate of 25% per year during the four-year period
following the date of the grant. Options that are forfeited due to termination
of employment or expiration shall be available for new grants under the Plan.
All options granted prior to March 5, 1998 shall expire seven years after the
date of grant unless earlier exercised; options granted on or after such date,
if unexercised, shall expire ten years after the date of grant.
In the event of a change of control involving the Company, all
optionees will be guaranteed either the continuation of a comparable stock
option plan with comparable rights (including identical rights with respect to
options granted prior to such change of control), or the right within a
reasonable period of time following such change of control, not to exceed one
year, to exercise all granted options under the 1995 Option Plan, whether or not
vested.
Amendment and Termination
The 1995 Option Plan may be amended, suspended or terminated by the
Board of Directors, except that no such amendment may, without the approval of
the holders of outstanding shares of the Company having a majority of the
general voting power, (i) increase the maximum number of shares for which
options may be granted (other than by reason of changes in capitalization and
similar adjustments), (ii) change the provisions of the 1995 Option Plan
relating to the establishment of the exercise price (other than the provisions
relating to the manner of determination of fair market value of the Company's
capital stock to conform to any applicable requirements of the Code or
regulations issued thereunder) or (iii) permit the granting of options to
members of the Compensation Committee. No options will be granted under the 1995
Option Plan after December 31, 1999.
General Provisions
All shares issued upon exercise of options granted under the 1995
Option Plan are subject to (i) the Company's right of first refusal in the event
that the optionee desires to sell his or her shares other than on the Internal
Market and (ii) the Company's right of repurchase upon termination of the
optionee's employment or affiliation. See "Description of Capital Stock --
Restrictions on Common Stock."
Grants of stock options may be contingent upon a requirement that such
individuals purchase a specified number of shares of Common Stock on the
Internal Market at the prevailing Formula Price. The Compensation Committee may
also establish other terms relating to vesting and exercise, such as a target
Formula Price.
If the outstanding shares of Common Stock of the Company are changed
into or exchanged for a different number or kind of shares or securities of the
Company through reorganization, merger, recapitalization, reclassification or
similar transaction, or if the number of outstanding shares is changed through a
stock split, stock dividend, stock consolidation or similar transaction, an
appropriate adjustment (determined by the Board of Directors in its sole
discretion) will be made in the number and kind of shares and the exercise price
per share of options which are outstanding or which may be granted thereafter.
Administration
The 1995 Option Plan is administered by the Compensation Committee of
the Board of Directors. The current members of the Compensation Committee are H.
S. Winokur, Jr., R. E. Dougherty and P. G. Kaminski. The address of each such
person is 2000 Edmund Halley Drive, Reston, Virginia 20191. The Compensation
Committee is appointed annually by the Board of Directors, which may also fill
vacancies or replace members of the Compensation Committee. Subject to the
express provisions of the 1995 Option Plan, the Compensation Committee has the
authority to (i) interpret the 1995 Option Plan, (ii) prescribe, amend and
rescind rules and regulations relating to the 1995 Option Plan, (iii) determine
the individuals to whom and the time or times at which options may be granted
and the number of shares to be subject to each option granted under the 1995
Option Plan, (iv) determine the terms and conditions of the option agreements
under the 1995 Option Plan (which need not be identical) and (v) make all other
determinations necessary or advisable for the administration of the 1995 Option
Plan. In addition, the Compensation Committee may, with the consent of the
affected optionees and subject to the general limitations of the 1995 Option
Plan, make any adjustment in the exercise price, the number of shares subject to
or the term of, any outstanding option by cancellation of such option and a
subsequent re-granting of such option, or by amendment or substitution of such
option. Options which have been so amended, re-granted or substituted may have
higher or lower exercise prices, cover a greater or lesser number of shares of
capital stock, or have longer or shorter terms, than the prior options. The
members of the Compensation Committee receive no compensation from the 1995
Option Plan for services rendered in connection therewith.
Federal Income Tax Consequences
In the Company's view, the following discussion includes a description
of all material federal income tax considerations relating to the 1995 Option
Plan. The Company has not received an opinion of counsel with respect to this
discussion.
All options granted under the 1995 Option Plan are non-qualified
options. Generally, the optionee will not be taxed upon the grant of a
non-qualified option, but rather, at the time of exercise of such option, the
optionee will recognize ordinary income for federal income tax purposes in an
amount equal to the excess of the fair market value at the time of exercise of
the capital stock purchased over the exercise price. The Company will generally
be entitled to a tax deduction at such time and in the same amount that the
optionee realizes ordinary income.
If capital stock acquired upon the exercise of a non-qualified option
is later sold or exchanged, then the difference between the sale price and the
fair market value of such capital stock on the date which governs the
determination of ordinary income is generally taxable (provided the stock is a
capital asset in the holder's hands) as long-term or short-term capital gain or
loss depending upon whether the holding period for such capital stock at the
time of disposition is more or less than one year.
If payment of the exercise price of a non-qualified option is made by
surrendering previously owned shares of capital stock, the following rules
apply:
(a) No gain or loss will be recognized as a result of the surrender of
shares in exchange for an equal number of shares subject to the non-qualified
option;
(b) The number of shares received equal to the shares surrendered will
have a basis equal to the shares surrendered and a holding period that includes
the holding period of the shares surrendered; and
(c) Any additional shares received (i) will be taxed as ordinary income
in an amount equal to the fair market value of the shares at the time of
exercise, (ii) will have a basis equal to the amount included in taxable income
by the optionee and (iii) will have a holding period that begins on the date of
the exercise.
Holders of options granted under the Option Plan should consult their
own tax advisors for specific advice with respect to all federal, state or local
tax effects before exercising any options and before disposing of any shares of
capital stock acquired upon the exercise of an option. Moreover, the Company
does not represent that the foregoing tax consequences apply to any particular
option holder's specific circumstances or will continue to apply in the future.
EXECUTIVE INCENTIVE PLAN
General
The Company's current Executive Incentive Plan (the "EIP") became
effective in 1993. The EIP provides for the annual award of discretionary
bonuses based on the achievement of specific financial and individual
performance goals. The EIP was amended effective January 1, 1996, to provide for
the payment of 20% of each award in the form of shares of Common Stock, based on
the most recent Formula Price. 300,000 shares were reserved for possible
issuance under the EIP for calendar years 1996 through 2000. The EIP is not
subject to ERISA and is not intended to be qualified under Section 401(a) of the
Code.
Eligibility and Participation
The officers and key managerial employees of the Company designated by
the Compensation Committee are eligible to participate in and receive bonuses
under the EIP.
Awards
Each year the Company establishes bonus pools representing the
aggregate targeted bonuses negotiated in advance with EIP participants. Awards
under the EIP are generally made based upon the achievement of certain
individual and financial performance criteria. Awards under the EIP are made
based on recommendations of the Chief Executive Officer to the Compensation
Committee. Awards of bonuses under the EIP are generally distributed after the
end of the fiscal year to which the bonus relates. After calculation of each
individual award and deductions for payment of applicable taxes, 20% of the net
award distribution is made in the form of shares of Common Stock, valued at the
Formula Price. Pursuant to the By-Laws, all shares of Common Stock distributed
under the EIP will be subject to the Company's right of first refusal in the
event that the participant desires to sell such shares other than on the
Internal Market. See "Description of Capital Stock -- Restrictions on Common
Stock." Awards of bonuses, including potential shares of Common Stock, may also
be subject to forfeiture, in whole or in part, in the event of the termination
of the recipient's employment or affiliation with the Company prior to the date
for payment of awards.
Pursuant to the EIP, bonuses to the Chief Executive Officer must be
approved by the Compensation Committee. Members of the Compensation Committee
are ineligible to receive awards under the EIP. For services rendered during the
fiscal year ended December 31, 1997, a total of 41 individuals received an
aggregate of 9,610 shares of Common Stock as the stock portion of bonuses under
the EIP.
Federal Income Tax Consequences
In the Company's view, the following discussion includes a description
of all material federal income tax considerations relating to the EIP. The
Company has not received an opinion of counsel with respect to this discussion.
Awards under the EIP of cash bonuses and shares of Common Stock that
are not subject to forfeiture are taxable as ordinary income to the recipient in
the year received.
Recipients of awards under the EIP should consult their own tax
advisors with respect to all federal, state and local tax effects of
participation in the EIP. Moreover, the Company does not represent that the
foregoing tax consequences will apply to any particular participant's specific
circumstances.
Amendment and Termination
The EIP may at any time be amended or terminated by the Board of
Directors, except that no amendment or termination may, without a recipient's
consent, affect any bonus award previously made to such recipient.
Administration
The EIP is administered by the Compensation Committee of the Board of
Directors.
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of 20,000,000
shares of Common Stock, par value $0.10 per share, of which, as of April 3,
1998, 10,103,948 shares are outstanding, and 123,711 shares of Class C
Preferred, par value $0.10 per share, of which none are outstanding. As of April
3, 1998, there were approximately 590 holders of record of Common Stock.
As of April 3, 1998, there were also outstanding 347,185 warrants to
acquire an identical number of shares of Common Stock at an exercise price of
$0.25 per warrant. Warrants were issued at the rate of 6.6767 warrants for each
share of Common Stock acquired by certain management and other stockholders on
March 11, 1988, prior to the LBO, and 942,563 warrants were issued to an
affiliate of the lead bank financing the LBO. A total of 5,066,003 warrants were
issued in 1988, of which 4,718,818 or 93% have been exercised or surrendered
through April 3, 1998. Unexercised warrants will expire on September 9, 1998.
The following is a summary of the material provisions of the
Certificate of Incorporation and By-Laws of the Company regarding the Company's
capital stock. The summary is not complete and is qualified in its entirety by
reference to the Certificate of Incorporation and to the By-Laws, copies of
which are incorporated by reference to the Registration Statement of which this
Prospectus is a part.
Common Stock
The holders of Common Stock are entitled to one vote per share held of
record in elections for directors and on all other matters required or permitted
to be approved by a vote of stockholders of the Company. Each share of Common
Stock is equal in respect of rights and liquidation and rights to dividends and
to distributions. Stockholders of the Company do not and will not have any
preferred or preemptive rights to subscribe for, purchase or receive additional
shares of any class of capital stock of the Company, or any options or warrants
for such shares, or any rights to subscribe for or purchase such shares, for any
securities convertible into or exchangeable for such shares, which may be
issued, sold or offered for sale by the Company.
Restrictions on Common Stock
The Board of Directors of the Company amended the By-Laws on May 10,
1995, to provide that, as to any share of Common Stock issued on or after May
11, 1995, such share may not be sold or transferred by the holder thereof to any
third party, other than (1) by descent or distribution, (2) by bona fide gift or
(3) by bona fide sale after the holder thereof has first offered in writing to
sell the share to the Company at the same price and under substantially the same
terms as apply to the intended sale and the Company has failed or declined in
writing to accept such terms within 14 days of receipt of such written offer or
has refused to proceed to a closing on the transaction within a reasonable time
after such acceptance; provided, however, that the sale to the third party
following such failure, declination or refusal must be made on the same terms
which were not previously accepted by the Company and within 60 days following
such event, or the Company must again be offered such refusal rights prior to a
sale of such share; provided further, however, that this right does not apply to
(A) any transactions made at the current Formula Price through the Internal
Market; (B) any transactions made at any time while the Common Stock is listed
for trading on a national securities exchange or on the over-the-counter market;
(C) sales to the ESOP or (D) shares which have been reissued to the holder in
exchange for shares issued prior to May 11, 1995 to the extent such previously
issued shares were not subject to any right of first refusal by the Company or
its stockholders.
Shares of Common Stock purchased on the Internal Market will be subject
to contractual transfer restrictions having the same effect as those contained
in the By-Laws. Prior to trading on the Internal Market, each buyer will be
required to adhere to the Internal Market rules which impose such transfer
restrictions on all shares purchased on the Internal Market. Shares of Common
Stock issued prior to May 11, 1995 and not subsequently purchased on the
Internal Market are not subject to such restrictions. See "Risk Factors -- Right
of First Refusal."
Stockholders Agreement
Substantially all of the members of senior management, Capricorn and
other outside investors are parties to a Stockholders Agreement. The parties to
the Stockholders Agreement, who control approximately 32% of the voting stock on
a fully diluted basis, have agreed, among other things, to certain procedures
for making nominations to and voting on the election of the Directors and
selling shares on the Internal Stock Market or otherwise selling or transferring
DynCorp securities. Effective January 23, 1997, Capricorn waived its prior right
to nominate members to the Board of Directors, but not its obligation to vote in
accordance with the terms of the Stockholders Agreement.
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered by this Prospectus will be
passed upon for the Company by H. Montgomery Hougen, Vice President and
Secretary and Deputy General Counsel of the Company. As of April 3, 1998, Mr.
Hougen owned directly and indirectly 25,334 shares of Common Stock and options
to purchase 5,000 shares of Common Stock. Mr. Hougen is the beneficial owner of
an additional 4,085 shares through the Company's benefit plans.
EXPERTS
The consolidated financial statements and schedules of the Company as
of and for the year ended December 31, 1997, incorporated by reference in this
Prospectus and elsewhere in this Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
PROSPECTUS
No dealer, salesperson or any other person has been
authorized to give any information or to make any
representations other than those contained in this
Prospectus in connection with the offer contained herein,
and, if given or made, information or representations must 11,969,313 Shares
not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer of
any securities other than those to which it relates or an
offer to sell, or a solicitation of an offer to buy, to any DynCorp
person in any jurisdiction in which such offer or
solicitation is not authorized, or to any person to whom it
is not lawful to make such an offer or solicitation.
Neither delivery of this Prospectus nor any sale made
hereunder at any time implies that information contained
herein is correct as of any time subsequent to the date
hereof.
Common Stock
par value $0.10 per share
TABLE OF CONTENTS
Page
Available Information 3
Certain Information Incorporated by Reference 4
The Company 4
Risk Factors 5
Securities Offered by this Prospectus 10
Market Information 14
Use of Proceeds 17
Employee Benefit Plans 17
Description of Capital Stock 35
Validity of Common Stock 36
Experts 36
___________, 1998
II-4
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Not applicable.
Item 15. Indemnification of Directors and Officers.
Section 102 of the General Corporation Law of the State of Delaware
("GCL") allows a corporation to eliminate the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except in cases where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or a knowing violation of law, authorized the unlawful payment of a dividend or
approved an unlawful stock redemption or repurchase or obtained an improper
personal benefit. The Registrant's Amended and Restated Certificate of
Incorporation, a copy of which is filed as an exhibit to this Registration
Statement, contains a provision which eliminates directors' personal liability
as set forth above.
The Amended and Restated Certificate of Incorporation of the Registrant
and the Bylaws of the Registrant provide in effect that the Registrant shall
indemnify its directors, officers and employees to the extent permitted by
Section 145 of the GCL. Section 145 of the GCL provides that a Delaware
corporation has the power to indemnify its officers and directors in certain
circumstances.
Subsection (a) of Section 145 of the GCL empowers a corporation to
indemnify any director or officer, or former director or officer, who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith in
a manner reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding,
provided that such director or officer had no cause to believe his or her
conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses actually and reasonably incurred in connection with the
defense or settlement of such action or suit provided that such director or
officer acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be made in respect of any claim, issue or matter as to which such director
or officer shall have been adjudged to be liable for negligence or misconduct in
the performance of his or her duty to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action was brought
shall determine that despite the adjudication of liability such director or
officer is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.
Section 145 further provides that to the extent a director or officer
of a corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and empowers the corporation to purchase and maintain insurance on
behalf of a director or officer of the corporation against any liability
asserted against him or her or incurred by him or her in any such capacity or
arising out of his or her status as such whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
145.
Item 16. Exhibits.
Exhibit Description
4.1 Indenture and supplement, dated April 18, 1997 between Dyn Funding
Corporation (a wholly owned subsidiary of the Registrant)and Bankers
Trust Company relating to Contract Receivable Collateralized Notes
(incorporated by reference to Registrant's Post-Effective Amendment
No. 1 on Form S-2 to Form S-1, File No. 33-59279)
4.2 Registration Rights Agreement, dated as of March 17, 1997, among the
Registrant and BT Securities Corporation and Citicorp Securities, Inc.
(incorporated by reference to Registrant's Form S-4, File No. 333-25355)
4.3 Indenture, dated March 17, 1997, between the Registrant and United
States Trust Company of New York relating to the 9 1/2% Senior
Subordinated Notes due 2007 (incorporated by reference to Registrant's
Form S-4, File No. 333-25355)
4.4 Specimen Common Stock Certificate (incorporated by reference to
Registrant's Form 10-K for 1988, File No. 1-3879) 4.5 Statement
Respecting Warrants and Lapse of Certain Restrictions (incorporated by
reference to Registrant's Form 10-K for 1988, File No. 1-3879)
4.6 Amendment (effective March 26, 1991) to Statement Respecting Warrants
and Lapse of Certain Restrictions (incorporated by reference to
Registrant's Form 10-K for 1990, File No. 1-3879)
4.7 Article Fourth of the Amended and Restated Certificate of Incorporation
(incorporated by reference to Registrant's Form S-1, File No.33-59279)
4.8 By-Laws of the Registrant (incorporated by reference to Registrant's
Form S-1, File No. 33-59279)
4.9 Second Amended and Restated Credit Agreement by and among Citicorp North
America, Inc., certain Lenders and the Registrant dated May 15, 1997
(incorporated by reference to Registrant's Form S-4, File No. 333-25355)
4.10 Stockholders Agreement (incorporated by reference to Registrant's Form
S-1, File No. 33-59279)
4.11 Employee Stock Ownership Plan (incorporated by reference to Registrant's
Form S-1, File No. 33-59279)
4.12 Savings and Retirement Plan (incorporated by reference to Registrant's
Form S-1, File No. 33-59279)
4.13 Equity Target Ownership Policy (incorporated by reference to
Registrant's Form S-1, File No. 33-59279)
5 Opinion of H. Montgomery Hougen (previously filed)
10.1 Deferred Compensation Plan (incorporated by reference to Registrant's
Form 10-K for 1987, File No. 1-3879)
10.2 Management Incentive Plan (incorporated by reference to Registrant's
Form 10-K for 1997, File No. 1-3879)
10.3 DynCorp Executive Incentive Plan (incorporated by reference to
Registrant's Form 10-K for 1997, File No. 1-3879)
10.4 Severance Agreement of David L. Reichardt (incorporated by reference to
Exhibit (c)(7) to Schedule 14D-9 filed by Registrant January 25, 1988)
10.5 Amendment to Severance Agreement of David L. Reichardt (filed herewith)
10.6 Severance Agreement of Paul V. Lombardi (incorporated by reference to
Registrant's Form 10-K for 1993, File No. 1-3879)
10.7 Amendment to Severance Agreement of Paul V. Lombardi (filed herewith)
10.8 Severance Agreement of Patrick C.FitzPatrick (incorporated by reference
to Registrant's Form 10-K for 1996, File No. 1-3879)
10.9 Amendment to Severance Agreement of Patrick C. FitzPatrick (filed
herewith)
10.10 Severance Agreement of Carl H. McNair, Jr. (filed herewith)
10.11 Severance Agreement of Marshall S. Mandell (filed herewith)
10.12 Severance Agreement of Robert B. Alleger (filed herewith)
10.13 Restricted Stock Plan (incorporated by reference to Registrant's Form
10-K/A for 1995, File No. 1-3879)
10.14 1995 Stock Option Plan (incorporated by reference Registrant's Form 10-K
for 1997, File No. 1-3879)
11 Computations of Earnings Per Common Share for the Years Ended December
31, 1997, 1996 and 1995 (incorporated by reference to Registrant's Form
10-K for 1997, File No. 1-3879)
13 Registrant's 1997 Annual Report Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1998, File No. 1-3879
21 Subsidiaries of the Registrant (incorporated by reference to
Registrant's Form 10-K for 1997, File No. 1-3879)
23 Consent of Arthur Andersen LLP (filed herewith)
24 Powers of Attorney (previously filed)
Internal Market Rules (filed herewith)
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
1. The file, during any period in which offers or sales are being made,
a post-effective amendment to the Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) f
the Securities Act.
(b) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement; and
(c) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
Provided, however, that paragraphs 1(a) and 1(b) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to section 13 or
section 15(d) of the Exchange Act that are incorporated by reference in the
Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in conjunction with the securities being
registered, the Registrant will, unless in the opinion of its counsel of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this post-effective amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Fairfax, Commonwealth of Virginia, on May 13, 1998.
DynCorp
By: /s/ P. V. Lombardi
P. V. Lombardi
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature to
this post-effective amendment to Registration Statement appears below hereby
appoints Paul V. Lombardi, David L. Reichardt and H. Montgomery Hougen, and each
of them, any one of whom may act without the joiner of the others, as his or her
attorney in fact with full power of substitution and resubstitution to sign on
his or her behalf individually and in the capacity stated below, and to sign and
file all amendments and post-effective amendments to this post-effective
amendment to its Registration Statement and any and all other documents that may
be required in connection with the filing of this post-effective amendment to
Registration Statement, which amendments may make such changes and additions to
this post-effective amendment to Registration Statement as such attorney in fact
may deem necessary or appropriate.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this post-effective amendment to its Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/ P. V. Lombardi President and Director (Principal May 13, 1998
Executive Officer)
P. V. Lombardi
* P. C. FitzPatrick Senior Vice President -- May 13, 1998
Chief Financial Officer
(Principal Financial Officer)
* D. L. Reichardt Senior Vice President -- May 13, 1998
General Counsel and Director
* J. J. Fitzgerald Vice President and Controller May 13, 1998
(Principal Accounting Officer)
* D. R. Bannister Director May 13, 1998
* T. E. Blanchard Director May 13, 1998
* P. G. Kaminski Director May 13, 1998
* D. C. Mecum II Director May 13, 1998
* R. E. Dougherty Director May 13, 1998
* H. S. Winokur Director May 13, 1998
* By: /s/ H. M. Hougen
H. M. Hougen
Attorney-in-Fact