1
[DELOITTE & TOUCHE LLP LOGO]
WYLE LABORATORIES, INC.
Financial Statements as of and for the
Years Ended December 31, 1997 and 1996, and
Independent Auditors' Report
2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Wyle Laboratories, Inc.:
We have audited the accompanying balance sheets of Wyle Laboratories, Inc. (the
"Company") as of December 31, 1997 and 1996, and the related statements of
operations, redeemable preferred stock and common stockholders' equity, and of
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 27, 1998
3
WYLE LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 2,695,000 $ 50,000
Receivables, net (Notes 4 and 8) 18,177,000 18,122,000
Income tax refund receivable 820,000
Prepaid expenses and other current assets 404,000 347,000
Net assets held for sale (Notes 1 and 3) 4,435,000
------------- -----------
Total current assets 21,276,000 23,774,000
PROPERTY, PLANT AND EQUIPMENT, Net (Note 5) 10,766,000 8,554,000
DEFERRED TAX ASSETS (Note 9) 828,000 1,317,000
INTANGIBLE AND OTHER ASSETS (Notes 1, 3 and 6) 1,703,000 2,718,000
------------- -----------
TOTAL $ 34,573,000 $36,363,000
============= ===========
See notes to financial statements.
-2-
4
- --------------------------------------------------------------------------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Accounts payable (Note 2) $ 4,556,000 $ 2,828,000
Accrued liabilities (Note 7) 7,101,000 5,414,000
Deferred tax liability (Note 9) 797,000 1,342,000
Current portion of long-term debt (Note 8) 2,390,000 2,599,000
------------ ------------
Total current liabilities 14,844,000 12,183,000
LONG-TERM DEBT (Note 8) 6,445,000 7,864,000
RETIREE BENEFITS (Note 10) 3,170,000 4,156,000
------------ ------------
Total liabilities 24,459,000 24,203,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 10 and 11)
REDEEMABLE PREFERRED STOCK:
Series A senior cumulative redeemable preferred stock, $0.01 par
value; $6,406,000 aggregate liquidation value; 370,000 shares
authorized; 63,139 and 89,275 shares issued and outstanding at
December 31, 1997 and 1996, respectively (Note 12) 4,595,000 9,004,000
------------ ------------
Series B junior redeemable preferred stock, $0.01 par value; $1,557,000
aggregate liquidation value; 30,000 shares authorized; 15,725 shares
issued and outstanding at December 31, 1997 and 1996 (Note 12) 937,000 851,000
------------ ------------
COMMON STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 250,000 shares authorized; 125,776
and 121,025 shares issued and outstanding at December 31, 1997
and 1996, respectively (Notes 12 and 14) 1,000 1,000
Paid-in capital (Notes 12 and 14) 2,505,000 2,304,000
Retained earnings 2,076,000
------------ ------------
Total common stockholders' equity 4,582,000 2,305,000
------------ ------------
TOTAL $ 34,573,000 $ 36,363,000
============ ============
5
WYLE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996
REVENUE $71,119,000 $61,689,000
COST OF REVENUE 57,671,000 49,699,000
----------- -----------
GROSS PROFIT 13,448,000 11,990,000
----------- -----------
OTHER OPERATING EXPENSES:
Selling, general and administrative expenses 8,482,000 9,719,000
Depreciation and amortization 1,410,000 1,594,000
----------- -----------
Total other operating expenses 9,892,000 11,313,000
----------- -----------
OPERATING INCOME 3,556,000 677,000
INTEREST EXPENSE, Including $139,000 and $103,000 of
amortization of deferred debt issuance costs in 1997 and 1996,
respectively (Note 8) 917,000 895,000
OTHER (INCOME) EXPENSE, Net (Note 13) (579,000)
----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 3,218,000 (218,000)
INCOME TAX BENEFIT (Note 9) (159,000) (276,000)
----------- -----------
INCOME FROM CONTINUING OPERATIONS 3,377,000 58,000
DISCONTINUED OPERATIONS INCOME (LOSS) FROM
OPERATIONS, Net of applicable taxes of $(352,000) and
$127,000 in 1997 and 1996, respectively (Note 3) (558,000) 183,000
GAIN ON DISPOSAL, Net of applicable taxes of $1,089,000
(Note 3) 884,000
----------- -----------
NET INCOME $ 3,703,000 $ 241,000
=========== ===========
See notes to financial statements.
-3-
6
WYLE LABORATORIES, INC.
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------------------
REDEEMABLE
PREFERRED STOCK
------------------------------
SERIES A ADDITIONAL
SENIOR SERIES B COMMON PAID-IN RETAINED
CUMULATIVE JUNIOR STOCK CAPITAL EARNINGS
BALANCE, DECEMBER 31, 1995 $ 7,551,000 $ 766,000 $ 1,000 $ 3,193,000 $ 408,000
Net income 241,000
Accretion of mandatorily redeemable preferred
stock to redemption value (Note 12) 265,000 85,000 (202,000) (148,000)
Accrued dividends on 12% Series A mandatorily
redeemable preferred stock (Note 12) 1,188,000 (687,000) (501,000)
----------- --------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1996 9,004,000 851,000 1,000 2,304,000
Net income 3,703,000
Dividends paid on Series A mandatorily
redeemable preferred stock (Note 12) (3,362,000)
Redemption of Series A mandatorily redeemable
preferred stock (Note 12) (2,588,000)
Accretion of mandatorily redeemable preferred
stock to redemption value (Note 12) 252,000 86,000 (338,000)
Accrued dividends on 12% Series A mandatorily
redeemable preferred stock (Note 12) 1,289,000 (1,289,000)
Issuance of common stock (Note 14) 201,000
----------- --------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ 4,595,000 $ 937,000 $ 1,000 $ 2,505,000 $ 2,076,000
=========== ========= ======== =========== ===========
See notes to financial statements.
-4-
7
WYLE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,703,000 $ 241,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of Enclosures (1,973,000)
Depreciation 1,289,000 1,574,000
Provision for doubtful accounts (12,000) (225,000)
Loss on disposal of equipment 5,000
Amortization of deferred debt issuance costs 148,000 135,000
Amortization of goodwill 122,000 152,000
Amortization of other assets 8,000 8,000
Deferred income taxes (56,000) 1,501,000
Changes in other operating assets and liabilities:
Receivables (43,000) (2,119,000)
Inventories 787,000
Income taxes refund receivable 820,000 (820,000)
Prepaid expenses and other current assets (57,000) (73,000)
Net assets of Enclosures (536,000)
Accounts payable 1,728,000 (2,038,000)
Accrued liabilities 1,687,000 2,354,000
Retiree benefits (986,000) 390,000
----------- -----------
Net cash provided by operating activities 6,383,000 1,331,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Enclosures, net 7,158,000
Purchases of property, plant and equipment (3,506,000) (1,390,000)
Proceeds from sale of fixed assets 206,000
Cash paid to acquire other assets (13,000) (106,000)
----------- -----------
Net cash provided by (used in) investing activities 3,639,000 (1,290,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on Series A preferred stock (3,362,000)
Redemption on Series A preferred stock (2,588,000)
Proceeds from issuance of common stock 201,000
Principal payments on long-term debt (3,068,000) (2,358,000)
Proceeds from long-term debt borrowings 1,440,000 5,121,000
Deferred debt issuance costs (38,000)
Net payments against revolving credit facility (2,776,000)
----------- -----------
Net cash used in financing activities (7,377,000) (51,000)
----------- -----------
See notes to financial statements. (Continued)
-5-
8
WYLE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
1997 1996
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $2,645,000 $ (10,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 50,000 60,000
---------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,695,000 $ 50,000
========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid (received) during the year for:
Income taxes $ (69,000) $ (161,000)
Interest $ 802,000 $ 849,000
See notes to financial statements. (Concluded)
-6-
9
WYLE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION/ACQUISITION
WESS Investment Corp., a Delaware Corporation, was incorporated in
September 1994 and subsequently changed its name to Wyle Laboratories, Inc.
(the "Company"). On December 23, 1994, the Company acquired substantially
all of the assets and certain liabilities of the Scientific Services and
Systems Group, Burton Electrical Engineering ("Burton"), and Electronic
Enclosures ("Enclosures") operations of Wyle Electronics Corp. (the
"Seller").
The initial purchase price of $30,000,000 was financed through capital
contributions from the acquiring stockholders of $10,100,000 (net of equity
issuance costs of $400,000) and $21,015,000 of borrowings under a revolving
credit facility and term loan (see Note 8). The purchase price was
allocated among the net assets acquired, based on the fair market values
determined primarily by an independent appraisal.
Pursuant to the Purchase and Sale Agreement (the "Agreement"), there are
various provisions that could result in subsequent adjustments to the
purchase price. These include:
1) The Company is required to pay the Seller a prescribed amount if
minimum earnings levels are achieved in the future (the "Earnout
Payment"). Specifically, if the Company's earnings before interest,
taxes, depreciation and amortization ("EBITDA") exceed $8,410,000 in
1998 and $8,710,000 in 1999 (the "Breakpoint" as defined in the
Agreement), then the Company will pay the lesser of the excess of
actual EBITDA over the Breakpoint or the Maximum Earnout Payment
($1,500,000 in 1998 and $1,600,000 in 1999). Any amounts paid will be
treated as additional purchase price.
2) The Seller has indemnified the Company against all potential
liabilities related to violations of environmental laws for all acts
or omissions prior to December 23, 1994.
In 1996, the Company sold substantially all the assets and certain
liabilities of Burton to an unrelated third party. The results of Burton's
operations in 1996 and 1995 were not material in relation to those of the
Company.
In 1997, the Company sold substantially all the assets and certain
liabilities of Enclosures (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENTS - The preparation of the Company's financial
statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingencies at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared on the basis of the most current and best
available information, and actual results could differ from those
estimates.
-7-
10
NATURE OF OPERATIONS - The Company provides complete engineering, research and
development, testing, and mission support services in aerospace, defense,
energy and advanced technologies. The Company also produces high technology
electronic components and systems, electronic enclosures and power transmission
cable products.
RECLASSIFICATION - Certain amounts included in the 1996 balance sheet have been
reclassified to conform to the 1997 presentation.
REVENUE RECOGNITION - The Company provides services under fixed price,
cost-based, time and materials, and level of effort contracts. For fixed price
contracts, revenue is recorded on the basis of the estimated percentage of
completion of services rendered. Losses, if any, on fixed price contracts are
recognized during the period in which the loss is determined. For cost-based
contracts, revenue is recorded by applying an estimated factor to costs as
incurred, such factor being determined by the contract provisions and prior
experience. For time and materials and level of effort types of contracts,
revenue is recorded as the costs are incurred, income being the difference
between such costs and the agreed-upon billing amounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reported in the
balance sheets for cash and cash equivalents, receivables and accounts payable
approximate fair value because of the short maturity of these instruments. The
carrying values of amounts borrowed under the Company's revolving credit
facility and term notes approximate fair value due to the variable rate nature
of these instruments. The carrying value of the fixed asset loan approximates
fair value based on rates currently available to the Company for debt with
similar terms and maturities. In the opinion of management, the carrying value
of redeemable preferred stock approximates fair values.
CASH EQUIVALENTS - For purposes of reporting cash and cash equivalents, the
Company considers all investments purchased with an original maturity of three
months or less to be cash equivalents.
RECEIVABLES - Included are amounts billed and currently due from customers
under all types of contracts; amounts currently due but unbilled (primarily
related to contracts accounted for under the cost-to-cost type of
percentage-of-completion method of accounting), certain estimated contract
changes, and amounts retained pending contract completion.
PROPERTY, PLANT AND EQUIPMENT - Additions to property, plant and equipment are
stated at cost. Depreciation is computed under the straight-line and double
declining balance methods of depreciation over the estimated useful lives of
the assets, generally 5 to 15 years.
DEFERRED DEBT ISSUANCE COSTS - Debt origination costs are being amortized, on a
straight-line basis, over the term of the related debt.
GOODWILL AND OTHER INTANGIBLES - The excess of cost over fair value of net
assets acquired and other intangibles are amortized on the straight-line method
over 15 years. The future profitability and cash flow of the operations to
which they relate are evaluated annually. These factors, along with
management's plans with respect to the operations, are considered in assessing
the recoverability of goodwill and other purchased intangibles.
-8-
11
INCOME TAXES - Income taxes are provided for based on the liability method
of accounting. Deferred income taxes arise from temporary differences
between income tax and financial reporting and principally relate to income
recognition on long-term contracts, depreciation, retiree benefits and
certain accruals.
3. DISCONTINUED OPERATIONS
On May 29, 1997, the Company sold substantially all the assets of
Enclosures to an unrelated third party for cash proceeds of $7,158,000 (net
of transaction expenses). The Company recorded a gain on the disposal of
$884,000, net of $1,089,000 in income taxes. The gain was net of a
write-off of $750,000 of non-deductible goodwill (net of $150,000 in
accumulated amortization). This unit is accounted for as a discontinued
operation, and accordingly, its operations are segregated in the
accompanying statements of operations. Revenues, operating costs, other
income and expenses and income taxes for 1997 and 1996 have been
reclassified to amounts associated with discontinued operations.
Summary operating results form discontinued operations are as follows:
1997 1996
Revenues $ 5,600,000 $16,829,000
Gross profit 1,211,000 4,970,000
Earnings (loss) before taxes (910,000) 310,000
Income tax (expense) benefit 352,000 (127,000)
Net earnings (loss) from discontinued operations (558,000) 183,000
The net assets of Enclosures included in the 1996 consolidated balance
sheet are summarized as follows:
Accounts receivable, net $ 1,803,000
Inventory 1,332,000
Property, plant and equipment, net 1,743,000
Other assets 227,000
Current liabilities (670,000)
-----------
Net assets $ 4,435,000
===========
-9-
12
4. RECEIVABLES
Following are the details of receivables at December 31, 1997 and 1996:
1997 1996
Receivables related to long-term contracts:
Amounts billed $11,942,000 $12,252,000
Unbilled recoverable costs and accrued profit on
progress completed and retentions 5,902,000 5,545,000
Provision for uncollectible accounts (181,000) (193,000)
----------- -----------
17,663,000 17,604,000
Other receivables 514,000 518,000
----------- -----------
Net receivables $18,177,000 $18,122,000
=========== ===========
Of the retentions balance and amounts not billed at December 31, 1997,
substantially all amounts are expected to be collected in 1998.
5. PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment at December 31, 1997 and 1996
comprised the following:
1997 1996
Land $ 2,265,000 $ 2,265,000
Buildings and improvements 3,549,000 3,408,000
Machinery and equipment 6,970,000 5,313,000
Construction in progress 2,016,000 317,000
----------- -----------
14,800,000 11,303,000
Accumulated depreciation (4,034,000) (2,749,000)
----------- -----------
Property, plant and equipment $10,766,000 $ 8,554,000
=========== ===========
6. INTANGIBLE AND OTHER ASSETS
Following are the details of intangible and other assets at December 31,
1997 and 1996:
1997 1996
Goodwill $ 1,373,000 $ 2,273,000
Deferred debt origination costs 931,000 931,000
Deposits and other 106,000 93,000
----------- -----------
2,410,000 3,297,000
Accumulated amortization (707,000) (579,000)
----------- -----------
Net intangible and other assets $ 1,703,000 $ 2,718,000
=========== ===========
-10-
13
7. ACCRUED LIABILITIES
Following are details of accrued liabilities at December 31, 1997 and 1996:
1997 1996
Accrued payroll and related costs $ 2,754,000 $ 2,140,000
Accrued insurance 719,000 758,000
Advances from customers 2,678,000 1,119,000
Other accrued liabilities 950,000 1,397,000
----------- -----------
$ 7,101,000 $ 5,414,000
=========== ===========
8. DEBT
The Company has a revolving credit facility of $ 15,000,000, which
provides for borrowings and letters of credit, on which no balance was
outstanding at December 31, 1997 and 1996. Interest rates under the
revolving credit facility are LIBOR plus 2.0% or the bank's prime rate
plus 0.25%. At December 31, 1997, the interest rate was 8.75%.
Borrowings under the revolving credit facility renew annually. Under the
revolving credit facility, accounts receivable and unbilled receivables
are pledged as collateral, and borrowings are limited to an amount equal to
the sum of 85% of the unpaid face amount of eligible accounts receivable
and 50% of the eligible unbilled receivables.
Long-term debt consisted of the following at December 31, 1997 and 1996:
1997 1996
Bank term notes, payable in quarterly installments
through 2002 $ 6,597,000 $ 8,445,000
Fixed asset loan, payable in monthly installments
through 2001 2,238,000 1,618,000
Acquisition note (7.50%), payable in annual installments
through 1997 400,000
----------- -----------
8,835,000 10,463,000
Less current portion 2,390,000 2,599,000
----------- -----------
Total long-term debt $ 6,445,000 $ 7,864,000
=========== ===========
Borrowings under the bank term notes are to be repaid over six years and
require mandatory prepayments at year-end if certain cash flows are
achieved. Interest rates under the term loans are LIBOR plus 2.25% or the
bank's rate plus 0.5% per annum (8.22% and 9.75% at December 31, 1997 and
1996, respectively). The bank term notes are secured by certain fixed
assets of the Company.
The revolving credit facility and bank term note agreement contain certain
restrictive covenants that limit the Company's ability to make
acquisitions, redeem preferred stock, and pay dividends without prior
approval (limited to $ 200,000 in any fiscal year). Furthermore,
noncompliance with such covenants could result in acceleration of amounts
due under the agreements. At December 31, 1997, the Company was in
compliance with all financial covenants.
-11-
14
The Company has a $4 million facility with a bank, under which the bank
provides financing to be utilized in the purchase of certain fixed assets.
The loan, which bears interest at 8%, is payable in monthly principal and
interest payments over five years and is secured by the fixed assets
purchased with the proceeds of the facility. Remaining unused capacity on
the facility was approximately $688,000 at December 31, 1997.
Maturities on long-term debt are as follows: 1998, $2,390,000; 1999,
$2,445,000; 2000, $2,505,000; 2001, $1,245,000; 2002, $250,000.
9. INCOME TAXES
The provision (benefit) for income taxes, classified as between current
and deferred, consisted of the following for the years ended
December 31, 1997 and 1996:
1997 1996
Current portion:
Federal $ (66,000) $ (1,549,000)
State (37,000) (228,000)
------------ ------------
(103,000) (1,777,000)
------------ ------------
Deferred portion:
Federal (11,000) 1,326,000
State (45,000) 175,000
------------ ------------
(56,000) 1,501,000
------------ ------------
Total income tax benefit $ (159,000) $ (276,000)
============ ============
The provision (benefit) for income taxes differs from the amount computed
by multiplying the statutory federal income tax rate times income before
income taxes due to the following:
1997 1996
Income tax expense at statutory rate $ 1,105,000 $ (74,000)
State income tax, less effect of
federal deduction 181,000 (13,000)
Goodwill amortization 49,000 52,000
Research and development and other
tax credits (1,302,000) (399,000)
Other permanent differences (165,000)
Other (27,000) 158,000
------------ ------------
Total income tax benefit $ (159,000) $ (276,000)
============ ============
-12-
15
Deferred tax assets (liabilities) comprised the following as of
December 31, 1997 and 1996:
1997 1996
Deferred contract revenue $ (2,516,000) $ (2,291,000)
Net operating loss carryforwards 480,000
Other tax credit carryforwards 1,629,000 399,000
State taxes (74,000) (31,000)
Employee benefits 289,000 241,000
Other (125,000) (140,000)
------------ ------------
Current (797,000) (1,342,000)
------------ ------------
Fixed asset basis (89,000) (83,000)
Retiree benefits 1,342,000 1,668,000
Depreciation and amortization (273,000) (119,000)
Other (152,000) (149,000)
------------ ------------
Noncurrent 828,000 1,317,000
------------ ------------
$ 31,000 $ (25,000)
============ ============
Deferred taxes are classified in the balance sheet as current or
noncurrent, based on the classification of the related asset or liability,
or, in the absence of a related asset or liability, on their expected
reversal date. No valuation allowance is considered necessary for the
deferred tax assets.
The Company's federal tax credit carryforwards of $1,321,000 expire
beginning in 2010. The state tax credit carryforward of $308,000 has no
expiration date.
10. RETIREMENT PLANS
The Company has a defined benefit pension plan for substantially all its
employees. The plan provides for payment of retirement benefits, primarily
commencing after age 65. After meeting certain qualifications, an employee
acquires a vested right to future benefits. The benefits payable under the
plans are generally determined on the bases of the retiree's age, average
salary and length of service with a Social Security benefit offset. The
plan also recognizes past service credit for employees who were previously
employed by the Seller.
A summary of the components of net periodic pension cost for the Company's
defined benefit pension plan for the years ended December 31, 1997 and
1996 is as follows:
1997 1996
Service cost - benefits earned during the year $ 870,000 $ 820,000
Interest cost on projected benefit obligation 256,000 172,000
Actual return on plan assets (100,000) (23,000)
Net amortization and deferral (227,000) (213,000)
--------- ---------
Net periodic pension cost $ 799,000 $ 756,000
========= =========
-13-
16
A reconciliation of the funded status of the Company's defined benefit
pension plan as of December 31, 1997 and 1996 is as follows:
1997 1996
Vested benefit obligation $(4,161,000) $(1,695,000)
=========== ===========
Accumulated benefit obligation $(4,372,000) $(1,881,000)
=========== ===========
Projected benefit obligation $(5,081,000) $(3,270,000)
Fair value of plan assets 2,375,000 863,000
Prior service cost (2,417,000)
Unrecognized (gain) loss 727,000 874,000
Additional minimum liability (19,000)
----------- -----------
Accrued pension obligation $(1,998,000) $(3,950,000)
=========== ===========
In 1997 the Company amended its defined benefit plan. Under the amended
plan, participants' years of service were frozen as of December 31, 1997,
and salary increases were frozen subsequent to 1999. As a result of these
amendments the Company recorded a curtailment gain of $1,164,000.
The primary actuarial assumptions used include:
1997 1996
Expected long-term rate of return 8.0% 8.0%
Weighted-average discount rate 7.0% 7.5%
Rate of increase on future compensation levels 4.0% 4.0%
Plan assets consist primarily of investments in bond and mortgage mutual
funds.
In addition to the defined benefit plan described above, the Company also
sponsors a 401(k) defined contribution plan for substantially all of its
employees. The Company matches 25% of the employee's contribution up to a
$300 annual maximum. During 1997 and 1996, the Company contributed $162,000
and $134,000, respectively. Effective January 1, 1998, the plan was amended
to increase the Company's match to 50% of the employee's contribution (up
to 6% of the employee's compensation) plus a discretionary profit sharing
contribution up to 2% of employee compensation.
Concurrent with the amendment to its defined benefit plan, the Company
formally adopted a plan to offer postretirement benefits to eligible
employees and their families. Eligibility was based on years of service and
was frozen at the time the plan was implemented. The plan, which is
unfunded, requires the Company to pay a percentage of the retiree's medical
cost with a Medicare offset. The percentage paid by the Company (frozen
effective December 31, 1997) varies depending on the individual's years of
service with the Company. The Company recorded a pre-tax charge of $966,000
in connection with the adoption of the retiree medical plan.
-14-
17
A reconciliation of the funded status of the Company's retiree medical plan
as of December 31, 1997 is as follows:
Accumulated postretirement benefit obligation: $ 78,000
Retirees and spouses 550,000
Fully eligible active participants 544,000
Other active participants ----------
Unfunded accumulated postretirement benefit obligation $1,172,000
==========
The weighted average discount rate used in the calculation of the
accumulated postretirement benefit obligation was 7.0%. Health care costs
are assumed to increase at a rate of 9.0% in 1998 and continue to increase
at rates declining to 5.5% in 2002. A 1% increase in the assumed health
care cost trend rate would increase the accumulated postretirement benefit
obligation by $144,000.
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS - The Company has operating leases for the use of certain
property and equipment. Substantially all operating leases are
noncancelable or cancelable only by the payment of penalties. All lease
payments are based on the lapse of time but include, in some cases,
payments for insurance, maintenance and property taxes. There are no
purchase options on operating leases at favorable terms, but most leases
have one or more renewal options. Certain leases on real property are
subject to annual escalations for increases in utilities and property
taxes. Lease rental expense amounted to $731,000 and $866,000 during 1997
and 1996, respectively.
As of December 31, 1997, minimum fixed rental commitments under
noncancelable operating leases were:
OPERATING
LEASES
1998 $ 452,000
1999 266,000
2000 114,000
---------
Total $ 832,000
=========
CONTINGENCIES - The Company has other contingent liabilities arising in the
ordinary course of its government contracting business. In the opinion of
management, the ultimate disposition of such matters will not materially
affect the Company's financial statements.
In addition to the previously discussed credit facilities, the Company has
seven open letters of credit totaling $ 3,009,000 at December 31, 1997. As
of December 31, 1997, the Company had no borrowings outstanding under these
letters of credit.
-15-
18
12. REDEEMABLE PREFERRED STOCK
In connection with the capitalization of the Company, 120,725 shares of
common stock, 89,275 shares of Series A senior cumulative redeemable
preferred stock, and 15,725 shares of Series B junior redeemable preferred
stock were issued for an aggregate $10,500,000. Such shares were offered
and issued to the investors on a bundled basis. Bundle A consisted of one
share of common and one share of Series A senior cumulative preferred for a
subscription price of $100, while Bundle B consisted of two common shares
and one Series B junior redeemable preferred for a subscription price of
$100. Accordingly, each class of stock was not separately priced. The
aggregate equity proceeds have been allocated among the three classes of
stock based on their relative estimated fair values at the date of
issuance. The per share amounts assigned to each class of stock were:
common, $27.50; Series A senior cumulative preferred, $72.50; and Series B
junior redeemable preferred, $45.00.
Each share of Series A senior cumulative redeemable preferred stock is
entitled to receive dividends, when declared, at the annual rate of 12% of
the liquidation value ($101.46 and $124.19 per share at December 31, 1997
and 1996, respectively). Dividends are cumulative and accrue from the
initial issue date. No dividends will be declared or paid on the Series B
junior redeemable preferred stock.
The Company may (at its option) redeem, in whole or in part, Series A
senior cumulative redeemable preferred stock at the liquidation value. In
October 1997, the Company declared and paid accumulated dividends of
$3,362,000 on the Series A senior cumulative redeemable preferred stock and
redeemed 26,136 shares for $2,588,000. In March 1998, the Company paid all
accrued dividends and redeemed all of the remaining outstanding shares of
the Series A preferred stock.
The Company may (at its option) redeem, in whole or in part, Series B
junior redeemable preferred stock at the liquidation value of $99 per
share. The Company must redeem 1/3 of the remaining shares outstanding in
December 2003, 2004 and 2005.
The difference between the per share amounts assigned to the Series A
senior cumulative preferred ($72.50) and Series B junior redeemable
preferred ($45.00), based upon their relative fair values at the date of
issuance, and the original liquidation value ($99) is being accreted over
the mandatory redemption period on a straight-line basis, which
approximates the interest method.
13. OTHER INCOME (EXPENSE)
Other income (expense) comprises the following:
Proceeds from insurance recovery $ 381,000
Defined benefit plan curtailment gain (Note 10) 1,164,000
Adoption of retiree medical plan (Note 10) (966,000)
-----------
$ 579,000
===========
-16-
19
14. RELATED PARTY TRANSACTION
In 1997, the Company entered into an employment contract with a senior
executive in connection with his initial employment with the Company. Under
the terms of the contract, the executive purchased 4,651 shares of the
Company's common stock at a stipulated price of $43 per share. The
executive was also granted options to purchase an additional 7,731 shares
of the Company's common stock at a stipulated price of $86 per share. Said
options vested ratably over a three-year period. Should the executive
terminate his employment prior to three years from his date of hire, the
Company has the right to repurchase his shares at their original cost. No
compensation expense has been recorded relating to the stock purchase or
the stock options because management believes that the stipulated prices
equal or exceed the fair market value of the stock as of the grant dates.
15. SUBSEQUENT EVENT
On March 16, 1998, the Company acquired the Krug Life Sciences, Inc. and
Technology/Scientific Services, Inc. subsidiaries of Krug International for
a cash payment of $3,052,000, 3,800,000 shares of a newly created Series
A-1 ("New Series A") voting preferred stock, and 9,460 shares of the
Company's existing Series B preferred stock as well as assumed debt of
$3,280,000. The acquired entities primarily provide on-site support
services to federal government agencies.
Each share of the New Series A is entitled to receive dividends, when
declared, at a rate of 12% of the liquidation value of $1.7106 per share.
Dividends are cumulative and accrue from the date of issuance. Shares of
the New Series A are convertible into an equivalent number of shares of
common stock upon a qualifying initial public offering or, after a
nine-month period after the date of issuance, at the discretion of the
holder. In the event the shares are not converted prior to the first
anniversary of the date of issuance, the total cash dividends payable to
the New Series A increase semiannually by 5%.
In connection with the transaction, the Company entered into a revised
credit agreement with its existing lender. Under the terms of the new
agreement, the Company's existing term loans were replaced with a new $13
million term loan. The terms and condition of the new agreement were
substantially the same as the previous agreement.
******
-17-