As filed with the Securities and Exchange Commission on May 10, 1996
Pre-Effective Amendment No. 4 to Registration Statement No. 33-59379
Securities and Exchange Commission
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 22091-3436
(703) 264-0330
(Address, including zip code, and telephone number,
including
area code, of registrant's principal executive offices)
David L. Reichardt Daniel L. Goelzer
Senior Vice President & General Counsel Marc R. Paul
DynCorp Baker & McKenzie
2000 Edmund Halley Drive 815 Connecticut Avenue,
N.W.
Reston, Virginia 22091-3436 Washington, D.C.
20006-4078
(703) 264-9106 (202) 452-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to
the
public: As soon as practicable after this Registration
Statement
becomes effective.
If any of the securities being registered on this form are to be offered
on a
delayed or continuous basis pursuant to rule 415 under the Securities
Act of
1933, check the following box. |X|
CALCULATION OF REGISTRATION FEE
Proposed
Title of Proposed Maximum Amount of
Each Class of Amount to Maximum Offering Aggregate
Securities to be Offering Price Registration Fee
be Registered(1)Registered Price Per Share(2) Aggregate
Common Stock 11,969,313 $15.00 $179,539,695 $61,497.50(3)
par value $0.10 shares
per share
(1) This Registration Statement also relates to an indeterminate number of
interests in the DynCorp Savings and Retirement Plan, the DynCorp
Employee Stock Purchase Plan, the DynCorp 1995 Non-Qualified Stock
Option Plan, the DynCorp Executive Incentive Plan, and the DynCorp
Employee Stock Ownership Plan pursuant to which certain of the shares
of Common Stock offered pursuant to the Prospectus included as part of
this Registration Statement may be issued and delivered or sold.
(2) Estimated solely for purposes of determining the registration fee
pursuant
to Rule 457 under the Securities Act of 1933.
(3) Fee based on a bona fide estimate of maximum offering price per share
of
$14.90.
The Registrant hereby amends this Registration Statement on such
date
or dates as may be necessary to delay its effective date until the
Registrant
shall file a further amendment which specifically states that this
Registration
Statement shall thereafter become effective in accordance with Section
8(a) of
the Securities Act of 1933 or until this Registration Statement shall
become
effective on such date as the Commission, acting pursuant to said Section
8(a),
may determine.
DynCorp
Cross Reference Sheet
Pursuant to Rule 404(a) of Regulation C and Item 501(b) of Regulation S-K
Form S-1
Item Number and Caption Caption or Location
1. Forepart of Registration Statement Facing Page of Registration
Statement;
and Outside Front Cover Page of Outside Front Cover Page of
Prospectus
Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Pages of Prospectus
3. Summary Information, Risk Factors The Company; Risk Factors;
Securities
and Ratio of Earnings to Fixed Offered by this Prospectus; Exhibit
12
Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of
Prospectus;
Market Information -- Determination
of
Offering Price
6. Dilution Dilution
7. Selling Security Holders Securities Offered by this
Prospectus
8. Plan of Distribution Outside Front Cover Page of
Prospectus;
Employee Benefit Plans; Market
Information
9. Description of the Securities Securities Offered by this
Prospectus;
to be Registered Description of Capital Stock
10.Interests of Named Experts and Validity of Common Stock; Experts
Counsel
11.Information with Respect to the The Company; Risk Factors; Use of
Registrant Proceeds; Dividend Policy; Selected
Financial Data; Business;
Management's
Discussion and Analysis of
Financial
Condition and Results of
Operations;
Employee Benefit Plans;
Management;
Security Ownership of
Certain
Beneficial Owners and
Management;
Certain Relationships and
Related
Transactions; Description of
Capital
Stock; Financial Statements
12.Disclosure of Commission Position Commission Position on
Indemnification
on Indemnification for Securities
Act Liabilities
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"), being offered hereby
(the
"Offering"), 4,277,728 shares may be offered and sold by the Company,
5,810,308
shares (which represent all of the shares owned by certain officers,
directors,
and affiliates of the Company as of the date of this Prospectus) may be
offered
and sold by such officers, directors, and affiliates, and 1,881,277 shares
may
be offered and sold by other current and former employees and other
stockholders
of the Company. 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 4,277,728 shares of Common Stock offered by the Company (of
which
approximately 1,600,000 are currently treasury shares which were acquired by
the
Company pursuant to the Stockholders Agreement and through the Employee
Stock
Ownership Plan ("ESOP") between 1989 and 1995, and the remainder of such
shares
are heretofore unissued shares) are expected to be offered as follows: (i)
up to
850,000 shares may be issued and delivered by the Company to a trustee for
the
benefit of employees under the DynCorp Savings and Retirement Plan; (ii)
up to
100,000 shares may be issued and delivered by the Company to employees under
the
DynCorp Employee Stock Purchase Plan; (iii) up to 1,200,000 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
300,000
shares may be issued and delivered to employees under the DynCorp
Executive
Incentive Plan; and (v) up to 1,827,728 shares may be offered and sold by
the
Company to present and future employees and directors through one or more of
the
employee benefit plans listed above. The actual number of shares offered
and
sold by the Company under each category may be less than the indicated
number,
but will not exceed the maximum for such category. See "Securities
Offered by
this Prospectus" and "Employee Benefit Plans."
All of the shares offered hereby will 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 is established and managed by
DynEx,
Inc., in order to provide employees, directors and stockholders of the
Company
the opportunity to buy and sell shares of Common Stock. The Internal
Market
generally permits eligible stockholders to buy and sell shares of Common
Stock
on four predetermined days each year (each a "Trade Date"). All offers and
sales
on the Internal Market by officers, directors, employees, affiliates and
other
stockholders of the Company may, for purposes of the registration
requirements
of the Securities Act of 1933, 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 shareholders 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
purchase and sale of shares on the Internal Market are carried out by
Buck
Investment Services, Inc. ("Buck"), a registered broker-dealer,
upon
instructions from the respective buyers and sellers. All stockholders
(other
than the Company and its retirement plans) will pay a commission to Buck
equal
to 2% of the proceeds from the sale of any shares of Common Stock sold by
them
on the Internal Market, half of which will be paid to DynEx, Inc. to defray
the
costs of establishing and maintaining the Internal Market. See
"Market
Information -- The Internal Market."
There is no public market for the Common Stock, and it is not
currently
anticipated that such a market will develop. To the extent that the
Internal
Market does not provide sufficient liquidity for a shareholder, and
the
shareholder is otherwise unable to locate a buyer for his or her
shares of
Common Stock, the shareholder could effectively be subject to a total
loss of
investment. See "Market Information -- The Internal Market."
All of the shares of Common Stock offered hereby will be
subject to
certain restrictions (including restrictions on their transferability) set
forth
in the Company's By-Laws (the "By-Laws") and may be subject to
other
contingencies. Shares purchased on the Internal Market will be
subject to
contractual transfer restrictions having the same effect as those
contained in
the By-Laws. See "Description of Capital Stock -- Restrictions on Common
Stock."
See "Risk Factors" on pages 6 through 11 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 purchase price of the shares of Common Stock offered hereby,
other
than those shares issuable upon exercise of options or awarded under the
DynCorp
Executive Incentive Plan, will be determined pursuant to the formula
and
valuation process described below (the "Formula Price"). The Formula Price
per
share of Common Stock is the product of seven times the operating cash
flow
("CF") where operating cash flow is represented by earnings before
interest,
taxes, depreciation and amortization ("EBITDA") of the Company for the
four
fiscal quarters immediately preceding the date on which a price revision
is to
occur and the market factor (the "Market Factor" 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 Class C Preferred Stock
and
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 will be reviewed
four
times each year, generally in conjunction with Board of Directors
meetings,
which are generally scheduled for February, May, August and November. At
such
meetings, the Market Factor is reviewed by the Board in conjunction
with an
appraisal which is prepared by an independent appraisal firm for the
committee
administering the ESOP. The Board of Directors believes that the
valuation
process results in a stock price which reasonably reflects the value of
the
Company on a per share basis. See "Market Information -- Determination
of
Offering Price" and "Market Information -- Price Range of Common Stock."
On May 9, 1996, the Formula Price as determined by the Company's
Board of Directors was $15.00 per share.
This Prospectus contains forward-looking statements that involve
risks
and uncertainties. The Company's actual results may differ significantly
from
the results discussed in the forward-looking statements. Factors that
might
cause such differences include, but are not limited to, those discussed in
"Risk
Factors".
The date of this Prospectus is May 10, 1996
THE COMPANY
DynCorp (the "Company") provides diversified management, technical,
and
professional services to government and commercial customers throughout
the
United States and internationally. The Company provides primarily
information
technology, operations and maintenance, and research and development
support
services under contracts with U.S. Government agencies, foreign
government
agencies and commercial customers. The Company's U.S. Government
customers
include the Department of Defense, the National Aeronautics and
Space
Administration, the Department of State, the Department of Energy,
the
Environmental Protection Agency, the Centers for Disease Control, the
National
Institutes of Health, the U.S. Postal Service, and other U.S.
Government
agencies.
1988 Leveraged Buy-Out
In late 1987, the Board of Directors of the Company received
several
expressions of interest and firm proposals for the purchase of the
Company.
Following negotiations with several parties, the Board entered into an
agreement
and plan of merger with DME Holdings, Inc. ("DME"), a company newly
formed by
the senior managers of the Company in conjunction with Capricorn>>
<<Investors>>, L.P.
("<<Capricorn>>"), a limited partnership in which a company controlled
by H. S.
Winokur, Jr., the Company's current Chairman, served as general partner,
and
other outside investors. The agreement provided for a two-step
transaction,
whereby DME made a partial tender offer for 51% of the outstanding common
stock
of the Company, reduced by the number of DynCorp shares owned by DME, at a
cash
price of $24.25 per share, followed by a second-step merger of DME into
the
Company. In the merger, DME disappeared, and the Company was the
surviving
corporation. Upon the merger, which was completed on September 9, 1988,
each
remaining outstanding share of the Company's common stock (other than the
shares
held by DME) was converted into the right to receive $8.82 in cash,
$10.45
principal amount of newly issued DynCorp 16% pay-in-kind junior
subordinated
debentures, and 0.1992 shares of newly issued DynCorp 17% redeemable
pay-in-kind
Class A preferred stock. All the previously outstanding common stock of
the
Company was automatically canceled, and each outstanding equity security of
DME
was converted into a like security of the Company. Thus, the Company's
capital
structure immediately following this leveraged buy-out (the "LBO") consisted
of:
Post-LBO capitalization table (in thousands)
Long-term debt
ESOP exempt loan $100,000
Revolving credit 35,000
Bank bridge loan 5,000
Debentures (net of discount) 46,593
Other notes payable 1,399
Total long-term debt 187,992
Redeemable Class A preferred stock (net of discount) 14,504
Redeemable Class B preferred stock 10,875
Total redeemable preferred stock 25,379
Class C preferred stock 3,000
Common stock 474
Common stock warrants 15,119
Paid-in surplus 101,818
DME Holdings deficit (1,138)
ESOP loan (100,000)
Total stockholders equity 19,273
Total capitalization $232,644
The following tables set forth the sources and use of funds for the
LBO
transaction:
Sources of funds (in millions):
$100.0 Bank loan to DynCorp. These funds were in turn
loaned to a newly formed DynCorp employee stock
ownership plan, which immediately used the
funds to purchase 4,123,711 shares of new
common stock of DynCorp, and DynCorp used the
proceeds to repay an earlier bridge loan of a
like amount used to fund the first step of the
two-step transaction
35.0 Bank revolving credit facility
5.0 Bank bridge loan
55.0 16% pay-in-kind Junior Subordinated Debentures (principal amount
issued
in exchange for cancellation of DynCorp stock upon the merger)
26.2 Class A preferred 17% pay-in-kind redeemable stock (principal
amount
issued in exchange for cancellation of DynCorp stock upon the
merger)
13.0 Sale of DME Class B and C preferred stock, issued to investors
and
subsequently converted into like securities of DynCorp
11.8 Sale of DME common stock, issued to investors and subsequently
converted
into like securities of DynCorp (cash portion only; excludes
shares of
DynCorp common stock and DynCorp options converted into DME stock)
35.0 Available cash of DynCorp
$281.0 Total
Uses of funds (in millions):
$253.1 Acquisition of DynCorp shares
9.7 Investment banker fees
0.1 Filing fees
4.2 Legal and accounting fees
1.0 Printing fees and expenses
0.1 Depository fees
0.2 Solicitation expenses
5.5 Break-up fee
2.0 Expenses of Special Committee of Board of Directors
3.7 Termination of Stock Options
1.4 Miscellaneous
$281.0
As to the officers, directors and affiliates whose shares of
Common
Stock are offered hereby, the following table sets forth the securities
owned by
such investors at the time of the LBO in September, 1988, their
cost of
acquiring such securities, the number of shares of Common Stock into which
such
securities have been or could be converted, the current market price for
such
shares on the Internal Market, and the potential gain in the event
such
investors were to sell all such shares offered hereby. These investors
purchased
securities from DME Holdings, Inc., in March, 1988, and such securities
were
converted into like securities of the Company in September, 1988. Although
the
principal means of payment for the DME securities was cash, portions of
the
price were paid by employees surrendering shares of pre-merger common
stock,
valued at $22.31 per share, which was the pre-merger estimate of the fair
market
value based on the blended two-step tender price; cancellation of
vested
pre-merger options under the Company's former stock option plan, valued at
the
spread between such pre-merger fair market value and the then-current
exercise
price; and conversion of deferred compensation accounts held by the
Company,
valued at the cash value of such accounts.
1988 Class
Fully
1988 C Preferred
diluted Current
Common Stock shares 1988
Common market value
Stock 1988 aggregate
Stock @ $15.00 per Potential
Beneficial owner shares Warrants cost
shares1 share gain2
D.R.Bannister 37,542 250,590 $910,401
282,850 $4,242,750 $3,332,349
T.E.Blanchard 20,635 137,707 $500,406
155,439 $2,331,585 $1,831,179
D.L.Reichardt 7,840 52,279 $190,128
59,017 $885,255 $695,127
Capricorn <<Investors>> 278,146 1,857,097 123,711
$9,745,032 3,084,936 $46,274,040 $36,529,008
L.P./H.S.Winokur,Jr.
G.A.Dunn 8,292 55,296 $201,089
62,422 $936,330 $735,241
H.M.Hougen 1,821 12,158 $44,159
13,723 $205,845 $161,686
R.A.Hutchinson 1,856 12,392 $45,008
13,987 $209,805 $164,797
M.J.Hyman 2,067 13,801 $50,125
15,577 $233,655 $183,530
R.Morrel 1,257 8,393 $30,482
9,473 $142,095 $111,613
R.G.Wilson 2,700 18,027 $65,475
20,347 $305,205 $239,730
Total 362,156 2,417,740 123,711 $11,782,305
3,717,771 $55,766,580 $43,984,260
1 Reflects fully diluted shares of Common Stock after taking into
effect
shares surrendered to the Company in payment for exercise of
warrants
to purchase Common Stock ("Warrants").
2 Amount which would be realized if all shares were to be sold at
current
Formula Price.
3 Reduced by costs to exercise outstanding warrants. No other
shareholders listed on this table currently hold warrants.
The table does not include Class B Preferred Stock purchased
by
<<Capricorn>> <<Investors>> L.P. in 1988, which was redeemed by the Company
in 1989. The
outstanding options to purchase Common Stock under the Company's 1995
Stock
Option Plan were granted at exercise prices ranging from $14.50 to $17.50.
Recent Developments - Sale of Commercial Aviation Business
During the second quarter of 1995, the Company's Board of
Directors
determined that it would be in the Company's best interest to discontinue
its
commercial aviation business operations (the "Commercial Aviation
Business"),
which provided approximately 20% of the Company's revenues in fiscal year
1994.
This decision was made as a result of several factors including: (i)
the
Company's need for cash to reduce its debt, (ii) the capital-intensive
nature of
the Commercial Aviation Business, (iii) the continuing losses of the unit of
the
Commercial Aviation Business responsible for aircraft maintenance and
repair
operations (the "Aircraft Maintenance Unit"), and (iv) a high level of
interest
from potential buyers. On June 30, 1995, the Company sold the
Aircraft
Maintenance Unit in a $13.7 million cash transaction with
Sabreliner
Corporation. On August 31, 1995, the Company divested that portion of
the
Commercial Aviation Business comprising its aviation ground handling
business,
including DynAir Services, Inc. and its affiliates (the "Ground Handling
Unit"),
in a $122 million (subject to adjustment) cash transaction with ALPHA
Airports
Group Plc. The proceeds from the two aforementioned transactions have been
used
to retire all of the Company's 16% Pay-In-Kind debentures and to
satisfy
existing equipment financing obligations of the Ground Handling Unit.
See
"Business -- Commercial Aviation" and "Management's Discussion and
Analysis of
Financial Condition and Results of Operations."
Contemporaneously with the sale of the Commercial Aviation
Business,
the Company agreed with 46 management employees of the sold entities and
the
former president of the Commercial Aviation Business sector to repurchase
their
Common Stock (other than stock held in their Employee Stock Ownership
Plan
accounts) at the August 15, 1995 Formula Price. As a result, the Company
has,
since June 30, 1995, repurchased 532,604 shares of Common Stock and
Warrants, at
a cost of $7,916,536, and has agreed to repurchase an additional 42,664
shares
at a cost of $635,694 in May, 1996. In addition, in January, 1996, pursuant
to a
Stockholders Agreement with other employees who terminated employment in
1994
and 1995, the Company repurchased 198,246 shares of Common Stock and
Warrants
from such terminated employees, at a total cost of $2,952,275.
Recent Developments - Possible Sale or Merger of Company
The Company has engaged Bear Stearns & Co. Inc., ("Bear Stearns"),
an
investment banking firm, to analyze the Company and its businesses with a
view
to determining the potential value of the Company to a third-party
purchaser.
Under the engagement, the Board of Directors has the option to authorize
Bear
Stearns to discuss the possible acquisition of the Company or portions of
the
Company with third-party potential buyers. It is possible that the
Board of
Directors will authorize such discussions, although no specific
buyer or
proposal has been identified to or by the Company. In the event a
transaction
involving the sale or merger of the Company is approved by the
Board of
Directors, the value of the Company's Common Stock in such a transaction
could
be greater than or less than the Formula Price for shares sold on the
Internal
Market.
Principal Executive Offices
The Company's principal executive offices are located at 2000
Edmund
Halley Drive, Reston, Virginia 22091-3436. The Company's telephone
number is
(703) 264-0330. As used in this Prospectus, all references to the
Company
include, unless the context indicates otherwise, DynCorp and its predecessor
and
subsidiary corporations.
RISK FACTORS
Prior to purchasing the Common Stock offered hereby, purchasers
should
carefully consider all of the information contained in this Prospectus
and in
particular should carefully consider the following factors:
Past and Prospective Net Operating Losses
The Company reported net earnings of $2.4 million for the year
ended
December 31, 1995 and net losses for the years ended December 31, 1994 and
1993
of $12.8 million and $13.4 million respectively, and for the years
ended
December 31, 1992 and 1991 of $23.3 million and $12.4 million,
respectively. In
the future, there can be no guarantee that profitable operations
will be
sustained. See "Management's Discussion and Analysis of Financial Condition
and
Results of Operations."
Highly Leveraged Financial Position
As a result of the management buyout in 1988 and the recent
acquisition
of several businesses, the Company is highly leveraged. As of December 31,
1995,
the Company had a long-term indebtedness of $104.1 million, temporary
and
permanent stockholders' equity of $25.9 million, and a long-term
debt-to-equity
ratio of 4.0:1. The Company's continuing debt service payments may
have
materially adverse effects on its cash flow. In addition, the Company's
debt
levels may limit its future ability to borrow funds, including borrowing
for
growth opportunities or to respond to competitive conditions, or if
additional
borrowings can be made, they may not be on terms favorable to the Company.
The
Company's ability to meet its future debt service and working
capital
requirements is dependent upon improved cash flow from the Company's
continuing
operations, the potential expansion of the financing facility underlying
the
Contract Receivable Collateralized Notes and the continuation of other
programs
which have been initiated to improve operations and cash flows. If the
Company
is unable to repay its debt as it becomes due, the purchasers of Common
Stock
could lose some or all of their investment. See "Risk Factors --
Inability to
Maintain Certain Ratios Under the Contract Receivable Collateralized Notes"
and
"Management's Discussion and Analysis of Financial Condition and
Results of
Operations."
Dependence on and Risks Inherent in U.S. Government Contracts
The Company derived 96% of its revenues in 1995 from contracts with
the
U.S. Government ("Government Contracts"); contracts with the
Department of
Defense ("DoD") represented 55% of the Company's 1995 revenues. 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. The current world political situation and domestic pressure to
reduce
the federal budget deficit have reduced, and may continue to reduce,
military
and other spending by the U.S. Government.
Typically, a Government Contract has an initial term of one year
combined
with two, three, or four one-year renewal periods, exercisable at the
discretion
of the Government. The Government is not obligated to exercise its
option to
renew a Government Contract. At the time of completion of a Government
Contract,
the contract in its entirety is "recompeted" against all interested
third-party
providers. Federal law permits the Government to terminate a contract at
any
time if such termination is deemed to be in the Government's best interest.
The
Government's failure to renew or termination of any significant portion of
the
Company's Government Contracts could adversely affect the Company's business
and
prospects. See "Business -- Government Contracting."
Termination of Contracts/Increased Demand on Cash Flow
Upon termination of any of the Company's contracts, including
Government
Contracts, the Company would no longer accrue a stream of accounts
receivable
thereunder for sale to its wholly owned financing subsidiary, Dyn
Funding
Corporation ("DFC"), which may result in demands on the Company's available
cash
as the Company endeavors to replace the terminated contracts. The ability of
the
Company to maintain certain ratios under the Contract Receivable
Collateralized
Notes depends in part on its ability to keep in force existing contracts
and/or
acquire new contracts such that sufficient eligible receivables are
available
for sale by the Company to DFC. See "Risk Factors -- Inability to
Maintain
Certain Ratios Under the Contract Receivable Collateralized Notes" and
"Business
- -- Factoring of Receivables."
Inability to Maintain Certain Ratios Under the Contract Receivable
Collateralized Notes
In 1992, the Company, DFC and various lending institutions entered
into a
Note Purchase Agreement whereby DFC purchased certain accounts receivable
from
the Company and issued to the lending institutions $100,000,000 of 5-year,
8.54%
Contract Receivable Collateralized Notes (the "Notes") which are
secured by
certain of the Company's accounts receivable. By the terms of the Notes, in
the
event that the interest coverage ratio (as defined in the Notes) falls
below
certain prescribed levels and the Company's principal debt exceeds
certain
amounts, DFC may be prohibited from purchasing additional receivables from
the
Company, thereby reducing the Company's access to additional cash
resources.
Further, in the event that the collateral value ratio (as defined in the
Notes)
falls below certain levels required in the Notes due to a decrease in
the
Company's contract revenue and the Company fails to provide
sufficient
receivables in order to increase the collateral value ratio, the Company
may be
forced to redeem part or all of the Notes which would result in
additional
demands on the Company's cash resources. See "Risk Factors --
Termination of
Contracts/Increased Demand on Cash Flow," "Risk Factors -- Potential
for
Suspension and Debarment" and "Business -- Factoring of Receivables."
Contract Profit Exposure Based on Type of Contract
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 (approximately
20%
of the Company's total Government Contracts revenue in 1995)
and
time-and-material contracts (approximately 25% of its total Government
Contracts
revenue in 1994), 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. The
balance of
the Company's Government Contracts revenue in 1995 (approximately 55%)
was
derived from cost-reimbursement contracts. To the extent that the actual
costs
incurred in performing a cost-reimbursement contract are within the
contract
ceiling and allowable under the terms of the contract and
applicable
regulations, the Company is entitled to reimbursement of its costs
plus a
stipulated profit. However, if the Company's costs exceed the ceiling or are
not
allowable under the terms of the contract or applicable regulations, any
excess
would be subject to adjustment and repayment upon audit by Government
agencies.
See "Risk Factors -- Contract Receivables Subject to Audits by U.S.
Government
Agencies" and "Business -- Government Contracting."
Contract Receivables Subject to Audits by U.S. Government Agencies
Government Contract payments received by the Company for allowable
direct
and indirect costs are subject to adjustment and repayment after
audit by
Government auditors if the payments exceed allowable costs as defined in
such
Government Contracts. Audits have been completed on the Company's
incurred
contract costs through 1986 and are continuing for subsequent periods.
The
Company has included an allowance in its financial statements for
excess
billings and contract losses 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. See
"Business --
Government Contracting."
Potential for Suspension and 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, should the Company be convicted of a crime or be
indicted
based on allegations of a violation of certain specific federal
statutes or
other activities. Suspensions, even if temporary, can result in the
loss of
valuable contract awards for which the Company would otherwise be
eligible.
While suspension and debarment actions may be limited to that division
or
subsidiary of a company which is involved in the alleged improper activity
which
gives rise to the suspension or debarment actions, Government agencies
have
authority to impose debarment and suspension on affiliated entities which
in no
way were involved in the alleged improper activity. 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.
See "Risk Factors -- Termination of Contracts/Increased Demand on Cash
Flow,"
"Risk Factors -- Inability to Maintain Certain Ratios Under the
Contract
Receivable Collateralized Notes" and "Business -- Government Contracting."
Future Revenues Dependent on Funding of Backlog
Much of the Company's future revenue is dependent upon the eventual
funding of its currently unfunded backlog. The Company's backlog of
business was $2.9 billion at December 31, 1995. To the extent that this
backlog is not funded, the Company will not realize revenue on the
estimated
value of its outstanding contracts. See "Business -- Backlog."
Potential Environmental Liability
The Company's business activities occasionally result in the
generation of
non-nuclear hazardous wastes, the hauling and disposal of which are
governed by
federal, state, and local environmental compliance statutes and regulations.
In
addition, certain of the Company's businesses operate petroleum storage
and
other facilities that are subject to similar regulations. Violations of
these
laws can result in significant fines and penalties for which insurance is
not
reasonably available. Moreover, because many of the Company's operations
involve
the management of storage and other facilities owned by others,
primarily
governmental entities, the Company is not always in a position to control
the
compliance of the facilities it operates with environmental and other laws.
See
"Business -- Environmental Matters."
Dilution
Because the net tangible book value per share of the Common Stock
after
the Offering will be ($15.30), which is substantially less than the
offering
price of $15.00, purchasers of Common Stock in the Offering will realize
immediate and substantial dilution of $32.09 per share or $24.22 per share
assuming the conversion of all outstanding and issuable warrants. See
"Dilution."
Potential for Adverse Judgments in Legal Proceedings
The Company is a party to various civil lawsuits which have
arisen in
the course of its business. In addition, a former subsidiary of the
Company
which was acquired in 1974 was, as of March 1, 1996, named as one of
many
defendants in approximately 3,000 civil law suits which have been
filed in
various state courts beginning in 1986. The alleged claims arise out of
the
subsidiary's installation and distribution of industrial insulation
products
which contained asbestos. See "Legal Matters."
No Payment of Cash Dividends
The Company has not paid a cash dividend since 1986. The Company
does
not have a policy for the payment of regular dividends. The payment of
dividends
in the future will be subject to the discretion of the Board of Directors of
the
Company. The holder of the Class C Preferred also has the right to
approve or
disapprove proposed dividend payments and any proposed dividend payments
may be
subject to restrictions imposed by financing arrangements, if any, and by
legal
and regulatory restrictions. See "Dividend Policy," "Risk Factors --
Class C
Preferred Stockholder's Ability to Veto Certain Corporate Actions"
and
"Description of Capital Stock -- Class C Preferred Stock."
Risks Inherent in International Operations
The Company from time to time conducts some operations outside of
the
United States. Such international operations entail additional business
risks
and complexities such as foreign currency exchange fluctuations,
different
taxation methods, restrictions on financial and business practices and
political
instability. Each of these factors could have an adverse impact on
operating
results. There can be no assurance that the Company can achieve or
maintain
success in these markets. See "Business -- International Operations."
Competition
The markets which the Company services are highly competitive. Some of
the
Company's competitors are large, diversified firms with substantially
greater
financial resources and larger technical staffs than the Company has
available
to it. Government agencies also compete with and are potential
competitors of
the Company because they can utilize their internal resources to perform
certain
types of services that might otherwise be performed by the Company.
See
"Business -- Competition."
Participants in Employee Stock Ownership Plan Maintain Substantial
Shareholdings
in the Company
In September 1988, the Company established its Employee Stock
Ownership
Plan (the "ESOP") as a principal retirement vehicle for the Company's
employees.
As of the date of this Prospectus, the ESOP owns approximately 76% of
the
outstanding Common Stock, and approximately 48% of the Common Stock on a
fully
diluted basis assuming conversion of all Class C Preferred Stock and
exercise of
all outstanding options and warrants. Under the terms of the ESOP,
each
participant has the right to instruct the ESOP trustee as to how to vote
his or
her shares. The ESOP trustee will vote all unallocated shares (shares for
which
no voting instructions have been received) in the same proportion as
the
allocated shares. Collectively, the ESOP participants maintain
substantial
shareholdings and may influence Company policy. See "Risk Factors --
Parties to
Shareholders Agreement Effectively Control Appointments to the Board
of
Directors" and "Employee Benefit Plans -- Employee Stock Ownership Plan."
Absence of a Public Market
There is no present public market for the Common Stock, and it is
not
currently anticipated that such a market will develop in the future. There
can
be no assurance that the purchasers of Common Stock in this Offering
will be
able to resell their shares through the Internal Market should they decide
to do
so. To the extent that the Internal Market does not provide sufficient
liquidity
for a shareholder, and the shareholder is otherwise unable to locate a buyer
for
his or her shares, the shareholder 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."
All Shares of Stock Issued in Connection with the Internal Market are
Subject
to the Company's Right of First Refusal
All shares of Common Stock offered hereby will be subject to
the
Company's right of first refusal to purchase such shares before they
may be
offered to third parties (other than on the Internal Market). Shares of
Common
Stock purchased on the Internal Market will be subject to contractual
transfer
restrictions having the same effect as those contained in the By-Laws.
See
"Description of Capital Stock -- Restrictions on Common Stock."
Offering Price Determined by Formula Not Market Forces
The offering price is, and subsequent offering prices will
be,
determined by means of a formula as set forth on the cover page of
this
Prospectus. The formula takes into consideration the Company's
financial
performance, the market valuation of comparable companies and the
limited
liquidity of the Common Stock, as determined by the Board of Directors
based on
an independent appraisal. The Formula is subject to change by the
Board of
Directors in its sole discretion. See "Market Information --
Determination of
Offering Price" and "Market Information -- Price Range of Common Stock."
Class C Preferred Stockholder's Ability to Veto Certain Corporate Actions
The Company has outstanding 123,711 shares of Class C Preferred
Stock,
par value $0.10 per share (the "Class C Preferred"), all of which is
owned by
<<Capricorn>> <<Investors>>, L.P. ("<<Capricorn>>"), a limited
partnership in which a
company controlled by H. S. Winokur, Jr., the Company's Chairman,
serves as
general partner. The holder of Class C Preferred shares has the right to
vote as
a separate class on certain major corporate actions, such as
corporate
borrowings, issuance of stock, payment of dividends and the repurchase of
more
than $250,000 per annum of shares of Common Stock held by employees of
the
Company (other than shares of Common Stock distributed to retiring or
terminated
employees by the ESOP). These voting rights give the holder of Class C
Preferred
the ability to effectively control the Company with respect to certain
major
corporate decisions. Consequently, actions that might otherwise be approved
by a
majority of the holders of Common Stock could be vetoed by the holder of
Class C
Preferred. See "Description of Capital Stock -- Class C Preferred Stock."
Parties to Stockholders Agreement Effectively Control Appointments to the
Board of Directors
Certain individuals in the management group of the Company, 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 51% 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. Since the management group stockholders,
directly
and through ESOP shareholdings, and Capricorn represent a majority of the
shares
of Common Stock necessary to elect the Company's Board of Directors on a
fully
diluted basis, it is unlikely that other stockholders acting in
concert or
otherwise will be able to change the composition of the Board of
Directors.
Unless extended, the Stockholder's Agreement expires on March 10, 1999.
See
"Description of Capital Stock -- Stockholders Agreement."
The Company may be Obligated to Repurchase Shares of Certain ESOP
Participants
In the event that an employee participating in the ESOP is
terminated,
retires, dies or becomes disabled while employed by the Company, the
Company is
obligated to repurchase shares of Common Stock distributed to such
former
employee under the ESOP, until such time as the Common Stock becomes
"Readily
Tradable Stock," as defined in the ESOP plan documents. In the event
the
valuation of shares, as determined in accordance with the ESOP plan (the
"ESOP
Share Price") is less than $27.00 per share, the Company is committed
through
December 31, 1996, to pay up to an aggregate of $16,000,000, the
difference
("Premium") between the ESOP Share Price and $27.00 per share. As of
December
31, 1995, the Company had paid a total of $5,400,000 of the $16,000,000 to
such
former employees. 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 "Employee Benefit Plans -- Employee Stock Ownership Plan."
Anti-Takeover Effects
The combined effects of management's and Capricorn's collective
ownership
of a majority of the outstanding shares of Common Stock, the voting
rights of
the Class C Preferred, 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."
Possible Sale or Merger of the Company
The Company has engaged Bear Stearns & Co. Inc., an investment
banking
firm, to analyze the Company and its businesses with a view to determining
the
potential value of the Company to a third-party purchaser. Under the
engagement,
the Board of Directors has the option to authorize Bear Stearns to discuss
the
possible acquisition of the Company or portions of the Company with
third-party
potential buyers. It is possible that the Board of Directors will authorize
such
discussions, although no specific buyer or proposal has been identified to
or by
the Company. In the event a transaction involving the sale or merger of
the
Company is approved by the Board of Directors, the value of the Company's
Common
Stock in such a transaction could be greater than or less than the Formula
Price
for shares sold on the Internal Market. See "Recent Developments - Possible
Sale
or Merger of the Company" and or Merger of the Company" and Risk
Factors -
Anti-Takover Effects."
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 and directly or contingently to present and future
employees
and directors of the Company and to trustees or agents for the
benefit of
employees under the Company's employee benefit plans described below.
Direct and Contingent Sales to Employees and Directors
The Company believes that its success is dependent upon the
abilities of
its employees and directors. Therefore, since 1988, the Company has
pursued a
policy of offering such persons an opportunity to make an equity
investment in
the Company as an inducement to such persons to become or remain employed
by or
affiliated with the Company. At the discretion of the Board of Directors or
the
Compensation Committee of the Board of Directors (the "Compensation
Committee"),
employees and directors may be offered an opportunity to purchase a
specified
number of shares of Common Stock offered hereby. All such direct and
contingent
sales to employees and directors will be effected through the Internal
Market or
the employee benefit plans described below, and may be attributable to
the
Company. Pursuant to the By-Laws, all shares of Common Stock offered by
the
Company after May 11, 1995, directly or contingently, to its employees
or
directors and all shares of Common Stock purchased on the Internal Market
are
subject to a right of first refusal. See "Description of Capital
Stock --
Restrictions on Common Stock."
Equity Target Ownership Policy
The Company has adopted an Equity Target Ownership Policy (the
"ETOP")
under which certain highly paid employees of the Company are encouraged
over a
period of seven years to invest up to specified multiples of their
annual
salaries in shares of the Common Stock. Under the ETOP, corporate
officers,
presidents and vice presidents of strategic business units, and
other
participants in the Executive Incentive Plan with salaries greater than
$99,999
but less than $200,000 are encouraged to invest at least 1.5 times their
salary
in shares of Common Stock; those with salaries greater than $199,999 but
less
than $300,000 are encouraged to invest at least two times their salary in
shares
of Common Stock; and those with salaries greater than $299,999 are
encouraged to
invest at least three times their salary in shares of Common Stock.
Investments
under any of the employee benefit plans described below, as well as any
other
holdings, including securities held prior to adoption of the ETOP, will
qualify
for purposes of the ETOP.
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. The SARP permits a participant to elect to defer,
for
federal income tax purposes, a portion of his or her annual compensation
and to
have such amount contributed directly by the Company to the deferred fund of
the
SARP for his or her benefit. The Company may, but is not obligated to,
make a
matching contribution to the SARP's deferred fund for the benefit of
those
participants who have elected to defer a portion of their compensation
for
investment in shares of Common Stock. The amount of the matching
contribution
will be determined periodically by the Company's Board of Directors based on
the
aggregate amounts deferred by participants. The SARP currently provides
for a
Company matching contribution, in cash or Common Stock, of 100% of the first
one
percent of compensation invested in a Company Common Stock fund by a
participant
and 25% of the next four percent of compensation so invested. The Company
may
also make additional contributions to the SARP deferred fund in order to
comply
with Section 401(k) of the Code. Each participant will be vested at all
times in
100% of his or her contributions to the deferred fund accounts.
Company
contributions will vest 50% after two years of service and 100% after
three
years of service. Benefits are payable to a participant within certain
specified
time periods following such participant's retirement, permanent
disability,
death or other termination of employment. Pursuant to the By-Laws,
shares of
Common Stock distributed to a participant under the SARP will be subject to
the
Company's right of first refusal. See "Employee Benefit Plans -- Savings
and
Retirement Plan" and "Description of Capital Stock -- Restrictions on
Common
Stock."
Employee Stock Purchase Plan
The Company has established the Employee Stock Purchase Plan (the
"ESPP")
for the benefit of substantially all its employees. The ESPP provides for
the
purchase of Common Stock through payroll deductions by participating
employees.
The ESPP is intended to qualify under Section 423(b) of the Code.
Participants
contribute 95% of the purchase price of the Common Stock, and the
Company
contributes the balance in the form of cash or shares of Common Stock.
Such
purchases will be made through the Internal Market. All shares
purchased
pursuant to the ESPP will be credited to the participant's account
promptly
following the Internal Market trade day on which they were purchased
and,
pursuant to the By-Laws, will be subject to the Company's right of
first
refusal. See "Employee Benefit Plans -- Employee Stock Purchase Plan"
and
"Description of Capital Stock -- Restrictions on Common Stock."
1995 Stock Option Plan
Pursuant to the Company's 1995 Non-Qualified Stock Option Plan
("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 upon an employee obtaining a certain level of contract awards for
the
Company within a specified period or upon the satisfaction of other
performance
criteria and, in many cases, a requirement that such individual also
purchase a
specified number of shares of Common Stock on the Internal Market at the
Formula
Price. Pursuant to the By-Laws, all shares of Common Stock issued upon
the
exercise of such stock options will be subject to the Company's right of
first
refusal. See "Employee Benefit Plans -- 1995 Stock Option Plan" and
"Description
of Capital Stock -- Restrictions on Common Stock."
Executive Incentive Plan
The Company maintains an Executive Incentive Plan (the "EIP"),
which
provides for the payment of annual bonuses to certain officers
and
management/executive employees. The Company intends to amend the Incentive
Plan,
effective January 1, 1996, to provide for payment of up to 20% of the
bonuses in
the form of shares of Common Stock, valued at the then current Formula
Price.
Awards of shares of Common Stock will be distributed during each fiscal
year.
Pursuant to the By-Laws, all shares of Common Stock awarded pursuant to the
EIP
will be subject to the Company's right of first refusal. See "Employee
Benefit
Plans -- Executive Incentive Plan" and "Description of Capital
Stock --
Restrictions on Common Stock."
Employee Stock Ownership Plan
The Company maintains an Employee Stock Ownership Plan ("ESOP"),
which
is a stock bonus plan intended to be qualified under Section 401(a) of the
Code.
Generally, all employees are eligible to participate, except employees of
groups
or units designated as ineligible. Interests of participants in the ESOP
vest in
accordance with the vesting schedule and other vesting rules set forth in
the
ESOP plan document. Benefits are allocated to a participant in shares of
Common
Stock and are distributable within certain specified time periods following
such
participant's retirement, permanent disability, death or other
termination of
employment. Upon distribution, the participant is entitled to a statutory
"put"
right at two separate times, whereby the ESOP or the Company is
obligated to
purchase the shares at the ESOP Share Price. In the event the
participant
declines to exercise the put right, such shares of Common Stock may be
sold by
the participant on the Internal Market subject to the restrictions
and
limitations of the Internal Market. The ESOP Share Price is not
determined by
the Formula, and amounts paid to participants at the time of distribution
may be
different from amounts paid to sellers on the Internal Market. See
"Market
Information -- The Internal Market." The amount of the Company's
annual
contribution to the ESOP is determined by, and within the discretion of,
the
Board of Directors and may be in the form of cash, Common Stock or
other
qualifying securities. Pursuant to the ESOP plan document, any shares of
Common
Stock distributed out of the ESOP will be subject to a right of first
refusal on
behalf of the Company. See "Employee Benefit Plans -- Employee Stock
Ownership
Plan -- Distributions and Withdrawals."
Common Stock Offered by Officers, Directors, and Affiliates
Certain officers, directors, and affiliates of the Company may,
from
time to time, sell up to an aggregate of 5,810,308 shares of the Common
Stock
being offered hereby on the Internal Market or otherwise. 5,810,308 is the
total
aggregate holdings of all officers, directors and affiliates as of the
date of
this Prospectus. While the Company has registered all shares owned by
its
officers, directors and affiliates on a fully diluted basis, including
unvested
options, the Company does not know whether some, none, or all of such
shares
will be so offered or sold. However, the Company believes that the ETOP will
act
as a disincentive to the officers to sell their Common Stock during 1996
and
possibly in later years as well. The officers, directors, and affiliates
will
not be treated more favorably than other stockholders participating on
the
Internal Market and, like all other stockholders selling shares on the
Internal
Market (other than the Company and its retirement plans), will pay Buck,
the
Company's designated broker-dealer, a commission equal to two percent of
the
proceeds from their sales. See "Market Information -- The Internal Market."
The following table sets forth information as of March 7, 1996,
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
upon
conversion of outstanding Class C Preferred and exercise of related
warrants,
shares issuable as a result of vesting and 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) is now and has, during some portion of
the
past three years, been a director and/or officer of the Company.
Except as
indicated below, all the shares are owned of record or beneficially. The
table
also reflects the relative ownership of such persons in the event of
their
individual sales of all the shares owned by them in this Offering.
Name and Title of Beneficial Owner Number of
Percent of Number of Percent
Shares
Ownership of Shares Ownership
Beneficially Fully
Diluted Offered After Sale of
Owned (1) Equity
(1) Before All Shares
Offering
D. R. Bannister, President & Director 544,493
4.05% 544,493 *
T. E. Blanchard, Senior Vice President & Director 297,864
2.22% 297,864 *
R. E. Dougherty, Director 4,000
* 4,000 *
P. V. Lombardi, Executive Vice President & Director 150,697
1.12% 150,697 *
D. C. Mecum II, Director 4,000
* 4,000 *
D. L. Reichardt, Senior Vice President & Director 199,754
1.49% 199,754 *
Capricorn/H. S. Winokur, Jr., Chairman of the Board 4,117,127
30.63% 4,117,127 *
and Director
R. B. Alleger, Jr., Vice President 8,000
* 8,000 *
G. A. Dunn, Vice President & Controller 112,560
* 112,560 *
M. C. Filteau, Vice President 52,858
* 52,858 *
C. L. Hendershot, Vice President 13,523
* 13,523 *
H. M. Hougen, Vice President & Secretary 32,684
* 32,684 *
R. A. Hutchinson, Treasurer 24,535
* 24,535 *
M. J. Hyman, Vice President 32,092
* 32,092 *
J. A. Mackin, Vice President 7,243
* 7,243 *
M. S. Mandell, Vice President 47,670
* 47,670 *
C. H. McNair, Jr., Vice President 56,918
* 56,918 *
R. Morrel, Vice President 25,606
* 25,606 *
H. H. Philcox, Vice President 35,113
* 35,113 *
R. E. Stephenson, Vice President 7,535
* 7,535 *
R. G. Wilson, Vice President & General Auditor 36,036
* 36,036 *
Total 5,810,308
43.16% 5,810,308 *
* indicates less than one percent
(1) Includes shares issuable upon the exercise of outstanding
warrants, shares issuable upon conversion of outstanding
Class C Preferred and exercise of related warrants, shares
issuable as a result of vesting and expiration of
deferrals or otherwise under the former Restricted Stock
Plan, exercise of all outstanding options whether or not
vested, and shares allocated to such person's accounts under
the Company's employee benefit plans.
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
33,500 former and present employees are now beneficial owners of the
Common
Stock through the ESOP, representing approximately 76% of the shares of
Common
Stock outstanding on the date of this Prospectus and approximately 48% of
the
Company's Common Stock on a fully diluted basis.
Approximately 280 managers and other employees have also made
direct
investments in the Company since the LBO. As a consequence of these
investments
and the subsequent issuance of shares pursuant to the Company's
former
Restricted Stock Plan, 1,428,144 shares of Common Stock, and 119,154
warrants to
purchase Common Stock at an exercise price of $0.25 per share (the
"Warrants"),
are held by current and former management employees. In addition, the
Company
accepted a subscription for 350,313 shares of Common Stock and
2,338,934
Warrants from certain private and institutional investors and
Capricorn, a
limited partnership which is controlled by the Company's Chairman,
Herbert S.
Winokur, Jr. Capricorn also purchased 123,711 Class C Preferred shares,
which
are convertible share for share into Common Stock and into 825,981 Warrants,
and
purchased 82,475 shares of Class B Preferred Stock, which the Company
retired
through redemption in 1990. See "Description of Capital Stock --
Class C
Preferred Stock."
Since the LBO, the management stockholders, Capricorn and certain
other
investors have relied on the Stockholders Agreement as a means of
restricting
the distribution of the Company's shares of capital stock. The
Stockholders
Agreement contains various provisions for the annual offering of
shares of
Common Stock owned by retiring and terminated management stockholders,
first to
other management stockholders, Capricorn, and certain other investors and
then
to the Company as purchaser of last resort. However, the holder of
Class C
Preferred shares may veto the repurchase of more than $250,000 per
annum of
shares of Common Stock held by employees of the Company (other than
shares of
Common Stock distributed to retiring or terminated employees by the ESOP).
On May 10, 1995, the Board of Directors, with the consent of the
Class C
Preferred holder, approved the establishment of the Internal Market
as a
replacement for the resale procedures set forth in the Stockholders
Agreement.
The Internal Market generally permits all stockholders to sell shares
of Common Stock on four predetermined days each year (each a "Trade
Date"),
subject to purchase demand. All Warrants to be sold must first be converted
into
shares of Common Stock which can then be sold on the Internal Market,
subject to
purchase demand.
All sales of Common Stock on the Internal Market will be made to employees
and
directors of the Company who have been approved by the Compensation
Committee
as being entitled to purchase Common Stock, and to the trustees of the
SARP
and the ESOP and the administrator of the ESPP who may purchase shares of
Common
Stock for their respective trusts and plan (collectively "Authorized
Buyers").
The Compensation Committee will normally permit direct purchases in the
Internal Market only by employees who are purchasing such stock to meet the
requirements of the ETOP. Other employees will be encouraged to participate
through the various employee benefit plans. Limitations on the number of
shares
which an individual may purchase may be imposed where there are more buy
orders
than sell orders for a particular trade date.
The Internal Market will be established and managed by the
Company's
wholly owned subsidiary, DynEx, Inc. The purchase and sale of shares on
the
Internal Market will be carried out by Buck Investment Services, Inc.
("Buck"),
a registered broker-dealer, upon instructions from the respective buyers
and
sellers, and individual stock ownership account records will be
maintained by
Buck's affiliate, Buck Consultants, Inc. Subsequent to determination of
the
applicable Formula Price for use on the next Trade Date, and at least
fifteen
days prior to such trade date, Buck will advise the stockholders of record
by
mail as to the amount of the Formula Price and the Trade Date, inquiring
whether
such stockholders wish to sell shares on the Internal Market and advising
them,
if they do so, how to deliver written sell orders and stock certificates
(which
must be received by Buck at least two days prior to such Trade
Date) to
facilitate such sale.
The Company may, but is not obligated to, purchase shares of
Common
Stock on the Internal Market on any Trade Date, but only if and to the
extent
that the number of shares offered for sale by stockholders exceeds the
number of
shares sought to be purchased by Authorized Buyers, and the Company, in
its
discretion, determines to make such purchases. Such purchases are also
limited
by the rights and preferences of the Class C Preferred Stock as noted above.
See
"Risk Factors -- Class C Preferred Stockholder's Ability to Veto
Certain
Corporate Actions."
Except as provided below, in the event that the aggregate
number of
shares offered for sale on the Internal Market is greater than the
aggregate
number of shares sought to be purchased by Authorized Buyers and the
Company,
offers to sell 500 shares or less of Common Stock or up to the first 500
shares
if more than 500 shares of Common Stock are offered by any seller
will be
accepted first and offers to sell shares in excess of 500 shares of Common
Stock
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. 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. To the extent that
the
aggregate number of shares sought to be purchased exceeds the aggregate
number
of shares offered for sale, the Company may, but is not obligated to,
sell
authorized but unissued shares of Common Stock on the Internal Market.
All
sellers on the Internal Market (other than the Company and its retirement
plans)
will pay Buck a commission equal to two percent of the proceeds from such
sales.
No commission is paid by purchasers on the Internal Market. All offers and
sales
of Common Stock made on the Internal Market may be attributed to the
Company.
If the aggregate purchase orders exceed the number of shares
available
for sale, the following prospective purchasers will have priority, in the
order
listed:
1. the administrator of the Employee Stock Purchase Plan
2. the trustees of the Savings and Retirement Plan
3. individuals approved for purchases by the Compensation
Committee
of the Board of Directors, on a pro rata basis
4. the trustees of the Employee Stock Ownership Plan
Pursuant to Section 1042 of the Internal Revenue Code, stockholders
who
tender certain shares of Common Stock purchased by the ESOP in response
to a
tender offer by the Company may be entitled to defer the payment of
federal
income tax relating to the gain derived from the sale of such shares,
provided
that certain conditions are met. Although the Company has not entered
into a
tender offer pursuant to Section 1042 and has no current intention to do
so, it
is conceivable that it may choose to do so in the future. In the event that
such
a tender offer is commenced in the future, those stockholders who tender
their
shares and who satisfy the other conditions of Section 1042 may, by
virtue of
their being able to defer the income tax on the gain derived from the sale,
in
effect, temporarily receive a higher after-tax benefit from tendering
their
shares than they would receive by selling such shares on the Internal
Market.
There is no public market for the Common Stock. While the Company
is
initiating the Internal Market in an effort to provide liquidity
to
stockholders, there can be no assurance that there will be sufficient
liquidity
to permit stockholders to resell their shares on the Internal Market, or
that a
regular trading market will develop or be sustained in the future. The
Internal
Market will be dependent on the presence of sufficient buyers to support
sell
orders that will be placed through the Internal Market. Depending on
the
Company's performance, potential buyers (which would include employees
and
trustees under the Company's benefit plans) may elect not to buy on the
Internal
Market. Moreover, although the Company may enter the Internal Market as a
buyer
of Common Stock under certain circumstances, including an excess of sell
orders
over buy orders, the Company has no obligation to engage in Internal
Market
transactions. Consequently, there is a risk that sell orders could be
prorated
as a result of insufficient buyer demand, or that the Internal Market may
not be
permitted to open because of the lack of buyers. To the extent that the
Internal
Market does not provide sufficient liquidity for a shareholder and
the
shareholder is otherwise unable to locate a buyer for his or her shares,
the
shareholder could effectively be subject to a total loss of
investment.
Accordingly, the purchase of Common Stock is suitable only for persons who
have
no need for liquidity in this investment and who can afford a total
loss of
investment. See "Risk Factors -- Absence of a Public Market."
Determination of Offering Price
The purchase price of the shares of Common Stock offered hereby, other
than
those shares issuable upon exercise of options or awarded under the EIP,
will be
determined pursuant to the formula and valuation process described below
(the
"Formula Price"). The Formula Price per share of Common Stock is the
product of
seven times the operating cash flow ("CF") where operating cash
flow is
represented by earnings before interest, taxes, depreciation and
amortization
("EBITDA") of the Company for the four fiscal quarters immediately preceding
the
date on which a price revision is 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
Class C
Preferred Stock and 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
"CF" is the earnings basis which is considered to be
representative of
the future performance of the Company. The abbreviation stands for
operating
cash flow, and the basic measurement used by the Company for operating cash
flow
is Earnings Before Interest, Depreciation and Taxes ("EBITDA."). Each
element of
EBITDA is measured according to generally accepted accounting
principles
("GAAP"), but, before using those objective numbers in the formula, the
Board of
Directors examines the details used in those earnings to see if any
adjustments
are needed in order for the earnings number to be representative of the
future
performance of the Company. Following are examples of situations where the
Board
used in the Formula would be representative of expected future performance:
(a)
the earnings from an acquisition made late in the year may be pro-formed
for a
full year, (b) the earnings from a discontinued activity may be pro-formed
out
even though the discontinued activity may not qualify as a discontinued
business
under GAAP; or (c) a truly unusual expenditure or windfall profit may be
pro-
formed out even though it is clearly part of GAAP earnings for the current
year.
"MF" is the market factor. In the end, it is totally
subjective.
Annually, the Board of Directors looks at the public market pricing for
other
government service contractors which in its opinion are most comparable to
the
Company. Six to eight other companies are generally considered, but there
is no
set number of comparables. The pricing multiples of Net Income and of Cash
Flow
for these companies are looked at on a last twelve-month basis, on a
fiscal-
year basis, and, where available from analysts' reports, on a projected
basis.
Since the Formula capitalizes the Company's CF at seven times, these
comparables
give the Board of Directors a sense whether the public market is currently
at a
higher, lower or roughly the same level as that fixed multiple. The
Board of
Directors also looks at the Company's earnings trends in setting the MF,
because
the stock market generally rewards an upward trend and punishes a
downward
trend. On a quarterly basis, the Board of Directors will look at the
Price
Earnings Multiples of its annual comparable companies to see if there are
any
significant changes which might influence the Board's determination of the
MF to
be used in the formula.
"NOA" are non-operating assets at disposition value (net of
disposition
costs). The Company's principal non-operating asset since 1992 has
been
"Restricted Cash". This is cash in its wholly owned subsidiary, Dyn
Funding
Corporation ("DynFunding"), which must remain in specified short-term
marketable
investments (e.g., U.S. Treasury bills) on a temporary basis, because
the
Company and its other subsidiaries do not have enough eligible
accounts
receivable to sell to DynFunding at any particular point in time to utilize
the
full $100 million of capital of DynFunding. 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
will
also look at any convertible securities and subjectively decide whether or
not
it is likely that those securities will 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, will be considered as IBD. (At
the
present time, it is the opinion of the Board of Directors that the
Class C
Preferred Stock of the Company will be converted into common shares, so
it is
not treated 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, the conversion of the
Class C
Preferred Stock into common shares and possibly the conversion of any
other
convertible securities of which there are none at the present time.
The Formula Price including the Market Factor will be reviewed
four
times each year, generally in conjunction with Board of Directors
meetings,
which are generally scheduled for February, May, August and November. At
such
meetings, the Market Factor will be reviewed by the Board in conjunction
with an
appraisal which is prepared by an independent appraisal firm for the
committee
administering the Company's Employee Stock Option Plan (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" and
"Market
Information -- Price Range of Common Stock."
The Formula was adopted in its present form by the Board of
Directors
on August 15, 1995. The Formula is subject to change by the Board of
Directors.
The most recent Formula Price is $15.00 per share based on a
Market
Factor of 1.362, as determined at the Board of Directors meeting on May 9,
1996. The first use of the Formula Price on the Internal Market will
be in
connection with determination of the Formula Price prior to the first
Trade
Date. Such determination, and all subsequent determinations of the
Formula
Price, will be based on financial data for the four fiscal quarters
immediately
preceding the date on which a price revision is to occur. Changes in the
Formula
Price will be communicated on a regular basis to stockholders and
participants
in the employee benefit plans through which the employees can make
investments
in Common Stock. Trade Dates are expected to occur on or about February 15,
May
15, August 15, and November 15 of each year.
Price Range of Common Stock
Because the Company's Common Stock has not been publicly traded since
1988,
there has not been any historical market-determined price. However, there
have
been valuations of the Common Stock made by an independent appraiser as
required
by the ESOP, the Board of Directors has (based upon such
valuations)
periodically determined the price of the Common Stock for purposes of offers
and
sales of Common Stock made pursuant to the Stockholders Agreement, and
there
have also been private share transactions based upon such determinations.
The
prices of Common Stock set forth in the table below are based on these
various
valuations, determinations and transactions, and (with the exception of
the
price for July 1, 1995) not on the Formula Price that will be utilized
for
purchases and sales of Common Stock on the Internal Market.
Effective with the commencement of the LBO in January 1988, the price
was
based on a "package" consisting of one share of Common Stock plus
Warrants to
purchase 6.6767 additional shares. The exercise price of the Warrants
was
reduced from $5.00 per share to $0.25 per share during the period 1988 to
1993;
as each third of the outstanding balance of the initial ESOP loan was
repaid,
the exercise price was reduced by $1.58.
The average price per share figures shown below for July 1, 1988 and
1989
($3.47 and $3.79, respectively) represent the weighted average of the
actual
costs to the Company's employee stockholders based on a purchase price of
$24.25
per unit, each unit being comprised of one share of Common Stock and
Warrants to
purchase 6.6767 shares of Common Stock at an exercise price of $0.25 per
share.
The average price per share figures shown below for July 1, 1990
through
July 1, 1994, reflect market values established by the Board of Directors
for
purposes of sales under the former Management Employees Stock Purchase Plan
and
for transactions under the Stockholders Agreement. The Board's determination
was
based on its review of valuations of the Common Stock made annually
by an
independent appraiser for the ESOP Trust. Prior to December 31, 1993,
the
appraiser's calculation produced annually a single control share
valuation,
which applied to shares allocated to ESOP participants' accounts during
the
period from 1988 through 1993. This control share premium was not
applicable to
shares of Common Stock outside the ESOP, and therefore such valuation
was
adjusted by the Company's Chief Financial Officer in his recommendation to
the
Board to apply a discount for lack of liquidity and to eliminate the
control
share premium. Since December 31, 1993, the independent appraiser has
also
produced annually a valuation for the shares of Common Stock not having
such a
control premium, and the Board of Directors has determined market values
for
purposes of the Stockholders Agreement following its review of the
ESOP
valuation of Common Stock not having a control premium. The price per share
for
July 1, 1995 and later dates is based upon the Formula Price.
From and after May 10, 1995, the Board of Directors has determined that
the
price per share will equal the Formula Price described herein. There can
be no
assurance that the Common Stock will in the future provide returns
comparable to
historical returns, or that the Formula Price will provide returns
similar to
those for past transactions that were based on prices other than the
Formula
Price. Because the prices listed in the table below were developed
under
differing valuation methods for differing purposes, they are not
fully
comparable with the Formula Price.
Date Average Price % Increase
Per Share
July 1, 1988 $ 3.47 ---
July 1, 1989 $ 3.79 9.22%
July 1, 1990 $ 5.20 37.20%
July 1, 1991 $ 5.72 10.00%
July 1, 1992 $ 7.68 34.27%
July 1, 1993 $ 7.97 3.78%
July 1, 1994 $11.86 48.81%
July 1, 1995 $14.90 25.63%
February 10, 1996 $14.50 (2.68%)
May 9, 1996 $15.00 3.45%
Although the Formula is subject to change by the Board of Directors in
its
sole discretion, the Board of Directors will not change the Formula unless
(i)
in the good faith exercise of its fiduciary duties and after consultation
with
its professional advisors, the Board of Directors, including a majority of
the
directors who are not employees of the Company, determines that the
Formula no
longer results in a stock price which reasonably reflects the value of
the
Company on a per share basis, or (ii) a change in the Formula or the
method of
valuing the Common Stock is required under applicable law.
The Company intends to disseminate the current Formula Price on at
least a
quarterly basis to all employees through internal communications, including
bulletins and electronic mail messages and to other stockholders by mailed
reports, including mailed notices of upcoming Trade Dates. Participants in
any
of the employee benefit plans may obtain the current Formula Price by
calling
the Company's Powerline system toll-free number (1-800-956-4015), which
operates
24 hours a day, seven days a week.
The Company also intends to distribute copies of its audited annual
financial statements to all stockholders, as well as other employees, and to
potential participants in the Internal Market through employee benefit
plans,
either through U. S. Mail or inter-company mail. Such information is
normally
distributed at the time of distribution of employee annual reports, which is
made at approximately the same time that proxy information is distributed
and
solicitations are made for voting instructions from participants in the ESOP
and
SARP, in April or May of each year. The Company files unaudited quarterly
financial information with the Securities and Exchange Commission, and
copies of
such information are available from the Commission. See "Available
Information."
USE OF PROCEEDS
The shares of Common Stock which may be offered by the Company
are
principally being offered to permit the acquisition of shares by the
Company's
employee benefit plans as described herein and to permit the Company to
offer
shares of Common Stock to present and future employees and directors.
The
Company does not intend or expect this Offering to raise significant
capital.
Any net proceeds received by the Company from the sale of the Common
Stock
offered (after giving effect to the payment of expenses of the Offering)
will be
added to the general funds of the Company for working capital and
general
corporate purposes. Currently, the Company has no specific plans for the
use of
such proceeds. It is anticipated that the majority of the sales of Common
Stock
on the Internal Market will be made by stockholders rather than by the
Company,
and the Company will not receive any portion of the net proceeds from the
sale
of such shares (other than the 1% received by DynEx, Inc. to defray the
costs of
establishing and maintaining the Internal Market).
DIVIDEND POLICY
The Company last paid a dividend in 1986, prior to the LBO. The
Company
has not, since that time, paid a dividend and does not have a policy for
the
payment of regular dividends. The payment of dividends in the future
will be
subject to the discretion of the Board of Directors of the Company and
will
depend on the Company's results of operations, financial position, and
capital
requirements, general business conditions, restrictions imposed by
financing
arrangements, if any, legal and regulatory restrictions on the payment
of
dividends, and other factors the Board of Directors deems relevant. The
holder
of the Class C Preferred also has the right to approve or disapprove
proposed
dividend payments. See "Risk Factors - No Payment of Cash Dividends"
and
"Description of Capital Stock -- Class C Preferred Stock."
DILUTION
The tangible book value of the Company on December 31, 1995
was a
negative figure of $160,721,000 or ($455.20) per share. Tangible book value
per
share represents the amount of total tangible assets less total liabilities
and
Redeemable Common Stock, divided by 353,078 shares of Common Stock
outstanding
(excluding Redeemable Common Stock). Total Common Stock outstanding at
December
31, 1995 was 8,195,598 shares including Redeemable Common Stock. As
the
following table demonstrates, after giving effect to the sale of
4,722,366
shares of Common Stock by the Company in the Offering at a Formula
Price of
$15.00 per share, and after deducting anticipated expenses, the pro forma
book
value of the Company on December 31, 1995, would have been a
negative
$97,082,000 or ($20.96) per share, representing an immediate $35.96 per
share
(or 140%) dilution to new investors purchasing shares of Common Stock at
the
Formula Price.
Formula Price per share $15.00
Net tangible book value per share ($455.20)
before the Offering
Increase per share attributable $476.16
to new investors
Pro forma net tangible book value
per share after the Offering ($20.96)
Dilution per share to new investors $35.96
Dilution is determined by subtracting pro forma book value per
share
after giving effect to the Offering from the Formula Price paid by a
new
investor for a share of Common Stock. The foregoing calculation
assumes no
additional exercises of the outstanding warrants to purchase shares of
Common
Stock. As of December 31, 1995 there were outstanding warrants to
purchase
4,322,449 million shares of Common Stock at a warrant exercise price of
$0.25
per share. If all the warrants outstanding and warrants issuable upon
conversion
of the Class C Preferred as of December 31, 1995, were to be
immediately
converted to Common Stock, dilution per share to new investors would be
$25.84
per share (or 73%).
SELECTED FINANCIAL DATA
The following table presents summary selected historical financial
data
derived from the Consolidated Financial Statements of the Company, which
have
been audited by Arthur Andersen LLP for each of the five years. During
the
periods presented, the Company paid no cash dividends on its Common Stock.
The
following information should be read in conjunction with
"Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and
the Consolidated Financial Statements and related notes thereto,
included
elsewhere in this Prospectus. (Dollars in thousands except per share data.)
Years Ended
December 31,
1995(2) 1994(1)(4)
1993(1)(5) 1992(1)(6) 1991(1)
Statement of Operations Data:
Revenues $908,725 $818,683
$777,216 $728,244 $654,710
Cost of services $871,471 $783,095
$742,455 $707,905 $634,126
Gross Profit $ 37,254 $ 35,588 $
34,761 $ 20,339 $ 20,584
Selling and corporate administrative $ 18,705 $ 16,887 $
17,547 $ 18,503 $ 15,538
Interest expense $ 14,856 $ 14,903 $
14,777 $ 14,629 $ 12,135
Earnings (loss) from continuing
operations before extraordinary item (3) $ 5,274 $ (352) $
(4,485) $(14,112) $ (7,568)
Net earnings (loss) $ 2,368 $(12,831)
$(13,414) $(23,342) $ (12,403)
Common stockholders' share of earnings (loss) $ 453 $(14,437)
$(14,761) $(25,430) $ (18,530)
Earnings (loss) per share from continuing
operations before extraordinary
item for common stockholders $ 0.27 $ (0.29) $
(1.13) $ (3.18) $ (2.90)
Balance Sheet Data:
Total assets $375,490 $396,000
$360,103 $338,135 $298,725
Long-term debt excluding current maturities $104,112 $230,444
$215,939 $198,770 $119,949
Redeemable preferred stock $ - $ -
- $ - $ 24,884
Redeemable common stock $135,894 $130,828
$100,630 $ 95,391 $ 91,536
(1) Restated for the discontinuance of the Commercial Aviation
business.
(2) 1995 included $7,707,000 reversal of income tax reserves (see Note
14),
$4,362,000 accrued for losses and reserves related to the
Company's
Mexican operation, $2,400,000 accrual of legal fees related to
the
defense of a lawsuit filed by a subcontractor of a former
electrical
contracting subsidiary (see Notes 13 and 20) and $5,300,000 accrued
for
uninsured costs related to a former subsidiary's use of
asbestos
products (see Notes 13 and 20).
(3) The extraordinary loss in 1995 of $2,886,000 and 1992 of $2,526,000
and
the gain in 1991 of $192,000 results from the early extinguishment
of
debt.
(4) 1994 includes $3,250,000 (see Note 13) write-off of investment
in
unconsolidated subsidiary, $2,665,000 (Notes 13 and 20) accrual
of
legal fees related to the defense of a lawsuit filed by a
subcontractor
of a former electrical contracting subsidiary, $1,830,000 (see Note
13)
credit for reversal of legal costs associated with an acquired
business
and $4,069,000 (see Note 14) reversal of income tax reserves.
(5) 1993 includes $2,000,000 of legal and other expenses associated
with an
acquired business (see Note 13). 1993 also includes
$988,000
accelerated amortization of costs in excess of net assets
of an
acquired business, for assets that were subsequently determined to
have
been overvalued at the time of acquisition.
(6) 1992 Cost of Services includes approximately $6,000,000 for
settlement
of claims against the Company related to prior years.
BUSINESS
Overview
The Company provides diversified management, technical, and
professional
services to government and commercial customers throughout the United States
and
internationally. The Company provides primarily information
technology,
operations and maintenance, and research and development support services
under
contracts with U.S. Government agencies, foreign government agencies
and
commercial customers. The Company's U.S. Government customers include
the
Department of Defense (the "DoD"), the National Aeronautics and
Space
Administration ("NASA"), the Department of State, the Department of Energy
(the
"DOE"), the Environmental Protection Agency (the "EPA"), the Centers for
Disease
Control, the U.S. Postal Service and other U.S. Government agencies.
Sales
generated from services provided to the DoD and the U.S. Government in
the
aggregate, represented 55% and 96% of total sales, respectively, in 1995.
Total
sales, earnings before extraordinary item, interest, taxes, depreciation
and
amortization, and net earnings for the Company in 1995 were $908.7
million,
$21.6 million and $2.4 million, respectively.
During the second quarter of 1995, the Company's Board of
Directors
determined that it would be in the Company's best interest to discontinue
its
commercial aviation business operations (the "Commercial Aviation
Business"),
which provided about 20% of the Company's revenues in fiscal year 1994.
This
decision was made as a result of several factors including: (i) the
Company's
need for cash to reduce its debt, (ii) the capital intensive nature of
the
Commercial Aviation Business, (iii) the continual losses of the unit of
the
Commercial Aviation Business responsible for aircraft maintenance and
repair
operations (the "Aircraft Maintenance Unit") and (iv) a high level of
interest
from potential buyers. On June 30, 1995, the Company sold the
Aircraft
Maintenance Unit in a $13.7 million cash transaction with
Sabreliner
Corporation. On August 31, 1995, the Company divested that portion of
the
Commercial Aviation Business comprising its aviation ground handling
business,
including DynAir Services, Inc. and its affiliates (the "Ground Handling
Unit"),
in a $122 million (subject to adjustment) cash transaction with ALPHA
Airports
Group Plc. The proceeds from the two aforementioned transactions have been
used
to retire all of the Company's 16% Pay-In-Kind debentures and satisfy
existing
equipment financing obligations of the Ground Handling Unit. See
"Business --
Commercial Aviation" and "Management's Discussion and Analysis of
Financial
Condition and Results of Operations."
The Company's strategy has been to grow internally, increasing
business
through strong marketing and business development efforts, as well as
through an
aggressive strategic acquisition program. The Company provides services
through
three primary business areas. The composition and market niches, including
the
total contract price of certain significant contracts, of the business areas
are
described below. While the contract descriptions provided below may
refer to
contract terms in excess of one year, such contracts are normally
one-year
contracts which may be extended at the customer's option for additional
one-year
periods up to the number of years indicated. Except as otherwise
identified,
contract amounts set forth herein represent aggregate anticipated gross
revenues
over the life of such contract, assuming exercise of all option years.
Amounts
include both prior periods and the remaining life of the contract. See
"Risk
Factors -- Dependence on and Risks Inherent in U.S. Government Contracts"
and
"Business -- Government Contracting."
Aerospace Technology
This organization consists of one of the Company's oldest
businesses --
Aerospace Operations -- first started by the Company in 1951. It
includes
military aviation maintenance and aerospace engineering operations in
Texas,
various military bases and locations where Government aircraft are
maintained,
and certain locations overseas in support of the North Atlantic
Treaty
Organization ("NATO") and the United Nations. Revenues for 1995, 1994, and
1993
were $319.3 million, $300.9 million and $327.3 million, respectively.
$508 million Contract Field Teams - This is the Company's
second oldest contract, first awarded by the U.S.
Air
Force in 1951. Under this contract, which has
been
retained by the Company through successive
recompetitions
(the last of which was in 1993 for a five-year
renewal),
the Company furnishes between 1,500 and 2,500
aviation
technicians who are available on short notice to
travel
anywhere in the world to service and modify U.S.
military aircraft.
$407 million Fort Rucker Helicopter Support - First awarded to
the Company in 1988, this contract involving
1,400
employees was renewed in 1993 for an additional
five-year
period. The Company maintains over 600
rotary-wing
aircraft which are operated 24 hours a day to support
Army
pilot training activities.
$111 million Aerotherm - The Aerotherm subsidiary of Aerospace
Technology is a test and evaluation contractor
with
expertise in space vehicle reentry technology. It
also
builds test vehicles for the U.S. Air Force
Ballistic
Missile Office and operates a high energy laser
testing
facility for the Army. Aerotherm performs most of its
work
under five major long-term contracts and
numerous
subcontracts of various durations.
$98 million International Narcotics Matters Support - Under
this
contract first awarded in 1991, the Company operates
and supports a dedicated air wing of the Department
of State's drug interdiction program in Central and
South America. The program is based in Florida and
employs over 120 pilots, engineers, and technical
support and advisory personnel.
$97 million Johnson Space Center Support - This NASA aircraft
maintenance support contract was won by the Company
in
January of 1994. A total of 200 Company technicians
and support personnel maintain NASA aircraft used
in
launch activities.
$84 million III Corps and Fort Hood Combined Aircraft
Maintenance
Program - More than 500 Company personnel support the
U.S. Army and U.S. Army Reserve units in a ten-state
region in maintaining 1,200 rotary wing aircraft and
related ground support equipment. Under the
contract,
which extends through 1999, the Company provides line
maintenance support, limited depot level repairs,
maintenance work order installations and maintenance
test
flight operations.
$76 million Patuxent River Research & Development Center -
This is a Navy contract first awarded to the Company
in 1985 and re-won in 1991 for an additional
five-year
term. Approximately 225 employees provide test and
systems operations support in connection with test
launches.
$50 million Contingency Support - Under a five-year contract
awarded in February, 1996, a joint venture between
the
Company (50%) and Brown & Root (50%) will provide
operations, logistical, and other support to the
U.S. Army in the Caribbean and Central and South
American
regions.
$39 million Mission Field Teams - Under several contracts with
the
Department of State and the United Nations, Aerospace
Technology furnishes logistical and other support
services in connection with international peace
keeping
activities world-wide. Recent operations have been
in
Haiti, Bolivia, the United Arab Emirates, Kuwait, and
the former Yugoslavia.
Other Business Aerospace Technology has recently acquired
exclusive application rights in North and South
America to
Australian-developed technology for the application
of
composite patches to aircraft surfaces and
structural
members. The utilization of this process where
appropriate
avoids the costly alternative of replacing and
rebuilding
metal surfaces and support members. Aerospace
Technology
recently completed repairs of C-141 aircraft for the
U.S.
Air Force using the composite repair technology.
A
prototype repair has also been made to a C-5A
Starlifter
aircraft. The Company believes that there is a
significant
market for composite repair of military and
commercial
aircraft surfaces and supporting structures.
Enterprise Management
This organization consists primarily of the former Support
Services
Division of the Company which was started in 1987 and the range operations
and
test and evaluation activities and contracts of the former Test &
Evaluation
Division of the Company. Its basic markets include management of test
ranges,
military and other governmental facilities, management of commercial
enterprises
and facilities, health and healthcare-related support services, and
the
operation and management of multi-location service contracts, such as the
U.S.
Department of Justice Asset Forfeiture Program involving over 300
offices
throughout the United States.
It includes the operation, maintenance, and management of
major
governmental and private enterprises and installations, ranging from
the
turn-key responsibility for operation of all aspects of a single base (such
as a
military installation) to assumption of responsibility for the
staffing of
particular functions at various locations for a single customer.
Disciplines
included within operational responsibility vary, but generally
include
scientific support, operation of sophisticated electronic and
mechanical
systems, grounds and buildings, environmental systems, security
systems,
industrial hygiene, transportation systems, construction and
demolition,
environmental remediation, and the handling of and accountability
for
inventories of equipment and materials/supplies and other property.
Activities
include testing and evaluation of military hardware systems at government
test
ranges, collection and processing of data, maintenance of targets, ranges
and
laboratory facilities, health education, health surveillance,
clinical
laboratory services, developmental testing of complex weapons systems,
security
systems work, and technology transfer into commercial applications. Revenues
for
1995, 1994, and 1993 were $318.3 million, $325.6 million and $312.0
million,
respectively.
$1.5 billion 1 DOE Strategic Petroleum Reserve - Through
its
60% controlled affiliate, DynMcDermott
Petroleum
Operations Company, Inc. ("DynMcDermott"),
the
Company furnishes approximately 900
technicians
and operational personnel to operate DOE's
seven-site emergency crude oil storage
facilities
in Louisiana and Texas (the "Reserve"). The
Reserve
is maintained for possible draw-down and
domestic
sales of crude in the event of an international
crisis or threat to the U.S. oil supply. The
operation of the Reserve involves all technical
responsibility for approximately 700 million
barrels of crude in storage, over 1,000 miles of
pipeline, as well as all related environmental,
safety, and security matters. The current
contract
runs through 2003.
$585 million Rocky Flats - A subsidiary of the Company is a
subcontractor to Kaiser Hill, a joint venture.
Through the subsidiary, the Company will
provide
site support services to the DOE complex at
Rocky
Flats, Colorado. These services include
facilities and equipment maintenance,
logistics
and property management, information and
records
management, and environmental safety and
health
services. The subcontract will run through 2003.
$250 million 2 Arnold Engineering Development Center - Under
a
joint venture with Computer Sciences
Corporation
and General Physics Corporation, the Company
will
provide information technology, civil
engineering,
facilities management and environmental expertise
to
the Air Force's Advanced Simulation and Test
Facilities. The Company is a 35% owner of the
joint
venture, which holds the eight-year contract,
due
to expire in 2003.
$217 million Department of Justice Asset Forfeiture
Support
Program - This five-year, 1,000-person
contract,
requiring staffing of over 300 locations in the
United States, involves the support of Department
of
Justice's drug-related asset seizure program.
Company personnel support the various U.S.
Attorney
offices that are responsible for enforcing and
administering the federal asset forfeiture laws.
The
contract was secured for a period of five years
in
1993.
$215 million National Training Center - Over 1,100 Company
personnel operate the Army's National Training
Center near Barstow, California, where U.S. and
foreign military organizations engage in mock
military exercises. The Company maintains and
issues over 3,000 items of military equipment
and provides personnel to operate the entire
Fort Irwin facility, which supports more than
12,000 personnel. This contract was first won
in 1987 and was renewed for an additional
five-year term in 1991.
$98 million White Sands Missile Range - Under the Company's
oldest contract, originally awarded in 1946, the
Company provides data collection services to the
U.S. Army at White Sands Missile Range, New
Mexico.
The contract will expire in December, 1996.
$88 million Fort Belvoir - This facility management and
support
contract involves every aspect of operational
responsibility ranging from grounds maintenance
to security and air field operations at Fort
Belvoir, Virginia. Over 225 Company personnel
are involved under this contract. The contract
was
renewed for a five-year period in March, 1995.
$62 million Fallon Naval Air Station Support - Awarded in
1992,
this contract covers the maintenance and support
of
the facilities at Fallon Naval Air Station,
including all grounds and air field
maintenance.
The contract requires 302 Company support
personnel.
$55 million Department of State Security - The Company
provides
a variety of technical services to the Department
of
State at various locations around the world under
six contracts that extend through 2000.
$50 million Marine Spill Response Corporation Operations
Contract
Under this contract originally awarded in 1993
and extended for five years in October,1995,
the Company operates a fleet of 16 oil spill
response
ships that were specifically commissioned and
built
for U.S. coastal protection service under the Oil
Pollution Act of 1992.
$44 million Memphis Naval Air Station - This five-year
Navy contract awarded in 1993 involves
operational
and maintenance support for the infrastructure of
the Naval Air Station in Millington, Tennessee.
$40 million Reserve Training - A joint venture in which the
Company is a 40% participant will provide
operations
and maintenance training on deployable medical
systems for the U.S. Army Reserve Command under
a
five-year contract awarded in February, 1996.
$18 million Biotechnology and Health Services - The
Company
provides biomedical technology services to
various
health organizations. Under contracts
extending
into 1998, the Company operates seven
laboratories
and five repositories for the National Institutes
of
Health.
Other Business Enterprise Management operates
internationally where it performs security
services
and other support activities related to
facilities
and enterprise management. In addition to
its
military customers, this unit has contracts
for
similar services with non-DoD agencies such as
the
U.S. Department of Agriculture, Department of
State,
and Department of Justice.
1 Represents value of costs incurred and fee earned by DynMcDermott. Only
the
Company's portion of the fee ($6.2 million in 1995) has been recorded
as
revenue in the Company's financial statements.
2 Represents the value of the Company's share of the joint
venture's
reimbursable costs and award fee. The Company will report only its
share of
net earnings on its financial statements.
Information and Engineering Technology
This business consists of segments of businesses acquired during
the
period 1991 through 1994 -- Viar & Company, Meridian Corporation, NMI
Systems,
Inc., Technology Applications, Inc., and CBIS Federal, Inc. -- plus
existing
segments. The Company integrated these portions of the previously
acquired
corporate entities into the Information and Engineering Technology
business in
1995 and 1996.
Its activities include software development and maintenance,
computer
center operations, data processing and analysis, database
administration,
telecommunications support and operations, maintenance and operation
of
integrated electronic systems, and networking of electronic systems in a
local
and wide area environment. This business also includes environmental
regulation
development, quality assurance studies and research, management of
information
relating to the proper handling of hazardous materials and
substances,
alternative energy research and evaluation, and energy security studies
and
assessments. This business also provides services in support of
nuclear
safeguards and security research and development. Specialized
disciplines
include the development of physical security systems, vulnerability and
risk
assessments, and human reliability. Revenues for 1995, 1994, and 1993
were
$271.1 million, $192.2 million and $137.9 million, respectively.
$247 million DOE Information Technology Support Operations -
This
five-year information technology support
contract
marks a significant milestone in the Company's
efforts, starting with the acquisitions of Viar
and
Meridian in 1992, to expand its activities into
the
growing information technology marketplace. Over
200
Company personnel provide basic computer,
software,
and networking support to all of DOE's
operations.
$200 million Department of Treasury Information Processing
Support Services - This five-year contract
awarded in
June, 1995 provides support to the Internal
Revenue
Service and Treasury Department for major
information resource management projects.
Company
personnel will provide information systems
services,
telecommunication and network support,
software
and database development and technical evaluation
analysis.
$156 million General Services Administration ("GSA") Automated
Data Processing - Under this recently acquired 4
1/2
year contract, the Company provides life cycle
applications software development and maintenance
for
business and scientific systems to U.S. agencies
in
the GSA's Southeast Sunbelt and Great Lakes
regions.
The contract will employ between 400 and 800
persons
in 14 states.
$90 million Naval Warfare Systems Contract - One of the
Company's
oldest contracts, first awarded over 30 years
ago,
this is an engineering, technical and computer
operations contract with the U.S. Navy. The
contract was renewed for a five-year term in
April, 1996.
$89 million EPA Programs - Under several contracts, the
Company
performs program management, analytical, and
technical support for EPA Superfund policy,
research
and development, and enforcement under Superfund
and effluent guidelines. These contracts extend
into 1998.
$81 million Defense Policy Support - As a provider of direct
energy policy support to DoD, DOE and other
federal
agencies, the Company holds contracts with
terms
continuing through 1999, under which it
furnishes
analysis and documentation support on defense
policy
related to energy matters.
$40 million EPA Contract Laboratory Administrative Support
Services - Under this five-year contract awarded
in 1994, the Company provides program management
support in the testing of environmental samples
by EPA's contracted laboratories for the Office
of
Emergency and Remedial Responses. This is a
successor contract to a contract first awarded to
Viar & Company in 1980.
Other Business Information and Communications
Technology
Performs approximately $20 million per annum
of
systems networking contracts inherited from its
1993
acquisition of NMI Systems, Inc. Commercial
and
governmental customers are served.
Commercial Aviation
During the second quarter of 1995, the Company's Board of
Directors
determined that it would be in the Company's best interest to discontinue
the
Commercial Aviation Business, which provided about 20% of the Company's reve
nues
in fiscal year 1994. This decision was made as a result of several
factors
including: (i) the Company's need for cash to reduce its debt, (ii) the
capital
intensive nature of the Commercial Aviation Business, (iii) the continual
losses
of the Aircraft Maintenance Unit and (iv) a high level of interest
from
potential buyers.
The Aircraft Maintenance Unit included the Company's DynAir
Tech
subsidiaries in Arizona (acquired in 1987), Florida (acquired in 1969),
and
Texas. The Aircraft Maintenance Unit performed maintenance checks,
component
overhauls, heavy structural maintenance, airframe and systems maintenance
and
modification of a wide variety of passenger and cargo aircraft. The
Aircraft
Maintenance Unit was sold on June 30, 1995, for $13.7 million. In addition,
the
Company may receive additional payments based on future revenues of the
Aircraft
Maintenance Unit.
The aviation ground handling business was conducted through
the
Company's wholly owned subsidiaries, DynCorp Aviation Services, Inc.,
DynAir
Fueling Inc., and DynAir Services Inc., formerly Servair Inc., which
was
acquired by the Company in 1971 (collectively, the "Ground Handling Unit").
The
Ground Handling Unit provided a wide range of ground handling services
at
approximately 80 airports, ranging from line maintenance and fueling to
cleaning
and baggage handling. The Ground Handling Unit was sold on August 31, 1995,
for
$122 million, which price is subject to adjustment based on balance
sheet
figures to be established after closing.
Government Contracting
The Company derived 96% of its revenues in 1995 from
Government
Contracts, and 55% of its total revenues in 1995 were derived from
Government
Contracts with the DoD. Typically, a Government Contract has an initial
term of
one year combined with two, three, or four one-year renewal periods,
exercisable
at the discretion of the Government. The Government is not obligated to
exercise
its option to renew a Government Contract. At the time of completion
of a
Government Contract, the contract in its entirety is "recompeted" against
all
interested third-party providers. Approximately 80% of the Company's
Government
Contracts business is from contracts that have an aggregate initial
term
(including renewal periods) of five years or more. Federal law permits
the
Government to terminate a contract at any time if such termination is
deemed to
be in the Government's best interest. The Government's failure to renew, or
the
early termination of, any significant portion of the Company's
Government
Contracts could adversely affect the Company's business and prospects.
In
addition, the fact that Government Contracts may be terminated without
renewal
prior to the stated maturity of the Contract Receivable Collateralized
Notes
previously issued by the Company to its wholly owned financing subsidiary,
Dyn
Funding Corporation, may result in demands on the Company's available
cash as
the Company endeavors to replace the terminated contracts underlying
the
Contract Receivable Collateralized Notes. See "Risk Factors -- Dependence on
and
Risks Inherent in Government Contracts " and "Risk Factors -- Termination
of
Contracts/Increased Demand on Cash Flow."
Contracts with the U.S. Government and its prime contractors
usually
contain standard provisions for termination at the convenience of the
Government
or such prime contractors, pursuant to which the Company is generally
entitled
to recover costs incurred, settlement expenses, and profit on work
completed
prior to termination. There can be no assurance that terminations will
not
occur, and such terminations could adversely affect the Company's business
and
prospects. The Company's Government Contracts do not provide for
renegotiation
of profits. See "Risk Factors -- Dependence on and Risks Inherent in
Government
Contracts."
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. The current world political situation
and
domestic pressure to reduce the federal budget deficit have reduced, and
may
continue to reduce, military and other spending by the U.S. Government.
The
precise effect of these political developments on the Company's business
and
prospects cannot be predicted. Such budget reductions and/or changes
in
governmental policies might increase somewhat the nature and amount of
work
contracted out by Government agencies to businesses such as the Company,
but
they might also limit future revenue opportunities for the Company with
respect
to U.S. Government Contracts. See "Risk Factors -- Dependence on and
Risks
Inherent in Government Contracts."
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 (approximately
20%
of the Company's total Government Contracts revenue in 1995)
and
time-and-material contracts (approximately 25% of its total Government
Contracts
revenue in 1995), 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. The
balance of
the Company's Government Contracts revenue in 1995 (approximately 55%)
was
derived from cost-reimbursement contracts. To the extent that the actual
costs
incurred in performing a cost-reimbursement contract are within the
contract
ceiling and allowable under the terms of the contract and
applicable
regulations, the Company is entitled to reimbursement of its costs
plus a
stipulated profit. However, if the Company's costs exceed the ceiling or are
not
allowable under the terms of the contract or applicable regulations, any
excess
would be subject to adjustment and repayment upon audit by Government
agencies.
See "Risk Factors -- Contract Profit Exposure Based on Type of Contract."
Government Contract payments received by the Company in
excess of
allowable direct and indirect costs are subject to adjustment and
repayment
after audit by Government auditors. 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 in its financial statements for
possible
excess billings and contract losses 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. See "Risk
Factors --
Contract Receivables Subject to Audits by U.S. Government Agencies."
As a U.S. Government contractor, the Company is subject to
federal
regulations under which its right to receive future awards of new
Government
Contracts, or extensions of existing Government Contracts, may be
unilaterally
suspended or barred should the Company be convicted of a crime or be
indicted
based on allegations of a violation of certain specific federal
statutes or
other activities. Suspensions, even if temporary, can result in the
loss of
valuable contract awards for which the Company would otherwise be
eligible.
While suspension and debarment actions may be limited to that division
or
subsidiary of a company which is involved in the alleged improper activity
which
gives rise to the suspension or debarment actions, Government agencies
have
authority to impose debarment and suspension on affiliated entities which
in no
way were involved in the alleged improper activity. 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.
See "Risk Factors -- Potential for Suspension and Debarment."
Factoring of Receivables
On January 23, 1992, the Company's wholly owned subsidiary, Dyn
Funding
Corporation ("DFC"), completed a private placement of $100,000,000 of
8.54%
Contract Receivable Collateralized Notes, Series 1992-1 (the "Notes").
Upon
receiving the proceeds from the sale of the Notes, DFC purchased from
the
Company an initial pool of receivables for $70,601,000, paid $1,524,000
for
expenses and deposited $3,000,000 into a reserve fund account and
$24,875,000
into a collection account with Bankers Trust Company as trustee
pending
additional purchases of receivables from the Company. Of the proceeds
received
from DFC, the Company used $38,112,000 to pay the outstanding balances of
the
ESOP loan and a revolving loan facility, and $33,280,000 was used for
the
redemption of all outstanding Class A Preferred Stock plus accrued
dividends
(the redemption price per share was $25.00 plus accrued dividends of $0.66
per
share).
The Notes are collateralized by the right to receive proceeds
from
certain Government Contracts and certain eligible accounts receivable
of
commercial customers of the Company. Credit support for the Notes is
provided by
over-collateralization in the form of additional receivables. The
Company
retains an interest in the excess balance of receivables through its
ownership
of the common stock of DFC. Additional credit and liquidity support is
provided
to the Notes through a cash reserve fund. Interest payments are made
monthly
with monthly principal payments beginning February 28, 1997. The Notes are
for a
term of five years and two months and are required to be fully repaid by
July
30, 1997.
On an ongoing basis, the cash receipts from collection of
the
receivables will be used by DFC to make interest payments on the Notes,
pay a
servicing fee to the Company, and purchase additional receivables from
the
Company. Beginning February 28, 1997, instead of purchasing
additional
receivables, the cash receipts will be used by DFC to repay principal on
the
Notes. During the non-amortization period (the period between January 23,
1992
and January 30, 1997), cash in excess of the amount required to
purchase
additional receivables and meet payments on the Notes is to be paid to
the
Company, subject to certain collateral coverage tests. The receivables
pledged
as security for the Notes are valued at a discount from their stated value
for
purposes of determining adequate credit support. DFC is required to
maintain
receivables, at their discounted values, plus cash on deposit at least
equal to
the outstanding balance of the Notes.
The Notes are redeemable in whole, but not in part, at the
option of
DFC at a price equal to the principal amount of the Notes plus accrued
interest
plus a premium (as defined in the Notes).
Upon termination of any of the Company's contracts,
including
Government Contracts, the Company would no longer accrue a stream of
accounts
receivable thereunder for sale to DFC, which may result in demands on
the
Company's available cash as the Company endeavors to replace the
terminated
contracts. The ability of the Company to maintain certain ratios under the
Notes
depends in part on its ability to keep in force existing contracts
and/or
acquire new contracts such that sufficient eligible receivables are
available
for sale by the Company to DFC. See "Risk Factors -- Termination
of
Contracts/Increased Demand on Cash Flow."
By the terms of the Notes, in the event that the interest
coverage
ratio (as defined in the Notes) falls below certain prescribed levels and
the
Company's principal debt exceeds certain amounts, DFC may be prohibited
from
purchasing additional receivables from the Company, thereby reducing
the
Company's access to additional cash resources. Further, in the event that
the
collateral value ratio (as defined in the Notes) falls below certain
levels
required in the Notes due to a decrease in the Company's contract revenue
and
the Company fails to provide sufficient receivables in order to increase
the
collateral value ratio, the Company may be forced to redeem part or all of
the
Notes which would result in additional demands on the Company's cash
resources.
See "Risk Factors -- Inability to Maintain Certain Ratios Under the
Contract
Receivable Collateralized Notes."
Environmental Matters
The Company's business activities occasionally result in the
generation
of non-nuclear hazardous wastes, the hauling and disposal of which are
governed
by federal, state and local environmental compliance statutes and
regulations.
In addition, certain of the Company's businesses operate petroleum storage
and
other facilities that are subject to similar regulations. Violations of
these
laws can result in significant fines and penalties for which insurance is
not
reasonably available. Moreover, because many of its operations involve
the
management of storage and other facilities owned by others,
primarily
governmental entities, the Company is not always in a position to control
the
compliance of the facilities it operates with environmental and other
laws.
However, neither the Company nor any of its subsidiaries have been
named a
potentially responsible party relating to environmental liability at any
sites.
There are no enforcement actions relating to environmental liability
currently
in progress with respect to the Company, its subsidiaries or any of
their
operations. See "Risk Factors -- Environmental Matters" and "Legal Matters."
International Operations
The Company from time to time conducts some operations outside of
the
United States. Such international operations entail additional business
risks
and complexities such as foreign currency exchange fluctuations,
different
taxation methods, restrictions on financial and business practices and
political
instability. Each of these factors could have an adverse impact on
operating
results. There can be no assurance that the Company can achieve or
maintain
success in these markets. See "Risk Factors -- Risks Inherent in
International
Operations."
Competition
The markets which the Company services are highly competitive. In
each
of its operating groups, the Company's competition is quite fragmented,
with no
single competitor holding a significant market position. The Company
experiences
vigorous competition from industrial firms, university laboratories,
non-profit
institutions and U.S. Government agencies. Some of the Company's competitors
are
large, diversified firms with substantially greater financial resources
and
larger technical staffs than the Company has available to it.
Government
agencies also compete with and are potential competitors of the Company
because
they can utilize their internal resources to perform certain types of
services
that might otherwise be performed by the Company. A majority of the
Company's
revenues are derived from contracts with the U.S. Government and its
prime
contractors, and such contracts are awarded on the basis of negotiations
or
competitive bids where price is a significant factor. See "Risk
Factors --
Competition."
Backlog
The Company's backlog of business (including estimated value of
option
years on Government Contracts) was $2.9 billion at December 31, 1995,
compared
to a year-end 1994 backlog of $2.0 billion. U.S. Government agencies
operate
under annual fiscal appropriations by the Congress and fund various
contracts on
an incremental basis. Therefore, a substantial portion of the Company's
backlog
represents contracts which have not been funded by the responsible
Government
agency. See "Risk Factors Future Revenues Dependent on Funding of Backlog."
Properties
The Company is primarily a service-oriented company, and, as such,
the
ownership or leasing of real property is an activity which is not material
to an
understanding of the Company's operations. The Company owns two
office
buildings. The Company leases numerous commercial facilities used in
connection
with the various services rendered to its customers, including its
corporate
headquarters, a 149,000 square foot facility under a 12-year lease. None of
the
properties is unique. All of the Company's owned facilities are located
within
the United States. In the opinion of management, the facilities employed by
the
Company are adequate for the present needs of the business.
LEGAL MATTERS
General
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 amount of possible damages
currently
claimed by the various plaintiffs for these items, a portion of
which is
expected to be covered by insurance, aggregate approximately
$120,000,000
(including compensatory and possible punitive damages and penalties).
This
amount includes estimates for claims which have been filed without
specified
dollar amounts or for amounts which are in excess of recoveries
customarily
associated with the stated causes of action; it does not include any
estimate
for claims which may have been incurred but which 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. These issues
are
described below. See "Risk Factors - Potential for Adverse Judgments in
Legal
Proceedings."
Asbestos Claims
A former acquired subsidiary, Fuller-Austin Insulation Company
(the
"Subsidiary"), which discontinued its business activities in 1986, has
been
named as one of many defendants in civil lawsuits which have been
filed in
various state courts beginning in 1986 (principally Texas)
against
manufacturers, distributors and installers of asbestos products. The
Subsidiary
was a nonmanufacturer that installed or distributed industrial
insulation
products. The Subsidiary had discontinued the use of asbestos products
prior to
being acquired by the Company in 1974. These claims are not part of a
class
action.
The claimants generally allege injuries to their health
caused by
inhalation of asbestos fibers. Many of the claimants seek punitive
damages as
well as compensatory damages. The amount of damages sought is impacted
by a
multitude of factors. These include the type and severity of the
disease
sustained by the claimant (i.e. mesothelioma, lung cancer, other
types of
cancer, asbestosis or pleural changes); the occupation of the claimant;
the
duration of the claimant's exposure to asbestos-containing products; the
number
and financial resources of the defendants; the jurisdiction in which the
claim
is filed; the presence or absence of other possible causes of the
claimant's
illness; the availability of legal defenses such as the statute of
limitations;
and whether the claim was made on an individual basis or as part of a
group
claim.
As of March 1, 1996, 8,630 plaintiffs have filed claims against
the
Subsidiary and various other defendants. Of these claims 1,187 have
been
dismissed, 1,898 have been resolved without an admission of liability
at an
average cost of $5,000 per claim (excluding legal defense costs)
and an
additional 2,606 claims have been settled in principle (subject to
future
processing and funding) at an average cost of $1,950 per claim. Following
is a
summary of claims filed against the subsidiary through March 1, 1996:
Years
Prior 1993 1994 1995 1996(1) Total
Claims filed 2,160 668 1,026 4,647 129 8,630
Claims dismissed (14) (65) (21) (1,035) (52) (1,187)
Claims resolved (76) (1,142) (333) (182) (165) (1,898)
Settlements in process (2,606)
Claims outstanding at March 1, 1996 2,939
(1) January 1 - March 1, 1996
In connection with these claims the Subsidiary's primary
insurance
carriers have incurred approximately $16,300,000 (including $6,800,000 of
legal
defense costs but excluding $5,100,000 for settlements in process) to defend
and
settle the claims and, in addition, judgments have been entered against
the
Subsidiary for jury verdicts of $6,500,000 which have not been paid and
which
are under appeal by the Subsidiary. Through December 31, 1995, the Company
and
the Subsidiary have charged to expense approximately $12,500,000
consisting of
$6,200,000 of charges under retrospectively rated insurance policies
and
$6,300,000 of reserves for potential uninsured legal and settlement
costs
related to these claims. These charges substantially eliminate any
further
exposure for retrospectively determined premium payments under
the
retrospectively rated insurance policies.
During 1995, the Subsidiary continued its strategy to require
direct
proof that claimants had significant exposure to asbestos as the result of
the
Subsidiary's operations. This has resulted in an increased level of
trial
activity. The Subsidiary believes that this strategy will have the near
term
effect of increasing average per-case resolution cost but will reduce
the
overall cost of asbestos personal injury claims in the long run by
limiting
indemnity payments only to claimants who can establish
significant
asbestos-related impairment and exposure to the Subsidiary's operations
and by
substantially reducing indemnity payments to individuals who are
unimpaired or
who did not have significant exposure to asbestos as a result of
the
Subsidiary's operations. Further, the level of filed claims has
become
significant only since 1992, and therefore, the Subsidiary has a
relatively
brief history (compared to manufacturers and suppliers) of claims volume
and a
limited data file upon which to estimate the number or costs of claims that
may
be received in the future. Also, effective September 1, 1995, the State of
Texas
enacted tort reform legislation which is believed to have caused a
nonrecurring
surge in the volume of filed claims in 1995 immediately prior to the
effective
date of the legislation.
The Company and its defense counsel have analyzed the 8,630
claim
filings incurred through March 1, 1996. Based on this analysis and
consultation
with its professional advisors, the Subsidiary has estimated its cost,
including
legal defense costs, to be $20,000,000 for claims filed and still unsettled
and
$40,000,000 as its minimum estimate of future costs of unasserted
claims,
including legal defense costs. No upper limit of exposure can
presently be
reasonably estimated. The Company cautions that these estimates are
subject to
significant uncertainties including the future effect of tort reform
legislation
enacted in Texas, the size of jury verdicts, success of appeals in process,
the
number and financial resources of future plaintiffs, and the actions of
other
defendants. Therefore, actual experience may vary significantly from
such
estimates. At December 31, 1995 and 1994 (restated), the Subsidiary
recorded an
estimated liability for future indemnity payments and defense costs
related to
currently unsettled claims and minimum estimated future claims of
$60,000,000
and $17,000,000, respectively (recorded as long-term liability).
Defense has been tendered to and accepted by the Subsidiary's
primary
insurance carriers, and by certain of the Company's primary insurance
carriers
that issued policies under which the Subsidiary is named as an
additional
insured; however, only one such primary carrier has partially accepted
defense
without a reservation of rights. The Company believes the Subsidiary
has at
least $12,000,000 in unexhausted primary coverage (net of deductibles
and
self-insured retentions but including disputed coverage) under its
liability
insurance policies to cover the unsettled claims, verdicts and future
unasserted
claims and defense costs. When the primary limits are exhausted, liability
for
both indemnity and legal defense will be tendered to the excess
coverage
carriers, all of which have been notified of the pendency of the
asbestos
claims. The Company and the Subsidiary have approximately $490,000,000
of
additional excess and umbrella insurance that is generally responsive
to
asbestos claims. This amount excludes approximately $92,000,000 of
coverage
issued by insolvent carriers of which $35,000,000 is the next insurance
layer
above the Company's primary coverage carrier for policy years 1979 through
1984.
All of the Company's and the Subsidiary's liability insurance policies
cover
indemnity payments and defense fees and expenses subject to applicable
policy
terms and conditions.
The Company and the Subsidiary have instituted litigation in
Los
Angeles Superior Court, California, against their primary and excess
insurance
carriers, to obtain declaratory judgments from the Court regarding
the
obligations of the various carriers to defend and pay asbestos claims.
The
issues in this litigation include the aggregate liability of the carriers,
the
triggering and drop-down of excess coverage and allocation of losses
covering
multiple carriers and insolvent carriers, and various other issues
relating to
the interpretation of the policy contracts. All of the carrier defendants
have
filed general denial answers in response to the Company's claims
for
indemnification. Legal and insurance experts retained by the Company and
the
Subsidiary have analyzed the insurance policies, the history of coverage
and
insurance reimbursement for these types of claims, and the outcome of
unrelated
litigation involving identical policy language and factual circumstances.
The
Company is also aware of the fact that the insurance carriers have paid to
date
approximately $16.3 million in asbestos legal defense and claim settlement
costs
which represents 100% of such costs and which is consistent with the
Company's
view of the enforceability of the policies. Moreover, a recent appellate
court
decision involving insurance company liability for asbestos claims
comparable to
those being asserted against the subsidiary, gives further support to
the
Company's position that all carriers have a liability to indemnify the
Company
and the subsidiary for asbestos claims.
Based on these analyses and observations, management believes
that it
is probable that the Company and the Subsidiary will prevail in
obtaining
judicial rulings confirming the availability of a substantial portion of
the
coverage, assuming no additional carrier insolvencies. Currently, the
Company
has remaining coverage under policies issued by solvent carriers
of
approximately $502 million ($12 million in primary coverage and $490
million in
excess coverage). Based on a review of the independent ratings of
these
carriers, the Company believes that a substantial portion of this coverage
will
continue to be available to meet the claims. The Subsidiary recorded in
other
assets $60,000,000 and $17,000,000 (not including reserves of $7,000,000
and
$2,000,000, respectively) at December 31, 1995 and 1994 (restated),
respectively
representing the amounts that it expects to recover from its insurance
carriers
for the payment of currently unsettled and estimated future claims. The
Company
cautions, however, that even though the existence and aggregate dollar
amounts
of insurance are not generally being disputed, such insurance
coverage is
subject to interpretation by the Court and the timing of the availability
of
insurance payments could, depending upon the outcome of the litigation
and/or
negotiation, delay the receipt of insurance company payments and require
the
Subsidiary to make interim payments for asbestos defense and indemnity
from
reserves and insurance settlement funds created as a result of settlements
with
certain of the carriers. While the Company and the Subsidiary believe that
they
have recorded sufficient liability to satisfy the Subsidiary's
reasonably
anticipated costs of present and future plaintiffs' suits, it is not
possible to
predict the amount or timing of future suits or the future solvency of
its
insurers. In the event that currently unsettled and future claims exceed
the
recorded liability of $60,000,000, the Company believes that the
judicially
determined and/or negotiated amounts of excess and umbrella insurance
coverage
that will be available to cover additional claims will be significant;
however,
it is unable to predict whether or not such amounts will be adequate to
cover
all additional claims without further contribution by its Subsidiary.
General Litigation
The Company has retained certain liability in connection with its
1989
divestiture of its major electrical contracting business, Dynalectric
Company
("Dynalectric"). The Company and Dynalectric were sued in 1988 in Bergen
County
Superior Court, New Jersey, by a former Dynalectric joint
venture
partner/subcontractor (subcontractor). The subcontractor has alleged that
its
subcontract to furnish certain software and services in connection with a
major
municipal traffic signalization project was improperly terminated by
Dynalectric
and that Dynalectric fraudulently diverted funds due, misappropriated its
trade
secrets and proprietary information, fraudulently induced it to enter the
joint
venture, and conspired with other defendants to commit acts in violation of
the
New Jersey Racketeering Influenced and Corrupt Organization Act. The
aggregate
dollar amount of these claims has not been formally recited in
the
subcontractor's complaint. Dynalectric has also filed certain
counterclaims
against the former subcontractor. The Company and Dynalectric believe that
they
have valid defenses, and/or that any liability would be offset by
recoveries
under the counterclaims. Discovery is ongoing; no trial date has been
scheduled.
The Company believes that it has established adequate reserves
($4,023,000 at
December 31, 1995) for the contemplated defense costs and for the
cost of
obtaining enforcement of arbitration provisions contained in the contract.
In November, 1994, the Company acquired an information
technology
business which was involved in various disputes with federal and state
agencies,
including two contract default actions and a qui tam suit by a former
employee
alleging improper billing of a federal government agency customer. The
Company
has contractual rights to indemnification from the former owner of the
acquired
subsidiary with respect to the defense of all such claims and litigation,
as
well as all liability for damages when and if proven. In October, 1995,
one of
the federal agencies asserted a claim against the subsidiary and gave
the
Company notice that it intended to offset against the contract under which
the
claim arose. To date, the agency has withheld approximately $3,300,000
allegedly
due the agency under one of the aforementioned disputes. The Company
has
submitted a demand for indemnification to the former owner of the
subsidiary
which has been denied. The Company has commenced arbitration of
the
indemnification denial under the terms of the acquisition agreement which
the
former owner is fighting in federal district court. The Company
expects to
recover in full, but gives no assurances in this reguard.
Environmental Issues
As to environmental issues, neither the Company nor any of
its
subsidiaries is named a potentially responsible party at any site. The
Company,
however, did undertake, as part of the 1988 divestiture of a
petrochemical
engineering subsidiary, an obligation to install and operate a soil and
water
remediation system at a subsidiary research facility site in New Jersey.
The
Company is required to pay the costs of continued operation of the
remediation
system through 1996 (see Note 13 to the Financial Statements). In addition,
the
Company, pursuant to the sale of the Commercial Aviation Business,
is
responsible for the costs of clean-up of environmental conditions at
certain
designated sites. Such costs may include the removal and subsequent
replacement
of contaminated soil, concrete, tanks, etc. that existed prior to the
sale of
the Commercial Aviation Business (See Note 2 to the Financial Statements).
Other Litigation
The Company is a party to other civil and contractual lawsuits
which
have arisen in the normal course of business for which potential
liability,
including costs of defense, which constitute the remainder of the
$120,000,000
discussed above. The estimated probable liability for these issues
is
approximately $10,000,000 and is substantially covered by insurance. The
Company
has recorded an offsetting asset (Other Assets) and liability
(long-term
liability) of $10,000,000 million at December 31, 1995 for these items.
There
are no known disputes regarding availability of this insurance, and the
carriers
have accepted defense and have agreed to pay any indemnity claims.
The Company has recorded its best estimate of the aggregate
liability
that will result from these matters. While it is not possible to predict
with
certainty the outcome of litigation and other matters discussed above, it is
the
opinion of the Company's management, based in part upon opinions of
counsel,
insurance in force and the facts currently known, that liabilities in
excess of
those recorded, if any, arising from such matters would not have a
material
adverse effect on the results of operations, consolidated financial
position or
liquidity of the Company over the long-term. However, it is possible that
the
timing of the resolution of individual issues could result in a
significant
impact on the operating results and/or liquidity for one or more
particular
future reporting periods.
The major portion of the Company's business involves contracting
with
departments and agencies of, and prime contractors to, the U.S. Government,
and
such contracts are subject to possible termination for the convenience of
the
government and to audit and possible adjustment to give effect to
unallowable
costs under cost-type contracts or to other regulatory requirements
affecting
both cost-type and fixed-price contracts. In addition, the Company
is
occasionally the subject of investigations by the Department of Justice
and
other investigative organizations, resulting from employee and other
allegations
regarding business practices. In management's opinion, there are no
outstanding
issues of this nature at December 31, 1995 that will have a material
adverse
effect on the Company's consolidated financial position, results of
operations
or liquidity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In June 1995, the Company's Board of Directors concluded that it
was in
the best interests of the Company to divest its Commercial Aviation
Business. On
June 30, 1995, the Company sold the stock of all its subsidiaries engaged in
the
business of commercial aircraft heavy maintenance (the "Aircraft
Maintenance
Unit") for $13.7 million to Sabreliner Corporation. On August 31, 1995
the
Company sold to ALPHA Airports Group Plc, all of its subsidiaries
engaged in
commercial airline ground handling, passenger services, aircraft
fueling,
aircraft line maintenance and cargo handling (the "Ground Handling Unit")
for
$122 million (subject to adjustment). As a result of the decision to
divest
itself of the entire Commercial Aviation Business, which constituted a
major
class of customer, the related accounts have been classified as
discontinued
operations for financial reporting purposes. See Note 2,
"Discontinued
Operations" to the Consolidated Financial Statements. The following
discussion
and amounts exclude the discontinued operations of the Commercial
Aviation
Business unless stated otherwise.
Following is a summary of operations, cash flow and long-term debt
(in
thousands):
Years Ended December 31,
1995 1994 1993
Operations
Revenues $ 908,725 $818,683
$777,216
Gross Profit 37,254 35,588
34,761
Selling and corporate administrative (18,705) (16,887)
(17,547)
Interest, net (11,052) (12,505)
(12,349)
Other (10,058) (7,654)
(7,109)
Provision (benefit) for income taxes (9,090) (2,236)
1,289
Earnings (loss) from continuing
operations before minority interest
and extraordinary item $ 6,529 $ 778 $
(3,533)
Cash Flow
Net earnings (loss) $ 2,368 $(12,831)
$(13,414)
Depreciation and amortization 11,348 16,340
13,151
Pay-in-kind interest - 8,787
6,676
Working capital items (16,293) (26,216)
(12,544)
Other 16,321 511
3,207
Discontinued operations (3,355) 22,770
11,273
Cash provided by operating activities 10,389 9,361
8,349
Investing activities 139,939 (22,235)
(18,527)
Financing activities (126,915) 8,840
7,817
Increase (decrease) in cash and
short-term investments $ 23,413 $ (4,034) $
(2,361)
Long-term Debt (including current maturities)
Contract Receivable Collateralized Notes $ 100,000 $100,000
$100,000
Junior Subordinated Debentures - 102,658
86,947
Mortgages payable 3,802 22,285
23,416
Other notes payable and
capitalized leases 1,570 8,505
8,785
$ 105,372 $233,448
$219,148
Revenues
Revenues from continuing operations were $908.7 million in
1995
compared to $818.7 million in 1994, an increase of $90.0 million.
Information
and Engineering Technology's (I&ET) revenues increased to $271.1 million
from
$192.2 million in 1994, Aerospace Technology's (AT) revenues increased to
$319.3
million from $300.9 million in 1994, and Enterprise Management's (EM)
revenues
decreased to $318.3 million from $325.6 million in 1994. The increase in
I&ET
was primarily attributable to a business acquired in October 1994 and
new
contract awards; the increase in AT was primarily the result of increased
level
of effort on existing contracts while new contract awards were
offset
substantially by contracts lost in recompetition; the decrease in EM was
the
result of contracts lost in recompetition offset partially by contracts
which
were in the start-up phase in 1994 but were fully operational in 1995. Both
I&ET
and EM were effected by the shutdown of the Federal Government in November
and
December 31, 1995 and the subsequent furloughs resulting from the
stalled
federal budget negotiations. The shutdown affected revenue by
approximately
$1,000,000.
Revenues from continuing operations were $818.7 million in 1994
compared to
$777.2 million in 1993, an increase of $41.5 million. I&ET increased to
$192.2
million from $137.9 million, AT decreased to $300.9 million from $327.3
million
and EM increased to $325.6 million from $312.0 million. The increase in I&ET
was
primarily attributable to businesses acquired in November and December 1993
and
October 1994 ($52.5 million). AT decreased primarily as the result of the
loss
of a major contract, the completion of work on a major fixed price contract
and
reduced efforts on another major contract offset partially by award of a
new
contract in late 1994. EM increased primarily due to award of several
new
contracts, expansion of work on existing contracts and $7.0 million
retroactive
adjustment on one cost reimbursable contract mandated by the Department of
Labor
under the Service Contract Act. These increases were partially offset by
the
loss of three contracts in recompetition.
Cost of Services/Gross Margins
Cost of services from continuing operations was 95.9% of
revenue in
1995, 95.7% in 1994 and 95.5% in 1993, which resulted in gross margins of
$37.3
million (4.1%), $35.6 million (4.3%) and $34.8 million (4.5%), respectively.
The
1995 gross margin was adversely affected by losses of $4.4 million in
connection
with the Company's efforts to further expand its Mexican operations
and to
complete a contract for the design and installation of a large security
system
in Mexico. These losses included such expenses as business development
and
marketing expenses ($1.6 million), recognition of an estimated loss
at
completion including currency devaluation losses for a security system
contract
($2.1 million), severance costs associated with the reduction and
realignment of
the local workforce ($0.4 million), and a reserve for closing the
operation
($0.3 million). The contract loss resulted primarily from labor
overruns to
install the security systems and the customer refusing to pay the contract
price
in U.S. dollars as originally agreed. These problems were discovered in
the
fourth quarter pursuant to management changes initiated by DynCorp
Corporate
office. The contract had a total contract value of $4.7 million and is
estimated
to be completed in the second quarter of 1996. The Company recorded
revenues of
$0.5 million, $2.9 million and $0 and cost of services of $2.6 million,
$2.6
million and $0 during 1995, 1994 and 1993, respectively, for the
contract.
Excluding its Mexican operations, the Company's gross margin would have
been
$41.7 million, $36.6 million and $34.8 million in 1995, 1994 and
1993,
respectively. Approximately $3.1 million of costs, consisting primarily
of
labor and costs to complete the contract ($2.1 million), severance costs
($0.3
million) and operations close-out costs ($0.7 million), were accrued at
December
31, 1995, and are expected to be expended in 1996. The loss incurred by
the
Mexican operations, along with the effect of the shutdown of the
Federal
Government in November and again in December which reduced revenue by
$1.0
million and gross margin by $120,000, substantially offset increased
earnings
from an acquisition which was consummated in October 1994 and new
contract
awards net of contract losses.
The increase in the 1994 gross margin over 1993 was
attributable
primarily to acquisitions consummated in November and December, 1993
and
October, 1994, and new contract awards which were partially offset by
decreases
related to lost contracts and reduced level of services on existing
contracts.
Selling and Corporate Administrative
Selling and corporate administrative expenses as a percentage
of
revenue was 2.1% in 1995 and 1994 and 2.3% in 1993. Even though selling
and
corporate administrative expenses as a percentage of revenue remained the
same
in 1995 as in 1994, the dollar amount increased $1.8 million in 1995 over
1994.
This increase is primarily attributable to increased facility costs
resulting
from the sale and leaseback of the Corporate headquarters building at a
cost in
excess of the previous cost of ownership. The decrease of $0.7 million in
1994
from 1993 was primarily attributable to a decrease in Restricted Stock
Plan
expense due to the award of fewer shares in 1994 than in 1993.
Interest
Interest expense in 1995 was $14.9 million, virtually unchanged
from
1994. However, there were different factors affecting the amount of
interest
expense for these years. 1995 included the effect of the declining balance
and
eventual redemption of all the 16% Junior Subordinated Debentures and
the
liquidation of the mortgage on the Corporate office building, which was sold
and
leased back; 1994 included nonrecurring credits resulting from the
reversal of
interest accruals due to a favorable settlement with the Internal
Revenue
Service of the Company's tax liability for the period 1985-1988.
Interest expense was $14.9 million in 1994, compared to $14.8
million
in 1993. Increases resulting from the compounding of the pay-in-kind
interest on
the Junior Subordinated Debentures and the inclusion of a full year of
interest
on mortgages assumed in conjunction with an acquisition in the fourth
quarter of
1993 were offset by the reversal of interest accruals related to the
Company's
tax liability, referred to previously.
Interest income was $3.8 million in 1995, up from $2.4 million in
1994.
The increase, due to greater interest yields on higher cash and
short-term
investment balances, was partially offset by the collection of the 17%
Cummings
Point Industries, Inc. note receivable in August, 1995.
Interest income in 1994 was approximately the same as that of
1993.
Although the interest on the Cummings Point Industries, Inc. note receivable
was
higher in 1994 than 1993 because of compounding, 1993 included the
recording of
prior years' interest income (and offsetting bank fee expense) on cash
balances
in various operating accounts.
Other
The increase in other expense in 1995 as compared to 1994 is
due to
several different factors (see Note 13 to the Consolidated
Financial
Statements). In 1995, the Company recorded a charge of $5.3 million to
increase
its reserve for the estimated future uninsured cost to defend and
settle
asbestos claims (see Note 20(a) to the Consolidated Financial Statements).
In
addition, in 1995, 1994 and 1993, the Company recorded charges of $2.4
million,
$2.7 million and $0.5 million, respectively, to increase its reserves for
the
estimated costs (primarily legal defense) to resolve a lawsuit filed
by a
subcontractor to a former subsidiary (see Note 20(b) to the
Consolidated
Financial Statements). The determination of these reserves is subject
to
numerous uncertainties and judgments which are described in Note 20(a) and
(b)
and it is possible that additional reserves may be required in the future.
Other expense in 1994 as compared to 1993 contained several
variances:
(i) the 1994 write-off of $3.3 million of the Company's 50.1% investment
in an
unconsolidated subsidiary, (ii) accrual of legal fees and environmental
costs
related to divested businesses, (iii) reversal of reserves of $1.8 million
for
legal and other expenses associated with events which predated the
Company's
acquisition of another business and (iv) nonrecurrence of
accelerated
amortization of $1.0 million of cost in excess of net assets of an
acquired
business that was determined in 1993 to be overvalued because
of
misrepresentation by the sellers in respect to the level of profitability
and
duration of performance of two major contracts which represented
approximately
85% of the future earnings of SMC anticipated at the time of acquisition.
See
Note 13, "Other Expense," to the Consolidated Financial Statements.
Income Taxes
The benefit for income taxes in 1995 reflects a tax provision
based on
an estimated annual effective tax rate, excluding expenses not deductible
for
tax and the reversal of $7.7 million of tax valuation reserves for deferred
tax
assets which are expected to be used in the 1995 tax returns. The 1994
federal
tax benefit resulted from the reversal of tax reserves for the IRS
examination
and the tax benefit for operating losses net of a valuation allowance less
the
federal tax provision of a majority owned subsidiary required to file a
separate
return. The Federal tax provision recognized in 1993 was only that of
the
majority owned subsidiary referred to previously.
Intangible Assets
Intangible assets principally consist of the excess of the
acquisition
cost over the fair value of the net tangible assets of businesses acquired.
In
accordance with the guidance provided in APB No. 16, the Company assesses
and
allocates, to the extent possible, excess acquisition price to
identifiable
intangible assets and any residual is considered goodwill. A large
portion of
the intangible assets is goodwill which resulted from the 1988 LBO and
merger,
accounted for as a purchase, and represents the existing technical
capabilities,
customer relationships and ongoing business reputation that had been
developed
over a significant period of time. The Company believes that these
relationships
and the value of the Company's business reputation were and continue
to be
long-term intangible assets with an almost infinite life. Since the APB
No. 17
limitation is 40 years, this period is used for amortization purposes for
the
majority of the goodwill. The value assigned to identifiable intangible
assets
at the time of the LBO and merger in 1988 was amortized over
applicable
estimated useful lives and was fully amortized as of December 31, 1994.
Working Capital and Cash Flow
Working capital at December 31, 1995 was $64.7 million
compared to
$85.1 million at December, 1994, a decrease of $20.4 million. This
decrease
resulted from increased Federal income tax liability (payable in March,
1996), a
decrease in net assets of discontinued operations and an offsetting
increase in
restricted cash, all of which were attributable to the sale of the
Commercial
Aviation Business. The ratio of current assets to current liabilities
at
December 31, 1995 was 1.42 compared to 1.70 at December 31, 1994.
At December 31, 1995, $113.6 million of accounts receivable
are
restricted as collateral for the Contract Receivable Collateralized Notes
(the
"Notes"). Additionally, $3.0 million of cash is restricted as collateral for
the
Notes and $6.2 million of cash is restricted as collateral for letters of
credit
required for certain contracts, most with terms of from three to five
years.
This restricted cash has been included in Other Assets on the balance
sheet at
December 31, 1995. To conform with the current period presentation,
restricted
cash of $3.0 million and $2.9 million representing collateral for the Notes
and
letters of credit, respectively, has been reclassified to Other
Assets at
December 31, 1994.
Cash provided by continuing operations was $13.8 million in
1995
compared to cash used of $1.0 million in 1994. Numerous factors
contributed to
the change: (i) payment in cash of accrued interest on the 16%
Subordinated
Debentures in 1995 as opposed to payment in kind in 1994, (ii) a $15.2
million
increase in earnings and (iii) a $6.9 million increase in accounts
receivable.
Current liabilities increased due to the accrual of income tax
liability
resulting from the gain on the sale of the Commercial Aviation Business. For
the
year 1994, continuing operations used $1.0 million of cash compared to
cash
provided of $6.0 million in 1993. The deterioration from 1993 to 1994
was
primarily due to an increase in accounts receivable attributable to delays
and
interruptions in the usual billing and collection procedures. This
decrease in
cash from operations was partially offset by increased non-cash amortization
and
pay-in-kind interest as well as a reduction in net loss.
The proceeds from the sale of the Commercial Aviation Business,
the
sale/leaseback of the Corporate headquarters facility and the collection of
the
Cummings Point Industries, Inc. note receivable all contributed to the
$139.9
million of funds provided from investing activities in 1995. For the year
1994,
investing activities used $22.2 million of cash, of which $14.3 million was
used
for the acquisition of businesses and another $3.7 million was used for
the
purchase of property and equipment. For the year 1993, investing activities
used
$18.5 million of cash which included $10.9 million for acquisitions
of
businesses and $3.6 million for the purchase of property and equipment.
The $126.9 million use of funds from financing activities in
1995
substantially consisted of the utilization of the proceeds referred
to
previously to redeem $106.0 million of 16% Junior Subordinated Debentures,
to
extinguish the mortgage on the Corporate headquarters, and to purchase
treasury
shares. These uses were partially offset by funds provided from sale of
stock to
the ESOP of $17.5 million. For the year 1994, financing activities provided
cash
of $8.8 million. The sale of stock to the ESOP contributed $17.1 million of
cash
of which $4.5 million was used for payments on indebtedness, and $3.2
million
was used to purchase treasury stock. For the year 1993, financing
activities
provided cash of $7.8 million. Payments of $16.1 million were received on
the
loan to the ESOP, $5.8 million was used for payments on indebtedness and
$2.0
million was used to purchase treasury stock. The treasury stock purchases
were
primarily to meet ERISA requirements to repurchase ESOP shares.
Liquidity and Capital Resources
At December 31, 1995, the Company's debt totaled $105.4
million
compared to $233.4 million at December 31, 1994 and $219.1 million at
December
31, 1993. The decrease in debt from December 31, 1994 to December 31,
1995
resulted from the redemption of $106.0 million of Junior Subordinated
Debentures
and the liquidation of the $18.2 million mortgage on the Company's
headquarters
building. The funds used for the liquidation of debt were obtained from the
sale
of the Commercial Aviation Business, the sale/leaseback of the
Company's
headquarters building and the collection of the Cummings Point Industries,
Inc.
note receivable. The increase in debt for 1994 and 1993 resulted
principally
from the pay-in-kind interest on the Junior Subordinated Debentures.
The Company had an increase in cash and short-term investments of
$23.4
million from December 31, 1994 to December 31, 1995, which resulted
primarily
from the aforementioned transactions. The Company had a net decrease in cash
and
short-term investments of $4.0 million and $2.4 million in 1994 and
1993,
respectively. The decrease for 1994 was caused to a large degree by
net
investments in acquired businesses of $14.3 million and an increase in
accounts
receivable and contracts in process of $22.5 million. The latter increase
was
largely attributable to a delay in finalizing the terms on a new contract
and an
internal disruption in a government finance office, both of which
occurred in
the fourth quarter of 1994. The Company's cash flow was favorably
impacted in
1994 and 1993 through the utilization of pay-in-kind interest on the
Junior
Subordinated Debentures and the sale of stock to the ESOP totaling $32.4
million
and $29.2 million, respectively. The Company paid in cash the June 29,
1995
interest payment on its 16% Junior Subordinated Debentures and on October
12,
1995, called the balance of the debentures outstanding.
On June 30, 1995, the Company sold the stock of its
subsidiaries
engaged in the business of aircraft maintenance to Sabreliner Corporation
for
$13.7 million in cash subject to possible additional payments based on
future
business revenue of the sold subsidiaries. On August 31, 1995, the Company
sold
to ALPHA Airports Group Plc, all of its subsidiaries engaged in ground
handling
for $122 million in cash, subject to final adjustments based on the
closing
balance sheet. The net proceeds from these transactions were in excess of
the
book value of the net assets of the discontinued businesses and a gain of
$1.4
million, net of income taxes, was recognized in 1995. The proceeds were
used
primarily to retire DynCorp debt and satisfy existing equipment
financing
obligations of the Ground Handling Unit. These two sales represented the
entire
Commercial Aviation Business.
On July 25, 1995, the Company entered into a revolving credit
facility
with Citicorp North America, Inc. under which the Company may borrow up to
$20
million secured by specified eligible government contract receivables
($15
million) and other receivables ($5 million). The agreement requires the
Company
to maintain compliance with certain covenants and will expire on the
earlier of
July 23, 1996 or the refinancing of the existing $100 million
Contract
Receivable Collateralized Notes. In the event that the financing
facility
underlying the Contract Receivable Collateralized Notes is expanded, the
Company
is required to pay down the Citicorp North America, Inc. revolving
credit
facility. There were no borrowings under this line of credit at December
31,
1995. On March 14, 1996, the Company concluded an agreement with Citicorp
for a
$50 million Senior Secured Revolving Credit facility which amends and
restates
the aforementioned $20 million facility.
The Company agreed to contribute up to $18.0 million in cash or
stock
to the ESOP to satisfy ESOP funding obligations for 1995 and a portion of
1996.
The amount of the Company's annual contribution to the ESOP is determined
by,
and within the discretion of, the Board of Directors and may be in the
form of
cash, Common Stock or other qualifying securities. In accordance with
ERISA
requirements and the ESOP plan documents, in the event that an
employee
participating in the ESOP is terminated, retires, dies or becomes disabled
while
employed by the Company, the ESOP Trust or the Company is obligated
to
repurchase shares of Common Stock distributed to such former employee under
the
ESOP, until such time as the Common Stock becomes "Readily Tradable
Stock," as
defined in the ESOP plan documents. (See Note 7 to the Consolidated
Financial
Statements.) Through December 31, 1996, the Company will be obligated to pay
the
higher of $27.00 per share or the fair market value at the time of
repurchase
for any such shares. In the event the fair market value of a share is less
than
$27.00, the Company is committed to pay through December 31, 1996, up
to an
aggregate of $16.0 million, the difference ("Premium") between the fair
market
value and $27.00 per share. As of December 31, 1995, the Company had
paid a
total of $5.4 million of the premium to such former employees. As of
March 31, 1996, the ESOP Share Price was determined to be $18.90 per share
(for shares with a control premium) for shares allocated in the years 1988
through 1993, and $15.00 per share (for shares without a control premium)
for
shares allocated in 1994 and 1995. The Company estimates an aggregate annual
commitment to repurchase shares from the ESOP participants as follows: $3.9
million in 1996, $2.8 million in 1997, $5.5 million in 1998, $6.0 million in
1999, $6.6 million in 2000 and $78.2 million thereafter.
The Company is 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
environmental, personal injury, tax and contract dispute issues related to
the
prior operations of divested businesses. In most cases, the Company has
denied,
or believes it has a basis to deny liability, and in some cases has
offsetting
claims against the plaintiffs, third parties or insurance carriers.
The
aggregate amount of possible damages currently claimed by the
various