-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GGVt5sxdV48avUp6uZo0un9eCUldaghR2B82TBg+LDBvoNysJJTrRpXqt9UEgo6M 9KxQXMpyEwt2SnmOeJ3kVw== 0000030770-00-000016.txt : 20000411 0000030770-00-000016.hdr.sgml : 20000411 ACCESSION NUMBER: 0000030770-00-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991230 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNCORP CENTRAL INDEX KEY: 0000030770 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744] IRS NUMBER: 362408747 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03879 FILM NUMBER: 583842 BUSINESS ADDRESS: STREET 1: 11710 PLAZA AMERICA DRIVE CITY: RESTON STATE: VA ZIP: 20190 BUSINESS PHONE: 7032640330 MAIL ADDRESS: STREET 1: 2000 EDMUND HALLEY DRIVE CITY: RESTON STATE: VA ZIP: 22091-3436 FORMER COMPANY: FORMER CONFORMED NAME: DYNALECTRON CORP DATE OF NAME CHANGE: 19870722 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA EASTERN AVIATION INC DATE OF NAME CHANGE: 19710923 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For the fiscal year ended December 30, 1999 or [ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For the transition period from to ---- ---- Commission file number: 1-3879 DynCorp (Exact name of registrant as specified in its charter) Delaware 36-2408747 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11710 Plaza America Drive, Reston, Virginia 20190 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (703) 261-5000 Former address: 2000 Edmund Halley Drive, Reston, Virginia 20191 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by nonaffiliates of the registrant. The registrant's voting stock is not publicly traded; therefore, the aggregate market value of approximately 7% of outstanding voting stock held by nonaffiliates is not available. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 10,413,708 shares of common stock having a par value of $0.10 per share were outstanding March 28, 2000. TABLE OF CONTENTS 1999 FORM 10-K Item Page Part I 1. Business 1-3 2. Properties 3 3. Legal Proceedings 3 4. Submission of Matters to a Vote of Security Holders 3 Part II 5. Market for the Registrant's Common Stock and Related Stockholder Matters 3-5 6. Selected Financial Data 5-6 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-14 8. Financial Statements and Supplementary Data Report of Independent Public Accountants 15 Financial Statements Consolidated Balance Sheets Assets 16 Liabilities and Stockholders' Equity 17 Consolidated Statements of Operations 18 Consolidated Statements of Cash Flows 19 Consolidated Statements of Stockholders' Equity 20 Notes to Consolidated Financial Statements 21-37 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 37 Part III 10.Directors and Executive Officers of the Registrant 38-40 11.Executive Compensation 40-43 12.Security Ownership of Certain Beneficial Owners and Management 43-44 13.Certain Relationships and Related Transactions 44 Part IV 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45-48 PART I ITEM 1. BUSINESS General Information DynCorp and subsidiaries (collectively the "Company") provides diversified management, technical and professional services primarily to U.S. Government customers throughout the United States and internationally. The Company provides services to various branches of the Department of Defense, Energy, State, Justice, and Agriculture, the Drug Enforcement Agency, the National Institute of Health, the Defense Information Systems Agency, the National Aeronautics and Space Administration and various other U.S., state and local government agencies, commercial clients and foreign governments. Generally, these services are provided under both prime contracts and subcontracts, which may be fixed-price, time-and-material or cost-type contracts depending on the work requirements and other individual circumstances. These services encompass a wide range of management, technical and professional services covering the following areas: DynCorp Information and Enterprise Technology ("DI&ET"), based in Reston, Virginia, designs, develops, supports and integrates software and hardware systems to provide customers with comprehensive solutions for information management and engineering needs. DI&ET provides a wide range of information technology solutions including information technology ("IT") lifecycle support, electronic records and media management, network and communications engineering, seat management, metrology engineering, operational outsourcing, healthcare information and technology services and security and intelligence programs. Revenues for fiscal years ended 1999, 1998, and 1997 were $635.9 million, $633.1 million, and $553.3 million, respectively. DynCorp Technical Services ("DTS"), based in Fort Worth, Texas, delivers a myriad of specialized technical services including aviation services, base operations, range technical services, contingency services, international program, space and re-entry system services, logistics support services, personal and physical security services and marine services. These services are provided to the U.S. Government as well as the United Nations and other foreign organizations at various locations throughout the world depending on the customer's requirements. Revenues for 1999, 1998, and 1997 were $695.5 million, $600.6 million, and $592.6 million, respectively. DynCorp Information Systems LLC ("DIS"), based in Chantilly, Virginia, provides a broad range of integrated telecommunications services and information technology solutions in the areas of professional services, business systems integration, information infrastructure solutions and IT operations and support. DIS is DynCorp's full-service voice/data integrator and has an established business base in the Federal defense and civil markets. DIS was acquired on December 10, 1999 from GTE Corporation. Revenue for the twenty days ended December 30, 1999, was $13.9 million and was included in the Company's consolidated results of operations. Full year revenues, which are not included in the Company's results of operations except for the portion representing the twenty days ended December 30, 1999, as noted above, were $221.6 million, $233.6 million, and $209.4 million, for 1999, 1998 and 1997, respectively. Industry Segments For business segment reporting, DI&ET, DTS and DIS each constitute reportable business segments. Backlog The Company's backlog of business, which includes awards under both prime contracts and subcontracts, as well as the estimated value of option years on government contracts, was $4.4 billion at December 30, 1999, compared to December 31, 1998 backlog of $4.1 billion, a net increase of $0.3 billion. The increase resulted primarily from the acquisition of GTE Information Systems LLC. The backlog at December 30, 1999 consisted of $2.2 billion for DTS, $1.7 billion for DI&ET, and $0.5 billion for DIS compared to December 31, 1998 backlog of $2.0 billion for DTS and $2.1 billion for DI&ET. Of the total backlog at December 30, 1999, $3.0 billion is expected to produce revenues after 2000: DTS $1.5 billion, DI&ET $1.2 billion, and DIS $0.3 billion. Contracts with the U.S. Government are generally written for periods of three to five years with a few Federal contracts awarded with options up to eight and ten years. Because of appropriation limitations in the Federal budget process, firm funding is usually made for only one year at a time, and, in some cases, for periods of less than one year, with the remainder of the years under the contract expressed as a series of one-year options. The Company's experience has been that the Government generally exercises these options. Amounts included in backlog are based on the contract's total awarded value and the Company's estimates regarding the amount of the award that will ultimately result in the recognition of revenue. These estimates are based on the Company's experience with similar awards and similar customers. Estimates are reviewed periodically and appropriate adjustments are made to the amounts included in backlog and in unexercised contract options. Historically, these adjustments have not been significant. In 1999, 98.9% of the Company's prime contract revenue was from the U.S. Government, 54.1% attributable to the Department of Defense. During 1998, the Company was awarded significant indefinite delivery, indefinite quantity ("IDIQ") contracts with GSA and NASA to provide comprehensive desktop computer, server and intra-center communication support. These contracts were multiple awards and have estimated values in the billions of dollars. The Company's backlog at December 30, 1999 does not include any value for these contracts, except for one contract under GSA, because the Company has not received any contract tasks and cannot reasonably estimate the future revenues from these contracts. Competition The markets that the Company services are highly competitive. In each of its business areas, the Company's competition is quite fragmented, with no single competitor holding a significant market position. The Company experiences vigorous competition from industrial firms, university laboratories, non-profit institutions, and U.S. Government agencies. Many of the Company's competitors are large, diversified firms with substantially greater financial resources and larger technical staffs than the Company has available. Government agencies also compete with and are potential competitors of the Company because they can utilize their internal resources to perform certain types of services that might otherwise be performed by the Company. A majority of the Company's revenues is derived from contracts with the U.S. Government and its prime contractors, and such contracts are awarded on the basis of negotiations or competitive bids where price is a significant factor. Foreign Operations The Company currently provides services in foreign countries under contracts with the U.S. Government, the United Nations, and other foreign customers. None of these foreign operations is material to the Company's financial position or results of operations. The risks associated with the Company's foreign operations relating to foreign currency fluctuation and political and economic conditions in foreign countries have not been significant. Incorporation The Company was incorporated in Delaware in 1946. With more than 19,000 employees worldwide, the Company is one of the largest employee-owned companies in the United States. Employees At December 30, 1999, the Company employed 17,713 full-time and 1,554 part-time employees. Approximately 3,163 employees were located outside of the United States. Of the Company's U.S. employees, 3,671 were covered by various collective bargaining agreements with labor unions. At year-end, the Company had approximately 497 vacant positions, a majority of which was for IT professionals. The scarcity of IT professionals is a common predicament within the industry. The Company is actively recruiting to fill these vacancies utilizing extensive advertising, participation in job fairs, sign-on bonuses, and other recruitment incentives. Forward Looking Statements Certain matters discussed or incorporated by reference in this report are forward-looking statements within the meaning of the federal securities laws. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, there can be no assurance that its expectations will be achieved. Factors that could cause actual results to differ materially from the Company's current expectations include the early termination of, or failure of a customer to exercise option periods under, a significant contract; the inability of the Company to generate actual customer orders under indefinite delivery, indefinite quantity contracts; technological change; the inability of the Company to manage its growth or to execute its internal performance plan; the inability of the Company to integrate the operations of acquisitions; the inability of the Company to attract and retain the technical and other personnel required to perform its various contracts; general economic conditions; and other risks discussed elsewhere in this report and in other filings of the Company with the Securities and Exchange Commission. ITEM 2. PROPERTIES The Company is primarily a service-oriented company and, as such, the ownership or leasing of real property is an activity that is not material to an understanding of the Company's operations. The Company leases numerous commercial facilities used in connection with the various services rendered to its customers. None of the properties is unique. In the opinion of management, the facilities employed by the Company are adequate for the present needs of the business. On February 29, 2000, the Company sold an office building located in Alexandria, Virginia to a third party for $10.5 million, and simultaneously closed on a lease of that property from the new owner. The Company used a portion of the net proceeds to payoff the mortgage on the property. ITEM 3. LEGAL PROCEEDINGS This item is incorporated herein by reference to Note 20 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS DynCorp's common stock is not publicly traded. However, the Company has established an Internal Market to provide liquidity for its stockholders. Shares available for trading in the Internal Market are registered under the Securities Act of 1933. The Internal Market generally permits stockholders to sell shares of common stock which have been registered for such sale on four predetermined days each year, subject to purchase demand. Sales of common stock on the Internal Market are made at established prices for the common stock determined pursuant to the formula and valuation process described below (the "Formula Price") to active employees and directors of the Company, subject to state securities regulations, and to the trustees of the Savings and Retirement Plan ("SARP") and the Employee Stock Ownership Plan ("ESOP"), as well as the administrator of the Employee Stock Purchase Plan ("ESPP"), who may purchase shares of common stock for their respective trusts and plans. If the aggregate purchase orders exceed the number of shares available for sale, the Company may, but is not obligated to, sell shares of common stock on the Internal Market. Further, the following prospective purchasers will have priority, in the order listed: - the administrator of the ESPP; - the trustee of the SARP; - eligible employees and directors, on a pro rata basis; and - the trustees of the ESOP. If the aggregate number of shares offered for sale on the Internal Market is greater than the aggregate number of shares sought to be purchased, offers by stockholders to sell 500 shares or less, or up to the first 500 shares if more than 500 shares are offered, will be accepted first. If, however, there are insufficient purchase orders to support the primary allocation of 500 shares, then the purchase orders will be allocated equally among all of the proposed sellers up to the first 500 shares offered for sale by each seller. Thereafter, a similar procedure will be applied to the next 10,000 shares offered by each remaining seller, and offers to sell in excess of 10,500 shares will then be accepted on a pro-rata basis. The Company may, but is not required to, purchase shares offered for sale in the Internal Market, to the extent the number of shares offered exceeds the number sought to be purchased. All sellers on the Internal Market (other than the Company and its retirement plans) will pay a commission equal to one percent of the proceeds from such sales. Purchasers on the Internal Market pay no commission. The market price of the common stock is established pursuant to the valuation process described below, which uses the formula set forth below to determine the Formula Price at which the Common Stock trades in the Internal Market. The Formula Price is reviewed on a quarterly basis, generally in conjunction with Internal Market trade dates. The Formula Price per share of common stock is the product of seven times the operating cash flow ("CF"), where operating cash flow is represented by earnings before interest, taxes, depreciation and amortization of the Company for the four fiscal quarters immediately preceding the date on which a price revision is made, multiplied by a market factor ("Market Factor" denoted MF) plus the non-operating assets at disposition value (net of disposition costs) ("NOA"), minus the sum of interest bearing debt adjusted to market and other outstanding securities senior to common stock ("IBD"), the whole divided by the number of shares of common stock outstanding at the date on which a price revision is made, on a fully diluted basis assuming exercise of all outstanding options and shares deferred under a former restricted stock plan ("ESO"). The Market Factor is a numeric factor which reflects existing securities market conditions relevant to the valuation of such stock. The Formula Price of the common stock, expressed as an equation, is as follows: [(CFx7)MF+NOA-IBD] ------------------ Formula Price = ESO The Board of Directors believes that the valuation process and Formula result in a fair price for the common stock within a broad range of financial criteria. Other than quarterly review and possible modification of the Market Factor, the Board of Directors will not change the Formula unless (i) in the good faith exercise of its fiduciary duties and after consultation with its professional advisors, the Board of Directors determines that the formula no longer results in a stock price which reasonably reflects the value of the Company on a per share basis, or (ii) a change in the Formula or the method of valuing the common stock is required under applicable law. The following table sets forth the Formula Price for the common stock and the Market Factor by quarter since the adoption of the Formula by the Board of Directors in August 1995. Quarter Ended Formula Price ($) Market Factor ------------- ----------------- ------------- December 31, 1995 14.50 2.14 March 28, 1996 14.50 2.14 June 27, 1996 15.00 1.36 September 26, 1996 16.75 1.15 December 31, 1996 19.00 1.15 March 27, 1997 20.00 1.27 June 26, 1997 20.00 1.27 September 25, 1997 20.00 1.27 December 31, 1997 20.00 1.23 April 2, 1998 21.00 1.29 July 2, 1998 22.50 1.33 October 1, 1998 23.25 1.30 December 31, 1998 20.00 1.16 April 1, 1999 23.50 1.21 July 1, 1999 24.50 1.21 September 30, 1999 24.00 1.08 December 30, 1999 23.50 1.11 The price at December 30, 1999 is based on third quarter data and has not been revised to reflect the current valuation. The ESOP valuation price was $22.75. Prior to August 1995, the market value of the common stock was established periodically by the Board of Directors for purposes of repurchases under a former stockholders agreement. Based on the Board's review of valuations set by the ESOP Trust, the price per share by quarter was as follows: March 30, 1995 $14.90 June 29, 1995 $14.90 September 28, 1995 $14.90 There were approximately 722 record holders of DynCorp common stock at December 30, 1999. The DynCorp Employee Stock Ownership Plan Trust owns 7,451,989 shares on behalf of approximately 33,000 current and former employees of the Company. In addition, the Company's Savings and Retirement Plan holds 763,758 shares. Cash dividends have not been paid on the common stock since 1988. ITEM 6. SELECTED FINANCIAL DATA The following table presents summary selected historical financial data derived from the audited Consolidated Financial Statements of the Company for each of the five years presented. During these periods, the Company paid no cash dividends on its Common Stock. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited Consolidated Financial Statements and related notes thereto, included elsewhere in this Annual Report on Form 10-K. (Dollars in thousands, except per share data.) Reference to "note" are the footnotes to the audited consolidated financial statements.
Fiscal Year Ended Dec 30 Dec 31 Dec 31 Dec 31 Dec 31 1999 (a) 1998(b) 1997(c) 1996(d) 1995(e) -------- ------- ------- ------- ------- Statement of Operations Data: Revenues $1,345,281 $1,233,707 $1,145,937 $1,021,453 $908,725 Cost of services $1,280,239 $1,173,151 $1,096,246 $ 970,163 $871,317 Corporate general and administrative $ 21,741 $ 18,630 $ 17,785 $ 18,241 $ 18,705 Interest expense $ 18,943 $ 14,144 $ 12,432 $ 10,220 $ 14,856 Earnings from continuing operations before extraordinary item and certain other expenses (f) $ 9,487 $ 15,585 $ 15,579 $ 12,774 $ 12,974 Earnings from continuing operations before extraordinary item (g) $ 7,590 $ 15,055 $ 7,422 $ 11,949 $ 5,274 Net earnings $ 5,989 $ 15,055 $ 7,422 $ 14,629 $ 2,368 Common stockholders' share of net earnings $ 5,895 $ 15,055 $ 7,422 $ 12,345 $ 453 EBITDA (h) $ 42,112 $ 45,226 $ 29,274 $ 34,948 $ 17,841 Earnings per share from continuing operations before extraordinary item for common stockholders Basic $ 0.75 $ 1.47 $ 0.83 $ 1.14 $ 0.40 Diluted $ 0.73 $ 1.43 $ 0.70 $ 0.82 $ 0.29 Common stockholders' share of net earnings Basic $ 0.59 $ 1.47 $ 0.83 $ 1.46 $ 0.05 Diluted $ 0.57 $ 1.43 $ 0.70 $ 1.05 $ 0.04 Balance Sheet Data: Total assets $ 639,673 $ 379,238 $ 390,122 $ 368,752 $ 375,490 Long-term debt excluding current maturities $ 334,944 $ 152,121 $ 152,239 $ 103,555 $ 104,112 Redeemable common stock $ 189,116 $ 183,861 $ 154,840 $ 139,322 $ 135,894
[FN] (a) 1999 includes reversal of $2,000 reserve for favorable resolution of contract compliance issues, $4,387 for the replacement of core systems, DIS in-process R&D write-off $6,400, settlement of a suit with a former electrical subcontractor $2,200 (see Notes 13 and 20(a)), and write-off of cost in excess of net assets acquired of consolidated subsidiary $1,234. (b) 1998 includes reversal of $670 reserve for asbestos litigation (see Notes 13 and 20(a)), $1,177 accrual for subcontractor suit (see Notes 13 and 20(a)), reversal of $2,500 reserve for contract compliance issues, and $2,159 expense for the replacement of core systems. (c) 1997 includes $7,800 accrual of costs related to asbestos litigation (see Notes 13 and 20(a)), $2,488 reversal of income tax valuation allowance and $2,055 reversal of accrued interest related to IRS examinations and potential disallowance of deductions (see Note 14). (d) 1996 includes $3,299 accrual for supplemental pension and other fees payable to retiring officers and a member of the Board of Directors, $1,286 write-off of cost in excess of net assets acquired of an unconsolidated subsidiary, $1,250 credit for a revised estimate of the ESOP Put Premium and $4,067 reversal of income tax valuation allowance. (e) 1995 includes $7,707 reversal of income tax valuation allowance, $4,362 accrued for losses and reserves related to the Company's Mexican operation, $2,400 accrual of legal fees related to the defense of a lawsuit filed by a subcontractor of a former electrical contracting subsidiary and $5,300 accrued for uninsured costs related to claims against a former subsidiary for alleged use of asbestos containing products. (f) Certain other expenses include costs and expenses associated with divested businesses of $1,897 in 1999, $530 in 1998, $8,157 in 1997, $825 in 1996, and $7,700 in 1995, (see Note 13). (g) The extraordinary loss, net of income taxes, in 1999 and 1995 of $1,601 and $2,886, respectively, resulted from the early extinguishment of debt. (h) EBITDA as defined by management consists of earnings from continuing operations before extraordinary item and before interest, taxes, depreciation and amortization. EBITDA represents a measure of the Company's ability to generate cash flow and does not represent net income or cash flow from operating, investing and financing activities as defined by generally accepted accounting principles ("GAAP"). EBITDA is not a measure of performance or financial condition under GAAP, but is presented to provide additional information about the Company to the reader. EBITDA should be considered in addition to, but not as a substitute for, or superior to, measures of financial performance reported in accordance with GAAP. EBITDA has been adjusted for the amortization of deferred debt expense and debt issuance discount which are included in "interest expense" in the Consolidated Statements of Operations and included in "depreciation and amortization" in the Consolidated Statements of Cash Flows. Amortization of deferred debt expense was $1,211 in 1999, $721 in 1998, $706 in 1997, $829 in 1996, and $743 in 1995. Amortization of debt issuance discount was $39 in 1999, $36 in 1998 and $26 in 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of DynCorp and subsidiaries' (collectively, the Company) consolidated results of operations and financial condition for the fiscal years ended 1999, 1998, and 1997. The discussion should be read in conjunction with the Company's audited consolidated financial statements and accompanying notes. Overview The Company provides diversified management, technical, and professional services primarily to U.S. Government customers throughout the United States and internationally. The Company's customers include various branches of the Department of Defense and the Department of Energy, NASA, the Department of State, the Department of Justice, and various other U.S., state and local government agencies, commercial clients and foreign governments. Effective January 1, 1999, the Company realigned its three Strategic Business Segments into two focused sectors. The Company's Information and Engineering Technology Unit and most of its Enterprise Management Unit were combined to become DynCorp Information and Enterprise Technology ("DI&ET"). Aerospace Technology and the remaining parts of Enterprise Management were combined to become DynCorp Technical Services ("DTS"). The purpose of this realignment was to provide focus and clarity to the Company's businesses and enable the Company to better serve its customers by concentrating technical services and information technology competencies in individual single business unit structures. Business segment information for 1998 and 1997 has been restated to give effect to this change. On December 10, 1999, the Company completed its acquisition of GTE Information Systems LLC, a subsidiary of GTE Corporation. On December 13, 1999, the name of the Company was changed to DynCorp Information Systems LLC ("DIS"). It will operate as a separate subsidiary of the Company. The acquisition was accounted for as a purchase; accordingly, operating results for DIS have been included from the date of acquisition. Revenue and Operating Profit In 1999, revenue increased by $111.6 million, or 9.0%, from 1998 compared to a $87.8 million, or 7.7% increase in 1998 revenue over 1997. Operating profit, defined as the excess of revenues over operating expenses and certain nonoperating expenses, increased by $5.4 million, or 9.4%, from 1998 compared to a $9.1 million, or 18.7% increase in 1998 operating profit from 1997. The operating profit was $63.1 million, $57.7 million, and $48.6 million in 1999, 1998, and 1997, respectively. DTS revenue and operating profit showed continued growth for the twelve months ended December 30, 1999. Revenues were $695.5 million in 1999 compared to $600.6 million in 1998, an increase of $94.9 million or 15.8%. Operating profit increased by $5.0 million to $31.5 million, or 18.8%, from $26.5 million in 1998. The DTS business unit had increased tasking on State Department contracts providing support services to Kosovo and East Timor, increased services on a contract in support of the government's drug eradication program, and increased services in Qatar. The increase in both revenue and operating profit resulted in part from a contract for the providing of technical and support services to the United States Air Force at Columbus AFB. The 1999 revenue includes a full year's revenue from this contract, which became operational in the fourth quarter of 1998. Also contributing to the increase in revenue were increases in the purchase of reimbursable materials for the customer at Fort Rucker. Slightly offsetting these revenue increases were lower revenues on certain base operations support contracts. The DTS business unit increased backlog by 10.0% over 1998 to $2.2 billion at December 30, 1999, primarily due to expansion of several contracts, including the aforementioned State Department contracts, and the winning of several contracts in recompetition. Management believes the DTS business area will continue to grow in 2000. However, the nature of the procurement process and the volume of the Company's business, portions of which are subject to recompetition annually, can have a dramatic impact on revenues and operating profit. Additionally, the U.S. Government has the right to terminate contracts for convenience or may reduce the volume of services ordered. DTS revenues increased 1.4% to $600.6 million in 1998 as compared to $592.6 million in 1997. Operating profit increased by 15.3% from $23.0 million in 1997 to $26.5 million in 1998. The increase in both revenues and operating profit was attributable to new contract wins and growth in several existing contracts. The DTS business unit was awarded a new contract with the United Nations to provide support services in Angola, new Department of State contracts providing protective services in Kosovo, Bosnia, and Haiti, and a contract with Kuwait providing repair and maintenance on military aircrafts. A new contract, which became operational in the fourth quarter, for the providing of technical and support services to the United States Air Force at Columbus AFB, and the addition of the operations of two more ships in the marine services area, contributed to DTS's growth in 1998 revenues. Increased services on existing contracts and the development and installation of a new information system at Fort Rucker also contributed to the twelve months revenue increase. Partially offsetting these increases in revenues were reduced business volumes due to several contract completions. DI&ET revenues were $635.9 million in 1999, a 0.4% increase over 1998 revenues of $633.1 million. The revenue increase was due in part to the start-up of a contract with the U.S. Postal Service, which was awarded in 1998, but became operational in 1999, and a sub-contract from the Department of Commerce Census Cenus 2000 that was also awarded in 1998 but became operational in 1999. DI&ET health information technology services' revenues increased due to a full year impact of FMAS, a medical outcome measurement and data abstraction services company acquired in 1998, and growth in a joint venture for vaccine technology services to the Department of Defense. Also contributing to the revenue increases were higher volumes of state and local contract business, increased tasking on several indefinite delivery/indefinite quantity ("IDIQ") contracts, and new business with the customer at the Norco location. Partially offsetting these increases in revenue was the loss in recompetition of significant portions of the work scope of an enterprise contract at the Department of Energy Rocky Flats location. In the twelve months of 1998, Rocky Flats' revenue was $71.0 million. DI&ET's operating profit decreased slightly to $30.6 million from $31.1 million in 1998, a 1.8% decrease. The operating profit decrease resulted from losses on two state government contracts, a write-off associated with a vaccine lab business that was divested during 1999, and the loss of a contract at the DOE Rocky Flats location. Rocky Flats operating profit for the twelve months ended December 31, 1998 was $4.3 million. Partially offsetting these decreases in operating profit were increases due to the start-up of the contracts with the U.S. Postal Service and the sub-contract from the Department of Commerce Census 2000, the higher volumes in health information technology services, and improved profitability on previously awarded IDIQ contracts. Also offsetting the decreases in DI&ET's operating profit was the receipt of an award fee on a contract that was greater than accrued (expected), and operating profits on contracts in 1999 which reflected losses in 1998. DI&ET's revenues were $633.1 million in 1998, a 14.4% increase over 1997 revenues of $553.3 million. Operating profit increased $5.6 million, or 21.7% to $31.1 million from $25.6 million in 1997. The increases in revenues and operating profit were attributable to new IDIQ contract tasks and sole source contracts with the Department of Defense, Environmental Protection Agency, and the Health Care Finance Administration. Increased volume on a subcontract to the U. S. Postal Service, new state contract business, and increased tasking and level of effort on several existing contracts also contributed to DI&ET's revenue and operating profit increases. Management believes DI&ET's revenues will continue to show small growth in 2000. However, much of the growth will be dependent upon DI&ET's success in servicing new orders under its IDIQ contracts. Additionally, the U.S. Government has the right to terminate contracts for convenience or may reduce the volume of services ordered. DIS, which was acquired on December 10, 1999, from GTE Corporation, had revenue of $13.9 million in the twenty-day period ended December 30, 1999. Managemenent expects the revenue for 2000 to be greater than the prior year revenue. However, there are no assurances because the nature of the procurement process and the volume of the business, which is subject to recompetition annually, can have a dramatic impact on revenues and operating profit. Additionally, the U.S. Government has the right to terminate contracts for convenience or may reduce the volume of services ordered. Corporate General and Administrative Corporate general and administrative expenses increased in 1999 by $3.1 million, or 16.7%, over 1998, to $21.7 million as compared to $18.6 million and $17.8 million in 1998 and 1997, respectively. Corporate general and administrative expense as a percentage of revenue was 1.6% in 1999, 1.5% in 1998, and 1.6% in 1997. The higher expense in 1999 was primarily the result of the Company's deployment of new financial and human resource software packages. The software design and development stage of the project has been completed, and related costs have been capitalized as intangible assets, as discussed below under Year 2000. $4.4 million of expenses for the resystemization effort and expenses incurred related to potential acquisitions were offset by the $2.0 million reversal of reserves for old contract compliance issues, which were settled in the Company's favor during 1999. The comprehensive resystemization effort is projected to add approximately $4.2 million to corporate general and administrative expense in 2000. The increase in corporate general and administrative expense in 1998 compared to 1997 resulted from the resystemization effort, which added $2.2 million to corporate general and administrative expense. This expense and increases in other expenses were offset by the $2.5 million reversal of reserves for old contract compliance issues, which were settled in the Company's favor during 1998. Interest Expense and Interest Income Interest expense for 1999 was $18.9 million as compared to $14.1 million reported for 1998. The increase in interest expense was attributable to higher average debt levels throughout 1999, $0.5 million interest expense associated with settlement of a subcontractor suit from a former electrical contracting subsidiary, and a $0.7 million interest expense refund received from the Internal Revenue Service in 1998. The refund, received in 1998, decreased 1998 interest expense and therefore increases the change in 1999 expense compared to 1998. The weighted annual levels of borrowing were approximately $203.8 million in 1999 compared to $163.1 million in 1998. The weighted annual level of indebtedness increased due to borrowings used to fund the acquisition of DIS and borrowings used to fund working capital requirements (see working capital and cash flow discussion). Management expects interest expense to increase in 2000 due to a higher level of indebtedness resulting from additional borrowings of approximately $167.5 million at the end of 1999 for the acquisition of DIS. Interest expense was $14.1 million in 1998, up from $12.4 million in 1997. The increase was due to the greater level of outstanding indebtedness throughout 1998. The average level of outstanding indebtedness was $163.0 million in 1998, as compared to $150.9 million in 1997. Levels of indebtedness increased due to the FMAS acquisition, payments to settle the Fuller-Austin bankruptcy, and increased capital required for growth in the Company's business (see working capital and cash flow discussion). Offsetting the increase in interest expense attributable to the greater level of outstanding indebtedness was a refund of $0.7 million of interest assessed in prior years by the Internal Revenue Service on the Company's Federal income taxes. Interest income was $1.4 million, $1.6 million, and $2.0 million in 1999, 1998, and 1997, respectively. The fluctuations are primarily attributable to the balance of cash and short-term investments throughout any given year and the average rates of interest. The twelve-month weighted average balance of cash and short-term investments was $19.8 million in 1999, $10.9 million in 1998, and $25.0 million in 1997. Other Expense Other expense increased by $7.9 million to $10.5 million in 1999 compared to $2.7 million and $10.3 million in 1998 and 1997, respectively. The higher expense in 1999 resulted from expenses of $1.7 million for the settlement of a suit with a former electrical subcontractor, write-off of $1.2 million of cost in excess of net assets acquired for a business that was divested in February, 2000, in-process R&D write-off of $6.4 million associated with the acquisition of DIS, and higher amortization of intangible assets also associated with the acquisition of DIS. The lower expense in 1998 resulted from the absence of charges such as that incurred in 1997. In 1997 the Company increased reserves by $7.8 million for asbestos litigation resulting from a subsidiary's agreement in principle to settle globally approximately 11,000 pending asbestos personal injury claims and unknown future claims pursuant to Section 524(g) of the U.S. Bankruptcy Code and a related contingent settlement agreement between the Company and the subsidiary for the release of the Company from any subsidiary asbestos liability (see Notes 13 and 20(a) to the Consolidated Financial Statements and the discussion of "Liquidity and Capital Resources" which follows). The Company anticipates that other expense will increase in 2000 due to higher goodwill and other intangible amortization expense resulting from the acquisition of DIS. Income Taxes The provision for income taxes is based on reported earnings, adjusted to reflect the impact of permanent differences between the book value of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. In 1999, the Company reversed state income taxes provided in prior years related to the favorable resolution of state tax audit issues. In 1998, the Company reversed foreign taxes provided in prior years due to their expected utilization as foreign tax credits. Additionally, $2.5 million of tax valuation reserves were reversed in 1997. Based on current projections, management estimates tax payments, net of tax refunds, of $13.7 million in 2000. No valuation allowance for deferred federal tax assets was deemed necessary at December 30, 1999. The Company has provided a valuation allowance for deferred state tax assets of $4.8 million at December 30, 1999 due to the uncertainty of achieving future earnings in either the time frame or in the particular state jurisdiction needed to realize the tax benefit. Extraordinary Item In the fourth quarter of 1999, the Company recorded an extraordinary item totaling $1.6 million (gross extraordinary item of $2.5 million net of income tax benefit of $0.9 million). The charge was recorded in connection with the early extinguishment of secured indebtedness due to refinancing of the Company's debt in order to complete the acquisition of DIS. Working Capital and Cash Flows Working capital, defined as current assets less current liabilities, was $165.2 million at December 30, 1999 compared to $90.7 million at December 31, 1998, an increase of $74.5 million. This increase is primarily the result of an increase in accounts receivable, attributable to the acquisition of DIS, increased revenues as discussed above, and slow collections on several contracts due to start-up of new contracts. The ratio of current assets to current liabilities at December 30, 1999 was 1.7 compared to 1.5 at December 31, 1998. The increase resulted from the higher accounts receivable balance at December 30, 1999 compared to December 31, 1998. For the year ended December 30, 1999, the Company's cash flow from operations was $13.8 million, increasing $6.1 million from $7.8 million cash used in operations in 1998. The increase in cash flow from operations was primarily attributable to the absence in 1999 of payments related to the settlement of the Fuller-Austin bankruptcy and from the absence of an increase in accounts receivable similar to that of 1998, which was caused by increased revenues and start-up of new contracts. In 1998 the cash used by operations resulted mostly from increases in accounts receivable due to increased revenues and start-up of new contracts. Also contributing to the increase in cash used by operations was the settlement of the Fuller-Austin bankruptcy, which used $8.5 million. In 1997, cash provided by operations was $9.9 million. The cash provided by operations was attributable to higher costs and expenses that did not use cash in 1997 such as reserves established for the Fuller-Austin settlement. Cash used in investing activities for the year ended December 30, 1999 totaled $185.0 million and included acquisition costs of $167.5 million and capital expenditures of $19.8 million. Acquisition costs related to the acquisition of DIS on December 10, 1999. Capital expenditures included $13.9 million for the purchase of property and equipment and $5.9 million for new software for internal use as part of the Company's Year 2000 plan. The Company has capitalized a total of $11.7 million of costs related to internal use software on its December 30, 1999 balance sheet. Investing activities used funds of $20.1 million in 1998, principally for the acquisition of FMAS $10.2 million, the purchase of property and equipment $4.8 million, and the purchase of new software for internal use as part of the Company's Year 2000 plan $5.6 million. In 1997, investing activities used funds of $8.3 million, attributable to the purchase of property and equipment $5.1 million, and the remainder of the cash used was mostly for funding of the Company's 47% interest in a minority owned company, and a loan to the same company. In 1999, financing activities provided funds of $172.7 million. The Company borrowed $223.8 million under a Senior Secured Credit Agreement. Of the total borrowings under the credit agreement, $125.0 million was used for partial payment of the purchase price for DIS. The balance of the borrowings was used to make an optional redemption of the Company's outstanding 7.486% Fixed Rate Contract Receivable Collateralized Notes, Series 1997-1 ("the Notes"), Class A, to reduce irrevocably the Company's Floating Rate Contract Receivable Collateralized Notes, Series 1997-1, Class B and to pay transactional expenses and for general corporate operating purposes. The Company issued $40.0 million face value of its subordinated pay-in kind notes for $33.9 million and issued 426,217 shares of the Company's stock for $6.1 million. The proceeds were used for payment of the balance of the purchase price for DIS. Financing activities provided funds of $7.4 million in 1998. The proceeds from the draw on the Class B Notes were used to fund working capital needs. In 1997, financing activities utilized funds of $3.0 million. The proceeds from the issuance of the 9 1/2% Senior Notes and the 7.486% Contract Receivable Collateralized Notes were used to retire the maturing 8.54% Contract Receivable Collateralized Notes, to make a loan to the ESOP to fund the purchase of the Class C Preferred Stock, to fund the Company's purchase of common stock and warrants from certain investors, and to pay transaction fees associated with the placement of the Senior Notes and amendments to the terms of the Company's revolving line of credit. Liquidity and Capital Resources The Company's primary source of cash and cash equivalents is from operations and financing activities. The Company's principal customer is the U.S. Government. This provides for a dependable flow of cash from the collection of accounts receivable. Additionally, many of the contracts with the U.S. Government provide for progress billings based on costs incurred. These progress billings reduce the amount of cash that would otherwise be required during the performance of these contracts. As of December 30, 1999 the Company's total debt was $343.2 million, an increase of $182.9 million from December 31, 1998, primarily due to borrowing of $167.5 million used to fund the acquisition of GTE Information Systems, LLC. On December 10, 1999, the Company entered into a Senior Secured Credit Agreement with a group of financial institutions. Under the Credit Agreement, the Company borrowed $100.0 million under Term A loans maturing December 9, 2004, $100.0 million under Term B loans maturing December 9, 2006, and $23.8 million under a $90.0 million revolving line of credit. Upon the closing of the Credit Agreement, the Company terminated its previous revolving line of credit facility. The Credit Agreement contains customary restrictions on the ability of the Company to undertake certain activities, such as the incurrance of additional debt, the payment of dividends on or the repurchase of the Company's common stock, the merger of the Company into another company, the sale of substantially all the Company's assets, and the acquisition of the stock or substantially all the assets of another company. The Credit Agreement also stipulates that the Company must maintain certain financial ratios, including specified ratios of earnings to fixed charges, debt to earnings, and accounts receivable to borrowings under the Credit Agreement. At December 30, 1999, the Company was in compliance with these covenants. The Term A Loans are to be repaid in sixteen quarterly installments of $6.3 million beginning in February 2001. The Term B Loans are to be repaid in twenty quarterly installments of $0.3 million starting in February 2000 and then eight quarterly installments of $11.9 million beginning in February 2005. At the option of the Company, borrowings under the Credit Agreement bear interest at either LIBOR or a base rate established by the bank, plus a margin that varies based upon the Company's ratio of debt to earnings. The Company is charged a commitment fee of 0.5% per annum on unused commitments under the revolving line of credit. At December 30, 1999, $7.0 million was outstanding under the line of credit and $75.6 million additional was available. On December 10, 1999, the Company entered into an agreement with various financial institutions for the sale of $40.0 million face value of the Company's subordinated pay-in-kind notes due 2007, with an estimated fair value of $33.9 million (Senior Subordinated Notes), and for the sale of 426,217 shares of the Company's stock with an estimated fair value of $6.1 million (see Note 7). The Subordinated Notes bear interest at 15.0% per annum, payable semi-annually in-kind. The Company may, at its option, prior to December 15, 2004, pay the interest in cash or in additional Subordinated Notes. The Subordinated Notes are redeemable, in whole or in part, at the option of the Company, on or after December 15, 2000 at a redemption price that ranges from 114.0% in 2000 to 100.0% in 2006 and thereafter. The Subordinated Notes are general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future senior debt of the Company and to the Senior Notes. At December 31, 1998, $87.9 million of accounts receivable were restricted as collateral for the 7.486% Contract Receivable Collateralized Notes. At December 31, 1998, $1.5 million of cash was restricted as collateral for the Notes and has been included in Other Assets on the accompanying Consolidated Balance Sheet. The notes were paid off on December 10, 1999. The Company had a $15.0 million line of credit that it utilized through December 9, 1999, never exceeding $8.9 million in borrowings at any given point in time. As noted above, on December 10, 1999, the Company terminated this revolving line of credit facility. The Company has embarked on a comprehensive resystemization effort (see "Year 2000") and had expenditures in 1999 of $10.4 million, of which $6.0 million was capitalized and $4.4 million was expensed. The Company is projecting expenditures in 2000 of $4.2 million. The resystemization will necessitate replacing some of the Company's desktop workstations over the next year, at a cost of approximately $4.0 million. The Board of Directors has issued an enabling resolution that provides for the repurchase of up to 500,000 shares of the Company's common stock at a price not to exceed the current market price, subject to all applicable financial covenants. Management continuously reviews alternative uses of excess cash and debt capacity for purposes of acquisitions, dividends, repurchase of shares and other financial matters. The Company anticipates contributing approximately $14.1 million in cash to the Employee Stock Ownership Plan ("ESOP") in 2000. The amount of the Company's annual contribution to the ESOP is determined by and within the discretion of the Board of Directors and may be in the form of cash, common stock, or other qualifying securities. In accordance with ERISA requirements and the ESOP documents, in the event that an employee participating in the ESOP is terminated, retires, dies, or becomes disabled while employed by the Company, the ESOP Trust or the Company is obligated to repurchase shares of common stock distributed to such former employee under the ESOP ("ESOP Participant Puts"), until such time as the common stock becomes "readily tradable stock," as defined in the ESOP plan document. (See Note 7 to the Consolidated Financial Statements.) To the extent the ESOP Participant Puts, debt service, administrative expenses, and interest expense exceed the Company's 2000 contribution, the Company would fund the ESOP Participant Puts. The Company projects these payments to be less than $2.0 million in 2000. On February 29, 2000, the Company sold an office building located in Alexandria, Virginia to a third party for $10.5 million, and simultaneously closed on a lease of that property from the new owner. The Company used a portion of the net proceeds to payoff the mortgage on the property. The Company anticipates selling other non-strategic assets from time to time in the future. In conjunction with the acquisition of Technology Applications, Inc. in November 1993, the Company issued put options on 125,714 shares of its common stock. On January 12, 1999, the former owner of Technology Applications, Inc. exercised the put option on the 125,714 shares at a price of $24.25 per share. The Company's repurchase of this common stock required cash of $3.0 million. On December 10, 1998, pursuant to the terms of a Global Settlement Agreement among the Company, its wholly owned inactive subsidiary, Fuller-Austin Insulation Company ("Fuller-Austin"), a committee representing various asbestos claimants, and the legal representative of unknown future asbestos claimants, the Company transferred and conveyed all of its interests in Fuller-Austin to an unrelated independent bankruptcy settlement trust ("Trust") established in accordance with Section 524(g) of the U.S. Bankruptcy Code. The Trust was established pursuant to a Confirmation Order entered jointly on November 13, 1998 by the United States District and Bankruptcy Courts in Wilmington, Delaware. The Trust is part of a Plan of Reorganization of Fuller-Austin approved in the Confirmation Order for the resolution of present and future asbestos personal injury and other claims against Fuller-Austin. In consideration of the transfer and certain other payments by DynCorp to the Trust aggregating approximately $8.5 million (a portion of which was recorded in prior years including $7.8 million reserved by the Company in 1997 in anticipation of the Global Settlement), both the Trust and Fuller-Austin have given DynCorp full indemnification with respect to all present and future asbestos claims arising from the operations of Fuller-Austin. The Confirmation Order also channels all present and future asbestos claims related to Fuller-Austin's operations to the Trust. (See Note 21(a) to the Consolidated Financial Statements for the history of the Fuller-Austin asbestos claims and other circumstances related to the Global Settlement and Fuller-Austin bankruptcy filing.) On March 17, 1997, the Company issued $100.0 million of 9 1/2% Senior Subordinated Notes ("Senior Notes") with a scheduled maturity in 2007. Interest is payable semi-annually, in arrears, on March 1 and September 1 of each year. The Senior Notes are redeemable, in whole or in part, at the option of the Company, on or after March 1, 2002 at a redemption price which ranges from 104.75% in 2000 to 100.00% in 2005 and thereafter. In addition, at any time prior to March 1, 2000, the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes (at a redemption price of 109.50%) with proceeds generated from a public offering of equity, provided at least 65% of the original aggregate amount of the Senior Notes remains outstanding. The Senior Notes are general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future senior debt of the Company. On January 23, 1997, the Company entered into an agreement with Capricorn Investors, L.P. ("Capricorn") in which Capricorn agreed to waive its rights to nominate directors of the Company and also waived certain voting rights of the Company's then outstanding Class C Preferred Stock. In return for these waivers, the Company paid a fee and authorized Capricorn to distribute a substantial portion of the shares of common stock and warrants and all of the outstanding shares of Class C Preferred Stock to its investors. On February 5, 1997, the Employee Stock Ownership Trust purchased from certain of these investors all of the Company's Class C Preferred Stock. The ESOP subsequently converted the Class C Preferred Stock into common shares and common share warrants and exercised the related warrants. Concurrently with the ESOP's purchase, the Company acquired certain number of the outstanding common shares and common stock warrants held by other Capricorn investors. The purchase price of these securities was $56.4 million ($19.55 per common share or warrant), of which half, $28.2 million, was paid in cash ($9.3 million and $18.9 million, was paid by the ESOP and the Company, respectively) and short-term notes were issued for the balance (notes issued by the ESOP and the Company were $9.3 million and $18.9 million, respectively). The Company engaged in the aforementioned equity repurchases in order to eliminate the potential effect of certain preferential voting rights given the Class C Preferred Stock in the Company's certificate of incorporation; to reduce the outstanding and fully diluted equity of the Company; to provide treasury shares for future issuance to employees under the Company's various compensation and benefit plans without the need for issuance of new shares; and to provide additional shares for the ESOP, which can only acquire shares by purchase from the Company or other stockholders. The ESOP's purpose for engaging in the aforementioned transaction was to acquire shares for the allocation to participants' accounts in 1997 and 1998. In addition to converting a portion of the Company's total capitalization from equity capitalization to debt capitalization, the transactions reduced the Company's fully diluted equity, thus improving the Company's diluted earnings per share. Year 2000 Readiness Disclosure The principal "Year 2000" issue ("Y2K") risk to the Company would have come from an extended failure of one or more of its core systems (financial, payroll, and human resources). Replacement of the Company's core financial, human resources and payroll systems software was initiated following a Year 2000 analysis conducted in 1997 that found these programs to be non-compliant for the millennium date rollover. Deployment of a new human resources and payroll system was launched and completed prior to the end of 1999. Due to the large number of conversions and the need to convert the core systems of DIS, the financial systems implementation is now scheduled for completion in late 2001. A contingency plan was activated to install an updated compliant version of the Company's current financial software package in all locations where conversion to the new Enterprise Resource Planning package was not assured prior to 2000. The updates were completely implemented by November 30, 1999, and no failures were reported during or after the rollover. Total expenditures for the Y2K effort were approximately $19.5 million as of December 30, 1999, of which $11.6 million represented capitalized software costs. A Year 2000 Program Management Plan was developed and a Y2K Project Office launched in mid-1998 to address other Y2K compliance issues. A multifunctional task group oversaw assessment and remediation or replacement efforts in the areas of core systems, network and office automation, and field information and non-information systems. No problems have been found following the rollover other than very minor, possibly Y2K-related aberrations that were quickly addressed, usually within minutes. No problems have been found that materially affected the Company's ability to perform on its significant contracts. These assessments included third-party service providers and other vendors on whom a given contract might depend. The core systems assessment included initial contact in 1998 with third-party telecommunications, employee benefits, insurance, and other providers. Documentation obtained from these providers generally stated that they were addressing the Y2K problem. Follow-up contacts to ascertain the progress of these providers was also conducted in late 1999 and no problems were reported. The Company also assessed its vulnerability arising from payment capability of the various government payment offices receiving and processing invoices from a contract site. No problems surfaced with either the Defense Finance and Accounting Service (DFAS) or the Department of Energy payment office. DoD and DoE contracts represent a large portion of the Company's work. The Company also conducted assessments on government furnished equipment ("GFE") at contract sites. No failures affecting contract performance were experienced. Infrastructure items that could have had Y2K compliance problems such as desktop workstations, network components, and servers, were tested, and repaired or replaced. The annual expenditures for these components were not significantly above levels that could be expected in the normal course of business, given the Company's infrastructure replacement plan and budget. In summary, the primary Y2K vulnerability for the Company was the possible failure of core systems. This did not happen, as the resystemization effort was a top priority within the Company, with dedicated teams and incentive plans for retaining key employees throughout the project. Assessments at the contract level were completed to the extent possible. These assessments included analysis of the readiness of hardware, software, prime and subcontractors, customers, suppliers and vendors, data dependencies, and facilities. These assessments added value in that there were no reported issues on any contracts. Many Y2K-related actions will have long-term benefits to the Company. In 1999 the Company: o upgraded much of the hardware and software company-wide, bringing the Company to a higher level of technology, with the added benefit of establishing a more "level playing field" system-wide that in the long run should be easier to maintain; o developed an expertise in contingency planning, which is a growing opportunity in government contracting; o became much more attuned to software virus issues and potential problems, has increased security measures accordingly and has been alerted to investigate other enhanced security precautions; and o documented its inventories of IT and non-IT equipment. Environmental Matters Neither the Company nor any of its subsidiaries has been named as a Potentially Responsible Party (as defined in the Comprehensive Environmental Response, Compensation, and Liability Act) at any site. The Company has incurred costs for the installation and operation of a soil and water remediation system and for the clean up of environmental conditions at certain other sites (see Note 20(b) to the Consolidated Financial Statements). The Company's liability, in the aggregate, with respect to these matters is not deemed to be material to the Company's results of operations or financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's only use of derivative financial instruments is to manage its exposures to fluctuations in interest rates and foreign exchange rates. The Company does not hold or issue derivative financial instruments for trading purposes. There were no such financial instruments held during 1999. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this item is contained in the Company's Consolidated Financial Statements and Financial Statement Schedules included elsewhere in this Annual Report on Form 10-K. Report of Independent Public Accountants To DynCorp: We have audited the accompanying consolidated balance sheets of DynCorp (a Delaware corporation) and subsidiaries as of December 30, 1999 and December 31, 1998, and the related consolidated statements of operations, cash flows and stockholders' equity for the year ended December 30, 1999 and each of the two years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DynCorp and subsidiaries as of December 30, 1999 and December 31, 1998, and the results of its operations and its cash flows for the year ended December 30, 1999 and each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II, listed in Item 14 of the Form 10-K, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Vienna, VA ARTHUR ANDERSEN LLP March 21, 2000 DynCorp and Subsidiaries Consolidated Balance Sheets As of the Fiscal Years Ended (In thousands) 1999 1998 ---- ---- Assets Current Assets: Cash and cash equivalents $ 5,657 $ 4,088 Accounts receivable and contracts in process, net 357,411 258,216 Prepaid income taxes 6,558 4,204 Other current assets 28,582 11,794 -------- -------- Total Current Assets 398,208 278,302 Property and Equipment, at cost: Land 621 621 Buildings and leasehold improvements 28,957 11,845 Machinery and equipment 32,800 33,616 -------- -------- 62,378 46,082 Accumulated depreciation and amortization (21,583) (27,538) -------- -------- Net Property and Equipment 40,795 18,544 -------- -------- Intangible Assets, net 149,159 58,796 Other Assets 51,511 23,596 -------- -------- Total Assets $639,673 $379,238 ======== ======== See accompanying notes to the consolidated financial statements. DynCorp and Subsidiaries Consolidated Balance Sheets As of the Fiscal Years Ended (In thousands, except share amounts) Liabilities and Stockholders' Equity 1999 1998 - ------------------------------------ ---- ---- Current Liabilities: Notes payable and current portion of long-term debt $ 8,242 $ 8,145 Accounts payable 85,357 66,885 Deferred revenue and customer advances 6,048 2,542 Accrued income taxes 2,100 1,934 Accrued expenses 131,274 108,117 -------- -------- Total Current Liabilities 233,021 187,623 Long-term Debt 334,944 152,121 Deferred Income Taxes 4,547 12,498 Other Liabilities and Deferred Credits 51,171 15,146 Contingencies and Litigation - - Temporary Equity: Redeemable common stock at redemption value ESOP shares, 7,350,937 and 7,082,422 shares issued and outstanding in 1999 and 1998, respectively, subject to restrictions 182,974 180,812 Other, 426,217 and 125,714 shares issued and outstanding in 1999 and 1998, respectively 6,142 3,049 Stockholders' Equity: Common stock, par value ten cents per share, authorized 20,000,000 shares; issued 4,908,447 shares in 1999 and 4,976,423 shares in 1998 491 498 Paid-in surplus 133,338 127,216 Accumulated other comprehensive income (9) (10) Reclassification to temporary equity for redemption value (188,339) (183,140) Deficit (72,887) (78,782) Common stock held in treasury, at cost; 2,301,262 shares in 1999 and 2,005,728 shares 1998 (43,062) (35,640) Unearned ESOP shares (2,658) (2,153) -------- -------- Total Liabilities and Stockholders' Equity $639,673 $379,238 ======== ======== See accompanying notes to the consolidated financial statements. DynCorp and Subsidiaries Consolidated Statements of Operations For the Fiscal Years Ended (In thousands, except per share amounts) 1999 1998 1997 ------ ------ ------ Revenues $1,345,281 $1,233,707 $1,145,937 --------- --------- --------- Costs and expenses: Cost of services 1,280,239 1,173,151 1,096,246 Corporate general and administrative 21,741 18,630 17,785 Interest expense 18,943 14,144 12,432 Interest income (1,393) (1,600) (2,018) Other expense 10,544 2,687 10,349 --------- --------- --------- Total costs and expenses 1,330,074 1,207,012 1,134,794 --------- --------- --------- Earnings from continuing operations before income taxes, minority interest, and extraordinary item 15,207 26,695 11,143 Provision for income taxes 4,649 9,559 2,282 ------ ------ ------ Earnings from continuing operations before minority interest and extraordinary item 10,558 17,136 8,861 Minority interest 2,968 2,081 1,439 ------ ------ ------ Earnings from continuing operations before extraordinary item 7,590 15,055 7,422 Extraordinary loss from early extinguishment of debt, net of income taxes 1,601 - - ------ ------ ------ Net earnings $ 5,989 $ 15,055 $ 7,422 ========== ========== ========= Accretion of Mezzanine Shares to redeemable value 94 - - ---------- ---------- --------- Common stockholders' share of net earnings $ 5,895 $ 15,055 $ 7,422 ========== ========== ========= Net Earnings per common share: Basic earnings per share $ 0.59 $ 1.47 $ 0.83 Diluted earnings per share $ 0.57 $ 1.43 $ 0.70 Weighted average number of shares outstanding for basic earnings per share 10,044 10,242 8,985 Weighted average number of shares outstanding for diluted earnings per share 10,273 10,514 10,638 See accompanying notes to the consolidated financial statements. DynCorp and Subsidiaries Consolidated Statements of Cash Flows For the Fiscal Years Ended (In thousands) 1999 1998 1997 ------ ------ ------ Cash Flows from Operating Activities: Common stockholders' share of net earnings $ 5,895 $ 15,055 $ 7,422 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 13,572 8,825 9,888 Purchased in-process research and development 6,400 - - Deferred income taxes (7,630) 1,463 4,165 Proceeds from insurance settlement for asbestos claims - 1,462 1,488 Change in reserve for divested business - Fuller-Austin - (10,797) 7,800 Changes in reserves for divested business - other (2,000) (1,698) 357 Capitalized costs incurred on existing contracts (2,473) - - Other 1,781 (63) (882) Change in assets and liabilities, net of acquisitions and dispositions: Increase in accounts receivable and contracts in process (37,919) (52,416) (15,311) Increase in other current assets (326) (963) (1,305) Increase (decrease) in current liabilities except notes payable and current portion of long-term debt 36,535 31,380 (3,685) -------- -------- -------- Cash provided (used) by operating activities 13,835 (7,752) 9,937 -------- -------- -------- Cash Flows from Investing Activities: Sale of property and equipment 610 1,293 318 Proceeds received from notes receivable - - 4 Purchase of property and equipment (13,878) (4,797) (5,110) Capitalized cost of new financial and human resource systems (5,969) (5,598) - Deferred income taxes from "safe harbor" leases (481) (257) (309) Increase in investment in unconsolidated subsidiaries 1,363 (302) (2,038) Increase in notes receivable to equity investee - - (867) Assets and liabilities of acquired business (excluding cash acquired) (167,504) (10,239) - Other 884 (231) (255) --------- --------- --------- Cash used by investing activities (184,975) (20,131) (8,257) --------- --------- --------- Cash Flows from Financing Activities: Treasury stock purchased (7,208) (6,194) (923) Payment on indebtedness (253,491) (20,371) (100,208) Proceeds from debt issuance 428,552 28,113 149,484 Common stock and warrants purchased from investors - - (37,819) Proceeds from issues of redeemable common stock 6,048 - - Payments on ESOP loans 10,577 5,933 5,189 Loans to ESOP (11,082) - (13,274) Deferred financing expenses - - (5,080) Other (687) (112) (324) --------- --------- --------- Cash provided (used) by financing activities 172,709 7,369 (2,955) --------- ---------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 1,569 (20,514) (1,275) Cash and Cash Equivalents at Beginning of the Fiscal Year 4,088 24,602 25,877 --------- --------- --------- Cash and Cash Equivalents at End of the Fiscal Year $ 5,657 $ 4,088 $ 24,602 ========= ========= ========= See accompanying notes to the consolidated financial statements.
DynCorp and Subsidiaries Consolidated Statements of Stockholders' Equity For the Fiscal Years Ended (In thousands) Accumulated Adjustment for Common Redemption Unearned Other Preferred Common Stock Paid-in Value Greater Treasury ESOP Comprehensive Stock Stock Warrants Surplus than Par Value Deficit Stock Shares Income ------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $3,000 $332 $11,139 $148,234 $(138,694) $(101,259) ($25,235) - - Stock issued under Restricted Stock Plan - 13 - (802) - - - - - Treasury stock issued - - - - - - 233 - - Treasury stock purchased - - - - - - (907) - - Warrants & stock options exercised - 111 (2,683) 2,981 - - - - - Class C Preferred Stock converted & warrants exercised (3,000) 95 (2,007) 5,119 - - - - - Common stock purchased & warrants exercised - - (5,190) (30,120) - - (2,794) - - Loans to ESOP - - - - - - - (13,274) - Payment received on ESOP note - - - - - - - 5,189 - Net earnings - - - - - 7,422 - - - Reclassification to Redeemable - - - - Common Stock - (73) - - (15,444) - - - - ------ ---- ------ ------- --------- -------- -------- ------- ----- Balance, December 31, 1997 - $478 $1,259 $125,412 $(154,138) $(98,837) $(28,703) $(8,085) $ - Employee compensation plans (option exercises, restricted stock plan, - 4 - 891 - - (960) - - incentive bonus) Treasury stock purchased - - - - - - (6,386) - - Warrants & stock options exercised - 35 (1,259) 903 - - 409 - - Payment received on ESOP note - - - - - - - 5,932 - Reclassification to Redeemable Common Stock - (19) - - (29,002) - - - - Translation adjustment - - - 10 - - - - (10) Net earnings - - - - - 15,055 - - - ------ ---- ----- -------- --------- --------- -------- ------- ----- Balance, December 31, 1998 - $498 - $127,216 $(183,140) $(78,782) $(35,640) $(2,153) $(10) Employee compensation plans (option exercises, restricted stock plan, - 7 - (6) - - (321) - - incentive bonus) Stock issued under Mezzanine financing - 43 - 6,006 - - - - - Treasury stock purchased - - - - - - (7,208) - - Warrants & stock options exercised - - - 28 - - 107 - - Payment received on ESOP note - - - - - - - 10,577 - Loans to ESOP - - - - - - - (11,082) - Reclassification to Redeemable Common Stock - (57) - - (5,105) - - - - Accretion of mezzanine shares to Redeemable value - - - 94 (94) (94) - - - Translation adjustment - - - - - - - - 1 Net earnings - - - - - 5,989 - - - --- ---- --- -------- ---------- --------- --------- -------- ---- Balance, December 30, 1999 - $491 - $133,338 $(188,339) $(72,887) $(43,062) $(2,658) $(9) === ==== === ======== ========== ========= ========= ======== ==== See accompanying notes to the consolidated financial statements.
DynCorp and Subsidiaries Notes to Consolidated Financial Statements December 30, 1999 (Dollars in thousands, except per share amounts or where otherwise noted) (1) The Company and Summary of Significant Accounting Policies Description of Business and Organization: DynCorp, a Delaware corporation (the "Company") provides diversified management, technical and professional services primarily to U.S. Government customers throughout the United States and internationally. Organized in 1946, the Company provides services to various branches of the Departments of Defense, Energy, State, Justice, and Agriculture, the Drug Enforcement Agency, the National Institute of Health, the Defense Information Systems Agency, the National Aeronautics and Space Administration and various other U.S., state and local government agencies, commercial clients and foreign governments. Generally, these services are provided under both prime contracts and subcontracts, which may be fixed-price, time-and-material or cost-type contracts depending on the work requirements and other individual circumstances. These services encompass a wide range of management, technical and professional services. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. All majority-owned subsidiaries have been included in the financial statements. Investments in which the Company owns a 20% to 50% ownership interest, are accounted for by the equity method while investments of less than 20% ownership are accounted for under the cost method. Outside investors' interest in the majority-owned subsidiaries is reflected as minority interest. Effective in 1999 the fiscal year is the 52 or 53 weeks period ending the last Thursday in December. Previously, the Company had a calendar year-end. Use of Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates include accrued liabilities such as incentive compensation awards, which are not paid out until the following year. Actual results could differ from those estimates. Contract Accounting: Contracts in process are stated at the lower of actual cost incurred plus accrued profits or net estimated realizable value of incurred costs, reduced by progress billings. The Company records income from major fixed-price contracts, extending over more than one accounting period, using the percentage-of-completion method. During performance of such contracts, estimated final contract prices and costs are periodically reviewed and revisions are made as required. The effects of these revisions are included in the periods in which the revisions are made. On cost-plus-fee contracts, revenue is recognized to the extent of costs incurred plus a proportionate amount of fee earned, and on time-and-material contracts, revenue is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred. Losses on contracts are recognized when they become known. Disputes arise in the normal course of the Company's business on projects where the Company is contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability or collectibility. Such disputes, whether claims or unapproved change orders in the process of negotiation, are recorded at the lesser of their estimated net realizable value or actual costs incurred and only when realization is probable and can be reliably estimated. Claims against the Company are recognized where loss is considered probable and reasonably determinable in amount. Accounts Receivable: It is the Company's policy to provide reserves for the collectibility of accounts receivable when it is determined that it is probable that the Company will not collect all amounts due and the amount of reserve requirement can be reasonably estimated. Property and Equipment: The Company computes depreciation using the straight-line method. The estimated useful lives used in computing depreciation are buildings, 15-33 years; machinery and equipment, 3-20 years; and leasehold improvements, the lesser of the useful life or the term of the lease. Depreciation expense was $5,412 for 1999, $4,781 for 1998 and $4,881 for 1997. Cost of property and equipment sold or retired and the related accumulated depreciation or amortization is removed from the accounts in the year of disposal, and any gains or losses are reflected in the consolidated statements of operations. Expenditures for maintenance and repairs are charged to expense as incurred, and major additions and improvements are capitalized. Intangible Assets: The major classes of intangible assets as of December 30, 1999 and December 31, 1998 are summarized below (in millions): Amortization Period 1999 1998 Goodwill..................... 10 to 40 years $109.8 $44.9 Capitalized Software... 8 years 10.6 5.9 Core & developed technology... 5 years 7.6 - Contracts acquired............ up to 10 years 8.4 1.1 Assembled workforce........... 7 years 6.5 - Patent...................... 17 years 6.3 6.9 ------ ----- Total net intangibles....... $149.2 $58.8 Intangible assets are being amortized using the straight-line method for the periods noted above. Amortization expense was $8,160, $1,575, and $1,560 in 1999, 1998, and 1997, respectively (see Note 13 ). Amortization expense for 1999 includes $1.2 million acceleration of goodwill amortization due to impairment. Accumulated amortization of $55,755 and $50,030 has been recorded through December 30,1999 and December 31, 1998, respectively. Long-lived assets and identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for impairment, the Company estimates the future cash flows expected to result from the use of the asset. If impaired, the Company would write down the asset to its fair market value. If the asset is held for sale, the Company reviews its fair value less cost to sell. In 1999, the Company expensed $1.7 million related to impaired assets including the $1.2 million noted above. Derivative Financial Instruments: The Company has a policy to use derivative financial instruments to manage its exposures to fluctuations in interest rates and foreign exchange rates as warranted. The Company does not hold or issue derivative financial instruments for trading purposes. There were no such financial instruments held during 1999. Recently Issued Accounting Standards: In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities," which became effective for fiscal years beginning after December 15, 1998. The statement provides guidance on the financial reporting of start-up costs and organization costs and requires costs of start-up activities to be expensed as incurred, except for long-term contracts. The adoption of this statement, effective January 1, 1999, did not have a material impact on the Company's financial statements. In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, which deferred the effective date of SFAS 133. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Because of the Company's minimal use of derivatives, the Company does not expect that the adoption of this new standard will have a material impact on its results of operations, financial condition or cash flows. Consolidated Statements of Cash Flows: For purposes of these statements, short-term investments, which consist of government treasury bills and time deposits with a maturity of ninety days or less, are considered cash equivalents. At December 30, 1999, checks not yet presented for payment of $11.1 million in excess of cash balances were included in accounts payable on the accompanying balance sheet. The Company had sufficient funds available to cover these outstanding checks when they were presented for payment. Cash and short-term investments at December 31, 1998, excludes $1.5 million of restricted cash which is classified as Other Assets. Investing and financing activities include the following: 1999 1998 1997 Acquisitions of businesses: Assets acquired $ 212,642 $ 11,185 $ - Liabilities assumed (45,138) (946) - Cash acquired 36 - - ---------- --------- ----------- Net cash $ 167,540 $ 10,239 $ - ---------- --------- ----------- Capitalized equipment leases and notes secured by property and equipment $ - $ - $ 626 The Company acquired GTE Information Systems LLC in 1999 and FMAS Corporation in 1998. Comprehensive Income: Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income," which requires the presentation and disclosure of comprehensive income. Translation adjustment of $(0.01) million is the only component of the Company's comprehensive income for the years ended December 30, 1999 and December 31, 1998 other than net income. Reclassifications: Consistent with industry practice, assets and liabilities relating to long-term contracts and programs are classified as current although a portion of these amounts is not expected to be realized within one year. Certain prior year information has been reclassified to conform to the current year presentation. (2) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value: Accounts receivable and contracts in process, net, prepaid income taxes, accounts payable and accrued income taxes - The carrying amount approximates the fair value due to the short maturity of these instruments. Long-term debt and other liabilities and deferred credits - The carrying value of the Company's Senior Secured Credit Agreement and its 15.0% Senior Subordinated Notes approximated the fair value. The fair value of the Company's Senior Notes, based on the current rate as if the issue date was December 30, 1999 was $92.4 million, as compared to a book value of $99.6 million in 1999. The fair value of the Company's 7.486% Contract Receivable Collateralized Notes and the Senior Notes, based on the current rate as if the issue dates were December 31, 1998 was $154.4 million, as compared to a book value of $149.5 million in 1998. For the remaining long-term debt (see Note 4) and other liabilities and deferred credits, the carrying amount approximates the fair value. (3) Accounts Receivable and Contracts in Process The components of accounts receivable and contracts in process were as follows for the years ending December 30, 1999 and December 31, 1998: 1999 1998 ------ ------ U.S. Government: Billed and billable $238,709 $158,190 Recoverable costs and accrued profit on progress completed but not billed 47,885 23,374 Retainage due upon completion of contract 2,769 2,641 ------- ------- 289,363 184,205 ------- ------- Other Customers (primarily subcontracts from U.S. Government prime contracts and contracts with state, local and quasi-government agencies): Billed and billable (less allowance for doubtful accounts of $3,156 in 1999 and $1,126 in 1998) 52,063 54,520 Recoverable costs and accrued profit on progress completed but not billed 15,985 19,491 -------- -------- 68,048 74,011 -------- -------- $357,411 $258,216 ======== ======== Billed and billable include amounts earned and contractually billable at year-end but which were not billed because customer invoices had not yet been prepared at year-end. Recoverable costs and accrued profit on progress completed but not billed is composed primarily of amounts recognized as revenues, but which are not contractually billable at the balance sheet dates. It is expected that all amounts outstanding at December 30, 1999 will be collected within one year except for approximately $5,892. (4) Long-term Debt At December 30, 1999 and December 31, 1998, long-term debt consisted of: 1999 1998 ------ ------ Senior Secured Credit Agreement - Term A Loan $100,000 $ - Senior Secured Credit Agreement - Term B Loan 100,000 - Senior Secured Credit Agreement - Revolving Credit Facility 6,970 - 15% Senior Subordinated Notes 33,952 - 9 1/2% Senior Notes 99,584 99,546 7.486% Contract Receivable Collateralized Notes, Series 1997-1, Class A - 50,000 Floating Rate Contract Receivable Collateralized Notes, Series 1997-1, Class B - 7,000 8% Mortgage payable 2,575 2,729 Notes payable 105 991 ------- ------- 343,186 160,266 Less current portion 8,242 8,145 -------- -------- $334,944 $152,121 Debt maturities as of December 30, 1999, were as follows: 2000 $ 8,242 2001 26,180 2002 26,195 2003 28,034 2004 26,000 Thereafter 228,535 -------- $343,186 ======== On December 10, 1999, the Company entered into a Senior Secured Credit Agreement (the "Credit Agreement") with a group of financial institutions. Under the Credit Agreement, the Company borrowed $100.0 million under Term A loans maturing December 9, 2004, $100.0 million under Term B loans maturing December 9, 2006, and $23.8 million under a $90.0 million revolving line of credit maturing December 9, 2004. Of the total borrowings under the Credit Agreement, $125.0 million was used for partial payment of the purchase price for GTE Information Systems LLC. An additional $112.0 million of the borrowings was used to make an optional redemption of Dyn Funding Corporation's outstanding 7.486% Fixed Rate Contract Receivable Collateralized Notes, Series 1997-1, Class A and to reduce irrevocably Dyn Funding Corporation's Floating Rate Contract Receivable Collateralized Notes, Series 1997-1, Class B. The remainder was used to pay transactional expenses and for general corporate operating purposes. Upon the closing of the Credit Agreement, the Company terminated its previous revolving line of credit facility. The Credit Agreement stipulates that the Company must maintain certain financial ratios, including specified ratios of earnings to fixed charges, debt to earnings, and accounts receivable to borrowings under the Credit Agreement. On December 10, 1999, the Company incurred an extraordinary loss of $2.5 million ($1.6 million after tax or $0.16 for basic and diluted earnings per share) in connection with the early retirement of the $50.0 million 7.486% Fixed Rate Contract Receivable Collateralized Notes. The extraordinary loss was comprised of the payment of a yield maintenance premium and the write-off of associated debt issuance cost. The Term A Loans are to be repaid in sixteen quarterly installments of $6.3 million beginning in February 2001. The Term B Loans are to be repaid in twenty quarterly installments of $0.3 million starting in February 2000 and then eight quarterly installments of $11.9 million beginning in February 2005. At the option of the Company, borrowings under the Credit Agreement bear interest at either LIBOR or a base rate established by the bank, plus a margin that varies based upon the Company's ratio of debt to earnings. The Company is charged a commitment fee of 0.5% per annum on unused commitments under the revolving line of credit. As of December 30, 1999, $7.0 million of borrowings and $7.4 million of letters of credit were outstanding under the line of credit, and the amount available was $75.6 million. On December 10, 1999, the Company entered into an agreement with various financial institutions for the sale of $40.0 million face value of the Company's subordinated pay-in-kind notes due 2007, with an estimated fair value of $33.9 million (Senior Notes), and for the sale of 426,217 shares of the Company's stock with an estimated fair value of $6.1 million (see Note 7). The proceeds were used for payment of the balance of the purchase price for GTE Information Systems LLC. The Subordinated Notes bear interest at 15.0% per annum, payable semi-annually in-kind. The Company may, at its option, prior to December 15, 2004, pay the interest in cash or in additional Subordinated Notes. The Subordinated Notes are redeemable, in whole or in part, at the option of the Company, on or after December 15, 2000 at a redemption price that ranges from 114.0% in 2000 to 100.0% in 2006 and thereafter. The Subordinated Notes are general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future senior debt of the Company and to the Senior Notes. On March 17, 1997, the Company issued $100.0 million of 9 1/2% Senior Subordinated Notes ("Senior Subordinated Notes") with a scheduled maturity in 2007. Interest is payable semi-annually, in arrears, on March 1 and September 1 of each year. The Senior Notes are redeemable, in whole or in part, at the option of the Company, on or after March 1, 2002 at a redemption price which ranges from 104.8% in 2000 to 100.0% in 2005 and thereafter. In addition, at any time prior to March 1, 2000, the Company may redeem up to 35.0% of the aggregate principal amount of the Senior Notes (at a redemption price of 109.5%) with proceeds generated from a public offering of equity, provided at least 65.0% of the original aggregate amount of the Senior Notes remains outstanding. The Senior Notes are general unsecured obligations of the Company and will be subordinated in right of payment to all existing and future senior debt of the Company. The Credit Agreement and indentures for the Senior Notes and Senior Subordinated Notes contains customary restrictions on the ability of the Company to undertake certain activities, such as the incurrance of additional debt, the payment of dividends on or the repurchase of the Company's common stock, the merger of the Company into another company, the sale of substantially all the Company's assets, and the acquisition of the stock or substantially all the assets of another company. The Company acquired the Alexandria, VA headquarters of Technology Applications, Inc. ("TAI") on November 12, 1993, in conjunction with the acquisition of TAI. A mortgage of $3,344 bearing interest at 8.0% per annum was assumed. Payments are made monthly and the mortgage matures in April 2003. On February 29, 2000, the Company sold the related property for $10.5 million in cash and simultaneously entered into a lease agreement for the property. The 8.0% mortgage was paid off at this time. Deferred debt issuance costs are being amortized using the effective interest rate method over the term of the related debt. At December 30, 1999, and December 31, 1998, unamortized deferred debt issuance costs were $12,113 and $4,924, respectively and amortization for 1999, 1998 and 1997 was $1,211, $721, and $706, respectively. Amortization of debt issue discount was $39, $36, and $26 in 1999, 1998 and 1997, respectively. Cash paid for interest was $16,209 for 1999, $13,454 for 1998, and $13,076 for 1997. (5) Accrued Expenses At December 30, 1999 and December 31, 1998, accrued expenses consisted of the following: 1999 1998 ---- ---- Salaries and wages $ 73,028 $ 49,566 Insurance 24,147 21,419 Interest 4,345 1,993 Payroll and miscellaneous taxes 12,051 10,836 Accrued contingent liabilities and operating reserves (see Note 20) 10,105 17,999 Other 7,598 6,304 -------- -------- $131,274 $108,117 ======== ======== (6) Employee Stock Ownership Plan In September 1988, the Company established an Employee Stock Ownership Plan ("ESOP"). The Company borrowed $100 million and loaned the proceeds, on the same terms as the Company's borrowings, to the ESOP to purchase 4,123,711 shares of common stock of the Company. The ESOP acquired 2,797,812 additional shares from 1993 through 1996 either through contributions of stock from the Company, or contributions of cash from the Company with which the ESOP then purchased shares either from the Company, on the Internal Market, or directly from other stockholders. At the beginning of 1997, the ESOP had considerable cash on hand. Utilizing this cash and loans from the Company, the ESOP purchased all of the Company's Class C Preferred Stock. The ESOP subsequently converted the Class C Preferred Stock and exercised the related warrants, at which time the Company issued 949,642 shares of common stock to the ESOP. The purchase price for the Class C Preferred Stock was $18,566 ($19.55 per share, after exercise of warrants) of which half was paid in cash ($8,277 on hand and $1,006 loaned from the Company) and notes were issued for the balance. The notes, and related accrued interest, have been paid in full as of December 30, 1999. In 1999, the ESOP utilized 1999 contributions and loans to make the required principal and interest payments on the aforementioned notes, pay administrative fees, purchase 95,735 shares of stock on the internal market and purchase 273,139 shares of stock from other stockholders. At December 30, 1999, the unpaid balance on these subsequent loans, $2,658, representing 101,052 shares, was reflected as a reduction in stockholders' equity. The ESOP covers a majority of the employees of the Company. Participants in the ESOP become fully vested after four years of service. At December 30, 1999, the ESOP owned 7,451,989 shares, of which most has been allocated to participants. The Company recognizes compensation expense each year based on the cash contribution for the year. In 1999, 1998, and 1997, cash contributions to the ESOP were $13,220, $12,600, and $11,200, respectively. These amounts were charged to Cost of Services and Corporate General and Administrative Expenses. (7) Redeemable Common Stock Common stock which is redeemable has been reflected as Temporary Equity at the redeemable value at each balance sheet date and consists of the following: Balance at Balance at Redeemable December 30, Redeemable December 31, Shares Value 1999 Shares Value 1998 ------- ------ ------ ------- ------ ------ ESOP Shares 3,313,729 $27.50 $ 91,128 3,382,340 $27.75 $ 93,860 4,037,208 $22.75 91,846 3,700,082 $23.50 86,952 --------- -------- --------- -------- 7,350,937 $182,974 7,082,422 $180,812 ========= ======== ========= ======== Other Shares 426,217 $14.41 $ 6,142 125,714 $24.25 $ 3,049 ========= ======== ========= ========= ESOP Shares In accordance with ERISA regulations and the Employee Stock Ownership Plan (the "Plan") documents, the ESOP Trust or the Company is obligated to purchase vested common stock shares from ESOP participants (see Note 6) at the fair value (as determined by an independent appraiser) until such time as the Company's common stock is publicly traded. The shares initially bought by the ESOP in 1988 were bought at a "control price," reflecting the higher price that buyers typically pay when they buy an entire company (as the ESOP and other investors did in the 1988 LBO). A special provision in the ESOP's 1988 agreement permits participants to receive a "control price" when they sell these shares back to the Company under the ESOP's "put option" provisions. This "control price", determined by the appraiser on February 21, 2000, was $27.50 per share as of December 30, 1999. The additional shares obtained by the ESOP in 1994 through 1999 were at a "minority interest price", reflecting the lower price that buyers typically pay when they are buying only a small piece of a company. Participants do not have the right to sell these shares at the "control price". The minority interest price determined by the independent appraiser on February 21, 2000, was $22.75 per share as of December 30, 1999. Participants receive their vested shares upon retirement, becoming disabled, or death over a period of one to five years and for other reasons of termination over a period of one to ten years, all as set forth in the Plan documents. The ESOP Trust purchases participants' shares at the applicable price, utilizing cash available from the Company's contributions and loans (see Note 6). The participant can elect to receive stock in kind instead of a participant put. Based on fair values of $27.50 and $22.75 per share as of December 30, 1999, the estimated aggregate annual commitment to repurchase shares from the ESOP participants upon death, disability, retirement and termination is as follows: $8,424 in 2000, $12,559 in 2001, $15,084 in 2002, $17,043 in 2003, $22,649 in 2004 and $107,215 thereafter. Under the Subscription Agreement with the ESOP dated September 9, 1988, the Company is permitted to defer put options if, under Delaware law, the capital of the Company would be impaired as a result of such repurchase. Other Shares On December 10,1999, the Company entered into an agreement with various financial institutions for the sale of 426,271 shares of the Company's stock and Senior Subordinated Notes (see Note 4). Under a contemporaneous registration rights agreement, the holders of these shares of stock will have a put right to the Company commencing on December 10, 2003, at a price of $40.53 per share, unless one of the following events has occurred prior to such date or the exercise of the put right: (1) an initial public offering of the Company's common stock has been consummated; (2) all the Company's common stock has been sold; (3) all the Company's assets have been sold in such a manner that the holders have received cash payments; or (4) the Company's common stock has been listed on a national securities exchange or authorized for quotation on the Nasdaq National Market System for which there is a public market of at least $100 million for the Company's common stock. If, at the time of the holders' exercise of the put right the Company is unable to pay the put price because of financial covenants in loan agreements or other provisions of law, the Company will not honor the put at that time, and the put price will escalate for a period of up to four years, at which time the put must be honored. The escalation rate increases during such period until the put is honored, and the rate varies from an annualized factor of 22% for the first quarter after the put is not honored up to 52% during the sixteenth quarter. In conjunction with the acquisition of TAI in November 1993, the Company issued put options on 125,714 shares of common stock. The holder could, at any time commencing on December 31, 1998 and ending on December 31, 2000, sell these shares to the Company at a price per share equal to the greater of $17.50; or, if the stock is publicly traded, the market value at a specified date; or, if the Company's stock is not publicly traded, the ESOP control price at the time of exercise. On January 12, 1999, the holder exercised the put option on these shares at the applicable price of $24.25 per share. Following are the changes in Redeemable Common Stock for the three years ended December 30, 1999: Redeemable Common Stock ------------------------------------- Other ESOP Total ------ ----- ------ Balance, December 31, 1996 $2,979 $136,343 $139,322 Shares purchased on Internal Market - 205 205 Shares purchased by ESOP not collateralized by notes - 13,371 13,371 Adjustment of shares to fair value 38 1,904 1,942 ------ -------- -------- Balance, December 31, 1997 3,017 151,823 154,840 Shares purchased by ESOP - 1,482 1,482 Shares released from collateral - 5,798 5,798 ESOP diversification (a) - (4,074) (4,074) Adjustment of shares to fair market value 32 25,783 25,815 ------ -------- -------- Balance, December 31, 1998 3,049 180,812 183,861 Exercise of put option (3,049) - (3,049) Shares purchased by the ESOP - 6,466 6,466 Shares purchased on the Internal Market - 2,319 2,319 Shares released from collateral - 10,577 10,577 Shares pledged as collateral - (11,082) (11,082) ESOP diversification (a) - (2,652) (2,652) Issuance of common stock with put rights 6,048 - 6,048 Adjustment of shares to fair value 94 (3,466) (3,372) ------ -------- -------- Balance December 30, 1999 $6,142 $182,974 $189,116 ====== ======== ======== (a) Under diversification rules, as defined by the Plan, ESOP participants have the option of receiving a distribution of up to 25.0% of their aggregate accounts, in order to convert Company stock into another type of investment. The option extends over a five-year period beginning after the participant has reached age 55 and has ten years of participation in the ESOP. At the sixth year, the distribution right increases to 50.0% of the participant's account. (8) Preferred Stock, Class C Dividends on the Class C Preferred Stock accrued at an annual rate of 18.0%, compounded quarterly. At December 31, 1996, cumulative dividends of $11,147 had not been recorded or paid. In February 1997, the ESOP purchased all of the Class C Preferred Stock, which was immediately converted into Common Stock. (9) Common Stock At December 30, 1999, Common Stock includes those shares issued to outside investors, officers and directors, current and former employees and the Savings and Retirement Plan ("SARP"), as well as any ESOP or SARP shares that have been distributed in kind to former participants in the plans. (10) Common Stock Warrants and Restricted Stock The Company initially issued warrants on September 9, 1988 to certain stockholders to purchase a maximum of 5,891,987 shares of common stock of the Company. The warrants were recorded at their fair value of $2.43 per warrant and warrants issued to a lender were recorded at $3.28 per warrant. Each warrant was exercisable to obtain one share of common stock. The stockholder could exercise the warrant and pay in cash the exercise price of $0.25 for one share of common stock or sell back to the Company a sufficient number of the exercised shares to equal the value of the warrants to be exercised. All warrants were either exercised or canceled before their September 9, 1998 expiration date. There were no warrants outstanding at December 30, 1999 and December 31, 1998, respectively. The Company had a Restricted Stock Plan (the "Plan") under which management and key employees could be awarded shares of common stock based on the Company's performance. The Company initially reserved 1,023,037 shares of common stock for issuance under the Plan. Under the Plan, Restricted Stock Units ("Units") were granted to participants who were selected by the Compensation Committee of the Board of Directors. Each Unit entitled the participant upon achievement of the performance goals (all as defined) to receive one share of the Company's common stock. Units could not be converted into shares of common stock until the participant's interest in the Units had vested. Vesting occurred upon completion of the specified periods as set forth in the Plan. (11) Acquisitions On December 10, 1999, the Company acquired GTE Information Systems LLC, a subsidiary of GTE Corporation, for $167.5 million in cash and has accounted for the acquisition as a purchase. The purchase price has been allocated to the assets acquired and the liabilities assumed based on preliminary estimated fair value at the date of acquisition. In addition, $6.4 million of the purchase price was allocated to in-process research, which the Company has expensed at the date of acquisition. $67.7 million of goodwill has been recorded on a preliminary basis based on the allocation of the purchase price and will be amortized over 30 years. On December 13, 1999, the name of the Company was changed to DynCorp Information Systems LLC ("DIS"). It will operate as a separate subsidiary of the Company. Operating results for DIS have been included from the date of acquisition. The following unaudited pro forma combined financial information presents the historical results of operations of the Company and DIS, with pro forma adjustments as if DIS had been acquired as of the beginning of the periods presented. The unaudited pro forma information is not necessarily indicative of what the results of operations actually would have been if the transaction had occurred as of the beginning of those periods, or of future results of operations. 1999 1998 ------ ------ Revenue $1,560,971 $1,457,870 Net income 4,251 3,219 Basic earnings per share $0.42 $0.31 Diluted earnings per share $0.41 $0.31 On February 2, 1998, the Company acquired a majority of the net assets of FMAS Corporation ("FMAS"), a medical outcome measurement and data abstraction services company headquartered in Rockville, MD, for $10.2 million in cash. FMAS is a leading provider of proprietary outcome performance measurement systems to DoD treatment facilities as well as other public and governmental facilities. The acquisition has been accounted for as a purchase, and $7.1 million of value assigned to a pending patent, $0.4 million of goodwill, and $0.4 million of value assigned to contracts has been recorded based on allocation of the purchase price. These amounts will be amortized over 17 years, 15 years, and the life of the contracts, respectively. (12) Savings Plan The Company has a Savings and Retirement Plan which is intended to qualify under section 401(k) of the Internal Revenue Code. The plan allows eligible employees to contribute from 1.0% to 15.0% of their income on a pretax basis. In 1996, the Company began matching 100.0% of the first 1.0% of employee contributions and 25.0% of the next 4.0% of employee contributions, provided the employee contribution was invested in the Company's Stock Fund. Matching contributions are invested in additional shares of the Company's common stock. The Company has expensed approximately $1,937, $1,624, and $1,224, in 1999, 1998, and 1997, respectively, related to these matching contributions. (13) Other Expenses Fiscal Years Ended 1999 1998 1997 ---- ---- ---- Amortization of costs in excess of net assets acquired (see Note 1) $2,957 $1,575 $1,560 In-process research and development write-off 6,400 - - Provision for non-recovery of receivables 1,434 900 629 Legal and other expense accruals associated with business discontinued in 1995 - - 177 Costs associated with businesses discontinued in 1988 and prior years o Asbestos liability issues (a) - (670) 7,800 o Subcontractor suit (b) 1,700 1,177 - o Environmental costs (see Note 20(b)) - 23 180 Miscellaneous (c) (1,947) (318) 3 ------- ------ ------- Total Other $10,544 $2,687 $10,349 ======= ====== ======= (a) In connection with the global settlement that transferred ownership of the Fuller-Austin Insulation Company ("Fuller-Austin") to a post-Fuller-Austin bankruptcy settlement trust (the "Trust") for the benefit of present and future asbestos claimants (see Note 20(a)), the Company reserved an additional $7.8 million in 1997 for the transfer of certain property and insurance rights to the Trust, and the payment to the Trust of certain cash consideration. In 1998, a portion representing excess over future needs was reversed. (b) Reserves for the estimated costs to resolve a lawsuit filed by a subcontractor of a former subsidiary (see Note 20(b)). (c) 1999 miscellaneous consists predominately of gains on sales of certain assets and other miscellaneous items. (14) Income Taxes As prescribed by SFAS No. 109, "Accounting for Income Taxes", the Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Valuation allowances are provided if required. Earnings (loss) from continuing operations before income taxes, minority interest, and extraordinary item (see Note 4) were derived from the following: Fiscal Years Ended 1999 1998 1997 ---- ---- ---- Domestic operations $ 15,936 $ 26,909 $ 11,422 Foreign operations (729) (214) (279) -------- -------- -------- $ 15,207 $ 26,695 $ 11,143 ======== ======== ======== The provision (benefit) for income taxes consisted of the following: Fiscal Years Ended 1999 1998 1997 ---- ---- ---- Current: Federal $11,523 $ 7,616 $(1,926) Foreign 120 22 43 State 636 458 - ------- ------- -------- 12,279 8,096 (1,883) ------- ------- -------- Deferred: Federal (5,485) 2,933 6,653 Foreign - (1,470) - State (2,167) 298 499 --------- ------ ------ (7,652) 1,761 7,152 --------- ------ ------ Valuation Allowance: Federal - - (2,488) State 22 (298) (499) ------- ------ ------- 22 (298) (2,987) ------- ------ ------- Total $ 4,649 $ 9,559 $2,282 ======= ======= ====== The components of deferred taxes are as follows: Dec. 30, Dec. 31, 1999 1998 -------- -------- Deferred tax liabilities: Employee benefits $ (1,933) $ (2,223) Contracts revenue recognition (17,739) (13,280) Intangible amortization (66) (249) Depreciation and other amortization (1,052) (993) Other, net (653) (132) --------- -------- Total deferred tax liabilities (21,443) (16,877) Deferred tax assets: Deferred compensation 922 1,251 Operating reserves and other accruals 23,518 13,138 Increase due to federal rate change 335 335 Benefit of state tax on temporary differences and state net operating loss carryforwards 5,028 2,861 ------ ------ Total deferred tax assets 29,803 17,585 ------ ------ Total temporary differences before valuation allowances 8,360 708 Valuation allowances: State (4,758) (4,736) ------- --------- Total temporary differences affecting tax provision 3,602 (4,028) ------ --------- "Safe harbor" leases (4,632) (5,113) -------- --------- Net deferred tax liability $(1,030) $ (9,141) ======== ========= No Federal valuation allowance was required for the Company's deferred tax assets at December 30, 1999, and December 31, 1998. State valuation allowances represent reserves for income tax benefits, which are not recognized due to uncertainty regarding future earnings in the applicable states. The net deferred tax liability includes current deferred tax assets of $3,517 and $3,357 as of December 30, 1999 and December 31, 1998, respectively, which are included in Other Current Assets on the consolidated balance sheets. The Company's U.S. Federal income tax returns have been cleared with the IRS through 1993. Cash paid for income taxes was $4,942 for 1999, $7,338 for 1998, and $2,676 for 1997. The tax provision differs from the amounts obtained by applying the statutory U.S. Federal income tax rate to the earnings from continuing operations before minority interest. The differences are reconciled as follows: Fiscal Years Ended 1999 1998 1997 ----- ----- ----- Expected Federal income tax provision $5,322 $9,343 $ 3,900 Minority interest not included in tax provision (446) (277) (70) Valuation allowance - - (2,488) State and local income taxes, net of Federal income tax benefit (1,637) 297 - Nondeductible amortization of intangibles and other costs 1,173 724 726 Foreign income tax 120 (1,448) 43 Foreign and fuel tax credits (54) (27) (31) Other, net 171 947 202 ------ ------ ------ Tax provision $4,649 $9,559 $2,282 ====== ====== ====== The Company has state net operating loss carryforwards available to offset future taxable income. Following are the net operating losses by year of expiration: Year of State Net Expiration Operating Losses ---------- ---------------- 1999 $ 726 2000 800 2001 403 2002 331 2003 1,019 Through 2013 64,098 ------- $67,377 ======= (15) Pension and Postretirement Benefits Plans Multiemployer Pension Plan Union employees who are not participants in the ESOP are covered by multiemployer pension plans under which the Company pays fixed amounts, generally per hours worked, according to the provisions of the various labor contracts. In 1999, 1998, and 1997, the Company expensed $3,954, $3,538, and $3,451, respectively, for these plans. Under the Employee Retirement Income Security Act of 1974 as amended by the Multiemployer Pension Plan Amendments Act of 1980, an employer is liable upon withdrawal from or termination of a multiemployer plan for its proportionate share of the plan's unfunded vested benefits liability. Based on information provided by the administrators of the majority of these multiemployer plans, the Company does not believe there is any significant amount of unfunded vested liability under these plans. Defined Benefit Pension and Union Benefit Plans On December 11, 1999, the Company began participating in the DIS Pension Plan for Salaried Employees, which is a noncontributory defined benefit pension plan sponsored by DIS, covering a majority of DIS' employees. The benefits to be paid under this plan are generally based on years of credited service and average final earnings. The Company's funding policy, subject to the minimum funding requirements of employee benefit and tax laws, is to contribute such amounts as are determined on an actuarial basis to accumulate funds sufficient to meet the plan's benefit obligation to employees upon their retirement. The assets of the plan consist primarily of corporate equities, government securities and corporate debt securities. Also on December 11, 1999, certain of the Company's union employees began participating in the DynCorp Information Systems LLC Union Pension Plan, which is a noncontributory defined benefit pension and a postretirement healthcare and life insurance benefit plan, sponsored by DIS. The significant weighted-average assumptions used by the Company for the pension measurements were as follows at December 30, 1999: Discount rate 7.75% Rate of compensation increase 5.00% Expected return on plan assets 9.00% Net periodic benefit cost for the Company's pension plans is $68 for the year ended December 30, 1999. The projected benefit obligation and fair value of the pension plans' assets at December 30, 1999 is $44,553 and $57,604, respectively. The net prepaid benefit cost at December 30, 1999 is therefore $13,051. Postretirement Benefit Plan On December 11, 1999, a majority of the Company's DIS employees became covered under a postretirement healthcare and life insurance benefit plan sponsored by DIS. The determination of benefit cost for postretirement health plan is generally based on comprehensive hospital, medical and surgical benefit plan provisions. The weighted-average assumptions used by the Company in the actuarial computations for postretirement benefits were as follows at December 30, 1999: Discount rate 7.75% Expected return on plan assets 6.75% Net periodic benefit cost for the Company's postretirement healthcare and life insurance benefit plan as of December 30, 1999 is $53. The projected benefit obligation and fair value of the postretirement benefit plan's assets at December 30, 1999 is $21,608 and $12,090, respectively. The net accrued benefit liability at December 30, 1999 is therefore $9,518. (16) Net Earnings Per Common Share Basic EPS is computed by dividing common stockholders' share of net earnings by the weighted average number of common shares outstanding and contingently issuable shares. The weighted average number of common shares outstanding includes issued shares less shares held in treasury and any unallocated ESOP shares. Shares earned and vested but unissued under the Restricted Stock Plan are contingently issuable shares whose condition for issuance have been satisfied and as such have been included in the calculation of basic EPS. Diluted EPS is computed similarly except the denominator is increased to include the weighted average number of stock warrants and options outstanding, assuming the treasury stock method. The following is a reconciliation of shares for basic EPS to shares for diluted EPS for the fiscal years ended: 1999 1998 1997 ---- ---- ---- Weighted average shares outstanding for basic EPS 10,044 10,242 8,985 Effect of dilutive securities: Warrants - 131 1,524 Stock options 229 141 129 ------ ------ ------ Weighted average shares outstanding for diluted EPS 10,273 10,514 10,638 ====== ====== ====== (17) Incentive Compensation Plans The Company has several formal incentive compensation plans that provide for incentive payments of cash and stock to officers and key employees. Incentive payments under these plans are based upon operational performance, individual performance or a combination thereof, as defined in the plans. (18) Stock Option Plan In March 1999, the Company adopted a Long-Term Incentive Stock Plan, which authorizes the grant of performance-based stock and cash incentive compensation in the form of stock options, stock appreciation rights, restricted stock, performance grants and awards, and other stock-based grants and awards. Specific terms relating to the grant are set by the Compensation Committee at the time of the grant. Stock options granted under the Plan permit optionees to purchase a designated number of shares of common stock at an exercise price set by the Committee, which establishes vesting and exercise provisions to be set forth in individual option agreements. The exercise price may not be lower than the fair market value of the shares as of the time the option is granted. Options granted during 1999 generally vest based on cumulative profit performance of the Company against a projected return over a four-year period. Options, which do not vest during the first four years, will vest if, but only if, the employee is still employed by the Company at the earlier of the eighth anniversary of the grant or the employee's 65th birthday. Options that are not exercised within ten years of the grant date will expire. The Company adopted an incentive stock option plan in 1995, whereby options could be granted to officers and other key employees to purchase a maximum of 1,250,000 common shares at an option price not less than the most recently determined fair market value as of the grant date. The grants are exercisable only when vested and vest proportionately over a period of seven or five years, depending on the date of the grant. Options that are not exercised within ten or seven years from the date of the grant, depending on the date of the grant, shall expire. The fair value of each option grant is equal to the Formula Price at the date of grant. Stock option activity was as follows: 1999 1998 1997 - ------------------------------------------------------------------------------ Outstanding January 1 1,238,600 878,000 789,900 Granted 468,750 389,500 145,000 Exercised (5,400) (16,900) (9,000) Canceled or terminated (98,800) (12,000) (47,900) - ------------------------------------------------------------------------------ Outstanding December 30, 31, and 31 1,603,150 1,238,600 878,000 Exercisable 564,920 365,360 199,600 Average price Outstanding, beginning of Year $18.69 $17.05 $16.55 Granted 24.38 22.13 19.48 Exercised 17.26 14.90 14.90 Canceled or terminated 19.82 16.17 16.61 Outstanding, end of year 20.29 18.69 17.05 Weighted average grant date fair value of options was $24.38, $22.12, and $19.54 for 1999, 1998, and 1997, respectively. The following table summarizes information about stock options outstanding at December 30, 1999: Weighted-Average Range of Number Weighted-Average Remaining Prices Outstanding Exercise Price Contractual Life - ------------------------------------------------------------------------------- $14.50 - 19.00 722,900 $16.82 3.15 20.00 - 23.25 419,500 21.76 5.32 23.50 - 24.50 460,750 24.38 6.57 - ------------------------------------------------------------------------------- The following table summarizes information about stock options exercisable at December 30, 1999: Range of Number Weighted-Average Prices Exercisable Exercise Price - ------------------------------------------------------------------------------- $14.50 - 19.00 466,720 $16.58 20.00 - 23.25 98,200 21.50 - ------------------------------------------------------------------------------ Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has elected to account for its employee stock option plan under APB Opinion No. 25 "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for this plan. Had compensation cost for the plan been determined based on the fair value at the grant date consistent with SFAS No. 123, common stockholders' share of net earnings and earnings per share would have been as follows: Fiscal Years Ended 1999 1998 1997 - ------------------------------------------------------------------------------ Common stockholders' share of net earnings As reported $5,895 $15,055 $7,422 Pro forma 5,186 14,900 7,145 Basic earnings per share As reported 0.59 1.47 0.83 Pro forma 0.52 1.45 0.80 Diluted earnings per share As reported 0.57 1.43 0.70 Pro forma 0.50 1.42 0.67 The minimum value is estimated on the date of grant assuming a five year expected life of the options, a volatility factor of zero, a dividend yield of zero, and a risk-free interest rate of 5.2%, 4.6%, and 5.7%, for 1999, 1998, and 1997, respectively. (19) Leases Future minimum lease payments required under operating leases that have remaining noncancellable lease terms in excess of one year at December 30, 1999 are summarized below: Fiscal Years Ending, -------------------- 2000 $ 30,349 2001 28,508 2002 27,646 2003 26,383 2004 19,689 Thereafter 76,003 -------- Total minimum lease payments $208,578 ======== Net rent expense for leases of $34,769, $31,138 and $21,577 for 1999, 1998 and 1997, respectively, has been charged to Cost of Services and Corporate General and Administrative Expense. (20) Contingencies and Litigation The Company and its subsidiaries and affiliates are involved in various claims and lawsuits, including contract disputes and claims based on allegations of negligence and other tortious conduct. The Company is also potentially liable for certain personal injury, tax, environmental, and contract dispute issues related to the prior operations of divested businesses. In addition, certain subsidiary companies are potentially liable for environmental, personal injury, and contract and dispute claims. In most cases, the Company and its subsidiaries have denied, or believe they have a basis to deny liability, and in some cases have offsetting claims against the plaintiffs, third parties or insurance carriers. The total amount of damages currently claimed by the plaintiffs in these cases is estimated to be approximately $41.0 million (including compensatory punitive damages and penalties). The Company believes that the amount that will actually be recovered in these cases will be substantially less than the amount claimed. After taking into account available insurance, the Company believes it is adequately reserved with respect to the potential liability for such claims. The estimates set forth above do not reflect claims that may have been incurred but have not yet been filed. The Company has recorded such damages and penalties that are considered to be probable recoveries against the Company or its subsidiaries. (a) Certain Pre-1999 Contingent Liability A former subsidiary, Fuller-Austin Insulation Company ("Fuller-Austin"), which discontinued its industrial insulation business activities in 1986, became a defendant in various personal injury law suits that were filed against manufacturers, distributors and installers of products allegedly containing asbestos. Fuller-Austin was a non-manufacturer that installed and occasionally distributed industrial insulation products. Effective September 4, 1998, Fuller-Austin filed a Plan of Reorganization (the "Plan") under Chapter 11 of the United States Bankruptcy Code (the "Code") in the United States Bankruptcy Court for the District of Delaware. The filing of the Plan followed a year of negotiations among a committee representing asbestos claimants (the "Committee"), a legal representative of the unknown future claimants (the "Legal Representative"), Fuller-Austin, and the Company. As a consequence of these negotiations, the Plan was developed as part of a pre-packaged filing by Fuller-Austin under Section 524(g) of the Code. Section 524(g) is designed to deal specifically with the resolution under the Code of obligations of debtors that have asbestos liability. In furtherance of the Plan and the proposed global settlement, representatives of Fuller-Austin, the Company as Fuller-Austin's parent and sole stockholder, the Committee, and the Legal Representative negotiated a separate release agreement under which the Company has been released from any and all present and future liability for Fuller-Austin asbestos liability, in consideration of the transfer of certain Company property (including all the outstanding stock of Fuller-Austin) and certain insurance rights to the Fuller-Austin settlement trust, and the payment to the trust of certain cash consideration. The total amount reserved for this purpose at December 31, 1997 was $14.0 million, in anticipation of the settlement under the Release Agreement. Effective December 10, 1998, pursuant to the terms of a Confirmation Order entered jointly on November 13, 1998 by the United States District and Bankruptcy Courts in Wilmington, Delaware, and the terms of the Release Agreement, the Company transferred and conveyed all of its interests in Fuller-Austin (including all of Fuller-Austin's liabilities) to a trust (the "Trust") established by the Confirmation Order in accordance with Section 524(g) of the Code. The Trust is part of the Plan approved in the Confirmation Order for the resolution of present and future asbestos personal injury and other claims against Fuller-Austin. As part of the Confirmation Order, the Courts issued an injunction channeling all future asbestos claims against Fuller-Austin or the Company to the Trust. The Trust has also undertaken to indemnify the Company against any and all future asbestos and other liability related to Fuller-Austin or the past ownership of Fuller-Austin by the Company. Effective December 11, 1998, the liabilities and assets of Fuller-Austin were removed from the consolidated financial statements in accordance with the Plan and Confirmation Order. The decreases in the balance sheet resulting from this de-consolidation of Fuller-Austin is as follows: Cash and cash equivalents $ 8,476 Property and equipment $ 1,248 Other assets $44,462 Accrued liabilities $ 8,464 Other liabilities and deferred credits $45,722 Under the terms of the Release Agreement, the Trust will continue to have access on an exclusive basis to certain Company insurance aggregating as much as $251,500 and issued during the periods 1974 through 1986, under which Fuller-Austin is an additional insured. (b) General Litigation The Company retained certain potential 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") claiming unspecified damages for improper subcontract termination, misappropriation of technology, and fraud, among other allegations. The New Jersey Court ordered the parties to arbitration in December of 1997. Under the terms of a July 9, 1998 arbitration award and a decision by the Court on certain discovery sanctions and indemnification obligations, Dynalectric was required to pay the Subcontractor a total of $2.73 million, of which the Company was responsible for two-thirds. The Subcontractor filed an action to vacate the arbitration award and indicated its intention to pursue other actions against Dynalectric and the Company. Effective December 27, 1999, the Subcontractor, the Company and Dynalectric executed a mutual settlement finally resolving all issues related to the original Subcontractor allegations and the court and arbitration proceedings. Under the settlement terms, Dynalectric was obligated to pay the Subcontractor $3.0 million, two-thirds of which was ultimately paid by the Company. The resolution of these matters did not have a material impact on the Company's results of operations or financial condition. In November, 1994, the Company acquired an information technology business which was involved in various disputes with federal and state agencies, including two contract default actions and a qui tam suit by a former employee alleging improper billing of a federal government agency customer. The Company has contractual rights to indemnification from the former owner of the acquired subsidiary with respect to the defense of all such claims and litigation, as well as all liability for damages when and if proven. In October 1995, one of the federal agencies asserted a claim against the subsidiary and gave the Company notice that it intended to withhold payments against the contract under which the claim arose. The agency withheld approximately $3.0 million due the Company under one of the aforementioned disputes. In January, 2000, pursuant to a settlement negotiated by the former subsidiary owner, the federal agency repaid the Company approximately $2.8 million of the offset funds. The Company is pursuing a claim against the former subsidiary owner for the balance of the offset amount, plus interest since the date of offset. The offset amount, excluding interest, is included in accounts receivable and contracts in process on the balance sheet as of December 30, 1999. The Company believes that it has meritorious claims for the recovery of these amounts under the terms of the acquisition agreement indemnification provisions. In December of 1997, a subsidiary of the Company filed an action against an unrelated teaming partner to enforce the terms of a teaming agreement under which the subsidiary was to receive a subcontract upon the award of a ship operation contract to the teaming partner. The teaming partner filed a counter claim against the Company's subsidiary alleging approximately $15 million of damages related to the subsidiary's alleged interference with the teaming partner's efforts to purchase a ship. The subsidiary is defending against the counter claim and believes that it has meritorious defenses. The resolution of this matter is not expected to have a material impact on the Company's results of operations or financial condition. As to environmental issues, neither the Company, nor any of its subsidiaries, is named a Potentially Responsible Party (as defined in the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)) at any site. The Company, however, did undertake, as part of the 1988 divestiture of a petrochemical engineering subsidiary, an obligation to install and operate a soil and water remediation system at a subsidiary research facility site in New Jersey and also is required to pay the costs of continued operation of the remediation system. In addition, the Company, pursuant to the 1995 sale of its 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, and underground storage tanks, that existed prior to the sale of the Commercial Aviation Business. The resolution of these matters is not expected to have a material impact on the Company's results of operations or financial condition. The Company believes it has adequate accruals for any liability it may incur arising from the designated sites. The Company is a party to other civil and contractual lawsuits that have arisen in the normal course of business for which potential liability, including costs of defense, constitutes the remainder of the $41.0 million discussed above. The estimated probable liability for these issues is approximately $18.0 million and is substantially covered by insurance. All of the insured claims are within policy limits and have been tendered to and accepted by the applicable carriers. The Company has recorded an offsetting asset (Other Assets) and liability (Other Liabilities and Deferred Credits) of $18.0 million at December 30, 1999 for these items. The Company has recorded its best estimate of the aggregate liability that will result from these matters. While it is not possible to predict with certainty the outcome of litigation and other matters discussed above, it is the opinion of the Company's management, based in part upon opinions of counsel, insurance in force, and the facts currently known, that liabilities in excess of those recorded, if any, arising from such matters would not have a material adverse effect on the results of operations, consolidated financial condition or liquidity of the Company over the long-term. However, it is possible that the timing of the resolution of individual issues could result in a significant impact on the operating results and/or liquidity for one or more future reporting periods. The major portion of the Company's business involves contracting with departments and agencies of, and prime contractors to, the U.S. Government, and such contracts are subject to possible termination for the convenience of the government and to audit and possible adjustment to give effect to unallowable costs under cost-type contracts or to other regulatory requirements affecting both cost-type and fixed-price contracts. Payments received by the Company for allowable direct and indirect costs are subject to adjustment and repayment after audit by government auditors if the payments exceed allowable costs. Audits have been completed on the Company's incurred contract costs through 1995 with the exception of two contracts. Reports on several completed audits have not been issued pending resolution of minor items. The Company has included an allowance for excess billings and contract losses in its financial statements that it believes is adequate based on its interpretation of contracting regulations and past experience. There can be no assurance, however, that this allowance will be adequate. The Company is aware of various costs questioned by the government, but cannot determine the outcome of the audit findings at this time. In addition, the Company is occasionally the subject of investigations by various 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 30, 1999 that will have a material adverse effect on the Company's consolidated financial condition, results of operations or liquidity. (21) Business Segments The Company has three reportable segments, DynCorp Information and Enterprise Technology ("DI&ET"), DynCorp Technical Services ("DTS") and DynCorp Information Systems LLC ("DIS"). These three reportable segments are strategic business units that provide distinctly different services to a variety of customers. DI&ET designs, develops, supports and integrates software and hardware systems to provide customers with comprehensive solutions for information management and engineering needs. DTS provides services ranging from aviation maintenance to multifaceted aerospace sciences, technology and avionics engineering. DIS offers a full range of integrated telecommunications services and information technology solutions in the area of professional services, business systems integration, information infrastructure solutions and information technology operations and support. The Company evaluates performance based primarily on operating profit, but also evaluates return on net assets and days sales outstanding. Operating profit is the excess of revenues over operating expenses and certain nonoperating expenses. The Company derived 93%, 95% , and 97% of its revenues from contracts and subcontracts with the U.S. Government in 1999, 1998, and 1997 respectively. Prime contracts comprised 75% of revenue in 1999 and 72% of revenue in 1998 and 1997, respectively. Prime contracts with the Department of Defense ("DoD") represented 40%, of revenue in 1999 and 1998, respectively, and 45% in 1997. In 1999, the Company's second largest customer was the Department of Energy, comprising 12% of revenue. No other customer accounted for more than 10% of revenues in any year. Revenue, operating profit, identifiable assets, capital expenditures, and depreciation and amortization by segment are presented below: Fiscal Years Ended 1999 1998 (c) 1997 (c) ------ --------- --------- Revenue DI&ET $ 635,881 $ 633,089 $ 553,334 DTS 695,499 600,618 592,603 DIS 13,901 - - ---------- ---------- ---------- $1,345,281 $1,233,707 $1,145,937 ========== ========== ========== Operating Profit DI&ET $ 30,575 $ 31,138 $ 25,581 DTS 31,523 26,525 23,007 DIS 989 - - ---------- ----------- -------- 63,087 57,663 48,588 ---------- ----------- -------- Corporate general and administrative 21,741 18,630 17,785 Interest expense 18,943 14,144 12,432 Interest income (1,393) (1,600) (2,018) Goodwill amortization (a) 2,958 1,575 1,560 Costs associated with divested businesses 286 530 8,157 Minority interest included in operating profit (2,968) (2,081) (1,439) Acquisition costs 8,461 1,336 2,203 Other miscellaneous (148) (1,566) (1,235) ---------- ----------- --------- Earnings from continuing operations before income taxes, minority interest, and extraordinary item $ 15,207 $ 26,695 $ 11,143 ========== ========= ======== Fiscal Years Ended 1999 1998 1997 ------ ----- ----- Identifiable Assets DI&ET $ 205,798 $ 193,094 $ 137,956 DTS 173,629 141,514 104,230 DIS 206,083 - - Corporate (b) 54,163 44,630 147,936 ---------- ---------- -------- $ 639,673 $ 379,238 $390,122 ========== ========== ======== (a) 1999 includes write off of the unamortized goodwill balance of an impaired investment. (b) 1997 includes assets related to probable insurance indemnification recoveries pertaining to a former subsidiary (see Note 20(a)). (c) Data has been restated to give recognition to the 1999 composition of reportable segments. Fiscal Years Ended 1999 1998 1997 ---- ---- ---- Capital Expenditures -------------------- DI&ET $ 8,266 $ 2,064 $ 2,433 DTS 2,519 1,129 1,820 DIS 872 - - Corporate 2,221 1,604 857 -------- -------- -------- $ 13,878 $ 4,797 $ 5,110 ======== ======== ======== Fiscal Years Ended 1999 1998 1997 ----- ----- ----- Depreciation and Amortization ----------------------------- DI&ET $ 6,641 $ 5,651 $ 3,775 DTS 2,132 1,349 2,337 DIS 860 - - Corporate 3,939 1,825 3,776 --------- -------- ------- $ 13,572 $ 8,825 $ 9,888 ========= ======== ======= The equity in net income of investees accounted for by the equity method included in operating profit and the amount of investment in equity method investees included in identifiable assets for each segment is presented below: Fiscal Years Ended 1999 1998 1997 ------ ------ ------ Equity Investees Earnings ------------------------- DTS $ 362 $ 1,563 $ 1,130 --------- --------- ----------- $ 362 $ 1,563 $ 1,130 ========= ========= =========== Fiscal Years Ended 1999 1998 1997 ----- ----- ----- Investment in Equity Investees ------------------------------ DTS $ 2,490 $ 4,136 $ 3,834 --------- --------- --------- $ 2,490 $ 4,136 $ 3,834 ========= ======== ========= (22) Quarterly Financial Data (Unaudited) A summary of quarterly financial data for 1999 and 1998 is as follows: 1999 Quarters 1998 Quarters -------------------------------------- --------------------------------------
First Second Third Fourth(a) First Second Third Fourth(b) ----- ------ ----- --------- ----- ------ ----- --------- Revenues $311,886 $321,262 $334,635 $377,498 $297,873 $303,602 $316,358 $315,874 Gross profit 16,517 17,442 16,114 14,969 13,937 15,675 16,297 14,647 Earnings from continuing operations before income taxes, minority interest and extraordinary item 7,588 5,490 6,532 (4,403) 4,859 5,853 7,196 8,787 Minority interest 1,103 205 590 1,070 420 528 485 648 Net earnings (loss) 3,891 3,312 3,636 (4,850) 2,663 3,195 4,026 5,171 Net Earnings (loss) per common share: Basic earnings (loss) per share $0.38 $0.33 $0.37 $(0.49) $ 0.27 $ 0.31 $ 0.39 $ 0.50 Diluted earnings (loss) per share $0.38 $0.32 $0.36 $(0.49) $ 0.25 $ 0.30 $ 0.38 $ 0.50
[FN] (a) 1999 Fourth Quarter includes: - In-process research and development write-off and amortization of DIS goodwill and other intangibles (b) 1998 Fourth Quarter includes: - $2,500 reversal of reserve for contract compliance issues ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III Item 10. Directors and Executive Officers of the Registrant The directors and executive officers of the Company are: Name Age Position - ---- --- -------- Dan R. Bannister 69 Director and Chairman of the Board T. Eugene Blanchard 69 Director Russell E. Dougherty 79 Director Paul G. Kaminski 57 Director Paul V. Lombardi 58 Director, President and Chief Executive Officer * Dudley C. Mecum II 65 Director David L. Reichardt 57 Director, Senior Vice President and General Counsel * H. Brian Thompson 61 Director Herbert S. Winokur, Jr. 56 Director and Chairman of the Executive Committee Robert B. Alleger, Jr. 54 Vice President, Technical Services and President of the Technical Services Business Unit John J. Fitzgerald 46 Vice President and Controller * Patrick C. FitzPatrick 60 Senior Vice President and Chief Financial Officer * Paul T. Graham 33 Vice President and Treasurer H. Montgomery Hougen 64 Vice President and Secretary and Deputy General Counsel Roxane P. Kerr 51 Senior Vice President, Human Resources and Administration * Marshall S. Mandell 57 Senior Vice President, Corporate Development * James P. McCoy 56 President of the Information Systems business unit * Ruth Morrel 45 Vice President, Law and Compliance Henry H. Philcox 59 Vice President and Chief Information Officer Charlene A. Wheeless 35 Vice President, Corporate Communications Robert G. Wilson 58 Vice President and General Auditor * Officers designated by an asterisk are deemed to be "officers" for purposes of Rule 16a-1(f), as promulgated in Release No. 34-28869. DIRECTORS Dan R. Bannister Director since 1985 Mr. Bannister, age 69, Chairman of the Board, has served in that capacity since 1997. He served as President of the Company from 1984 to 1997 and as Chief Executive Officer from 1985 to 1997. He retired as an active employee of the Company in 1999. He is a director of ITC Learning Corporation. His current term as a director expires in 2001. T. Eugene Blanchard Director since 1988 Mr. Blanchard, age 69, served as Senior Vice President and Chief Financial Officer from 1979 to 1997, when he retired as an active employee of the Company. He is the Chairman of the Company's Employee Stock Ownership Plan Committee and a trustee of the Employee Stock Ownership Plan Trust. He is a director of Landmark Systems Corporation. His current term as a director expires in 2000. Russell E. Dougherty Director since 1989 General Dougherty, age 79, was an attorney with the law firm of McGuire, Woods, Battle & Boothe until his retirement in 1999. He is a retired General, United States Air Force, who served as Commander-in-Chief, Strategic Air Command and Chief of Staff, Allied Command, Europe. From 1980 to 1986, he served as Executive Director of the Air Force Association and Publisher of Air Force Magazine. He was formerly a member of the Defense Science Board; trustee of the Institute for Defense Analysis; and trustee of The Aerospace Corp. His current term as a director expires in 2000. Paul G. Kaminski Director since 1997 Dr. Kaminski, age 57, also served as a director of the Company from 1988 to 1994. He is President and Chief Executive Officer of Technovation, Inc. (consulting and investment banking). He served in the United States Department of Defense as Under Secretary of Defense for Acquisition and Technology from 1994 to 1997. He was Chairman and Chief Executive Officer of Technology Strategies & Alliances (strategic partnership consulting) from 1993 to 1994. He is a director of Anteon Corporation; Condor Systems, Inc.; DeCrane Aircraft Holdings, Inc.; Eagle Picher Technologies, LLC; and General Dynamics Corporation. His current term as a director expires in 2001. Paul V. Lombardi Director since 1994 Mr. Lombardi, age 58, has served as President and Chief Executive Officer since 1997. He served as Chief Operating Officer from 1995 to 1997; as Executive Vice President from 1994 to 1997; as Vice President from 1992 to 1994; as President of the Federal Sector from 1994 to 1995; and as President of the Government Services Group from 1992 to 1994. He was Senior Vice President and Group General Manager, Planning Research Corporation from 1990 to 1992. He is a director of Avid Medical Systems, Inc. His current term as a director expires in 2000. Dudley C. Mecum II Director since 1988 Mr. Mecum, age 65, is a Managing Director of Capricorn Holdings LLC (private investment company). He was a partner, G. L. Ohrstrom & Co. (investment firm) from 1989 to 1997. He served as Group Vice President and Director, Combustion Engineering, Inc. from 1985 to 1988, and previously as Vice Chairman, Peat, Marwick & Mitchell. He is a director of CCC Information Services Group, Inc.; Citigroup Inc.; Lyondell, Inc.; Suburban Propane Partners LLP; and Travelers Property and Casualty Inc. His current term as a director expires in 2000. David L. Reichardt Director since 1988 Mr. Reichardt, age 57, has served as Senior Vice President and General Counsel of the Company since 1986. He served as President of Dynalectric Company, a former subsidiary of the Company, from 1984 to 1986 and as Vice President and General Counsel of DynCorp from 1977 to 1984. His current term as a director expires in 2001. H. Brian Thompson Director since 1999 Mr. Thompson, age 61, has served as Chairman and Chief Executive Officer of Global TeleSystems Group, Inc. since March 1999. He was Chairman and Chief Executive Officer of LCI International Inc. from 1991 to 1998 and Vice Chairman of Qwest Communications International Inc. from June to December 1998. From 1981 to 1990, he was Executive Vice President, MCI Communications Corporation. He is a director of Bell Canada International Inc. and Williams Communications Group, Inc. and a member of the management committee of Paging Brazil Holding Company, LLC. His current term as a director expires in 2002. Herbert S. Winokur, Jr. Director since 1988 Mr. Winokur, age 56, served as Chairman of the Board from 1988 to 1997. He is Chairman and Chief Executive Officer of Capricorn Holdings, Inc. (private investment company) and Managing General Partner of three Capricorn Investors limited partnerships concentrating on investments in restructure situations. He was formerly Senior Executive Vice President and Director, Penn Central Corporation. He is a director of Azurix Corp.; CCC Information Services Group, Inc.; ENRON Corporation; Mrs. Fields Holdings, Inc.; and The WMF Group, Ltd. His current term as a director expires in 2002. OTHER EXECUTIVE OFFICERS In addition to the executive officers named above, who are also directors, the Company's executive officers include: Robert B. Alleger, Jr., age 54, Vice President, Technical Services, has served in that capacity since 1996 and as President of DynCorp Technical Services, Inc. and President of the Technical Services business unit since January 1999. He served as President of the Aerospace Technology business unit from 1996 through 1998. He was Vice President, Systems Support Services, Lockheed Martin Services, Inc. from 1992 to 1996 and Vice President, Business Development, GE Government Services, General Electric Company from 1989 to 1992. John J. Fitzgerald, age 46, Vice President and Controller, has served in that capacity since 1997. He was Vice President and Controller, PRC, Inc. from 1992 to 1997; Chief Financial Officer and Treasurer of American Safety Razor Company from 1990 to 1992; Vice President and Controller of American Bank Stationery Company from 1988 to 1990; and Chief Financial Officer and Treasurer of Physician's Pharmaceutical Services, Inc. from 1986 to 1988. Patrick C. FitzPatrick, age 60, Senior Vice President and Chief Financial Officer, has served in that capacity since 1997. He also served as Treasurer during 1997. He was Chief Financial Officer, American Mobile Satellite Corporation from 1996 to 1997; Senior Vice President and Chief Financial Officer of PRC, Inc. from 1992 to 1996; and President and Chief Operating Officer, Oxford Real Estate Management Services from 1990 to 1992. Paul T. Graham, age 33, Vice President and Treasurer, has served in that capacity since 1997. He was Finance Manager of the Company from 1992 to 1994, Assistant Treasurer from 1994 to 1997, and Director of Finance from 1995 to 1997. H. Montgomery Hougen, age 64, Vice President and Secretary and Deputy General Counsel, has served as a Vice President since 1994 and as Corporate Secretary and Deputy General Counsel since 1984. Roxane P. Kerr, age 51, Senior Vice President, Human Resources and Administration, has served in that capacity since 1998. She was Director of Human Resources, North America, LucasVerity Plc from 1993 to 1998 and a private human resources consultant from 1992 to 1993. Marshall S. Mandell, age 57, Senior Vice President, Corporate Development, has served in that capacity since 1998. He served as Vice President, Business Development from 1994 to 1998. He also served as Acting President of the Information and Engineering Technology strategic business unit from 1997 to 1998. He served as Vice President, Business Development, Applied Sciences Group from 1992 to 1994. He was Senior Vice President, Eastern Computers, Inc. from 1991 to 1992 and President of the Systems Engineering Group, Ogden/Evaluation Research Corporation from 1984 to 1991. James P. McCoy, age 56, President of DynCorp Information Systems LLC, has served in that capacity and as President of the Information Systems business unit since December 1999. He served as Executive Vice President of the Information & Enterprise Technology business unit from 1998 to December 1999. He was Senior Vice President of the Professional Technical Services business unit of GRC International, Inc. from 1995 to 1997. Ruth Morrel, age 45, Vice President, Law and Compliance, has served in that capacity since 1994. She served as Group General Counsel from 1984 to 1994. Henry H. Philcox, age 59, Vice President and Chief Information Officer, has served in that capacity since 1995. He was Chief Information Officer of the Internal Revenue Service from 1990 to 1995. Charlene A. Wheeless, age 35, Vice President, Corporate Communications, has served in that capacity since February 2000. She served as Director, Corporate Communications from 1996 to 2000 and as Manager, Corporate Communications from 1992 to 1995. She was Director, Employee Communications for PRC, Inc. from 1995 to 1996. Robert G. Wilson, age 58, Vice President and General Auditor, has served in that capacity since 1985. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company believes that all required persons filed all required reports under Section 16 of the Securities Exchange Act in a timely manner. Item 11. Executive Compensation The following table sets forth information regarding annual and long-term compensation for the chief executive officer and the other four most highly compensated executive officers of the Company (the "named executive officers"). The table does not include information for any fiscal year during which a named executive officer did not hold such a position with the Company. SUMMARY COMPENSATION TABLE
Long Term Compensation Annual compensation Awards Other Securities annual underlying All other Name and principal position Salary ($) Bonus compen-sation options/SARs (#) compensation (a) Year (c) ($) (1) ($) (f) ($) (2) (b) (d) (e) (i) Paul V. Lombardi 1999 370,400 78,000 -- 70,000 11,940 President & Chief 1998 342,104 185,300 -- -- 14,283 Executive Officer 1997 332,789 160,000 177 -- 8,307 Patrick C. FitzPatrick 1999 272,170 43,300 -- 30,000 14,840 Senior Vice President & 1998 248,947 129,800 -- -- 10,896 Chief Financial Officer 1997 241,933 90,000 -- 100,000 11,060 Marshall S. Mandell 1999 224,446 36,200 -- 30,000 9,191 Senior Vice President 1998 212,724 87,300 -- 40,000 10,854 Business Development 1997 204,248 73,300 364 -- 10,155 David L. Reichardt 1999 272,170 43,300 -- 30,000 14,191 Senior Vice President & 1998 248,947 204,800 -- -- 16,706 General Counsel 1997 245,082 90,000 244 -- 11,738 Robert B. Alleger, Jr. 1999 227,077 103,500 -- 35,000 13,007 President of the Technical 1998 191,585 88,200 -- 20,000 12,788 Services business unit 1997 184,777 81,000 141 -- 9,252 (1) Column (d) reflects bonuses earned and expensed during year, whether paid during or after such year. Twenty percent of executive incentive plan bonuses is normally paid in the form of shares of Common Stock, valued at then-current market value. (2) Column (i) includes respective individual's pro rata share of the Company's contribution to the Employee Stock Ownership Plan ("ESOP"), Company-matching contributions to the Savings and Retirement Plan ("SARP") and the imputed income, according to IRS tax tables, for Company-paid premiums for supplemental executive retirement plan life and term life insurance. These amounts are:
ESOP contributions ($) SARP contributions ($) Imputed Income ($) Name 1999(1) 1998 1997 1999 1998 1997 1999 1998 1997 Mr. Lombardi 4,320 4,435 4,356 2,886 3,000 2,850 4,735 6,848 1,101 Mr. FitzPatrick 4,320 4,435 4,356 2,500 2,338 1,267 8,020 4,122 5,437 Mr. Mandell 4,320 4,435 4,356 2,143 2,143 2,361 2,728 4,277 3,438 Mr. Reichardt 4,320 4,435 4,356 3,125 3,125 1,269 6,746 9,146 6,112 Mr. Alleger 4,320 4,435 4,356 4,570 2,106 -- 3,937 6,247 4,896 (1) Individual allocations of 1999 ESOP contributions have been estimated.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential realizable value at assumed annual rates of stock price appreciation for option term Individual Grants Number of Percent of total securities options/ SARs underlying granted to Exercise or options/SARs employees in base price Expiration Name granted (#) fiscal year ($/Share) date 5% ($) 10% ($) (a) (b) (c) (d) (e) (f) (g) Mr. Lombardi 70,000 15.2% $24.50 7/15/09 2,793,735 4,448,710 Mr. FitzPatrick 30,000 6.5% $24.50 7/15/09 1,197,315 1,906,590 Mr. Mandell 30,000 6.5% $24.50 7/15/09 1,197,315 1,906,590 Mr. Reichardt 30,000 6.5% $24.50 7/15/09 1,197,315 1,906,590 Mr. Alleger 35,000 7.6% $24.50 7/15/09 1,396,868 2,224,355
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of securities underlying unexercised Value of unexercised options/SARs at fiscal in-the-money options/ SARs year-end (#) at fiscal year-end ($) Shares acquired on exercise(#) Value Exercisable/ Exercisable/ Name (b) realized ($) Unexercisable Unexercisable (a) (c) (d) (e) Mr. Lombardi -- -- 86,000 114,000 599,200 284,800 Mr. FitzPatrick -- -- 40,000 90,000 160,000 240,000 Mr. Mandell -- -- 38,000 74,500 204,000 123,500 Mr. Reichardt -- -- 65,000 65,000 442,000 223,000 Mr. Alleger -- -- 21,800 61,200 100,280 78,520
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company has established a Supplemental Executive Retirement Plan for certain senior executives, including the named executive officers, whereby the individuals (or their beneficiaries) receive payments having an aggregate amount equal to 150% of the sum of their final annual salary rate plus their final target annual bonus, paid over the ten-year period following their normal retirement, disability retirement, and, in some cases, early retirement. Upon their death following such retirement, the individuals' beneficiaries will also receive an additional aggregate lump-sum payment equal to one-half of the foregoing amount. In the event of their death prior to retirement, the individuals' beneficiaries will receive, in lieu of the foregoing payments, an aggregate lump-sum payment equal to 100% of the sum of their final annual salary rate plus their final target annual bonus. The Company funds some of such potential payments through split-dollar life insurance policies. CHANGE-IN-CONTROL AGREEMENTS The Company has entered into change-in-control agreements with the named executive officers (the "Severance Agreements"). Each Severance Agreement provides that certain benefits, including a lump-sum payment, will be triggered if the executive is terminated following a change in control of the Company, unless termination occurs under certain circumstances set forth in the Severance Agreements. A change in control would occur if the Company were to be substantially acquired by a new owner or if a majority of the Board of Directors were replaced. The Severance Agreements currently expire on December 31, 2000 but are subject to annual automatic renewal unless terminated by the Board of Directors. The amount of such lump-sum payment would be 2.99 times the sum of the executive's annual salary and the average incentive compensation for the three prior years. Other benefits include payment of incentive compensation not yet paid for the prior year and a pro rata portion of incentive compensation awards for the current year. Each Severance Agreement also provides a reduction if the proposed payments exceed the amount the Company is entitled to deduct on its federal income tax return. The Severance Agreements also provide that the Company will reimburse the individual for legal fees and expenses incurred by the executive as a result of termination. COMPENSATION OF DIRECTORS Mr. Bannister receives an annual fee of $144,000 to serve as Chairman of the Board and member of various Board committees and to provide other services to the Company. Other non-employee directors of the Company receive an annual retainer fee of $20,000 as directors and $2,750 for each committee on which they serve. The chairmen of the Business Ethics and Compliance, Compensation, and Executive Committees receive an additional annual fee of $2,000, and the chairman of the Audit Committee receives an additional annual fee of $3,000. The Company also pays non-employee directors a meeting fee of $1,000 for attendance at each Board meeting and $500 for attendance at committee meetings. Directors are reimbursed for expenses incurred in connection with attendance at meetings and other Company functions. In 1999, 5,000 stock options, having an exercise price equal to the then-current fair market value, were awarded to Mr. Thompson, pursuant to the Company's 1995 Stock Option Plan. DIRECTORS AND OFFICERS LIABILITY INSURANCE The Company has purchased and paid the premium for insurance in respect of claims against its directors and officers and in respect of losses for which the Company may be required or permitted by law to indemnify such directors and officers. The directors insured are the directors named herein and all directors of the Company's subsidiaries. The officers insured are all officers and assistant officers of the Company and its subsidiaries. There is no allocation or segregation of the premium as regards specific subsidiaries or individual directors and officers. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the Compensation Committee are current or former employees of or have a business or other relationship with the Company. No executive officer of the Company serves on the board of directors or compensation committee of any entity (other than subsidiaries of the Company) whose directors or executive officers served on the Board of Directors or Compensation Committee of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management As of March 15, 2000, the Company had 10,410,958 shares of Common Stock outstanding, which constituted all the outstanding voting securities of the Company. If all shares issuable upon exercise of all vested and unvested options and shares issuable as a result of expiration of deferrals under a former Restricted Stock Plan were to be issued, the outstanding voting securities following such events (the "fully diluted shares") would consist of 11,998,981 shares of Common Stock. The following tables show beneficial ownership of outstanding voting shares as a percentage of currently outstanding stock and beneficial ownership of issued and issuable shares as a percentage of common stock on a fully diluted basis assuming all such exercises and issuances. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table presents information as of March 15, 2000, concerning the only beneficial owners of five percent or more of the outstanding shares of the Company's common stock. Name and address of Amount & nature of Percent of beneficial owner ownership shares DynCorp Employee Stock Ownership Plan Trust 7,451,989 71.6% c/o DynCorp Direct (1) 11710 Plaza America Drive Reston, Virginia 20190 DynCorp Saving and Retirement Plan Trust 763,758 7.3% c/o DynCorp Direct (1) 11710 Plaza America Drive Reston, Virginia 20190 (1) The Trusts hold these shares for the accounts of several thousand participants who are current or former employees of the Company. The Trustees vote the shares in accordance with instructions received from participants. SECURITY OWNERSHIP OF MANAGEMENT The following table presents information as of March 15, 2000 concerning the beneficial ownership of the Company's common stock by directors and named executive officers and all directors and officers as a group. Shares held indirectly include those held on behalf of the individuals in the ESOP and SARP Trusts. Amount & nature of ownership
Name and title of beneficial owner Outstanding Obtainable within Total Percent of shares 60 days (1) shares (2) R. B. Alleger, Jr. 2,239 28,400 30,639 Direct * President of the Technical Services 4,303 4,303 Indirect business unit D. R. Bannister 263,289 132,000 395,289 Direct }3.7% Chairman of the Board & Director 48,290 48,290 Indirect T. E. Blanchard(3) 38,426 64,900 103,326 Direct }1.3% Director 51,828 51,828 Indirect R. E. Dougherty 4,276 0 4,276 Direct * Director P. C. FitzPatrick 2,720 50,000 52,720 Direct * Senior Vice President & Chief 4,257 4,257 Indirect Financial Officer P. G. Kaminski 0 7,500 7,500 Direct * Director P. V. Lombardi 25,334 104,000 129,334 Direct }1.1% President, Chief Executive Officer & Director 7,750 7,750 Indirect M. S. Mandell 5,501 54,000 59,501 Direct * Senior Vice President, Corporate 3,367 3,367 Indirect Development D. C. Mecum II 2,825 2,500 5,325 Direct * Director D. L. Reichardt 28,738 80,000 108,738 Direct 1.0% Senior Vice President, General 6,425 6,425 Indirect Counsel & Director H. B. Thompson 0 0 0 Director H. S. Winokur, Jr. 25,639 0 25,639 Direct }3.6% Director 409,773 409,773 Indirect All directors and officers as a group 439,969 593,800 1,033,769 Direct }13.5% 580,434 580,434 Indirect
[FN] (1) Column reflects shares issuable upon exercise of options, which will be vested as of the end of such period. (2) Reflects aggregate direct and indirect shares as a percentage of fully diluted shares. An asterisk indicates that beneficial ownership is less than one percent of the class. (3) Mr. Blanchard disclaims beneficial ownership of 40,000 shares owned by his spouse. Item 13. Certain Relationships and Related Transctions Mr. Blanchard serves as Chairman of the Administrative Committee for the Company's Employee Stock Ownership Plan and as a trustee of the Employee Stock Ownership Plan Trust. He is compensated at an hourly fee rate and is reimbursed for expenses. Total fees in the amount of $48,000 were paid to Mr. Blanchard in 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: 1. All financial statements. 2. Financial statement Schedules. Schedule II - Valuation and Qualifying Accounts for the Years Ended December 30, 1999 and December 31, 1998 and 1997. All other financial schedules not listed have been omitted since the required information is included in the Consolidated Financial Statements or the notes thereto, or is not applicable or required. 3. Exhibits. Exhibit Description 3.1 Certificate of Incorporation, as currently in effect, consisting of Amended and Restated Certification of Incorporation (incorporated by reference to Registrant's Form 10-K/A for 1995, File No. 1-3879) 3.2 Registrant's By-laws as amended to date (incorporated by reference to Registrant's Form S-1, File No. 1-3879) 4.1 Indenture and supplement, dated April 18, 1997 between Dyn Funding Corporation (a wholly-owned subsidiary of the Registrant) and Bankers Trust Company relating to Contract Receivable Collateralized Notes (incorporated by reference to Registrant's Post-Effective Amendment No. 1 on Form S-2 to Form S-1, File No. 33-59279) 4.2 Indenture, dated March 17, 1997, between the Registrant and United States Trust Company of New York relating to the 9 1/2% Senior Subordinated Notes due 2007 (incorporated by reference to Registrant's Form S-4, File No. 333-2535) 4.3 Specimen Common Stock Certificate (incorporated by reference to Registrant's Form 10-K for 1988, File No. 1-3879) 4.4 Article Fourth of the Amended and Restated Certificate of Incorporation (incorporated by reference to Registrant's Form 10-K for 1992, File No. 1-3879) 4.5 Second Amended and Restated Credit Agreement by and among Citicorp North America, Inc., certain lenders, and the Registrant dated May 15, 1997 (incorporated by reference to Registrant's Form S-4, File No. 333-2535) 4.6 Stockholders Agreement (incorporated by reference to Registrant's Form S-1, File No. 33-59279) 10.1 Deferred Compensation Plan (incorporated by reference to Registrant's Form 10-K for 1987, File No. 1-3879) 10.2 Management Incentive Plan (incorporated by reference to Registrant's Form 10-K for 1997, File No. 1-3879) 10.3 Executive Incentive Plan (incorporated by reference to Registrant's Form 10-K for 1997, File No. 1-3879) 10.4 Severance Agreements (incorporated by reference to Exhibits (c)(4) through (c)(12) to Schedule 14D-9 filed by Registrant January 25, 1998) 10.5 Amendment to Severance Agreement of Paul V. Lombardi, Vice President, Government Services Group and currently President and Chief Executive Officer (incorporated by reference to Registrant's Form 10-K for 1993, File No. 1-3879) 10.6 Amendment to Severance Agreement of Patrick C. FitzPatrick, Senior Vice President and Chief Financial Officer (incorporated by reference to Registrant's Form 10-K for 1996, File No. 1-3879) 10.7 Amendment to Severance Agreement of David L. Reichardt, Senior Vice President and General Counsel (incorporated by reference to Registrant's Form 10-K for 1996, File No. 1-3879) 10.8 Restricted Stock Plan (incorporated by reference to Registrant's Form 10-K/A for 1995, File No. 1-3879) 10.9 1995 Stock Option Plan, as amended (incorporated by reference to Registrant's Form 10-K for 1997, File No. 1-3879) 21 Subsidiaries of the Registrant (filed herewith) 23 Consent of Independent Public Accountants (filed herewith) (b) Reports on Form 8-K Form 8-K was filed on December 27, 1999 for the December 10, 1999 acquisition of 100% of the limited liability company interest of GTE Information Systems LLC from Contel Federal Systems, Inc., a subsidiary of GTE Corporation. Item 7 of the Form 8-K included the Purchase Agreements, Credit Agreement, and Registration Rights Agreement. An amendment to the aforementioned Form 8-K, Form 8-K/A, was filed on February 23, 2000 and included the audited financial statements of Information Systems Division as of December 31, 1998 and 1997, together with auditors' report, the unaudited pro forma combined statements of operation for the nine-month and twelve-month periods ending September 30, 1999 and December 31, 1998, respectively, giving effect to the acquisition, and the notes to the unaudited pro forma combined financial statements. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DYNCORP March 22, 2000 By: /s/ P.V. Lombardi ------------------ P. V. Lombardi President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report is signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ P. V. Lombardi _____________________ President and Director March 22, 2000 P. V. Lombardi (Chief Executive Officer) /s/ P.C. FitzPatrick _____________________ Senior Vice President - March 22, 2000 P. C. FitzPatrick Chief Financial Officer /s/ D.L. Reichardt _____________________ Senior Vice President - March 22, 2000 D. L. Reichardt General Counsel and Director /s/ J.J. Fitzgerald _____________________ Vice President March 22, 2000 J. J. Fitzgerald and Controller (Chief Accounting Officer) /s/ D.R. Bannister _____________________ Director March 22, 2000 D. R. Bannister /s/ T.E. Blanchard _____________________ Director March 22, 2000 T. E. Blanchard /s/ H.S. Winokur, Jr. _____________________ Director March 22, 2000 H. S. Winokur, Jr. /s/ D.C. Mecum II _____________________ Director March 22, 2000 D. C. Mecum II /s/ R.E. Dougherty ____________________ Director March 22, 2000 R. E. Dougherty /s/ P.G. Kaminski ____________________ Director March 22, 2000 P. G. Kaminski /s/ H.B. Thompson ____________________ Director March 22, 2000 H. B. Thompson DynCorp and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the Fiscal Years Ended, 1999, 1998 and 1997 (Dollars in thousands)
Balance at Charged to Write-off of Balance Beginning Costs and Uncollectible at End of Description of Period Expenses Accounts Other Period Year Ended December 30, 1999 Allowance for doubtful accounts $ 1,126 $ 1,434 $(130) $ 726 $3,156 Year Ended December 31, 1998 Allowance for doubtful accounts $ 476 $ 900 $(234) $ (16) $1,126 Year Ended December 31, 1997 Allowance for doubtful accounts $ 229 $ 629 $(382) $ - $ 476
EX-21 2 Exhibit 21 DYNCORP AND SUBSIDIARIES Aerotherm Corporation Anedyn, Inc. Anedyn Power Company AT/Mexico Holdings Inc. Dyn Funding Corporation Dyn Logistics Services Inc. Dyn Marine Services, Inc. Dyn Marine Services of Virginia, Inc. Dyn/Mexico Holdings Inc. Dyn Network Management, Inc. Dyn Pacific Aerospace Services, Inc. Dyn Realty Corporation Dyn Systems Technology, Inc. Dyn Trade Systems, Inc. DynAir Technical Services, Inc. Dynalectron Corporation Dynalectron Systems Inc. DynCIS, Inc. DynComm 2000 LLC DynCorp DynCorp Advanced Repair Technology, Inc. DynCorp Aerospace Operations Inc. DynCorp Aerospace Operations (UK) Ltd. DynCorp Aviation Services, Inc. DynCorp Biotechnology and Health Services, Inc. DynCorp Information & Enterprise Technology, Inc. DynCorp Information Systems LLC DynCorp International Services, GmbH DynCorp International Services, Inc. DynCorp International Services, Ltd. DynCorp of Colorado, Inc. DynCorp Panama, Inc. DynCorp Procurement Systems, Inc. DynCorp Property Management, Inc. DynCorpServices.com, Inc. DynCorp Technical Services, Inc. DynCorp Tri-Cities Services, Inc. DynCorp Viar Inc. DynCorp West Virginia Inc. DynEDRS, Inc. DynEx, Inc. DynMeridian Corporation DynPar LLC DynSpace Corporation DynTel Corporation Electric Utility Construction, Inc. FMAS Corporation Grupo DynCorp de Mexico S.A. de C.V. Kwajalein Services, Inc. OLDHD Systems, Inc. Pacific TSD Corporation Sea Mobility Inc. TAI Realty Corporation EX-23 3 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated March 21, 2000, included in this Form 10-K, into the Company's previously filed Amendment No. 3 to Form S-4 Registration Statement No. 333-25355 and post-effective Amendment No. 4 on Form S-2 to Form S-1 Registration Statement No. 33-59279. ARTHUR ANDERSEN LLP Vienna, VA March 29, 2000 EX-27 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K. 1000 12-MOS DEC-30-1999 DEC-30-1999 5,657 0 360,567 3,156 0 398,208 62,378 21,583 639,673 233,021 0 0 0 491 15,499 639,673 1,345,281 1,345,281 0 1,280,239 0 0 18,943 15,207 4,649 7,590 0 1,601 0 5,895 0.59 0.57
EX-3 5 Exhibit 3.2 DYNCORP BY-LAWS (As amended through 12/10/1999) ARTICLE I Office Section 1. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware, and the name of the resident agent is The Company Corporation. Section 2. The Corporation may also have offices in the Reston area of Fairfax County, Commonwealth of Virginia, and at such other places either within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II Stockholders' Meetings Section 1. All meetings of the stockholders for the election of directors shall be held at the office of the Corporation in the Reston area of Fairfax County, Virginia, or at such other place either within or without the State of Delaware as may be fixed from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such place and time as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. An annual meeting of stockholders shall be held on the second Monday of May in each year if not on a legal holiday, and if a legal holiday then on the next secular day following, at 1:30 p.m. or at such other date and/or time as shall be designated by the Board of Directors and stated in the notice of meeting, at which they shall elect directors by a plurality vote and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting or any special meeting shall be served upon or mailed to each stockholder entitled to vote thereat at such address as appears on the books of the Corporation, except as provided by the statutes or these By-Laws, at least ten days prior to the meeting. Section 4. At least ten days before every election of directors, a complete list of stockholders entitled to vote at said election, arranged in alphabetical order, with the address of each and the number of voting shares held by each, shall be prepared by the Secretary. Such list shall be open at the place where the election is to be held, during ordinary business hours, for said ten days, to the examination of any stockholder for any purpose germane to the meeting, and shall be produced and kept at the time and place of election during the whole time thereof and subject to the inspection of any stockholder who may be present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board or the President and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Business transacted at all special meetings shall be confined to the objects stated in the notice. Section 7. The holders of at least one-third of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute, the Certificate of Incorporation, or these By-Laws. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 8. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy and voting thereon shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or the Certificate of Incorporation, or these By-Laws, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 9. At any meeting of the stockholders, every stockholder having the right to vote thereat shall be entitled to vote in person or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period. Each stockholder shall have one vote for each share of stock having voting power, registered in his name on the books of the Corporation, and except where the transfer books of the Corporation shall have been closed or a date shall have been fixed as a record date for the determination of its stockholders entitled to vote, no share of stock shall be voted on at any election of directors which shall have been transferred on the books of the Corporation within twenty days next preceding such election of directors. At the elections of directors of the Corporation, each stockholder having voting power shall be entitled to exercise the right of cumulative voting, if any, as provided in the Certificate of Incorporation. Section 10. Unless otherwise provided by the statutes or the Certificate of Incorporation, whenever the vote of stockholders is required or permitted to be taken in connection with any corporate action, the meeting and vote of stockholders may be dispensed with, if the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action if such meeting and vote were held shall consent in writing to such corporate action being taken. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III Directors Section 1. Subject to the provision of the Certificate of Incorporation, the number of directors of the Corporation shall not be less than nine (9), nor more than twelve (12), the exact number of directors to be determined from time to time by resolution of a majority of the whole Board of Directors, and such exact number shall be nine (9) until otherwise determined by resolution adopted by affirmative vote of a majority of the whole Board of Directors. As used in these By-Laws, the term "whole Board" means the total number of directors which the Corporation would have if there were no vacancies. The Board of Directors shall be divided into three classes, as nearly equal in number as the then-total number of directors constituting the whole Board permits, with the term of office of one class expiring each year. The initial term of directors of the first class shall expire at the next succeeding annual meeting, the initial term of directors of the second class shall expire at the second succeeding annual meeting, and the initial term of directors of the third class shall expire at the third succeeding annual meeting. Thereafter at the conclusion of each term, each class of nominated directors shall stand for election for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office; provided further that the policy regarding mandatory retirement of directors shall be as established by a majority of the whole Board of Directors, and any incumbent director reaching any mandatory retirement age last established prior to his most recent election to the Board of Directors shall be eligible to serve only through the date he attains such mandatory retirement age (regardless of the remaining term of such incumbent director's class). Section 2. Any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the whole Board of Directors, and any other vacancy occurring in the Board of Directors may be refilled by a majority of the whole Board of Directors, although less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. Section 3. The property, business, and affairs of the Corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute, the Certificate of Incorporation, or these By-Laws directed or required to be exercised or done by the stockholders. Committees of Directors Section 4. The Board of Directors at its first meeting after each annual meeting of the stockholders shall designate three or more of its members, to include the Chairman of the Board and the Chief Executive Officer, if the Chief Executive Officer is a member of the Board of Directors, who shall constitute the Executive Committee of the Board of Directors. The Executive Committee shall have and may exercise all of the powers of the Board of Directors as may be lawfully delegated in the management of the business and affairs of the Corporation and shall have the power to authorize the seal of the Corporation to be affixed to all papers which may require it. The Board of Directors may designate one or more of its members as alternate members of the Executive Committee, who may replace any absent or disqualified member at any meeting of the Executive Committee. In the absence or disqualification of a member of the Executive Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member; provided however, that in no event shall the Executive Committee have the authority to consider or act upon matters concerning United States Government security. Section 5. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate one or more additional committees consisting of two or more of the directors of the Corporation. Such additional committee or committees shall have and may exercise such powers and shall have such names as are provided in said resolution or resolutions. Section 6. The committees shall keep regular minutes of their proceedings and report the same to the Board when required. Advisory Directors Section 7. The Board of Directors may appoint advisory directors whose experience and knowledge would be useful to the Board, said advisory directors to be former members of the Board or current stockholders. Such advisory directors shall be no more than four in number and shall serve at the pleasure of the Board, with terms expiring as of each annual meeting of stockholders. Advisory directors shall be given notice of and may attend meetings of the Board of Directors but shall not be considered members of the Board of Directors. Advisory directors shall have no right to vote and shall not be counted in determining whether a quorum is present at any meeting. Advisory directors shall not be charged with responsibilities, nor shall they be subject to the liabilities of directors. An advisory director may be appointed as an advisory member of any committee of the Board. Compensation of Directors and Advisory Directors Section 8. Directors or advisory directors, as such, shall not receive any stated salary for their services but, by resolution of the Board, may be allowed an annual retainer fee and/or a fixed sum for attendance at each regular or special meeting of the Board, together with any expenses of attendance; provided that nothing herein contained shall be construed to preclude any director or advisory director from serving the Corporation in any other capacity and receiving compensation therefor. Section 9. Members of special or standing committees may, by resolution of the Board, be allowed an annual retainer fee and/or a fixed sum for attending committee meetings, together with any expenses of attendance. Meetings of the Board Section 10. The first meeting of the Board after each annual meeting of stockholders shall be held at such time and place either within or without the State of Delaware as shall be fixed by the vote of the stockholders at the annual meeting or by the Board of Directors prior to the annual meeting, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present, or they may meet at such place and time as shall be fixed by the consent in writing of all the directors. Section 11. Regular meetings of the Board may be held without notice at such time and place either within or without the State of Delaware as shall from time to time be determined by the Board. Section 12. Special meetings of the Board may be called by the Chairman of the Board or by the President on one day's notice to each director, either personally or by mail or by telegram; special meetings shall be called by the Chairman of the Board or the President or the Secretary in like manner and on like notice on the written request of two directors. Section 13. At all meetings of the Board, the presence of four directors, or, if fewer, a majority of the whole Board, shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as otherwise specifically provided by statute, the Certificate of Incorporation, or these By-Laws. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 14. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 15. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors, or any committee, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meetings. ARTICLE IV Reimbursement and Indemnification of Officers, Directors, and Advisory Directors Section 1. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative, or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was or has agreed to become a director, advisory director, officer, employee, or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, advisory director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit, or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 2. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was or has agreed to become a director, advisory director, officer, employee, or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, advisory director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, and expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection with the defense or settlement of such action or suit and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such costs, charges, and expenses which the Court of Chancery or such other court shall deem proper. Section 3. Notwithstanding the other provisions of these By-Laws, to the extent that a director, advisory director, officer, employee, or agent of the Corporation has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit, or proceeding referred to in this Article IV or in defense of any claim, issue, or matter therein, he shall be indemnified against all costs, charges, and expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection therewith. Section 4. Any indemnification under these By-Laws (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the director, advisory director, officer, employee, or agent is not proper in the circumstances, because he has not met the applicable standard of conduct set forth in these By-Laws. Such determination may be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 5. Costs, charges, and expenses (including attorneys' fees) incurred by a person referred to in this Article IV in defending a civil or criminal action, suit, or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding; provided, however, that the payment of such costs, charges, and expenses incurred by a director, advisory director, or officer in his capacity as a director, advisory director, or officer (and not in any other capacity in which service was or is rendered while a director, advisory director, or officer) in advance of the final disposition of such action, suit, or proceeding shall be made only upon receipt of an undertaking by or on behalf of the director, advisory director, or officer to repay all amounts so advanced in the event that it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article IV. Such costs, charges, and expenses incurred by other employees and agents maybe so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The Board of Directors may, in the manner set forth above, and upon approval of such director, advisory director, officer, employee, or agent of the Corporation, authorize the Corporation's counsel to represent such person in any action, suit, or proceeding, whether or not the Corporation is a party to such action, suit, or proceeding. Section 6. Any indemnification or advance of costs, charges, and expenses under these By-Laws shall be made promptly, and in any event within 60 days, upon the written request of the director, advisory director, officer, employee, or agent. The right to indemnification or advances as granted by these By-Laws shall be enforceable by the director, advisory director, officer, employee, or agent in any court of competent jurisdiction, if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such person's costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges, and expenses under Section 5 of this Article IV where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in these By-Laws, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that the indemnification of the claimant is proper in the circumstances, because he has met the applicable standard of conduct set forth in these By-Laws, or the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 7. The rights of indemnity provided in these By-Laws shall not be deemed exclusive, and the Corporation may, by contract, the Certificate of Incorporation, vote of stockholders or disinterested directors, or otherwise, further indemnify directors, advisory directors, officers, employees, or agents of the Corporation to the full extent permitted under the laws of the State of Delaware or any other applicable laws, now or hereafter in effect, both as to matters in such person's official capacity and as to action in another capacity while holding such office, and the provisions of these By-Laws shall inure to the benefit of a person who has ceased to be a director, advisory director, officer, employee, or agent and to the benefit of the heirs, executors, and administrators of such a person. All rights to indemnification under these By-Laws shall be deemed to be a contract between the Corporation and each director, advisory director, officer, employee, or agent of the Corporation who serves or served in such capacity at any time while these By-Laws are in effect. Any repeal or modification of these By-Laws or any repeal or modification of relevant provisions of the Delaware General Corporation Law or any other applicable laws shall not in any way diminish any rights to indemnification of such director, advisory director, officer, employee, or agent or the obligations of the Corporation arising hereunder. Section 8. The foregoing rights shall be available in respect of any claim, action, suit, or proceeding whether or not based upon matters which antedate the adoption or amendment of these By-Laws. Section 9. If this Article IV or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director, advisory director, officer, employee, and agent of the Corporation as to costs, charges, expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of these By-Laws that shall not have been so invalidated and to the full extent permitted by applicable law. ARTICLE V Notices Section 1. Whenever, under the provisions of the statutes, the Certificate of Incorporation, or these By-Laws, notice is required to be given to any director or stockholder, it shall not be construed solely to mean personal notice, but such notice may be given in writing, by mail, by depositing the same in a post office or letter box, in a post-paid sealed wrapper, addressed to such director or stockholder at such address as appears on the books of the Corporation and such notice shall be deemed to be given at the time when the same shall be thus mailed. Section 2. Whenever any notice is required to be given under the provisions of the statutes, the Certificate of Incorporation, or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VI Officers Section 1. The officers of the Corporation shall be chosen by the Directors and shall include a Chairman of the Board, a President, a Vice President, a Secretary, a Treasurer and a General Auditor. The Board of Directors may also choose one or more Executive Vice Presidents, one or more Senior Vice Presidents, and additional Vice Presidents, and the Board of Directors or the Chief Executive Officer may also choose one or more Assistant Vice Presidents, Assistant Secretaries, and Assistant Treasurers. Two or more offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. Section 2. The Board of Directors at its first meeting after each annual meeting of the stockholders shall choose a Chairman of the Board from its members, and a President, one or more Vice Presidents, a Secretary, and a Treasurer, none of whom need be a member of the Board. Section 3. The Board may appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4. The salaries of all officers, other than assistant officers, of the Corporation shall be fixed by the Board of Directors. Section 5. The officers of the Corporation shall hold office until their successors are chosen and qualify in their stead. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the whole Board of Directors. If any office becomes vacant for any reason, the vacancy may be filled as provided above. The Chairman of the Board Section 6. The Chairman of the Board shall preside at all meetings of the stockholders, Board of Directors, and Executive Committee and shall be ex-officio a member of all of the standing committees, excepting, however, such Audit Committee or Committees as may be established by the Board of Directors from time to time. He shall see that all votes and resolutions of the Board are carried into effect. He shall also perform such other duties as may from time to time be assigned to him by the Board of Directors or the Executive Committee. The President and Chief Executive Officer Section 7. The President shall be the Chief Executive Officer of the Corporation. He shall report to the Board of Directors and shall have active and general charge and control of all affairs of the Corporation. He may execute bonds, mortgages, and other contracts requiring a seal, under the seal of the Corporation, except where required by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. He shall also perform such other duties as the Executive Committee or the Board of Directors shall prescribe. Vice Presidents Section 8. The Executive Vice President shall, subject to the direction of the President, be responsible for the operations of the Corporation. He shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties as the President, the Executive Committee, or the Board of Directors may prescribe. Section 9. The Senior Vice Presidents shall perform such duties as the President, the Executive Committee, the Board of Directors, or the Executive Vice President to whom they may report shall prescribe. Section 10. The Vice Presidents shall perform such duties as the President, the Executive Committee, the Board of Directors, or the Executive Vice President or any Senior Vice President to whom they may report directly or indirectly may prescribe. The Secretary and Assistant Secretaries Section 11. The Secretary shall attend all sessions of the Board and all meetings of the stockholders and record all votes and the minutes of proceedings in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and in his capacity as Secretary shall perform such other duties as may be prescribed by the Board of Directors, the Executive Committee, the Chairman of the Board, or the President. He shall keep in a safe custody the seal of the Corporation and, when authorized by the Board, affix the same to any instrument requiring it, and, when so affixed, it shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary or an Assistant Treasurer or such other officer who may be so authorized by the Board of Directors. Section 12. The Assistant Secretaries in the order designated from time to time by the Secretary shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Directors shall prescribe. The Treasurer and Assistant Treasurers Section 13. The Treasurer shall have the custody of the corporate funds and securities and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Executive Committee or the Board of Directors. Section 14. He shall disburse the funds of the Corporation as may be ordered by the Executive Committee or the Board, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at the regular meetings of the Board or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. Section 15. If required by the Board of Directors, he shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the Corporation in case of his death, resignation, retirement, or removal from office, of all books, papers, vouchers, money, and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 16. The Assistant Treasurers in the order of their seniority shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as the Executive Committee or the Board of Directors shall prescribe. General Auditor Section 17. The General Auditor shall, subject to guidance from the Audit Committee of the Board of Directors, organize and maintain an effective audit program for the Corporation, including coordination of the internal audit activities of the Corporation with those of the independent public accountants who are called upon to certify the Corporation's annual financial statements. The scope of the audit shall encompass all of the managerial, administrative, financial, and operational functions of the Corporation. ARTICLE VI Certificates of Stock Section 1. The certificates of stock of the Corporation shall be numbered and shall be entered in the books of the Corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the Chairman of the Board or the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issuance. Any of or all the signatures on the certificate may be a facsimile. Transfer of Stock Section 2. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to, or to cause such transaction to be electronically recorded in the name of, the person entitled thereto, cancel the old certificate, and record the transaction upon its books. Closing of Transfer Books Section 3. The Board of Directors shall have the power to close the stock transfer books of the Corporation for a period not exceeding sixty days preceding the date of any meeting of stockholders or the date for payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect or for a period not exceeding sixty days in connection with obtaining the consent of stockholders for any purpose; provided, however, that in lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not exceeding sixty days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect or a date in connection with obtaining such consent, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting, and any adjournment thereof, or entitled to receive payment of any such dividend, or any such allotment or rights, or to exercise the rights in respect of any such change, conversion, or exchange of capital stock or to give such consent, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. Registered Stockholders Section 4. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. Lost Certificate Section 5. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Right of First Refusal Section 6. As to any share of Common Stock issued on or after May 11, 1995, such share may not be sold or transferred by the holder thereof to any third party, other than (1) by descent or distribution, (2) by bona fide gift, or (3) by bona fide sale after the holder thereof has first offered in writing to sell the share to the corporation at the same price and under substantially the same terms as apply to the intended sale and the corporation has failed or declined in writing to accept such terms within 14 days of receipt of such written offer by the Secretary of the corporation or has refused to proceed to a closing on the transaction within a reasonable time after such acceptance; provided, however, that the sale to the third party following such failure, declination, or refusal must be made on the same terms which were not previously accepted by the corporation and within 60 days following such event, or the corporation must again be offered such refusal rights prior to a sale of such share; provided further, however, that this Section shall not apply to (A) any transactions made at current market price through the corporation's internal stock market; (B) any transactions made at any time while the Common Stock is listed for trading on a national securities exchange or on the over-the-counter market; (C) sales to the corporation's Employee Stock Ownership Plan; or (D) shares which have been reissued to the holder in exchange for shares issued prior to May 11, 1995 to the extent such previously issued shares were not subject to any right of first refusal by the corporation or its shareholders; provided, however, that this right of first refusal shall not apply to 426,217 shares of Common Stock issued pursuant to the Purchase Agreement, dated December 10, 1999, among this Corporation, as Issuer, and certain named Purchasers, relating to $40,000,000 aggregate principal amount of 15% Senior Subordinated Notes due 2007. ARTICLE VII General Provisions Dividends Section 1. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors, from time to time in its absolute discretion, thinks proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board shall think conducive to the interest of the Corporation, and the Board may modify or abolish any such reserve in the manner in which it was created. Directors' Annual Statement Section 3. The Board of Directors shall present at each annual meeting, and when called for by vote of the stockholders at any special meeting of the stockholders, a full and clear statement of the business and condition of the Corporation. Checks Section 4. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Fiscal Year Section 5. The fiscal year shall be the 52- or 53-week period ending on the last Thursday in December, effective from and after the 52-week period ending December 30, 1999. Seal Section 6. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization, and the words "Corporate Seal, Delaware", and said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII Amendments Section 1. These By-Laws may be altered, amended, or repealed at any regular meeting of the stockholders or at any special meeting of the stockholders at which a quorum is present or represented, provided notice of the proposed alteration, amendment, or repeal be contained in the notice of such special meeting, by the affirmative vote of a majority of the stock entitled to vote at such meeting and present or represented thereat, or by the affirmative vote of a majority of the Board of Directors at any regular meeting of the Board or at any special meeting of the Board if notice of the proposed alteration or repeal be contained in the notice of such special meeting. EX-10.3 6 Exhibit 10.3 DynCorp Executive Incentive Plan Amended and Restated as of DynCorp Fiscal Year 1999 I. PURPOSE The purpose of the Executive Incentive Plan (the Plan) is to reward and motivate executives who have significant impact on the Company strategy, performance and profitability for the achievement of pre-established, measurable objectives which directly impact the financial performance of the DynCorp and increase shareholder value. II. GENERAL DESCRIPTION At the beginning of the Plan Year, DynCorp and organizational financial objectives, individual objectives and target incentive award levels will be established and confirmed in writing for each Plan participant. At the conclusion of the Plan Year, the achievement of the specified financial objectives and individual objectives will be scored and weighted for each participant according to established formulae to determine the actual incentive amount to be awarded. III. ELIGIBILITY All executives in Salary Bands 1 through 3 who have been in their positions a minimum of six months during the Plan Year are participants in the Plan. Inclusion of individuals with less than six months must be approved as an exception to the Plan. With the exception of disability, retirement or death, participants must be employed (on the active payroll) on the date an award is paid in order to receive an incentive award. However, at its sole discretion, the Compensation Committee may approve an award to a former employee, or to the former employee's estate, in such amount as is deemed appropriate. Participation in the Plan precludes eligibility for participation in any other annual cash incentive plan(s) provided by the Company. IV. RESPONSIBILITIES A. The Senior Vice President, Human Resources and Administration, is responsible for administering the Plan. B. As appropriate, Band 2 executives are responsible for confirming Plan participants, recommending individual target award levels, SBA and SBU financial performance objectives, and individual performance objectives, submitting financial results at the end of the Plan Year for SBA, SBU, and other financial metrics approved at the beginning of the Plan Year, and evaluating participant individual performance. C. The DynCorp Chief Financial Officer (CFO) is responsible for reviewing SBA and SBU financial performance objectives recommended by the Presidents and informing the CEO of his concurrence with the recommended measurements or proposing alternative financial measurements more applicable to specific SBA's or SBU's and for concurring with the calculations of actual financial performance used to determine actual award amounts. D. The Chief Executive Officer (CEO) is responsible for reviewing, modifying and subsequently recommending individual target award levels and financial and individual participant objectives, DynCorp financial objectives, deviations from the Plan and actual incentive payments. E. The Compensation Committee of the Board of Directors (the Committee) is responsible for amending the Plan, approving individual target award levels, financial objectives, DynCorp financial objectives, deviations from the Plan and actual incentive payments. V. DEFINITIONS A. Award Pool The dollar amount available for payment of Executive Incentive awards. B. Base Salary The base annual salary rate of a participant as of April 1 of the Plan Year or, if later, the time the individual is approved as a participant for a given year, exclusive of overtime, per diem, bonuses or any other premiums, special payments or allowances. C. Days Sales Outstanding (DSO) Days Sales Outstanding as defined in DynCorp Finance Policy Statement PS505, as in effect at the beginning of the fiscal year during which performance is measured for Plan purposes. D. EBIDTA Earnings of DynCorp before deductions for interest, taxes, depreciation, amortization, discontinued operations and merger/acquisition costs, as recorded on the books and records of the Corporation. E. Earnings per Share (EPS) Diluted Earnings Per Share, per GAAP, assuming the treasury stock method, calculated by dividing the income available to common shareholders for the fiscal year by the fully diluted shares outstanding at the end of the fiscal year. F. Operating Profit Earnings of the applicable organizational unit (i.e. SBA, SBU, Business, division, subsidiary, or group, etc.) after ESOP and after all accruals, but before the Corporate G&A Expense, Interest and Dividend Income, Interest Expense, Net Asset Allocation and Taxes on Income. G. Plan Year The fiscal year of DynCorp. H. Revenue Revenue as recorded in accordance with DynCorp Finance Policy Statement PS510, as in effect at the beginning of the fiscal year during which performance is measured for Plan purposes and as reported in the Company's consolidating financial statements after audit adjustments, if any. I. Return on Net Assets (RONA) Return on Net Assets as defined in accordance with DynCorp Finance Policy Statement PS505, as in effect at the beginning of the fiscal year during which performance is measured for Plan purposes. J. Strategic Business Area (SBA) A group of DynCorp organizational units responsible to a presiding officer who reports directly to the CEO of DynCorp or a DynCorp Senior Vice President. K. Strategic Business Unit (SBU) One or more DynCorp organizational units (excluding joint ventures) responsible to an officer or manager who reports directly to the presiding officer of an SBA. L. Target Award The dollar amount that a participant is eligible to receive if the combined weighted performance against DynCorp, organizational unit and individual objectives equals an overall achievement level of exactly 100%. M. Target Percentage The percentage of Base Salary which is payable to a participant if combined weighted performance against DynCorp, organizational unit and individual objectives equals an overall achievement level of exactly 100%. N. Threshold The level of performance required before an award is paid. For Plan purposes the threshold performance level is 75% of objectives. The threshold is applied at three levels. o If performance against any single objective is less than 75%, then the portion of the award based on performance against that objective is not paid. o If combined weighted performance against the applicable financial objective(s) is less than 75% in the aggregate, then no award is paid. o If combined weighted performance against both financial and individual objectives is less than 75% in the aggregate, then no award is paid. VI. FUNDING At the beginning of the Plan Year executive management establishes, subject to approval by the Committee, the amount of the total bonus award pool which includes the payment of Executive Incentive Plan awards for that year. This amount represents the maximum amount that can be paid to bonus participants unless Plan financial performance exceeds Plan financial objectives. The definition of Plan financial objectives is those organizational financial metrics approved by the CEO or Compensation Committee at the beginning of the Plan Year. The Award Pool will be accrued ratably on a monthly basis during the Plan Year. The accrual amount will be reviewed quarterly and adjusted as necessary to reflect the most recent projections of actual financial performance versus budgeted performance and additions to, deletions from or other changes in Plan participation. VII. AWARDS Target Awards ranging from 30% to 70% (in 5% increments) of Base Salary will be established for each participant at the beginning of each Plan Year. These targets will be divided into financial and individual performance components and weighted as shown below in Table 1. TABLE 1 Weighting of Performance Measurement Components DynCorp SBA SBU Financial Financial Financial Individual Description Performance Performance Performance Performance Corporate Participants 80% 20% SBA Participants 20% 60% 20% SBU Participants 20% 60% 20% Target award recommendations will be submitted for review and approval in accordance with procedures established by the Senior Vice President, Human Resources and Administration, to achieve the approvals described in Section IV of the Plan. At the end of the Plan Year, performance against pre-established financial and individual objectives, as described in Section VIII, will be calculated to develop financial and individual performance factors. These factors will reflect the level, expressed as a percentage, of attainment of each objective. These performance factors will be multiplied by the appropriate weighting for each objective. The results of these calculations then will be added to determine the percentage of the Target Award payable to each participant. Payment of the calculated award is subject to performance exceeding Threshold performance as described in Section V. (Exhibit I of the Plan shows detailed examples of award calculations.) A bonus due to a participant hired after the beginning of the Plan Year will be prorated based upon the number of months employed by the Company as a percentage of the full year. With the exception of disability, retirement or death, participants must be employed (on the active payroll) on the date the awards are paid in order to receive an incentive award. However, at its sole discretion, the Compensation Committee may approve an award to a former employee, or to the former employee's estate, in such amount as deemed appropriate. VIII. PERFORMANCE MEASUREMENT COMPONENTS In order to reinforce the importance of DynCorp executives achieving a balanced performance against financial and non-financial criteria, incentive awards under the Plan will be based on team and individual achievements in two or more of the following three areas: A. The Financial Performance of DynCorp: DynCorp's financial success is the key determinant of its ongoing viability as an independent business entity. In recognition of this, a portion of each Corporate and SBA level participant's award will be based on DynCorp's performance against its financial objective. This objective, which will be recommended by the CEO, and approved by the Committee at the beginning of each Plan Year, may be comprised of one or more financial measurements. The measurement may be changed each Plan Year to properly reflect DynCorp's strategic objectives. Further, the financial objective will be established at a level that will require above average performance from the management team to achieve it. B. The Financial Performance of the Organizational Unit: For non-Corporate participants, the financial performance of the SBA or SBU in which they have the most direct control and accountability, will be given the heaviest weighting in order to motivate and reward participants for financial. Financial objectives established for each SBA and SBU will be measurable and consistent with the overall strategic goals of the SBA. SBA and SBU financial objectives generally will be expressed in terms of RONA, Revenue, Operating Profit and/or DSO. Moreover, as with the DynCorp financial objective, they will be established at a level that will require above average performance from the management team to achieve them. C. The Individual Performance of the Participant: Individual performance will be measured in terms of performance against pre-established objectives and the participant's manager's subjective judgment of overall individual performance. Performance against objectives must comprise at least 50% of the individual performance factor. Individual objectives should be established according to the following guidelines: 1. Each participant will have 4-6 written objectives that have been jointly agreed to by the participant and the participant's supervisor. 2. Objectives will evolve from, respond to and/or reflect the Company objectives established and communicated by the CEO. Objectives covering the following areas may typically be included: o Key operational objectives o Human resources management o Quality and process improvement o Business development o Customer satisfaction 3. Objectives will be both quantitative and qualitative in nature and will include non-financial as well as appropriate financial related goals. 4. Objectives will be highly measurable and within the control of the participant. X. AWARD DETERMINATION Awards will be calculated by: 1) multiplying the appropriate Financial and Individual Performance Factors by the weighting assigned to corresponding performance components as determined in Table 1 above, 2) adding the resulting percentages together to determine a composite percentage that represents overall achievement against expectations, and 3) then multiplying the target award amount by the composite percentage. The award payable for any single component for any participant may range from 0 to 150% of the established target amount for the component. Actual award amounts will be rounded to the nearest $100.00. If the performance achievement level on any of the approved financial performance factors falls below the Threshold level, the participant will not generally receive an award for that component. However, the CEO may on a discretionary basis recommend the payment of an award where unusual or extraordinary circumstances contributed to the below Threshold performance. If the combined weighted achievement level for all applicable financial performance measurements is less than the Threshold level, the award for the individual performance component shall also be at the discretion of the CEO and the Committee. Should a participant transfer to another organization during the Plan Year, the final award will be jointly determined and prorated for the time spent in each organization. All incentive awards proposed under the Plan are subject to the approval of the CEO and the Committee, who may at their discretion adjust the amounts to be awarded in order to reflect exceptional performance, performance that falls below objectives or other performance factors that affect or potentially affect the ability of the Company or any of its units to meet its business and financial goals. XI. YEAR-END ADMINISTRATION Initial actual award recommendations will be calculated at the SBA and Corporate levels and submitted in accordance with procedures established by the Senior Vice President, Human Resources and Administration, for Company level consolidation and submission to the CEO. Documentation of objectives, accomplishments and individual evaluations will be required to be submitted along with the individual award recommendations. Financial performance will be reviewed by the CFO as soon as the results for the Plan Year are available. Initial actual award recommendations will be adjusted as necessary based on this review to reflect the actual financial performance. The adjusted recommendations will be submitted by the CEO to the Committee for approval. Effective with the Plan Year beginning 1996 and thereafter, a portion of each award payable will be paid in the form of DynCorp Common Stock. Twenty percent of the total award will be paid in the aggregate in the form of stock and withholding taxes and Savings and Retirement Plan (SARP) deferrals due thereon. The remaining 80% of the award, net of any reductions by reason of the Key Executives Share-Option Compensation Plan, will be paid in the aggregate in cash, withholding taxes and SARP deferrals. Bonus award payments are made following approval by the Compensation Committee at its annual spring meeting. Nothing in the Plan or in any action taken hereunder shall constitute any contract of employment or affect the Company's right to terminate at any time and for any reason the employment of any employee who is a participant in the Plan. 2 Exhibit I Sample Award Calculations The following examples illustrate how the Plan formula will be applied to calculate the incentive award for a Corporate Staff executive and for a Strategic Business Unit line executive. A. Sample Award Calculation: Corporate Staff executive Target formula: 0.80 DynCorp Financial Performance + 0.20 Individual Performance = 1.00 ASSUMPTIONS: Base Salary $108,000 Target Award Percentage 30% Target Award $ 32,400 Company Financial Performance Factor 80% (actual EPS $1.60 / EPS Objective $2.00) Individual Performance Factor 90% Award Calculation Performance % of Component Component Factor Weighting Target % Payable Company Financial 80% X 80% = 64% + Performance Individual Performance 90% X 20% = 18% = Percent of Total Target Award Payable = 82% Actual Award Amount = 82% of $32,400 = $26,568 (Round to $26,600) B. Sample Award Calculation: Strategic Business Unit Manager. Target formula: .20 SBA RONA Performance + .30 SBU RONA Performance + .30 SBU Revenue Performance + 0.20 Individual Performance = 1.0 ASSUMPTIONS: Base Salary $ 108,000 Target Award Percentage 30% Target Award $ 32,400 SBA Financial Performance Factor 80% SBU RONA Performance Factor 100% SBU Revenue Factor 110% Individual Performance Factor 75% Award Calculation Performance % of Component Component Factor Weighting Target % Payable SBA Financial Performance 80% X 20% = 16% + SBU RONA Performance 100% X 30% = 30% + SBU Revenue Performance 110% X 30% = 33% + Individual Performance 75% X 20% = 15% = Percent of Total Target Award Payable = 94% Actual Award Amount = 94% of $32,400 = $30,456 (Round to $32,500) EX-10.10 7 Exhibit 10.1 DynCorp 1999 LONG-TERM INCENTIVE STOCK PLAN (Adopted March 3, 1999) 1. PURPOSE. The purposes of the DynCorp 1999 Long-Term Incentive Stock Plan (the "Plan") are to advance the interests of the Company and its shareholders by strengthening the ability of the Company to attract, retain, and reward highly qualified directors, officers, and other employees, to motivate them to achieve business objectives established to promote the long-term growth, profitability, and success of the Company, and to encourage their ownership of the Common Stock of the Company. The Plan authorizes performance-based stock and cash incentive compensation in the form of stock options, stock appreciation rights, restricted stock, performance grants and awards, and other stock-based grants and awards. 2. DEFINITIONS. For the purposes of the Plan, the following terms shall have the following meanings: (a) "Adjusted Net Income" means, with respect to any calendar or other fiscal year of the Company, the amount reported as "Net Income" in the audited Consolidated Income Statement of the Company and Subsidiaries for such year (as set forth in the Company's Annual Report to Shareholders for such year), adjusted to exclude any of the following items: (i) extraordinary items (as described in Accounting Principles Board Opinion No. 30); (ii) gains or losses on the disposition of discontinued operations; (iii) the cumulative effects of changes in accounting principles; (iv) the writedown of any asset; and (v) charges for restructuring and rationalization programs. (b) "Annual Net Income Per Share" means, with respect to any calendar or other fiscal year of the Company in respect of which a determination thereof is being or to be made, the Adjusted Net Income for such year divided by the average number of shares of Common Stock outstanding during such year. (c) "Award" means any payment or settlement in respect of a grant made pursuant to the Plan, whether in the form of shares of Common Stock or in cash, or in any combination thereof. (d) "Board of Directors" means the Board of Directors of the Company. (e) "Change in Control" means any of the following: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of DynCorp or its subsidiaries, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of DynCorp representing more than 35% of the combined voting power of DynCorp's then-outstanding securities; or (ii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with DynCorp to effect a transaction described in clause (iii) of this definition) whose election by the Board or nomination for election by DynCorp's Shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) the shareholders of DynCorp approve a merger or consolidation of DynCorp with any other corporation, other than a merger or consolidation which would result in the voting securities of DynCorp outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of DynCorp approve a plan of complete liquidation of DynCorp or an agreement for the sale or disposition by DynCorp of all or substantially all DynCorp's assets. (f) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor statute thereto, together with the published rulings, regulations and interpretations duly promulgated thereunder. (g) "Committee" means the Compensation Committee of the Board of Directors established and constituted as provided in Section 5 of the Plan. (h) "Common Stock" means the common stock, par value $0.10 per share, of the Company, or any security issued by the Company in substitution or exchange therefor or in lieu thereof. (i) "Common Stock Equivalent" means a Unit (or fraction thereof, if authorized by the Committee) substantially equivalent to a hypothetical share of Common Stock, credited to a Participant and having a value at any time equal to the Fair Market Value of a share of Common Stock (or such fraction thereof) at such time. (j) "Company" means DynCorp, a Delaware corporation, or any successor corporation. (k) "Covered Employee" means any person who is a "covered employee" within the meaning of Section 162(m) of the Code. (l) "Cumulative Net Income" means, in respect of any Performance Period, the aggregate cumulative amount of the Adjusted Net Income for the calendar or other fiscal years of the Company during such Performance Period. (m) "Cumulative Net Income Per Share" means, in respect of any Performance Period, the aggregate cumulative amount of the Annual Net Income Per Share for the calendar or other fiscal years of the Company during such Performance Period. (n) "Director" means a member of the Board of Directors who is not an Employee. (o) "Dividend Equivalent" means, in respect of a Common Stock Equivalent and with respect to each dividend payment date for the Common Stock, an amount equal to the cash dividend on one share of Common Stock payable on such dividend payment date. (p) "Employee" means any individual, including any officer of the Company or a Subsidiary, who is on the active payroll of the Company or a Subsidiary falling within Bands 1 through 4 of the DynCorp Executive/Senior Management Compensation Program or, in the event the Subsidiary does not participate in such Program, employed at a level determined by the Committee to be commensurate therewith. (q) "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time, including all rules and regulations promulgated thereunder. (r) "Fair Market Value" means, in respect of any date on or as of which a determination thereof is being or to be made, the most recent DynEx Internal Stock Market valuation, or, if the Common Stock of the Company is publicly traded on a national stock exchange, the average of the high and low per share sale prices of the Common Stock reported on such exchange on such date, or, if the Common Stock was not traded on such date, on the next preceding day on which sales of shares of the Common Stock were reported on such exchange. (s) "Incentive Stock Option" means any option to purchase shares of Common Stock granted pursuant to the provisions of Section 6 of the Plan that is intended to be and is specifically designated by the Committee as an "incentive stock option" within the meaning of Section 422A of the Code. (t) "Non-Qualified Stock Option" means any option to purchase shares of Common Stock granted pursuant to the provisions of Section 6 of the Plan that is not an Incentive Stock Option. (u) "Participant" means any Director of the Company or Employee of the Company or a Subsidiary who receives a grant or Award under the Plan. (v) "Performance Award" means the number of shares of Common Stock and/or the amount of cash earned and payable in settlement of a Performance Grant pursuant to Section 9. (w) "Performance Grant" means a grant made pursuant to Section 9 of the Plan, the Award of which is contingent on the achievement of specific Performance Goals during a Performance Period, determined using a specific Performance Measure, all as specified in the grant agreement relating thereto. (x) "Performance Goals" mean, with respect to any applicable grant made pursuant to the Plan, the one or more targets, goals or levels of attainment required to be achieved in terms of the specified Performance Measure during the specified Performance Period, all as set forth in the related grant agreement. (y) "Performance Measure" means, with respect to any applicable grant made pursuant to the Plan, one or more of the criteria identified at Section 9(c) of the Plan selected by the Committee for the purpose of establishing, and measuring attainment of, Performance Goals for a Performance Period in respect of such grant, as provided in the related grant agreement. (z) "Performance Period" means, with respect to any applicable grant made pursuant to the Plan, the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select during which the attainment of one or more Performance Goals will be measured to determine whether, and the extent to which, a Participant is entitled to receive payment of an Award pursuant to such grant. (aa) "Plan" means this 1999 Long-Term Incentive Stock Plan, as set forth herein and as hereafter amended from time to time in accordance with the terms hereof. (bb) "Restricted Stock" means shares of Common Stock issued pursuant to a Restricted Stock Grant under Section 8 of the Plan so long as such shares remain subject to the restrictions and conditions specified in the grant agreement pursuant to which such Restricted Stock Grant is made. (cc) "Restricted Stock Grant" means a grant made pursuant to the provisions of Section 8 of the Plan. (dd) "Stock Appreciation Right" means a grant in the form of a right to benefit from the appreciation of the Common Stock made pursuant to Section 7 of the Plan. (ee) "Stock-Based Grant" means a grant made pursuant to Section 10 of the Plan. (ff) "Stock Option" means and includes any Non-Qualified Stock Option and any Incentive Stock Option granted pursuant to Section 6 of the Plan. (gg) "Subsidiary" means any corporation or entity in which the Company directly or indirectly owns or controls 50% or more of the equity securities issued by such corporation or entity having the power to vote for the election of directors; provided, however, that in the case of Incentive Stock Options, Grants shall be limited to Employees of corporations. (hh) "Unit" means a bookkeeping entry used by the Company to record and account for the grant, settlement or, if applicable, deferral of an Award until such time as such Award is paid, canceled, forfeited or terminated, as the case may be, which, except as otherwise specified by the Committee, shall be equal to one Common Stock Equivalent. 3. EFFECTIVE DATE; TERM. (a) EFFECTIVE DATE. The Plan shall be effective on March 1, 1999. (b) TERM. The Plan shall remain in effect until February 29, 2004, unless sooner terminated by the Board of Directors. Termination of the Plan shall not affect grants and Awards then outstanding. 4. SHARES OF COMMON STOCK SUBJECT TO PLAN. (a) MAXIMUM NUMBER OF SHARES AVAILABLE FOR ISSUANCE UNDER THE PLAN. The maximum aggregate number of shares of Common Stock which may be issued pursuant to the Plan, subject to adjustment as provided in Section 4(b) of the Plan, shall be eight hundred thousand (800,000) plus (i) any shares of Common Stock issued under the Plan that are forfeited back to the Company or are canceled, and (ii) any shares of Common Stock that are tendered, whether by physical delivery or by attestation, to the Company by a Participant as full or partial payment of the exercise price of any Stock Option granted pursuant to the Plan, in connection with the payment or settlement of any other grant or Award made pursuant to the Plan, or in payment of any applicable withholding for federal, state, city, local or foreign income, payroll or other taxes incurred in connection with the exercise of any Stock Option or Stock Appreciation Right granted under the Plan or the receipt or settlement of any other grant or Award under the Plan. The shares of Common Stock which may be issued under the Plan may be authorized and unissued shares or issued shares which have been reacquired by the Company. No fractional share of the Common Stock shall be issued under the Plan. Awards of fractional shares of the Common Stock, if any, shall be settled in cash. (b) ADJUSTMENTS UPON CHANGES IN CAPITAL STRUCTURE. In the event of any change in the capital structure, capitalization or Common Stock of the Company such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, or any other change affecting the Common Stock, such proportionate adjustments, if any, as the Board of Directors in its discretion may deem appropriate to reflect such change shall be made with respect to: (i) the maximum number of shares of Common Stock which may be (1) issued pursuant to the Plan, (2) the subject of any type of grant or Award under the Plan, and (3) granted, Awarded or issued to any Participant pursuant to any provision of the Plan; (ii) the number of shares of Common Stock subject to any outstanding Stock Option, Stock Appreciation Right or other grant or Award made to any Participant under the Plan; (iii) the per share exercise price in respect of any outstanding Stock Options and Stock Appreciation Rights; (iv) the number of shares of Common Stock and the number of Units or the value of such Units, as the case may be, which are the subject of grants and Awards then outstanding under the Plan; and (v) any other term or condition of any grant affected by any such change. 5. ADMINISTRATION. (a) THE COMMITTEE. The Plan shall be administered by the Committee. Action approved in writing by a majority of the members of the Committee then serving shall be fully as effective as if the action had been taken by unanimous vote at a meeting duly called and held. The Company shall make grants and effect Awards under the Plan in accordance with the terms and conditions specified by the Committee, which terms and conditions shall be set forth in grant agreements and/or other instruments in such forms as the Committee shall approve. (b) COMMITTEE POWERS. The Committee shall have full power and authority to operate and administer the Plan in accordance with its terms. The powers of the Committee include, but are not limited to, the power to: (i) select Participants from among the Employees of the Company and Subsidiaries; (ii) establish the types of, and the terms and conditions of, all grants and Awards made under the Plan, subject to any applicable limitations set forth in, and consistent with the express terms of, the Plan; (iii) make grants and pay or otherwise effect Awards subject to, and consistent with, the express provisions of the Plan; (iv) establish Performance Goals, Performance Measures and Performance Periods, subject to, and consistent with, the express provisions of the Plan; (v) reduce the amount of any grant or Award; (vi) prescribe the form or forms of grant agreements and other instruments evidencing grants and Awards under the Plan; (vii) pay and to defer payment of Awards on such terms and conditions, not inconsistent with the express terms of the Plan, as the Committee shall determine; (viii) direct the Company to make conversions, accruals and payments pursuant to the Plan; (ix) construe and interpret the Plan and make any determination of fact incident to the operation of the Plan; (x) promulgate, amend and rescind rules and regulations relating to the implementation, operation and administration of the Plan; (xi) adopt such modifications, procedures and subplans as may be necessary or appropriate to comply with the laws of other countries with respect to Participants or prospective Participants employed in such other countries; (xii) delegate to other persons the responsibility for performing administrative or ministerial acts in furtherance of the Plan; (xiii) engage the services of persons and firms, including banks, consultants and insurance companies, in furtherance of the Plan's activities; and (xiv) make all other determinations and take all other actions as the Committee may deem necessary or advisable for the administration and operation of the Plan. (c) SPECIAL SUBCOMMITTEE. When deemed advisable by the Committee, a special Subcommittee, consisting solely of members of the Committee who are not "outside directors" as such term is used in Section 162(m) of the Code or "non-employee directors" as such term is used in Section 16 of the Exchange Act, may be designated to act as the Committee and to make grants and Awards under the Plan. (d) GRANTS BY BOARD OF DIRECTORS. Notwithstanding any other provision of the Plan. the Board of Directors shall also have the power to make grants and Awards under the Plan when such grants are to be made to Directors or to Employees who are designated as "officers" for purposes of Section 16 of the Exchange Act. (e) COMMITTEE'S DECISIONS FINAL. Any determination, decision or action of the Committee in connection with the construction, interpretation, administration or application of the Plan, and of any grant agreement, shall be final, conclusive and binding upon all Participants, and all persons claiming through Participants, affected thereby. (f) ADMINISTRATIVE ACCOUNTS. For the purpose of accounting for Awards deferred as to payment, the Company shall establish bookkeeping accounts expressed in Units bearing the name of each Participant receiving such Awards. Each account shall be unfunded, unless otherwise determined by the Committee in accordance with Section 15(d) of the Plan. (g) CERTIFICATIONS. In respect of each grant under the Plan to a Covered Person which the Committee intends to be "performance based compensation" under Section 162(m) of the Code, the provisions of the Plan and the related grant agreement shall be construed to confirm such intent, and to conform to the requirements of Section 162(m) of the Code, and the Committee shall certify in writing (which writing may include approved minutes of a meeting of the Committee) that the applicable Performance Goal(s), determined using the Performance Measure specified in the related grant agreement, was attained during the relevant Performance Period at a level that equaled or exceeded the level required for the payment of such Award in the amount proposed to be paid and that such Award does not exceed any applicable Plan limitation. 6. STOCK OPTIONS. (a) IN GENERAL. Options to purchase shares of Common Stock may be granted under the Plan and may be Incentive Stock Options or Non-Qualified Stock Options; provided however, that Incentive Stock Option may not be granted until the Plan has been approved by the stockholders of the Company. All Stock Options shall be subject to the terms and conditions of this Section 6 and shall contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee shall determine. Stock Options may be granted in addition to, or in tandem with or independent of Stock Appreciation Rights or other grants and Awards under the Plan. The Committee may grant Stock Options that provide for the automatic grant of a replacement Stock Option if payment of the exercise price and/or any related withholding taxes is made by tendering (whether by physical delivery or by attestation) shares of Common Stock or by having shares of Common Stock withheld by the Company. The replacement Stock Option would cover the number of shares of Common Stock tendered or withheld, would have a per share exercise price equal to at least 100% of the Fair Market Value of a share of Common Stock on the date of the exercise of the original Stock Option, and would have such other terms and conditions as may be specified by the Committee and set forth in the related grant agreement. (b) ELIGIBILITY AND LIMITATIONS. Any Director of the Company and any Employee of the Company or a Subsidiary may be granted Stock Options. The Committee shall determine, in its discretion, the Employees to whom Stock Options will be granted, the timing of such grants, and the number of shares of Common Stock subject to each Stock Option granted; provided, that, in respect of Incentive Stock Options, the aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the shares of Common Stock with respect to which an Incentive Stock Option becomes exercisable for the first time by a Participant during any calendar year shall not exceed $100,000, or such other limit as may be required by the Code, except that, if authorized by the Committee and provided for in the related grant agreement, any portion of any Incentive Stock Option that cannot be exercised as such because of this limitation may be converted into and exercised as a Non-Qualified Stock Option. In no event shall any Stock Option or Stock Appreciation Right be granted to a Participant in exchange for the Participant's agreement to the cancellation of one or more Stock Options or Stock Appreciation Rights then held by such Participant if the exercise price of the new grant is lower than the exercise price of the grant to be cancelled and in no event shall any Stock Option or Stock Appreciation Right be amended to reduce the option price, except as contemplated by Section 4(b) of the Plan. (c) OPTION EXERCISE PRICE. The per share exercise price of each Stock Option granted under the Plan shall be determined by the Committee prior to or at the time of grant, but in no event shall the per share exercise price of any Stock Option be less than 100% of the Fair Market Value of the Common Stock on the date of the grant of such Stock Option. (d) OPTION TERM. The term of each Stock Option shall be fixed by the Committee; except that in no event shall the term of any Incentive Stock Option exceed ten years after the date such Incentive Stock Option is granted. (e) EXERCISABILITY. A Stock Option shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at the date of grant; provided, however, that no Stock Option shall be exercisable during the first six months after the date such Stock Option is granted. No Stock Option may be exercised unless the holder thereof is at the time of such exercise an Employee is and has been continuously an Employee since the date such Stock Option was granted, except as provided below and except that the Committee may permit the exercise of any Stock Option for any period (not to exceed 90 days in the case of an Incentive Stock Option except in case of the Participant's death or disability) following the Participant's termination of employment not in excess of the original term of the Stock Option on such terms and conditions as it shall deem appropriate and specify in the related grant agreement. A Stock Option may only be exercised by the Participant or, in the case of the Participant's death or disability, by the Participant's estate or other legal representative. Unless otherwise provided by the Committee, a Stock Option may only be exercised within (i) 360 days following the Participant's retirement on or after age [65], in the case of a Non-Qualified Stock Option; (ii) 90 days following the Participant's retirement on or after age [65], in the case of an Incentive Stock Option; and (iii) 180 days following termination by reason of death or disability. (f) METHOD OF EXERCISE. A Stock Option may be exercised, in whole or in part, by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased. Such notice shall be accompanied by payment in full of the purchase price, plus any required withholding taxes, in cash or, to the extent permitted by law, in shares of Common Stock already owned by the Participant valued at the Fair Market Value of the Common Stock on the date of exercise. The Committee may also permit Participants, either on a selective or aggregate basis, to simultaneously exercise Stock Options and sell the shares of Common Stock thereby acquired pursuant to a brokerage or similar arrangement approved in advance by the Committee and to use the proceeds from such sale to pay the exercise price and withholding taxes. 7. STOCK APPRECIATION RIGHTS. (a) IN GENERAL. Stock Appreciation Rights in respect of shares of Common Stock may be granted under the Plan alone, in tandem with, in addition to or independent of a Stock Option or other grant or Award under the Plan. A Stock Appreciation Right entitles a Participant to receive an amount equal to the excess of the Fair Market Value of a share of Common Stock on the date of exercise over the Fair Market Value of a share of Common Stock on the date of grant of the Stock Appreciation Right, or such other higher price as may be set by the Committee, multiplied by the number of shares of Common Stock with respect to which the Stock Appreciation Right shall have been exercised. (b) ELIGIBILITY. Any Employee of the Company or a Subsidiary selected by the Committee may be granted Stock Appreciation Rights. The Committee shall determine, in its discretion, the Employees to whom Stock Appreciation Rights will be granted, the timing of such grants and the number of shares of Common Stock in respect of which each Stock Appreciation Right is granted. (c) EXERCISABILITY; EXERCISE; FORM OF PAYMENT. A Stock Appreciation Right may be exercised by a Participant at such time or times and in such manner as shall be authorized by the Committee and set forth in the related grant agreement, except that in no event shall a Stock Appreciation Right be exercisable within the first six months after the date of grant. The Committee may provide that a Stock Appreciation Right shall be automatically exercised on one or more specified dates. No Stock Appreciation Right may be exercised unless the holder thereof is at the time of exercise an Employee and has been continuously an Employee since the date the Stock Appreciation Right was granted, except that the Committee may permit the exercise of any Stock Appreciation Right for any period following the Participant's termination of employment not in excess of the original term of the Stock Appreciation Right on such terms and conditions as it shall deem appropriate and specify in the related grant agreement. A Stock Appreciation Right may be exercised, in whole or in part, by giving the Company a written notice specifying the number of shares of Common Stock in respect of which the Stock Appreciation Right is to be exercised. Stock Appreciation Rights may be paid upon exercise in cash, in shares of Common Stock, or in any combination of cash and shares of Common Stock as determined by the Committee. 8. RESTRICTED STOCK GRANTS AND AWARDS. (a) IN GENERAL. A Restricted Stock Grant is the issue of shares of Common Stock in the name of an Employee, which issuance is subject to such terms and conditions as the Committee shall deem appropriate, including, without limitation, restrictions on the sale, assignment, transfer or other disposition of such shares and the requirement that the Employee forfeit such shares back to the Company (i) upon termination of employment for specified reasons within a specified period of time, or (ii) if any specified Performance Goals are not achieved during a specified Performance Period, or (iii) if such other conditions as the Committee may specify are not satisfied. (b) ELIGIBILITY. Any Employee of the Company or a Subsidiary selected by the Committee may receive a Restricted Stock Grant. The Committee, in its sole discretion, shall determine whether a Restricted Stock Grant shall be made, the Employee to receive the Restricted Stock Grant, and the conditions and restrictions imposed on the Restricted Stock Grant. (c) RESTRICTION PERIOD. Restricted Stock Grants shall provide that in order for a Participant to receive shares of Common Stock free of restrictions, the Participant must remain in the employment of the Company or its Subsidiaries, subject to such exceptions as the Committee shall deem appropriate and specify in the related grant agreement, for a period of not less than three years commencing on the date of the grant and ending on such later date or dates as the Committee may designate at the time of the grant (the "Restriction Period"). The Committee, in its sole discretion, may provide for the lapse of restrictions in installments during the Restriction Period. The Committee may also establish one or more Performance Goals that are required to be achieved during one or more Performance Periods within the Restriction Period as a condition to the lapse of the restrictions. (d) RESTRICTIONS. The following restrictions and conditions shall apply to each Restricted Stock Grant during the Restriction Period: (i) the Participant shall not be entitled to delivery of the shares of the Common Stock; (ii) the Participant may not sell, assign, transfer, pledge, hypothecate, encumber or otherwise dispose of or realize on the shares of Common Stock subject to the Restricted Stock Grant; and (iii) the shares of the Common Stock issued as Restricted Stock shall be forfeited to the Company if the Participant for any reason ceases to be an Employee prior to the end of the Restriction Period, except due to circumstances specified in the related grant agreement or otherwise approved by the Committee. The Committee may in, its sole discretion, include such other restrictions and conditions as it may deem appropriate. (e) PAYMENT. Upon expiration of the Restriction Period and if all conditions have been satisfied and any applicable Performance Goals attained, the shares of the Restricted Stock will be made available to the Participant, subject to satisfaction of applicable withholding tax requirements, free of all restrictions; provided, that the Committee may, in its discretion, require (i) the further deferral of any Restricted Stock Grant beyond the initially specified Restriction Period, (ii) that the Restricted Stock be retained by the Company, and (iii) that the Participant receive a cash payment in lieu of unrestricted shares of Common Stock. (f) RIGHTS AS A SHAREHOLDER. A Participant shall have, with respect to shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares and receive any cash dividends paid thereon. Stock dividends distributed with respect to shares of Restricted Stock shall be treated as additional shares under the Restricted Stock Grant and shall be subject to the restrictions and other terms and conditions set forth therein. 9. PERFORMANCE GRANTS AND AWARDS. (a) ELIGIBILITY AND TERMS. The Committee may grant to Employees of the Company and its Subsidiaries the prospective contingent right, expressed in Units, to receive payments of shares of Common Stock, cash or any combination thereof, with each Unit equivalent in value to one share of Common Stock, or equivalent to such other value or monetary amount as may be designated or established by the Committee, based upon Company performance over a specified Performance Period. The Committee shall, in its sole discretion, determine the officers of the Company and other key Employees eligible to receive Performance Grants. At the time each Performance Grant is made, the Committee shall establish the Performance Period, the Performance Measure, and the Performance Goals to be attained relative to such Performance Measure in respect of such Performance Grant. The number of shares of Common Stock and/or the amount of cash earned and payable in settlement of a Performance Grant shall be determined at the end of the Performance Period (a "Performance Award"). (b) PERFORMANCE GOALS, PERFORMANCE MEASURES, AND PERFORMANCE PERIODS. Each Performance Grant shall provide that, in order for a Participant to receive an Award of all or a portion of the Units subject to such Performance Grant, the Company must achieve certain Performance Goals over a designated Performance Period having a minimum duration of one year, with attainment of the Performance Goals determined using a specific Performance Measure. The Performance Goals and Performance Period shall be established by the Committee in its sole discretion. The Committee shall establish a Performance Measure for each Performance Period for determining the portion of the Performance Grant which will be earned or forfeited based on the extent to which the Performance Goals are achieved or exceeded. In setting Performance Goals, the Committee may use a Performance Measure based on any one, or on any combination, of the following Company performance factors as the Committee deems appropriate: (i) stock price; (ii) earnings per share, (iii) Cumulative Net Income Per Share; (iv) Cumulative Net Income; (v) return on sales; (vi) total shareholder return; (vii) return on assets; (viii) economic value added; (ix) cash flow; (x) return on equity; and (xi) cumulative operating income (which shall equal consolidated sales minus cost of goods sold and selling, administrative and general expense). Performance Goals may include minimum, maximum and target levels of performance, with the size of Performance Award based on the level attained. Once established by the Committee and specified in the grant agreement, and if and to the extent provided in or required by the grant agreement, the Performance Goals and the Performance Measure in respect of any Performance Grant (or any Restricted Stock Grant or Stock-Based Grant that requires the attainment of Performance Goals as a condition to the Award) shall not be changed. The Committee may, in its discretion, eliminate or reduce (but not increase) the amount of any Performance Award (or Restricted Stock or Stock-Based Award) that otherwise would be payable to a Participant upon attainment of the Performance Goal(s). (c) FORM OF GRANTS. Performance Grants may be made on such terms and conditions not inconsistent with the Plan, and in such form or forms, as the Committee may from time to time approve. Performance Grants may be made alone, in addition to in tandem with, or independent of other grants and Awards under the Plan. Subject to the terms of the Plan, the Committee shall, in its discretion, determine the number of Units subject to each Performance Grant made to a Participant and the Committee may impose different terms and conditions on any particular Performance Grant made to any Participant. The Performance Goals, the Performance Period or Periods, and the Performance Measure applicable to a Performance Grant shall be set forth in the relevant grant agreement. (d) PAYMENT OF AWARDS. Each Participant shall be entitled to receive payment in an amount equal to the aggregate Fair Market Value (if the Unit is equivalent to a share of Common Stock), or such other value as the Committee shall specify, of the Units earned in respect of such Performance Award. Payment in settlement of a Performance Award may be made in shares of Common Stock, in cash, or in any combination of Common Stock and cash, and at such time or times, as the Committee, in its discretion, shall determine. 10. OTHER STOCK-BASED GRANTS AND AWARDS. (a) IN GENERAL. The Committee may make other Stock-Based Grants pursuant to which Common Stock is, or in the future may be, acquired by Participants, and other grants and Awards to Participants denominated in Common Stock Equivalents or other Units. Such Stock-Based Grants may be granted alone or in addition to, in tandem with, or independent of any other grant made or Award effected under the Plan. (b) ELIGIBILITY AND TERMS. The Committee may make Stock-Based Grants to Directors of the Company and Employees of the Company and its Subsidiaries. Subject to the provisions of the Plan, the Committee shall have authority to determine the Employees to whom, and the time or times at which, Stock-Based Grants will be made, the number of shares of Common Stock, if any, to be subject to or covered by each Stock-Based Grant, and any and all other terms and conditions of each Stock-Based Grant. (c) FORM OF GRANTS; PAYMENT OF AWARDS. Stock-Based Grants may be made in such form or forms and on such terms and conditions, including the attainment of specific Performance Goals, as the Committee, in its discretion, shall approve. Payment of Stock-Based Awards may be made in cash, in shares of Common Stock, or in any combination of cash and shares of Common Stock, and at such time or times, as the Committee shall determine. 11. DEFERRALS. The Committee may, whether at the time of grant or at anytime thereafter prior to payment or settlement, require a Participant to defer, or permit (subject to such conditions as the Committee may from time to time establish) a Participant to elect to defer, receipt of all or any portion of any payment of cash or shares of Common Stock that would otherwise be due to such Participant in payment or settlement of any Award under the Plan. If any such deferral is required by the Committee (or is elected by the Participant with the permission of the Committee), the Committee shall establish rules and procedures for such payment deferrals. The Committee may provide for the payment or crediting of interest, at such rate or rates as it shall in its discretion deem appropriate, on such deferred amounts credited in cash and the payment or crediting of dividend equivalents in respect of deferred amounts credited in Common Stock Equivalents. Deferred amounts may be paid in a lump sum or in installments in the manner and to the extent permitted, and in accordance with rules and procedures established, by the Committee. 12. NON-TRANSFERABILITY OF GRANTS AND AWARDS. No grant or Award under the Plan, and no right or interest therein, shall be (i) assignable, alienable or transferable by a Participant, except by will or the laws of descent and distribution, or (ii) subject to any obligation, or the lien or claims of any creditor, of any Participant, or (iii) subject to any lien, encumbrance or claim of any party made in respect of or through any Participant, however arising. During the lifetime of a Participant, Stock Options and Stock Appreciation Rights are exercisable only by, and shares of Common Stock issued upon the exercise of Stock Options and Stock Appreciation Rights or in settlement of other Awards will be issued only to, and other payments in settlement of any Award will be payable only to, the Participant or his or her legal representative. The Committee may, in its sole discretion, authorize written designations of beneficiaries and authorize Participants to designate beneficiaries with the authority to exercise Stock Options and Stock Appreciation Rights granted to a Participant in the event of his or her death. Notwithstanding the foregoing, the Committee may, in its sole discretion and on and subject to such terms and conditions as it shall deem appropriate, which terms and conditions shall be set forth in the related grant agreement: (i) authorize a Participant to transfer all or a portion of any Non-Qualified Stock Option or Stock Appreciation Right, as the case may be, granted to such Participant; provided, that in no event shall any transfer be made to any person or persons other than such Participant's spouse, children or grandchildren, or a trust for the exclusive benefit of one or more such persons, which transfer must be made as a gift and without any consideration; and (ii) provide for the transferability of a particular grant or Award pursuant to a qualified domestic relations order. All other transfers and any retransfer by any permitted transferee are prohibited and any such purported transfer shall be null and void. Each Stock Option or Stock Appreciation Right which becomes the subject of permitted transfer (and the Participant to whom it was granted by the Company) shall continue to be subject to the same terms and conditions as were in effect immediately prior to such permitted transfer. The Participant shall remain responsible to the Company for the payment of all withholding taxes incurred as a result of any exercise of such Stock Option or Stock Appreciation Right. In no event shall any permitted transfer of a Stock Option or Stock Appreciation Right create any right in any party in respect of any Stock Option, Stock Appreciation Right or other grant or Award, other than the rights of the qualified transferee in respect of such Stock Option or Stock Appreciation Right specified in the related grant agreement. 13. CHANGE IN CONTROL. In the event of a Change in Control of the Company, except as the Board of Directors comprised of a majority of Continuing Directors may expressly provide otherwise, and notwithstanding any other provision of the Plan to the contrary: (i) all Stock Options and Stock Appreciation Rights then outstanding shall become fully exercisable as of the date of the Change in Control, whether or not then exercisable; (ii) all restrictions and conditions in respect of all Restricted Stock Grants then outstanding shall be deemed satisfied as of the date of the Change in Control; and (iii) all Performance Grants and other Stock-Based Grants shall be deemed to have been fully earned, at the maximum amount of the award opportunity specified in the grant agreement, as of the date of the Change in Control. 14. GENERAL PROVISIONS (a) EFFECT ON EMPLOYMENT. Neither the adoption of this Plan, its operation, nor any documents describing or referring to this Plan (or any part thereof) shall confer upon any individual any right to continued employment with the Company or in any way affect any right and power of the Company to terminate the employment of any employee at any time with or without assigning a reason thereof. (b) UNFUNDED PLAN. The Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under this Plan. Any liability of the Company to any person with respect to any grant under this Plan shall be based solely upon any contractual obligations that may be created pursuant to this Plan. No such obligation of the Company shall be deemed to be secured by a pledge of, or other encumbrance on, any property of the Company. (c) RULES OF CONSTRUCTION. Headings are given to the sections of this Plan solely as a convenience to facilitate reference. The reference to any statute, regulation, or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. (d) NO OBLIGATION TO EXERCISE. No grant or Award shall impose any obligation upon the Participant to exercise such grant or Award. (e) GOVERNING LAW. The validity, construction and effect of the Plan, of Agreements entered into pursuant to the Plan, and of any rules, regulations, determinations or decisions made by the Compensation Committee relating to the Plan or such Agreements, and the rights of any and all persons having or claiming to have any interest therein or thereunder, shall be determined exclusively in accordance with applicable federal laws and the laws of the Commonwealth of Virginia, without regard to its conflict of laws rules. EX-10.1 8 Exhibit 10. DYNCORP KEY EXECUTIVES SHARE-OPTION COMPENSATION PLAN ("KEYSOP") ARTICLE I PURPOSE 1.1 Purpose. The purpose of the Plan is to provide benefits to eligible Employees of the Employer in a form that will encourage the recipients to continue in the service of the Employer, and allow the recipients to diversify their investment portfolios. 1.2 Intent. The Plan is intended to be a nonqualified option plan governed by Section 83 of the Code and not an employee benefit plan as defined under ERISA. ARTICLE II DEFINITIONS As used herein, the following capitalized words and phrases shall have the respective meanings set forth below: 2.1 "Administrative Committee" means a committee consisting of two or more members designated from time to time by the Compensation Committee to administer the Plan. 2.2 "Beneficiary" means the person or persons designated by a Participant, pursuant to Section 3.6, to exercise a Share-Option after the Participant's death. 2.3 "Board of Directors" or "Board" means the Board of Directors of DynCorp. 2.4 "Change of Control" means any of the following: (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of DynCorp or its subsidiaries, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of DynCorp representing more than 35% of the combined voting power of DynCorp's then-outstanding securities; or (B) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with DynCorp to effect a transaction described in clause (C) of this definition) whose election by the Board or nomination for election by DynCorp's Shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (C) the shareholders of DynCorp approve a merger or consolidation of DynCorp with any other corporation, other than a merger or consolidation which would result in the voting securities of DynCorp outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of DynCorp approve a plan of complete liquidation of DynCorp or an agreement for the sale or disposition by DynCorp of all or substantially all DynCorp's assets. Notwithstanding the foregoing, in the event the Employer by which a Participant is employed is no longer a subsidiary or controlled affiliate of DynCorp, a Change of Control shall not be deemed to have occurred if the Employer or new owner of such Employer undertakes in writing with DynCorp to assume all the obligations of DynCorp under this Plan. 2.5 "Code" means the Internal Revenue Code of 1986, as amended, and any regulations or rulings issued thereunder. 2.6 "Compensation Committee" means the Compensation Committee of the Board of Directors. 2.7 "Disability" means a disability as defined under the Employer's executive long-term disability plan. 2.8 "Effective Date" means December 14, 1998. 2.9 "Employee" means any common law employee of the Employer. 2.10 "Employer" means DynCorp, any of its subsidiaries and controlled affiliates, and any successor thereto. 2.11 "ERISA" means the Employee Retirement Income Security Act of 1974, any amendments thereto, and any regulations or rulings issued thereunder. 2.12 "Exercise Date" means the date upon which the Administrative Committee approves the Share-Option exercise form, which is completed and submitted by a Participant to the Administrative Committee with respect to the Share-Option being exercised. 2.13 "Exercise Period" means the period during which a Participant may exercise a Share-Option, as determined under Section 4.1. 2.14 "Exercise Price" means the price to be paid by a Participant to exercise a Share-Option, as determined under Section 3.3. 2.15 "Fair Market Value" means the closing price of a Share reflected in the consolidated trading tables of The Wall Street Journal, or other recognized market source, as determined by the Administrative Committee, on the applicable date of reference hereunder or, if there is no sale of the Shares on such date, then the closing price on the last previous day on which a sale is reported. 2.16 "Grant Date" means, with respect to any Share-Option, the date on which the Share-Option is granted by the Administrative Committee to a Participant pursuant to Section 3.2, which shall be the last day of the quarter on which Shares are sold on the relevant market. 2.17 "Intrinsic Value" means the Fair Market Value of the aggregate underlying Shares minus the aggregate Exercise Price, as of the Grant Date. 2.18 "Participant" means any individual who meets the eligibility requirements of Section 3.1, who has received an award of Share-Options in accordance with Section 3.2, and whose Share-Options have not all been completely exercised or lapsed. For purposes of Section 4.3: (a) After a Participant's death, his Beneficiary is to be treated as a Participant under this Plan with respect to any Share-Options that are outstanding at the time of the Participant's death; (b) In the event of a Participant's legal incapacity, the Participant's legal representative is to be treated as a Participant under this Plan with respect to any Share-Options that are outstanding at the time the Participant incurred the legal incapacity; and (c) If a Participant has assigned Share-Options under Section 3.8, then the assignee of such Share-Options is to be treated as a Participant under this Plan with respect to the assigned Share-Options. 2.19 "Plan" means the DynCorp Key Executives Share-Option Compensation Plan ("KEYSOP") (including Exhibit A) as adopted by DynCorp and set forth herein and from time to time amended. 2.20 "Retirement" means termination of employment, other than for Cause and not due to Disability, at or after age 60. 2.21 "Share" or "Shares" means a share or shares of a registered investment company regulated by the Investment Company Act of 1940, as amended (i.e., Mutual Fund shares), which share or shares are designated by the Administrative Committee as subject to purchase through the exercise of Share-Option(s). 2.22 "Share-Option" means the right of a Participant, granted by the Employer in accordance with Section 3.2, to purchase a Share from the Employer at the Share-Option's Exercise Price. 2.23 "Share-Option Agreement" means an agreement executed on behalf of the Employer and by a Participant to whom Share-Options have been awarded, acknowledging the issuance of the Share-Options and setting forth terms of the Share-Options. 2.24 "Termination for Cause" means termination of a Participant's employment following a decision by a two-thirds majority vote of the Board that the Participant's employment should be terminated by reason of any one or more of the following acts: (a) gross negligence relating to the Participant's employment; (b) refusal to follow the reasonable instructions of the Board; (c) actions involving a material breach of the Participant's employment agreement, if any; (d) willful violation of environmental laws and regulations relating to the Participant's employment; (e) criminal conduct relating to the Participant's employment; (f) violation of the Procurement Integrity Provisions of the Office of the Federal Procurement Policy Act Amendments of 1988; or (g) material violation of the DynCorp Standards of Conduct, as amended or supplemented from time to time. 2.25 "Termination of Employment" means an Employee's separation from the service of the Employer by reason of resignation, discharge, death, disability or other termination. The Administrative Committee may, in its discretion, determine whether any leave or other absence from service constitutes a Termination of Employment for purposes of the Plan. 2.26 "Trust" means the trust that shall be established pursuant to Article VII to hold the Shares that are subject to purchase through the exercise of Share-Options. 2.27 "Trust Agreement" means an agreement setting forth the terms of the Trust, which may be established pursuant to Article VII. 2.28 "Trust Fund" means the Shares that are held in the Trust. 2.29 "Trustee" means the persons or institution acting as trustee of the Trust. ARTICLE III GRANT OF SHARE-OPTION 3.1 Eligibility. Share-Options may be granted to any Employee falling within Bands 1 through 4 of the DynCorp Executive/Senior Management Compensation Program. 3.2 Grant of Share-Option. Share-Options may be granted, in its sole discretion, by the Administrative Committee to any eligible Employee at any time on or after the Effective Date and prior to the termination of the Plan, as determined by the Administrative Committee. (No Employee, even if an eligible Employee, shall have any entitlement to a grant of Share-Options; grants are within the discretion of the Administrative Committee.) A Share-Option is granted as follows: (a) Participation. The Administrative Committee will notify an eligible Employee that he or she is eligible to participate in the Plan. If the Employee desires to participate, the Employee and Employer will execute a written Share-Option Agreement, substantially in the form set forth in Exhibit A, in which they mutually agree that a fixed dollar amount or a fixed percentage of the Employee's future bonus payments or future salary payments will be exchanged for options to buy Shares ("Share-Options") that have a Fair Market Value, at the Grant Date, equal to one and one-third (1-1/3) times the amount of the salary or bonus payments so exchanged, and in which they mutually agree as to the type(s) of Shares upon which the Share-Options will be granted, at an Exercise Price set by the Administrative Committee. (b) Changes in Participation. An Employee's election relating to future bonus payments shall be irrevocable for the bonus year for which the election is made. An Employee's election relating to future salary payments may be changed, upon execution by the Employee and the Employer of a revised Share-Option Agreement setting for such changed election, and will become effective with the first practicable following pay period. If an election change relating to salary payments is reduced so as to cease exchanging any current salary payments for Share-Options, the Employee may not make any further election as to salary payments until the fiscal quarter following such change. (c) Addendum. The Employer will, as soon as practicable, prepare and periodically update an Addendum to the Share-Option Agreement, which shall reflect the amount or percentage of compensation to be exchanged for Share-Options rather than cash, and specify the number of Shares subject to the Share-Option Agreement, the Exercise Price of the Share-Options as of the Grant Date, and such other terms and in such form as the Administrative Committee may from time to time determine in accordance with the Plan. The Administrative Committee may establish a policy, which sets forth a maximum and/or minimum number of Share-Options allowed to be granted to a Participant during any calendar year; provided that any maximum number shall not include substitutions pursuant to Section 3.5. (d) Effect of Dividends and Distributions with Respect to Shares. (1) Cash Dividends and Distributions. The Employer agrees to reinvest all cash dividends and distributions received in cash with respect to Shares in additional property of the same kind (or as nearly the same kind as feasible, if property of the same kind is not available). Any Shares acquired through reinvestment will immediately be subject to Share-Options in favor of the Participant which are granted pursuant to the Share-Option Agreement that pertains to the Shares on which the dividends or distributions were made. (2) Noncash Distributions or Similar Transaction. In the event of a Shares dividend, Shares split, reverse Shares split, rights offering, recapitalization or similar transaction that materially affects the Fair Market Value of the Shares, the Administrative Committee shall adjust the Exercise Price so that it retains the same ratio to the Fair Market Value of the Shares as existed immediately before such transaction. 3.3 Exercise Price. (a) Upon a request to exercise any Share-Option(s), the Exercise Price required to be paid by the Participant shall be the greater of (i) the Exercise Price initially set in the Share-Option Agreement as of the Grant Date, or (ii) twenty-five percent (25%) of the Fair Market Value of the Share(s) on the Exercise Date. The initial Exercise Price in effect as of the effective date of this Plan is twenty-five percent (25%) of the Fair Market Value of the Shares on the Grant Date. (b) Notwithstanding any provision herein to the contrary, the Administrative Committee may, in its discretion, charge reasonable administrative costs of the Plan to individual Participants by adjusting the Exercise Price of Share-Options, reducing the number of Shares subject to Share-Options, or by other means in its discretion. 3.4 Purchase of Property Subject to Share-Option. Upon the grant of Share-Options to a Participant, the Employer shall acquire an amount of Shares having a Fair Market Value equal to the Intrinsic Value of the aggregate Share-Options. The Employer shall contribute such amount of Shares to the Trust established in accordance with Article VII. At the time the Shares are contributed to the Trust, and at the time the Share-Options are exercised, the Shares acquired by the Employer pursuant to the preceding sentence shall not be subject to any security interest, whether or not perfected, or to any Share-Options or contract under which any other person may acquire any interest in them. Additional Shares required to be delivered at the time of exercise of the Share-Options may be acquired in the open market by the Trustees, utilizing proceeds from the Exercise Price payment. 3.5 Substitution of Share-Option Shares. The Administrative Committee may, in its discretion and at the request of a Participant, cancel outstanding Share-Options and issue substitute Share-Options on different types of Shares, provided that the Shares of the substitute Share-Options are of equal aggregate Fair Market Value as that of the Shares of the original Share-Options as of the date of substitution. Notwithstanding anything to the contrary in this Plan, a substitution of Share-Options pursuant to this paragraph shall be made no more than one time during any fiscal quarter, or at additional times upon special circumstances as determined by the Administrative Committee. Upon a change in Shares pursuant to this paragraph, the Employer shall cause the Trust to dispose of the old Shares and acquire and contribute to the Trust new Shares having the same Fair Market Value (taken as of the Grant Date of the new Share-Options) as the old Shares. This transaction shall be treated as a new grant of Share-Options. The Intrinsic Value of the old Share-Options will in all cases equal the Intrinsic Value of the new Share-Options on the date of substitution. 3.6 Designation of Beneficiary. In the Share-Option Agreement, the Participant shall designate one or more Beneficiaries and successor Beneficiaries, and the Participant may change a Beneficiary designation at any time, by filing the prescribed form with the Administrative Committee. The consent of the Participant's current Beneficiary shall not be required for a change of Beneficiary. No Beneficiary shall have any rights under the Plan or a Share-Option Agreement during the lifetime of the Participant, except as may otherwise be provided in herein. A Participant who dies without having designated a Beneficiary in accordance with this Section 3.6 shall be deemed to have named the Participant's estate as Beneficiary. 3.7 General Non-Transferability. No Share-Option granted under this Plan may be transferred, assigned, or alienated (whether by operation of law or otherwise), except as provided herein, and no Share-Option shall be subject to execution, attachment or similar process. A Share-Option may be exercised only by a Participant. 3.8 Permitted Transfers. Notwithstanding the provisions of Section 3.7, a Participant may at any time prior to death, assign a Share-Option to the Participant's spouse, lineal and/or collateral descendants, a trust for the benefit of the Participant's spouse and/or lineal descendants, or a partnership of which the Participant's spouse and/or lineal descendants are the only partners, subject to approval by the Administrative Committee. Any such assignment shall be permitted only if an assignment is expressly permitted in the Share-Option Agreement, or approved in writing by the Administrative Committee, and the Participant receives no consideration for the assignment. Any such assignment shall be evidenced by an appropriate written document executed by the Participant, and delivered to the Administrative Committee on or before the effective date of the assignment. In the event of such assignment, the spouse, lineal or collateral descendant, partnership or trustee of the trust shall be entitled to all of the rights of the Participant under Section 4.3 with respect to the assigned Share-Option, and such Share-Option shall continue to be subject to all of the terms, conditions and restrictions applicable to the Share-Option, as set forth in the Plan and the Share-Option Agreement. ARTICLE IV EXERCISE OF SHARE-OPTION 4.1 Exercise Period. A Participant may exercise a Share-Option pursuant to Section 4.3 at any time during the period beginning on the earlier of (i) the date which is six (6) months after the initial Grant Date (disregarding a subsequent Grant Date caused by substitution of Shares pursuant to Section 3.5) or (ii) the date of a Change of Control and ending on the earliest of: (a) ninety (90) days after the Participant's Termination for Cause or other Termination of Employment for reasons other than described in Section 4.1(b) below; or (b) fifteen (15) years after the Grant Date for active Employees, Participants who have incurred a Termination of Employment by reason of retirement, disability, death or an involuntary termination which is not a Termination for Cause, or such later time as is approved by the Administrative Committee. If a Participant fails to exercise a Share-Option within the Exercise Period, then the Share-Option expires and the Participant or his Beneficiary loses any rights he or she had with respect to the Share-Option. Notwithstanding the foregoing, (i) except in the case of a Share-Option outstanding as of a Change of Control, the Exercise Period shall not commence earlier than six months following the Grant Date and, (ii) in the event of the Participant's death, the Exercise Period shall not expire earlier than one year following the date of the Participant's death. 4.2 Notice. The Administrative Committee shall cause notice to be provided to the Participant that Share-Options are set to expire. Such notice shall be given approximately six months prior to the expiration of the Exercise Period, if known and otherwise, as soon as practicable. The required notice will be a written notice and will list the Shares subject to the Share-Option and the date on which the Share-Option Exercise Period would expire. Failure to give or receive notice with respect to a Share-Option will not in any way extend the Exercise Period of the Share-Option or increase a Participant's rights with respect to the Share-Option. 4.3 Share-Option Exercise. A Participant may exercise a Share-Option by giving written notice to the Administrative Committee and tendering full payment of the Exercise Price by cash, check or other means acceptable to the Administrative Committee on or about the Exercise Date. The minimum amount of Share-Options that can be exercised by a Participant at any one time is the number of Share-Options for which the Fair Market Value of the underlying Shares minus the applicable aggregate Exercise Price totals $5,000, or 100% of the Fair Market Value of the underlying Shares, whichever is less. For these purposes, the term "underlying Shares" means the Shares which will be acquired by the Participant upon the exercise of the Share-Options. A Participant shall not have any of the rights and privileges of a shareholder with respect to any Shares purchasable or issuable upon the exercise of Share-Options prior to the date of exercise of such Share-Options in accordance with this Section 4.3. In the event that the listing, registration or qualification of the Share-Option on any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary as a condition of, or in connection with, the exercise of the Share-Option, then the Share-Option shall not be exercised in whole or in part until such listing, registration, qualification, consent or approval has been effected or obtained. 4.4 Delivery of Shares. Within ten business days following the date that a Participant satisfies the conditions for exercising Share-Options in accordance with Section 4.3, the Employer shall deliver or cause to be delivered to the Participant title to, or beneficial ownership of, the Shares subject to such Share-Options, which Shares the Participant can direct to be liquidated or otherwise disposed of. 4.5 Tax Withholding. Whenever Shares are to be delivered upon exercise of Share-Options under the Plan, the Employer shall require as a condition of such delivery payment by the Participant of an amount sufficient to satisfy all federal, state and local tax withholding requirements related thereto. Such payment shall take the form of whichever of the following is acceptable to the Administrative Committee: (a) cash; (b) the withholding of such amount from any Shares to be delivered to the Participant, (c) the withholding of such amount from compensation otherwise due to the Participant, or (d) any combination of the foregoing, at the election of the Participant. Such election shall be made before the date on which the amount of tax to be withheld is determined by the Employer, and such election shall be irrevocable. With the consent of the Employer, the Participant may elect a greater amount of withholding, not to exceed the estimated amount of the Participant's total tax liability with respect to the exercise of Share-Options under the Plan. Such election shall be made at the same time and in the same manner as provided above. 4.6 Failure to Exercise. No Share-Option shall be exercised, in whole or in part, after the end of the Share-Option's Exercise Period as stated in Section 4.1. The Employer shall have no obligation to deliver or cause to be delivered to the Participant the Shares subject to such Share-Option after the end of the Share-Option's Exercise Period. Failure to exercise a Share-Option in a timely fashion shall constitute a forfeiture of the Share-Option. ARTICLE V AMENDMENT OR TERMINATION 5.1 Plan Amendment. The Administrative Committee may, from time to time in its discretion, amend any provision of the Plan, in whole or in part, with respect to any Participant or group of Participants. Such amendment shall be effective as of the date specified therein and shall be binding upon the Administrative Committee, all Participants and Beneficiaries, and all other persons claiming an interest under the Plan. Subject to Section 5.2 below, such amendment shall not affect any Share-Options that are outstanding as of the amendment date without the Participant's consent. Notwithstanding anything herein to the contrary, any amendments which modify the category of individuals eligible to participate in the Plan or which modify Article V or VI of the Plan must be approved by the Compensation Committee. 5.2 Plan Termination. The Plan shall terminate as the Compensation Committee may determine, in its discretion. Such termination shall be effective as of the date determined by the Compensation Committee and shall be binding upon the Administrative Committee, all Participants and Beneficiaries, and all other persons claiming an interest under the Plan. Share-Options that are outstanding as of the Plan's termination shall continue to be subject to exercise after the effective date of such termination, and may be exercised in accordance with Article IV and any applicable Share-Option Agreement; except that termination of the Plan may provide for termination of all then outstanding Share-Options, provided that the Employer gives the affected Participants 90 days' notice before such termination. In the event a termination of outstanding Share-Options occurs pursuant to the preceding sentence, and such outstanding Share-Options are not exercised during the 90-day notice period, the Employer may pay all holders of such Share-Options, in cash or such other form as determined by the Employer in its sole discretion, the Share-Options' Intrinsic Value as of the date the Share-Options terminated. As of the date of termination of the Plan, no new Share-Options shall be granted, except for Share-Options required to be granted under Section 3.2(b). 5.3 Amendment of Share-Options. A Share-Option may be amended by the Administrative Committee at any time after the Grant Date if the Administrative Committee determines that an amendment is necessary as a result of: (a) any addition to or change in the Code or ERISA, a federal or state securities law or any other law or regulation, which occurs after the Grant Date and by its terms applies to the Share-Option; (b) any Plan amendment pursuant to Section 5.1, or Plan termination pursuant to Section 5.2, provided that the amendment does not materially affect the terms, conditions and restrictions applicable to the Share-Option, except for termination of the Share-Option with 90 days' notice as set forth in Section 5.2 above; or (c) any circumstances not specified in paragraphs (a) or (b), with the consent of the Participant. 5.4 Change of Control. Notwithstanding any other provision of the Plan or a Share-Option Agreement, in the event of a Change of Control, the Exercise Period under Section 4.1 shall begin immediately upon such Change of Control. ARTICLE VI ADMINISTRATION 6.1 The Administrative Committee. The Plan shall be administered by the Administrative Committee. 6.2 Powers of the Administrative Committee. In carrying out its duties with respect to the general administration of the Plan, the Administrative Committee shall have, in addition to any other powers conferred by the Plan or by law, the following powers: (a) to grant Share-Options, and to determine the form, amount and timing of such Share-Options; (b) to determine the terms and provisions of the Share-Option Agreements, and to modify such Share-Option Agreements as provided in Section 5.3; (c) to maintain all records necessary for the administration of the Plan; (d) to prescribe, amend, and rescind rules for the administration of the Plan to the extent not inconsistent with the terms thereof; (e) to appoint such individuals and subcommittees as it deems desirable for the conduct of its affairs and the administration of the Plan; (f) to employ counsel, accountants and other consultants to aid in exercising its powers and carrying out its duties under the Plan; (g) to revise periodically, on a prospective basis only, the nature of the Shares to the subject of Share-Options and/or the amount or percentage of the initial Exercise Price to be included in Share-Option Agreements. (h) to contract for services, i.e. trustee, record keeper, etc.; (i) to establish the cost for participants in the plan; (j) to authorize the payment of expenses related to the plan set-up, administrative and/or record keeping etc.; (k) to perform any other acts necessary and proper for the conduct of its affairs and the administration of the Plan, except those reserved by the Compensation Committee; 6.3 Determinations by the Administrative Committee. The Administrative Committee shall interpret and construe the Plan and the Share-Option Agreements, and its interpretations and determinations shall be conclusive and binding on all Participants, Beneficiaries and any other persons claiming an interest under the Plan or any Share-Option Agreement. The Administrative Committee's interpretations and determinations under the Plan and the Share-Option Agreements need not be uniform and may be made by it selectively among Participants, Beneficiaries and any other persons whether or not they are similarly situated. 6.4 Indemnification of the Administrative Committee and the Compensation Committee. The Employer shall indemnify and hold harmless each member of the Administrative Committee and Compensation Committee against any and all expenses and liabilities arising out of such member's action or failure to act in such capacity, excepting only expenses and liabilities arising out of such member's own willful misconduct or failure to act in good faith. Expenses and liabilities against which a member of the Administrative Committee or the Compensation Committee is indemnified hereunder shall include, without limitation, the amount of any settlement or judgment, costs, counsel fees and related charges reasonably incurred in connection with a claim asserted or a proceeding brought against him or the settlement thereof. This right of indemnification shall be in addition to any other rights to which any member of the Administrative Committee or the Compensation Committee may be entitled. The Employer may, at its own expense, settle any claim asserted or proceeding brought against any member of the Administrative Committee or the Compensation Committee when such settlement appears to be in the best interest of the Employer. 6.5 Expenses of the Administrative Committee. The members of the Administrative Committee shall serve without compensation for services as such. All reasonable expenses of the Administrative Committee shall be paid by the Employer. ARTICLE VII TRUST PROVISIONS 7.1 Establishment of the Trust. The Employer shall establish a trust to hold all Shares contributed by the Employer pursuant to Section 3.4. Except as otherwise provided in Section 7.2 of the Plan and the terms of the Trust Agreement, the Trust will be irrevocable and no portion of the Trust Fund will be used for any purpose other than the exchange of substitute Shares in accordance with Section 3.5, the delivery of Shares pursuant to the exercise of Share-Options under the Plan, the delivery of Shares subject to forfeited Share-Options to the Employer, and the payment of expenses of the Plan and Trust. 7.2 Trust Status. Any Trust established pursuant to Section 7.1 shall be designed as a grantor trust, within the meaning of section 671 of the Code, of which the Employer is the grantor, and this Plan is to be construed in accordance with that intention. Notwithstanding any other provision of this Plan, the Trust Fund will remain the property of the Employer and will be subject to the claims of its creditors in the event of its bankruptcy or insolvency. No Participant will have any priority claim on the Trust Fund or any security interest or other right superior to the rights of a general creditor of the Employer. ARTICLE VIII MISCELLANEOUS PROVISIONS 8.1 Headings. The headings of Articles, Sections and Paragraphs are solely for convenience of reference. If there is any conflict between such headings and the text of this Plan, the text shall control. 8.2 Gender. Unless the context clearly requires a different meaning, all pronouns shall refer indifferently to persons of any gender. 8.3 Singular and Plural. Unless the context clearly requires a different meaning, singular terms shall also include the plural and vice versa. 8.4 Governing Law. Except to the extent preempted by federal law, the construction and operation of the Plan shall be governed by the laws of the Commonwealth of Virginia without regard to the choice of law principles of such state. 8.5 Severability. If any provision of this Plan is held illegal or invalid by any court or governmental authority for any reason, the remaining provisions shall remain in full force and effect and shall be construed and enforced in accordance with the purposes of the Plan as if the illegal or invalid provision did not exist. 8.6 No Obligation to Exercise. The granting of a Share-Option shall impose no obligation upon a Participant to exercise such Share-Option. 8.7 No Rights of Shareholder. Neither the Participant, a Beneficiary nor any assignee shall be, or shall have any of the rights and privileges of, a Shareholder with respect to any Shares subject to purchase or issuance or upon the exercise of Share-Options, prior to the date of exercise of such Share-Options in accordance with Section 4.3 of the Plan. 8.8 No Right to Continued Employment. Nothing contained in the Plan shall be deemed to give any person the right to be retained in the employ of the Employer, or to interfere with the right of the Employer to discharge any person at any time without regard to the effect that such discharge shall have upon such person's rights or potential rights, if any, under the Plan. 8.9 Notices. Unless otherwise specified in a Share-Option Agreement, any notice to be provided under the Plan to the Administrative Committee shall be mailed (by certified mail, postage prepaid) or delivered to the Administrative Committee in care of the Employer at its executive offices, and any notice to the Participant shall be mailed (by certified mail, postage prepaid) or delivered to the Participant at the current address shown on the payroll records of the Employer, or at such address as a Participant shall provide to the Administrative Committee in accordance with this Section 8.9. No notice shall be binding on the Administrative Committee until received by the Administrative Committee, and no notice shall be binding on the Participant until received by the Participant. 8.10 Conflict Between Plan and Share-Option Agreement. Should there be a conflict or other contradiction between the language of the Plan and that contained in any Share-Option Agreement, the terms and conditions of the Plan will control. EX-10.2 9 Exhibit 10.2 DynCorp Management Incentive Plan Amended and Restated as of DynCorp Fiscal Year 1999 I. PURPOSE The purpose of the Management Incentive Plan (the Plan) is to reward and motivate key employees, who have significant impact on the Company strategy, performance and profitability, for the achievement of pre-established, measurable objectives which directly impact the financial performance of DynCorp and increase shareholder value. II. GENERAL DESCRIPTION At the beginning of the Plan Year, DynCorp and organizational financial objectives, individual objectives and target incentive award levels will be established and confirmed in writing for each Plan participant. At the conclusion of the Plan Year, the achievement of the specified financial objectives and individual objectives will be scored and weighted for each participant according to established formulae to determine the actual incentive amount to be awarded. III. ELIGIBILITY Senior and mid-level managers and employees in Salary Band 4 and selected individuals in Salary Grades 10-14 who have at least six months service during the Plan Year, will be eligible for participation in the Plan. Inclusion of individuals with less than six months service must be approved as an exception to the Plan. With the exception of disability, retirement or death, participants must be employed (on the active payroll) on the date the awards are paid in order to receive an incentive award. However, at its sole discretion, the Compensation Committee may make an award to a former employee, or to the former employee's estate, in such amount as is deemed appropriate. Participation in the Plan precludes eligibility for participation in any other annual cash incentive plan(s) provided by the Company. IV. RESPONSIBILITIES A. The Senior Vice President, Human Resources and Administration, is responsible for administering the Plan. B. The Presidents of SBA's and standalone businesses, Band 2 and other appropriate Corporate executives are responsible for confirming Plan participants, recommending individual target award levels, recommending SBA, SBU and other financial performance objectives, recommending appropriate individual performance objectives for Plan participants from their respective organizations or functions, evaluating participant performance, submitting financial results at the end of the Plan Year for SBA, SBU, and other financial metrics approved at the beginning of the Plan Year, and recommending individual incentive award amounts. C. The DynCorp Chief Financial Officer (CFO) is responsible for reviewing SBA, SBU and other financial performance objectives recommended by the Presidents and informing the CEO of his concurrence with the recommended measurements or proposing alternative financial measurements more applicable to specific SBAs or SBUs and for concurring with the calculations of actual financial performance used to determine actual award amounts. D. The Chief Executive Officer (CEO) is responsible for approving Plan participants, individual target award levels and financial and individual objectives. Further, the CEO is responsible for recommending DynCorp financial objectives, deviations from the Plan and actual incentive payments. E. The Compensation Committee of the Board of Directors (the Committee) is responsible for amending the Plan, approving DynCorp financial objectives, deviations from the Plan and actual incentive payments. V. DEFINITIONS A. Award Pool The dollar amount available for payment of Management Incentive awards. B. Base Salary The base annual salary rate of a participant as of April 1 of the Plan Year or, if later, the time the individual is approved as a participant for a given year, exclusive of overtime, per diem, bonuses or any other premiums, special payments or allowances. C. Days Sales Outstanding (DSO) Days Sales Outstanding as defined in DynCorp Finance Policy Statement PS505, as in effect at the beginning of the fiscal year during which performance is measured for Plan purposes. D. EBIDTA Earnings of DynCorp before deductions for interest, taxes, depreciation, amortization, discontinued operations and merger/acquisition costs, as recorded on the books and records of the Corporation. E. Earnings per Share (EPS) Diluted Earnings Per Share, per GAAP, assuming the treasury stock method, calculated by dividing the income available to common shareholders for the fiscal year by the fully diluted shares outstanding at the end of the fiscal year. F. Operating Profit Earnings of the applicable organizational unit (i.e. SBA, SBU, business, division, subsidiary or group, etc.) after ESOP and after all accruals, but before the Corporate G&A Expense, Interest and Dividend Income, Interest Expense, Net Asset Allocation and Taxes on Income. G. Plan Year The fiscal year of DynCorp. H. Revenue Revenue as recorded in accordance with DynCorp Finance Policy Statement PS510 and as in effect at the beginning of the fiscal year during which performance is measured for Plan purposes and as reported in the Company's consolidating financial statements after audit adjustments, if any. I. Return on Net Assets (RONA) Return on Net Assets as defined in accordance with DynCorp Finance Policy Statement PS505, as in effect at the beginning of the fiscal year during which performance is measured for Plan purposes. J. Strategic Business Area (SBA) A group of DynCorp organizational units responsible to a presiding officer who reports directly to the CEO of DynCorp or a DynCorp Senior Vice President. K. Strategic Business Unit One or more DynCorp organizational units (excluding joint ventures) responsible to an officer or manager who reports directly to the presiding officer of an SBA. L. Target Award The dollar amount that a participant is eligible to receive if the combined weighted performance against DynCorp, organizational unit and individual objectives equals an overall achievement level of exactly 100%. M. Target Percentage The percentage of Base Salary which is payable to a participant if combined weighted performance against DynCorp, organizational unit and individual objectives equals an overall achievement level of exactly 100%. N. Threshold The level of performance level required before an award is paid. For Plan purposes the threshold performance level is 75% of objectives. The threshold is applied at three levels. o If performance against any single objective is less than 75%, then the portion of the award based on performance against that objective is not paid. o If combined weighted performance against the applicable financial objective(s) is less than 75% in the aggregate, then no award is paid. o If combined weighted performance against both financial and individual objectives is less than 75% in the aggregate, then no award is paid. VI. FUNDING At the beginning of the Plan Year executive management establishes, subject to approval by the Committee, the amount of the total bonus award pool which includes the payment of Management Incentive Plan awards for that year. This amount represents the maximum amount that can be paid to bonus participants unless Plan financial performance exceeds Plan financial objectives. The definition of Plan financial objectives is those organizational financial metrics approved by the CEO or Compensation Committee at the beginning of the Plan Year. The Award Pool will be accrued ratably on a monthly basis during the Plan Year. The accrual amount will be reviewed quarterly and adjusted as necessary to reflect the most recent projections of actual financial performance versus budgeted performance and additions to, deletions from or other changes in Plan participation. VII. AWARDS Target Awards ranging from 10% to 30% (in 5% increments) of Base Salary will be established for each participant at the beginning of each Plan Year. These targets will be divided into financial and individual performance components and weighted as shown below in Table 1. TABLE 1 Weighting of Performance Measurement Components
Unit/Site/ DynCorp Division Contract Participant Profile Financial SBA Financial SBU Financial Financial Financial Individual Performance Performance Performance Performance Performance Performance Band 4 - Corporate 80% 20% Grades 10-14 - Corporate 60% 40% Band 4 and Grades 10-14 20% 60% 20% SBA Staff Support Band 4 and Grades 10-14 20% 60% 20% SBU Oprns/Staff Support Band 4 and Grades 10-14 20% 60% 20% Div Oprns/Staff Support Grades 10-14 20% 60% 20% Unit/Site/Contract Oprns/Staff Support
Target award recommendations will be submitted for review and approval in accordance with procedures established by the Senior Vice President, Human Resources and Administration, to achieve the approvals described in Section IV of the Plan. At the end of the Plan Year, performance against pre-established financial and individual objectives, as described in Section VIII, will be calculated to develop financial and individual performance factors. These factors will reflect the level, expressed as a percentage, of attainment of each objective. These performance factors will be multiplied by the appropriate weighting for each objective The results of these calculations then will be added to determine the percentage of the Target Award payable to each participant. Payment of the calculated award is subject to performance exceeding Threshold performance as described in Section V. (Exhibit I of the Plan shows detailed examples of award calculations.) A bonus due to a participant hired after the beginning of the Plan Year will be prorated based upon the number of months employed by the Company as a percentage of the full year. With the exception of disability, retirement or death, participants must be employed (on the active payroll) on the date the awards are paid in order to receive an incentive award. However, at its sole discretion, the Compensation Committee may make an award to a former employee, or to the former employee's estate, in such amount as is deemed appropriate. VIII. PERFORMANCE MEASUREMENT COMPONENTS In order to reinforce the importance of DynCorp managers achieving a balanced performance against financial and non-financial criteria, incentive awards under the Plan will be based on team and individual achievements in two or more of the following three areas: A. The Financial Performance of DynCorp: DynCorp's financial success is the key determinant of its ongoing viability as an independent business entity. In recognition of this, a portion of each Corporate and SBA level participant's award will be based on DynCorp's success against its financial objective. This objective, which will be recommended by the CEO and approved by the Committee at the beginning of each Plan Year, may be comprised of one or more financial measurements. The measurement may be changed each Plan Year to properly reflect DynCorp's strategic objectives. Further, the financial objective will be established at a level that will require above average performance from the management team to achieve it. B. The Financial Performance of the Organizational Unit: For non-Corporate participants, the financial performance of the SBA, SBU or other organizational unit in which they have the most direct control and accountability, will be given the heaviest weighting in order to motivate and reward participants for financial achievements. Financial objectives established for each SBA and SBU will be measurable and consistent with the overall strategic goals of the SBA. SBA and SBU financial objectives generally will be expressed in terms of RONA, Revenue, Operating Profit and/or DSO. Moreover, as with the DynCorp financial objective, they will be established at a level that will require above average performance from the management team to achieve them. C. The Individual Performance of the Participant: Individual performance will be measured in terms of performance against pre-established objectives and the participant's manager's subjective judgment of overall individual performance. Performance against objectives must comprise at least 50% of the individual performance factor. Individual objectives should be established according to the following guidelines: 1. Each participant will have 4-6 written objectives that have been jointly agreed to by the participant and the participant's supervisor. 2. Objectives will evolve from, respond to and/or reflect the Company objectives established and communicated by the CEO. Objectives covering the following areas will typically be included: o Key operational objectives o Human resources management o Quality and process improvement o Business development o Customer satisfaction 3. Objectives will be both quantitative and qualitative in nature and will include non-financial as well as appropriate financial related goals. 4. Objectives will be highly measurable and within the control of the participant. IX. AWARD DETERMINATION Awards will be calculated by: 1) multiplying the appropriate Financial and Individual Performance Factors by the weighting assigned to corresponding performance components as determined in Table 1 above, 2) adding the resulting percentages together to determine a composite percentage that represents overall achievement against expectations, and 3) then multiplying the target award amount by the composite percentage. The award payable for any single component for any participant may range from 0 to 150% of the established target amount for the component. Actual award amounts will be rounded to the nearest $100.00. If the performance achievement level on any of the approved financial performance factors falls below the Threshold level, the participant will not generally receive an award for that component. However, the CEO may on a discretionary basis recommend the payment of an award where unusual or extraordinary circumstances contributed to the below Threshold performance. If the combined weighted achievement level for all applicable financial performance measurements is less than the Threshold level, the award for the individual performance component shall also be at the discretion of the CEO and the Committee. Should a participant transfer to another organization during the Plan Year, the final award will be jointly determined and prorated for the time spent in each organization. All incentive awards proposed under the Plan are subject to the approval of the CEO and the Committee, who may at their discretion adjust the amounts to be awarded in order to reflect exceptional performance, performance that falls below objectives, or other performance factors that affect or potentially affect the ability of the Company or any of its units to meet its business and financial goals. X. YEAR-END ADMINISTRATION Initial award recommendations will be calculated at the SBA and Corporate levels and submitted in accordance with procedures established by the Senior Vice President, Human Resources and Administration, for Company level consolidation and submission to the CEO. Documentation of objectives, accomplishments and individual evaluations will be required to be submitted along with the individual award recommendations. Financial performance will be reviewed by the CFO as soon as the results for the Plan Year are available. Initial actual award recommendations will be adjusted as necessary based on this review to reflect the actual financial performance. The adjusted recommendations will be submitted by the CEO to the Committee for approval. Payments will be made in cash, net of applicable witholdings, as soon as practical following the Compensation Committee meeting, normally held in March following final year-end closing. Nothing in the Plan or in any action taken hereunder shall affect the Company's right to terminate at any time and for any reason the employment of any employee who is a participant in the Plan. The following examples illustrate how the Plan formula will be applied to calculate the incentive award for a Grade 10-14 Corporate and SBU Operations employees. A. Sample Award Calculation: Corporate Target formula: 0.60 DynCorp Financial Performance + 0.40 Individual Performance = 1.00 ASSUMPTIONS: Base Salary $75,000 Target Award Percentage 15% Target Award $ 11,250 Company Financial Performance Factor 80% (actual EPS $1.60 / EPS Objective $2.00) Individual Performance Factor 90% Award Calculation % of Component Performance Target % Component Factor Weighting Payable Company Financial 80% X 80% = 64% + Performance Individual Performance 90% X 20% = 18% = Percent of Total Target Award Payable = 82% Actual Award Amount = 82% of $11,250 = $9,225 (Rounded to $9,200) B. Sample Award Calculation: SBU Operations Target formula: .20 SBA RONA Performance + .30 SBU RONA Performance + .30 SBU Revenue Performance + 0.20 Individual Performance = 1.0 ASSUMPTIONS: Base Salary $ 100,000 Target Award Percentage 25% Target Award $ 25,000 SBA Financial Performance Factor 80% SBU RONA Performance Factor 100% SBU Revenue Factor 110% Individual Performance Factor 75% Award Calculation Performance % of Component Component Factor Weighting Target % Payable SBA Financial Performance 80% X 20% = 16% + SBU RONA Performance 100% X 30% = 30% + SBU Revenue Performance 110% X 30% = 33% + Individual Performance 75% X 20% = 15% = Percent of Total Target Award Payable = 94% Actual Award Amount = 94% of $23,500= $23,500 (No rounding required) -----END PRIVACY-ENHANCED MESSAGE-----