FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 1998 Commission file number 1-3879
DynCorp
(Exact name of registrant as specified in its charter)
Delaware 36-2408747
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2000 Edmund Halley Drive, Reston, VA 20191-3436
(Address of principal executive offices) (Zip Code)
(703) 264-0330
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of October 1, 1998
Common Stock, $0.10 Par Value 10,386,306
<PAGE>
DYNCORP AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 1, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
October 1, 1998 and December 31, 1997 3-4
Consolidated Condensed Statements of Operations for
Three and Nine Months Ended October 1, 1998 and September 25, 1997 5
Consolidated Condensed Statements of Cash Flows for
Nine Months Ended October 1, 1998 and September 25, 1997 6
Consolidated Statement of Permanent Stockholders' Equity 7
Notes to Consolidated Condensed Financial Statements 8-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
OCTOBER 1, 1998 AND DECEMBER 31, 1997
(In thousands)
October 1,
1998 December 31,
Unaudited 1997
--------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 6,393 $ 24,602
Accounts receivable and contracts in process (Note 2) 239,256 202,758
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 675 1,090
Other current assets 12,581 11,133
-------- --------
Total current assets 258,905 239,583
Property and Equipment (net of accumulated
depreciation and amortization of $27,715 in
1998 and $22,412 in 1997) 19,703 19,620
Goodwill and Contracts Acquired (net of accumulated
amortization of $47,006 in 1998 and $45,205 in
1997) (Note 7) 45,707 46,750
Other Assets (Notes 2 and 9) 80,980 76,631
-------- --------
Total Assets $405,295 $382,584
======== ========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
OCTOBER 1, 1998 AND DECEMBER 31, 1997
(In thousands, except share amounts)
October 1,
1998 December 31,
Unaudited 1997
---------- ------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt $ 440 $ 450
Accounts payable 57,401 46,109
Deferred revenue and customer advances 1,664 2,947
Accrued liabilities 112,005 105,833
-------- --------
Total current liabilities 171,510 155,339
Long-Term Debt (Note 2) 152,138 152,239
Other Liabilities and Deferred Credits (Note 9) 72,569 77,780
Contingencies and Litigation (Note 9) - -
Temporary Equity: (Note 3)
Redeemable Common Stock -
ESOP Shares, 7,076,080 and 6,887,119
shares issued and outstanding in 1998 and 1997,
respectively, subject to restrictions 156,482 151,823
Other, 125,714 shares issued and outstanding in
1998 and 1997 3,049 3,017
Permanent Stockholders' Equity: (Note 4)
Common Stock, par value ten cents per share, authorized
20,000,000 shares; issued 4,957,043 shares in 1998
and 4,784,770 shares in 1997 496 478
Common Stock Warrants - 1,259
Paid-in Surplus 127,626 125,412
Reclassification to temporary equity for redemption
value greater than par value (158,811) (154,138)
Deficit (83,952) ( 93,837)
Common Stock Held in Treasury, at cost; 1,778,493
shares and 0 warrants at October 1, 1998 and
1,677,511 shares and 170,716 warrants at
December 31, 1997 (31,045) (28,703)
Unearned ESOP Shares (4,767) (8,085)
--------- ---------
Total Liabilities and Stockholders' Equity $405,295 $382,584
========= =========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
UNAUDITED
Three Months Ended Nine Months Ended
------------------ -----------------
October September October September
1, 25, 1, 25,
1998 1997 1998 1997
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Revenues $316,358 $283,832 $917,833 $843,665
Costs and Expenses:
Costs of services 300,061 269,851 871,924 806,018
Corporate general and
administrative 5,015 4,062 15,076 12,855
Interest income (291) (463) (968) (1,460)
Interest expense 3,676 3,730 11,325 10,621
Other 701 555 2,569 1,850
-------- -------- -------- -------
Total costs and expenses 309,162 277,735 899,926 829,884
Earnings before income taxes
and minority interest 7,196 6,097 17,907 13,781
Provision for income taxes (Note 5) 2,685 1,623 6,590 4,351
-------- -------- ------- -------
Earnings before minority interest 4,511 4,474 11,317 9,430
Minority interest 485 387 1,432 997
-------- -------- ------- -------
Net earnings $ 4,026 $ 4,087 $ 9,885 $ 8,433
======= ======= ======= =======
Weighted average number of
shares outstanding for basic
earnings per share (Note 6) 10,436 8,928 10,224 8,792
Weighted average number of
shares outstanding for
diluted earnings per share (Note 6) 10,579 10,458 10,541 10,694
Basic earnings per share $ 0.39 $ 0.46 $ 0.97 $ 0.96
Diluted earnings per share $ 0.38 $ 0.39 $ 0.94 $ 0.79
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Nine Months Ended
-----------------
October September
1, 25,
1998 1997
------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 9,885 $ 8,433
Adjustments to reconcile net earnings from operations
to net cash provided (used):
Depreciation and amortization 6,517 7,254
Increase in reserves for divested businesses 1,000 325
Proceeds from insurance settlement for asbestos claims 1,463 1,488
Other 94 (744)
Changes in current assets and liabilities, net of
acquisitions:
Increase in current assets except cash and cash equivalents (34,221) (5,327)
Increase (decrease) in current liabilities excluding
notes payable and current portion of long term debt 13,422 (195)
------- -------
Cash (used) provided by operating activities ( 1,840) 11,234
Cash Flows from Investing Activities:
Sale of property and equipment 187 57
Purchase of property and equipment (3,583) (4,462)
Assets and liabilities of acquired business (10,241) -
Increases in investment in unconsolidated affiliates (971) (3,351)
Increase in notes receivable - (168)
Other (3,519) (210)
-------- -------
Cash used by investing activities (18,127) (8,134)
Cash Flows from Financing Activities:
Treasury stock purchased (1,287) (284)
Payment on indebtedness (43,347) (664)
Retirement of Contract Receivable Collateralized Notes
1992-1 - (98,500)
Proceeds from Contract Receivable Collateralized Notes
1997-1 43,210 50,000
Proceeds from issuance of Senior Notes - 99,484
Payment received on Employee Stock Ownership Plan note 3,318 2,595
Loan to Employee Stock Ownership Plan (Note 4) - (11,879)
Deferred financing expenses - (5,080)
Common stock and warrants purchased from investors - (37,819)
Other (136) (501)
------- --------
Cash provided (used) from financing activities 1,758 (2,648)
Net (Decrease) Increase in Cash and Cash Equivalents (18,209) 452
Cash and Cash Equivalents at Beginning of the Period 24,602 25,877
------- -------
Cash and Cash Equivalents at End of the Period $ 6,393 $26,329
======= =======
Supplemental Cash Flow Information:
Cash paid for income taxes $ 7,060 $ 2,534
======= =======
Cash paid for interest $10,796 $11,449
======= =======
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PERMANENT STOCKHOLDERS' EQUITY
(In thousands)
UNAUDITED
Adjustment
Common for Redemption Unearned
Common Stock Paid-in Value Greater Treasury ESOP
Stock Warrants Surplus than Par Value Deficit Stock Shares
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 478 $ 1,259 $125,412 $(154,138) $(93,837) $(28,703) $(8,085)
Employee compensation
plans (option exercises, restricted
stock plan, incentive bonus) 2 904 (863)
Treasury stock purchased (1,479)
Stock warrants exercised 34 (1,259) 1,310
Payment received on Employee Stock
Ownership Plan note 3,318
Reclassification to Redeemable
Common Stock (18) (4,673)
Net earnings 9,885
Balance, October 1, 1998 $ 496 $ - $127,626 $(158,811) $(83,952) $(31,045) $(4,767)
====== ========== ======== ========== ========= ========= ========
</TABLE>
<PAGE>
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
OCTOBER 1, 1998
UNAUDITED
Note 1. Basis of Presentation
The unaudited consolidated condensed financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these condensed financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, the unaudited consolidated condensed
financial statements included herein reflect all adjustments (consisting
of normal recurring adjustments) necessary to present fairly the financial
position, the results of operations and the cash flows for such interim
periods. The results of operations for such interim periods are not
necessarily indicative of the results for the full year. Certain de
minimus amounts presented for prior periods have been reclassified to
conform to the 1998 presentation.
Note 2. Accounts Receivable and Contracts in Process
At October 1, 1998, $71.0 million of accounts receivable are restricted as
collateral for the Contract Receivable Collateralized Notes, Series 1997-1
Class A and B. Additionally, $1.5 million of cash is restricted as
collateral for the Notes and has been included in Other Assets on the
balance sheet at October 1, 1998 and December 31, 1997.
Accounts receivable are net of an allowance for doubtful accounts of
$1.2 million at October 1, 1998 and $0.5 million at December 31, 1997.
Note 3. Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary Equity at
each balance sheet date and consists of the following:
<TABLE>
<CAPTION>
Balance at Balance at
Redeemable October 1, Redeemable December 31,
Shares Value 1998 Shares Value 1997
------ ---------- ----------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
ESOP Shares 3,520,037 $24.25 $ 85,360,897 3,520,037 $24.00 $ 84,480,888
3,556,043 $20.00 71,120,860 3,367,082 $20.00 67,341,640
--------- ------------ --------- ------------
7,076,080 $156,481,757 6,887,119 $151,822,528
========= ============ ========= ============
Other Shares 125,714 $24.25 $ 3,048,565 125,714 $24.00 $ 3,017,136
========= ============ ========= ============
</TABLE>
In accordance with the Employee Retirement Income Security Act regulations
and the Employee Stock Ownership Plan ("ESOP") documents, the ESOP Trust
or the Company is obligated to purchase distributed common stock shares
from ESOP participants on retirement or termination at fair value as long
as the Company's common stock is not publicly traded. However, 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. In
conjunction with the acquisition of Technology Applications, Inc. in 1993,
the Company issued put options on 125,714 shares of its common stock to
the former owner. The holder may, at any time commencing on December 31,
1998 and ending on December 31, 2000, sell these shares to the Company at
a price per share equal to the greater of $17.50 or, (a) if the stock is
publicly traded, the market value at a specified date or, (b) if the
Company's stock is not publicly traded, the fair value at the time of
exercise.
Note 4. Employee Stock Ownership Plan
The Company made loans to the Employee Stock Ownership Trust during 1997
to purchase shares and warrants as well as to pay off expiring loans. At
October 1, 1998, the unpaid balance on these loans, $4.8 million
representing 226,891 shares, is reflected as a reduction in stockholders'
equity.
Note 5. Income Taxes
The provision for income taxes in 1998 and 1997 is based upon an estimated
annual effective tax rate, including the impact of differences between the
book value of assets and liabilities recognized for financial reporting
purposes and the basis recognized for tax purposes.
Note 6. Earnings Per Share
The Company has adopted SFAS No. 128 "Earnings Per Share," which became
effective for financial statements for periods ending after December 15,
1997. The statement establishes new standards for computing and presenting
earnings per share ("EPS") and requires restatement of prior periods.
Specifically, the statement replaces the presentation of primary and fully
diluted EPS with a presentation of basic and diluted EPS and requires a
dual presentation on the face of the income statement and a reconciliation
of basic EPS to diluted EPS.
Basic EPS is computed by dividing 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 has 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.
<TABLE>
<CAPTION>
The reconciliation of basic EPS to diluted EPS is as follows:
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, September 25, October 1, September 25,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic Earnings Per Share
- ------------------------
Net income $ 4,026 $ 4,087 $ 9,885 $ 8,433
======= ======= ======= =======
Weighted average shares outstanding 10,436 8,928 10,224 8,792
Basic earnings per share for net income $0.39 $0.46 $0.97 $0.96
===== ======= ===== =====
Diluted Earnings Per Share
- --------------------------
Net income $ 4,026 $ 4,087 $ 9,885 $ 8,433
======= ======= ======= =======
Weighted average shares outstanding 10,436 8,928 10,224 8,792
Effect of dilutive securities:
Warrants 1 1,403 170 1,772
Stock options 142 127 147 130
------ ------ ------ ------
Shares for diluted earnings per share 10,579 10,458 10,541 10,694
Diluted earnings per share for net income $0.38 $0.39 $0.94 $0.79
====== ====== ===== ======
</TABLE>
<PAGE>
Note 7. Acquisitions
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 $0.9 million of goodwill, which will be
amortized over 15 years, has been recorded based on a preliminary
allocation of the purchase price.
Note 8. Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" was issued in June 1997, and became effective for
fiscal years beginning after December 15, 1997. The statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The
Company has reviewed the requirements of SFAS No. 130 and at present, the
Company has not had any transactions that would be included in
comprehensive income.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132 "Employers' Disclosures about Pensions and Other Post Retirement
Benefits," which became effective for fiscal years beginning after
December 15, 1997. The statement standardizes employers' disclosure
requirements for pensions and other post retirement benefits. Because the
Company does not have significant post retirement benefits, adoption of
the standard is not expected to materially change the Company's financial
reporting.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use,"
which will be effective for fiscal years beginning after December 15,
1998. The Statement of Position requires the capitalization of certain
costs incurred in connection with developing or obtaining software for
internal use after the date of adoption. During 1998, the Company adopted
SOP No. 98-1 and has capitalized $3.4 million of internal use software,
primarily related to the design and development of financial and human
resource software packages.
AICPA SOP No. 98-5, "Reporting on the Costs of Start-up Activities," was
issued in April 1998 and is 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. The Company estimates that
adoption of this statement will not have a material impact on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company is required to adopt
the provisions of the standard during the first quarter of 2000. Because
of the Company's minimal use of derivatives, the Company does not expect
that the adoption of the new standard will have a material impact on the
results of operations or financial condition.
Note 9. 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 tortuous 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 $128.8 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) Asbestos Claims
An acquired and inactive subsidiary, Fuller-Austin, which discontinued its
business activities in 1986, has been named as one of many defendants in
civil lawsuits which have been filed in certain state courts (principally
Texas) beginning in 1986 against manufacturers, distributors and installers
of products allegedly containing asbestos. Fuller-Austin was a
non-manufacturer that installed and occasionally distributed industrial
insulation products. Fuller-Austin had discontinued the use of
asbestos-containing products prior to being acquired by the Company in
1974. These claims are not part of a class action.
The claimants generally allege injuries to their health caused by
inhalation of asbestos fibers. Many of the claimants seek punitive damages
as well as compensatory damages. The amount of damages sought is impacted
by a multitude of factors. These include the type and severity of the
disease sustained by the claimant (i.e., mesothelioma, lung cancer, other
types of cancer, asbestosis or pleural changes); the occupation of the
claimant; the duration of the claimant's exposure to asbestos-containing
products; the number and financial resources of the defendants; the
jurisdiction in which the claim is filed; the presence or absence of other
possible causes of the claimant's illness; the availability of legal
defenses, such as the statute of limitations; and whether the claim was
made on an individual basis or as part of a group claim.
Claim Exposure (number of plaintiffs, claims and per claim amounts not in
thousands)
As of September 30, 1998, 19,019 plaintiffs have filed claims against
Fuller-Austin and various other defendants. Of these claims, 2,366 have
been dismissed and 5,082 have been resolved without an admission of
liability at an average cost of $3,213 per claim, excluding legal defense
costs.
The following is a summary of the number of claims filed against
Fuller-Austin:
<TABLE>
<CAPTION>
Years
-------------------------------------
1994
& Prior 1995 1996 1997 1998 Total
------- ----- ----- ----- ----- ------
<S> <C> <C) <C> <C> <C> <C>
Claims Filed 4,057 4,527 4,122 3,807 2,506 19,019
Claims Dismissed (113) (51) (1,116) (931) (155) (2,366)
Claims Resolved (1,619) (189) (1,825) (460) (989) (5,082)
Claims Under Appeal (13) (13)
-------
Claims Outstanding,
as of September 30, 1998 11,558
=======
</TABLE>
In connection with these claims, Fuller-Austin's primary insurance carriers
have incurred with a reservation of rights approximately $29.7 million
(including $13.4 million of legal defense costs) to defend and settle the
claims and, in addition, jury verdict judgments have been entered against
Fuller-Austin in the aggregate amount of $6.5 million, partially reduced by
appeal during 1997 by $2.0 million, which have not been paid and which are
under appeal by Fuller-Austin.
Fuller-Austin has experienced a decline in the number of claims taken to
trial. During the 24-month period ending September 30, 1998, no cases were
tried by plaintiffs although approximately 1,327 cases were set for trial
during this period. Plaintiffs have instead elected to enter into
settlements with Fuller-Austin for amounts ranging from $250 to $14,500 for
an average during the period of $2,699 per claim. In addition, in
connection with these settlements, a significant number of claims filed
against Fuller-Austin were dismissed with no payment by Fuller-Austin or
its insurers. Fuller-Austin and its carriers will continue to evaluate
settlement proposals, but will be prepared to try cases that cannot be
settled in a manner consistent with recent settlement trends.
During the first quarter of 1998, Fuller-Austin agreed in principle to
settle with approximately 660 non-Texas claimants who were threatening to
amend pending lawsuits to add Fuller-Austin as a defendant. The settlement
aggregates approximately $4.0 million which is included in the estimate of
future claims set forth below. Fuller-Austin considers the entire
settlement to be covered by insurance.
The number of claims filed against Fuller-Austin has become significant
only since 1992, and therefore, Fuller-Austin has a relatively brief
history (compared to manufacturers and suppliers) of claims volume and a
limited data file upon which to estimate the number or costs of claims that
may be received in the future. Also, effective September 1, 1995, the State
of Texas (where most of these claims have been filed) enacted tort reform
legislation which Fuller-Austin believes has curtailed the number of
unsubstantiated asbestos claims filed against the subsidiary in Texas.
Fuller-Austin's defense counsel has analyzed the 11,558 claims outstanding
as of September 30, 1998. Based on this analysis and consultation with its
other professional advisors, Fuller-Austin has estimated its cost,
including legal defense costs, to be $8.1 million for claims filed and
still unsettled and $37.6 million as its minimum estimate of future costs
of claims and settlements, including legal defense costs. No upper limit of
exposure can presently be reasonably estimated by the Company in accordance
with prevailing accounting requirements. The Company cautions that its
estimate is subject to significant uncertainties, including the future
effect of tort reform legislation enacted in Texas and other states, the
success of Fuller-Austin's litigation strategy, the size of jury verdicts,
success of appeals in process, the number and financial resources of future
plaintiffs, and the actions of other defendants. Therefore, actual claim
experience may vary significantly from such estimates, especially if
certain Texas appeals are decided unfavorably to Fuller-Austin and/or the
level of claims filed in other states increases. Fuller-Austin recorded an
estimated liability for future indemnity payments and defense costs related
to currently unsettled claims and minimum estimated future claims of $45.7
million and $50.2 million at October 1, 1998 and December 31, 1997,
respectively (recorded as long-term liability).
Insurance Coverage
Defense has been tendered to and accepted by Fuller-Austin's primary
insurance carriers, and by certain of the Company's primary insurance
carriers that issued policies under which Fuller-Austin is named as an
additional insured; however, only one such primary carrier has partially
accepted defense without a reservation of rights. The Company believes that
Fuller-Austin has at least $2.2 million in unexhausted primary coverage
(net of deductibles and self-insured retentions, but including disputed
coverage) under its liability insurance policies to cover the unsettled
claims, verdicts and future unasserted claims and defense costs. The
primary carriers also have unlimited liability for defense costs (presently
running at an average annual rate of approximately $1.3 million) until such
time as the primary limits under these policies are exhausted. When the
primary limits are exhausted, liability for both indemnity and legal
defense will be tendered to the excess coverage carriers, all of which have
been notified of the pendency of the asbestos claims. The Company and
Fuller-Austin have approximately $390.0 million of additional excess and
umbrella insurance that is generally responsive to asbestos claims after
taking into consideration certain pending carrier settlements that are
discussed below. This amount excludes approximately $92.0 million of
coverage issued by insolvent carriers. After the $2.2 million of
unexhausted primary coverage, the Company has first tier excess coverage of
$39.0 million excluding a $40.0 million first tier excess segment of
insolvent coverage for policy years 1979 through 1984 (the "Insolvent
Segment"). All of the Company's and Fuller-Austin's liability insurance
policies cover indemnity payments and defense fees and expenses subject to
applicable policy terms and conditions.
Coverage Litigation
The Company and Fuller-Austin have instituted litigation in Los Angeles
Superior Court, California, against their primary and excess insurance
carriers to obtain declaratory judgments from the court regarding the
obligations of the various carriers to defend and pay asbestos claims. The
issues in this litigation include the aggregate liability of the carriers,
the triggering and drop-down of excess coverage to cover the Insolvent
Segment and allocation of losses among multiple carriers including
insolvent carriers and various other issues related to the interpretation
of the policy contracts. All of the carrier defendants have filed general
denial answers.
Although there can be no assurances as to the outcome of this litigation,
management believes that it is probable that Fuller-Austin will prevail in
obtaining judicial rulings confirming the availability of a substantial
portion of the coverage. Based on a review of the independent ratings of
these carriers, the Company and Fuller-Austin believe that a substantial
portion of this coverage will continue to be available to meet the claims.
Fuller-Austin recorded in Other Assets $44.5 million and $50.2 million at
October 1, 1998 and December 31, 1997 respectively, representing the amount
that it expects to recover from its insurance carriers for the payment of
currently unsettled and estimated future claims.
The Company cautions, however, that even though the existence and aggregate
dollar amounts of insurance are not generally being disputed, such
insurance coverage is subject to interpretation by the court and the timing
of the availability of insurance payments could, depending upon the outcome
of the litigation and/or carrier settlement negotiations, delay the receipt
of insurance company payments and require Fuller-Austin to assume
responsibility for making interim payment of asbestos defense and indemnity
costs at a time when it may not have adequate cash funds.
While the Company believes that Fuller-Austin has recorded sufficient
liability to satisfy Fuller-Austin's reasonably anticipated costs of
present and future asbestos claimants' suits, it is not possible to predict
the amount or timing of future suits or the future solvency of
Fuller-Austin's insurers. In the event that currently unresolved and future
claims exceed the recorded liability of $45.7 million, the Company and
Fuller-Austin believe that the judicially determined and/or negotiated
amounts of excess and umbrella insurance coverage that will be available to
cover additional claims will be significant; however, it is impossible to
predict whether or not such amounts will be adequate to cover all
additional claims without further contribution by Fuller-Austin.
Possible Global Settlement/Bankruptcy Filing
Effective September 4, 1998, Fuller-Austin filed a Plan of Reorganization
under Chapter 11 of the United States Bankruptcy Code ("Plan") in the
United States Bankruptcy Court for the District of Delaware, case number
98-2038. The filing of the Plan followed almost 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 Bankruptcy Code ("Code"). Section
524(g) is designed to deal specifically with the resolution under the Code
of obligations of debtors that have asbestos liability. The Company is not
a party to the filing or the Plan.
In furtherance of the Plan and the proposed global settlement,
representatives of Fuller-Austin, its parent and sole stockholder, the
Company, the Committee, and the Legal Representative previously reached a
separate agreement in principle ("Release Agreement"), contingent on
approval of the Plan by the Bankruptcy Court, under which the Company would
be released from any and all present and future liability for Fuller-Austin
asbestos liability in consideration of the transfer of certain Company
property (including the stock of Fuller-Austin) and insurance rights to the
Fuller-Austin bankruptcy trust, and the payment to the trust of certain
cash consideration. The total amount reserved for this purpose was $14.0
million at December 31, 1997. During the first nine months of 1998,
approximately $3.5 million was used for legal and other related costs.
Pending resolution of the Fuller-Austin bankruptcy filing, all litigation
against it (including all asbestos claims) has been stayed and may not
proceed. Upon approval of the Plan, all such claims will be channeled into
a post-bankruptcy trust, independent of the Company, and Fuller-Austin will
no longer be owned by the Company. The trust will also be obligated under
the Release Agreement to indemnify the Company against present and future
asbestos claims.
On October 15, 1998, a hearing on the Plan was held at which time certain
excess insurance carriers of Fuller-Austin ("Excess Carriers") entered
appearances and asserted various objections to the entry of a Confirmation
Order. Effective November 10, 1998, the court denied the objections of the
Excess Carriers. The court is currently considering the Fuller-Austin Plan.
A decision is expected during the fourth quarter.
Pending the outcome of the Fuller-Austin petition, there can be no
assurance that Fuller-Austin will be able to proceed to closing under the
Plan. Should Fuller-Austin determine that it is unable to proceed to
closing of the global settlement, it may seek alternative relief by
amending its bankruptcy filing so that it might proceed without regard to
the settlement or the pre-packaged plan. In such event, the
Fuller-Austin/DynCorp Settlement Agreement would be null and void, and the
obligations of the Company with respect to Fuller-Austin asbestos
liability, if any, would be subject to determination by the bankruptcy
court.
(b) General Litigation
The Company has retained certain liability in connection with its 1989
divestiture of its major electrical contracting business, Dynalectric
Company ("Dynalectric"). The Company and Dynalectric were sued in 1988 in
Bergen County Superior Court, New Jersey, by a former Dynalectric joint
venture partner/subcontractor (subcontractor). The subcontractor has
alleged that its subcontract to furnish certain software and services in
connection with a major municipal traffic signalization project was
improperly terminated by Dynalectric and that Dynalectric fraudulently
diverted funds due, misappropriated its trade secrets and proprietary
information, fraudulently induced it to enter the joint venture, and
conspired with other defendants to commit acts in violation of the New
Jersey Racketeering Influenced and Corrupt Organization Act. The aggregate
dollar amount of these claims has not been formally recited in the
subcontractor's complaint. Dynalectric has also filed certain counterclaims
against the former subcontractor. The Company and Dynalectric believe that
they have valid defenses, and/or that any liability would be offset by
recoveries under the counterclaims. The Company and Dynalectric were found
by a Special Master to have committed certain discovery abuses, but no
monetary amount of sanctions has yet been assessed. The Company and
Dynalectric expect to file an appeal with respect to this finding. In late
1997, the state court granted Dynalectric's Motion to Compel Arbitration
that originally had been filed in 1988. The arbitration proceeding
commenced in July 1998 and concluded October 1, 1998. The ruling of the
arbitrator is expected during the fourth quarter, 1998. The Company
believes that it has established adequate reserves for the contemplated
defense costs and for the cost of obtaining enforcement of arbitration
provisions contained in the contract.
In November, 1994, the Company acquired an information technology business
which was involved in various disputes with federal and state agencies,
including two contract default actions and a qui tam suit by a former
employee alleging improper billing of a federal government agency customer.
The Company has contractual rights to indemnification from the former owner
of the acquired subsidiary with respect to the defense of all such claims
and litigation, as well as all liability for damages when and if proven. In
October, 1995, one of the federal agencies asserted a claim against the
subsidiary and gave the Company notice that it intended to withhold
payments against the contract under which the claim arose. To date, the
agency has withheld approximately $3.0 million due the Company under one of
the aforementioned disputes. This subsidiary has submitted a demand for
indemnification to the former owner of the subsidiary, which has been
denied. The subsidiary received an arbitration award confirming that it is
entitled to indemnification.
As to environmental issues, neither the Company, nor any of its
subsidiaries, is named a Potentially Responsible Party (as defined in the
Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA)) at any site. The Company, however, did undertake, as part of the
1988 divestiture of a petrochemical engineering subsidiary, an obligation
to install and operate a soil and water remediation system at a subsidiary
research facility site in New Jersey 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, tanks, etc., that existed prior
to the sale of the Commercial Aviation Business.
The Company is a party to other civil and contractual lawsuits which have
arisen in the normal course of business for which potential liability,
including costs of defense, constitute the remainder of the $128.8 million
discussed above. The estimated probable liability for these issues is
approximately $10.0 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 (long-term liability) of
$10.0 million at October 1, 1998 and December 31, 1997 for these items.
The Company has recorded its best estimate of the aggregate liability that
will result from these matters. While it is not possible to predict with
certainty the outcome of litigation and other matters discussed above, it
is the opinion of the Company's management, based in part upon opinions of
counsel, insurance in force and the facts currently known, that liabilities
in excess of those recorded, if any, arising from such matters would not
have a material adverse effect on the results of operations, consolidated
financial position or liquidity of the Company over the long-term. However,
it is possible that the timing of the resolution of individual issues could
result in a significant impact on the operating results and/or liquidity
for one or more future reporting periods.
The major portion of the Company's business involves contracting with
departments and agencies of, and prime contractors to, the U.S. Government,
and such contracts are subject to possible termination for the convenience
of the government and to audit and possible adjustment to give effect to
unallowable costs under cost-type contracts or to other regulatory
requirements affecting both cost-type and fixed-price contracts. Payments
received by the Company for allowable direct and indirect costs are subject
to adjustment and repayment after audit by government auditors if the
payments exceed allowable costs. Audits have been completed on the
Company's incurred contract costs through 1986 and are continuing for
subsequent periods. The Company has included an allowance for excess
billings and contract losses in its financial statements that it believes
is adequate based on its interpretation of contracting regulations and past
experience. There can be no assurance, however, that this allowance will be
adequate. The Company is aware of various costs questioned by the
government, 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
September 30, 1998 that will have a material adverse effect on the
Company's consolidated financial position, results of operations or
liquidity.
Note 10. Supplemental Balance Sheet Information
At October 1, 1998, checks not yet presented for payment of $7.6 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.
Note 11. Business Segments
The Company has three reportable segments: Information and Engineering
Technology (I&ET), Aerospace Technology (AT) and Enterprise Management
(EM).
Revenues, operating profit and identifiable assets by segment are presented
below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
October 1, September 25, October 1, September 25,
1998 1997 1998 1997
--------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Revenues
I&ET $ 88,785 $ 64,161 $240,808 $195,749
AT 119,607 111,506 356,020 329,541
EM 107,966 108,165 321,005 318,375
-------- -------- -------- --------
$316,358 $283,832 $917,833 $843,665
======== ======== ======== ========
Operating Profit (a)
I&ET $4,367 $2,791 $ 12,456 $9,603
AT 4,684 5,059 13,660 13,019
EM 6,727 5,885 17,359 14,838
-------- -------- -------- --------
15,778 13,735 43,475 37,460
Corporate general and
administrative 5,015 4,062 15,076 12,855
Interest expense, (net) 3,385 3,267 10,357 9,161
Goodwill amortization 243 389 1,182 1,172
Minority interest included in
operating profit (485) (387) (1,432) (997)
Amortization of intangibles of
acquired companies 645 548 1,001 1,762
Other miscellaneous (221) (241) (616) (274)
-------- -------- -------- --------
Earnings from continuing
operations before income
taxes and minority
interest $7,196 $6,097 $ 17,907 $ 13,781
====== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
October 1, December 31,
1998 1997
Identifiable Assets
<S> <C> <C>
I&ET $132,320 $118,016
AT 75,986 75,239
EM 101,174 70,026
Other (b) 45,825 51,575
Corporate 49,990 67,728
-------- --------
$405,295 $382,584
======== ========
</TABLE>
(a) Defined as revenue less direct and indirect costs of services of the
operating segments.
(b) Includes assets related to probable insurance indemnification
recoveries pertaining to a former subsidiary
(See Note 9).
<PAGE>
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 the consolidated
results of operations and financial condition of DynCorp and its subsidiaries
(collectively, the "Company"). The discussion should be read in conjunction with
the interim condensed consolidated financial statements and notes thereto and
the Company's annual report on Form 10-K for the year ended December 31, 1997.
Results of Operations
The Company provides diversified management, technical and professional services
to primarily 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. The following
discusses the Company's results of operations for the three and nine months
ended October 1, 1998 and the comparable periods for 1997.
Revenues
Revenues for the third quarter and nine months of 1998 were $316.4 million and
$917.8 million, respectively, as compared to $283.8 million and $843.7 million
for the comparable periods in 1997, an increase of $32.6 million and $74.1
million, respectively. Information and Engineering Technology (I&ET), Aerospace
Technology (AT) and Enterprise Management (EM) reported revenues of $88.8
million, $119.6 million and $108.0 million, respectively, for the third quarter
of 1998 as compared to $64.1 million, $111.5 million and $108.2 million for the
same quarter in 1997. Revenues for the nine months of 1998 for I&ET, AT and EM
were $240.8 million, $356.0 million and $321.0 million, respectively, an
increase of $45.1 million, $26.5 million and $2.6 million, respectively, over
the same period in 1997. Increases in I&ET's third quarter and nine months
revenues were attributable to new Indefinite Delivery/Indefinite Quantity
contract awards and sole source contracts for the Department of Defense,
Environmental Protection Agency and the Health Care Finance Administration.
Increased tasking and level of effort on several existing contracts also
contributed to I&ET's third quarter and nine months revenue increases. AT's
third quarter revenue increases resulted from new contracts for technical and
support services for the Air Force. The nine months revenue increases resulted
primarily from three new contract wins in Kuwait, Angola, and Qatar as well as
the contract wins with the Air Force. Increased services on existing contracts
and the installation of a new information system at Fort Rucker also contributed
to the nine months revenue increases. Partially reducing these increases were
reduced business volumes on several existing contracts and a contract
completion. Revenues increased slightly for EM for the nine months of 1998.
Increases in revenues due to new contracts with Department of Justice
(Immigration and Naturalization Service), the addition of the operations of a
seventh ship in the marine services area, and the acquisition of FMAS
Corporation, a medical outcome measurement and data abstraction services
company, were offset by reduced level of services on several contracts due to
funding cutbacks as well as completion of several contracts. For the third
quarter 1998, decreases in revenues were attributable to the aforementioned
completion of several contracts, coupled with the reduction in the level of
effort on existing contracts.
In July 1998, EM was informed that its customer at the Rocky Flats location
would not exercise the remaining two one-year options on its contract. This
event will not have a significant financial impact on 1998. This contract was
expected to generate revenues of $35 million to $50 million per year and
operating profit of $2.0 million to $3.0 million for the next two years. The
award of two significant logistic support contracts from the U.S. Postal Service
will partially offset the lost business in those future years.
Cost of Services
Cost of Services for the third quarter and nine months of 1998 was 94.8% and
95.0% of revenue as compared to 95.1% and 95.5% for the comparable periods in
1997. This resulted in gross margins of $16.3 million for the third quarter of
1998 as compared to $14.0 million for the third quarter of 1997 and $45.9
million and $37.6 million for the nine months of 1998 and 1997, respectively.
Contract wins and increased level of effort on existing contracts contributed to
the improvement in gross margin and offset any decreases attributable to
contract losses. Additionally, the Company charged $0.5 million to Cost of
Services in the nine months of 1997, representing a partial write-off of certain
purchased software as the result of net realization concerns and $0.4 million of
residual losses recorded in conjunction with the closure of the Company's
operations in Mexico.
Corporate General and Administrative
Corporate general and administrative for the third quarter and nine months of
1998 were $5.0 million and $15.1 million, respectively, as compared to $4.1
million and $13.0 million for the comparable periods in 1997, an increase of $.9
million and $2.1 million, respectively. The increase in third quarter and nine
months corporate general and administrative expense primarily resulted from the
Company's design and development of a new financial and human resource software
packages as described below under Year 2000.
Interest Expense
Interest expense was $3.7 million in the third quarter of 1998, unchanged from
the comparable period in 1997. For the nine months of 1998, interest expense was
$11.3 million, up $0.7 million compared to $10.6 million for the nine months of
1997, primarily due to higher average debt balance in 1998.
Income Taxes
The provision for income taxes in 1998 and 1997 is based upon an estimated
annual effective tax rate, including the impact of differences between the book
value of assets and liabilities recognized for financial reporting purposes and
the basis recognized for tax purposes. The provision for income taxes increased
by $1.1 million and $2.2 million for the three and nine months ended October 1,
1998 from the comparable periods in 1997 as a result of the increase in 1998
pre-tax income and an increase in the effective income tax rate. The 1997
effective income tax rate was lower than 1998 due to valuation allowance
reversal in 1997. The Company's effective tax rate approximated 40% for the
three and nine months ended October 1, 1998.
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 October 1, 1998 compared to $3.6
billion at December 31, 1997, a net increase of $.8 billion. The increase
resulted from new and follow-on business in the nine months of 1998. The backlog
at October 1, 1998 consisted of $2.0 billion for AT, $1.4 billion for EM, $1.0
billion for I&ET.
Working Capital and Cash Flow
Working capital, defined as current assets less current liabilities, was $87.4
million at October 1, 1998 compared to $84.2 million at December 31, 1997, an
increase of $3.2 million. This increase is primarily the result of an increase
in accounts receivable, attributable to increased revenues and start-up of new
contracts such as Department of Justice contract for the Immigration and
Naturalization Service.
Cash used by operations was $1.8 million in the nine months of 1998, as compared
to $11.2 million cash provided in the nine months of 1997, an increase in cash
used of $13.0 million. The increase resulted mostly from the aforementioned
increases in accounts receivable. Excluding the effect of changes in current
assets and liabilities, operating activities produced a positive cash flow of
$18.0 million in 1998 as compared to $16.4 million in 1997. The increase in cash
flow attributable to increased earnings from continuing operations was partially
offset by a decrease in non-cash charges, primarily depreciation and
amortization.
Investing activities used funds of $18.1 million in the nine months ended
October 1, 1998, principally for the acquisition of FMAS, the purchase of
property and equipment, and the purchase of new software for internal use as
part of the Company's Year 2000 plan. The Company has capitalized $3.4 million
of internal use software and anticipates capitalizing another $8.6 million over
the next year. During the nine months of 1997, cash used by investing activities
was $8.1 million, principally for the purchase of property and equipment and to
fund the Company's 47% interest in an equity investee.
Financing activities provided funds of $1.8 million in the nine months of 1998.
During the nine months of 1998, the Company borrowed $43.0 million and repaid
$43.0 million of the Contract Receivable Collateralized Class B Variable Rate
Notes to finance working capital needs. During the nine months of 1997,
financing activities used funds of $2.6 million. The proceeds from the issuance
of the 9.5% Senior Notes and the Contract Receivable Collateralized Notes Series
1997-1 were used to retire the Contract Receivable Collateralized Notes Series
1992-1, to a make a loan to the Employee Stock Ownership Plan to fund the
purchase of the Class C Preferred Stock, to fund the Company's purchase of
common stock and warrants from investors and to pay transaction fees associated
with the placement of the Senior Notes.
In the fourth quarter 1998, the Company anticipates a global settlement of the
Fuller-Austin Asbestos lawsuits under which the Company would be released from
any and all present and future liability for Fuller-Austin asbestos liability in
consideration of the transfer of certain Company property and insurance rights
to the Fuller Austin bankruptcy trust, and payment to the trust of certain cash
considerations. This settlement is expected to use cash of approximately $8.5
million to $10.5 million in the last three months of 1998.
Earnings before Interest, Taxes, Depreciation, and Amortization
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA") as
defined by management, consists of net earnings before income tax provision, net
interest expense, and depreciation and amortization. EBITDA represents a measure
of the Company's ability to generate cash flows and does not represent net
income or cash flows 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, measure
of financial performance reported in accordance with GAAP. EBITDA has been
adjusted for the amortization of deferred debt expense and debt issue discount
which are included in "interest expense" in the Consolidated Statements of
Operations and included in "amortization and depreciation" in the Consolidated
Statements of Cash Flows. Readers are cautioned that the Company's definition of
EBITDA may not necessarily be comparable to similarly titled captions used by
other companies due to the potential inconsistencies in the method of
calculation. The following presentation represents the Company's computation of
EBITDA (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
October September October September
1, 25, 1, 25,
1998 1997 1998 1997
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net earnings $4,026 $4,087 $9,885 $8,433
Depreciation and amortization 2,375 2,211 6,517 7,254
Interest expense, net 3,385 3,267 10,357 9,161
Income taxes 2,685 1,623 6,590 4,351
Amortization of deferred debt expense (170) (169) (538) (529)
Debt issue discount (9) (8) (26) (18)
------- ------- ------- -------
EBITDA $12,292 $11,011 $32,785 $28,652
</TABLE>
<PAGE>
Year 2000
The "Year 2000" issue ("Y2K") concerns the inability of some computer software
and hardware to accommodate "00" in the two digit data field used to identify
the year. The principal Y2K risk to the Company would come from an extended
failure of one or more of its core systems (financial, payroll, and human
resources). The Company's core systems have operated, for the last eight years,
on commercial off-the-shelf software in a distributed PC environment.
A Year 2000 analysis of the Company's core systems software has been completed.
Key software packages were found to be non-compliant, prompting a replacement of
these packages with a new enterprise resource planning software package. The
implementation is underway with a projected completion date of September 1999.
The implementation phase of the project is on schedule at the end of the third
quarter of 1998. Total expenditures for this resystemization as of October 1,
1998 have been $4.3 million. The Company anticipates additional expenditures of
more than $14 million in 1998 and 1999, of which $9 million will be capitalized.
In the event the replacement of core systems cannot be completed before the
fourth quarter of 1999, a contingency plan calling for installation of an
updated compliant version of the Company's current financial software package
and remediation of the Company's current human resource and payroll software
package, is in place which will assure that the Company's core system will
continue to operate.
The core systems assessment included contact with third-party
telecommunications, employee benefits, insurance and other providers. Letters
have been obtained from these providers which generally state that all are
working on the Y2K problem. Follow-up contacts are planned in 1999 to ascertain
progress by these providers.
A Year 2000 Program Management Plan has been developed and put in place to
address all other Y2K compliance issues. A multifunctional task group is
overseeing assessment and remediation or replacement efforts in the areas of
core systems, network and office automation and field information and
non-information systems. The assessment and remediation/replacement phases are
well underway, and no major problems have yet been identified that would
materially affect the Company's ability to perform on any of its current
contracts. These assessments include third party service providers and other
vendors on whom a given contract might depend.
One area of possible vulnerability that is being addressed is the payment
capability of the various government payment offices receiving and processing
invoices from a given contract site. While the readiness of government financial
systems is considered "mission critical" by the government, the specific
readiness of many government payment offices is not known. Efforts have been
started by the Company to assess this issue.
Another assessment being pursued by contract sites is on government-furnished
equipment (GFE). If GFE is critical to performance on a contract and is not
compliant, a failure could affect contract performance. While this may not be
material to the Company as a whole, individual contracts are ensuring that
non-compliant GFE is assessed and remediation responsibilities are delineated.
An employee awareness program has been initiated that is intended to inform
employees and managers of the potential for Y2K problems. In addition to
creating general awareness, this program is intended to address "home grown"
office automation systems and stand alone PC's. None of these types of systems
is considered mission critical to the Company as a whole.
Infrastructure items that may have Y2K compliance problems such as desktop
workstations, network components, servers, etc., are being systematically
repaired or replaced as part of the normal infrastructure replacement strategy.
The annual expenditures for these components are not significantly above levels
that can be expected in the normal course of business. Depreciation and
amortization expenses for the resystemization and for these infrastructure
components are allowable costs under government contracts.
<PAGE>
The Company held a Y2K symposium during the third quarter for employees that are
involved in contract negotiations and implementations as well as employees who
purchase technology products for the Company. Recommended clauses for contracts
and purchases have been adopted to protect the Company from inappropriate
litigation.
In summary, the primary Y2K vulnerability for the Company is possible failure of
core systems. The resystemization effort is a top priority within DynCorp with
dedicated teams and incentive plans for keeping these employees throughout the
project. Contingency plans are in place in the event of a delay. Millennium
Coordinators are overseeing the Y2K effort at each business unit, and a
multi-functional team headed by the Corporate Chief Information Officer acts as
a Y2K steering committee with representation from Internal Audit, Risk
Management, the Law Department, Finance, and Resystemization. While assessments
are still underway at the contract level, progress is being made to complete
assessments and impact analyses during the fourth quarter of 1998.
Forward Looking Statements
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward-looking statements" that are
based on management's expectations, estimates, projections and assumptions.
Words such as "expects," "anticipates," "plans," "believes," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements that include, but are not limited to, projections of
future performance, assessment of contingent liabilities and expectations
concerning liquidity, cash flow and contract awards. Such forward-looking
statements are made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future performance and involve certain risks and uncertainties that are
difficult to predict. Therefore, actual future results and trends may differ
materially from what is forecast in forward-looking statements due to a variety
of factors, including the Company's successful execution of internal performance
plans; the outcome of litigation in process; labor negotiations; changing
priorities or reductions in the U.S. Government defense budget; and termination
of government contracts due to unilateral government action.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
This item is incorporated herein by reference to Note 9 to the Consolidated
Condensed Financial Statements included elsewhere in this quarterly Report on
Form 10-Q.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None filed
(b) Reports on Form 8-K
None filed
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNCORP
Date: November 13, 1998 /s/ Patrick C. FitzPatrick
--------------------------
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: November 13, 1998 /s/ John J. Fitzgerald
----------------------
J.J. Fitzgerald
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
THIRD QUARTER 10 - Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10 - Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-01-1998
<CASH> 6,393
<SECURITIES> 0
<RECEIVABLES> 240,472
<ALLOWANCES> 1,216
<INVENTORY> 675
<CURRENT-ASSETS> 258,905
<PP&E> 47,418
<DEPRECIATION> 27,715
<TOTAL-ASSETS> 405,295
<CURRENT-LIABILITIES> 171,510
<BONDS> 0
0
0
<COMMON> 496
<OTHER-SE> 8,582
<TOTAL-LIABILITY-AND-EQUITY> 405,295
<SALES> 917,833
<TOTAL-REVENUES> 917,833
<CGS> 0
<TOTAL-COSTS> 871,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,325
<INCOME-PRETAX> 17,907
<INCOME-TAX> 6,590
<INCOME-CONTINUING> 9,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,885
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.94
</TABLE>
