FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 1998
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
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. 10,169,304 shares of common
stock having a par value of $0.10 per share were outstanding at May 13, 1998.
DYNCORP
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets -
April 2, 1998 and December 31, 1997
Consolidated Condensed Statements of Operations -
Three Months Ended April 2, 1998 and March 27, 1997
Consolidated Condensed Statements of Cash Flows -
Three Months Ended April 2, 1998 and March 27, 1997
Consolidated Statement of Permanent Stockholders' Equity
Notes to Consolidated Condensed Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
APRIL 2, 1998 AND DECEMBER 31, 1997
(Dollars in thousands)
April 2,
1998 December 31,
Unaudited 1997
Assets
Current Assets:
Cash and cash equivalents $ 17,706 $ 24,602
Accounts receivable and contracts in process (Note 2) 224,165 202,758
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 822 1,090
Other current assets 12,607 11,133
Total current assets 255,300 239,583
Property and Equipment (net of accumulated depreciation
and amortization of $24,157 in 1998 and $22,412 in 1997) 19,496 19,620
Goodwill and Contracts Acquired (net of accumulated amortization
of $45,898 in 1998 and $43,577 in 1997) (Note 7) 53,894 46,750
Other Assets (Notes 2 and 9) 77,948 76,631
Total Assets $406,638 $382,584
See accompanying notes to consolidated condensed financial statements.
<PAGE>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
APRIL 2, 1998 AND DECEMBER 31, 1997
(Dollars in thousands, except per share amounts)
April 2,
1998 December 31,
Unaudited 1997
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt $ 339 $ 450
Accounts payable 39,300 46,109
Deferred revenue and customer advances 2,941 2,947
Accrued liabilities 112,722 105,833
Total current liabilities 155,302 155,339
Long-Term Debt (Note 2) 172,198 152,239
Other Liabilities and Deferred Credits (Note 9) 77,670 77,780
Contingencies and Litigation (Note 9) - -
Temporary Equity (Note 3):
Redeemable Common Stock -
ESOP Shares, 6,967,930 and 6,887,119
shares issued and outstanding in 1998 and 1997,
respectively, subject to restrictions 159,527 151,823
Other, 125,714 shares issued and outstanding in
1998 and 1997, respectively 3,111 3,017
Permanent Stockholders' Equity (Note 4):
Common Stock, par value ten cents per share, authorized
20,000,000 shares; issued 4,738,412 shares in 1998
and 4,784,770 shares in 1997 474 478
Common Stock Warrants 1,252 1,259
Paid-in Surplus 125,300 125,412
Reclassification to temporary equity for redemption value
greater than par value (161,929) (154,138)
Deficit (91,174) (93,837)
Common Stock Held in Treasury, at cost; 1,675,676 shares and 170,716 warrants
in 1998 and 1,677,511 shares and
170,716 warrants in 1997 (28,667) (28,703)
Unearned ESOP Shares (6,426) (8,085)
Total Liabilities and Stockholders' Equity $406,638 $382,584
See accompanying notes to consolidated condensed financial statements.
<PAGE>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
UNAUDITED
Three Months Ended
April 2, March 27,
1998 1997
Revenues:
Information and Engineering Technology $ 74,158 $ 62,565
Aerospace Technology 116,497 104,594
Enterprise Management 107,218 103,978
Total revenues 297,873 271,137
Costs and expenses:
Cost of services 283,936 259,794
Corporate selling and administrative 5,267 4,439
Interest income (349) (361)
Interest expense 3,794 2,983
Other 366 277
Total costs and expenses 293,014 267,132
Earnings before income taxes and minority interest 4,859 4,005
Provision for income taxes (Note 5) 1,776 1,286
Earnings before minority interest 3,083 2,719
Minority interest 420 408
Net earnings $ 2,663 $ 2,311
Weighted average number of shares
outstanding for basic earnings per share (Note 6) 10,000 8,628
Weighted average number of shares
outstanding for diluted earnings per share (Note 6) 10,463 11,078
Basic earnings per share $ 0.27 $ 0.27
Diluted earnings per share $ 0.25 $ 0.21
See accompanying notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
UNAUDITED
Three Months Ended
<S> <C> <C>
April 2, March 27,
1998 1997
Cash Flows from Operating Activities:
Net earnings $ 2,663 $ 2,311
Adjustments to reconcile net earnings from operations
to net cash used:
Depreciation and amortization 2,088 2,650
Other 536 163
Changes in current assets and liabilities, net of acquisitions:
Increase in current assets except
cash, cash equivalents and notes receivable (19,280) (4,912)
Decrease in current liabilities except notes payable
and current portion of long-term debt (1,320) (8,195)
Cash used by operating activities (15,313) (7,983)
Cash Flows from Investing Activities:
Sale of property and equipment 4 23
Purchase of property and equipment (832) (1,360)
Assets and liabilities of acquired businesses (10,000) -
Increase in investment in unconsolidated affiliates (478) (154)
Other (1,645) (116)
Cash used by investing activities (12,951) (1,607)
Cash Flows from Financing Activities:
Treasury stock issued (purchased) 54 (268)
Payment on indebtedness (161) (595)
Proceeds from Contract Receivable Collateralized Notes 1997-1 20,000 -
Proceeds from issuance of Senior Notes - 99,484
Stock released to Employee Stock Ownership Plan 1,659 1,297
Loan to Employee Stock Ownership Plan (Note 4) - (10,379)
Deferred financing expenses (3,502)
Common stock and warrants purchased from investors - (37,819)
Other (184) (367
Cash provided from financing activities 21,368 47,851
Net (Decrease) Increase in Cash and Cash Equivalents (6,896) 38,261
Cash and Cash Equivalents at Beginning of the Period 24,602 25,877
Cash and Cash Equivalents at End of the Period $ 17,706 $ 64,138
Supplemental Cash Flow Information:
Cash paid for income taxes $ 730 $ 804
Cash paid for interest $ 7,438 $ 4,169
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PERMANENT STOCKHOLDERS' EQUITY
(Dollars in thousands)
UNAUDITED
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustment for
Common Redemption Value Unearned
Common Stock Paid-in Greater than Treasury ESOP
Stock Warrants Surplus Par Value Deficit Stock Shares
Balance, December 31, 1997 $ 478 $1,259 $125,412 $(154,138) $(93,837) $ (28,703)$ (8,085)
Stock issued under
Restricted Stock Plan 2 170
Treasury stock issued 86
Treasury stock purchased (288) (50)
Stock warrants and options exercised 1 (7) 6
Payment received on Employee Stock
Ownership Plan note 1,659
Common stock and warrants
purchased (Note 4)
Net earnings 2,663
Reclassification to Redeemable
Common Stock (7) (7,791)
Balance, April 2, 1998 $ 474 $1,252 $125,300 $(161,929) $(91,174) $(28,667) $(6,426)
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
April 2, 1998
UNAUDITED
1. 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 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. Prior year financial statements have been reclassified to conform to
1998 presentation. Prior year earnings per share have been restated in
accordance with SFAS No.128 "Earnings Per Share," which was adopted by the
Company on December 31, 1997. (See Note 6)
2. At April 2, 1998, $75.7 million of accounts receivable are restricted as
collateral for the Contract Receivable Collateralized Notes, Series
1997-1. 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
April 2, 1998 and December 31, 1997.
At April 2, 1998, the Company's wholly-owned subsidiary Dyn Funding
Corporation ("DFC") had drawn $20.0 million under the Floating Rate
Contract Receivable Collateralized Rates Notes, Series 1997-1, Class B
(the "Class B Notes"). This amount was utilized to fund a temporary
increase in the Company's working capital. Subsequent to April 2, 1998,
DFC reduced the balance outstanding under the Class B Notes by $15.0
million.
Accounts receivable are net of an allowance for doubtful accounts of
$316,000 as of April 2, 1998 and $476,000 as of December 31, 1997.
3. Common stock which is redeemable has been reflected as Temporary Equity at
each balance sheet date and consists of the following:
Balance at Balance at
Redeemable April 2, Redeemable December 31,
Shares Value 1998 Shares Value 1997
ESOP Shares 3,520,037 $24.75 $ 87,120,916 3,520,037 $24.00 $ 84,480,888
3,447,893 $21.00 72,405,753 3,367,082 $20.00 67,341,640
6,967,930 $159,526,669 6,887,119 $151,822,528
Other Shares 125,714 $24.75 $ 3,111,422 125,714 $24.00 $ 3,017,136
In accordance with ERISA regulations and the Employee Stock Ownership Plan
documents, the ESOP Trust or the Company is obligated to purchase vested
common stock shares from ESOP participants at the 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 common stock.
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, if the stock is publicly traded, the
market value at a specified date; or, if the Company's stock is not
publicly traded, the fair value at the time of exercise.
4. 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
April 2, 1998, the unpaid balance on these loans, $6.426 million
representing 308,060 shares, is reflected as a reduction in stockholders'
equity.
5. 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.
6. The Company has adopted SFAS No. 128 "Earnings Per Share," which became
effective for financial statements for periods ended 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
considered contingently issuable and 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.
<PAGE>
The reconciliation of basic EPS to diluted EPS is as follows:
3 Months Ended
April 2, 1998 March 27, 1997
Earnings Per Earnings Per
Share Share
Basic Earnings Per Share
Income for basic earnings per share $2,663 $0.27 $2,311 $0.27
Weighted average shares outstanding 9,999,612 8,628,228
Diluted Earnings Per Share
Income for diluted earnings per share $2,663 $0.25 $ 2,311 $0.21
Weighted average shares outstanding 9,999,612 8,628,228
Effect of dilutive securities:
Warrants 341,867 2,321,176
Stock Options 121,912 128,749
Shares for diluted earnings per share 10,463,391 11,078,153
7. 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
million in cash. FMAS is a leading provider of proprietary outcome
performance measurement systems to all DoD treatment facilities as well as
a number of other facilities under contract with the DoD. The acquisition
has been accounted for as a purchase and $7.8 million of goodwill, which
will be amortized over 20 years, has been recorded based on a preliminary
allocation of the purchase price.
8. New 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 does not report any transactions which would be deemed to be
included in comprehensive income.
AICPA Statement of Position 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.
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 $101.0 million (including compensatory
punitive damages and penalties). The Company believes that the amount that
will actually be recovered in these cases will be substantially less than
the amount claimed. After taking into account available insurance, the
Company believes it is adequately reserved with respect to the potential
liability for such claims. The estimates set forth above do not reflect
claims that may have been incurred but have not yet been filed. The Company
has recorded such damages and penalties that are considered to be probable
recoveries against the Company or its subsidiaries.
(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 April 17, 1998, 18,326 plaintiffs have filed claims against
Fuller-Austin and various other defendants. Of these claims, 2,239 have
been dismissed and 4,717 have been resolved without an admission of
liability at an average cost of $3,262 per claim, excluding legal defense
costs.
The following is a summary of the number of claims filed against
Fuller-Austin:
Years
1994
& Prior 1995 1996 1997 1998 Total
Claims Filed 4,057 4,523 4,122 3,787 1,837 18,326
Claims Dismissed (113) (51) (1,116) (931) (28) (2,239)
Claims Resolved (1,619) (189) (1,825) (460) (624) (4,717)
Claims Under Appeal (13) (13)
Claims Outstanding,
as of April 17, 1998 11,357
In connection with these claims, Fuller-Austin's primary insurance carriers
have incurred approximately $27.6 million (including $12.2 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 18-month period ending April 30, 1998, no cases were
tried by plaintiffs although approximately 904 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 $2,658 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 law suits to add Fuller-Austin as a defendant. The
settlement, if concluded, will aggregate 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 11,357 claims outstanding
as of April 17, 1998. Based on this analysis and consultation with its
other professional advisors, Fuller-Austin has estimated its cost,
including legal defense costs, to be $11.2 million for claims filed and
still unsettled and $38.7 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. The Company cautions that
these estimates are 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.
At April 2, 1998 and December 31, 1997, Fuller-Austin recorded an estimated
liability for future indemnity payments and defense costs related to
currently unsettled claims and minimum estimated future claims of $49.9
million and $50.2 million, 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 $4.4 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 $4.4 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 $49.9 million and $50.2 million at
April 2, 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 $49.9 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.
<PAGE>
Possible Global Settlement/Bankruptcy Filing
Representatives of Fuller-Austin are currently in discussions with
representatives of more than 75% of the asbestos claimants and a designated
but not confirmed representative of potential future asbestos claimants
regarding the possibility of a global settlement of all present and future
asbestos claims against Fuller-Austin. If successful, these discussions
could lead to the preparation and filing by Fuller-Austin of a bankruptcy
proceeding under the U.S. Bankruptcy Code (the "Code") that has been
previously approved by the asbestos claimants. It is contemplated that
presently negotiated settlements with certain of the carrier-defendants in
the coverage litigation would also be achieved by Fuller-Austin
concurrently with the confirmation of the Fuller-Austin reorganization plan
as part of the bankruptcy proceeding. The contemplated plan would call for
Fuller-Austin and certain of its insurance proceeds and rights to be placed
in a bankruptcy trust to be administered by unrelated parties for the
benefit of present and future asbestos claimants.
In furtherance of the proposed global settlement, representatives of
Fuller-Austin, its parent and sole stockholder, the Company, the present
asbestos claimants, and the representative of the future unknown claimants
have 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 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 is approximately
$14.0 million, a portion of which was recorded in prior years and the
balance, $7.8 million, was reserved by the Company in the fourth quarter of
1997 in anticipation of the settlement under the Release Agreement.
In the event Fuller-Austin is unsuccessful in concluding such negotiations
for a global settlement of all present and future asbestos claims, and
depending on the progress of the coverage litigation, the extent to which
carriers agree to voluntarily pay Fuller-Austin asbestos claims pending the
resolution of the coverage litigation, and the interim cash demands on
Fuller-Austin in connection with pending and future asbestos claims,
Fuller-Austin may seek protection under the Code without a global or other
settlement with the asbestos claimants. Fuller-Austin has been advised by
its bankruptcy counsel that, upon filing for such protection under the
Code, all pending claims against Fuller-Austin (including all asbestos
claims) would be stayed, and the disposition of such claims and all
Fuller-Austin assets, including its insurance assets, would be subject to
the jurisdiction of the U.S. Bankruptcy Court in which Fuller-Austin's
petition is filed.
There can be no assurance at this time that the global settlement will be
concluded. Also, it is impossible to determine whether it will be necessary
for Fuller-Austin to otherwise seek protection from its creditors
(including asbestos claimants) under the Code.
(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. Arbitration will take place in
Washington, D.C. later in 1998. The Company believes that it has
established adequate ($1.3 million at April 2, 1998) 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 recently 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 $101.0 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 April 2, 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 the Department of Justice and other investigative
organizations, resulting from employee and other allegations regarding
business practices. In management's opinion, there are no outstanding
issues of this nature at April 2, 1998 that will have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
<PAGE>
10. 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:
April 2, March 27,
1998 1997
Revenue
I&ET $ 74,158 $ 62,565
AT 116,497 104,594
107,218 103,978
$297,873 $217,137
Operating Profit
I&ET $ 4,412 $ 3,788
AT 4,040 3,080
EM 5,047 4,915
13,499 $ 11,783
Corporate selling and
Administrative 5,267 4,440
Interest (net expense) 3,445 2,622
Goodwill amortization 539 394
Minority interest included in
operating profit (420) (408)
Acquisition costs 178 897
Other miscellaneous (369) (167)
Earnings (loss) from continuing
operations before income taxes
and minority interest $ 4,859 $ 4,005
As of
April 2, December 31,
1998 1997
Identifiable Assets
I&ET $ 129,039 $118,016
AT 76,639 75,239
EM 84,708 70,026
Other (a) 50,321 51,575
Corporate 65,931 67,728
$406,638 $382,584
(a) 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
The following discussion of financial condition and results of operations should
be read in conjunction with the 1997 Form 10-K.
Working capital at April 2, 1998 was $100.0 million compared to $84.2 million at
December 31, 1997, an increase of $15.8 million, which was primarily due to an
increase in accounts receivable. During the first quarter of 1998, the
implementation of a new procedure for payments by the Defense Finance and
Accounting Service ("DFAS") caused significant delays in payments on certain of
the Company's contracts with the Department of Defense. These delays, along with
a phase-in of two significant contracts, were primarily responsible for the
borrowing of $20.0 million during the first quarter under the Class B Notes. As
the implementation at DFAS has progressed, delays in payment have become less
significant, and subsequent to April 2, 1998 the balance outstanding under the
Class B Notes was reduced by $15.0 million.
Cash used by operations was $15.3 million in the first quarter of 1998, as
compared to $8.0 million in the first quarter of 1997. The increase in cash used
is mainly attributable to a greater demand for working capital in 1998, as
described above.
Investing activities used funds of $13.0 million in the first quarter of 1998,
principally for the acquisition of FMAS and for the purchase of new software for
internal use. During the first quarter of 1997, cash used by investing
activities was $1.6 million, principally for the purchase of property and
equipment.
Financing activities provided funds of $21.4 million in the first quarter of
1998 which consisted primarily of $20.0 million borrowed against the Contract
Receivable Collateralized Class B Variable Rate Note to finance working capital
needs described above. Subsequent to April 2, 1998, the balance outstanding
under the Class B Notes was reduced by $15.0 million. During the first quarter
of 1997, financing activities provided funds of $47.9 million, which consisted
primarily of proceeds from the sale of the 9.5% Senior Notes less funds utilized
to 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 Notes.
At April 2, 1998, $75.7 million of accounts receivable are restricted as
collateral for the Contract Receivable Collateralized Notes Series 1997-1.
At April 2, 1998, backlog (including option years on government contracts) was
$3.7 billion compared to $3.6 billion at December 31, 1997, a net increase of
$142 million, attributable to contract wins, extensions and add-ons.
Results of Operations
Revenues for the first quarter of 1998 were $297.9 million, up $26.8 million
(9.9%) from $271.1 million in the first quarter of 1997. Revenues for Aerospace
Technology (AT), Enterprise Management (EM) and Information and Engineering
Technology (I&ET) for the first quarter were $116.5 million, $107.2 million and
$74.2 million respectively, an increase of $11.9 million, $3.2 million and $11.6
million over the comparable period in 1997. Increased levels of effort on State
Department contracts in support of the government's drug eradication program and
the Haitian peacekeeping initiative contributed to the increase in both revenues
and operating profit for AT. Both EM's revenues and operating profit increased
in the first quarter 1998 over the first quarter 1997 primarily due to the
February, 1998, acquisition of FMAS Corporation, a medical outcome measurement
and data abstraction services company. Increased revenues for I&ET were
attributable to higher levels of effort on numerous Indefinite
Delivery/Indefinite Quantity ("IDIQ") contracts and increased state and local
business.
Cost of Services was 95.3% of revenue for the first quarter of 1998 as compared
to 95.8% of revenue for the comparable period in 1997, resulting in gross
margins of $13.9 million (4.7%) and $11.3 million (4.2%), respectively. The same
contract wins and losses which affected revenues and operating profit similarly
affected gross margin. Additionally, the Company charged $0.5 million to Cost of
Services in the first quarter of 1997, representing a partial write-off of
certain purchased software as the result of net realization concerns.
Interest expense was $3.8 million in the first quarter of 1998, up from $3.0
million in 1997, principally due to additional borrowings in 1998 from the
utilization of the Class B Variable Rate Note.
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.
<PAGE>
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
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: May 12, 1998 /s/ Patrick C. FitzPatrick
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: May 12, 1998 /s/ John J. Fitzgerald
J.J. Fitzgerald
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> APR-02-1998
<CASH> 17706
<SECURITIES> 0
<RECEIVABLES> 224165
<ALLOWANCES> 316
<INVENTORY> 822
<CURRENT-ASSETS> 255300
<PP&E> 43653
<DEPRECIATION> 24157
<TOTAL-ASSETS> 406638
<CURRENT-LIABILITIES> 155302
<BONDS> 172198
0
0
<COMMON> 474
<OTHER-SE> 994
<TOTAL-LIABILITY-AND-EQUITY> 406638
<SALES> 297873
<TOTAL-REVENUES> 297873
<CGS> 0
<TOTAL-COSTS> 283936
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3794
<INCOME-PRETAX> 4859
<INCOME-TAX> 1776
<INCOME-CONTINUING> 2663
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2663
<EPS-PRIMARY> .27
<EPS-DILUTED> .25
</TABLE>
