SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 23, 2000
(December 10, 1999)
DynCorp
(Exact name of registrant as specified in its charter)
Delaware 1-3879 36-2408747
(State or other jurisdiction (Commission File Number) IRS Employer
of incorporation) (Identification No)
11710 Plaza America Drive, Reston, Virginia 20190
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 261-5000
Former address: 2000 Edmund Halley Drive, Reston, Virginia 20191
(Former name or former address, if changed since last report)
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The registrant hereby amends and restates Item 7 to its Current Report on Form
8-K, filed with the Securities and Exchange Commission as of December 27, 1999,
to add financial statements exhibits relating to the business acquired and
amends the cover sheet of the Current Report to reflect the change of address
and telephone number of the registrant's principal executive offices.
Item 7. -- Financial Statements and Exhibits
Exhibit 1 Purchase Agreement, dated as of October 29, 1999, between the
registrant and Contel Federal Systems, Inc. joined in to the
extent set forth therein by GTE Corporation (previously filed)
Exhibit 2 Credit Agreement, dated as of December 10, 1999, among the
registrant, Citicorp USA, as administrative agent, and Citibank,
N.A., Citicorp USA, Inc., Bankers Trust Company, and First Union
National Bank, as lenders.(previously filed)
Exhibit 3 Purchase Agreement, dated as of December 10, 1999, among the
registrant, DB Capital Investors, L.P., The Northwestern
Mutual Life Insurance Company, and Wachovia Capital Investments.
(previously filed)
Exhibit 4 Registration Rights Agreement, dated as of December 10, 1999,
among the registrant, DB Capital Investors, L.P., The
Northwestern Mutual Life Insurance Company, and Wachovia Capital
Investments. (previously filed)
Exhibit 5 Audited financial statements of Information Systems Division (A
Division of GTE Government Systems Corporation) as of December 31,
1998 and 1997, together with auditors' report. (filed herewith)
Exhibit 6 Unaudited pro forma combined statements of operation for the
nine-month and twelve-month periods ending September 30, 1999 and
December 31, 1998, respectively, giving effect to the acquisition
as though it had occurred on the first day of the respective
periods; unaudited pro forma combined balance sheet as of
September 30, 1999, giving effect to the acquisition as though it
had occurred on September 30, 1999; and notes to unaudited pro
forma combined financial statements. (filed herewith)
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 hereunto duly authorized.
DynCorp
Date: February 23, 2000 /s/ H. Montgomery Hougen
------------------------
H. Montgomery Hougen
Vice President and Secretary
Exhibit 5
INFORMATION SYSTEMS DIVISION
(A Division of GTE Government Systems Corporation)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Information Systems Division:
We have audited the accompanying balance sheets of the Information Systems
Division (a division of GTE Government Systems Corporation) as of December 31,
1998 and 1997, and the related statements of income, net parent company
investment and cash flows for the years then ended. These financial statements,
as restated (see Note 1), are the responsibility of the Division's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Information Systems
Division as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the years then ended, in conformity with generally
accepted accounting principles.
Arthur Andersen
Boston, Massachusetts
January 12, 2000
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INFORMATION SYSTEMS DIVISION
(A Division of GTE Government Systems Corporation)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
ASSETS
1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ - $ 58
Receivables, less allowance
of $1,032 and $536, in 1998
and 1997, respectively 85,128 67,719
Due from affiliates 187 348
Inventories 7,274 8,683
Deferred income taxes 5,062 4,693
Other 456 -
Total current assets 98,107 81,501
PROPERTY, PLANT AND EQUIPMENT, NET 7,296 4,556
DEFERRED CHARGES - 172
DEFERRED INCOME TAXES 11,906 10,619
OTHER ASSETS, NET 434 823
Total assets $ 117,743 $ 97,671
LIABILITIES AND NET PARENT COMPANY INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 7,563 $ 2,440
Accrued payroll and benefits 6,192 5,310
Advance billings 10,672 10,023
Other current liabilities 9,839 9,822
Total current liabilities 34,266 27,595
EMPLOYEE BENEFIT PLAN OBLIGATIONS 28,361 26,223
COMMITMENTS AND CONTINGENCIES (Note 9)
NET PARENT COMPANY INVESTMENT 55,116 43,853
Total liabilities and net parent $117,743 $ 97,671
company investment
The accompanying notes are an integral part of these financial statements.
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INFORMATION SYSTEMS DIVISION
(A Division of GTE Government Systems Corporation)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
1998 1997
REVENUE:
Affiliate $ 184 $ 509
Nonaffiliate 233,368 208,877
Total revenue 233,552 209,386
OPERATING COSTS AND EXPENSES:
Cost of sales (exclusive of
depreciation and amortization) 189,278 163,964
Research and development 1,909 2,237
Selling, general and administrative 27,177 31,526
Depreciation and amortization 2,584 3,639
Total operating costs and expenses 220,948 201,366
Operating income 12,603 8,020
INTEREST EXPENSE 1,220 1,118
Income before provision for income taxes 11,383 6,902
PROVISION FOR INCOME TAXES 4,661 2,957
Net income $ 6,722 $ 3,945
The accompanying notes are an integral part of these financial statements.
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INFORMATION SYSTEMS DIVISION
(A Division of GTE Government Systems Corporation)
STATEMENTS OF NET PARENT COMPANY INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
Net Parent
Company
Investment
BALANCE, DECEMBER 31, 1996 $ 46,090
Net income 3,945
Net transfers to GSC (6,182)
BALANCE, DECEMBER 31, 1997 43,853
Net income 6,722
Net transfers from GSC 4,541
BALANCE, DECEMBER 31, 1998 $ 55,116
The accompanying notes are an integral part of these financial statements.
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INFORMATION SYSTEMS DIVISION
(A Division of GTE Government Systems Corporation)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,722 $ 3,945
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 2,584 3,639
Deferred income taxes (1,655) 738
Changes in assets and liabilities-
Receivables (17,409) 470
Due from affiliate 161 248
Inventories 1,409 6,007
Other current assets (554) (26)
Deferred changes 172 598
Accounts payable 5,123 (3,745)
Accrued payroll and benefits 882 2,264
Advance billings 649 (1,366)
Other current liabilities 115 (2,538)
Employee benefit plan obligations 2,138 (648)
Net cash provided by operating activities 337 9,586
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,696) (3,633)
Increase in other assets (240) -
Proceeds from sales of property plant and equipment - 225
Net cash used in investing activities (4,936) (3,408)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transfers from (to) GSC 4,541 (6,183)
Net cash provided by financing activities 4,541 (6,183)
Decrease in cash and cash equivalents (58) (5)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 58 63
CASH AND CASH EQUIVALENTS, END OF YEAR $ - $ 58
The accompanying notes are an integral part of these financial statements.
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INFORMATION SYSTEMS DIVISION
(A Division of GTE Government Systems Corporation)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Dollars in Thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
The Information Systems Division (ISD or the Division) is a division of
GTE Government Systems Corporation (GSC). GSC was incorporated in
Delaware in 1982 and is a wholly owned subsidiary of Contel Federal
Systems, Inc. (CFS), which in turn is a wholly owned subsidiary of GTE
Corporation (GTE). Headquartered in Needham Heights, Massachusetts, GSC
provides communications and information solutions and services.
On September 1, 1999, General Dynamics Corporation acquired GTE
Government Systems Corporation, except for ISD and certain other assets
and liabilities of GSC. Also effective September 1, 1999, the assets and
liabilities of ISD were transferred to GTE Information Systems LLC a
wholly-owned subsidiary of CFS.
On December 10, 1999, GTE Information Systems LLC was sold to DynCorp.
In December 1999, Information Systems Division restated its December 31,
1998 financial statements. The restatement related to the Division's
obligation for postretirement benefits other than pension and the related
expense. As of December 31, 1998, the Division had previously recorded a
liability of $23,722 for the obligation. Upon further review by the
Division's actuaries, management has determined that $25,298 should be
recorded for the liability as of December 31, 1998. In addition, the
adjusted related expense recorded in the accompanying statement of
operations is approximately $1,003 compared with $741, which had been
previously recorded. The accompanying financial statements reflect this
restatement and include an increase in the associated deferred tax asset.
Nature of Operations
Information Systems Division provides a broad range of integrated
telecommunications services and information solutions to the U.S.
Department of Defense, government civilian agencies, state and local
governments, and selected commercial customers. Headquartered in
Chantilly, Virginia, ISD is organized into two business areas: Defense
Market and Civil Market.
Revenue Recognition and Unbilled Receivables
The Division provides services under fixed price, cost reimbursement,
time and material, and level of effort contracts. Revenues are generally
recognized using the percentage of completion method as costs are
incurred, and include applicable fees in the proportion that costs
incurred bear to total estimated
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INFORMATION SYSTEMS DIVISION
(A Division of GTE Government Systems Corporation)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Dollars in Thousands)
(Continued)
costs. Changes in contract fee rates result in cumulative fee adjustments
booked to current period income. Award fees under cost reimbursement
contracts are generally recognized upon receipt of contract modification
incorporating the award. When a loss is indicated on any contract in
process, provision for the estimated loss is charged to income currently,
as measured by comparing projected revenues against projected costs prior
to the absorption of general and administrative (G&A) expenses.
Accrued revenues in excess of billings are reported as unbilled
receivables (see Note 2). Such amounts usually become billable upon
completion of a specific phase of the contract, negotiation of contract
modifications, completion of government audit or acceptance by the
customer. The Division's unbilled receivables are generally expected to
be billed and collected within one year. Costs related to certain
contracts, including applicable indirect costs, are subject to audit by
the U.S. government. Price adjustment reserves are established for
flexibly priced contracts to recognize the estimated difference between
overhead and G&A rates used to record sales and the expected recoverable
rates after negotiation with the government. Billings in excess of
accrued revenues are reported as advance billings.
The Division generally requires that funded contract value be awarded in
order to accrue revenue and margin. Amounts related to claims are
included in revenues only when they can be reliably estimated and
realization is probable.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions, including estimates of anticipated contract costs and
revenues utilized in the earnings recognition process, that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
The Division accounts for income taxes using the liability method as set
forth in Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under this method deferred taxes and
liabilities are established for the temporary differences between the
accounting bases and tax bases of the Division's assets and liabilities.
Deferred taxes are measured using enacted tax rates. Provisions for
income taxes recognize the tax effect of all revenue and expense
transactions as well as any changes during the period in deferred tax
assets and liabilities. The effects of changes in tax rates and laws on
deferred tax assets and liabilities are reflected in net income in the
period in which such changes are enacted.
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The Division's results are included in GTE's consolidated federal income
tax return and certain state income tax returns. For purposes of these
financial statements, the Division is using the separate return method to
allocate income tax expense. Under the separate return method, the income
tax provision reflects what the Division's current and deferred tax
expense would have been had the Division filed separate tax returns. For
purposes of these financial statements, all accrued income taxes have
been included in the net parent company investment account.
Financial Instruments
The fair values of the Division's financial instruments, accounts payable
and receivables, closely approximate their carrying value.
Inventories
Inventories consist primarily of contract work completed in advance of
customer funding, and procurements in advance of customer requirements
designed to achieve pricing breaks and/or to maintain anticipated
delivery schedules. Inventory is tracked based on actual cost and stated
at the lower of cost or net realizable value.
Property, Plant and Equipment
Property, plant and equipment is stated at original cost. Assets lives
and depreciation methods are generally as follows:
Data processing equipment 6 years Double declining balance
Machinery and equipment 3-20 years Double declining balance
Buildings and improvements 20-50 years Straight line or 150% declining
balance
Furniture and fixtures 7-15 years Double declining balance
Property under capital
leases Life of lease Double declining balance
Revenue assets purchased for specific contracts are depreciated as direct
contract charges on a straight-line basis over the contract term.
Betterments, renewals and extraordinary repairs that extend the life of
the asset are capitalized; other repairs and maintenance are expensed.
The cost and accumulated depreciation applicable to assets retired are
removed from the accounts and the gain or loss on disposition, if any, is
recognized in income.
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Other Assets
Other assets consist of capitalized software development costs. Software
development costs for new software and for enhancements to existing
software are expensed as incurred prior to the establishment of
technological feasibility and subsequent to general release of the
product. Software development costs, after technological feasibility,
have been capitalized and are being amortized on a straight-line basis
over the estimated life of the products or three years, whichever is
less.
Impairment of Long-Lived Assets
The Division reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. If the sum of the expected nondiscounted
cash flows is less than the carrying amount of the assets, the Division
would recognize an impairment loss. Based on its review, the Division
does not believe that any material impairment of its long-lived assets
has occurred as of December 31, 1998 or 1997.
Recent Accounting Pronouncements
Effective January 1, 1998, the Division adopted SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for the
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in the financial statements. The
effect of adopting this pronouncement was not material to the Division's
financial statements.
In March 1998 the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP 98-1,
effective January 1, 1999, defines internal-use software and requires
that the cost of such software be expensed as incurred until certain
capitalization criteria are met. External direct costs of materials and
services consumed in developing or obtaining internal-use computer
software, and payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use computer
software project (to the extent of the time spent directly on the
project) are capitalized. The Division has elected to expense in-house
developed internal-use software with a cost below $500, and purchased
software with a cost below $200. Generally, training costs and data
conversion costs are expensed as incurred. Prior to the effective date of
SOP 98-1, the Division's practice has generally been to expense
internal-use software.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 requires all costs associated with
pre-opening, pre-operating and organization activities to be expensed as
incurred. The Division will adopt SOP 98-5 beginning January 1, 1999. The
Division believes that adoption of SOP 98-5 will not have a material
impact on the Division's financial statements or results of operations.
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS No. 133,
as amended by SFAS No. 137, is effective for fiscal quarters of all
fiscal years beginning after June 15, 2000. A Division may also implement
the statement as of the beginning of any fiscal quarter after issuance.
SFAS No. 133 cannot be applied retroactively. SFAS No. 133, as amended by
SFAS No. 137, must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were
issued, acquired or substantially modified after either January 1, 1998
or January 1, 1999, as selected by the Division. The Division does not
expect that the adoption of this statement will have a material impact on
the Division's financial position or results of operations.
Transactions with Parent and Affiliates
The Division is billed by GSC for certain management, research and
development, accounting, treasury, human resource and brand name
advertising services. In addition, GSC through GTE provides financing,
investment and cash management services for the Division. These charges
amounted to $3,203 and $2,808 for the years ended December 31, 1998 and
1997, respectively. The amounts charged for these transactions are based
on a beneficiary analysis performed by GTE and GSC with expenses prorated
and invoiced accordingly.
The Division performs services under contract for other GTE affiliates.
Revenues under these contracts were $184 and $509 for the years ended
December 31, 1998 and 1997, respectively. The Division had a net
receivable from affiliates of $187 and $348 at December 31, 1998 and
1997, respectively.
Affiliates of the Division provide services as subcontractors pursuant to
certain contracts of the Division. These services are billed directly to
the customer by the affiliate; accordingly, there are no accounts
receivable or accounts payable related to these services on the
accompanying balance sheet of the Division. The Division does not earn
any profit on these services provided by their affiliates. Revenues and
costs related to these services for the years ended December 31, 1998 and
1997, were $20,629 and $13,148, respectively, and are reflected in the
accompanying statements of income.
For the years ended December 31, 1998 and 1997, GSC allocated to the
Division $1,220 and $1,126, respectively, for the Division's share of
GSC's interest expense. The allocation is based on the Division's capital
balance. In addition, GSC allocated occupancy charges to the Division for
a building owned by GTE (see Note 9).
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(2) RECEIVABLES
Receivables as of December 31, 1998 and 1997, consisted of the following:
1998 1997
Trade receivables $ 36,088 $ 30,761
Unbilled receivables 49,705 37,285
Employee and other receivables 367 209
Allowance for doubtful accounts (1,032) (536)
Receivables, net $ 85,128 $ 67,719
The Division classifies price adjustment reserves in other current
liabilities, which are established for flexibly priced contracts to
recognize the estimated difference between overhead and G&A rates used to
record sales and the expected recoverable rates after negotiation with
the government (see Note 6).
(3) INVENTORIES
As of December 31, 1998 and 1997, inventories consisted of work in
process of $7,274 and $8,683, respectively.
(4) PROPERTY, PLANT AND EQUIPMENT
As of December 31, 1998 and 1997, property, plant and equipment consisted
of the following:
1998 1997
Data processing equipment $ 10,135 $ 11,738
Machinery and equipment 3,230 814
Furniture and fixtures 257 69
Buildings and improvements 36 -
Revenue assets 55,999 55,777
Property under capital leases 55 81
Construction in process 3,948 685
Property, plant and equipment, at cost 73,660 69,164
Accumulated depreciation (66,364) (64,608)
Property, plant and equipment, net $ 7,296 $ 4,556
Depreciation expense in 1998 and 1997 was $1,955 and $3,010,
respectively.
(5) OTHER ASSETS
As of December 31, 1998 and 1997, other assets consisted of the
following:
1998 1997
Capitalized software, at cost $ 1,692 $ 1,452
Accumulated amortization (1,258) (629)
Other assets, net $ 434 $ 823
Capitalized software amortization expense was $629 in 1998 and 1997.
(6) OTHER CURRENT LIABILITIES
As of December 31, 1998 and 1997, other current liabilities consisted of
the following:
1998 1997
Accrued expenses $ 508 $ 677
Contract related reserves 7,328 7,244
Price adjustment reserves 2,003 1,803
Other - 98
Total $ 9,839 $ 9,822
Price adjustment reserves are established for flexibly priced contracts
to recognize the estimated difference between overhead and G&A rates used
to record sales and the expected recoverable rates after negotiation with
the government. The reserve considers management's estimate of overhead
rate and G&A differences, as well as the effect of open audit questions,
<PAGE>
noncompliance assertions, and the impact of negotiated settlements that
have not been applied at the individual contract level.
(7) EMPLOYEE BENEFIT PLAN OBLIGATIONS
As of December 31, 1998 and 1997, the employee benefit plan liabilities
consisted of the following:
1998 1997
Defined benefit pension plan $ 101 $ (1,202)
Postretirement benefits other than pension 25,298 26,146
Union postretirement other than pension 1,579 517
Union defined benefit pension 221 (67)
Supplement executive retirement plan 898 831
Other employee benefit plan obligations 1,118 998
29,215 27,223
Less--Current postretirement other than
pension liabilities 854 1,000
Total long-term employee benefit
plan liabilities $28,361 $ 26,223
Incentive Compensation Plans
GTE sponsors several incentive compensation plans to provide awards to
its officers and employees, as well as the officers and employees of its
subsidiaries. To be entitled to an annual award, a participant in the
plans must be an employee of GTE or an affiliate at the end of the plan
year. Awards under the plans may be granted in either cash or stock or a
combination at the discretion of the Compensation Committee of the Board
of Directors of GTE. The Division records a fixed incentive compensation
expense based on an amount provided from GTE Service Corporation that is
determined based on the participant's salaries. The Division records an
additional estimate of a discretionary performance based award. Under one
of the plans, a participant may elect to be paid for their award or defer
it until a later date. During 1998 and 1997, the Division recorded $769
and $600, respectively, of compensation expense under these plans.
Stock Option Plans
GTE maintains broad-based stock option plans that cover substantially all
employees. The Division participates in these plans. Prior to 1997,
options were granted separately or in conjunction with stock appreciation
rights (SARs). In 1997 the GTE long-term incentive plan (LTIP) was
approved. Each option granted under the LTIP conveys the right to
purchase at fair market value on the date of grant, shares of GTE common
stock. GTE has historically hedged the potential appreciation related to
the SARs and as a result, GTE incurred no net compensation expense in
1998. Accordingly, no amounts have been allocated to the Division
relative to the SARs.
Savings Plans
The Division participates in the employee savings plans sponsored by GTE
under Section 401(k) of the Internal Revenue Code. The plans cover
substantially all full-time employees. Under the plans, GTE provides
matching contributions in GTE common stock based on qualified employee
contributions. Matching contributions charged to expense by the Division
during 1998 and 1997 were $1,791 and $1,692, respectively.
Defined Benefit Pension Plan
The Division participates in a noncontributory defined benefit pension
plan sponsored by GTE covering a majority of the Division's employees.
The benefits to be paid under this plan are generally based on years of
credited service and average final earnings. GTE's funding policy,
subject to the minimum funding requirements of employee benefit and tax
laws, is to contribute such amounts as are determined on an actuarial
basis to accumulate funds sufficient to meet the plan's benefit
obligation to employees upon their retirement. The assets of the plan
consist primarily of corporate equities, government securities and
corporate debt securities.
The structure of GTE's benefits plans does not provide for the
determination of certain disclosures required by SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. However,
the significant weighted-average assumptions used by GTE for the pension
measurements were as follows at December 31, 1998 and 1997:
1998 1997
Discount rate 7.00% 7.25%
Rate of compensation increase 5.25 5.00
Expected return on plan assets 9.00 9.00
Net periodic benefit cost for the Division was $1,303 and $744 for the
years ended December 31, 1998 and 1997.
<PAGE>
Postretirement Benefits Other Than Pensions
A majority of the Division's employees are covered under a postretirement
healthcare and life insurance benefit plan sponsored by GTE. The
determination of benefit cost for postretirement health plan is generally
based on comprehensive hospital, medical and surgical benefit plan
provisions.
The weighted-average assumptions used by GTE in the actuarial
computations for postretirement benefits were as follows at December 31,
1998 and 1997:
1998 1997
Discount rate 7.00% 7.25%
Expected return on plan assets 6.75 8.00
Postretirement benefit cost for the Division was $1,003 and $1,248 for
the years ended December 31, 1998 and 1997.
Union Benefit Plans
The Division's union employees participate in a noncontributory defined
benefit pension and a postretirement healthcare and life insurance
benefit plan sponsored by GTE.
Net periodic pension cost for the Division's union benefit pension plan
as of December 31, 1998 and 1997 included the following components:
1998 1997
Service cost $ 98 $ 114
Interest cost on projected benefit
obligation 556 553
Expected return on plan assets (629) (585)
Amortization of prior service cost 70 37
Amortization of transition obligation 126 125
Net periodic pension cost $ 221 $ 244
<PAGE>
The following table sets forth the changes in the union benefit pension
plans' funded status and the amounts recognized in the Division's balance
sheets at December 31, 1998 and 1997:
1998 1997
Accumulated benefit obligations $ 7,733 $ 7,526
Projected benefit obligations at
beginning of year $ 8,063 $ 7,165
Service cost 98 114
Interest cost on projected benefit
obligation 556 553
Benefits paid (484) (476)
Actuarial loss 72 22
Plan amendments (9) 172
Transfers (159) 513
Projected benefits obligations at
end of year $ 8,137 $ 8,063
1998 1997
Fair value of plan assets at
beginning of year $ 8,608 $ 7,231
Actual return on plan assets 1,291 1,370
Employer contributions - 309
Employee contributions - -
Transfers (265) 174
Benefits paid (484) (476)
Fair value of plan assets at end of year $ 9,150 $ 8,608
1998 1997
Plan assets less than projected benefit
obligation $ (1,013) $ (546)
Unrecognized net transition asset (378) (504)
Unrecognized prior service costs (222) (302)
Unrecognized net actuarial gain 1,834 1,285
Accrued pension liability $ 221 $ (67)
<PAGE>
Net periodic pension cost for the Division's union postretirement
healthcare and life insurance benefit plan as of December 31, 1998 and
1997, included the following components:
1998 1997
Service cost $ 12 $ 27
Interest cost on projected benefit
obligation 233 349
Expected return on plan assets - -
Amortization of prior service cost 150 337
Amortization of transition obligation - -
Net periodic pension cost $ 395 $ 713
The following table sets forth the changes in the union postretirement
and life insurance benefit plans' funded status and the amounts
recognized in the Division's balance sheets at December 31, 1998 and
1997:
1998 1997
Accumulated benefit obligations $ 3,498 $ 5,327
Projected benefit obligations at beginning
of year $ 5,327 $ 4,726
Service cost 12 27
Interest cost on projected benefit obligation 233 349
Benefits paid (166) (198)
Actuarial (gain) loss (572) 142
Plan amendments (1,336) 281
Transfers - -
Projected benefits obligations at end of year $ 3,498 $ 5,327
1998 1997
Fair value of plan assets at beginning
of year $ - $ -
Actual return on plan assets - -
Employer contributions 166 -
Employee contributions 23 -
Transfers - -
Benefits paid (189) -
Fair value of plan assets at end of year $ - $ -
<PAGE>
1998 1997
Plan assets less than projected
benefit obligation $ 3,498 $ 5,327
Unrecognized net transition asset - -
Unrecognized prior service costs (1,858) (3,343)
Unrecognized net actuarial loss (61) (1,467)
Accrued pension liability $ 1,579 $ 517
1998 1997
Weighted average assumptions:
Discount rate 7.00% 7.25%
Expected rate of return on assets 6.75% 8.00%
Supplemental Executive Retirement Plan
The Division participates in a GTE sponsored supplemental executive
retirement plan for certain executives. This supplemental plan provides
for pension benefits to be paid on incentive compensation not considered
by the GTE retirement plan. The Division recorded $67 and $(113) in
expense related to this plan for the year ended December 31, 1998 and
1997, respectively.
Long-Term Disability and Workers' Compensation
The Division participates in GTE's long-term disability and workers'
compensation plan. The Division records its liability based on
information provided to it by GTE. No expense was incurred related to
this plan for the years ended December 31, 1998 and 1997.
Executive Life Insurance
GTE sponsors executive life insurance plans. These plans provide eligible
executives of GTE and its affiliates a postretirement life insurance
benefit on a graduated scale of one to three times final base salary.
Upon retirement, a participant can elect to continue life insurance
coverage or convert to an annuity or lump sum supplemental retirement
benefit. One executive of the Division participates in this plan. No
expense was incurred related to this plan for the years ended December
31, 1998 and 1997.
<PAGE>
(8) INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1998 and 1997 are:
1998 1997
Current:
Federal $ 4,455 $ 1,770
State 1,130 439
5,585 2,209
Deferred:
Federal (760) 609
State (164) 139
(924) 748
Provision for income taxes $ 4,661 $ 2,957
A reconciliation between taxes computed by applying the statutory federal
income tax rate of 35% to pretax income and income taxes provided in the
statements of income is as follows:
1998 1997
Provision at federal statutory rate $ 3,956 $ 2,416
State taxes, net of federal benefit 627 359
Other, net 78 182
Total provision $ 4,661 $ 2,957
<PAGE>
The tax effects of temporary differences that give rise to the deferred
income tax assets and deferred income tax liabilities at December 31,
1998 and 1997 are as follows:
1998 1997
Depreciation of fixed assets $ 621 $ 566
Pension and benefit plans 2,323 1,007
Post retirement benefits, other than pension 9,885 9,934
Contract accruals and provisions 4,157 3,844
Amortization of intangibles (174) (331)
Other, net 156 292
Net deferred tax assets $ 16,968 $ 15,312
Based on management's assessment, it is more likely than not that the net
deferred tax assets will be realized.
(9) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Division leases various equipment and buildings under operating
leases. The following is a schedule to approximate future minimum lease
payments under these leases:
Operating
Leases
Fiscal year-
1999 $ 207
2000 182
2001 157
2002 157
Total $ 703
Rental expense charged to operations was approximately $124 and $130 in
1998 and 1997, respectively. In addition, the Division occupies a
building owned by GTE. Included in the accompanying statements of income
for both 1998 and 1997 is approximately $7,500 of charges from GTE for
rent, utilities and other operating costs of the building. These charges
are based on square footage.
<PAGE>
Contingencies
The Division, as a government contractor, is from time to time subject to
U.S. government investigations relating to its operations. Government
contractors that are found to have violated the False Claims Act, or are
indicted or convicted for violations of other federal laws, or are
considered not to be responsible contractors may be suspended or debarred
from government contracting for some period of time. Such convictions
could also result in fines. Given the Division's dependence on government
contracting, suspension or debarment could have a material adverse effect
on the Division.
The Division is negotiating with the U.S. government under a contract for
the recovery of stepped-up depreciation and related costs pertaining to
certain assets acquired from Western Union in 1986. The U.S. government's
Contracting Officer has not yet issued a final decision. If the Division
were to prevail, a pretax gain of approximately $21,000 would be
realized, including the impact of booked reserve positions. If the U.S.
government were to prevail, a pretax loss of approximately $11,000 would
be incurred after the effect of booked reserve positions. In management's
opinion, it is probable that the Division will recover at least enough
from this negotiation to avoid a pretax loss.
Litigation
The Division is subject to a number of proceedings arising out of the
normal conduct of its business. Management believes that the ultimate
resolution of these matters will not have a material adverse effect on
the results of operations or the financial position of the Division.
(10) BUSINESS SEGMENTS
Effective January 1, 1998, the Division adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing their performance.
The Division's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business unit requires different technologies, employee
skill sets and market strategies:
<PAGE>
Defense Market
The Defense Market segment provides systems, software and network
engineering, commercial-off-the-shelf integration, and workflow
management services to select U.S. Department of Defense agencies. ISD's
core defense customer base includes the Defense Information Systems
Agency (DISA) and the Joint Chiefs of Staff.
Civil Markets
The Civil Markets segment provides telecommunications and IT products and
services, including network engineering, software, telecommunications
engineering, workflow management, commercial off the shelf equipment
integration and Web development to civilian agencies of the federal
government. The primary federal agencies supported are the Department of
Treasury, Justice, State, Transportation, and Commerce.
The accounting policies of the operating segments are described in the
summary of significant accounting policies (see Note 1). The chief
operating decision makers evaluate performance based on several factors,
of which the primary financial measure is gross margin less certain
selling costs.
The following table reflects reportable segment-specific information for
the year ended 1998:
Defense Civil
Market Market Total
Revenues-
Non-affiliate $ 132,661 $ 100,701 $ 233,362
Affiliate - 184 184
Intersegment - 6 6
Total 132,661 100,891 233,552
U.S. government revenues 129,347 92,117 221,464
Percent of total revenues 97.5% 91.3% 94.8%
Gross margin less certain
selling costs 20,187 12,488 32,675
Depreciation and amortization 709 1,875 2,584
Operating income 9,058 3,545 12,603
Net interest expense 672 548 1,220
Income taxes 3,588 1,073 4,661
Net income 4,798 1,924 6,722
Identifiable assets as of
December 31, 1998 62,586 55,157 117,743
Capital expenditures 489 4,207 4,696
<PAGE>
The following table reflects reportable segment-specific information for
the year ended 1997:
Defense Civil
Market Market Total
Revenues-
Non-affiliate $ 104,595 $ 104,021 $ 208,616
Affiliate - 509 509
Intersegment - 261 261
Total 104,595 104,791 209,386
U.S. government revenues 104,595 104,021 208,616
Percent of total revenues 100.0% 99.3% 99.6%
Gross margin less certain
selling costs 17,202 14,454 31,656
Depreciation and amortization 1,149 2,489 3,638
Operating income 5,396 2,624 8,020
Net interest expense 707 411 1,118
Income taxes 1,553 1,404 2,957
Net income 3,136 809 3,945
Identifiable assets as of
December 31, 1997 51,045 46,626 97,671
Capital expenditures 1,899 1,734 3,633
The Division operates only within the United States.
Intersegment revenues are generally based on arm's-length transactions
between the segments, and include an equitable allocation of all related
costs. Common operating expenses are allocated between segments either on
revenues or specific identification. Interest expense is allocated
between segments based on revenues. All significant intersegment amounts
have been eliminated.
As displayed in the table above, the U.S. government contributes over 10%
of the revenues for each segment. No other single customer contributes
over 10% of the revenue for any individual segment.
Exhibit 6
DYNCORP AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of September 30, 1999
(in thousands, except share amounts)
DynCorp Information Pro Forma
DynCorp Systems, LLC Adjustments Combined
---------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 11,537 $ 4 $ 254,812 D $ 18,921
(167,540) E
(79,892) C
Accounts receivable, net 254,581 69,280 99 A 323,960
Inventories 647 5,198 - 5,845
Other current assets 22,095 6,970 (5,199) A 23,941
75 D
----------- ------------ ------------ ----------
Total current assets 288,860 81,452 2,355 372,667
Property and Equipment, 24,258 10,940 - 35,198
net of accumulated
depreciation
Intangible Assets, net of 60,734 237 80,214 B 141,185
accumulated amortization
Other Assets 36,537 9,948 8,884 D 59,434
(9,948) A
(1,187) C
15,200 B
----------- ------------ ------------ ----------
Total Assets $ 410,389 $ 102,577 $ 95,518 $ 608,484
=========== ============ ============ ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and
current portion of
long-term debt $ 28,262 $ 5,486 $ (5,486) A $ 24,782
24,520 D
(28,000) C
Accounts payable 54,355 6,943 (519) A 60,779
Deferred revenue and
customer advances 2,646 7,504 - 10,150
Accrued liabilities 125,444 3,095 2,202 A 130,042
(699) C
---------- ------------ ----------- ---------
Total current liabilities 210,707 23,028 (7,982) 225,753
Long-Term Debt 152,025 - (50,000) C 335,227
233,202 D
Other Liabilities and
Deferred Credits 35,350 27,231 (11,000) B 51,581
Contingencies and
Deferred Credits - - - -
Temporary Equity:
Redeemable Common Stock -
ESOP shares, 7,256,919
shares issued and
outstanding, subject
to restrictions 190,067 - - 190,067
Other shares, subject to
restrictions - - 6,048 D 6,048
Permanent Stockholders' Equity:
Common Stock, par value
ten cents per share,
authorized 20,000,000
shares; issued
5,002,465 (1) shares 500 - - 500
Paid-in Surplus 127,195 - 6,006 D 133,201
Accumulated Other
Comprehensive Income (5) - - (5)
Reclassification to
Temporary Equity for
Redemption Value Greater
than Par Value (189,341) - (6,005) D (195,346)
Deficit (67,943) - (2,380) C (90,376)
(20,053) B
Treasury Stock, at cost;
2,259,522 shares (41,923) - - (41,923)
Unearned ESOP Shares (6,243) - - (6,243)
Net Parent Company Investment - 52,318 (41,073) B -
(11,245) A
----------- ---------- ---------- -------
Total Liabilities and
Shareholders' Equity $ 410,389 $ 102,577 $ 95,518 $ 608,484
=========== ========== ========== ==========
(1) Shares issued are at the historical amount, before pro forma adjustments.
<PAGE>
DYNCORP AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1999
(in thousands, except per share amounts)
DynCorp Information Pro Forma
DynCorp Systems, LLC Adjustments Combined
--------------------------------------------------
Revenues $ 967,782 $ 159,225 $ (2,032) A $ 1,122,513
(2,592) F
130 G
Costs and Expenses:
Costs of services 917,709 147,787 (3,966) A 1,054,996
1,875 H
(5,147) F
(3,262) G
Corporate general and
administrative 15,381 2,134 (2,134) G 15,381
Interest income (1,375) - - (1,375)
Interest expense 13,010 919 22,129 I 31,561
(4,497) J
Other 3,447 824 2,005 L 5,264
(1,012) K
--------- ------------- ----------
Total costs and
expenses 948,172 151,664 1,105,827
Earnings before income
taxes and minority
interest 19,610 7,561 16,686
Provision for income taxes 6,872 3,064 (3,462) N 6,474
--------- ------------- ---------
Earnings before minority
interest 12,738 4,497 10,212
Minority interest 1,899 - 1,899
--------- -------------- ----------
Net Earnings $ 10,839 $ 4,497 $ 8,313
========= ============== ==========
Accretion of redeemable
shares - - 1,332 M 1,332
Common stockholders'
share of earnings $ 10,839 $ 6,981
=========== ==========
Basic earnings per share $ 1.08 $ 0.67
Diluted earnings per
share $ 1.06 $ 0.65
Weighted average number
of shares outstanding
for basic earnings per
share 10,047 426 10,473
Weighted average number
of shares outstanding
for diluted earnings
per share 10,268 426 10,694
<PAGE>
DYNCORP AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
At December 31, 1998
(in thousands, except per share amounts)
DynCorp Information Pro Forma
DynCorp Systems, LLC Adjustments Combined
-------------------------------------------------------
Revenues $ 1,233,707 $ 233,552 $ (3,280) A $ 1,457,870
(6,280) F
171 G
Costs and Expenses:
Costs of services 1,173,151 215,836 2,500 H 1,376,259
(6,868) F
(2,464) A
(5,896) G
Corporate general
and administrative 18,630 3,204 (3,204) G 18,630
Interest income (1,600) - - (1,600)
Interest expense 14,144 1,220 29,596 I 40,340
(4,620) J
Other 2,687 1,909 2,673 L 7,269
----------- ----------- ----------
Total costs and
expenses 1,207,012 222,169 1,440,898
Earnings before
income taxes and
minority interest 26,695 11,383 16,972
Provision for income
taxes 9,559 4,661 (7,601) N 6,619
----------- ----------- ----------
Earnings before
minority interest 17,136 6,722 10,353
Minority interest 2,081 - 2,081
----------- ----------- ----------
Net Earnngs $ 15,055 $ 6,722 $ 8,272
=========== =========== ==========
Accretion of
redeemable shares - - 1,815 M 1,815
Common stockholders'
share of earnings $ 15,055 $ 6,722 $ 6,457
=========== ============= ==========
Basic earnings per
share $ 1.47 $ 0.61
Diluted earnings
per share $ 1.43 $ 0.59
Weighted average
number of shares
outstanding for
basic earnings per
share 10,242 426 10,668
Weighted average
number of shares
outstanding for
diluted earnings
per share 10,514 426 10,940
<PAGE>
DYNCORP AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(in thousands, except share amounts)
The following adjustments give pro forma effect to the transaction:
A)Eliminate assets, liabilities and results of operations for items not
acquired per the Purchase Agreement.
B)Record purchase accounting adjustments, including goodwill of $80,214
and in-process research and development costs of $20,053.
C)Eliminate fixed and floating rate note payable, including issuance
costs.
D)Record new financing, including issuance costs, and the issuance of
426,217 shares of redeemable common stock.
E)Record purchase price paid.
F)Eliminate results of operations of businesses sold and held for sale.
G)Eliminate GTE allocations of indirect expenses and related revenue
impact and replace with DynCorp allocations of indirect expenses and
related revenue impact.
H)Record estimated increase in pension and other post-retirement benefit
expenses.
I)Record interest on new financing and related costs.
J)Eliminate interest on old debt and related costs.
K)Eliminate adjustment to goodwill of business held for sale.
L)Record amortization of goodwill based on 30-year life.
M)Record accretion related to redeemable shares.
N)Adjust income tax provision to 38.8% and 39% to reflect DynCorp's
estimated effective tax rate for 1999 and 1998, respectively.
