SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-Amendment No. 2
Annual Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
For the fiscal year ended December 27, 2001 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.)
11710 Plaza America Drive, Reston, Virginia 20190
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 261-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
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.
|X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. The registrant's voting stock is not publicly traded; therefore,
the aggregate market value is based on the Company's February 21, 2002, internal
market price of $46.25 per share. Approximately 3.2% of outstanding voting stock
is held by nonaffiliates and has an aggregate market value of $15,174,949 as of
December 27, 2001.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 10,530,901 shares of common
stock having a par value of $0.10 per share were outstanding April 9, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information from the registrant's Definitive Proxy
Statement for the 2002 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission on Schedule 14A within 120 days after the
close of the registrant's fiscal year.
This Amendment No. 2 for Form 10-K/A is being filed to give effect to the
revision of the Company's financial statements, as discussed in Note 2 to the
Consolidated Financial Statements included in Item 8. This document does not
reflect any significant updates other than as related to the revision of
financial statements and related re-audit. The Company suggests reading its
Securities and Exchange Commission filings for subsequent periods including Form
10-Q for updated information.
TABLE OF CONTENTS
2001
FORM 10-K/A - Amendment No. 2
Item Page
- --------------------------------------------------------------------------------
Part I
1. Business 1-4
2. Properties 4-5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Part II
5. Market for the Registrant's Common Stock and Related Stockholder
Matters 6-7
6. Selected Financial Data 8-9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-27
7A.Quantitative and Qualitative Disclosures about Market Risk 27
8. Financial Statements and Supplementary Data 28
Report of Independent Public Accountants 29
Financial Statements
Consolidated Balance Sheets
Assets 30
Liabilities and Stockholders' Equity 31
Consolidated Statements of Operations 32
Consolidated Statements of Cash Flows 33
Consolidated Statements of Stockholders' Equity 34
Notes to Consolidated Financial Statements 35-66
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 67
Part III
10.Directors and Executive Officers of the Registrant 67
11.Executive Compensation 67
12.Security Ownership of Certain Beneficial Owners and Management 67
13.Certain Relationships and Related Transactions 67
Part IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 67-69
Signatures 70
Certification of the Chief Executive Officer 71
Certification of the Chief Financial Officer 72
Schedule II-Valuation and Qualifying Accounts 73
ITEM 1. BUSINESS
General Information
DynCorp and subsidiaries (collectively the "Company") provide diversified
management, technical, engineering and professional services primarily to U.S.
Government customers throughout the United States and internationally. The
Company's customers include various branches of the U.S. Departments of Defense,
Energy, State, and Justice, the Drug Enforcement Agency, the National Institutes
of Health, the Defense Information Systems Agency, the National Aeronautics and
Space Administration and various other U.S., state and local government
agencies, commercial clients and foreign governments. Generally, these services
are provided under both prime contracts and subcontracts, which may be
fixed-price, time-and-material or cost reimbursement contracts depending on the
work requirements and other individual circumstances. These services cover the
following areas:
DynCorp Information and Enterprise Technology ("DI&ET"), based in Reston,
Virginia, designs, develops, supports and integrates software and hardware
systems to provide customers with comprehensive solutions for information
management and engineering needs. DI&ET provides a wide range of
information technology ("IT") solutions including IT lifecycle support,
government operational outsourcing, network and communications engineering,
seat management, metrology engineering, and security and intelligence
programs. DI&ET revenues for fiscal years ended 2001, 2000, and 1999 were
$588.0 million, $606.7 million, and $581.9 million, respectively. These
services are provided primarily to U.S. Government customers throughout the
United States. DI&ET includes DynCorp Management Resources, Inc. ("DMR")
which provides IT and business process outsourcing solutions to state and
local government agencies. On December 27, 2001, DynCorp disposed of DMR by
merging it with TekInsight.com, Inc., in exchange for a 40.0% ownership of
the new company. See "DynCorp Management Resources, Inc. ("DMR") Merger
with DynTek, Inc." below for further discussion.
DynCorp Technical Services ("DTS"), based in Fort Worth, Texas, delivers a
wide variety of specialized technical services including engineering,
aviation services, base operations, range technical services, contingency
services, space and re-entry system services, logistics support services,
and marine services. These services are provided mainly to U.S. Government
customers in the United States. Revenues for fiscal years ended 2001, 2000,
and 1999 were $514.5 million, $446.2 million, and $361.9 million,
respectively.
DynCorp International ("DI"), based in Fort Worth, Texas, primarily
services the Company's international business, including personal and
physical security services, and base maintenance and operations worldwide
to support U.S. military aircraft engineering and IT solutions. These
services are provided to the U.S. Government and foreign organizations at
various locations throughout the world depending on the customers'
requirements. Revenues for fiscal years ended 2001, 2000, and 1999 were
$545.8 million, $459.1 million, and $333.6 million, respectively.
DynCorp Information Systems LLC ("DIS"), based in Chantilly, Virginia,
provides a broad range of integrated telecommunications services and IT
solutions in the areas of professional services, business systems
integration, information infrastructure solutions and IT operations and
support. DIS is DynCorp's full-service voice/data integrator and has an
established business base in the U.S. federal defense and civil markets.
DIS was acquired on December 10, 1999 from GTE Corporation. Revenues for
the fiscal years ended 2001 and 2000 and the twenty days ended December 30,
1999, were $246.3 million, $228.5 million and $13.9 million, respectively.
Full year revenues in 1999, which are not included in the Company's results
of operations except for the portion representing the twenty days ended
December 30, 1999, as noted above, were $221.6 million.
AdvanceMed ("ADVMED"), based in Reston, Virginia, is a
business-to-business, eHealth decision support solution organization and
provides an integrated set of decision support tools to meet the needs of
healthcare payers and providers. Revenues for fiscal years ended 2001,
2000, and 1999 were $61.3 million, $64.7 million, and $54.0 million,
respectively.
The revenues, operating profits, and total assets of the above industry segments
are incorporated herein by reference to Note 21 to the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K/A - Amendment
No. 2.
Industry Segments
For business segment reporting, DI&ET, DTS, DI, DIS, and ADVMED each constitute
reportable business segments.
Significant Customers
The Company derived 96%, 98%, and 97% of its revenues from contracts and
subcontracts with the U.S. Government in 2001, 2000, and 1999, respectively.
Prime contracts comprised 88% of revenue in 2001, 79% of revenue in 2000, and
75% of revenue in 1999. Prime contracts with the Department of Defense ("DoD")
represented 49% of revenue in 2001, 44% of revenue in 2000, and 40% of revenue
in 1999. In 2001, 2000, and 1999, 99% of the Company's prime contract revenue
was from the U.S. Government.
Government Contracts
The U.S. Government is the Company's primary customer. All U.S. Government
contracts and subcontracts may be modified, curtailed or terminated at the
convenience of the government if program requirements or budgetary constraints
change. In the event that a contract is terminated for convenience, the Company
generally is reimbursed for its allowable costs through the date of termination
and is paid a proportionate amount of the stipulated profit or fee attributable
to the work actually performed.
Although contract and program modifications, curtailments or terminations have
not had a material adverse effect on the Company in the past, no assurance can
be given that such modifications, curtailments or terminations will not have a
material adverse effect on the financial condition or results of operations of
the Company in the future.
The Company's business with the U.S. Government and other customers is generally
performed under cost-reimbursement, time-and-materials, and fixed-price
contracts. Under cost-reimbursement contracts, the customers reimburse the
Company for its direct costs and allocable indirect costs, plus a fixed fee or
incentive fee. Under time-and-materials contracts, the Company is paid for labor
hours at negotiated, fixed hourly rates and reimbursed for other allowable
direct costs at actual costs plus allocable indirect costs. Under fixed-priced
contracts, the Company is required to provide services or stipulated products
for a fixed price. Because the Company assumes the risk of performing a firm
fixed-price contract at a set price, the failure to accurately estimate ultimate
costs or to control costs during the contract performance could result, and in
some instances has resulted, in reduced profits or losses for particular
contracts.
During fiscal years 2001, 2000, and 1999, approximately 53%, 52% and 56%,
respectively, of the Company's revenues were derived from cost-reimbursement
contracts and approximately 24%, 23% and 16%, respectively, of the Company's
revenues were from fixed-priced contracts, with the balance from
time-and-materials contracts.
Contract costs for services or products supplied to the U.S. Government,
including allocated indirect costs, are subject to audit and adjustments as a
result of negotiations between the Company and U.S. Government representatives.
Substantially all of the Company's indirect contract costs have been agreed upon
through fiscal year 1999. Contract revenues for subsequent years have been
recorded in amounts, which are expected to be realized upon final settlement
with the U.S. Government. However, no assurance can be given that audits and
adjustments for subsequent years will not result in decreased revenues or
profits for those years.
Backlog
The Company's backlog of business, which includes awards under both prime
contracts and subcontracts, as well as
the estimated value of option years on government contracts, was $6.8 billion at
December 27, 2001, compared to December 28, 2000 backlog of $6.1 billion, a net
increase of $0.7 billion. The backlog at December 27, 2001 consisted of $2.0
billion for DI&ET, $2.0 billion for DTS, $2.2 billion for DI, $0.4 billion for
DIS, and $0.2 billion for ADVMED compared to December 28, 2000 of $1.7 billion
for DI&ET, $1.7 billion for DTS, $2.2 billion for DI, $0.4 billion for DIS, and
$0.1 billion for ADVMED. Contributing to the increase in backlog was a fourth
quarter 2001 win of $0.2 billion for a U.S. Air Force base contract which will
provide a broad range of base operations and support services, and another
fourth quarter 2001 win of $0.2 billion for a U.S. Naval Air Warfare Center
contract which will provide maintenance, engineering, software development, and
operations testing support. DI&ET wins in 2001 were for a contract that will
provide technical support encompassing information technology, engineering, and
ancillary services to the U.S. Naval Surface Warfare Center providing $0.2
billion of the increase, a contract that will provide technical support to the
Department of the Treasury providing $0.1 billion of the increase, and a
contract that involves infrastructure facilities, hardware, software, and
support systems to the Securities and Exchange Commission providing $0.2 billion
of the increase. Of the total backlog at December 27, 2001, $4.7 billion is
expected to produce revenues after 2002: DI&ET $1.5 billion, DTS $1.4 billion,
DI $1.7 billion, DIS $0.1 billion, and ADVMED $0.1 billion.
Contracts with the U.S. Government are generally written for periods of three to
five years with a few federal contracts awarded with options up to eight and ten
years. Because of appropriation limitations in the federal budget process, firm
funding is usually made for only one year at a time, and, in some cases, for
periods of less than one year, with the remainder of the years under the
contract expressed as a series of one-year options. The Company's experience has
been that the government generally exercises these options. Amounts included in
backlog are based on the contract's total awarded value and the Company's
estimates regarding the amount of the award that will ultimately result in the
recognition of revenue. These estimates are based on the Company's experience
with similar awards and similar customers. Estimates are reviewed periodically
and appropriate adjustments are made to the amounts included in backlog and in
unexercised contract options. Historically, these adjustments have not been
significant.
Competition
The markets that the Company services are highly competitive. In each of its
business areas, the Company's competition is quite fragmented, with no single
competitor holding a significant market position. The Company experiences
vigorous competition from industrial firms, university laboratories, non-profit
institutions, and U.S. Government agencies. Many of the Company's competitors
are large, diversified firms with substantially greater financial resources and
larger technical staffs than the Company has available. Government agencies also
compete with and are potential competitors of the Company because they can
utilize their internal resources to perform certain types of services that might
otherwise be performed by the Company. A majority of the Company's revenues is
derived from contracts with the U.S. Government and its prime contractors, and
such contracts are awarded on the basis of negotiations or competitive bids
where price is a significant factor.
Foreign Operations
The Company provides services in foreign countries under contracts with the U.S.
Government and foreign customers. The contracts with foreign customers are not
material to the Company's financial position or results of operations.
The risks associated with the Company's foreign operations relating to foreign
currency fluctuation and political and economic conditions in foreign countries
have not had a significant negative impact to the Company.
The Company's foreign operations are significantly influenced by the U.S.
Government's foreign policy and funding for such operations. Revenues in foreign
countries under contracts with the U.S. Government represent approximately 98%
of all foreign operations revenue for 2001 and 99% for 2000 and 1999.
Revenues from foreign operations by location are as follows:
($ thousands)
Locations
---------
2001 2000
Revised (a) Revised (a) 1999
----------- ----------- ----
Europe and North America $121,512 $137,227 $107,143
Latin America and the Caribbean 95,409 103,489 58,010
Middle East 82,207 54,510 41,979
Asia/Pacific 49,667 56,663 32,971
Africa 1,990 8,820 14,159
Other 1,378 24,099 3,430
-------- -------- --------
Total Foreign Operations Revenue $352,163 $384,808 $257,692
======== ======== ========
Assets outside the U.S. are $140 thousand and $545 thousand for December 27,
2001, and December 28, 2000, respectively.
(a) The Company has revised certain information in the Consolidated Financial
Statements for the fiscal years ended December 30, 1999, December 28, 2000 and
December 27, 2001 for a change in accounting method for certain long-term
service contracts previously using percentage of completion accounting. See Note
2 to the Consolidated Financial Statements and "Change in Accounting Method and
Revision of Financial Statements" discussion below.
Incorporation
The Company was incorporated in Delaware in 1946. With more than 23,300
employees worldwide, the Company is one of the largest employee-owned companies
in the United States.
Employees
At December 27, 2001, the Company employed over 22,200 full-time and over 1,100
part-time employees who work at more than 500 company and customer locations
around the world. Approximately 3,100 employees were located outside of the
United States. Of the Company's U.S. employees, approximately 5,000 were covered
by various collective bargaining agreements with labor unions.
Forward Looking Statements
Certain matters discussed or incorporated by reference in this report are
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, there can be
no assurance that its expectations will be achieved. Factors that could cause
actual results to differ materially from the Company's current expectations
include the early termination of, or failure of a customer to exercise option
periods under, a significant contract; the inability of the Company to generate
actual customer orders under indefinite delivery, indefinite quantity contracts;
technological change; the inability of the Company to manage its growth or to
execute its internal performance plan; the inability of the Company to integrate
the operations of acquisitions; the inability of the Company to attract and
retain the technical and other personnel required to perform its various
contracts; general economic conditions; and other risks discussed elsewhere in
this report and in other filings of the Company with the Securities and Exchange
Commission.
ITEM 2. PROPERTIES
The Company is primarily a service-oriented company, and as such the ownership
or leasing of real property is an activity that is not material to an
understanding of the Company's normal operations. However, the leasing of real
property is material to an understanding of the Company's liquidity and capital
resources (see Liquidity and Capital Resources discussion below).
Leased Properties
The Company leases numerous commercial facilities used in connection with the
various services rendered to its customers. None of the properties are unique
and, in the opinion of management, the facilities employed by the Company are
adequate for the present needs of the business. The following table sets forth
information on the Company's material leased properties:
Leased Properties as of Approximate Square
December 27, 2001 Footage General Usage
----------------- ------- -------------
Memphis, Tennessee 337,655 General Office and Warehouse
Cincinnati, Ohio 321,200 General Office and Warehouse
Reston, Virginia 292,942 General Office
Chantilly, Virginia 244,522 General Office
Atlanta, Georgia 218,448 General Office and Warehouse
Carrollton, Texas 208,000 General Office and Warehouse
Jacksonville, Florida 153,329 General Office and Warehouse
Urbandale, Iowa 152,945 General Office and Warehouse
Fort Worth, Texas 114,159 General Office
Herndon, Virginia 84,293 General Office and Warehouse
Alexandria, Virginia 76,589 General Office
Columbia, Maryland 55,930 General Office
Norco, California 48,912 General Office
Gaithersburg, Maryland 30,600 General Office
Springfield, Virginia 28,252 General Office
York, Pennsylvania 23,130 General Office
Foreign locations 321,498 General Office and Housing
Other Locations 152,821 General Office and Warehouse
Upon expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space. Lease expiration dates range from
fiscal 2002 through 2012.
Owned Property
On February 29, 2000, the Company sold an office building located in Alexandria,
Virginia to a third party for $10.5 million, and simultaneously closed on a
lease of that property from the new owner. The Company used a portion of the net
proceeds to pay off the mortgage on the property.
The Company does not own any other real property.
ITEM 3. LEGAL PROCEEDINGS
Note 20 to the Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K/A - Amendment No. 2 is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
DynCorp's common stock is not publicly traded. However, the Company has
established an Internal Market to provide liquidity for its stockholders. Shares
available for trading in the Internal Market are registered under the Securities
Act of 1933. The Internal Market generally permits stockholders to sell shares
of common stock which have been registered for such sale on four predetermined
days each year, subject to purchase demand.
Sales of common stock on the Internal Market are made at established prices for
the common stock determined pursuant to the formula and valuation process
described below (the "Formula Price") to active employees and directors of the
Company, subject to state securities regulations, and to the trustees of the
Savings and Retirement Plan and the Capital Accumulation and Retirement Plan
("Savings Plans"), as well as the administrator of the Employee Stock Purchase
Plan ("ESPP"), who may purchase shares of common stock for their respective
trusts and plans.
If the aggregate purchase orders exceed the number of shares available for sale,
the Company may, but is not obligated to, sell shares of common stock on the
Internal Market. Further, the following prospective purchasers will have
priority, in the order listed:
- the administrator of the ESPP;
- the trustees of the Savings Plans; and
- eligible employees and directors, on a pro rata basis.
If the aggregate number of shares offered for sale on the Internal Market is
greater than the aggregate number of shares sought to be purchased, offers by
stockholders to sell 500 shares or less, or up to the first 500 shares if more
than 500 shares are offered, will be accepted first. If, however, there are
insufficient purchase orders to support the primary allocation of 500 shares,
then the purchase orders will be allocated equally among all of the proposed
sellers up to the first 500 shares offered for sale by each seller. Thereafter,
a similar procedure will be applied first to the next 10,000 shares offered by
each remaining seller and then to the next 20,000 shares offered by each
remaining seller, and offers to sell in excess of 30,500 shares will then be
accepted on a pro rata basis.
The foregoing procedure does not apply to "accelerated distribution" shares to
be sold by the Savings Plan trustees. In February 2001, terminated ESOP
participants who were scheduled to receive distributions in 2002 and later years
were offered the opportunity to accelerate the distribution of those shares they
would otherwise receive in those years. Electing participants must request that
the trust sell as many of their shares on the Internal Market as there are
purchase orders remaining after the procedure described in the foregoing
paragraph is completed. The cash proceeds from such sales will be used to pay
the purchase price for the accelerated distribution shares. The number of
accelerated distribution shares offered on each Internal Market trade date will
be equal to the number of shares which the trustee can sell, and each electing
participant will sell a pro rata portion of shares.
The Company may, but is not required to, purchase shares offered for sale in the
Internal Market, to the extent the number of shares offered exceeds the number
sought to be purchased. All sellers on the Internal Market (other than the
Company and its retirement plans) will pay a commission equal to one percent of
the proceeds from such sales. Purchasers on the Internal Market pay no
commission.
The market price of the common stock is established pursuant to the valuation
process described below, which uses the formula set forth below to determine the
Formula Price at which the Common Stock trades in the Internal Market. The
Formula Price is reviewed on a quarterly basis, generally in conjunction with
Internal Market trade dates.
The Formula Price per share of common stock is the product of seven times the
operating cash flow ("CF"), where operating cash flow is represented by earnings
before interest, taxes, depreciation, and amortization of the Company for the
four fiscal quarters immediately preceding the date on which a price revision is
made, multiplied by a market factor ("Market Factor" denoted MF), plus the
non-operating assets at disposition value (net of disposition costs) ("NOA"),
minus the sum of interest bearing debt adjusted to market and other outstanding
securities senior to common stock ("IBD"), the whole divided by the number of
shares of common stock outstanding at the date on which a price revision is
made, on a fully diluted basis assuming exercise of all outstanding options and
shares deferred under a former restricted stock plan ("ESO"). The Market Factor
is a numeric factor which reflects existing securities market conditions
relevant to the valuation of such stock. The Formula Price of the common stock,
expressed as an equation, is as follows:
[(CFx7)MF+NOA-IBD]
------------------
Formula Price = ESO
The Board of Directors believes that the valuation process and Formula result in
a fair price for the common stock within a broad range of financial criteria.
Other than quarterly review and possible modification of the Market Factor, the
Board of Directors will not change the Formula unless (i) in the good faith
exercise of its fiduciary duties and after consultation with its professional
advisors, the Board of Directors determines that the formula no longer results
in a stock price which reasonably reflects the value of the Company on a per
share basis, or (ii) a change in the Formula or the method of valuing the common
stock is required under applicable law.
The following table sets forth the Formula Price for the common stock and the
Market Factor as of the end of each quarter for the past two years (prior to the
revisions as noted in the "Change in Accounting Method and Revision of Financial
Statements" and "Prior Revision of Financial Statements" discussions below).
Quarter Ended Formula Price ($) Market Factor
- ------------- ----------------- -------------
December 30, 1999 23.50 1.11
March 30, 2000 22.75 1.50
June 29, 2000 23.50 1.39
September 28, 2000 22.75 1.24
December 28, 2000 29.00 0.94
March 29, 2001 31.00 0.97
June 28, 2001 31.50 0.99
September 27, 2001 32.00 1.00
December 27, 2001 44.75 1.07
There were approximately 788 and 767 record holders of DynCorp common stock at
December 27, 2001 and December 28, 2000, respectively. The Savings Plans' Trusts
own 8,869,936 shares (including ESOP accounts), or 84.3% of total outstanding
shares, on behalf of approximately 40,000 current and former employees of the
Company as of December 27, 2001. The Trusts' independent appraiser valued the
Company's stock price at $46.25 at February 21, 2002. Cash dividends have not
been declared or paid on the common stock since 1988. The Company's financing
instruments severely restrict its ability to pay cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary selected historical financial data derived
from the audited Consolidated Financial Statements of the Company for each of
the five years presented. During these periods, the Company paid no cash
dividends on its Common Stock. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited Consolidated Financial Statements and
related notes thereto, included elsewhere in this Annual Report on Form 10-K/A -
Amendment No. 2. (Dollars in thousands, except per share data.)
Dec 27 Dec 28 Dec 30
2001 (b) 2000 (c) 1999 (d) Dec 31 Dec 31
Revised(a) Revised(a) Revised(a) 1998 (e) 1997 (f)
---------- ---------- ---------- -------- --------
Statement of Operations Data:
- -----------------------------
Revenues $1,955,973 $1,805,155 $1,345,281 $1,233,707 $1,145,937
Cost of services $1,810,273 $1,778,329 $1,280,239 $1,173,151 $1,096,246
Corporate general and administrative $ 29,456 $ 29,350 $ 21,741 $ 18,630 $ 17,785
Interest expense $ 31,521 $ 41,408 $ 18,943 $ 14,144 $ 12,432
Earnings (loss) from continuing operations before
extraordinary item, cumulative effect of
change in accounting principle and certain
other expenses (a) (g) (h) $ 60,834 $ (38,498) $ 9,507 $ 15,585 $ 15,579
Earnings (loss) from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle (a) (h) $ 60,834 $ (38,646) $ 7,610 $ 15,055 $ 7,422
Net earnings (loss) (a) (h) $ 60,834 $ (43,416) $ 6,009 $ 15,055 $ 7,422
Common stockholders' share of net earnings
(loss)(a) (h) $ 58,444 $ (45,258) $ 5,915 $ 15,055 $ 7,422
Common stockholders' share of earnings (loss) per
share from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle (a)
Basic $ 5.53 $ (3.86) $ 0.75 $ 1.47 $ 0.83
Diluted $ 5.26 $ (3.86) $ 0.74 $ 1.43 $ 0.70
Common stockholders' shares of net earnings
(loss)(a)
Basic $ 5.53 $ (4.32) $ 0.59 $ 1.47 $ 0.83
Diluted $ 5.26 $ (4.32) $ 0.58 $ 1.43 $ 0.70
Balance Sheet Data:
- -------------------
Total assets $ 598,440 $ 586,756 $ 628,934 $ 379,238 $ 390,122
Long-term debt excluding current maturities $ 264,482 $ 283,889 $ 334,944 $ 152,121 $ 152,239
Redeemable common stock $ 333,335 $ 246,330 $ 189,116 $ 183,861 $ 154,840
Statement of Cash Flows Data:
- -----------------------------
Cash flows provided by (used in) operating
activities $ 8,109 $ 59,051 $ 13,835 $ (7,752) $ 9,937
Cash flows (used in) provided by investing
activities $ (3,796) $ 8,082 $(184,975) $ (20,131) $ (8,257)
Cash flows (used in) provided by financing
activities $ (2,189) $ (59,836) $ 172,709 $ 7,369 $ (2,955)
Additional Data:
- ----------------
EBITDA (i) $ 144,101 $ 5,175 $ 42,112 $ 45,226 $ 29,274
(a) The Company has revised certain information in the Consolidated Financial
Statements for the fiscal years ended December 30, 1999, December 28, 2000
and December 27, 2001 for a change in accounting method for certain
long-term service contracts previously using percentage of completion
accounting. See Note 2 to the Consolidated Financial Statements and "Change
in Accounting Method and Revision of Financial Statements" discussion
below. 2001 includes $44.7 million of income primarily from revised loss
estimates due to contract modification in 2001 on a contract acquired with
the purchase of DIS. 2000 includes charges totaling $76.2 million related
primarily to revised loss estimates on the same contract acquired with the
acquisition of DIS. See the "Prior Revision of Financial Statements"
discussion below regarding revision of the 2000 and 1999 Consolidated
Financial Statements.
(b) 2001 includes a $17,442 gain recognized on the disposition of DMR on
December 27, 2001.
(c) 2000 includes $5,998 for the replacement of core systems, including DIS
systems. Interest expense was higher in 2000 compared to 1999 as a result
of the acquisition of DIS in December 1999, which the Company financed
through additional borrowings of $167.5 million under higher cost debt
instruments.
(d) 1999 includes reversal of $2,000 reserve for favorable resolution of
contract compliance issues, $4,387 for the replacement of core systems, DIS
in-process research and development write-off $6,400, settlement of a suit
with a former electrical subcontractor $2,200, and write-off of cost in
excess of net assets acquired of consolidated subsidiary $1,234.
(e) 1998 includes reversal of $670 reserve for asbestos litigation, $1,177
accrual for subcontractor suit, reversal of $2,500 reserve for contract
compliance issues, and $2,159 expense for the replacement of core systems.
(f) 1997 includes $7,800 accrual of costs related to asbestos litigation,
$2,488 reversal of income tax valuation allowance, and $2,055 reversal of
accrued interest related to IRS examinations and potential disallowance of
deductions.
(g) Certain other expenses include costs and expenses associated with divested
businesses of $148 in 2000, $1,897 in 1999, $530 in 1998, and $8,157 in
1997.
(h) The cumulative effect of change in accounting principle, net of income
taxes, in 2000 of $4,770 resulted from the Company's change in accounting
method for certain long-term service contracts previously using percentage
of completion accounting. See Note 2 to the Consolidated Financial
Statements for further details. The extraordinary loss, net of income
taxes, in 1999 of $1,601 resulted from the early extinguishment of the
$50.0 million of 7.486% Fixed Rate Contract Receivable Collateralized Notes
due to refinancing of the Company's debt in order to complete the
acquisition of DIS. The difference between Net Earnings (Loss) and Common
Stockholders' Share of Net Earnings (Loss) is the accretion in the fair
value of shares of the Company's stock which were issued as part of the
December 1999 acquisition of DIS.
(i) Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
represents a measure of the Company's ability to generate cash flow and
does not represent net income or cash flow from operating, investing and
financing activities as defined by U.S. generally accepted accounting
principles ("GAAP"). EBITDA is not a measure of performance or financial
condition under GAAP, but is presented to provide additional information
about the Company to the reader. EBITDA should be considered in addition
to, but not as a substitute for, or superior to, measures of financial
performance reported in accordance with GAAP. EBITDA has been adjusted for
the amortization of deferred debt expense and debt issuance discount which
are included in interest expense in the Consolidated Statements of
Operations and included in depreciation and amortization in the
Consolidated Statements of Cash Flows. Readers are cautioned that the
Company's definition of EBITDA may not necessarily be comparable to
similarly titled captions used by other companies due to the potential
inconsistencies in the method of calculation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of DynCorp and
subsidiaries' (collectively, the "Company") consolidated results of operations
and financial condition for the fiscal years ended 2001, 2000, and 1999. The
discussion should be read in conjunction with the Company's audited consolidated
financial statements and accompanying notes.
Overview
The Company provides diversified management, technical and professional services
primarily to U.S. Government customers throughout the United States and
internationally. The Company's customers include various branches of the U.S.
Departments of Defense, Energy, State, and Justice, the Drug Enforcement Agency,
the National Institute of Health, the Defense Information Systems Agency, the
National Aeronautics and Space Administration and various other U.S., state and
local government agencies, commercial clients and foreign governments.
Generally, these services are provided under both prime contracts and
subcontracts, which may be fixed-price, time-and-material or cost reimbursement
contracts depending on the work requirements and other individual circumstances.
The Company has five Strategic Business Segments: DynCorp Information and
Enterprise Technology ("DI&ET"), DynCorp Technical Services ("DTS"), DynCorp
International ("DI"), DynCorp Information Systems LLC ("DIS"), and AdvanceMed
("ADVMED").
On December 10, 1999, the Company acquired GTE Information Systems LLC, a
subsidiary of GTE Corporation and changed its name to DynCorp Information
Systems LLC. It operates as a separate subsidiary of the Company and a separate
Strategic Business Segment as noted above. The acquisition was accounted for as
a purchase; accordingly, operating results for DynCorp Information Systems LLC
have been included from the date of acquisition.
On December 27, 2001, the Company completed the merger of its wholly-owned
subsidiary, DynCorp Management Resources, Inc. ("DMR"), the Company's state and
local government services subsidiary, with TekInsight.com, Inc. Upon
consummation of this merger, TekInsight.com, Inc. was renamed DynTek, Inc., a
publicly traded company. The Company has obtained a 40% ownership interest in
DynTek, Inc. The shares of DynTek, Inc. received by the Company are not
registered but the Company has the right to require DynTek, Inc. to register
these shares. DMR's operating results, gain on disposal, and financial position
are included in the DI&ET Strategic Business Segment. For further information,
see "DynCorp Management Resources, Inc. ("DMR") Merger with DynTek, Inc." below.
Change in Accounting Method and Revision of Financial Statements
Subsequent to the issuance of the Company's financial statements for the year
ended December 27, 2001 on April 11, 2002, the Company revised certain
information in the Consolidated Financial Statements for the fiscal years ended
December 30, 1999, December 28, 2000 and December 27, 2001 following discussions
with the staff of the Securities and Exchange Commission ("SEC") regarding its
method of accounting for certain long-term service contracts and the related
applicability of the percentage of completion method to service contracts with
the Federal Government. Previously, the Company followed the historical
industry-wide practice of recording income from long-term service contracts
using the percentage of completion method, in accordance with the American
Institute of Certified Public Accountants' ("AICPA") "Audit and Accounting
Guide, Audits of Federal Government Contractors," which incorporates as an
appendix AICPA Statement of Position ("SOP") No. 81-1, "Accounting for
Performance of Construction Type and Certain Production-Type Contracts." Under
this method, income is recognized at a
consistent profit margin over the period of performance based on the estimated
profit margin at the completion of the contract. Such a method has resulted in
deferral of costs, including start-up costs, and deferral of profits on certain
contracts. Under SOP No. 81-1, revenue can be recognized based on costs incurred
as a measurement of progress towards completion, which can differ from other
revenue recognition methods such as those outlined in SEC Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements."
Following discussions with the SEC's staff it has been determined that
percentage of completion accounting should be applied to long-term contracts
which are specifically described in the scope section of AICPA SOP No. 81-1 and
other appropriate accounting literature. All other long-term service contracts,
even those with the Federal Government, should not apply the percentage of
completion method. Accordingly, the Company changed its method for accounting on
these long-term service contracts to be in accordance with SEC SAB No. 101 and
other applicable generally accepted accounting principles. As a result of these
changes, profit margins on a given long-term service contract could now
fluctuate from one accounting period to another due to fluctuations in the
revenue earned and costs incurred in a given accounting period.
In accordance with the SEC Staff's guidance, the Company has applied this change
in accounting method retroactively to January 2000 (the effective date of SAB
No. 101) and to the acquisition of DIS in December 1999. As a result, the
financial statements of the Company for the fiscal years ended December 30,
1999, December 28, 2000, and December 27, 2001 have been revised to eliminate
the deferral of such costs or profits on service contracts and to adjust
revenue. Revenue was adjusted for certain fixed price service contracts and
other service contracts, which had used cost incurred in relation to total
estimated cost at completion as a measurement of progress towards completion
under percentage of completion, in order to comply with SEC SAB No. 101, which
prescribes recognizing revenue on a straight-line basis over the contract period
or by other appropriate methods to measure services provided. The Company also
intends to amend its previously filed Form 10-Q for the three months ended March
28, 2002. The cumulative effect of the change in accounting principle on prior
years resulted in a one-time, non-cash reduction to net earnings of $4.8
million, net of taxes of $2.6 million, or $0.46 per diluted share, in 2000. The
change in accounting method did not have any effect on the Company's cash flows
in 2002, 2001, 2000, and 1999.
As a result of the revisions described above, reported common stockholders'
share of net earnings decreased by $0.1 million, from $58.5 million to $58.4
million for the year ended December 27, 2001. Reported common stockholders'
share of net loss increased by $4.6 million, from $(40.7) million to $(45.3)
million for the year ended December 28, 2000. Reported common stockholders'
share of net earnings slightly increased by $13.0 thousand, remaining at $5.9
million for the year ended December 30, 1999. Reported common stockholders'
share of net earnings (loss) per diluted share decreased from $5.27 to $5.26 for
the year ended December 27, 2001, increased from $(3.88) to $(4.32) for the year
ended December 28, 2000, and increased from $0.57 to $0.58 for the year ended
December 30, 1999.
The effects of the revisions for the change in accounting method on certain
long-term service contracts on the 2001, 2000, and 1999 financial data, and on
the 2001 and 2000 unaudited quarterly financial data are presented in Note 2 to
the Consolidated Financial Statements. The "As Reported" numbers are taken from
the previously filed 2001 Form 10-K/A and include the revisions to 2000 and 1999
results related to the "Prior Revision of Financial Statements" discussion
below.
Prior Revision of Financial Statements
In the original 2001 Form 10-K/A filed on May 15, 2002, the Company had revised
certain information in the Consolidated Financial Statements for the fiscal
years ended December 30, 1999 and December 28, 2000 following discussions with
the staff of the SEC regarding accounting principles articulated in Statement of
Financial Accounting Standards ("SFAS") No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises" and Accounting Principles Board ("APB")
No. 16, "Business Combinations" as they relate to the Company's acquisition of
DIS from GTE Corporation in December 1999.
When the Company purchased DIS in December 1999, issues existed relating to the
financial performance of certain DIS contracts and realization of certain DIS
receivables. The Company disclosed in its 1999 Form 10-K that its purchase
accounting was preliminary. During 2000, the Company continued its evaluation of
the status of contracts at the date of acquisition. Primarily in the third
quarter of 2000, the Company finalized its evaluation of the impact of the
future cash flows related to the contracts based on information obtained through
that quarter and recorded an
increase to reserves through a purchase accounting adjustment. The purchase
accounting adjustment also resulted in an increase to goodwill and deferred tax
assets. At the end of the third quarter of 2001, the Company reversed a
significant amount of the contract loss reserves as a result of entering into a
modification of one of the contracts acquired. This was also accounted for as a
purchase accounting adjustment, which resulted in a decrease to goodwill and
deferred tax assets.
According to SFAS No. 38, the allocation period for purchase accounting
adjustments ends when the acquiring enterprise is no longer waiting for
information that it has arranged to obtain and that is known to be available or
obtainable at the acquisition date. Items identified during the initial purchase
period as "preacquisition contingencies" shall be included in the allocation of
the purchase price based on the fair value of the contingency. The Company
previously believed that the allocation period related to these preacquisition
contingencies was still open during those periods. Although the Company stated
in its 1999 Form 10-K that the purchase price allocation was preliminary, after
discussions with the SEC's staff, the Company has determined that the allocation
period for these preacquisition contingencies was no longer open in 2000 and
2001, and therefore the adjustments made should have been accounted for directly
through the statement of operations, rather than as an adjustment to the
original purchase accounting. As a result, the financial statements of the
Company for the year ended December 28, 2000 and the nine months ended September
27, 2001 were revised to reflect the adjustments directly in the statements of
operations. In addition, the 1999 financial statements were revised for the
allocation of the DIS purchase price with respect to the valuation of an
acquired contract in progress.
Revenue and Operating Profit
In 2001, revenue (as revised - see "Change in Accounting Method and Revision of
Financial Statements" discussion above) increased by $150.8 million, or 8.4%,
from 2000 compared to a $459.9 million, or 34.2%, increase in 2000 revenue over
1999. Revenues were $2.0 billion, $1.8 billion, and $1.3 billion in 2001, 2000
and 1999, respectively. Operating profit was $163.5 million, $24.4 million, and
$63.1 million in 2001, 2000, and 1999, respectively. Operating profit for 2001
and 2000 includes $44.7 million and $(76.2) million, respectively, related
primarily to revised loss estimates on a contract acquired with the purchase of
DIS as described in the "Prior Revision of Financial Statements" discussion
above). Operating profit is defined as the excess of revenues over cost of
services and certain non-operating income and expense, which are included in
Other Income, net of Other Miscellaneous Expenses on the Consolidated Statements
of Operations. The growth in 2001 revenue and operating profit was due primarily
to several new contract wins, increased tasking on existing contracts, and the
gain on sale of DMR. The larger growth in 2000 as compared to 1999 in revenues
and operating profits was due in part to reporting the full year of operations
of DIS, which was acquired in December 1999. DIS accounted for 46.7% of the
growth in revenues in 2000 and for 145.7% of the decrease in operating profits
in 2000, as compared to 1999.
For the year ended December 27, 2001, DI&ET reported a decrease in revenues of
$18.7 million, or 3.1%, to $588.0 million as compared to 2000. The decrease in
revenues was primarily due to the completion of a subcontract for the Department
of Commerce for the 2000 Census in November 2000. This contract had revenues of
$1.5 million and $44.6 million for the years ended December 27, 2001 and
December 28, 2000, respectively. Also contributing to the decrease in revenues
in 2001 was the loss of the subcontract providing operations management to the
Department of Energy ("DoE") Hanford location and, to a lesser extent, the
completion of another DoE contract in the second quarter of 2000 that provided
management, technical, and scientific services. The subcontract providing
operations management to the DoE Hanford location ended effective September 30,
2001. Revenues for the DoE Hanford location contract totaled $75.1 million and
$109.0 million in 2001 and 2000, respectively.
Offsetting the decreases in DI&ET revenues were increased revenues on several
other contracts. DI&ET had increased revenues from growth in a joint venture for
vaccine technology services for the Department of Defense ("DoD"), a new
contract that provides battlefield simulation system support services and
maintenance for the U.S. Army, and a new contract with the DoD, which provides
security background investigations. The battlefield simulation contract and the
security background investigations contract were both awarded in the second
quarter of 2000 and were fully operational in 2001. These two new contracts
provided combined revenues of $30.0 million in 2001. Also contributing higher
revenues was a new DMR contract in the third quarter of 2001, which provides
non-emergency medical transportation services in the Commonwealth of Virginia.
This contract provided revenues of $15.1 million in 2001 and is part of DMR,
which was divested on December 27, 2001. Management expects growth in revenues
on the vaccine technology services contract and the battlefield simulation
contract and slower growth in revenues on the background security investigations
contract in 2002. In addition, management expects its two recently won
contracts, one with the Department of Treasury and another with the Securities
and Exchange Commission, to help offset the lost revenues from the DoE Hanford
contract for 2002; however, these increases are not assured and they are not
expected to fully replace the lost revenues. Management does not expect to be
able to replace the revenues from DMR in 2002, which were approximately $41.9
million, $27.0 million, and $24.5 million for 2001, 2000, and 1999,
respectively.
DI&ET's operating profit increased by $2.6 million, or 6.9%, to $39.7 million
for the year ended December 27, 2001. The increase is due partially to the gain
on the disposal of DMR in the amount of approximately $17.4 million, which was
offset by a $13.4 million loss from DMR operations. The DMR operating loss was
primarily due to losses of $9.4 million on the new contract that provides
non-emergency medical transportation services in the Commonwealth of Virginia.
Also contributing to the DMR operating loss were higher costs associated with a
contract that provides non-emergency transportation to Medicaid patients in the
State of Connecticut. Both of these contracts were divested on December 27, 2001
as part of DMR. The Company is obligated for the satisfactory performance on the
contract with the Commonwealth of Virginia, but is entitled to contractual
indemnification by TekInsight.com, Inc. for any post closing claims. In
addition, operating profits were negatively impacted due to the completion of
the subcontract for the Department of Commerce for the 2000 Census and the loss
of the DoE Hanford location subcontract as noted above. These two contracts
reported a combined decrease in operating profit in 2001 of $7.2 million.
Operating profits for the DoE Hanford location subcontract totaled $2.1 million
and $4.5 million in 2001 and 2000, respectively. Operating profits for the
Census subcontract totaled $0.2 million and $5.0 million in 2001 and 2000,
respectively.
Offsetting these decreases were increases in operating profit resulting
primarily from profit on the new battlefield simulation and the background
security investigations contracts that are noted above and increased tasking on
the vaccine technology services contract that is also noted above. The combined
increase in operating profit for these three contracts totaled $3.2 million in
2001.
The gain on disposal of DMR was due to the Company receiving 18,336,664 shares
of class B common stock of DynTek, Inc. These shares are not registered, but
DynCorp has rights to require DynTek, Inc. to register the shares. An
independent appraiser estimated a value of $31.0 million for these shares at
December 27, 2001. The result of this transaction was a gain on the sale of
approximately $29.1 million; however, under generally accepted accounting
principles ("GAAP") the Company recognized only 60% of the gain or $17.4 million
for this non-monetary transaction because the Company has a 40% ownership
interest in the new entity DynTek, Inc. See "DynCorp Management Resources, Inc.
("DMR") Merger with DynTek, Inc." below for further discussion.
DI&ET revenues were $606.7 million in 2000, an increase of $24.8 million, or
4.3% over 1999 revenues of $581.9 million. The revenue increases were primarily
due to increases on a subcontract for the Department of Commerce for the 2000
Census, which began generating revenue in the second half of 1999, and growth of
revenues on a contract with the U.S. Postal Service, which began operations in
1999 and was fully operational in 2000. Also contributing to DI&ET's increased
revenues was growth in a joint venture for vaccine technology services for the
Department of Defense, which was just starting up in 1999, increased tasking on
several General Services Administration indefinite delivery, indefinite quantity
(IDIQ) contracts, and an outsourcing contract awarded in late 1999 with the
Department of Housing and Urban Development which became operational in 2000.
Partially offsetting these increases in revenue were the loss of a subcontract
for the U.S. Postal Service and a contract with the Immigration and
Naturalization Service. Revenues on these two contracts in 2000 and 1999 totaled
$2.4 million and $55.5 million, respectively.
In 2000, DI&ET's operating profit increased by $7.2 million to $37.2 million
from $30.0 million in 1999, a 24.1% increase. The largest increase in operating
profit resulted from the Department of Commerce 2000 Census subcontract, which
provided $4.7 million of the increase. DI&ET experienced growth in operating
profits on
several General Services Administration IDIQ contracts and its joint venture for
vaccine technology services for the Department of Defense. Also contributing to
the increase in operating profit were operating losses in 1999 on certain
contracts that did not continue in 2000. Offsetting the increase in operating
profit was the loss of the Immigration and Naturalization Service contract in
1999, which had $3.8 million in operating profit in 1999.
DMR's revenues and operating profits are included in DI&ET's revenues and
operating profits noted above. In 2001, 2000, and 1999, DMR reported revenues of
$41.9 million, $27.0 million, and $24.5 million, respectively. Operating profits
(losses) for DMR were $4.0 million, $0.1 million, and $(1.4) million in 2001,
2000, and 1999, respectively. DMR's 2001 operating profit includes the gain on
disposition of $17.4 million, which was offset by $13.4 million loss from
operations. See "DynCorp Management Resources, Inc. ("DMR") Merger with DynTek"
below for further discussion.
DTS' 2001 revenues grew by $68.3 million, or 15.3%, in 2001 to $514.5 million.
The increase in revenues over 2000 resulted from continued growth in its
logistics support and aviation services businesses, primarily from new military
aircraft maintenance and base operations support contracts at two domestic U.S.
Air Force bases (Andrews AFB and Vance AFB). These two new U.S. Air Force base
contracts (which both began operations in the first half of 2001) provided
combined revenues of $62.5 million in the year ended December 27, 2001. An
additional U.S. Air Force base contract that began in 2000 recorded increased
revenues in 2001. This contract provided revenues of $30.8 million and $16.3
million for the years ended December 27, 2001 and December 28, 2000,
respectively. Slightly offsetting the increases in revenue was the divestiture
of certain aerospace research and development contracts in the third quarter of
2000. Revenues in 2000 for the aerospace contracts were $5.5 million. Management
expects future revenue increases due to the phase-in of another new contract
with the U.S. Air Force in March 2002 and the start up of a new contract with
the National Aeronautics and Space Administration Johnson Space Center, which
was awarded in early February of 2002.
DTS' operating profits for the year ended December 27, 2001 increased by $1.2
million, or 8.9%, in 2001 to $15.1 million. The increases in operating profits
were due primarily to the increased revenues on the new U.S. Air Force base
contracts that are noted above. Operating profits on the two new U.S. Air Force
base contracts totaled $2.9 million for the year ended December 27, 2001.
Slightly offsetting these increases in operating profit was the loss of
operating profit from the divestiture of certain aerospace research and
development contracts as noted above.
DTS revenues increased by $84.3 million, or 23.3%, to $446.2 million in 2000 as
compared to $361.9 million in 1999. Operating profit increased by $1.7 million,
or 13.9%, from $12.1 million in 1999 to $13.8 million in 2000. The increase in
revenues in 2000 was primarily attributable to increases in the purchase of
reimbursable materials for a U.S. Army contract. The increase in revenues on
this contract in 2000 totaled $23.9 million. An additional U.S. Air Force base
contract that began in 2000 recorded revenues of $16.3 million in 2000. Also
contributing to the increase in revenues was the contract providing
organizational and intermediate level maintenance for various aircraft at
Holloman Air Force Base, which began in the latter part of 1999 and ramped up in
2000. This contract reported increases in 2000 over 1999 of $11.4 million. The
increases in operating profits in 2000 over 1999 were primarily attributable to
the increased revenues on the contracts noted above. These increases in
operating profits were offset slightly by a decrease in profits on a DTS
start-up venture.
DI's revenues showed continued growth in the year ended December 27, 2001. DI's
2001 revenues grew by 18.9% to $545.8 million, as compared to 2000 growth of
37.6% to $459.1 million. The increases in 2001 over 2000 were primarily
attributable to the phase-in of two new contracts: one which was awarded in
August 2000 and provides maintenance and logistical support to the U.S. Army and
the other which was awarded in April 2000 and provides maintenance, storage, and
security support to the United States Central Command Air Forces. These
contracts reported combined revenues of $116.7 million and $30.2 million in 2001
and 2000, respectively. The growth in the U.S. Air Force contract was higher
than expected for 2001 due to increased activities resulting from the war in
Afghanistan. The war may have added as much as $20.0 million in revenue for the
contract in 2001. Management is expecting smaller growth on these two contracts
in 2002. Other increases in revenues resulted largely from increased services on
a contract with the Department of State ("DoS") in support of the government's
drug eradication program, primarily in South America, and to a smaller extent,
from a new contract in 2001 that provides
personnel services for U.S. embassies. This DoS contract provided revenues of
$83.4 million and $57.9 million in 2001 and 2000, respectively. Offsetting these
increases was decreased volume on an IDIQ contract that provides combat support,
combat service support augmentation and force provided training modules to the
U.S. Army and other military services. Other smaller decreases from prior year
revenues were due to the completion of a contract providing logistics support to
the United Nations in Sierra Leone, the loss of a contract that provided
services in support of the United Nations mission in Kosovo, and the phasing
down of an International Police Task Force contract with the DoS in Bosnia. The
combined revenue reductions in 2001 compared to 2000 on these four contracts
totaled $24.6 million. Management expects revenues to grow in 2002 due to the
two new contracts noted above as well as new business awarded in early 2002. In
February 2002, DI was awarded a five-year contract with the U.S. Air Force for
work in Latin America.
DI's operating profit increased by $13.0 million, or 52.0%, to $38.1 million in
2001. DI's operating profit increases resulted from the higher revenue as noted
above. Operating profits grew faster than revenues in 2001 due to improved
profit margins in some of its service areas and lower indirect expenses. These
improved profit margins resulted in part from contracts that started in the
first part of 2000. In addition, operating profits increased from a modification
to the DoS contract supporting the government's drug eradication programs noted
above that added fees in 2001.
DI revenues increased $125.5 million, or 37.6%, to $459.1 million in 2000 over
1999 revenues of $333.6 million. DI's revenues increased primarily due to the
start up of the two new contracts noted above: one which was awarded in August
2000 and provides maintenance and logistical support to the U.S. Army and the
other which was awarded in April 2000 and provides maintenance, storage, and
security support to the United States Central Command Air Forces. These two
contracts provided revenues of $30.2 million in 2000. In addition, there was
increased tasking on the International Police Task Force contract with the DoS
in Bosnia; increased volume on an IDIQ contract that provides combat support,
combat service support augmentation and force provided training modules to the
U.S. Army and other military services; increased tasking on a contract providing
aviation and related support of equipment maintenance to the armed forces; and
increased services on the DoS contract supporting the government's drug
eradication program. These four contracts provided revenues of $329.2 million
and $258.0 million in 2000 and 1999, respectively. Slightly offsetting these
increases in revenues were decreases in revenues resulting from the completion
of a base operations contract for the United Nations in Angola and a base
operations contract for the U.S. Army with a joint venture in Haiti in the first
half of 2000. These two contracts reported combined decreases in revenues of
$15.9 million in 2000 as compared to 1999.
DI operating profits increased by $5.7 million, or 29.3%, to $25.1 million in
2000 over 1999. These increases in operating profits resulted from the higher
revenues as noted above. Combined operating profits for the two new contracts
totaled $2.0 million in 2000. Offsetting these increases, were the decreases in
operating results from the completion of the United Nations and U.S. Army
contracts noted above. These two contracts reported combined decreases of $0.9
million in 2000 as compared to 1999.
DIS revenues were $246.3 million in 2001 as compared to $228.5 million in 2000,
an increase of $17.8 million, or 7.8%. DIS' operating profit increased in 2001
over 2000 by $123.3 million, or 222.8%, to $67.9 million. Adjustments related
primarily to revised loss estimates on an acquired contract increased operating
profit by $44.7 million due to contract modification in 2001 and decreased
operating profit by $76.2 million in 2000 (see the "Prior Revision of Financial
Statements" discussed above). Excluding these adjustments, the increases in both
revenues and operating profits were due primarily to the start up of a new
contract in the third quarter of 2001 with the Federal Bureau of Investigation
("FBI") for updated office automation, which consists primarily of desk top
computers, servers, and networks. Management is expecting further increases in
revenues and operating profits for this contract in 2002, due to an accelerated
schedule for completion of the contract. This contract's schedule was
accelerated as part of the government's response to the terrorist attacks on
September 11, 2001. Offsetting these increases were decreases that resulted from
several programs that were winding down in 2001. DIS expects revenue growth in
2002 to be at a higher rate than in 2001, due primarily to the FBI contract
noted above.
DIS, which was acquired on December 10, 1999 from GTE Corporation, had revenues
of $228.5 million in 2000
and $13.9 million for the twenty-day period ended December 30, 1999. DIS
operating results were $(55.3) million operating loss in 2000 (inclusive of the
above-noted adjustment of $(76.2) million) and $1.0 million for the twenty-day
period in 1999. 2000 operating profit excluding the one-time adjustment was
$20.9 million. Full year revenue, which is not included in the Company's results
of operations except for the portion representing the twenty days ended December
30, 1999, as noted above, was $221.6 million for 1999. A lack of new contract
awards to DIS resulted in modest revenue growth in 2000.
ADVMED reported revenues of $61.3 million and $64.7 million in 2001 and 2000,
respectively. ADVMED's operating profits were $2.7 million and $3.7 million in
2001 and 2000, respectively. The decreases in 2001 revenues of $3.3 million, or
5.2%, from 2000 were primarily due to the loss of a subcontract with the U.S.
Army that provided review and analysis of military health care facilities'
performance. This contract reported revenues of $8.8 million in 2000. In
addition, operating profit was negatively impacted in 2001 by costs associated
with the completion of a commercial software product. Partially offsetting the
lost revenue and operating profit for the year ended December 27, 2001 were the
start-up of several task orders for a contract that provides review and analysis
support for the Centers for Medicaid and Medicare Services ("CMS"), formerly
known as the Health Care Financing Administration, and also the collection of an
account receivable in the first half of 2001 that was written off in a prior
year of $0.8 million. The CMS contract reported revenues of $11.1 million in
2001. Management expects that the new CMS task orders will offset the lost
revenue and operating profit from the loss of the contract in 2001 that provided
review and analysis of military health care facilities' performance.
The increases in ADVMED's 2000 revenues over 1999 of $10.7 million, or 19.8%, to
$64.7 million were due to increased tasking on the clinical data abstraction
services contract that provides information to be analyzed by CMS and the
related revenues from the September 2000 purchase of certain net assets of a
company that develops and markets proprietary decision-support software and
provides related consulting services to evaluate and profile performance of
providers engaged by healthcare payers. The increases in ADVMED's 2000 operating
profit over 1999 of $3.1 million to $3.7 million were due to the increases in
revenues on the contracts noted above. Also contributing to the increase in 2000
in operating profit was the write off of an account receivable of $1.2 million
in 1999.
Cost of Services
Cost of services (as revised - see "Change in Accounting Method and Revision of
Financial Statements" discussion above) was 92.6%, 98.5%, and 95.2% of revenue
in 2001, 2000, and 1999, respectively. Cost of services (as revised) was $1.8
billion, $1.8 billion, and $1.3 billion in 2001, 2000, and 1999, respectively.
Cost of services includes a decrease in 2001 of $44.7 million and an increase of
$76.2 million in 2000 related primarily to revised loss estimates on an acquired
contract (as described in "Prior Revision of Financial Statements" discussion
above). Cost of services as a percentage of revenue fluctuated primarily due to
the one-time adjustments noted above. Cost of services increased by $31.9
million from 2000, or 1.8%, to $1.8 billion. The primary reasons for the change
in cost of services in 2001 are the $13.4 million operating loss for DMR and
lower profit margins for ADVMED due to higher indirect expenses, offset by the
one-time adjustment noted above.
Cost of services increased by $498.1 million from 1999, or 38.9%, to $1.8
billion in 2000. Cost of services for DIS, which was purchased in December 1999,
comprised $221.0, or 44.4%, of the increase from 1999.
The decrease in the cost of services (exclusive of the one-time adjustments
noted above) as a percentage of revenue in 2000 as compared to 1999 was
attributable to the higher margin DIS business acquired in 1999, partially
offset by significant growth in the lower margin DTS business. DIS cost of
services (exclusive of the one-time adjustments noted above) was 93.4% and 92.9%
of revenue in 2000 and 1999, respectively. DTS cost of services was 96.1% and
95.5% of revenue in 2000 and 1999, respectively.
Corporate General and Administrative
Corporate general and administrative expense increased slightly in 2001 by $0.1
million, or 0.4%, to $29.5 million,
as compared to $29.4 million in 2000. Corporate general and administrative
expense increased by $7.6 million, or 35.0%, in 2000 as compared to $21.7
million in 1999. Corporate general and administrative expense as a percentage of
revenue was 1.5% in 2001, and 1.6% in 2000 and 1999. The higher expense in 2000,
as compared to both 2001 and 1999, was primarily due to increased costs for
converting DIS to the Company's financial systems, which was completed in the
fourth quarter of 2000. In 2001, 2000 and 1999, corporate general and
administrative expenses were reduced by $0.4 million, $0.9 million and $2.0
million, respectively, due to reversal of reserves for federal acquisition
regulation compliance issues related to the early and middle 1990's, which were
settled in the Company's favor during those years.
Interest Expense and Interest Income
Interest expense for 2001 was $31.5 million, or 1.6% of revenues, as compared to
$41.4 million, or 2.3% of revenues for 2000. The decrease in interest expense
was attributable to lower average debt levels and lower average interest rates
in 2001 as compared to 2000. The average levels of indebtedness were
approximately $285.1 million in 2001 and $337.2 million in 2000.
Interest expense for 2000 was $41.4 million, or 2.3% of revenues, as compared to
$18.9 million, or 1.4% of revenues reported for 1999. The increase in interest
expense was attributable to higher average debt levels and higher average
interest rates in 2000, as compared to 1999. The average annual levels of
borrowing were approximately $337.2 million in 2000 compared to $203.8 million
in 1999. The average annual levels of borrowing and the average interest rates
increased in 2000 over 1999 as a result of the acquisition of DIS in December
1999, which the Company financed through additional borrowings of $167.5 million
under higher cost debt instruments (see Working Capital and Cash Flow
discussions).
Interest income was $0.7 million, $1.5 million, and $1.4 million in 2001, 2000,
and 1999, respectively. The fluctuations are primarily attributable to the
balance of cash and short-term investments throughout any given year and the
average rates of interest. In 2000, the Company received $0.5 million in
interest income on tax refunds due to amendments of prior years' tax returns.
The twelve-month average balance of cash and short-term investments was $14.2
million in 2001, $15.9 million in 2000, and $19.8 million in 1999.
Amortization of Intangibles of Acquired Companies
Amortization of intangibles of acquired companies (as revised - see "Change in
Accounting Method and Revision of Financial Statements" discussion above)
decreased by $8.5 million to $6.4 million in 2001 compared to $14.9 million in
2000. The decreases from 2000 resulted from intangibles related to DIS contracts
acquired, which became fully amortized early in the first quarter of 2001.
Amortization for the intangibles related to DIS contracts acquired which became
fully amortized in 2001 totaled $7.9 million in 2000 and only $0.2 million in
2001. Amortization costs related to all of the DIS intangibles in 2001 and 2000
totaled $4.3 million and $13.1 million, respectively.
Amortization of intangibles of acquired companies (as revised) increased by $3.5
million to $14.9 million in 2000 compared to $11.4 million in 1999. The increase
in amortization of intangibles of acquired companies in 2000 resulted from the
full year impact of the amortization of intangible assets that were recorded in
connection with the December 1999 acquisition of DIS. Also in 1999, there was an
in-process research and development write-off of $6.4 million associated with
the acquisition of DIS and a write-off of $1.2 million of cost in excess of net
assets acquired for a business that was divested in February 2000. Amortization
costs related to the DIS intangibles in 1999 were $7.1 million (which includes
the $6.4 million write-off).
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." The provisions of SFAS No. 142 eliminate amortization of goodwill and
identifiable intangible assets with indefinite lives and require an impairment
assessment at least annually by applying a fair value based test. Such testing
requires a fair value based assessment by reporting unit (which is defined as an
operating segment or component of an operating segment) to determine if
goodwill is impaired at the reporting unit level. SFAS No. 141 includes guidance
relating to identification of intangible assets that should be recognized apart
from goodwill. The Company is in the process of defining the reporting units and
performing the initial impairment testing. The Company is required to adopt SFAS
No. 142 starting in fiscal year 2002. The Company anticipates an annual increase
to common stockholders' share of net earnings of approximately $2.9 million (net
of tax), or $0.26 per diluted share, from the elimination of goodwill and
assembled workforce amortization. Management continues to estimate the impact on
reported financial position and results of operations for the other provisions
of the statements.
Income Taxes
The provision (benefit) for income taxes is based on reported earnings, adjusted
to reflect the impact of permanent differences between the book value of assets
and liabilities recognized for financial reporting purposes, and such amounts
recognized for tax purposes. The provision (benefit) for income taxes (as
revised - see "Change in Accounting Method and Revision of Financial Statements"
discussion above) increased by $55.9 million from 2000. The increase was due to
higher pretax income in 2001 resulting in large part from the one-time
adjustments recorded in 2001 and 2000 related primarily to revised loss
estimates on an acquired contract (see "Prior Revision of Financial Statements"
discussion above), and to a lesser extent a slightly higher effective tax rate,
as compared to 2000. The Company's effective tax rate (as revised - see "Change
in Accounting Method and Revision of Financial Statements" discussion above)
approximated 36.6% in 2001, 32.4% in 2000, and 43.6% in 1999, after taking into
account the effect of minority interest, extraordinary items, and cumulative
effect of change in accounting principle. In 1999 and 2001, the Company reversed
state income taxes provided in prior years related to the favorable resolution
of state tax audit issues. Based on current projections, management estimates
income tax payments, net of tax refunds, of $25.1 million in 2002.
No valuation allowance for deferred federal tax assets was deemed necessary at
December 27, 2001 or December 28, 2000. The Company has provided a valuation
allowance for deferred state tax assets of $5.1 million and $5.5 million at
December 27, 2001 and December 28, 2000, respectively, due to the uncertainty of
achieving future earnings in either the time frame or in the particular state
jurisdiction needed to realize the tax benefit.
Other Income
Other income increased by $18.8 million to $19.4 million in 2001, as compared to
$0.5 million in 2000. The increase resulted from the Company completing the
merger of its wholly-owned subsidiary, DMR, with TekInsight.com, Inc. on
December 27, 2001, and recognizing 60% or $17.4 million of the gain on the
disposition. See "DynCorp Management Resources, Inc. ("DMR") Merger with DynTek,
Inc." below for further discussion.
Other income was relatively unchanged in 2000 as compared to 1999, decreasing
slightly by $0.3 million to $0.5 million in 2000.
DynCorp Management Resources, Inc. ("DMR") Merger with DynTek, Inc.
DMR was divested on December 27, 2001, by merger with TekInsight.com, Inc. The
merger between TekInsight.com, Inc. and DMR formed the new entity DynTek, Inc.
DynTek, Inc. is a public company listed on NASDAQ under the symbol DYTK. DynTek,
Inc. is a provider of information technology and outsourced management services
to state and local governments serving customers across 17 states. On a pro
forma basis, DynTek, Inc. had revenues of approximately $77.2 million for the
fiscal year ended June 30, 2001.
The Company received 18,336,664 shares of class B common stock of DynTek, Inc.
These shares are not registered stock, but the Company has the right to require
DynTek, Inc. to register the shares. An independent appraisal of these shares
resulted in a value of $31.0 million for these shares at December 27, 2001. This
transaction resulted in a gain on the sale of approximately $29.1 million;
however, under GAAP the Company recognized only 60% of the gain, or $17.4
million, for this non-monetary transaction because the Company has a 40%
ownership interest in the new entity, DynTek, Inc.
The $17.4 million gain on the disposal of DMR was partially offset by DMR's
$13.4 million operating loss as noted above. Since the Company has a 40%
interest in DynTek, Inc. and does not have control, it will account for its
investment on the equity basis of accounting going forward. The Company has the
right to appoint persons to three of the seven director positions on the board
of DynTek, Inc.
As part of the merger agreement, the Company has contract obligations for
several outstanding performance bonds on certain DMR contracts, which total
approximately $3.4 million as of December 27, 2001. DynTek, Inc. has agreed to
make its best effort to replace the bonds with its own obligations. The Company
is also obligated to the Commonwealth of Virginia for satisfactory performance
on DMR's contract to provide non-emergency medical transportation services in
Virginia. Should DynTek, Inc. default on the Virginia contracts and/or any of
the performance bonds, it could result in financial losses for the Company. In
addition, the majority of the estimated loss on the Virginia contract has been
funded by the Company in the start-up phase of the contract, which occurred
prior to the merger on December 27, 2001.
In the first quarter of 2002, the Company paid $2.6 million to DynTek, Inc. in
resolution of a dispute concerning the adequacy of DMR's working capital at the
time of closing. The Company recorded the $2.6 million payment as a liability at
December 27, 2001, and included the $2.6 million payment in its calculation of
the gain on the sale. DynTek, Inc. is currently seeking additional financing. It
is possible that the Company may make additional payments to DynTek, Inc. in
order to assist in funding its business in the future.
Extraordinary Item
In the fourth quarter of 1999, the Company recorded an extraordinary item
totaling $1.6 million (gross extraordinary item of $2.5 million net of income
tax benefit of $0.9 million). The charge was recorded in connection with the
early extinguishment of secured indebtedness due to refinancing of the Company's
debt in order to complete the acquisition of DIS.
Working Capital
Working capital (as revised - see "Change in Accounting Method and Revision of
Financial Statements" discussion above), defined as current assets less current
liabilities, was $144.7 million at December 27, 2001 compared to $134.2 million
at December 28, 2000, an increase of $10.4 million. The ratio of current assets
to current liabilities at December 27, 2001 and December 28, 2000 was 1.6. The
increase in working capital is primarily the result of higher accounts
receivable balances that resulted from higher revenues in 2001 versus 2000 and a
higher other current asset balance, which was due to prepaid expenses on a FBI
contract. Partially offsetting these increases in accounts receivable and other
current assets was a larger current portion of the Term A debt as of December
27, 2001.
Cash Flows from Operating Activities
For the year ended December 27, 2001, the Company's net cash provided by
operations was $8.1 million, decreasing $50.9 million from $59.1 million cash
provided by operations in 2000. The decrease in operating cash flows resulted
primarily from increases in accounts receivable due to higher revenues in 2001,
increases in other current assets due to prepaid expenses on a FBI contract, and
decreases in accounts payable and certain accrued expenses. Offsetting these
decreases in operating cash flow was an increase in operating cash flow due to
an increase in deferred taxes that resulted from differences between book and
tax income. In 2000, the increases in cash flows from operations over 1999 of
$45.2 million resulted primarily from higher customer collections, partially
offset by payments on accounts payable.
Cash Flows from Investing Activities
Cash used in investing activities for the year ended December 27, 2001 was $3.8
million. The Company used cash of $7.1 million to purchase property and
equipment in 2001, and it sold certain other property and equipment which
provided cash of $5.2 million. The Company also purchased software of $3.2
million for a contract that provides review and analysis support for medical
services and for a contract which provides weather data services. Investing
activities provided funds of $8.1 million for the year ended December 28, 2000.
In February 2000, the Company sold an office building located in Alexandria,
Virginia to a third party for $10.5 million, and simultaneously closed on a
lease of that property from the new owner. The Company used a portion of the net
proceeds to pay off the mortgage on the property. In October 2000, the Company
sold various high-end communications equipment on a DIS contract to a third
party for $20.4 million and simultaneously closed on a lease of the equipment
from the new owner. Offsetting the cash provided from these sales was cash used
for the purchase of property and equipment of approximately $21.0 million, which
included approximately $11.1 million of equipment purchased in the first half of
2000 and sold in the October 2000 sale-leaseback transaction as noted above. In
September 2000, the Company purchased $1.6 million of certain net assets of a
company that develops and markets proprietary decision-support software and
provides related consulting services to evaluate and profile performance of
providers engaged by healthcare providers. Also in September 2000, the Company
sold $2.3 million of certain net assets of a DTS aerospace research and
development unit.
Cash used in investing activities in 1999 totaled $185.0 million and included
acquisition costs of $167.5 million and capital expenditures of $19.8 million.
Acquisition costs were related to the acquisition of DIS in December 1999.
Capital expenditures included $13.9 million for the purchase of property and
equipment and $5.9 million for new software for internal use. The Company had
capitalized a total of $11.6 million of costs related to internal use software
as of December 30, 1999.
Cash Flows from Financing Activities
Financing activities used funds of $2.2 million during 2001. Financing
activities included several short-term borrowings and subsequent payments of a
cumulated sum of $274.1 million under the Senior Secured Credit Agreement
Revolving Credit Facility maturing December 9, 2004. The Company also
contributed $2.2 million to the Savings and Retirement Plan and the Capital
Accumulation and Retirement Plan ("Savings Plans") in 2001. These contributions
were used to retire the put obligation on certain Savings Plans' shares.
In 2000, financing activities used funds of $59.8 million primarily for
voluntary prepayments on the Senior Secured Credit Agreement Term A and B Loans,
the Revolving Credit Facility and the mortgage on the Alexandria, Virginia
office building that the Company sold in the first quarter of 2000. The Company
reduced its outstanding borrowings under the Term A Loans by $30.0 million, the
Term B Loans by $23.1 million, and the Revolving Credit Facility by $7.0
million. Offsetting these reductions in cash flows was the net receipt of $2.7
million of payments on loans from the Employee Stock Ownership Trust and the
issuance of $3.4 million of additional 15% Subordinated Notes for pay-in-kind
interest.
In 1999, financing activities provided funds of $172.7 million. The Company
borrowed $223.8 million under a Senior Secured Credit Agreement. The borrowings
were used for an optional redemption of the Company's outstanding 7.486% Fixed
Rate Contract Receivable Collateralized Notes, Series 1997-1 (the "Notes"),
Class A, to reduce irrevocably the Company's Floating Rate Contract Receivable
Collateralized Notes, Series 1997-1, Class B and to pay transactional expenses
and for general corporate operating purposes. The Company issued $40.0 million
face value of its subordinated pay-in-kind notes for $33.9 million and issued
426,217 shares of the Company's stock for $6.1 million.
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
EBITDA represents a measure of the Company's ability to generate cash flow and
does not represent net income or cash flow from operating, investing and
financing activities as defined by U.S. GAAP. EBITDA is not a measure of
performance or financial condition under GAAP, but is presented to provide
additional information about the Company to the reader. EBITDA should be
considered in addition to, but not as a substitute for, or superior to, measures
of financial performance reported in accordance with GAAP. EBITDA has been
adjusted for the amortization of deferred debt expense and debt issuance
discount which are included in interest expense in the Consolidated Statements
of Operations and included in depreciation and amortization in the Consolidated
Statements of Cash Flows. Readers are cautioned that the Company's definition of
EBITDA may not necessarily be comparable to similarly titled captions used by
other companies due to the potential inconsistencies in the method of
calculation.
The following represents the Company's computation of EBITDA (in thousands):
For Fiscal Years Ended
----------------------
2001 2000 1999
(Revised - (Revised - (Revised-
See Note 2) See Note 2) See Note 2)
------------ -------------- -----------
Net earnings (loss) $ 60,834 $ (43,416) $ 6,009
Depreciation and amortization 19,910 27,054 13,561
Interest expense, net 30,864 39,937 17,550
Income tax provision (benefit) 35,060 (20,827) 4,640
Extraordinary item, net of tax - - 1,601
Cumulative effect of change in accounting principle,
net of tax - 4,770 -
Amortization of deferred debt expense (1,966) (2,300) (1,210)
Debt issue discount (601) (43) (39)
---------- ---------- ---------
EBITDA $ 144,101 $ 5,175 $ 42,112
========== ========== =========
In 2001, EBITDA (as revised - see "Change in Accounting Method and Revision of
Financial Statements" above) increased by $138.9 million, or 2,684.6%, to $144.1
million as compared to 2000. In 2000, EBITDA decreased by $36.9 million, or
87.7%, as compared to 1999. The increases in EBITDA (exclusive of the one-time
adjustments related primarily to revised loss estimates on a contract acquired
with the purchase of DIS described in "Prior Revision of Financial Statements"
above) are primarily attributable to the higher operating profits for DI&ET,
DTS, DI, and DIS. The DI&ET increase includes the gain on the disposition of DMR
of $17.4 million partially offset by DMR's operating losses of $13.4 million.
The above net earnings (loss) amounts include DIS transition expenses of $5.5
million and $0.1 million in 2000 and 1999, respectively, and none in 2001. These
expenses relate to administrative and accounting support provided by the former
parent corporation and affiliates of DIS and ended in the first quarter of 2001.
Also included in these expenses are costs related to transitioning these
services to the Company. See Working Capital and Cash Flows discussion above for
information on the Company's cash flow data.
Liquidity and Capital Resources
The Company's primary source of cash and cash equivalents is from operations and
financing activities. The Company's principal customer is the U.S. Government.
This customer provides for a dependable flow of cash from the collection of
accounts receivable. Additionally, many of the contracts with the U.S.
Government provide for progress billings based on costs incurred. These progress
billings reduce the amount of cash that would otherwise be required during the
performance of these contracts.
The carrying amounts reflected in the consolidated balance sheets of cash and
cash equivalents, accounts receivable and contracts in process, and accounts
payable approximate fair value at December 27, 2001 due to the short maturities
of these instruments.
The Company has minimal exposure to financial market risks such as changes in
interest rates and adverse movements in foreign currency exchange rates.
The Company has $99.7 million of 9 1/2% Senior Subordinated Notes ("Senior
Subordinated Notes") outstanding with a scheduled maturity in 2007. Interest is
payable semi-annually, in arrears, on March 1 and September 1 of each year. The
Senior Subordinated Notes are redeemable, in whole or in part, at the option of
the Company, on or after March 1, 2002 at a redemption price which ranges from
104.8% in 2002 to 100.0% in 2005 and thereafter. In addition, the Company may
redeem up to 35.0% of the aggregate principal amount of the Senior Subordinated
Notes (at a redemption price of 109.5%) with proceeds generated from a public
offering of equity, provided at least 65.0% of the original aggregate amount of
the Senior Subordinated Notes remains outstanding. The Senior Subordinated Notes
are general unsecured obligations of the Company and will be subordinated in
right of payment to all existing and future senior debt of the Company.
The Company has a Senior Secured Credit Agreement (the "Credit Agreement") with
a group of financial institutions. Under the Credit Agreement, the Company has
outstanding borrowings of $70.0 million under Term A Loans maturing December 9,
2004, $76.9 million under Term B Loans maturing December 9, 2006, and has a
$90.0 million revolving line of credit, which, at December 27, 2001, had no
borrowings.
The Term A Loans are to be repaid in an installment of $1.3 million in February
2002 and then eleven quarterly installments of $6.3 million beginning in May
2002. The Term B Loans are to be repaid in an installment of $5.7 million in May
2005 and then six quarterly installments of $11.9 million beginning in August
2005. At the option of the Company, borrowings under the Credit Agreement bear
interest at either LIBOR or a base rate established by the bank, plus a margin
that varies based upon the Company's ratio of debt to earnings.
The Company is charged a commitment fee of 0.5% per annum on unused commitments
under the revolving line of credit. Letters of credit outstanding were $11.1
million and $9.5 million at December 27, 2001 and December 28, 2000,
respectively, under the line of credit. The amount available was $78.9 million
and $80.5 million, respectively, as of December 27, 2001 and December 28, 2000.
The Company also has $7.2 million in outstanding surety obligations for
performance and payment bonds supporting various contracts. These bonds are
partially collateralized with letters of credits, the value of which is included
in the $11.1 million noted above.
The Credit Agreement contains customary restrictions on the ability of the
Company to undertake certain activities, such as the incurrence of additional
debt, the payment of dividends on or the repurchase of the Company's common
stock, the merger of the Company into another company, the sale of substantially
all the Company's assets, and the acquisition of the stock or substantially all
the assets of another company. The Credit Agreement also stipulates that the
Company must maintain certain financial ratios, including specified ratios of
earnings to fixed charges, debt to earnings, and accounts receivable to
borrowings, under the Credit Agreement. At December 27, 2001 and December 28,
2000, the Company was in compliance with these covenants.
The Company has outstanding $40.0 million face value of the Company's
subordinated pay-in-kind notes due 2007, with an estimated fair value of $37.9
million ("Subordinated Notes"). The Subordinated Notes bear interest at 15.0%
per annum, payable semi-annually. The Company may, at its option, prior to
December 15, 2004, pay the interest in cash or in additional Subordinated Notes.
The Subordinated Notes are redeemable, in whole or in part, at the option of the
Company, on or after December 15, 2000, at a redemption price that ranges from
114.0% in 2000 to 100.0% in 2006 and thereafter. The Subordinated Notes are
general unsecured obligations of the Company and will be subordinated in right
of payment to all existing and future senior debt of the Company and to the
Senior Notes.
As of December 27, 2001 the Company's total debt was $284.6 million, an increase
of $0.6 million from $284.0 million as of December 28, 2000, primarily due to
the amortization of the discounts on the Subordinated Notes and the 9 1/2%
Senior Subordinated Notes discussed above.
The Board of Directors has issued an enabling resolution that provides for the
repurchase of up to 500,000 shares of the Company's common stock at a price not
to exceed the current market price, subject to all applicable financial
covenants. Management continuously reviews alternative uses of excess cash and
debt capacity for purposes of acquisitions, dividends, repurchase of shares and
other financial matters.
In November 2001 the Company entered into three-year employment agreements with
certain executives specifying annual salaries and incentive plan target bonuses
and providing for payment of salary and pro-rated bonuses following termination.
The employment agreements also provide, in the event of involuntary termination
without cause, for consulting payments and non-compete payments for a period of
thirty months, and, if the executive is terminated in connection with a change
in control of the Company, payment of an additional lump-sum amount.
Chart Outlining Future Financial Commitments
The following table sets forth the Company's total contractual cash obligations
over the next five years and thereafter (in thousands):
Cash Obligations Due by Year
Contractual
Cash Obligation Total 2002 2003 2004 2005 2006 Thereafter
- --------------- ----- ---- ---- ---- ---- ---- ----------
Long-term Debt $284,605 $20,123 $ 25,005 $28,083 $29,400 $47,500 $134,494
Operating Leases 249,782 46,963 42,968 36,790 27,600 25,643 69,818
Maximum Liability to
Repurchase ESOP
Shares 326,368 19,996 24,340 26,292 24,228 20,873 210,639
Liability to Repurchase
Other Redeemable
Common Stock 11,600 - 11,600 - - - -
DynTek, Inc. Payments 2,600 2,600 - - - - -
-------- ------- -------- ------- ------- ------- --------
Total Contractual Cash
Obligations $874,955 $89,682 $103,913 $91,165 $81,228 $94,016 $414,951
======== ======= ======== ======= ======= ======= ========
The Company has contractual cash obligations under several of its long-term debt
provisions, as discussed above.
The Company has several significant operating leases for facilities, furniture
and equipment. Minimum lease payments over the next 11 years are estimated to be
$249.8 million, including $47.0 million in 2002. Of the $47.0 million 2002
minimum lease payments, $14.6 million related to DIS leases (including the sale
and leaseback of various high-end communications equipment as noted above),
$10.4 million related to a U.S. Postal Service contract, and $6.9 million
related to the new corporate headquarters building.
The Company is obligated to repurchase certain of its Employee Stock Ownership
Plan ("ESOP") vested common stock shares (under a "put option") from ESOP
participants (see Note 8 to the Consolidated Financial Statements) upon death,
disability, retirement and termination at the fair value (as determined by an
independent appraiser) until such time as the Company's common stock is publicly
traded. Under the Subscription Agreement 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. Participants receive
their vested shares upon retirement, becoming disabled, or death over a period
of one to five years and for other reasons of termination over a period of one
to ten years, all as set forth in the ESOP documents. The participant can elect
to retain distributed ESOP shares instead of a participant put. The Company's
total contractual cash obligation to repurchase ESOP shares will fluctuate in
the future as the independently determined fair value fluctuates. The total
obligation to repurchase ESOP shares is $326.4 million as of December 27, 2001,
based on the independently determined fair value as of December 27, 2001.
Effective January 1, 2001, the Company established two new plans: the Savings
and Retirement Plan and the Capital Accumulation and Retirement Plan
(collectively, the "Savings Plans"). At the same time, the ESOP was
merged into the two plans. The Company stock accounts of participants in the
ESOP were transferred to one or the other of the Savings Plans' trusts, and
Savings Plans participants have the same distribution and put rights for these
ESOP shares as they had in the ESOP.
On December 10, 1999, the Company entered into an agreement with various
financial institutions for the sale of 426,217 shares of the Company's stock and
Subordinated Notes (see Note 5 to the Consolidated Financial Statements). Under
a contemporaneous registration rights agreement, the holders of these shares of
stock will have a put right to the Company commencing on December 10, 2003, at a
price of $40.53 per share, unless one of the following events has occurred prior
to such date or the exercise of the put right: (1) an initial public offering of
the Company's common stock has been consummated; (2) all the Company's common
stock has been sold; (3) all the Company's assets have been sold in such a
manner that the holders have received cash payments; or (4) the Company's common
stock has been listed on a national securities exchange or authorized for
quotation on the NASDAQ National Market System for which there is a public
market of at least $100 million for the Company's common stock. If, at the time
of the holders' exercise of the put right the Company is unable to pay the put
price because of financial covenants in loan agreements or other provisions of
law, the Company will not honor the put at that time, and the put price will
escalate for a period of up to four years, at which time the put must be
honored. The escalation rate increases during such period until the put is
honored, and the rate varies from an annualized factor of 22.0% for the first
quarter after the put is not honored up to 52.0% during the sixteenth quarter.
The total obligation to repurchase these shares of the Company's stock is $11.6
million as of December 27, 2001. On December 26, 2001, two of the holders sold
140,000 of these shares on the Company's internal market and those shares are no
longer subject to the put right.
The payment to DynTek, Inc. of $2.6 million was made in the first quarter of
2002 as noted above in the "DynCorp Management Resources, Inc. ("DMR") Merger
with DynTek, Inc." discussion.
Transactions, Arrangements and Other Relationships with Unconsolidated Entities
The Company owns a 49.5% ownership interest in DynCorp TechServ LLC, a Georgia
limited liability company. The primary purpose of DynCorp TechServ LLC is to
provide complete networked desktop computing environments to clients pursuant to
contractual arrangements under which payments are calculated on the basis of a
price per user for the entire service. The services are provided in a bundled
aggregation that includes the support of hardware and software already owned by
the customer, the provision of additional hardware and software for the
customer's use during the contractual term, network management, help desk
services, and related customer support services. Title to the hardware and
software provided to the customer equipment typically does not pass to the
customer, if at all, until the end of the contractual term.
DynCorp TechServ LLC has a Management and Operational Services Agreement with
the Company under which the Company provides all operational and management
services to DynCorp TechServ LLC under its current contracts and all marketing
assistance and proposal development services in the pursuit of additional prime
contracts and task orders under existing contracts and any future contracts.
DynCorp TechServ LLC secures all financing arrangements for the acquisition of
hardware, software, peripheral equipment, and other capital expenditures
necessary for the performance of the current or future contracts, including all
loans, capital leases, and similar arrangements, without guarantee or recourse
to the Company.
The Company is a minority partner in New Mexico Technology Group, LLC, a
partnership formed to respond to the request for proposal to perform on the
Department of Defense White Sands Missile Range Support Services contract
administered by the Directorate of Contracting, STEWS-DOC, White Sands Missile
Range, New Mexico. The Company is not obligated for any debt, obligation or
other liability of the partnership or to members of the partnership beyond the
partnership capital account.
The Company holds a minority interest in the Aerospace Center Support ("ACS") a
joint venture formed to support the U.S. Air Force contract for "Contractual
Support Services" for the Arnold Engineering Development Center and Arnold Air
Force Base, Tennessee. ACS operates a complex of aerospace ground simulation
test facilities for the
engineering development support for U.S. aircraft, missiles, spacecraft, fully
functional jet and rocket engines, and other aerospace systems. The Company has
not guaranteed, and does not intend to guarantee, ACS's obligations under its
contract agreements.
The Company has a minority interest in Composite Technology, Inc. ("CTI"). CTI
services and repairs aircraft components. The Company's minority interest in CTI
allows it the exclusive right to utilize and market boron and other advance
repair patch technologies in North and South America. The Company has not
guaranteed, and does not intend to guarantee, any of CTI's obligations.
The Company has a 40% interest in ES-KO (UK)/DynCorp Joint Venture (JV). This JV
provides for base operations support to NATO in Kosovo, Macedonia, and Albania.
In addition to the basic base level support the JV provides civil engineering
services of all roads and bridges throughout the region. The Company has not
guaranteed ES-KO (UK)/DynCorp Joint Venture's obligations under its contract
arrangements.
The Company also participates as a minority owner in several other limited
liability companies, joint ventures and corporations but does not guarantee any
of their operations, except for DynTek, Inc. (see "DynCorp Management Resources,
Inc. ("DMR") Merger with DynTek, Inc." discussion noted above).
The following table* sets forth the Company's investments (in thousands) in
limited liability companies, joint ventures, and corporations that are not
consolidated into the Company's financial statements as of December 27, 2001.
The other investors are not considered related parties, as defined by SFAS No.
57, "Related Party Disclosures." Related parties include affiliates, management,
directors, and entities owned or controlled by management or directors.
Name of Entity Ownership Ownership % Investment
(nature of business) Balance as of
December 27, 2001
- -------------------------------------------------------------------------------------------------------------
Composite Technology Inc. DynCorp Advanced Repair Technology Inc. 25.0% $ 786
boron patch technology Others 75.0%
- -------------------------------------------------------------------------------------------------------------
Aerospace Center Support DynCorp 35.0% 333
services at Arnold Engineering Support Others 65.0%
center
- -------------------------------------------------------------------------------------------------------------
DynCorp TechServ LLC DynCorp 49.5% 11
services Others 50.5%
- -------------------------------------------------------------------------------------------------------------
DynTek, Inc. DynCorp 40.0% 19,289
state and local outsourcing Public 60.0%
- -------------------------------------------------------------------------------------------------------------
ES-KO (UK)/DynCorp Joint DynCorp 40.0% 935
Venture Others 60.0%
government outsourcing services
- -------------------------------------------------------------------------------------------------------------
ITS Medical Systems LLC DynCorp 40.0% 567
hazardous biomedical substance Others 60.0%
training
- -------------------------------------------------------------------------------------------------------------
New Mexico Technology Group, LLC DynCorp 47.0% 343
government outsourcing services Other 53.0%
- -------------------------------------------------------------------------------------------------------------
*Excludes investments of less than 20% ownership and inactive investments
September 11, 2001
The September 11, 2001 terrorist attacks against the U.S. and the national and
global response to those terrorist attacks did not have a significant negative
impact on the Company. As a consequence of increased homeland defense and
military retaliation overseas, management expects increased business activity on
several contracts with the Federal Government, and thereby expects increased
revenues in 2002. At this time, management is not able to
project the total financial impact on its statements of operations or cash
flows.
Due to the normal cyclical nature of the insurance industry and also in part due
to the September 11, 2001 terrorist attacks against the U.S., the Company's
insurance position has changed. Specifically, some premiums have increased,
while the coverages have been restricted or eliminated, the contract periods
shortened, and the deductibles increased. As a result, the Company expects
increases in its insurance expense in 2002. The Company does not foresee
changing any of its current business operations due to these insurance changes.
Recent Developments
The Board of Directors has authorized management to consider interests of third
parties in a merger or sale of the Company. There is the potential for a merger
or sale of the Company in the short-term future, but no formal agreement has
been negotiated or executed at this time. The Company has notified its
stockholders and participants in its Savings and Retirement Plan, Capital
Accumulation and Retirement Plan, and former Employee Stock Ownership Plan of
this potential change in owners of the Company and merger or sale of the
Company.
Environmental Matters
Neither the Company nor any of its subsidiaries has been named as a Potentially
Responsible Party (as defined in the Comprehensive Environmental Response,
Compensation, and Liability Act) at any site. The Company has incurred costs for
the installation and operation of a soil and water remediation system and for
the clean up of environmental conditions at certain other sites and has been
involved with several environmental claims (see Note 20 to the Consolidated
Financial Statements). The Company's liability, in the aggregate, with respect
to these matters is not expected to be material to the Company's results of
operations or financial condition.
Critical Accounting Policies (Revised)
Revenues for cost-reimbursement contracts are recorded as reimbursable costs are
incurred, including a pro-rata share of the contractual fees. For
time-and-material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable costs incurred.
For long-term fixed price production contracts, revenue is recognized at a rate
per unit as the units are delivered. Revenue from other long-term fixed price
contracts is recognized ratably over the contract period or by other appropriate
methods to measure services provided. Contract costs are expensed as incurred
except for certain limited long-term contracts noted below. For long-term
contracts, which are specifically described in the scope section of AICPA SOP
No. 81-1, "Accounting for Performance of Construction Type and Certain
Production-Type Contracts," or other appropriate accounting literature the
Company applies the percentage of completion method. Under the percentage of
completion method, income is recognized at a consistent profit margin over the
period of performance based on estimated profit margins at completion of the
contract. This method of accounting requires estimating the total revenues and
total contract cost at completion of the contract. During the performance of
long-term contracts, these estimates are periodically reviewed and revisions are
made as required. The impact on revenue and contract profit as a result of these
revisions is included in the periods in which the revisions are made. This
method can result in the deferral of costs including start-up costs, or the
deferral of profit on these contracts. Because the Company assumes the risk of
performing a fixed price contract at a set price, the failure to accurately
estimate ultimate costs or to control costs during performance of the work could
result, and in some instances has resulted, in reduced profits or losses for
such contracts. Estimated losses on contracts at completion are recognized when
identified.
Disputes arise in the normal course of the Company's business on projects where
the Company is contesting with customers for collection of funds because of
events such as delays, changes in contract specifications and questions of cost
allowability or collectibility. Such disputes are recorded at the lesser of
their estimated net realizable value or actual costs incurred, and only when
realization is probable and can be reliably estimated. Claims against the
Company are recognized where loss is considered probable and reasonably
determinable in amount. Because there are estimates and judgments involved, the
actual results could be different from those estimates. Accounts receivable
balances related to such disputed items were immaterial at December 27, 2001,
December 28, 2000, and December 30, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and, to a
limited extent, foreign currency exchange rates that could affect its results of
operations and financial condition or cash flows. The Company manages its
exposure to these market risks through normal operating and financing activities
and, when deemed appropriate, hedges these risks through the use of derivative
financial instruments. The Company uses the term hedge to mean a strategy
designed to manage risks of volatility in rate movements on certain assets,
liabilities or anticipated transactions by creating a relationship in which
gains or losses on derivative instruments are expected to counterbalance the
losses or gains on the assets, liabilities or anticipated transactions exposed
to such market risks. The Company uses derivative financial instruments as a
risk management tool and not for trading or speculative purposes.
Interest Rate Risk
- ------------------
The Company has minimal exposure due to fluctuations in market interest rates.
Had market interest rates been 10% higher than they were throughout 2001, the
Company's net earnings would have been approximately $0.3 million lower, or a
change of 0.5%. This is derived from a historical model that recalculates the
interest expense incurred by the Company assuming that the market interest rates
to which the Company's interest payments are indexed were, in all cases, 10.0%
higher, taking into consideration the effect of such higher interest rates on
the interest rate swap as noted below.
From time to time, the Company may enter into various derivative financial
instruments, including interest rate forwards, options and interest rate swaps,
to manage the exposure of portions of the Company's total debt portfolio and
related cash flows to fluctuations in market interest rates. In December 2000,
the Company entered in a two year and 28-day swap agreement, wherein the Company
pays approximately 6.2% annualized interest on a notional amount of $35.0
million on a quarterly basis beginning on January 4, 2001 and ending on January
6, 2003. The objective of this transaction is to neutralize the cash flow
variability on designated portions of the Company's Senior Secured Credit
Agreement Term A and Term B loans, which have a floating-rate, that may be
caused by fluctuations in market interest rates. The adjustments to fair value
of this derivative instrument during 2001 resulted in additional decreases in
accumulated other comprehensive income of $0.9 million. This swap is perfectly
effective at its objective, and accordingly, there are no existing gains or
losses as of December 27, 2001 that are expected to be reclassified into
earnings within the next twelve months. The Company has also managed its
exposure to changes in interest rates by effectively capping at 7.5% the base
interest rate on a notional amount of $100.0 million of its Senior Secured
Credit Agreement Term A and Term B loans until February 2002. This option had no
value at the transition date of Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (see Note 7
to the Consolidated Financial Statements for further discussion on derivative
financial instruments).
Foreign Currency Risk
- -----------------------
The Company's cash flows are primarily denominated in U.S. dollars. With respect
to the limited cash flows that are denominated in foreign currency, the
Company's policy is to manage exposure to fluctuations in foreign exchange rates
by netting inflows of foreign exchange with outflows of foreign exchange. From
time to time the Company uses foreign exchange contracts to minimize exposure to
the risk that the eventual net cash inflows and outflows will be adversely
affected by changes in exchange rates. The Company's exposure to fluctuations in
foreign exchange risk is immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
DynCorp:
We have audited the accompanying consolidated balance sheets of DynCorp (a
Delaware corporation) and subsidiaries (the "Company"), as of December 27, 2001
and December 28, 2000, and the related consolidated statements of operations,
cash flows, and stockholders' equity for the years ended December 27, 2001,
December 28, 2000, and December 30, 1999. Our audits also included the financial
statement schedule referred to in the Index at Item 14(a)2. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 27, 2001
and December 28, 2000, and the results of its operations and its cash flows for
the years ended December 27, 2001, December 28, 2000, and December 30, 1999 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 2, the accompanying financial statements have been revised.
Deloitte & Touche LLP
McLean, Virginia
October 11, 2002
DynCorp and Subsidiaries
Consolidated Balance Sheets
As of the Fiscal Years Ended
(In thousands)
December 27, December 28,
2001 (Revised - 2000 (Revised -
See Note 2) See Note 2)
----------- -----------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 15,078 $ 12,954
Accounts receivable and contracts in process, net 345,358 332,583
Prepaid income taxes 2,158 1,153
Other current assets 35,775 28,101
-------- --------
Total Current Assets 398,369 374,791
Property and Equipment, at cost:
Land 0 22
Buildings and leasehold improvements 11,436 13,805
Machinery and equipment 36,122 37,772
-------- --------
47,558 51,599
Accumulated depreciation and amortization (26,599) (23,833)
-------- --------
Net Property and Equipment 20,959 27,766
Intangible Assets, net 130,425 135,244
Deferred Income Taxes - 10,013
Other Assets 48,687 38,942
-------- --------
Total Assets $598,440 $586,756
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Consolidated Balance Sheets
As of the Fiscal Years Ended
(In thousands, except share amounts)
December 27, December 28,
2001 (Revised - 2000 (Revised -
See Note 2) See Note 2)
----------- -----------
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes payable and current portion of long-term debt $ 20,123 $ 124
Accounts payable 19,420 27,574
Deferred revenue and customer advances 6,195 7,631
Accrued income taxes 932 6,895
Accrued expenses 207,029 198,330
-------- --------
Total Current Liabilities 253,699 240,554
Long-term Debt 264,482 283,889
Deferred Income Taxes 10,134 -
Other Liabilities and Deferred Credits 34,634 86,673
Contingencies and Litigation (Note 20) - -
Temporary Equity:
Redeemable common stock at redemption value
ESOP shares, 7,142,510 and 7,504,653 shares issued
and outstanding in 2001 and 2000, respectively,
subject to restrictions 326,368 238,346
Other redeemable common stock, 286,217 and 426,217
shares issued and outstanding in 2001 and 2000 6,967 7,984
Stockholders' Equity:
Common stock, par value ten cents per share, authorized
20,000,000 shares; issued 5,296,146
and 4,758,897 shares in 2001 and 2000, respectively 530 476
Paid-in surplus 138,052 134,638
Accumulated other comprehensive (loss) income (1,081) 3
Reclassification to temporary equity for redemption value
greater than par value (332,596) (245,540)
Deficit (59,681) (118,125)
Common stock held in treasury, at cost; 2,196,853
and 2,264,625 shares in 2001 and 2000, respectively (43,068) (42,142)
--------- ---------
Total Liabilities and Stockholders' Equity $598,440 $586,756
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Consolidated Statements of Operations
For the Fiscal Years Ended
(In thousands, except per share amounts)
December 27, December 28, December 30,
2001 (Revised - 2000 (Revised - 1999 (Revised -
See Note 2) See Note 2) See Note 2)
----------- ----------- -----------
Revenues $1,955,973 $1,805,155 $1,345,281
---------- ---------- ----------
Costs and expenses:
Cost of services 1,810,273 1,778,329 1,280,239
Corporate general and administrative 29,456 29,350 21,741
Interest expense 31,521 41,408 18,943
Interest income (657) (1,471) (1,393)
Amortization of intangibles of acquired companies 6,394 14,922 11,408
Other income, net of miscellaneous other expenses (19,370) (532) (875)
---------- ---------- ----------
Total costs and expenses 1,857,617 1,862,006 1,330,063
---------- ---------- ----------
Earnings (loss) from continuing operations before income taxes,
minority interest, extraordinary item, and cumulative effect
of change in accounting principle 98,356 (56,851) 15,218
Provision (benefit) for income taxes 35,060 (20,827) 4,640
---------- ---------- ----------
Earnings (loss) from continuing operations before minority interest,
extraordinary item, and cumulative effect of change in accounting principle 63,296 (36,024) 10,578
Minority interest 2,462 2,622 2,968
---------- ---------- ----------
Earnings (loss) from continuing operations before extraordinary item and
cumulative effect of change in accounting principle 60,834 (38,646) 7,610
Extraordinary loss from early extinguishment of debt, net of income taxes of $862 - - 1,601
---------- ---------- ----------
Earnings (loss) from continuing operations before cumulative effect of change in
accounting principle 60,834 (38,646) 6,009
Cumulative effect of change in accounting principle, net of income taxes of $2,568 - 4,770 -
---------- ---------- ----------
Net earnings (loss) $ 60,834 $ (43,416) $ 6,009
========== ========== ==========
Accretion of other redeemable common stock to redemption value 2,390 1,842 94
---------- ---------- ----------
Common stockholders' share of net earnings (loss) $ 58,444 $ (45,258) $ 5,915
========== ========== ==========
Common stockholders' share of net earnings (loss) per common share:
Basic earnings (loss) per share:
Common stockholders' share of earnings from continuing operations $ 5.53 $ (3.86) $ 0.75
Extraordinary loss - - (0.16)
Cumulative effect of change in accounting principle - 0.46 -
---------- ---------- ----------
Common stockholders' share of net earnings - basic $ 5.53 $ (4.32) $ 0.59
========== ========== ==========
Diluted earnings (loss) per share:
Common stockholders' share of earnings from continuing operations $ 5.26 $ (3.86) $ 0.74
Extraordinary loss - - (0.16)
Cumulative effect of change in accounting principle - 0.46 -
---------- ---------- ----------
Common stockholders' share of net earnings - diluted $ 5.26 $ (4.32) $ 0.58
========== ========== ==========
Weighted-average number of shares
outstanding for basic earnings per share 10,559 10,477 10,044
Weighted-average number of shares
outstanding for diluted earnings per share 11,113 10,477 10,273
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Fiscal Years Ended
(In thousands)
December 27, December 28, December 30,
2001 (Revised - 2000 (Revised - 1999 (Revised -
See Note 2) See Note 2) See Note 2)
----------- ----------- -----------
Cash Flows from Operating Activities:
Common stockholders' share of net earnings (loss) $ 58,444 $ (45,258) $ 5,915
Adjustments to reconcile common stockholders' share of net
earnings (loss) to net cash provided by operating activities:
Depreciation and amortization 19,910 27,054 13,561
Accretion of other redeemable common stock to redemption value 2,390 1,842 94
Cumulative effect of change in accounting principle - 4,770 -
Subordinated Notes issued in fulfillment of pay-in-kind interest - 3,397 -
Gain on divested business (17,442) - -
Purchased in-process research and development - - 6,400
Deferred income taxes 29,434 (35,279) 2,298
Changes in reserves for divested business - other (164) - (2,000)
Capitalized costs incurred on existing contracts - - (2,473)
(Reversal) establishment of preacquisition contingency reserves (42,744) 76,166 -
Changes in pension asset and other postretirement benefit obligations 1,775 2,688 -
Other 2,591 (1,774) 1,687
Change in current assets and liabilities, net of acquisitions and dispositions:
(Increase) decrease in accounts receivable and contracts in process (22,656) 25,523 (37,919)
(Increase) decrease in other current assets (19,302) (1,670) (340)
Increase in current liabilities except notes payable and current portion of
long-term debt and reclassification from long-term liabilities (4,127) 1,592 26,612
---------- ----------- ---------
Cash provided by operating activities 8,109 59,051 13,835
---------- ----------- ---------
Cash Flows from Investing Activities:
Sale of property and equipment 5,203 30,685 610
Purchase of property and equipment (7,070) (20,960) (13,878)
Capitalized cost of new financial and human resource systems - - (5,969)
Capitalized cost of software (3,243) - -
Deferred income taxes from "safe harbor" leases - (597) (481)
Increase (decrease) in investment in unconsolidated subsidiaries 500 (1,230) 1,363
Assets and liabilities of acquired business - (1,620) (167,504)
Proceeds from business divestiture - 2,300 -
Other 814 (496) 884
---------- ----------- ---------
Cash (used in) provided by investing activities (3,796) 8,082 (184,975)
---------- ----------- ---------
Cash Flows from Financing Activities:
Treasury stock purchased (2,182) - (7,208)
Payments on indebtedness (274,057) (406,618) (253,491)
Proceeds from debt issuance 274,050 344,005 428,552
Proceeds from issuance of redeemable common stock - - 6,048
Payments received on ESOT loans - 2,958 10,577
Loans to ESOT - (300) (11,082)
Other - 119 (687)
---------- ----------- ---------
Cash (used in) provided by financing activities (2,189) (59,836) 172,709
---------- ----------- ---------
Net Increase in Cash and Cash Equivalents 2,124 7,297 1,569
Cash and Cash Equivalents at Beginning of the Fiscal Year 12,954 5,657 4,088
---------- ----------- ---------
Cash and Cash Equivalents at End of the Fiscal Year $ 15,078 $ 12,954 $ 5,657
========== =========== =========
Supplemental Information of Noncash Investing Activities:
The Company completed the merger of its wholly-owned subsidiary, DMR, with
TekInsight.com, Inc. on December 27, 2001. The Company obtained a 40% ownership
interest in DynTek, Inc. and recognized a gain on disposition of $17.4 million.
The Company's ownership interest in DynTek, Inc. was recorded at $19.4 million,
which reflects the $17.4 million gain, net book value of the assets disposed,
and liabilities incurred.
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Fiscal Years Ended
(In thousands)
Reclassification Accumulated
of Redemption Deficit Unearned Other
Common Paid-in Value Greater (Revised- Treasury ESOP Comprehensive
Stock Surplus than Par Value See Note 2) Stock Shares (Loss) Income
--------------------------------------------------------------------------------------
Balance, December 31, 1998 $498 $127,216 $(183,140) $(78,782) $(35,640) $(2,153) $(10)
Employee compensation plans (option
exercises, restricted stock plan,
incentive bonus) 7 22 - - (214) - -
Stock issued under mezzanine financing 43 6,006 - - - - -
Treasury stock purchased - - - - (7,208) - -
Payment received on ESOT note - - - - - 10,577 -
Loans to ESOT - - - - - (11,082) -
Reclassification to redeemable common
stock (57) - (5,105) - - - -
Accretion of other redeemable common
stock to redemption value - 94 (94) (94) - - -
Translation adjustment - - - - - - 1
Net earnings (Revised-See Note 2) - - - 6,009 - - -
---- -------- ---------- --------- --------- -------- --------
Balance, December 30, 1999 (Revised-
See Note 2) 491 133,338 (188,339) (72,867) (43,062) (2,658) (9)
Employee compensation plans (option
exercises, restricted stock plan,
incentive bonus) - (542) - - 920 - -
Payment received on ESOT note - - - - - 2,958 -
Loans to ESOT - - - - - (300) -
Reclassification to redeemable common
stock (15) - (55,359) - - - -
Accretion of other redeemable common
stock to redemption value - 1,842 (1,842) (1,842) - - -
Translation adjustment and other - - - - - - 12
Net loss (Revised-See
Note 2) - - - (43,416) - - -
---- -------- ---------- --------- --------- -------- --------
Balance, December 28, 2000 (Revised-
See Note 2) 476 134,638 (245,540) (118,125) (42,142) - 3
Employee compensation plans (option
exercises, restricted stock plan,
incentive bonus, Savings' Plans
contributions) 1 1,024 - - (926) - -
Reclassification to redeemable common
stock 53 - (84,666) - - - -
Accretion of other redeemable common
stock to redemption value - 2,390 (2,390) (2,390) - - -
Adjustment to fair value of derivative
financial instrument - - - - - - (918)
Cumulative effect of change in
accounting principle - (See Note 7) - - - - - - (100)
Translation adjustment and other - - - - - - (66)
Net earnings (Revised - See Note 2) - - - 60,834 - - -
---- -------- ---------- --------- --------- -------- --------
Balance, December 27, 2001 (Revised-
See Note 2) $530 $138,052 $(332,596) $(59,681) $(43,068) $ - $(1,081)
==== ======== ========== ========= ========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Notes to Consolidated Financial Statements
December 27, 2001 and December 28, 2000
(Revised - See Note 2)
(Dollars in thousands, except per share amounts or where otherwise noted)
(1) The Company and Summary of Significant Accounting Policies
Description of Business and Organization:
DynCorp, a Delaware corporation, (the "Company") provides diversified
management, technical and professional services primarily to U.S. Government
customers throughout the United States and internationally. Organized in 1946,
the Company provides services to various branches of the U.S. Departments of
Defense, Energy, State, and Justice, the Drug Enforcement Agency, the National
Institute of Health, the Defense Information Systems Agency, the National
Aeronautics and Space Administration and various other U.S., state and local
government agencies, commercial clients and foreign governments. Generally,
these services are provided under both prime contracts and subcontracts, which
may be fixed-price, time-and-material or cost-type contracts depending on the
work requirements and other individual circumstances. These services encompass a
wide range of management, technical and professional services.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. All majority-owned subsidiaries have been
included in the financial statements. Investments in which the Company owns a
20.0% to 50.0% ownership interest are accounted for by the equity method while
investments of less than 20.0% ownership are accounted for under the cost
method. Outside investors' interest in the majority-owned subsidiaries is
reflected as minority interest. Effective in 1999, the Company's fiscal year is
the 52 or 53-week period ending the last Thursday in December. Previously, the
Company had a calendar year end.
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Estimates include accrued liabilities such as contract losses,
litigation reserves, and incentive compensation awards, which are not paid out
until the following year. Actual results could differ from those estimates.
Contract Accounting (Revised - See Note 2):
Revenues for cost-reimbursement contracts are recorded as reimbursable costs are
incurred, including a pro-rata share of the contractual fees. For
time-and-material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable costs incurred.
For long-term fixed price production contracts, revenue is recognized at a rate
per unit as the units are delivered. Revenue from other long-term fixed price
contracts is recognized ratably over the contract period or by other appropriate
methods to measure services provided. Contract costs are expensed as incurred
except for certain limited long-term contracts noted below. For long-term
contracts which are specifically described in the scope section of American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") No. 81-1, "Accounting for Performance of Construction Type and Certain
Production-Type Contracts," or other appropriate accounting literature the
Company applies the percentage of completion method. Under the percentage of
completion method, income is recognized at a consistent profit margin over the
period of performance based on estimated profit margins at completion of the
contract. This method of accounting requires
estimating the total revenues and total contract cost at completion of the
contract. During the performance of long-term contracts, these estimates are
periodically reviewed and revisions are made as required. The impact on revenue
and contract profit as a result of these revisions is included in the periods in
which the revisions are made. This method can result in the deferral of costs,
including start-up costs, or the deferral of profit on these contracts. Because
the Company assumes the risk of performing a fixed price contract at a set
price, the failure to accurately estimate ultimate costs or to control costs
during performance of the work could result, and in some instances has resulted,
in reduced profits or losses for such contracts. Estimated losses on contracts
at completion are recognized when identified.
Disputes arise in the normal course of the Company's business on projects where
the Company is contesting with customers for collection of funds because of
events such as delays, changes in contract specifications and questions of cost
allowability or collectibility. Such disputes are recorded at the lesser of
their estimated net realizable value or actual costs incurred, and only when
realization is probable and can be reliably estimated. Claims against the
Company are recognized where loss is considered probable and reasonably
determinable in amount. Because there are estimates and judgments involved, the
actual results could be different from those estimates. Accounts receivable
balances related to such disputed items were immaterial at December 27, 2001,
December 28, 2000, and December 30, 1999.
Accounts Receivable:
It is the Company's policy to provide reserves for the collectibility of
accounts receivable when it is determined that it is probable that the Company
will not collect all amounts due and the amount of the reserve requirement can
be reasonably estimated.
Property and Equipment:
The Company computes depreciation using either the straight-line or double
declining balance method. The estimated useful lives used in computing
depreciation are buildings, 15-33 years; machinery and equipment, 3-15 years;
and leasehold improvements, the lesser of the useful life or the remaining term
of the lease. Depreciation expense was $7,394 for 2001, $7,044 for 2000, and
$5,412 for 1999.
Cost of property and equipment sold or retired and the related accumulated
depreciation or amortization are removed from the accounts in the year of
disposal, and any gains or losses are reflected in the consolidated statements
of operations. Expenditures for maintenance and repairs are charged to expense
as incurred, and major additions and improvements are capitalized.
Intangible Assets:
The major classes of intangible assets, net of accumulated amortization as of
December 27, 2001 and December 28, 2000 are summarized below (in millions):
2001 2000
Amortization (Revised - See (Revised - See
Period Note 2) Note 2)
------ ------- -------
Goodwill 10 to 40 years $103.2 $108.0
Capitalized software 8 years 12.4 9.0
Core and developed technology 5 years 4.5 6.1
Contracts acquired up to 10 years 0.2 0.6
Assembled workforce 7 years 4.6 5.6
Patent 17 years 5.5 5.9
------- ------
Total net intangibles $130.4 $135.2
Intangible assets are being amortized using the straight-line method for the
periods noted above. Intangible asset amortization expense was $8,363, $16,524,
and $12,586 in 2001, 2000, and 1999, respectively. Intangible asset amortization
expense for 1999 includes $1.2 million acceleration of goodwill amortization due
to impairment.
Intangible asset accumulated amortization of $65,055 and $65,742 has been
recorded through December 27, 2001 and December 28, 2000, respectively.
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for impairment, the
Company estimates the future cash flows expected to result from the use of the
asset. If impaired, the Company will write down the asset to its fair market
value. If the asset is held for sale, the Company reviews its fair value less
cost to sell. In 1999, the Company expensed $1.7 million related to impaired
assets including the $1.2 million noted above.
The Company will adopt the Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," beginning on December 28, 2001,
as required. The provisions of SFAS No. 142 eliminate amortization of goodwill
and identifiable intangible assets with indefinite lives and require an
impairment assessment at least annually by applying a fair-value based test.
Derivative Financial Instruments:
The Company is exposed to market risk from changes in interest rates and, to a
limited extent, foreign currency exchange rates that could affect its results of
operations and financial condition or cash flows. The Company manages its
exposure to these market risks through normal operating and financing activities
and, when deemed appropriate, hedges these risks through the use of derivative
financial instruments. The Company uses the term hedge to mean a strategy
designed to manage risks of volatility in rate movements on certain assets,
liabilities or anticipated transactions by creating a relationship in which
gains or losses on derivative instruments are expected to counterbalance the
losses or gains on the assets, liabilities or anticipated transactions exposed
to such market risks. The Company uses derivative financial instruments as a
risk management tool and not for trading or speculative purposes.
Recently Issued Accounting Standards:
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. The provisions of SFAS
No. 142 eliminate amortization of goodwill and identifiable intangible assets
with indefinite lives and require an impairment assessment at least annually by
applying a fair-value based test. Such testing requires a fair-value based
assessment by reporting unit (which is defined as an operating segment or
component of an operating segment) to determine if goodwill is impaired at the
reporting unit level. SFAS No. 141 includes guidance relating to identification
of intangible assets that should be recognized apart from goodwill. The Company
is required to adopt SFAS No. 142 for fiscal year 2002 (the beginning of the
fiscal year after December 15, 2001). The Company anticipates an annual increase
to common stockholders' share of net earnings of approximately $2.9 million (net
of tax), or $0.26 per diluted share, from the elimination of goodwill and
assembled workforce amortization. The Company has completed the first step of
the transitional impairment test in accordance with the provisions of SFAS No.
142 and has concluded that there has been no impairment of such assets as of the
beginning of fiscal year 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. In August
2001, the FASB issued No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 and Accounting
Principles Board ("APB") No. 30 by establishing a single accounting model for
long-lived assets to be disposed of by sale. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years. Management does not expect SFAS
No. 143 or SFAS No. 144 to have a material impact on the Company's results of
operations or financial condition.
Consolidated Statements of Cash Flows:
The Company considers all highly liquid investments purchased with a remaining
maturity of three months or less to be cash equivalents.
Investing and financing activities include the following:
2001 2000 1999
---- ---- ----
Acquisitions of businesses:
Assets acquired $ - $ 4,403 $ 212,642
Liabilities assumed - (2,783) (45,138)
Cash acquired - - 36
----- -------- ----------
Net cash $ - $ 1,620 $ 167,540
===== ======== ==========
In 2000, the Company acquired certain assets and liabilities of a company that
developed and marketed proprietary decision-support software and provided
related consulting services to evaluate and profile performance of providers
engaged in healthcare. The Company also acquired GTE Information Systems LLC in
1999. The purchase price of these acquisitions has been allocated to the assets
acquired and liabilities assumed based on estimated fair value at the date of
acquisition, under the purchase method of accounting.
Comprehensive Income:
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which requires the presentation and disclosure
of comprehensive income. For the year ended December 27, 2001, total
comprehensive income was $59.8 million and includes, in addition to net income,
translation adjustment and other of $0.07 million, an adjustment to fair value
of the derivative financial instruments of $0.9 million, and the cumulative
effect of a change in accounting principle of $0.1 million for the adoption of
SFAS No. 133 (see Note 7). Translation adjustment and other of $(0.01) million
is the only component of comprehensive income for the year ended December 28,
2000, other than net income.
Reclassifications:
Certain prior year information has been reclassified to conform to the current
year presentation.
(2) Change in Accounting Method and Revision of Financial Statements
Subsequent to the issuance of the Company's financial statements for the year
ended December 27, 2001 on April 11, 2002, the Company revised certain
information in the Consolidated Financial Statements for the fiscal years ended
December 30, 1999, December 28, 2000 and December 27, 2001 following discussions
with the staff of the Securities and Exchange Commission ("SEC") regarding its
method of accounting for certain long-term service contracts and the related
applicability of the percentage of completion method to service contracts with
the Federal Government. Previously, the Company followed the historical
industry-wide practice of recording income from long-term service contracts
using the percentage of completion method, in accordance with the AICPA "Audit
and Accounting Guide, Audits of Federal Government Contractors," which
incorporates as an appendix AICPA SOP No. 81-1, "Accounting for Performance of
Construction Type and Certain Production-Type Contracts." Under this method,
income is recognized at a consistent profit margin over the period of
performance based on the estimated profit margin at the completion of the
contract. Such a method has resulted in deferral of costs, including start-up
costs, and deferral of profits on certain contracts. Under SOP No. 81-1, revenue
can be recognized based on costs incurred as a measurement of progress towards
completion, which can differ from other revenue recognition methods such as
those outlined in SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." Following discussions with the SEC's
staff, it has been determined that
percentage of completion accounting should be applied to long-term contracts
which are specifically described in the scope section of AICPA SOP No. 81-1 and
other appropriate accounting literature. All other long-term service contracts,
even those with the Federal Government, should not apply the percentage of
completion method. Accordingly, the Company changed its method for accounting on
these long-term service contracts to be in accordance with SEC SAB No. 101 and
other applicable generally accepted accounting principles. As a result of these
changes, profit margins on a given long-term service contract could now
fluctuate from one accounting period to another due to fluctuations in the
revenue earned and costs incurred in a given accounting period.
In accordance with the SEC Staff's guidance, the Company has applied this change
in accounting method retroactively to January 2000 (the effective date of SAB
No. 101) and to the acquisition of DIS in December 1999. As a result, the
financial statements of the Company for the fiscal years ended December 30,
1999, December 28, 2000, and December 27, 2001 have been revised to eliminate
the deferral of such costs or profits on service contracts and to adjust
revenue. Revenue was adjusted for certain fixed price service contracts and
other service contracts, which had used cost incurred in relation to total
estimated cost at completion as a measurement of progress towards completion
under percentage of completion, in order to comply with SEC SAB No. 101, which
prescribes recognizing revenue on a straight-line basis over the contract period
or by other appropriate methods to measure services provided. The Company also
intends to amend its previously filed Form 10-Q for the three months ended March
28, 2002. The cumulative effect of the change in accounting principle on prior
years resulted in a one-time, non-cash reduction to net earnings of $4.8
million, net of taxes of $2.6 million, or $0.46 per diluted share, in 2000. The
change in accounting method did not have any effect on the Company's cash flows
in 2002, 2001, 2000, and 1999.
In the original 2001 Form 10-K/A filed on May 15, 2002, the Company had revised
certain information in the Consolidated Financial Statements for the fiscal
years ended December 30, 1999 and December 28, 2000 following discussions with
the staff of the SEC regarding accounting principles articulated in SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises" and APB
No. 16, "Business Combinations" as they related to the Company's acquisition of
DIS from GTE Corporation in December 1999.
When the Company purchased DIS in December 1999, issues existed relating to the
financial performance of certain DIS contracts and realization of certain DIS
receivables. The Company disclosed in its 1999 Form 10-K that its purchase
accounting was preliminary. During 2000, the Company continued its evaluation of
the status of contracts at the date of acquisition. Primarily in the third
quarter of 2000, the Company finalized its evaluation of the impact of the
future cash flows related to the contracts based on information obtained through
that quarter and recorded an increase to reserves through a purchase accounting
adjustment. The purchase accounting adjustment also resulted in an increase to
goodwill and deferred tax assets. At the end of the third quarter of 2001, the
Company reversed a significant amount of the contract loss reserves as a result
of entering into a modification of one of the contracts acquired. This was also
accounted for as a purchase accounting adjustment, which resulted in a decrease
to goodwill and deferred tax assets.
According to SFAS No. 38, the allocation period for purchase accounting
adjustments ends when the acquiring enterprise is no longer waiting for
information that it has arranged to obtain and that is known to be available or
obtainable at the acquisition date. Items identified during the initial purchase
period as "preacquisition contingencies" shall be included in the allocation of
the purchase price based on the fair value of the contingency. The Company
previously believed that the allocation period related to these preacquisition
contingencies was still open during those periods. Although the Company stated
in its 1999 Form 10-K that the purchase price allocation was preliminary, after
discussions with the SEC's staff, the Company has determined that the allocation
period for these preacquisition contingencies was no longer open in 2000 and
2001, and therefore the adjustments made should have been accounted for directly
through the statement of operations, rather than as an adjustment to the
original purchase accounting. As a result, the financial statements of the
Company for the year ended December 28, 2000 and the nine months ended September
27, 2001 were revised to reflect the adjustments directly in the statements of
operations. In addition, the 1999 financial statements were revised for the
allocation of the DIS purchase price with respect to the valuation of an
acquired contract in progress.
The effects of the revisions for the change in accounting method on long-term
service contracts on the 2001, 2000, and 1999 financial data, and on the 2001
and 2000 unaudited quarterly financial data are presented in the tables below.
The "As Reported" numbers are taken from the previously filed 2001 Form 10-K/A
and include the revisions to 2000 and 1999 results related to the acquisition of
DIS as previously disclosed.
Statement of Operations Data: 2001 2001 2000 2000 1999 1999
- ----------------------------- As As As As As As
-- -- -- -- -- --
Reported Revised Reported Revised Reported Revised
-------- ------- -------- ------- -------- -------
Revenues $1,960,375 $1,955,973 $1,809,109 $1,805,155 $1,345,281 $1,345,281
Cost of services 1,813,991 1,810,273 1,781,825 1,778,329 1,280,239 1,280,239
Amortization of intangibles of
acquired companies 6,234 6,394 14,762 14,922 11,408 11,408
Earnings (loss) from continuing
operations before income taxes,
minority interest, extraordinary
item, and cumulative effect of
change in accounting principle 99,200 98,356 (56,233) (56,851) 15,218 15,218
Provision (benefit) for income taxes 34,750 35,060 (20,936) (20,827) 4,653 4,640
Minority Interest 3,538 2,462 3,515 2,622 2,968 2,968
Net earnings (loss) 60,912 60,834 (38,812) (43,416) 5,996 6,009
Common stockholders' share of net
earnings (loss) 58,522 58,444 (40,654) (45,258) 5,902 5,915
Common stockholders' share of net
earnings (loss) per common share:
Basic earnings (loss) per share $5.54 $5.53 $(3.88) $(4.32) $0.59 $0.59
Diluted earnings (loss) per share $5.27 $5.26 $(3.88) $(4.32) $0.57 $0.58
Balance Sheet Data:
- -------------------
Accounts receivable, net of
allowance for doubtful accounts $353,990 $345,358 $335,621 $332,583 $355,020 $358,811
Prepaid income taxes 2,126 2,158 1,139 1,153 6,558 6,572
Other current assets 37,310 35,775 34,707 28,101 26,348 17,684
Intangible assets, net of
accumulated amortization 126,107 130,425 130,766 135,244 143,266 147,904
Deferred income tax asset - - 10,339 10,013 - -
Other Assets 49,330 48,687 40,203 38,942 51,511 51,511
Total assets 604,900 598,440 593,495 586,756 629,155 628,934
Accrued income taxes 603 932 6,474 6,895 2,100 2,100
Accrued expenses 208,666 207,029 200,006 198,330 131,274 130,989
Deferred income tax liability 8,648 10,134 - - 6,784 6,835
Other liabilities and deferred credits 36,603 34,634 87,566 86,673 38,409 38,409
Deficit (55,012) (59,681) (113,534) (118,125) (72,880) (72,867)
2001 Quarters
(Unaudited and As Revised)
--------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
As As As As As As As As
Reported Revised Reported Revised Reported Revised Reported Revised
-------- ------- -------- ------- -------- ------- -------- -------
Statement of Operations Data:
- -----------------------------
Revenues $440,073 $438,979 $476,900 $476,611 $504,113 $502,856 $539,289 $537,527
Gross profit 23,257 23,721 25,687 26,954 75,032 73,856 22,408 21,169
Earnings from continuing
operations before income taxes and
minority interest 6,533 6,957 8,911 10,138 59,426 58,210 24,330 23,051
Provision for income taxes 2,546 2,787 3,430 4,086 21,221 20,060 7,553 8,127
Minority interest 611 476 934 635 925 532 1,068 819
Net earnings 3,376 3,694 4,547 5,417 37,280 37,618 15,709 14,105
Common stockholders' share
of net earnings 2,825 3,143 3,979 4,849 36,652 36,990 15,066 13,462
Common stockholders' share of net
earnings per common share:
Basic earnings per share $0.27 $0.30 $0.38 $0.46 $3.47 $3.50 $1.42 $1.27
Diluted earnings per share $0.26 $0.29 $0.36 $0.44 $3.30 $3.33 $1.35 $1.20
Balance Sheet Data:
- -------------------
Accounts receivable, net of allowance
for doubtful accounts $314,825 $309,501 $322,910 $317,297 $316,653 $309,783 $353,990 $345,358
Other current assets 40,280 36,237 36,900 34,288 39,134 36,477 39,436 37,933
Intangible assets, net of accumulated
amortization 127,908 132,346 125,495 129,893 124,672 129,030 126,107 130,425
Other assets 49,284 47,852 46,163 44,886 38,184 37,062 49,330 48,687
Total assets 568,224 561,863 562,349 557,245 557,650 551,360 604,900 598,440
Accrued expenses 156,965 155,904 160,482 160,107 163,463 161,956 209,269 207,961
Other liabilities and deferred credits 85,590 84,562 86,719 85,392 38,782 39,571 45,251 44,768
Deficit (110,710) (114,982) (106,733) (110,135) (67,569) (73,142) (55,012) (59,681)
2000 Quarters (a)
(Unaudited and As Revised)
--------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
As As As As As As As As
Reported Revised Reported Revised Reported Revised Reported Revised
-------- ------- -------- ------- -------- ------- -------- -------
Statement of Operations Data:
- -----------------------------
Revenues $428,500 $428,311 $445,302 $446,498 $467,673 $468,760 $467,634 $461,586
Gross profit (loss) 19,650 15,217 25,024 24,374 (48,191) (49,487) 30,801 36,722
Earnings (loss) from continuing
operations before income taxes,
minority interest, and cumulative
effect of change in accounting
principle (54) (4,527) 4,367 3,677 (69,199) (70,535) 8,653 14,534
Provision (benefit) for income taxes (313) (1,786) 1,520 1,020 (24,717) (24,794) 2,574 4,733
Minority interest 577 577 635 764 625 304 1,678 977
Net earnings (loss) (318) (8,088) 2,212 1,893 (45,107) (46,045) 4,401 8,824
Common stockholders' share
of net earnings (loss) (742) (8,512) 1,775 1,456 (45,590) (46,528) 3,903 8,326
Common stockholders' share of net
earnings (loss) per common share:
Basic earnings (loss) per share $(0.07) $(0.82) $0.17 $0.14 $(4.34) $(4.43) $0.36 $0.79
Diluted earnings (loss) per share $(0.07) $(0.82) $0.17 $0.14 $(4.34) $(4.43) $0.36 $0.79
Balance Sheet Data:
- -------------------
Accounts receivable, net of allowance
for doubtful accounts $331,910 $332,637 $337,726 $339,649 $335,588 $338,598 $335,621 $332,583
Other current assets 36,813 20,018 39,746 21,057 32,876 11,736 35,846 29,254
Intangible assets, net of accumulated
Amortization 138,723 143,321 136,038 140,596 135,043 139,561 130,766 135,244
Other assets 52,987 51,206 44,704 43,096 61,560 60,125 50,542 48,955
Total assets 606,537 593,286 604,550 590,735 623,996 608,949 593,495 586,756
Accrued expenses 141,457 135,830 148,480 142,396 163,499 157,361 206,480 205,225
Other liabilities and deferred credits 46,015 46,066 35,809 35,989 82,377 82,236 87,566 86,673
Deficit (73,591) (81,266) (71,969) (79,881) (117,716) (126,484) (113,534) (118,125)
(3) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate the
value:
Accounts receivable and contracts in process, net, prepaid income taxes,
accounts payable and accrued income taxes - The carrying amount approximates the
fair value due to the short maturity of these instruments.
Long-term debt and other liabilities and deferred credits - The carrying values
of the Company's Senior Secured Credit Agreement Loans, Revolving Credit
Facility, and the 15% Subordinated Notes approximated their fair values at
December 27, 2001 and December 28, 2000. The fair value of the Company's 9 1/2%
Senior Subordinated Notes, based on the current rate as if the issue date was
December 27, 2001 and December 28, 2000, was $102.2 million and $81.0 million,
respectively, as compared to a book value of $99.7 million and $99.6 million as
of December 27, 2001 and December 28, 2000, respectively. For the remaining
long-term debt (see Note 5) and other liabilities and deferred credits, the
carrying amounts approximate the fair values.
(4) Accounts Receivable and Contracts in Process, Net
The components of accounts receivable and contracts in process were as follows
for the years ending December 27, 2001 and December 28, 2000:
2001 (Revised - 2000 (Revised -
See Note 2) See Note 2)
----------- -----------
U.S. Government:
Billed and billable $282,266 $254,731
Recoverable costs and accrued profit on
progress completed but not billed 17,026 22,763
Retainage due upon completion of contract 1,048 2,006
-------- --------
300,340 279,500
-------- --------
Other Customers (primarily subcontracts
from U.S. Government prime contracts and
contracts with state, local and quasi-
government agencies):
Billed and billable (less allowance for
doubtful accounts of $6,637 in 2001 and
$2,804 in 2000) 37,315 49,157
Recoverable costs and accrued profit on
progress completed but not billed 7,703 3,926
-------- --------
45,018 53,083
-------- --------
$345,358 $332,583
======== ========
Billed and billable include amounts earned and contractually billable at
year-end, but which were not billed because customer invoices had not yet been
prepared at year-end. Recoverable costs and accrued profit on progress completed
but not billed is composed primarily of amounts recognized as revenues, but
which are not contractually billable at the balance sheet dates. It is expected
that all amounts outstanding at December 27, 2001 will be collected within one
year except for approximately $6.3 million.
(5) Long-term Debt
At December 27, 2001 and December 28, 2000, long-term debt consisted of:
2001 2000
---- ----
Senior Secured Credit Agreement - Term A Loan $ 70,000 $ 70,000
Senior Secured Credit Agreement - Term B Loan 76,900 76,900
Senior Secured Credit Agreement - Revolving Credit Facility - -
15% Subordinated Notes 37,903 37,349
9 1/2% Senior Subordinated Notes 99,674 99,627
Notes Payable 128 137
-------- --------
284,605 284,013
Less current portion 20,123 124
-------- --------
$264,482 $283,889
======== ========
Debt maturities as of December 27, 2001, were as follows:
2002 $ 20,123
2003 25,005
2004 28,083
2005 29,400
2006 47,500
Thereafter 134,494
--------
$284,605
========
On December 10, 1999, the Company and its wholly-owned subsidiary, Dyn Funding
Corporation, entered into a Senior Secured Credit Agreement (the "Credit
Agreement") with a group of financial institutions. Under the Credit Agreement,
the Company borrowed $100.0 million under Term A Loans maturing December 9,
2004, $100.0 million under Term B Loans maturing December 9, 2006, and $23.8
million under a $90.0 million revolving line of credit maturing December 9,
2004. Of the total borrowings under the Credit Agreement, $125.0 million was
used for partial payment of the purchase price for GTE Information Systems LLC.
An additional $112.0 million of the borrowings was used to make an optional
redemption of Dyn Funding Corporation's outstanding 7.486% Fixed Rate Contract
Receivable Collateralized Notes, Series 1997-1, Class A and to reduce
irrevocably Dyn Funding Corporation's Floating Rate Contract Receivable
Collateralized Notes, Series 1997-1, Class B. The remainder was used to pay
transactional expenses and for general corporate operating purposes. Upon the
closing of the Credit Agreement, the Company terminated its previous revolving
line of credit facility.
The Credit Agreement stipulates that the Company must maintain certain financial
ratios, including specified ratios of earnings to fixed charges, debt to
earnings, and accounts receivable to borrowings, under the Credit Agreement.
On December 10, 1999, the Company incurred an extraordinary loss of $2.5 million
($1.6 million after tax or $0.16 for basic and diluted earnings per share) in
connection with the early retirement of the $50.0 million 7.486% Fixed Rate
Contract Receivable Collateralized Notes. The extraordinary loss was comprised
of the payment of a yield maintenance premium and the write-off of associated
debt issuance costs.
On December 28, 2000, the Company voluntarily repaid $30.0 million of Term A
Loans, prepaying all scheduled principal installments due in 2001 and partially
prepaying the scheduled principal installment due in February 2002. As a
consequence of this prepayment, the Term A Loans are to be repaid in an
installment of $1.3 million in February 2002 and then eleven quarterly
installments of $6.3 million beginning in May 2002. On March 7, 2000, the
Company voluntarily repaid $7.1 million of Term B Loans, prepaying all scheduled
principal payments of Term B Loans from February 2001 through December 2004, and
partially prepaying the scheduled principal payment due in February 2005. On
December 28, 2000, the Company voluntarily repaid $15.0 million of Term B Loans,
prepaying the remaining scheduled principal payment due in February 2005 and
partially prepaying the scheduled
principal payment due in May 2005. As a consequence of these prepayments, the
Term B Loans are to be repaid in an installment of $5.7 million in May 2005 and
then six quarterly installments of $11.9 million beginning in August 2005. At
the option of the Company, borrowings under the Credit Agreement bear interest
at either LIBOR or a base rate established by the bank, plus a margin that
varies based upon the Company's ratio of debt to earnings.
The Company is charged a commitment fee of 0.5% per annum on unused commitments
under the revolving line of credit. As of December 27, 2001 and December 28,
2000, there were no borrowings and $11.1 million and $9.5 million of letters of
credit were outstanding, respectively, under the revolving line of credit. The
amount available under the revolving line of credit was $78.9 million and $80.5
million, respectively, as of December 27, 2001 and December 28, 2000. The
Company also has $7.2 million in outstanding surety obligations for performance
and payment bonds supporting various contracts. These bonds are partially
collateralized with letters of credit, the value which is included in $11.1
million noted above.
On December 10, 1999, the Company entered into an agreement with various
financial institutions for the sale of $40.0 million face value of the Company's
subordinated pay-in-kind notes due in 2007, with an estimated fair value of
$33.9 million ("Subordinated Notes"), and for the sale of 426,217 shares of the
Company's stock with an estimated fair value of $6.1 million (see Note 9). The
proceeds were used for payment of the balance of the purchase price for GTE
Information Systems LLC. The Subordinated Notes bear interest at 15.0% per
annum, payable semi-annually. The Company may, at its option, prior to December
15, 2004, pay the interest in cash or in additional Subordinated Notes. The
Subordinated Notes are redeemable, in whole or in part, at the option of the
Company, on or after December 15, 2000 at a redemption price that ranges from
114.0% in 2000 to 100.0% in 2006 and thereafter. The Subordinated Notes are
general unsecured obligations of the Company and will be subordinated in right
of payment to all existing and future senior debt of the Company and to the
Senior Subordinated Notes. On December 28, 2000, the Company paid $3.2 million
cash interest on the Subordinated Notes. On December 26, 2001, two of the
holders sold 140,000 of these shares on the Company's internal market and those
shares are no longer subject to the put right. This transaction reduced
Temporary Equity on the Consolidated Balance Sheet by $5.7 million.
On March 17, 1997, the Company issued $100.0 million of 9 1/2% Senior
Subordinated Notes ("Senior Subordinated Notes") with a scheduled maturity in
2007. Interest is payable semi-annually, in arrears, on March 1 and September 1
of each year. The Senior Subordinated Notes are redeemable, in whole or in part,
at the option of the Company, on or after March 1, 2002 at a redemption price
which ranges from 104.8% in 2002 to 100.0% in 2005 and thereafter. In addition,
the Company may redeem up to 35.0% of the aggregate principal amount of the
Senior Subordinated Notes (at a redemption price of 109.5%) with proceeds
generated from a public offering of equity, provided at least 65.0% of the
original aggregate amount of the Senior Subordinated Notes remains outstanding.
The Senior Subordinated Notes are general unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future senior
debt of the Company.
The Credit Agreement and the indentures for the Subordinated Notes and Senior
Subordinated Notes contain customary restrictions on the ability of the Company
to undertake certain activities, such as the incurrence of additional debt, the
payment of dividends on, or the repurchase of, the Company's common stock, the
merger of the Company into another company, the sale of substantially all the
Company's assets, and the acquisition of the stock or substantially all the
assets of another company. The Credit Agreement also stipulates that the Company
cannot exceed a certain level of capital expenditures and must maintain certain
financial ratios, including specified ratios of earnings to fixed charges, debt
to earnings, and accounts receivable to borrowings under the Credit Agreement.
At December 27, 2001 and December 28, 2000, the Company was in compliance with
these covenants.
The Company acquired the headquarters property of Technology Applications, Inc.
("TAI") on November 12, 1993, in conjunction with its acquisition of TAI, and
assumed a mortgage on the property of $3.3 million bearing interest at 8.0% per
annum. On February 29, 2000, the Company sold the property for $10.5 million in
cash and simultaneously entered into a lease agreement for the property. The
8.0% mortgage was repaid with proceeds from the sale of the property.
Deferred debt issuance costs are being amortized using the effective interest
rate method over the term of the related debt. At December 27, 2001, and
December 28, 2000, unamortized deferred debt issuance costs were $8,105 and
$10,071, respectively and amortization for 2001, 2000, and 1999 was $1,966,
$2,300, and $1,210, respectively. Amortization of debt issue discount was $601,
$43, and $39 in 2001, 2000, and 1999, respectively.
Cash paid for interest was $31,692 for 2001, $31,458 for 2000, and $16,209 for
1999.
(6) Accrued Expenses
At December 27, 2001 and December 28, 2000, accrued expenses consisted of the
following:
2001 (Revised - 2000 (Revised -
See Note 2) See Note 2)
----------- -----------
Salaries and wages $ 96,348 $ 79,216
Insurance reserve 30,511 25,298
Interest 4,541 7,279
Payroll and miscellaneous taxes 9,726 19,925
Accrued contingent liabilities and operating reserves 12,598 16,734
Other accrued expenses 53,305 49,878
-------- ---------
$207,029 $198,330
======== =========
(7) Derivative Financial Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133," on December 29, 2000. SFAS No. 133 requires the transition adjustment, net
of the tax effect, resulting from adopting these Statements to be reported in
net income or other comprehensive income, as appropriate, as the cumulative
effect of a change in accounting principle. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income based on the guidelines stipulated in SFAS No. 133. The adoption of the
standard did not have a material impact on the Company's results of operations,
financial condition or cash flows, but did reduce accumulated other
comprehensive income by $0.1 million, or $0.01 per diluted share, for the
cumulative effect of a change in accounting principle. The adjustments to fair
value of the derivative instruments during 2001 resulted in additional decreases
in accumulated other comprehensive income of $0.9 million.
The Company has managed its exposure to changes in interest rates by effectively
capping at 7.5% the base interest rate on a notional amount of $100.0 million of
its LIBOR indexed debt until February 2002. This option had no value at the
transition date of SFAS No. 133. In December 2000, the Company entered into a
two year and 28-day swap agreement, wherein the Company pays approximately 6.2%
annualized interest on a notional amount of $35.0 million on a quarterly basis
beginning on January 4, 2001 and ending on January 6, 2003. The objective of
this transaction is to neutralize the cash flow variability on designated
portions of the Company's Senior Secured Credit Agreement Term A and Term B
loans, which have a floating-rate, that may be caused by fluctuations in market
interest rates. The adjustments to fair value of this derivative instrument
during 2001 resulted in additional decreases in accumulated other comprehensive
income of $0.9 million. This swap is perfectly effective at its objective, and
accordingly, there are no existing gains or losses as of December 27, 2001 that
are expected to be reclassified into earnings within the next twelve months.
(8) Employee Stock Ownership Plan
In September 1988, the Company established an Employee Stock Ownership Plan
("ESOP"). The Company borrowed $100.0 million and loaned the proceeds, on the
same terms as the Company's borrowings, to the ESOP to purchase 4,123,711 shares
of common stock of the Company. The ESOP acquired additional shares from 1993
through 2001 either through contributions of stock from the Company, or
contributions of cash from the Company
with which the ESOP then purchased shares either from the Company, on the
Internal Market, or directly from other stockholders. From time to time, the
Company loaned additional funds to the ESOP to buy shares, and the ESOP issued
notes to the Company in like amounts. The notes, and related accrued interest,
were paid in full as of June 29, 2000.
In 1999, the ESOP utilized 1999 contributions and loans to make the required
principal and interest payments on the aforementioned notes, pay administrative
fees, purchase 95,735 shares of stock on the internal market and purchase
273,139 shares of stock from other stockholders. In 2000, the ESOP utilized 2000
contributions and loans to make the required principal and interest payments on
the aforementioned notes, pay administrative fees, purchase 27,490 shares of
stock on the internal market and purchase 25,175 shares of stock from other
stockholders. The ESOP covered a majority of the employees of the Company.
Participants in the ESOP become fully vested after four years of service.
Effective January 1, 2001, the Company established two new plans: the Savings
and Retirement Plan and the Capital Accumulation and Retirement Plan
(collectively, the "Savings Plans"). At the same time, the ESOP was merged into
the two plans. The Company stock accounts of participants in the ESOP were
transferred to one or the other of the Savings Plans' trusts, and Savings Plans
participants have the same distribution and put rights for these ESOP shares as
they had in the ESOP. See Note 13 for discussion of the Savings Plans. At
December 27, 2001 the Savings Plans owned 8,869,936 shares, or 84.3% of total
outstanding shares, of which 7,142,510 shares had ESOP put options. In 2000 and
1999, cash contributions to the ESOP were $13,350 and $13,220, respectively and
were charged to Cost of Services and Corporate General and Administrative
Expenses. In 2001 the Company made cash contributions to the Savings Plans
totaling $20,975 (the employer match and supplemental contribution). The
employer match of $18,793 included in this total was charged to Cost of Services
and Corporate General and Administrative Expenses and the supplemental
contribution of $2,182 in this total was charged to Treasury Stock.
(9) Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary Equity at the
redemption value at each balance sheet date and consists of the following:
Balance at Balance at
Redemption December 27, Redemption December 28,
Shares Value 2001 Shares Value 2000
------ ----- ---- ------ ----- ----
ESOP Shares 2,995,783 $47.00 $140,802 3,313,729 $35.25 $116,809
4,146,727 $44.75 185,566 4,190,924 $29.00 121,537
--------- ------- --------- -------
7,142,510 $326,368 7,504,653 $238,346
========= ======= ========= ========
Other Redeemable
Common Stock 286,217 $24.34 $ 6,967 426,217 $18.73 $ 7,984
========= ======== ========= ========
ESOP Shares
In accordance with ERISA regulations and the ESOP documents, the respective
Trust may purchase and the Company is obligated to purchase vested common stock
shares from ESOP participants (see Note 8) at the fair value (as determined by
an independent appraiser) until such time as the Company's common stock is
publicly traded. The shares initially bought by the investors, including the
ESOP, in 1988 were bought at a "control price," reflecting the higher price that
buyers typically pay when they buy an entire company (as the ESOP and other
investors did in the 1988 Leveraged Buy-Out). A special provision in the ESOP
permits participants to receive a "control price" when they sell these shares
back to the Company under the ESOP's "put option" provisions. This "control
price," as determined by the trustee was $47.00 per share as of December 27,
2001. The additional shares obtained by the ESOP in 1994 through 2001 were at a
"minority interest price," reflecting the lower price that buyers typically pay
when they are buying shares of a company in the market place. Participants do
not have the right to sell these shares at the "control price". The minority
interest price as determined by the trustee was $44.75 per share as of December
27, 2001. Participants receive their vested shares upon retirement, becoming
disabled, or death over a period of one to five years and for other reasons of
termination over a period of one to ten years, all as set forth in the Plan
documents. The ESOP Trust ("ESOT") or the Company purchases participants' shares
at the
applicable price, utilizing cash available from the Company's contributions and
loans (see Note 8). The participant can elect to retain distributed ESOP shares
instead of a participant put. Based on fair values of $47.00 and $44.75 per
share as of December 27, 2001, the estimated maximum contingent liability to
repurchase shares from the ESOP participants upon death, disability, retirement
and termination is as follows: $19,996 in 2002, $24,340 in 2003, $26,292 in
2004, $24,228 in 2005, $20,873 in 2006 and $210,639 thereafter. Under the
Subscription Agreement with the ESOP dated September 9, 1988, the Company is
permitted to defer put options if, under Delaware law, the capital of the
Company would be impaired as a result of such repurchase. As explained above in
Note 8, the ESOP was merged into the Savings Plans effective January 1, 2001.
All rights and obligations of the ESOP and its participants remain intact in the
Savings Plans.
Other Redeemable Common Stock
On December 10, 1999, the Company entered into an agreement with various
financial institutions for the sale of 426,217 shares of the Company's stock and
Subordinated Notes (see Note 5). Under a contemporaneous registration rights
agreement, the holders of these shares of stock will have a put right to the
Company commencing on December 10, 2003, at a price of $40.53 per share, unless
one of the following events has occurred prior to such date or the exercise of
the put right: (1) an initial public offering of the Company's common stock has
been consummated; (2) all the Company's common stock has been sold; (3) all the
Company's assets have been sold in such a manner that the holders have received
cash payments; or (4) the Company's common stock has been listed on a national
securities exchange or authorized for quotation on the NASDAQ National Market
System for which there is a public market of at least $100 million for the
Company's common stock. If, at the time of the holders' exercise of the put
right the Company is unable to pay the put price because of financial covenants
in loan agreements or other provisions of law, the Company will not honor the
put at that time, and the put price will escalate for a period of up to four
years, at which time the put must be honored. The escalation rate increases
during such period until the put is honored, and the rate varies from an
annualized factor of 22.0% for the first quarter after the put is not honored up
to 52.0% during the sixteenth quarter. The annual accretion in the fair value of
these shares is reflected as a reduction of Common Stockholders' Share of Net
Earnings on the Consolidated Statements of Operations. On December 26, 2001, two
of the holders sold 140,000 of these shares on the Company's internal market and
those shares are no longer subject to the put right.
In conjunction with the acquisition of TAI in November 1993, the Company issued
put options on 125,714 shares of common stock. The holder could, at any time
commencing on December 31, 1998 and ending on December 31, 2000, sell these
shares to the Company at a price per share equal to the greater of $17.50; or,
if the stock is publicly traded, the market value at a specified date; or, if
the Company's stock is not publicly traded, the ESOP control price at the time
of exercise. On January 12, 1999, the holder exercised the put option on these
shares at the applicable price of $24.25 per share.
Following are the changes in Redeemable Common Stock for the three years ended
December 27, 2001:
Redeemable Common Stock
Other ESOP Total
----- ---- -----
Balance, December 31, 1998 $ 3,049 $180,812 $183,861
Exercise of put option (3,049) - (3,049)
Shares purchased by the Company - (1,899) (1,899)
Shares purchased by the ESOP - 6,466 6,466
Shares purchased on the Internal Market - 2,319 2,319
Shares released from collateral - 10,577 10,577
Shares pledged as collateral - (11,082) (11,082)
ESOP diversification (a) - (753) (753)
Issuance of common stock with put rights 6,048 - 6,048
Adjustment of shares to fair value 94 (3,466) (3,372)
----- -------- --------
Balance, December 30, 1999 6,142 182,974 189,116
Shares purchased by the ESOP - 568 568
Shares purchased on the Internal Market - 612 612
Shares released from collateral - 2,958 2,958
Shares pledged as collateral - (300) (300)
Adjustment of shares to fair market value 1,842 51,534 53,376
----- ------- --------
Balance, December 28, 2000 7,984 238,346 246,330
Shares purchased by/contributed to the
Savings Plans - (11,569) (11,569)
Shares sold on the Internal Market (3,407) (2,420) (5,827)
Shares purchased on the Internal Market - 1,598 1,598
ESOP diversification (a) - (1,046) (1,046)
Adjustment of shares to fair market value 2,390 101,459 103,849
----- ------- -------
Balance, December 27, 2001 $6,967 $326,368 $333,335
===== ======= ========
(a) Under diversification rules, as defined by the Plan, ESOP participants have
the option of receiving a distribution of up to 25.0% of their aggregate
accounts, in order to convert Company stock into another type of
investment. The option extends over a five-year period beginning after the
participant has reached age 55 and has ten years of participation in the
ESOP. At the sixth year, the distribution right increases to 50.0% of the
participant's account less any amounts previously paid.
(10) Common Stock
At December 27, 2001, common stock includes shares issued to outside investors,
officers and directors, current and former employees, the ESOP, and the Savings
Plans, as well as any ESOP or Savings Plan shares that have been distributed in
kind to former participants in the plans.
(11) Restricted Stock
The Company had a Restricted Stock Plan (the "Plan") under which management and
key employees could be awarded shares of common stock based on the Company's
performance. The Company initially reserved 1,023,037 shares of common stock for
issuance under the Plan. Under the Plan, Restricted Stock Units ("units") were
granted to participants who were selected by the Compensation Committee of the
Board of Directors. Each unit entitled the participant upon achievement of the
performance goals (as defined in the Plan) to receive one share of the Company's
common stock. Units could not be converted into shares of common stock until the
participant's interest in the Units had vested. Vesting occurred upon completion
of the specified periods as set forth in the Plan. All units granted under the
Plan have vested or have been forfeited and all vested shares have been
subsequently
distributed or deferred until a future distribution date. Of the deferred
shares, 105,898 remain to be distributed.
(12) Acquisitions and Dispositions
On December 27, 2001, the Company completed the merger of its wholly-owned
subsidiary, DynCorp Management Resources, Inc. ("DMR"), the Company's state and
local government services subsidiary, into TekInsight.com, Inc. The merger
between TekInsight.com Inc. and DMR formed the new entity DynTek, Inc. DynTek,
Inc. is a public company listed on NASDAQ under the symbol DYTK. DynTek, Inc. is
a provider of information technology and outsourced management services to state
and local governments serving customers across 17 states. On a pro forma basis,
DynTek, Inc. had revenues of approximately $77.2 million for the fiscal year
ended June 30, 2001.
The Company received 18,336,664 shares of class B common stock of DynTek, Inc.
These shares are not registered, but the Company has the right to require
DynTek, Inc. to register the shares. An independent appraisal of these shares
resulted in a value of $31.0 million for these shares at December 27, 2001. This
transaction resulted in a gain on the sale of approximately $29.1 million;
however, under GAAP the Company recognized only 60% of the gain or $17.4 million
for this non-monetary transaction because the Company has a 40% ownership
interest in the new entity, DynTek, Inc.
The $17.4 million gain on the disposal of DMR is partially offset by DMR's $13.4
million operating loss. Since the Company has a 40% interest in DynTek, Inc. and
does not have control, it will account for its investment on the equity basis of
accounting going forward. The Company has the right to appoint people to three
of the seven director positions on the board of DynTek, Inc.
As part of the merger agreement, the Company has contract obligations for
several outstanding performance bonds on certain DMR contracts, which total
approximately $3.4 million as of December 27, 2001. DynTek, Inc. has agreed to
make its best effort to replace the bonds with its own obligations. The Company
is also obligated to the Commonwealth of Virginia for satisfactory performance
on DMR's contract to provide non-emergency medical transportation services in
Virginia. Should DynTek, Inc. default on the Virginia contracts and/or any of
the performance bonds, it could result in financial losses for the Company.
In the first quarter of 2002, the Company paid $2.6 million to DynTek, Inc. in
resolution of a dispute concerning the adequacy of DMR's working capital at the
time of closing. The Company recorded the $2.6 million payment as a liability at
December 27, 2001, and included the $2.6 million payment in its calculation of
the gain on the sale. DynTek, Inc. is currently seeking additional financing.
In September 2000, the Company purchased for $2.5 million certain assets and
liabilities of a company which develops and markets proprietary decision-support
software and provides related consulting services to evaluate and profile
performance of healthcare providers. The purchase price has been allocated to
the assets acquired and liabilities assumed based on preliminary estimated fair
value at the date of acquisition, under the purchase method of accounting.
Goodwill, net of accumulated amortization, associated with this purchase is $2.7
and $2.9 million as of December 27, 2001 and December 28, 2000, respectively and
is being amortized over 15 years.
On December 10, 1999, the Company acquired GTE Information Systems LLC, a
subsidiary of GTE Corporation, for $167.5 million in cash and has accounted for
the acquisition as a purchase. The purchase price was allocated to the assets
acquired and the liabilities assumed based on estimated fair value at the date
of acquisition. On December 13, 1999, the name of GTE Information Systems LLC
was changed to DynCorp Information Systems LLC ("DIS"). It operates as a
separate subsidiary of the Company. Operating results for DIS have been included
from the date of acquisition. Goodwill, net of accumulated amortization,
associated with this purchase is $57.2 and $59.6 million as of December 27, 2001
and December 28, 2000, respectively, and is being amortized over 30 years.
The following unaudited pro forma combined financial information presents the
historical results of operations of the Company and DIS, with pro forma
adjustments as if DIS had been acquired as of the beginning of the period
presented. The unaudited pro forma information is not necessarily indicative of
what the results of operations actually would have been if the transaction had
occurred as of the beginning of the period, or of future results of operations.
The unaudited pro forma information does not reflect purchase accounting
adjustments for any preacquisition contingencies or losses.
1999
(Unaudited and Revised -
See Note2)
----------
Revenue $1,560,971
Net earnings $ 4,164
Basic earnings per share $ 0.42
Diluted earnings per share $ 0.41
(13) Savings Plans
In 2000 and 1999, the Company had a Savings and Retirement Plan ("SARP") which
was intended to qualify under section 401(k) of the Internal Revenue Code
("IRC"). The plan allowed eligible employees to defer 1.0% to 15.0% of their
compensation on a pretax basis for contribution to their SARP accounts. In 1996,
the Company began matching 100.0% of the first 1.0% of employee deferrals and
25.0% of the next 4.0% of employee contributions, provided the employee
contribution was invested in Company stock funds. Matching contributions are
invested in additional shares of the Company's common stock.
Effective January 1, 2001, the Company revised its SARP to establish two plans:
the Savings and Retirement Plan and the Capital Accumulation and Retirement Plan
("Savings Plans"), which are intended to qualify under section 401(k) of the
IRC. At the same time, the ESOP was merged into the two plans. The Company stock
accounts of participants in the ESOP were transferred to one or the other of the
Savings Plans, and Savings Plan participants have the same distribution and put
rights for these ESOP shares as they had in the ESOP. Substantially all
employees participate in one of the two Savings Plans.
Under the revised Savings and Retirement Plan, the Company may make a matching
contribution of 50.0% of the first 8.0% of compensation deferred by the employee
and an additional matching contribution of 50.0% of the first 3.0% of
compensation so deferred which is invested in the Company stock investment fund;
the Company may also make a discretionary contribution of 1.0% of compensation
on behalf of eligible participants. All Company contributions are invested in
the Company stock investment fund for such participants. Under the Capital
Accumulation and Retirement Plan, the initial Company matching contribution is
25.0% of the first 8.0% of compensation deferred by the employee, and the
additional matching contribution for investments in the Company stock investment
fund is the same. Under the Capital Accumulation and Retirement Plan, the
Company may also make a discretionary contribution of 2.0% of compensation. All
Company contributions, other than those used to pay administrative expenses are
either in the form of Company stock or cash to be used by the Savings Plans to
acquire Company stock. Beginning in January 2001, the Plans allow eligible
employees to defer 1.0% to 18.0% of their compensation on a pretax basis for
contribution to their Savings Plans' accounts.
In 2001, the Company contributed $2,182 to the Savings Plans to cover the
difference between the control price and the minority interest price on the ESOP
shares which were put back to the Company during 2001 under the ESOP's "put
option" provisions. This amount was recorded as an increase to Treasury Stock on
the Consolidated Balance Sheet in 2001, due to the put obligation on the shares
being removed at the time the shares were purchased back by the Company.
The Company has expensed approximately $2,617, and $1,937 in 2000, and 1999,
respectively, related to the employer matching contributions to the SARP. These
amounts were charged to Cost of Services and Corporate General and
Administrative Expenses.
In 2001, the Company expensed approximately $18,792 for the employer match into
the Savings Plans which was charged to Cost of Services and Corporate General
and Administrative Expenses.
(14) Income Taxes
As prescribed by SFAS No. 109, "Accounting for Income Taxes," the Company
utilizes the asset and liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Valuation allowances are
provided if required.
Earnings (loss) from continuing operations before income taxes, minority
interest, extraordinary item (see Note 5), and cumulative effect of change in
accounting principle (see Note 2) were derived from the following:
Fiscal Years Ended
2001 (Revised - 2000 (Revised - 1999 (Revised -
See Note 2) See Note 2) See Note 2)
----------- ----------- -----------
Domestic operations $ 96,895 $ (57,248) $ 14,489
Foreign operations 1,461 397 729
-------- ---------- --------
$ 98,356 $ (56,851) $ 15,218
======== ========== ========
The provision (benefit) for income taxes consisted of the following:
Fiscal Years Ended
2001 (Revised - 2000 (Revised - 1999 (Revised -
See Note 2) See Note 2) See Note 2)
----------- ----------- -----------
Current:
Federal $ 5,017 $ 11,525 $ 1,564
Foreign 546 1,700 120
State 437 471 636
------- -------- ------
6,000 13,696 2,320
------- -------- ------
Deferred:
Federal 29,060 (34,793) 4,465
Foreign - - -
State 374 (486) (2,167)
------- -------- -------
29,434 (35,279) 2,298
------- -------- -------
Valuation Allowance:
Federal - - -
State (374) 756 22
------- -------- -------
(374) 756 22
------- -------- -------
Total $35,060 $(20,827) $ 4,640
======= ======== =======
The components of deferred taxes are as follows:
December 27, 2001 December 28, 2000
(Revised - See Note 2) (Revised - See Note 2)
---------------------- ----------------------
Deferred tax liabilities:
Employee benefits $ (450) $ (901)
Contract revenue recognition (15,094) (8,154)
Other, net (6,693) (847)
-------- --------
Total deferred tax liabilities (22,237) (9,902)
-------- --------
Deferred tax assets:
Deferred compensation 1,029 1,085
Operating reserves and other accruals 19,880 35,372
Depreciation and amortization 443 1,620
Benefit of state tax on temporary differences
and state net operating loss carryforwards 5,140 5,514
-------- ---------
Total deferred tax assets 26,492 43,591
-------- ---------
Total temporary differences before valuation
allowances 4,255 33,689
Valuation Allowances:
State (5,140) (5,514)
-------- ---------
Total temporary differences affecting tax
provision (885) 28,175
"Safe harbor" leases (3,903) (4,035)
Acquired postretirement benefit plan liability 3,056 4,055
-------- ---------
Net deferred tax (liability) asset $(1,732) $28,195
======== =========
No valuation allowance was required for the Company's federal deferred tax
assets at December 27, 2001 and December 28, 2000. State valuation allowances
represent reserves for income tax benefits, which are not recognized due to
uncertainty regarding future earnings in the applicable states. The net deferred
tax asset includes current deferred tax assets of $8,402 and $18,182 as of
December 27, 2001 and December 28, 2000, respectively, which are included in
Other Current Assets on the Consolidated Balance Sheets.
The Company's U.S. federal income tax returns have been cleared with the IRS
through 1997.
Cash paid for income taxes was $12,084 for 2001, $5,514 for 2000, and $4,942 for
1999.
The tax provision (benefit) differs from the amounts obtained by applying the
statutory U.S. federal income tax rate to the earnings from continuing
operations before minority interest. The differences are reconciled as follows:
Fiscal Years Ended
2001 (Revised - 2000 (Revised - 1999 (Revised -
See Note 2) See Note 2) See Note 2)
----------- ----------- -----------
Expected federal income tax provision
(benefit) $ 34,425 $ (19,898) $ 5,326
Minority interest not included in tax
provision (405) (519) (446)
State and local income taxes, net of
federal income tax benefit (provision) 284 482 (1,637)
Nondeductible amortization of in-
tangibles and other costs 601 590 1,160
Foreign income tax provision 546 1,700 120
Foreign and fuel tax credits (592) (2,614) (54)
Other, net 201 (568) 171
--------- --------- --------
Tax provision (benefit) $ 35,060 $(20,827) $ 4,640
========= ========= ========
The Company has state net operating loss carryforwards available to offset
future taxable income. Following are the net operating losses by year of
expiration:
Year of Expiration State Net Operating Losses
------------------ --------------------------
2001 $ 607
2002 727
2003 1,079
2004 5,290
2005 956
Through 2020 62,181
------
$ 70,840
======
(15) Pension and Postretirement Benefits Plans
Multi-employer Pension Plan
- ---------------------------
Union employees who normally are not participants in the ESOP or Savings Plans
may be covered by multi-employer pension plans under which the Company pays
fixed amounts, generally based on hours worked, according to the provisions of
the various labor contracts. In 2001, 2000, and 1999, the Company expensed
$5,063, $4,077, and $3,954, respectively, for these plans. Under the Employee
Retirement Income Security Act of 1974 as amended by the Multi-employer Pension
Plan Amendments Act of 1980, an employer is liable upon withdrawal from or
termination of a multi-employer plan for its proportionate share of the plan's
unfunded vested benefits liability. Based on information provided by the
administrators of the majority of these multi-employer plans, the Company does
not believe there is any significant amount of unfunded vested liability under
these plans.
Defined Benefit Pension Plans
- -----------------------------
On December 11, 1999, the Company's subsidiary, DIS, established the DIS Pension
Plan for Salaried Employees, which is a noncontributory defined benefit pension
plan sponsored by DIS, covering a majority of DIS's employees. The benefits to
be paid under this plan are generally based on years of credited service and
average final earnings. DIS' 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.
Certain participants who terminate from the Company as a result of a reduction
in work force receive Involuntary Separation Payments ("ISEP") from the DIS
Pension Plan for Salaried Employees, based on salary and length of service.
Also on December 11, 1999, certain of DIS's union employees began participating
in the DynCorp Information Systems LLC Union Pension Plan, which is a
noncontributory defined benefit pension plan. DIS union employees are also
eligible for a postretirement healthcare and life insurance benefit plan,
sponsored by DIS.
Postretirement Benefit Plan
- ---------------------------
On December 11, 1999, a majority of DIS's then-current employees became covered
under a postretirement healthcare and life insurance benefit plan sponsored by
DIS. The determination of benefit cost for the postretirement health plan is
generally based on comprehensive hospital, medical and surgical benefit plan
provisions.
The following is a reconciliation of the benefit obligations, plan assets, and
funded status of the Company's Defined Benefit Pension and Union Pension Plans
and Postretirement Benefit Plan:
Change in Benefit Obligation: Pension Benefits Postretirement Benefits
---------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Benefit obligation at beginning of year $37,455 $ 44,448 $22,632 $21,608
Service cost 3,148 2,943 78 188
Interest cost 3,302 3,633 1,552 1,631
Actuarial loss (gain) 6,722 (3,761) (913) 779
Participant contributions - - 102 96
ISEP benefits paid (2,228) (563) - -
Other benefits paid (6,348) (9,245) (1,327) (1,670)
------- ------- -------- -------
Benefit obligation at end of year $42,051 $37,455 $22,124 $22,632
------- ------- -------- -------
Change in Plan Assets: Pension Benefits Postretirement Benefits
---------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Fair value of assets at beginning of year $50,540 $57,604 $ 7,021 $12,090
Actual return on plan assets (1,962) 2,744 (2,996) -
Employer contributions - - 1,226 (3,495)
Employee contributions - - 102 96
ISEP benefits paid (2,228) (563) - -
Other benefits paid (6,348) (9,245) (1,327) (1,670)
------- ------- ------- -------
Fair value of assets at end of year $40,002 $50,540 $ 4,026 $ 7,021
------- ------- ------- -------
Funded Status Reconciliation: Pension Benefits Postretirement Benefits
---------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Funded status $(2,049) $13,085 $(18,098) $(15,611)
Unrecognized prior service cost 2 - - -
Unrecognized net actuarial (gain) loss 11,615 (1,564) 4,102 1,545
-------- ------- --------- ---------
Net prepaid (unfunded) benefit cost $9,568 $11,521 $(13,996) $(14,066)
======== ======= ========= =========
Assumptions: Pension Benefits Postretirement Benefits
---------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
Discount rate 7.3% 7.5% 7.3% 7.5%
Varying rates of increase in
compensation levels based on age 4.8% 5.0% N/A N/A
Expected weighted-average long-term
rate of return on assets 9.0% 9.0% 6.8% 6.8%
Assumed health care cost trend rate:
Post-65 claim group N/A N/A 6.3% 6.5%
Pre-65 claim group N/A N/A 6.3% 6.5%
Net periodic pension cost and postretirement benefit costs included the
following:
Pension Benefits Postretirement Benefits
---------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Service cost $ 3,146 $ 2,943 $ 78 $ 188
Interest cost 3,302 3,633 1,552 1,631
Expected return on plan assets (4,496) (4,942) (474) (765)
------- ------- ------ ------
Net periodic pension cost $ 1,952 $ 1,634 $1,156 $1,054
======= ======= ====== ======
For the postretirement benefit plan the health care cost trend rates are assumed
to decline gradually by 0.3% until the ultimate rate of 5.5% is reached in 2004
for post-65 and pre-65 claim groups and will remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point
Increase Decrease
Effect on total of service and
interest cost components $ 89 $ (81)
Effect on accumulated
postretirement benefit obligation $ 1,223 $(1,111)
(16) Net Earnings (Loss) Per Common Share
Basic earnings (loss) per common share ("EPS") is computed by dividing common
stockholders' share of net earnings (loss) by the weighted-average number of
common shares outstanding and contingently issuable shares. The weighted-average
number of common shares outstanding includes issued shares less shares held in
treasury and any unallocated ESOP shares. Shares earned and vested but unissued
under the Restricted Stock Plan are contingently issuable shares whose condition
for issuance have been satisfied and as such have been included in the
calculation of basic EPS. Diluted EPS is computed similarly except the
denominator is increased to include the weighted-average number of stock
warrants and options outstanding, assuming the treasury stock method.
The following is a reconciliation of shares for basic EPS to shares for diluted
EPS for the fiscal years ended:
2001 2000 1999
---- ---- ----
Weighted-average shares outstanding for basic EPS 10,559 10,477 10,044
Effect of dilutive securities:
Stock options 554 - 229
------ ------ ------
Weighted-average shares outstanding for diluted EPS 11,113 10,477 10,273
====== ====== ======
(17) Incentive and Deferred Compensation Plans
The Company has several formal incentive compensation plans that provide for
incentive payments of cash and stock to officers and key employees. Incentive
payments under these plans are based upon operational performance, individual
performance, or a combination thereof, as defined in the plans. In 2000, the
chief executive officer was awarded 25,000 shares of the Company's stock under
the Company's Long-Term Incentive Stock Plan, which would vest entirely and be
distributable at such time as, but only in the event that, the price of common
stock exceeded $40.00 per share by a date no later than December 31, 2002. In
December 2001, these 25,000 options vested when the common stock traded at
$40.50 per share on the Company's internal market. The expense of $1,013 was
recorded in December 2001, when the restrictions on the shares lapsed.
In November 2001 the Company entered into three-year employment agreements with
certain executives specifying annual salaries and incentive plan target bonuses
and providing for payment of salary and pro-rated bonuses following termination.
The employment agreements also provide, in the event of involuntary termination
without cause, for consulting payments and non-compete payments for a period of
thirty months, and, if the executive is terminated in connection with a change
in control of the Company, payment of an additional lump-sum amount.
The Company has several types of deferred compensation plans for certain
executives. In 1998 the Company established the Key Executive Share-Option
Compensation Plan, which offers certain executives and key management employees
the opportunity to defer any selected portion of annual salary and bonuses. The
Company has recorded an asset and a liability at the fair market value of the
investments made with the deferrals in the amount of $1.5 million and $1.0
million as of December 27, 2001 and December 28, 2000, respectively. The related
investment asset is treated as a trading security under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and therefore
the related fluctuations in the fair market value are charged to Corporate
General and Administrative Expenses and Cost of Services.
In 1997 the Company established the Supplemental Executive Retirement Plan,
which offers certain executives additional retirement benefits in the form of a
ten-year certain stream of payments based on a percentage of final year annual
compensation. The plan also includes pre- and post-retirement lump sum death
benefit provisions. The Company has recorded a liability in the amount of $2.6
million and $2.4 million as of December 27, 2001 and December 28, 2000,
respectively, for these retirement balances.
In 1980, the Company began allowing certain executives to defer any amount of
their base salary in excess of the Social Security wage base until retirement or
any set date more than five years in the future. These balances are to be paid
out in either lump sums or over a certain number of years up to ten years as
agreed to in the original deferred compensation agreements with each executive.
The deferred balances earn interest based on a rate equal to the average
interest rates of interest paid for one-year certificates of deposit. There have
not been any additional deferrals since 1988. The Company has recorded a
liability in the amount of $0.2 million as of December 27, 2001 and December 28,
2000, which includes all future pay-outs and accrued interest.
(18) Stock Option Plans
In March 1999, the Company adopted a Long-Term Incentive Stock Plan, which
authorizes the grant of performance-based stock and cash incentive compensation
in the form of non-qualified stock options, stock appreciation rights,
restricted stock, performance grants and awards, and other stock-based grants
and awards. Specific terms relating to the grant are set by the Compensation
Committee at the time of the grant. Stock options granted under the Plan permit
optionees to purchase a designated number of shares of common stock at an
exercise price set by the Committee, which establishes vesting and exercise
provisions to be set forth in individual option agreements. The exercise price
may not be lower than the fair market value of the shares as of the time the
option is granted. Following an action by the Compensation Committee in February
2001, options granted during 1999 and 2000 will generally vest over a six-year
period or over a lesser period if certain stock price targets are met in future
years. Options that are not exercised within ten-years of the grant date will
expire.
The Company adopted a non-qualified Stock Option Plan in 1995, whereby options
could be granted to officers, directors, and other key employees to purchase a
maximum of 1,250,000 common shares at an option price not less than the most
recently determined fair market value as of the grant date. The grants are
exercisable only when vested and vest proportionately over a period of four or
five years, depending on the date of the grant. Options that are not exercised
within ten or seven years from the date of the grant, depending on the date of
the grant, shall expire. The fair value of each option grant is equal to the
Formula Price at the date of grant. The Company's ability to grant options under
the 1995 Stock Option Plan ended on June 30, 2001.
Stock option activity was as follows:
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 1,625,000 1,603,150 1,238,600
Granted 339,200 447,000 468,750
Exercised (42,764) (95,813) (5,400)
Canceled or terminated (56,586) (329,337) (98,800)
- -------------------------------------------------------------------------------------------------------------
Outstanding, December 27, 28, and 30 1,864,850 1,625,000 1,603,150
Exercisable 973,535 698,450 590,200
Average price
Outstanding, beginning of year $20.82 $20.29 $18.69
Granted 29.78 23.50 24.38
Exercised 20.05 17.04 17.26
Canceled or terminated 23.77 22.95 19.82
Outstanding, end of year 22.38 20.82 20.29
Weighted-average grant date fair value of options was $6.51, $6.25, and $6.10
for 2001, 2000, and 1999, respectively.
The following table summarizes information about stock options outstanding at
December 27, 2001:
Weighted-Average
Range of Number Weighted-Average Remaining
Prices Outstanding Exercise Price Contractual Life
- -------------------------------------------------------------------------------------------------------------
$14.90 - 19.00 598,700 $16.85 1.15
20.00 - 23.25 316,500 21.65 6.07
23.50 - 24.50 672,650 23.89 8.07
31.00 - 31.50 277,000 31.49 9.57
The following table summarizes information about stock options exercisable at
December 27, 2001:
Range of Number Weighted-Average
Prices Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------
$14.90 - 19.00 586,700 $16.81
20.00 - 23.25 202,950 21.46
23.50 - 24.50 182,885 24.01
31.00 - 31.50 1,000 31.50
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company
has elected to account for its employee stock option plan under APB Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for this plan. Had compensation cost for the plan been
determined based on the fair value at the grant date consistent with SFAS No.
123, common stockholders' share of net earnings (loss) and earnings (loss) per
share would have been as follows:
2001 (Revised - 2000 (Revised - See 1999 (Revised -
Fiscal Years Ended See Note 2) Note 2) See Note 2)
- -------------------------------------------------------------------------------------------------------------
Common stockholders' share of
net earnings (loss)
As reported $58,444 $(45,258) $ 5,915
Pro forma $56,840 $(46,863) $ 4,141
Basic earnings (loss) per share
As reported $ 5.53 $ (4.32) $ 0.59
Pro forma $ 5.38 $ (4.47) $ 0.41
Diluted earnings (loss) per share
As reported $ 5.26 $ (4.32) $ 0.58
Pro forma $ 5.11 $ (4.47) $ 0.40
The minimum value is estimated on the date of grant assuming a five year
expected life of the options, a volatility factor of zero, a dividend yield of
zero, and risk-free interest rates of 5.01%, 6.28%, and 5.78% for 2001, 2000,
and 1999, respectively.
(19) Leases
Future minimum lease payments required under operating leases that have
remaining noncancellable lease terms in excess of one year at December 27, 2001
are summarized below:
Fiscal Years Ending
- -------------------
2002 $ 46,963
2003 42,968
2004 36,790
2005 27,600
2006 25,643
Thereafter 69,818
--------
Total minimum lease payments $249,782
========
Rent expense for leases of $40,734, $42,426, and $34,769 for 2001, 2000, and
1999, respectively, has been charged to Cost of Services and Corporate General
and Administrative Expense. Of these 2001 rent expenses, approximately $21.5
million was directly charged to cost reimbursable contracts. Of the future
minimum lease payments, approximately $155.9 million are expected to be directly
charged to cost reimbursable contracts.
(20) Contingencies and Litigation
The Company and its subsidiaries and affiliates are involved in various claims
and lawsuits, including contract disputes and claims based on allegations of
negligence and other 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 $7.0 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.
In September, 2000, the Company became aware of significant errors in
preacquisition estimates of the cost to complete a major ten-year federal
government telephone installation and operation contract that was undertaken in
1998 by GTE Information Systems LLC, now known as DynCorp Information Systems
LLC, a wholly-owned subsidiary of the Company ("DIS"). The Company acquired GTE
Information Systems LLC from Contel, Inc., a subsidiary of GTE, Inc., in
December 1999. As a consequence of these errors, the Company recorded a loss
reserve for the contract in the amount of $69.0 million, which had a remaining
balance of $53.8 million at December 28, 2000. Effective August 1, 2001, DIS and
the federal government customer entered into a bilateral modification of the
contract as a consequence of which the Company reduced the previously recorded
loss reserve by $44.7 million effective in the third quarter 2001. This
reduction resulted from the government's elimination of certain future
liabilities from the contract, an increase in future billing rates for calls,
and a decrease in future call revenue shared with the government agency. On
August 10, 2001, the Company instituted suit against GTE, Inc. claiming breaches
of the acquisition agreement representations and warranties and for other
relief.
On September 11, 2001, DynCorp and three of its wholly-owned subsidiaries were
served with a civil action filed in the United States District Court for the
District of Columbia on behalf of certain Ecuadorian citizens and an alleged
class that could consist of at least 10,000 such unnamed citizens, alleging
personal injury, property damage and wrongful death as a consequence of the
spraying of narcotic crops along the Colombian border adjacent to Ecuador. The
action seeks a declaratory judgment and injunctive relief as well as unspecified
compensatory and punitive damages. Spraying operations are conducted under a
Company subsidiary contract with the United States Department of State in
cooperation with the Colombian government. No spraying operations are conducted
in Ecuador, although the complaint alleges that sprayed material has drifted
across the border into Ecuador. All operations of the Company's subsidiary in
Colombia are conducted in accordance with specific instructions from the
Department of State using equipment and spray material provided by the United
States government. The State Department has publicly stated that the spray
material has been demonstrated not to be toxic to human beings. The Company and
its subsidiaries have placed their insurance carriers on notice and tendered
defense. The Company and its subsidiaries intend to vigorously defend against
all allegations. The Company does not expect any losses due to this litigation.
Regarding 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
the clean up of environmental conditions at certain designated sites. Such costs
may include the removal and subsequent replacement of contaminated soil,
concrete, and underground storage tanks, that existed prior to the sale of the
commercial aviation business. The resolution of these matters is not expected to
have a material impact on the Company's results of operations or financial
condition. The Company believes it has adequate accruals for any liability it
may incur arising from the designated sites.
The Company has been advised by the purchasers of two former subsidiaries
(DynAir Tech of Florida, Inc. and DynAir Services Inc.) of environmental claims
by Dade County, Florida, arising out of the former subsidiaries' conduct of
business at Miami International Airport ("MIA"). Claims for indemnification are
being asserted against the Company pursuant to divestiture agreements entered
into in 1995. The Company has assumed defense of these allegations with a full
reservation of rights. A lawsuit was filed in April 2001 by Dade County in
Florida State Court against DynAir Tech's successor-in-interest, Sabretech,
Inc., and 16 other defendants, but neither Sabretech nor any other named
defendant has been served. DynAir Services is not presently a named defendant,
although it is one of an additional 200 companies that the County has identified
as having possible responsibility for
contamination at MIA. Under the terms of the DynAir Tech divestiture agreement,
the purchaser is responsible for the first $125,000 of cost incurred as a result
of such claims; however, the Company is required to assume full responsibility
for all costs to the extent claims exceed $125,000 up to an aggregate maximum
amount of $2.5 million. If the Company is required to indemnify under the DynAir
Services divestiture agreement, it would be responsible for all related costs.
The County's complaint specifies $200.0 million of incurred and $250.0 million
of future damages against the named defendants. Defense has been tendered to
certain of the Company's insurance carriers, although no coverage determination
has been made. Both DynAir Services and Sabretech are represented by
environmental defense counsel and intend to vigorously defend against the
allegations. At this time, the Company cannot reasonably determine the exposure,
if any, to possible losses from these claims.
The Company is a party to other civil and contractual lawsuits that have arisen
in the normal course of business for which potential liability, including costs
of defense, constitutes the remainder of the $7.0 million discussed above. The
estimated probable liability (included in Other Liabilities and Deferred Credits
on the Consolidated Balance Sheet) for these issues is approximately $4.0
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 (included in Other Assets
on the Consolidated Balance Sheet) of $3.3 million at December 27, 2001 for
these items.
The Company has recorded its best estimate of the aggregate liability that will
result from these matters. While it is not possible to predict with certainty
the outcome of litigation and other matters discussed above, it is the opinion
of the Company's management, based in part upon opinions of counsel, insurance
in force, and the facts currently known, that liabilities in excess of those
recorded, if any, arising from such matters would not have a material adverse
effect on the results of operations, consolidated financial condition or
liquidity of the Company over the long-term. However, it is possible that the
timing of the resolution of individual issues could result in a significant
impact on the operating results and/or liquidity for one or more future
reporting periods.
The major portion of the Company's business involves contracting with
departments and agencies of, and prime contractors to, the U.S. Government, and
such contracts are subject to possible termination for the convenience of the
government and to audit and possible adjustment to give effect to unallowable
costs under cost-type contracts or to other regulatory requirements affecting
both cost-type and fixed-price contracts. Payments received by the Company for
allowable direct and indirect costs are subject to adjustment and repayment
after audit by government auditors if the payments exceed allowable costs. A
majority of the audits have been completed on the Company's incurred contract
costs through 1999. The Company has included an allowance for excess billings
and contract losses in its financial statements that it believes is adequate
based on its interpretation of contracting regulations and past experience.
There can be no assurance, however, that this allowance will be adequate. The
Company is aware of various costs questioned by the government, but cannot
determine the outcome of the audit findings at this time. In addition, the
Company is occasionally the subject of investigations by various investigative
organizations, resulting from employee and other allegations regarding business
practices. In management's opinion, there are no outstanding issues of this
nature at December 27, 2001 that will have a material adverse effect on the
Company's consolidated financial condition, results of operations, or liquidity.
(21) Business Segments
Effective January 1, 2001, the Company realigned its three Strategic Business
Segments into five focused sectors in order to further expand its business in
the growing international market and also to segregate out its health
information and technology services. These five reportable segments are
strategic business units that provide distinctly different services to a variety
of customers. DI&ET was divided into AdvanceMed ("ADVMED") and DI&ET. ADVMED is
structured as a business-to-business, eHealth decision support solution
organization and provides an integrated set of decision support tools to meet
the needs of healthcare payers and providers. DI&ET provides a wide range of IT
services and other professional services including network and communications
engineering, government operational outsourcing, and security and intelligence
programs. DI&ET includes DMR, which was divested in December 2001 (see Note 12).
DynCorp Technical Services ("DTS") was divided into DynCorp International LLC
("DI") and DTS. DI handles all of the Company's overseas business, including IT
solutions, and will continue to provide maintenance worldwide to support U.S.
military aircraft. DTS provides a myriad of specialized technical services
including aviation services, range technical services, base operations, and
logistics support. DynCorp Information Systems LLC ("DIS") offers a full range
of integrated telecommunications services and IT solutions in the area of
professional services, business systems integration, information infrastructure
solutions, and IT operations and support.
The purpose of these realignments was to provide focus and clarity to the
Company's businesses and enable the Company to better serve its customers by
concentrating and segregating the international and healthcare information and
technology services. Business segment information for 2000 has been revised to
give effect to this change.
The Company evaluates performance based primarily on operating profit, but also
evaluates return on net assets and days sales outstanding. Operating profit is
the excess of revenues over cost of services and certain non-operating income
and expenses included in Other Income, net of Other Miscellaneous Expenses on
the Consolidated Statements of Operations.
The Company derived 96.0%, 98.0%, and 97.0% of its revenues from contracts and
subcontracts with the U.S. Government in 2001, 2000, and 1999, respectively.
Prime contracts comprised 87.6% of revenue in 2001, 78.7% of revenue in 2000,
and 74.6% of revenue in 1999. Prime contracts with the Department of Defense
("DoD") represented 49.0% of revenue in 2001, 44.0% of revenue in 2000, and
40.0% of revenue in 1999. In 2001 and 2000, the Company's second largest
customer was the Department of State, comprising 11.0% of revenue. In 1999, the
Company's second largest customer was the Department of Energy, comprising 14.0%
of revenue. No other customer accounted for more than 10.0% of revenues in any
year.
Revenue, operating profit, identifiable assets, capital expenditures, and
depreciation and amortization by segment are presented below:
Fiscal Years Ended
2001 2000(e)
(Revised - (Revised -
See Note 2) See Note 2) 1999(e)
----------- ----------- -------
Revenue
- -------
DI&ET $ 588,014 $ 606,715 $ 581,904
DTS 514,497 446,210 361,880
DI 545,836 459,085 333,619
DIS 246,308 228,480 13,901
ADVMED 61,318 64,665 53,977
---------- ---------- ----------
$1,955,973 $1,805,155 $1,345,281
========== ========== ==========
Operating Profit (Loss)
- -----------------------
DI&ET (a) $ 39,746 $ 37,174 $ 29,954
DTS 15,058 13,825 12,140
DI 38,094 25,068 19,383
DIS (b) 67,932 (55,340) 989
ADVMED 2,652 3,692 621
---------- ---------- ----------
163,482 24,419 63,087
Corporate general and administrative 29,456 29,350 21,741
Interest expense 31,521 41,408 18,943
Interest income (657) (1,471) (1,393)
Goodwill amortization (c) 3,089 4,167 2,947
Amortization of other intangibles of
acquired companies (d) 3,305 10,755 8,461
Costs associated with divested
businesses - 148 286
Minority interest included in operating
profit (loss) (2,462) (2,622) (2,968)
Other miscellaneous 874 (465) (148)
---------- ----------- -----------
Earnings (loss) from continuing operations
before income taxes, minority interest,
extraordinary item, and cumulative effect of
change in accounting principle $ 98,356 $ (56,851) $ 15,218
========== =========== ===========
(a) 2001 includes a $17.4 million gain on disposition of DMR (see Note 12).
(b) 2001 includes $44.7 million of income primarily from revised loss
estimates due to contract modifications in 2001 on a contract acquired
with the purchase of DIS. 2000 includes a $76.2 million charge
primarily from revised loss estimates on the same contract.
(c) 1999 includes a write-off of the unamortized goodwill balance of an
impaired investment.
(d) 1999 includes write-off of in-process research and development.
Fiscal Years Ended
2001 2000(e)
(Revised - (Revised -
See Note 2) See Note 2)
----------- -----------
Identifiable Assets
- -------------------
DI&ET $131,780 $138,809
DTS 97,468 104,878
DI 94,464 83,588
DIS 162,058 153,123
ADVMED 26,880 26,815
Corporate 85,790 79,543
-------- --------
$598,440 $586,756
======== ========
Fiscal Years Ended
2001 2000(e) 1999(e)
---- ------- -------
Capital Expenditures
- --------------------
DI&ET $ 2,785 $ 3,084 $ 8,173
DTS 461 2,141 2,223
DI 387 251 296
DIS 1,636 12,231 872
ADVMED 227 843 93
Corporate 1,574 2,410 2,221
------- -------- --------
$ 7,070 $20,960 $ 13,878
======= ======== ========
2001 2000(e)
(Revised - (Revised -
Depreciation and Amortization See Note 2) See Note 2) 1999(e)
- ----------------------------- ----------- ----------- -------
DI&ET $ 3,480 $ 4,041 $ 5,692
DTS 1,211 1,105 1,950
DI 749 240 182
DIS 5,791 14,247 849
ADVMED 1,264 559 949
Corporate 7,415 6,862 3,939
-------- -------- --------
$ 19,910 $ 27,054 $ 13,561
======== ======== ========
(e) Data has been revised to give recognition to the current reportable segment
structure.
DMR's results of operations and financial position have been included in all of
the DI&ET segment balances noted above. DMR reported revenues of $41.9 million,
$27.0 million and $24.5 million in 2001, 2000, and 1999, respectively. DMR's
operating results were $4.0 million, $0.1 million, and $(1.4) million in 2001,
2000, and 1999, respectively. DMR's 2001 operating results include the gain on
disposition of $17.4 million, which is offset by $13.4 million loss from
operations. Capital expenditures for DMR were $1.2 million, $0.2 million, and
$0.1 million in 2001, 2000, and 1999, respectively. Depreciation and
amortization for DMR totaled $0.4 million, $0.2 million, $0.1 million in 2001,
2000, and 1999, respectively. DMR's identifiable assets were $0.0 million, $5.2
million, and $6.8 million in 2001, 2000, and 1999, respectively.
The equity in net income of investees accounted for by the equity method
included in operating profit and the amount of investment in equity method
investees included in identifiable assets for each segment is presented below:
Fiscal Years Ended
2001 2000 1999
---- ---- ----
Equity in Investees' Earnings
- -----------------------------
DTS $2,396 $2,366 $2,114
DI 935 - -
------ ------ ------
$3,331 $2,366 $2,114
====== ====== ======
Investment in Equity Investees
- ------------------------------
DTS $1,462 $3,695 $2,490
DI 935 - -
DI&ET - 25 -
------ ------ -------
$2,397 $3,720 $2,490
====== ====== =======
The Company provides services in foreign countries under contracts with the U.S.
Government and foreign customers.
The risks associated with the Company's foreign operations relating to foreign
currency fluctuation and political and economic conditions in foreign countries
have not had a significant negative impact to the Company.
The Company's foreign operations are significantly influenced by the U.S.
Government's foreign policy and funding for such operations. Revenues in foreign
countries under contracts with the U.S. Government represent approximately 98%
of all foreign operations revenue for 2001 and 99% for 2000 and 1999.
Revenue from foreign operations by segment was as follows:
Fiscal Years Ended
2001 2000
(Revised - (Revised -
See Note 2) See Note 2) 1999
----------- ----------- ----
Foreign Operations Revenue
- --------------------------
DI&ET $ 10,232 $ 4,552 $ 4,304
DTS 15,471 15,967 14,794
DI 304,616 344,529 234,787
DIS 21,844 18,805 1,352
ADVMED - 955 2,455
-------- --------- -------
$ 352,163 $ 384,808 $ 257,692
========= ========= =========
(22) Quarterly Financial Data (Unaudited)
A summary of quarterly financial data for 2001 and 2000 is as follows:
2001 Quarters 2000 Quarters (a)
(Unaudited and Revised (Unaudited and Revised
- See Note 2) - See Note 2)
------------- -------------
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
Revenues $438,979 $476,611 $502,856 $537,527 $428,311 $446,498 $468,760 $461,586
Gross profit (loss)(a) 23,721 26,954 73,856 21,169 15,217 24,374 (49,487) 36,722
Earnings(loss)from continuing
operations before income
taxes, minority interest,
and cumulative effect
of change in
accounting principle 6,957 10,138 58,210 23,051 (4,527) 3,677 (70,535) 14,534
Minority interest 476 635 532 819 577 764 304 977
Cumulative effect of change in
accounting principle - - - - 4,770 - - -
Net earnings (loss) 3,694 5,417 37,618 14,105 (8,088) 1,893 (46,045) 8,824
Common stockholders' share
of net earnings (loss) per
common share:
Basic earnings (loss) per share $0.30 $0.46 $3.50 $1.27 $(0.82) $0.14 $(4.43) $0.79
Diluted earnings (loss) per share $0.29 $0.44 $3.33 $1.20 $(0.82) $0.14 $(4.43) $0.79
(a) 2000 fourth quarter includes $1.1 million of closedown costs on an
operation which supported the Department of Justice.
DMR's quarterly revenue and operating results were the following:
($ thousands)
2001 Quarters (a)(b) 2000 Quarters
(unaudited) (unaudited)
----------- -----------
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
Revenue $7,134 $7,270 $13,925 $13,601 $6,555 $7,127 $6,107 $7,194
Gross (loss)
profit $ (40) $(524) $ 577 $(13,369) $ 486 $ 211 $(737) $ 116
(a) 2001 fourth quarter includes a $9.4 million loss on a DMR contract providing
non-emergency medical transportation services in the Commonwealth of Virginia.
(b) 2001 fourth quarter gross loss does not include the gain on disposition of
DMR of $17.4 million (see Note 12).
(23) Subsequent Events
During the second quarter of 2002, the Company recorded a $15.8 million loss on
an investment due to an other than temporary decline in its value. Also
regarding that same investment, in the third quarter of 2002 the Company entered
into an agreement with the investee pursuant to which the Company and its
investee agreed to settle all disputes between them. As part of the agreement,
the Company agreed to loan $5.0 million to the investee which was fully reserved
for in the third quarter of 2002.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
As disclosed in the Current reports, during the two most recent fiscal years of
the Company ended December 27, 2001 and December 28, 2000, and the subsequent
interim period through May 30, 2002, there were no disagreements between the
Company and its former accountant, Arthur Andersen LLP ("Andersen"), on any
matters of accounting principles or practices, financial statement disclosures,
or auditing scope or procedure, which disagreements, if not resolved to
Andersen's satisfaction, would have caused Andersen to make reference to the
subject matter of the disagreement in connection with its reports, and, during
the interim period between its engagement on May 30, 2002 and September 18,
2002, there were no disagreements between the Company and Ernst & Young LLP
("E&Y") on any matters of accounting principles or practices, financial
statement disclosures, or auditing scope or procedure, which disagreements, if
not resolved to E&Y's satisfaction, would have caused E&Y to make reference to
the subject matter of the disagreement in connection with its report, had it
issued a report.
As reported on Current Report on Form 8-K on May 31, 2002, as amended on June 3,
2002, the Board of Directors of DynCorp (the "Company"), upon the recommendation
of its Audit Committee, authorized the engagement of E&Y to serve as the
Company's independent public accountants for the fiscal year ending December 26,
2002. As reported on Current Report on Form 8-K on September 23, 2002, on
September 18,2002 the Audit Committee determined to engage Deloitte & Touche LLP
("D&T") as the Company's independent auditor. D&T has been engaged to audit the
Company's financial statements for the fiscal years ended December 30, 1999,
December 28, 2000, and December 27, 2001 and to audit the Company's financial
statements for the fiscal year ending December 26, 2002.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required to be set forth herein is included in the Company's
Definitive Proxy Statement, which is incorporated herein by reference.
Item 11. Executive Compensation
The information required to be set forth herein is included in the Company's
Definitive Proxy Statement, which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be set forth herein is included in the Company's
Definitive Proxy Statement, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Information
The information required to be set forth herein is included in the Company's
Definitive Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K/A - Amendment
No. 2:
1. All financial statements.
2. Financial statement Schedules.
Schedule II - Valuation and Qualifying Accounts for the Years Ended December 27,
2001, December 28, 2000 and December 30, 1999.
All other financial schedules not listed have been omitted since the required
information is included in the Consolidated Financial Statements or the notes
thereto, or is not applicable or required.
3. Exhibits.
Exhibit Description
- ------- -----------
3.1 Certificate of Incorporation, as currently in effect, consisting
of Amended and Restated Certification of Incorporation
(incorporated by reference to Registrant's Form 10-K/A for 1995,
File No. 1-3879)
3.2 Registrant's By-laws as amended to date (incorporated by
reference to Registrant's Form 10-K for 1999, File No. 1-3879)
4.1 Indenture, dated March 17, 1997, between the Registrant and
United States Trust Company of New York relating to the 9-1/2%
Senior Subordinated Notes due 2007 (incorporated by reference to
Registrant's Form S-4, File No. 333-25355)
4.2 Specimen Common Stock Certificate (incorporated by reference to
Registrant's Form 10-K for 1988, File No. 1-3879)
4.3 Article Four of the Amended and Restated Certificate of
Incorporation (incorporated by reference to Registrant's Form
10-K/A for 1995, File No. 1-3879)
4.4 Credit Agreement by and among Citicorp U.S.A., Inc., certain
Lenders, the Registrant and Dyn Funding Corporation, dated
December 10, 1999 (incorporated by reference to Registrant's Form
8-K, filed December 27, 1999, File No. 1-3879)
4.5 Purchase Agreement dated as of December 10, 1999 among certain
Purchasers and the Registrant relating to $40,000,000 Aggregate
Principal Amount of 15% Senior Subordinated Notes due 2007
(incorporated by reference to Registrant's Form 8-K, filed
December 27, 1999, File No. 1-3879)
4.6 Registration Rights Agreement, dated as of December 10, 1999,
among the Registrant, DB Capital Investors, L.P., The
Northwestern Mutual Life Insurance Society, and Wachovia Capital
Investors (incorporated by reference to Registrant's Form 8-K,
filed December 27, 1999, File No. 1-3879)
10.1 Deferred Compensation Plan (incorporated by reference to
Registrant's Form 10-K for 1987, File No. 1-3879)
10.2 Management Incentive Plan (incorporated by reference to
Registrant's Form 10-K for 1999, File No. 1-3879)
10.3 Executive Incentive Plan (incorporated by reference to
Registrant's Form 10-K for 1999, File No. 1-3879)
10.4 Employment Agreement of Paul V. Lombardi, dated November 1, 2001
(incorporated by reference to Registrants' Form 10-K for 1987,
File No.1-3879)
10.5 Employment Agreement of Patrick C. FitzPatrick, dated November 1,
2001 (previously filed)
10.6 Employment Agreement of Marshall S. Mandell, dated November 1,
2001 (previously filed)
10.7 Employment Agreement of David L. Reichardt, dated November 1,
2001 (previously filed)
10.8 Restricted Stock Plan (incorporated by reference to Registrant's
Form 10-K/A for 1995, File No. 1-3879)
10.9 1995 Stock Option Plan, as amended (previously filed)
10.10 1999 Long-Term Incentive Stock Plan, as amended (previously
filed)
10.11 Key Executive Share-Option Compensation Plan (incorporated by
reference to Registrant's Form 10-K for 1999, File No. 1-3879)
10.12 Change in Control Agreement of W. Ben Medley (previously filed)
21 Subsidiaries of the Registrant (previously filed)
23 Consent of Independent Public Accountants (filed herewith)
99 The Registrant's Letter to the Securities and Exchange Commission
pursuant to the Commission's Temporary Order issued on March 14,
2002 (previously filed)
99.1 Certification by Chief Executive Officer Pursuant to 18 USC
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certification by Chief Financial Officer Pursuant to 18 USC
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
Reports on Form 8-K
Form 8-K was filed on March 19, 2002, which included as an exhibit a copy of the
March 14, 2002 notice to the Company's stockholders and participants in its
Savings and Retirement Plan, Capital Accumulation and Retirement Plan, and
former Employee Stock Ownership Plan advising them that the Board of Directors
had authorized management to consider interests of third parties in a merger or
sale of the Company. The notice stated that there was the potential for
increasing share value, but noted that no formal agreement had been negotiated
or executed. The notice advised plan participants on how they could cancel
outstanding liquidation or distribution orders under the employee plans.
Form 8-K/A was filed on April 22, 2002 to amend the Company's Form 8-K filed on
December 27, 1999, to add as an Exhibit the unaudited financial statements of
Information Systems Division as of September 30, 1999.
Form 8-K was filed on May 31, 2002 to note the decision made on May 30, 2002, by
the Company's Board of Directors, upon the recommendation of its Audit
Committee, not to engage Arthur Andersen LLP as the Company's independent public
accountants for 2002 and authorized the engagement of Ernst & Young LLP to serve
as the Company's independent public accountants for the fiscal year ending
December 26, 2002. Form 8-K/A was filed on June 3, 2002 to amend the May 31,
2002 Form 8-K changing the date through which there were no disagreements
between the Company and Arthur Andersen LLP to May 30, 2002.
Form 8-K was filed on August 6, 2002 to note the decision made on May 30, 2002,
by the DynCorp Savings and Retirement Plan and DynCorp Capital Accumulation and
Retirement Plan (collectively, the "Plans"), to not engage Arthur Andersen LLP
as the Plans' auditor for the plan year ending December 31, 2001 and to engage
Ernst & Young LLP to serve as the auditor for such plan year.
Form 8-K was filed on September 23, 2002 to note the decision made on September
18, 2002, by the Audit Committee, to engage Deloitte & Touche LLP as the
Company's independent public accountant. D&T has been engaged to audit the
Company's financial statements for the fiscal years ended December 30, 1999,
December 28, 2000, and December 27, 2001 and to audit the Company's financial
statements for the fiscal year ending December 26, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DYNCORP
Date:November 1, 2002 By:/S/ P. C. FitzPatrick
---------------------
P. C. FitzPatrick
Senior Vice President -
Chief Financial Officer
Date:November 1, 2002 By: /S/ J. J. Fitzgerald
--------------------
J. J. Fitzgerald
Vice President
and Controller
Certification of the Chief Executive Officer
I, Paul V. Lombardi, hereby certify that:
1. I have reviewed this annual report on Form 10-K;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: November 1, 2002 /S/ Paul V. Lombardi
--------------------
Paul V. Lombardi
President and Chief Executive Officer
Certification of the Chief Financial Officer
I, Patrick C. FitzPatrick, hereby certify that:
1. I have reviewed this annual report on Form 10-K;
2. Based on my knowledge, this to annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this to annual report.
Date: November 1, 2002 /S/ Patrick C. FitzPatrick
--------------------------
Patrick C. FitzPatrick
Senior Vice President -
Chief Financial Officer
DynCorp and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Fiscal Years Ended, 2001, 2000 and 1999
(Dollars in thousands)
Balance at Charged to Write-off of Balance
Beginning Costs and Uncollectible At End
Description of Period Expenses Accounts Other of Period
- ----------- --------- -------- -------- ----- ---------
Year Ended December 27, 2001
allowance for doubtful accounts $ 2,804 $ 2,605 $ (667) $1,895 $ 6,637
Year Ended December 28, 2000
allowance for doubtful accounts $ 3,156 $ 220 $ (588) $ 16 $ 2,804
Year Ended December 30, 1999
allowance for doubtful accounts $ 1,126 $ 1,434 $ (130) $ 726 $ 3,156