FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2002 Commission file number 1-3879
DynCorp
(Exact name of registrant as specified in its charter)
Delaware 36-2408747
(State of incorporation or organization) (I.R.S. Employer Identification No.)
11710 Plaza America Drive, Reston, Virginia 20190
(Address of principal executive offices) (Zip Code)
(703) 261-5000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 2, 2002
----- -----------------------------
Common Stock, $0.10 par value 10,552,119
This amendment for Form 10-Q is being filed to give effect to the revisions of
the Company's financial statements, as discussed in Note 2 to the Consolidated
Condensed Financial Statements, included in Part I., Item 1.
DYNCORP AND SUBSIDIARIES
FORM 10-Q/A
FOR THE QUARTER ENDED MARCH 28, 2002
(Revised - See Note 2)
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
March 28, 2002 and December 27, 2001 3-4
Consolidated Condensed Statements of Operations for
Three Months Ended March 28, 2002 and March 29, 2001 5
Consolidated Condensed Statements of Cash Flows for
Three Months Ended March 28, 2002 and March 29, 2001 6
Consolidated Statement of Stockholders' Equity for
Three Months Ended March 28, 2002 7
Notes to Consolidated Condensed Financial Statements 8-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23-24
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal proceedings 24-26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certification of the Chief Executive Officer 28
Certification of the Chief Financial Officer 29
PART I. FINANCIAL INFORMATION
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 28, 2002 AND DECEMBER 27, 2001
(In thousands)
March 28,
2002
UNAUDITED
(Revised- December 27,
See Note 2) 2001
----------- ----
Assets
- ------
Current Assets:
Cash and cash equivalents $ 32,105 $ 15,078
Accounts receivable (net of allowance for doubtful accounts
of $7,188 in 2002 and $6,637 in 2001) 323,724 345,358
Other current assets 53,739 37,933
-------- --------
Total current assets 409,568 398,369
Property and Equipment (net of accumulated depreciation
and amortization of $27,667 in 2002 and $26,599 in 2001) 21,130 20,959
Goodwill 107,814 103,185
Intangible Assets (net of accumulated amortization of
$24,309 in 2002 and $24,454 in 2001) 20,835 27,240
Other Assets 47,950 48,687
-------- ---------
Total Assets $607,297 $598,440
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 28, 2002 AND DECEMBER 27, 2001
(In thousands, except share amounts)
March 28,
2002
UNAUDITED
(Revised- December 27,
See Note 2) 2001
----------- ----
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes payable and current portion of long-term debt $ 25,124 $ 20,123
Accounts payable 26,313 19,420
Deferred revenue and customer advances 6,230 6,195
Accrued liabilities 199,946 207,961
------- -------
Total current liabilities 257,613 253,699
Long-Term Debt 258,386 264,482
Other Liabilities and Deferred Credits 51,190 44,768
Contingencies and Litigation - -
Temporary Equity:
Redeemable common stock at redemption value-
ESOP shares, 7,107,858 and 7,142,510
shares issued and outstanding in 2002 and 2001,
respectively, subject to restrictions 335,428 326,368
Other redeemable common stock, 286,217 shares issued
and outstanding in 2002 and 2001 7,448 6,967
Stockholders' Equity:
Common stock, par value ten cents per share, authorized
20,000,000 shares; issued 5,331,216 and 5,296,146 shares
in 2002 and 2001, respectively 535 530
Paid-in surplus 137,427 138,052
Accumulated other comprehensive loss (833) (1,081)
Reclassification to temporary equity for redemption value
greater than par value (342,141) (332,596)
Deficit (55,316) (59,681)
Common stock held in treasury, at cost; 2,180,442 and
2,196,853 shares in 2002 and 2001, respectively (42,440) (43,068)
--------- ---------
Total Liabilities and Stockholders' Equity $607,297 $598,440
========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
UNAUDITED
Three Months Ended
------------------
March 28, March 29,
2002 (Revised 2001 (Revised
- See Note 2) - See Note 2)
------------- -------------
Revenues $542,341 $438,979
Costs and expenses:
Costs of services 515,182 415,258
Corporate general and administrative 7,617 6,827
Interest income (68) (293)
Interest expense 7,192 8,377
Amortization of intangibles of acquired companies 519 1,911
Other income, net of miscellaneous other expenses 1,793 (58)
-------- --------
Total costs and expenses 532,235 432,022
Earnings before income taxes and minority interest 10,106 6,957
Provision for income taxes 3,073 2,787
-------- --------
Earnings before minority interest 7,033 4,170
Minority interest 2,187 476
-------- --------
Net earnings $ 4,846 $ 3,694
======== ========
Accretion of other redeemable common stock
to redemption value 481 551
Common stockholders' share of net earnings $ 4,365 $ 3,143
======== ========
Basic earnings per share $ 0.41 $ 0.30
Diluted earnings per share $ 0.38 $ 0.29
Weighted average number of shares
outstanding for basic earnings per share 10,645 10,545
Weighted average number of shares
outstanding for diluted earnings per share 11,510 11,025
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Three Months Ended
------------------
March 28, March 29,
2002 (Revised 2001 (Revised
- See Note 2) - See Note 2)
------------- -------------
Cash Flows from Operating Activities:
Common stockholders' share of net earnings $ 4,365 $ 3,143
Adjustments to reconcile common stockholders' share of net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization 4,883 4,787
Accretion of other redeemable common stock to redemption value 481 551
Gain on sale of assets of DynServices.com (130) -
Deferred income taxes 575 121
Equity in net losses of unconsolidated investment 1,920 -
Change in minority interest 2,185 100
Other 667 214
Changes in current assets and liabilities, net of acquisitions and
dispositions:
Decrease in current and certain other assets except cash and cash
equivalents 5,783 16,608
Decrease in current and certain other liabilities excluding notes
payable and current portion of long-term debt (22) (28,665)
-------- ---------
Cash provided by (used in) operating activities 20,707 (3,141)
-------- ---------
Cash Flows from Investing Activities:
Sale of property and equipment 172 2,640
Purchase of property and equipment (2,371) (1,487)
(Increase) decrease in investments in unconsolidated affiliates (553) 768
Dividends paid to joint venture partners (393) (154)
Proceeds from the sale of assets of DynServices.com 400 -
Other 317 (105)
-------- ---------
Cash (used in) provided by investing activities (2,428) 1,662
-------- ---------
Cash Flows from Financing Activities:
Payments on indebtedness (56,902) (54,400)
Proceeds from debt issuance 55,650 54,400
Other - (411)
-------- ---------
Cash used in financing activities (1,252) (411)
-------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 17,027 (1,890)
Cash and Cash Equivalents at Beginning of the Period 15,078 12,954
-------- ---------
Cash and Cash Equivalents at End of the Period $32,105 $ 11,064
======== =========
Supplemental Cash Flow Information:
Cash paid for income taxes $ 1,011 $ 6,735
======== =========
Cash paid for interest $ 7,305 $ 9,435
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
UNAUDITED
Reclassification
for Redemption Accumulated Other
Common Paid-in Value Greater Treasury Comprehensive
Stock Surplus than Par Value Deficit Stock (Loss)/Income
----- ------- -------------- ------- ----- -------------
Balance, December 27, 2001 $530 $138,052 $(332,596) (59,681) $(43,068) $(1,081)
Employee compensation plans
(option exercises, restricted
stock plan, incentive bonus) 1 (1,106) 628
Reclassification to redeemable
common stock 4 (9,064)
Accretion of other redeemable
common stock to redemption
value 481 (481) (481)
Adjustment to fair value of
derivative financial instrument 205
Translation adjustment and other 43
Net earnings (Revised-See 4,846
Note 2)
------------------------------------------------------------------------------------
Balance, March 28, 2002 $535 $137,427 $(342,141) $(55,316) $(42,440) $ (833)
==== ======== ========== ========= ========= ========
(Revised - See Note 2)
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 28, 2002
(Dollars in thousands, except per share amounts)
UNAUDITED
Note 1. Basis of Presentation and Significant Accounting Policies
DynCorp, a Delaware Corporation, (the "Company") has prepared the unaudited
consolidated condensed financial statements included herein pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is recommended that these condensed financial statements
are read in conjunction with the financial statements and the notes thereto
included in the Company's annual report on Form 10-K/A, Amendment No. 2 for
the fiscal year ended December 27, 2001. In the opinion of the Company, the
unaudited consolidated condensed financial statements included herein re-
flect all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, the results of opera-
tions and the cash flows for such interim periods. The results of opera-
tions for such interim periods are not necessarily indicative of the re-
sults for the full year. Certain amounts presented for prior periods have
been reclassified to conform to the 2002 presentation.
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 March 28, 2002 and December 27, 2001.
Comprehensive Income
For the three months ended March 28, 2002, total comprehensive income was
$5.1 million and includes, in addition to net earnings, translation
adjustment and other of $0.04 million, and the adjustment to fair value of
derivative financial instruments of $0.2 million. The components of
accumulated other comprehensive loss as of March 28, 2002 consists of
translation adjustment and other of ($0.02) million, an adjustment to fair
value of derivative financial instruments of ($0.7) million, and the
cumulative effect of a change in accounting principle of ($0.1) million for
the adoption of the Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities."
Note 2. Change in Accounting Method and Revision of Financial Statements
Subsequent to the issuance of the Company's financial statements for the
quarter ended March 28, 2002, the Company revised certain information in
the Consolidated Condensed Financial Statements for the three months ended
March 28, 2002 and March 29, 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 or 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.
As a result, the financial statements of the Company for the three months
ended March 28, 2002 and March 29, 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 change in accounting method did not have any effect on the
Company's cash flows in 2002 or 2001.
The effects of the revisions for the change in accounting method on
long-term service contracts on the March 28, 2002 financial data are
presented in the table below. The "As Reported" numbers are taken from the
previously filed Form 10-Q for the quarterly period ended March 28, 2002.
Three Months Ended
(Unaudited)
-----------
March 28, March 28,
2002 2002
Statement of Operations Data: As Reported As Revised
- ----------------------------- ----------- ----------
Revenues $544,779 $542,341
Cost of services 514,341 515,182
Earnings before income taxes and
minority interest 13,385 10,106
Provision for income taxes 4,606 3,073
Minority interest 1,263 2,187
Net earnings 7,516 4,846
Common stockholders' share of net
earnings 7,035 4,365
Common stockholders' share of net
earnings per common share:
Basic earnings per share $ 0.66 $ 0.41
Diluted earnings per share $ 0.61 $ 0.38
Balance Sheet Data:
- -------------------
Accounts receivable, net of allowance for
doubtful accounts $334,794 $323,724
Other current assets 56,199 53,739
Goodwill 103,496 107,814
Other assets 48,448 47,950
Total assets 617,007 607,297
Accrued liabilities 202,758 199,946
Other liabilities and deferred credits 50,749 51,190
Deficit (47,977) (55,316)
The effects of the revisions on the March 29, 2001 and December 27, 2001
financial data were previously disclosed in the Company's 2001 annual re-
port on Form 10-K/A, Amendment No. 2. See Note 2 to the Consolidated Fi-
nancial Statements in Item 8 of the 2001 Form 10-K/A, Amendment No. 2 for a
discussion of these revisions.
Note 3. Other Current Assets
Other current assets as of March 28, 2002 and December 27, 2001 included
$28.8 million and $8.8 million of inventories on long-term contracts,
respectively.
Note 4. Redeemable Common Stock
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 Employee
Stock Ownership Plan ("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 the Savings Plans participants have the
same distribution and put rights for these ESOP shares as they had in the
ESOP. All rights and obligations of the ESOP remain intact in the new
plans. In accordance with the Employee Retirement Income Security Act
regulations and the Savings Plans' documents, the Company is obligated,
unless the Savings Plans' Trust purchases the shares, to purchase certain
distributed common stock shares transferred from the former ESOP from
former participants in the ESOP on retirement or termination at fair value
as long as the Company's common stock is not publicly traded. However, 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.
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. Under a contemporaneous registration rights
agreement, the holders of these shares of stock will have a put right to
the Company commencing on December 10, 2003, at a price of $40.53 per
share, unless one of the following events has occurred prior to such date
or the exercise of the put right: (1) an initial public offering of the
Company's common stock has been consummated; (2) all the Company's common
stock has been sold; (3) all the Company's assets have been sold in such a
manner that the holders have received cash payments; or (4) the Company's
common stock has been listed on a national securities exchange or
authorized for quotation on the Nasdaq National Market System for which
there is a public market of at least $100 million for the Company's common
stock. If, at the time of the holders' exercise of the put right the
Company is unable to pay the put price because of financial covenants in
loan agreements or other provisions of law, the Company will not honor the
put at that time, and the put price will escalate for a period of up to
four years, at which
time the put must be honored. The escalation rate increases during such
period until the put is honored, and the rate varies from an annualized
factor of 22% for the first quarter after the put is not honored up to 52%
during the sixteenth quarter. 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.
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
Redeemable March 28, Redeemable December 27,
Shares Value 2002 Shares Value 2001
------ ----- ---- ------ ----- ----
ESOP Shares 2,973,086 $48.50 $144,195 2,995,783 $47.00 $140,802
4,134,772 $46.25 191,233 4,146,727 $44.75 185,566
--------- ------- --------- -------
7,107,858 $335,428 7,142,510 $326,368
========= ======== ========= ========
Other Shares 286,217 $26.02 $ 7,448 286,217 $24.34 $ 6,967
========= ======== ========= ========
Note 5. Income Taxes
The provisions for income taxes in 2002 and 2001 are based upon estimated
effective tax rates. These rates include the impact of permanent
differences between the book bases of assets and liabilities recognized for
financial reporting purposes and the bases recognized for tax purposes.
Note 6. Earnings Per Share ("EPS")
The following table sets forth (in thousands) the reconciliation of shares
for basic EPS to shares for diluted EPS. Basic EPS is computed by dividing
common stockholders' share of net earnings by the weighted average number
of common shares outstanding and contingently issuable shares. The weighted
average number of common shares outstanding includes issued shares less
shares held in treasury and any unallocated Savings Plans' shares. Shares
earned and vested but unissued under the Restricted Stock Plan are
contingently issuable shares whose conditions 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 options outstanding, assuming
the treasury stock method.
Three Months Ended
------------------
March 28, March 29,
2002 2001
---- ----
Weighted average shares outstanding for basic EPS 10,645 10,545
Effect of dilutive securities:
Stock options 865 480
------ ------
Weighted average shares outstanding for diluted EPS 11,510 11,025
====== ======
Note 7. Goodwill and Other Intangible Assets - Adoption of Statement 142
The Company has adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," beginning December 28, 2001, the first day of fiscal 2002. The
provisions of SFAS No. 142 eliminate amortization of goodwill and require
an impairment assessment at least annually by applying a fair-value based
test. Accordingly, the Company has eliminated amortization in 2002 for
goodwill and the assembled workforce intangible asset. The total carrying
amounts for these intangible assets are $103.2 million and $4.6 million,
respectively as of March 28, 2002. The Company has identified the reporting
units to be tested for the goodwill impairment
test which will be measured as of the beginning of the fiscal year. 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.
The Company's contract backlog and core development intangible assets are
still subject to amortization under SFAS No. 142. Amortization for the
first quarter of 2002 for these intangible assets totaled $0.6 million.
Estimated aggregate amortization expense for these intangible assets for
the next five years totals: $2.1 million in each of 2002, 2003, and 2004
and $0.5 million in 2005 and 2006, respectively. The following table pre-
sents the intangible assets, net of accumulated amortization, as of
March 28, 2002 that are required to continue to be amortized under SFAS No.
142:
Intangible Assets, Net of Gross Accumulated
Accumulated Amortization Carrying Amount Amortization
------------------------- --------------- ------------
Contracts acquired $ 1,703 $ 1,514
Core and developed technology 14,800 5,282
------- -------
$16,503 $ 6,796
======= =======
The table above excludes capitalized software that is not covered by SFAS
No. 142. Capitalized software, net of accumulated amortization totals $11.1
million and $12.4 million as of March 28, 2002 and December 27, 2001,
respectively. The following table presents adjusted net income and earnings
per share for the three months ended March 29, 2001, in comparison to the
results for the three months ended March 28, 2002, to show what the impact
would have been if SFAS No. 142 had been adopted at the beginning of fiscal
2001. The adjusted results presented below are net of taxes.
Three Months Ended
------------------
March 28, March 29,
2002 2001
(Revised - (Revised -
See Note 2) See Note 2)
----------- -----------
Common stockholders' share of net earnings $4,365 $3,143
Add back: Goodwill amortization - 522
Add back: Assembled workforce amortization - 134
------ ------
Adjusted common stockholders' share of net
earnings $4,365 $3,799
====== ======
Basic earnings per share:
Common stockholders' share of net earnings $0.41 $0.30
Goodwill amortization - 0.05
Assembled workforce amortization - 0.01
-- ----
Adjusted common stockholders' share of net
earnings $0.41 $0.36
===== =====
Diluted earnings per share:
Common stockholders' share of net earnings $0.38 $0.29
Goodwill amortization - 0.04
Assembled workforce amortization - 0.01
-- ----
Adjusted common stockholders' share of net
earnings $0.38 $0.34
===== =====
Note 8. Recently Issued Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," which required that all gains and losses from
extinguishment of debt to be aggregated and classified as an extraordinary
item if material. SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary only if they meet
criteria in Accounting Principles Board Opinion No. 30, thus distinguishing
transactions that are part of recurring operations from those that are
unusual or infrequent, or that meet the criteria for classification as an
extraordinary item. SFAS No. 145 amends SFAS No. 13, "Accounting for
Leases", to require that lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner
as sale-leaseback transactions. In addition, SFAS No. 145 rescinds SFAS No.
44, "Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which
are not currently applicable to the Company. The provisions of SFAS No. 145
as they relate to the rescission of SFAS No. 4 shall be applied in fiscal
year 2003. Certain provisions related to SFAS No. 13 are effective for
transactions occurring after May 15, 2002. Management does not expect SFAS
No. 145 to have a material impact on the Company's results of operations or
financial condition.
Note 9. Business Segments
Effective January 2002, the Company realigned its five strategic business
segments into four segments. DynCorp Information and Enterprise Technology
("DI&ET") and DynCorp Information Systems LLC ("DIS") were combined into
one strategic business segment, DynCorp Systems and Solutions ("DSS"), in
order to structure one business segment providing integrated information
technology and business functional outsourcing to the federal government.
The business segment information for 2001 has been restated to give effect
to this change. DSS provides a wide range of information technology
services and other professional services including network and
communications engineering, government operational outsourcing, security
and intelligence programs. DynCorp International LLC ("DI") handles all of
the Company's overseas business, including information technology
solutions, technical services, and worldwide maintenance support to U.S.
military aircraft. DynCorp Technical Services ("DTS") provides a wide
variety of specialized technical services including aviation services,
range technical services, base operations, and logistics support.
AdvanceMed ("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.
Revenues, operating profit and identifiable assets for the Company's four
business segments for 2002 and the comparable periods for 2001 are
presented below:
Three Months Ended
------------------
March 28, March 29,
2002 (Revised 2001 (Revised -
- See Note 2) See Note 2) (b)
------------- ---------------
Revenues
- --------
DSS $ 224,537 $ 187,854
DI 164,452 118,657
DTS 139,212 117,580
ADVMED 14,140 14,888
--------- ---------
$ 542,341 $ 438,979
========= =========
Operating Profit (Loss) (a)
- ---------------------------
DSS $ 14,929 $ 9,412
DI 7,211 8,527
DTS 3,743 5,006
ADVMED (734) 297
--------- ---------
25,149 23,242
Corporate general and administrative 7,617 6,827
Interest income (68) (293)
Interest expense 7,192 8,377
Goodwill amortization - 914
Amortization of other intangibles of acquired companies 519 997
Minority interest included in operating profit (2,187) (476)
Other miscellaneous 1,970 (61)
--------- ---------
Earnings before income taxes and minority interest $ 10,106 $ 6,957
March 28,
2002 (Revised - December 27,
See Note 2) 2001 (b)
----------- --------
Identifiable Assets
-------------------
DSS $ 281,211 $ 290,733
DI 96,996 94,464
DTS 106,827 100,573
ADVMED 27,098 26,880
Corporate 95,165 85,790
--------- ---------
$ 607,297 $ 598,440
========= =========
(a) Defined as the excess of revenues over operating expenses and certain
non-operating expenses.
(b) Data has been revised to give recognition to the current reportable segment
structure.
Note 10. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of DynCorp and its subsidiaries
(collectively, the "Company"). The discussion should be read in conjunction with
the interim consolidated condensed financial statements and notes thereto and
the Company's annual report on Form 10-K/A, Amendment No. 2 for the year ended
December 27, 2001.
Results of Operations
- ---------------------
The Company provides 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, Justice, and
Treasury, 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 following discusses the Company's results of operations and
financial condition (as revised - see "Change in Accounting Method and Revision
of Financial Statements" discussion below) for the three months ended March 28,
2002 and the comparable period for 2001.
The Company realigned the DIS strategic business segment effective January 2002
into the DynCorp Systems and Solutions ("DSS") strategic business segment (see
Note 9 to the Consolidated Condensed Financial Statements), and therefore the
DIS results of operations and financial position have been included in the DSS
financial information.
Change in Accounting Method and Revision of Financial Statements
- ----------------------------------------------------------------
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 28, 2002, the Company revised certain information in the
Consolidated Condensed Financial Statements for the three months ended March 28,
2002 and March 29, 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 or
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.
As a result, the financial statements of the Company for the three months ended
March 28, 2002 and March 29, 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 change in accounting method did not have any
effect on the Company's cash flows in 2002 or 2001.
As a result of the revisions described above, reported common stockholders'
share of net earnings decreased by $2.7 million, from $7.0 million to $4.4
million for the three months ended March 28, 2002. Reported common stockholders'
share of net earnings increased by $0.3 million, from $2.8 million to $3.1
million for the three months ended March 29, 2001. Reported common stockholders'
share of net earnings per diluted share decreased from $0.61 to $0.38 for the
three months ended March 28, 2002. Reported common stockholders' share of net
earnings per diluted share increased from $0.26 to $0.29 for the three months
ended March 29, 2001.
The effects of the revisions for the change in accounting method on certain
long-term service contracts on the March 28, 2002 financial data are presented
in Note 2 to these Consolidated Condensed Financial Statements. The "As
Reported" numbers are taken from the previously filed Form 10-Q for the
quarterly period ended March 28, 2002.
Revenues and Operating Profit
- -----------------------------
Revenues for the first quarter of 2002 were $542.3 million, as compared to
$439.0 million for the comparable period in 2001, an increase of $103.4 million,
or 23.5%. Operating profit was $25.1 million for the first quarter of 2002,
compared to $23.2 million for the comparable period in 2001, an increase of $1.9
million or 8.2%. Operating profit is defined as the excess of revenues over cost
of services and certain non-operating income and expenses, which are included in
Other Income, net of Other Miscellaneous Expenses on the Consolidated Condensed
Statements of Operations. See the "Change in Accounting Method and Revision of
Financial Statements" discussion above and in Note 2 to the Consolidated
Condensed Financial Statements for the impact on revenues and operating profit
relating to the Company's change in its method of accounting on long-term
service contracts. The increase in both revenues and operating profit was
attributable primarily to several new contract wins and increased tasking on
existing contracts. The increase in operating profit is due to losses on several
contracts in the first quarter of 2001 that did not continue in the first
quarter of 2002, and increased profit due to additional revenue in the first
quarter of 2002 for contract costs that were recognized in a prior period.
DynCorp Systems and Solutions ("DSS") had revenues of $224.5 million for the
first quarter of 2002, compared to $187.9 million for the first quarter of 2001,
an increase of $36.7 million or 19.5%. The increase in revenues in the first
quarter of 2002 compared to the first quarter of 2001 resulted primarily from
the start-up of two new contracts, one which started in the third quarter of
2001 for updated office automation, primarily of desk top computers, servers,
and networks, for the Federal Bureau of Investigations ("FBI"), and the other to
provide information technology to the SEC. Also contributing to the revenue
increase was expansion of a U.S. Army program for vaccine technology services,
growth in a contract that provides battlefield simulation system support
services and maintenance for the U.S. Army, and growth in a DoD contract that
provides security background investigations. Partially offsetting these
increases in revenue was the completion of a subcontract providing operations
management to the Department of Energy ("DoE"). Revenues for the three months
ended March 29, 2001 for this subcontract were $24.9 million.
For the first quarter ended March 28, 2002, operating profit for DSS increased
by $5.5 million, or 58.6%, to $14.9 million from $9.4 million in the first
quarter of 2001. The increase in operating profit resulted from the new FBI and
SEC contracts and the increased tasking on the vaccine technology, battlefield
simulation, and the security background investigations contracts which were all
noted above. Also contributing to the increase in operating profits were
improved profitability on a contract with the U.S. Postal Service and losses on
contracts in 2001 that did not continue in 2002. These losses were part of
DynCorp Management Resources, Inc. ("DMR"), which was divested on December 27,
2001. Partially offsetting these increases to operating profit was the
completion of the DoE contract in the third quarter of 2001, which is noted
above. Operating profit on this DoE contract for the three months ended 2001 was
$0.9 million.
DynCorp International's ("DI") first quarter 2002 revenues were $164.5 million
compared to $118.7 million for the first quarter of 2001, an increase of $45.8
million or 38.6%. Operating profit decreased by $1.3 million to $7.2 million, or
15.4%, from $8.5 million in the first quarter of 2001. The increase in revenues
resulted primarily from growth in a contract that provides maintenance, storage,
and security support to the United States Central Command Air Forces, a new
contract that started up in the second half of 2001 that provides maintenance
and parts to military aircraft, and increased tasking on a contract with the
Department of State ("DoS") in support of the government's drug eradication
program, primarily in South America. DI also commenced performance on a new
commercial subcontract in Saudi Arabia involving repair and maintenance of Saudi
military aircraft. DI's decrease in operating profit for the first quarter of
2002 compared to the first quarter of 2001 resulted from significant upfront
costs on a new contract that provides maintenance and parts to military aircraft
discussed above . DI's decrease in operating profit is offset by additional
revenue on contract costs that were recognized in a prior period.
DynCorp Technical Services' ("DTS") first quarter 2002 revenues were $139.2
million compared to $117.6 million for the first quarter of 2001, an increase of
$21.6 million or 18.4%. Operating profit decreased by $1.3 million to $3.7
million, or 25.2%, from $5.0 million in the first quarter of 2001. The increase
in revenues resulted from a new military aircraft maintenance and base
operations support contract at Andrews AFB that started up in the second quarter
of 2001 and another similar contract at Vance AFB that was starting operations
in the first quarter of 2001 and was fully operational in the first quarter of
2002. Revenue also increased from tasking increases on some existing base
operations contracts and two new contracts: one providing support activities for
homeland security and another providing repair and maintenance to the California
Department of Forestry helicopters. Management expects future revenue and
operating profit increases due to the phase-in of another new contract with the
U.S. Air Force in second quarter of 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.
AdvanceMed ("ADVMED") had revenues of $14.1 million in the first quarter of 2002
as compared to $14.9 million for the comparable period in 2001, a decrease of
$0.7 million or 5.0%. Operating profit decreased by $1.0 million to a loss of
$(0.7) million from a profit of $0.3 million in the same period of 2001. The
decrease in revenues resulted mostly from the reduction in work scope on a
contract that provides external quality review to health care organizations in
the State of Texas. The decrease in operating profit resulted from increased
costs on a commercial product introduction and the addition of a sales team for
this commercial product, which was not reflected in prior year costs. The
commercial product provides performance measurement portfolios designed to
improve the delivery of high-risk, high-cost healthcare services. AdvanceMed has
strategies in place to grow new customers for this commercial product and
expects future revenue and operating profit increases from these strategies.
Cost of Services
- ----------------
Cost of services (as revised - see "Change in Accounting Method and Revision of
Financial Statements" discussion above) for the first quarter 2002 was 95.0% of
revenue as compared to 94.6% for the comparable period in 2001. The decrease in
margins in the first quarter of 2002 compared to the first quarter of 2001 were
primarily due to significant upfront costs on a new contract that provides
maintenance and parts to military aircraft.
Corporate General and Administrative Expense
- --------------------------------------------
Corporate general and administrative expense for the first quarter of 2002 was
$7.6 million as compared to $6.8 million for the same period last year, an
increase of $0.8 million, or 11.6%. Corporate general and administrative expense
as a percentage of revenue was 1.4% and 1.6% for the three months ended March
28, 2002 and March 29, 2001, respectively. The increase in corporate general and
administrative expense was due to cost associated with the potential sale of the
Company to or its merger with a third party. In the first quarter of 2002, the
Board of Directors authorized management to consider interests of third parties
in a merger or sale of the Company. 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 these
circumstances.
Interest Expense
- ----------------
Interest expense was $7.2 million in the first quarter of 2002, down from $8.4
million in the first quarter of 2001. Interest expense as a percentage of
revenue was 1.3% for the three months ended March 28, 2002, as compared to 1.9%
for the comparable period in 2001. The decrease in interest expense was
attributable to lower average debt levels and lower average interest rates in
the first three months of 2002 as compared to the first three months of 2001.
The average levels of indebtedness were approximately $284.3 million and $284.6
million during the three months ended March 28, 2002 and March 29, 2001,
respectively.
Amortization of Intangibles of Acquired Companies
- -------------------------------------------------
Amortization of intangibles of acquired companies was $0.5 million for the
quarter ended March 28, 2002 as compared to $1.9 million (as revised - see
"Change in Accounting Method and Revision of Financial Statements" discussion
above) for the first quarter of 2001, a decrease of $1.4 million. The decrease
resulted from the Company's adoption, on December 28, 2001, the first day of
fiscal year 2002, of the Statement of Financial Accounting Standard ("SFAS") No.
142, "Goodwill and Other Intangible Assets". The provisions of SFAS No. 142
eliminated amortization of goodwill and accordingly, the Company eliminated
amortization of goodwill beginning December 28, 2001. The provisions also
require an impairment assessment at least annually by applying a fair-value
based test. See Note 7 to the Consolidated Condensed Financial Statements
included in this Quarterly Report on Form 10-Q/A to show what the impact would
have been on the first quarter 2001 financial results if SFAS No. 142 had been
adopted at the beginning of fiscal 2001.
Other Income, Net of Miscellaneous Other Expenses
- -------------------------------------------------
Other income, net of miscellaneous other expenses decreased $1.9 million and
consists mostly of equity in net losses of an unconsolidated investment, which
represents the Company's share of the estimated net losses of DynTek.
Income Taxes
- ------------
The provisions for income taxes in 2002 and 2001 are based upon estimated
effective tax rates, including the impact of permanent differences between the
book bases of assets and liabilities recognized for financial reporting purposes
and the bases recognized for tax purposes. The provision for income taxes (as
revised - see "Change in Accounting Method and Revision of Financial Statements"
discussion above) increased by $0.3 million for the three months ended March 28,
2002 from the comparable period in 2001. The increase was due to higher pretax
income partially offset by a lower effective tax rate in the first quarter of
2002, compared to the same period in 2001. The Company's effective tax rate
approximated 38.8% for the three months ended March 28, 2002, compared to 43.0%
in the comparable period in 2001, after taking into account the effect of
minority interests.
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 $7.0 billion at March 28, 2002, compared to $6.8
billion at December 27, 2001, a net increase of $0.2 billion. The backlog at
March 28, 2002 consisted of $2.2 billion for DTS, $2.3 billion for DI, $2.4
billion for DSS, and $0.1 billion for ADVMED compared to December 27, 2001
backlog of $2.0 billion for DTS, $2.2 billion for DI, $2.4 billion for DSS, and
$0.2 billion for ADVMED.
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 $152.0 million at March 28, 2002 compared to $144.7 million at
December 27, 2001, an increase of $7.3 million. The ratio of current assets to
current liabilities at March 28, 2002 and December 27, 2001 remained consistent
at 1.6. The increase in working capital was primarily due to decreases in
certain accrued expenses partially offset by a larger portion of the Senior
Secured Credit Agreement Term A debt that became current in the first quarter of
2002.
Cash Flows from Operating Activities
- ------------------------------------
For the three months ended March 28, 2002, the Company's cash flow from
operating activities provided $20.7 million, an increase of $23.8 million as
compared to the same period in 2001 where operating activities used $3.1
million. The increase in cash provided by operations resulted from higher
customer collections in the first three months of 2002 compared to the same
period in 2001.
Cash Flows from Investing Activities
- ------------------------------------
Investing activities used funds of $2.4 million in the three months ended March
28, 2002, as compared to $1.7 million funds provided in the three months ended
March 29, 2001. The use of funds in the first quarter of 2002 resulted mostly
from the purchase of property and equipment of $2.4 million. The cash provided
by investing activities in the first quarter of 2001 resulted mostly from the
sale of property and equipment.
Cash Flows from Financing Activities
- ------------------------------------
Financing activities for the three months ended March 28, 2002 used funds of
$1.3 million and included several short-term borrowings and subsequent payments
of a cumulated sum of $55.7 million under the Senior Secured Credit Agreement
Revolving Credit Facility maturing December 9, 2004. In addition, the Company
made an installment payment of $1.3 million on the Senior Secured Credit
Agreement Term A Loan in February of 2002. During the first quarter of 2001,
financing activities used funds of $0.4 million, which consisted primarily of
short-term borrowing and subsequent payments of a cumulated sum of $54.4
million.
Earnings before Interest, Taxes, Depreciation, and Amortization
- ---------------------------------------------------------------
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA") (as
revised - see "Change in Accounting Method and Revision of Financial Statements"
discussion above) as defined by management, consists of net earnings before
income tax provision, net interest expense, and depreciation and amortization.
EBITDA represents a measure of the Company's ability to generate cash 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 issue discount which are included in "interest expense" in the
Consolidated Statements of Operations and included in "amortization and
depreciation" in the Consolidated Statements of Cash Flows.
Readers are cautioned that the Company's definition of EBITDA may not
necessarily be comparable to similarly titled captions used by other companies
due to the potential inconsistencies in the method of calculation.
The following represents the Company's computation of EBITDA (in thousands):
Three Months Ended
------------------
March 28, March 29,
2002 (Revised 2001 (Revised
- See Note 2) - See Note 2)
------------- -------------
Net earnings $ 4,846 $ 3,694
Depreciation and amortization 4,883 4,787
Interest expense, net 7,124 8,084
Income taxes 3,073 2,787
Amortization of deferred debt expense (522) (472)
Debt issue discount (155) (11)
-------- -------
EBITDA $19,249 $18,869
======== =======
EBITDA (as defined above) increased by $0.4 million, or 2.0%, to $19.2 million
for the first quarter of 2002 as compared to the comparable period in 2001. The
increase in EBITDA in the three-month period in 2002 as compared to the similar
period in 2001, is primarily attributable to higher operating profits as
discussed above.
DynCorp Management Resources, Inc. ("DMR") Merger with DynTek, Inc.
- -------------------------------------------------------------------
On December 27, 2001 the Company divested DMR, its state and local government
services subsidiary, by merging it into TekInsight.com, Inc. The merger of
TekInsight.com, Inc. and DMR formed the new entity DynTek, Inc. ("DynTek"). As a
result of the merger, the Company received a 40% ownership interest in the new
entity. DynTek is a public company listed on NASDAQ under the symbol DYTK, and
is a provider of information technology and outsource management services to
state and local governments serving customers across 17 states. Notwithstanding
the merger, the Company continues to have contractual obligations for several
outstanding performance bonds on certain DMR contracts, which total
approximately $3.1 million as of March 28, 2002. DynTek has agreed to make its
best effort to replace the bonds with its own obligations. The Company has also
given the Commonwealth of Virginia certain assurances regarding DMR's
performance on a contract to provide non-emergency medical transportation
brokerage services in Virginia. Should DynTek default on the Virginia contracts
and/or any of the performance bonds, it could result in financial losses for the
Company. At the end of the first quarter 2002, management perceives the exposure
to loss on these items as low. 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 in
resolution of certain disputes 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 is currently seeking additional
financing.
Liquidity and Capital Resources
- -------------------------------
The carrying amounts reflected in the Consolidated Condensed Balance Sheets of
cash and cash equivalents, accounts receivable and contracts in process, and
accounts payable approximate fair value at March 28, 2002 due to the short
maturities of these instruments.
As of March 28, 2001 the Company's total debt was $283.5 million, a decrease of
$1.1 million from $284.6 million as of December 27, 2001, primarily due to the
February 2002 payment of $1.3 million made on the Term A Loan, partially offset
by the amortization of the discounts on the Subordinated Notes and the 9 1/2%
Senior Subordinated Notes discussed below.
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 $68.8 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 March 28, 2002, had no
borrowings. An installment payment of $1.3 million was paid on the Term A Loans
in February 2002. The Term A Loans are to be repaid in eleven more 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. 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 $10.6 million and $11.1 million at
March 28, 2002 and December 27, 2001, respectively, under the line of credit.
The amount available was $79.4 million and $78.9 million, respectively, as of
March 28, 2002 and December 27, 2001.
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
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 $38.0 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.
Chart Outlining Future Financial Commitments
- --------------------------------------------
The following table sets forth the Company's total contractual cash obligations
for the remaining nine months of 2002 and over the next four years and
thereafter (in thousands):
Cash Obligations Due by Year
----------------------------
April -
Contractual December
Cash Obligation Total 2002 2003 2004 2005 2006 Thereafter
- --------------- ----- ---- ---- ---- ---- ---- ----------
Long-term Debt $283,510 $19,028 $ 25,005 $28,083 $29,400 $47,500 $134,494
Operating Leases 238,027 35,208 42,968 36,790 27,600 25,643 69,818
Maximum Liability to
Repurchase ESOP
Shares 335,428 18,398 25,187 27,207 25,071 21,599 217,966
Liability to Repurchase
Other Redeemable
Common Stock 11,600 - 11,600 - - - -
-------- ------- -------- ------- ------- ------- --------
Total Contractual Cash
Obligations $868,565 $72,634 $104,760 $92,080 $82,071 $94,742 $422,278
======== ======= ======== ======= ======= ======= ========
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
$238.0 million, including $35.2 million for the remaining nine months of 2002.
Of the $35.2 million 2002 minimum lease payments, $11.0 million related to DIS
leases, $7.8 million related to a U.S. Postal Service contract, and $5.2 million
related to the new corporate headquarters building.
The Company is obligated to repurchase certain of its former Employee Stock
Ownership Plan ("ESOP") vested common stock shares (under a "put option") from
former ESOP participants 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. The Company's total contractual cash obligation to repurchase former
ESOP shares will fluctuate in the future as the independently determined fair
value fluctuates. The total obligation to repurchase former ESOP shares is
$335.4 million as of March 28, 2001, based on the independently determined fair
value as of February 21, 2002.
Under a registration rights agreement, the holders of the other redeemable
common 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. The
total obligation to repurchase other redeemable shares of the Company's stock is
$11.6 million as of March 28, 2002.
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 March 28, 2002 and
December 27, 2001.
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 3. 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 in the first quarter of 2002, the
Company's net earnings would have been approximately $39.1 thousand lower, or a
change of 0.8%. 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 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 the three months ended March 28, 2002
resulted in additional decreases in accumulated other comprehensive income of
$0.2 million. This swap is perfectly effective at its objective, and
accordingly, there are no existing gains or losses as of March 28, 2002 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.
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.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
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 $8.3 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 a predecessor of 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. See Note 2 for a discussion of revisions concerning the
accounting for such preacquisition estimates and the impact of those revisions
on the financial statements. 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
$42.7 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 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 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
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 currently 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 $8.3 million discussed above. The
estimated probable liability (included in Other Liabilities and Deferred Credits
on the Consolidated Condensed Balance Sheet) for these issues is approximately
$5.8 million and is substantially covered by insurance at March 28, 2002. 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 Condensed Balance Sheet) of
$5.1 million at March 28, 2002 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 March 28, 2002 that will have a material adverse effect on the
Company's consolidated financial condition, results of operations, or liquidity.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
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).
(b) 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.
SIGNATURES
----------
Pursuant to the requirements of the Securities 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 4, 2002 /s/ P.C. FitzPatrick
================ ====================
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: November 4, 2002 /s/ J.J. Fitzgerald
================ ===================
J.J. Fitzgerald
Vice President
and Corporate Controller
Certification of the Chief Executive Officer
I, Paul V. Lombardi, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q;
2. Based on my knowledge, this quarterly 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 quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.
Date: November 4, 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 quarterly report on Form 10-Q;
2. Based on my knowledge, this quarterly 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 quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.
Date: November 4, 2002 /s/ Patrick C. FitzPatrick
================ ==========================
Patrick C. FitzPatrick
Senior Vice President and Chief Financial Officer