FORM 10-Q/A, Amendment No. 1
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 June 27, 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 August 12, 2002
----- ---------------------------------
Common Stock, $0.10 par value 10,575,692
This amendment for Form 10-Q is being filed to give effect to the revisions of
the Company's financials 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, Amendment No. 1
FOR THE QUARTER ENDED JUNE 27, 2002
(Revised - See Note 2)
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
June 27, 2002 and December 27, 2001 3-4
Consolidated Condensed Statements of Operations for
Three and Six Months Ended June 27, 2002 and
June 28, 2001 5
Consolidated Condensed Statements of Cash Flows for
Six Months Ended June 27, 2002 and
June 28, 2001 6
Consolidated Statement of Stockholders' Equity for
Six Months Ended June 27, 2002 7
Notes to Consolidated Condensed Financial Statements 8-16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26-27
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 27-29
Item 6. Exhibits and Reports on Form 8-K 29-30
Signatures 31
Certification of the Chief Executive Officer 32
Certification of the Chief Financial Officer 33
PART I. FINANCIAL INFORMATION
-----------------------------
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 27, 2002 AND DECEMBER 27, 2001
(In thousands)
June 27,
2002
UNAUDITED
(Revised - December 27,
See Note 2) 2001
----------- ----
Assets
- ------
Current Assets:
Cash and cash equivalents $ 41,167 $ 15,078
Accounts receivable (net of allowance for doubtful accounts
of $7,879 in 2002 and $6,637 in 2001) 340,193 345,358
Other current assets 54,429 37,933
--------- ---------
Total current assets 435,789 398,369
Property and Equipment (net of accumulated depreciation
and amortization of $27,127 in 2002 and $26,599 in 2001) 21,229 20,959
Goodwill 107,814 103,185
Intangible Assets (net of accumulated amortization of
$25,163 in 2002 and $24,454 in 2001) 19,981 27,240
Other Assets 29,487 48,687
--------- ---------
Total Assets $ 614,300 $ 598,440
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 27, 2002 AND DECEMBER 27, 2001
(In thousands, except share amounts)
June 27,
2002,
UNAUDITED
(Revised - December 27,
See Note 2) 2001
----------- ----
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes payable and current portion of long-term debt $ 25,047 $ 20,123
Accounts payable 29,827 19,420
Deferred revenue and customer advances 5,531 6,195
Accrued liabilities 217,350 207,961
--------- ---------
Total current liabilities 277,755 253,699
Long-Term Debt 249,099 264,482
Other Liabilities and Deferred Credits 48,853 44,768
Contingencies and Litigation - -
Temporary Equity:
Redeemable common stock at redemption value -
ESOP shares, 7,077,838 and 7,142,510
shares issued and outstanding in 2002 and 2001,
respectively, subject to restrictions 368,649 326,368
Other redeemable common stock, 286,217 shares issued
and outstanding in 2002 and 2001 7,944 6,967
Stockholders' Equity:
Common stock, par value ten cents per share, authorized
20,000,000 shares; issued 5,364,244 and 5,296,146 shares
in 2002 and 2001, respectively 536 530
Paid-in surplus 137,290 138,052
Accumulated other comprehensive loss (741) (1,081)
Reclassification to temporary equity for redemption value
greater than par value (375,860) (332,596)
Deficit (57,733) (59,681)
Common stock held in treasury, at cost; 2,152,607 and
2,196,853 shares in 2002 and 2001, respectively (41,492) (43,068)
---------- ----------
Total Liabilities and Stockholders' Equity $ 614,300 $ 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 Six Months Ended
------------------ ----------------
June 27, 2002 June 28, 2001 June 27, 2002 June 28, 2001
(Revised - (Revised - (Revised - (Revised -
See Note 2) See Note 2) See Note 2) See Note 2)
----------- ----------- ----------- -----------
Revenues $594,396 $476,611 $1,136,737 $915,590
Costs and expenses:
Costs of services 562,518 449,657 1,077,700 864,915
Corporate general and administrative 7,216 7,199 14,834 14,026
Interest income (172) (159) (240) (453)
Interest expense 6,963 8,032 14,156 16,409
Amortization of intangibles of acquired companies 519 1,738 1,037 3,649
Other expense (other income) 18,081 6 19,873 (51)
-------- -------- ---------- --------
Total costs and expenses 595,125 466,473 1,127,360 898,495
(Loss) earnings before income taxes and
minority interest
(729) 10,138 9,377 17,095
(Benefit) provision for income taxes (206) 4,086 2,867 6,873
-------- -------- ---------- --------
(Loss) earnings before minority interest (523) 6,052 6,510 10,222
Minority interest 1,398 635 3,585 1,111
-------- -------- ---------- --------
Net (loss) earnings $(1,921) $ 5,417 $ 2,925 $ 9,111
======== ======== ========== ========
Accretion of other redeemable common stock to
redemption value 496 568 977 1,119
Common stockholders' share of net (loss) earnings $(2,417) $ 4,849 $ 1,948 $ 7,992
======== ======== ========== ========
Basic (loss) earnings per share $ (0.23) $ 0.46 $ 0.18 $ 0.76
======== ======== ========== ========
Diluted (loss) earnings per share $ (0.23) $ 0.44 $ 0.17 $ 0.72
======== ======== ========== ========
Weighted average number of shares
outstanding for basic earnings per share 10,662 10,559 10,654 10,552
Weighted average number of shares
outstanding for diluted earnings per share 10,662 11,106 11,566 11,061
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
Six Months Ended
----------------
June 27, June 28,
2002 2001
(Revised - (Revised -
See Note 2) See Note 2)
----------- -----------
Cash Flows from Operating Activities:
Common stockholders' share of net earnings $ 1,948 $ 7,992
Adjustments to reconcile common stockholders' share of net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 7,757 10,325
Accretion of other redeemable common stock to redemption value 977 1,119
Gain on sale of assets of DynServices.com (130) -
Deferred income taxes 575 121
Non-cash net losses of unconsolidated affiliates 2,219 527
Change in minority interest 3,585 1,111
Changes in pension asset and other postretirement benefit obligations 2,591 1,404
Non-cash reserve of investment in unconsolidated
affiliate 15,812 -
Other (877) (425)
Changes in current assets and liabilities, net of acquisitions and
dispositions:
(Increase) decrease in current assets and certain other assets except
cash and cash equivalents (8,041) 11,434
Increase (decrease) in current liabilities and certain other liabilities
excluding notes payable and current portion of long-term debt 14,718 (39,124)
------- ---------
Cash provided by (used in) operating activities 41,134 (5,516)
------- ---------
Cash Flows from Investing Activities:
Proceeds from sale of property and equipment 211 2,942
Purchases of property and equipment (4,009) (3,348)
Proceeds from investments in unconsolidated affiliates 307 29
Dividends paid to joint venture partners (1,015) (486)
Proceeds from the sale of assets of DynServices.com 400 -
Capitalized software costs (267) -
Other - (489)
------- ---------
Cash used in investing activities (4,373) (1,352)
------- ---------
Cash Flows from Financing Activities:
Payments on indebtedness (73,622) (159,250)
Proceeds from debt issuance 62,950 159,250
Other - 142
------- ---------
Cash (used in) provided by financing activities (10,672) 142
------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 26,089 (6,726)
Cash and Cash Equivalents at Beginning of the Period 15,078 12,954
------- ---------
Cash and Cash Equivalents at End of the Period $41,167 6,228
======= =========
Supplemental Cash Flow Information:
Cash paid for income taxes $ 9,563 $ 7,270
======= =========
Cash paid for interest $13,011 $ 17,618
======= =========
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 Deficit Accumulated Other
Common Paid-in Value Greater (Revised - Treasury Comprehensive
Stock Surplus than Par Value See Note 2) 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) (1,739) 1,576
Reclassification to redeemable
common stock 6 (42,287)
Accretion of other redeemable
common stock to redemption
value 977 (977) (977)
Adjustment to fair value of
derivative financial instrument 337
Translation adjustment and other 3
Net earnings (Revised - See 2,925
Note 2)
----------------------------------------------------------------------------------------
Balance, June 27, 2002 (Revised $ 536 $137,290 $(375,860) $(57,733) $(41,492) $ (741)
- - 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
JUNE 27, 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 ("SEC").
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 be
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
reflect all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position, the results of
operations and the cash flows for such interim periods. The results of
operations for such interim periods are not necessarily indicative of the
results for the full year. Certain 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 when a 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 June 27, 2002 and December 27, 2001.
Comprehensive Income
For the three and six months ended June 27, 2002, total comprehensive
(loss) income was $(1.8) million and $3.3 million, respectively. The $(1.8)
million for the three months ended June 27, 2002 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 $0.1
million. The $3.3 million for the six months ended June 27, 2002 includes,
in addition to net earnings, translation adjustment and other of $0.003
million, and the adjustment to fair value of derivative financial
instruments of $0.3 million. The components of accumulated other
comprehensive loss as of June 27, 2002 consist of translation adjustment
and other of $(0.04) million, an adjustment to fair value of derivative
financial instruments of $(0.6) 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."
Investment Recoverability
The Company periodically evaluates the recoverability of its equity
investments, in accordance with Accounting Principles Board No. 18, "The
Equity Method of Accounting for Investments in Common Stock," and if
circumstances arise in which a loss in value is considered to be other than
temporary, the Company will record a write-down of the investment to its
estimated fair value. The Company's recoverability analysis is based on the
projected undiscounted cash flows of the investments, which is the lowest
level of cash flow information available, or other appropriate methods.
During the second quarter of 2002, the Company r ecorded a write-off of
approximately $15.8 million, which represented the net balance of a certain
investment, which was stated in excess of its net realizable value. The
total charge was included in Other Expense (Other Income) on the Consol-
idated Condensed Statement of Operations for the six months ended June 27,
2002.
Note 2. Revision of Financial Statements
The Company previously issued financial statements for the three and six
months ended June 27, 2002 and June 28, 2001 in which it had reflected the
change in accounting methods discussed below. Subsequent to the issuance of
these financial statements, the Company had a re-audit of its financial
statements for the three fiscal years ended December 27, 2001, December 28,
2000, and December 30, 1999 completed by its new independent accountants
and it was determined that revenue recognition was also impacted by the
accounting change. Certain fixed price service contracts and other service
contracts had calculated revenue by using cost incurred in relation to
total estimated cost at completion as a measurement of progress toward
completion. Revenue for such contracts was adjusted in order to comply with
SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Fi-
nancial Statements," which prescribes recognizing revenue on a straight-
line basis over the contract period or by other appropriate methods to
measure services provided. As a result, revenue was adjusted for the three
and six month periods ended June 27, 2002 and June 28, 2001.
As reported in the previously filed Form 10-Q for the period ended June 27,
2002, the Company had discussions with the staff of the SEC regarding its
method of accounting for certain long-term service contracts and the re-
lated applicability of the percentage of completion method to service con-
tracts with the Federal Government. Previously, the Company followed the
historical industry-wide practice of recording income from long-term ser-
vice 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. Under
this method, income is recognized at a consistent profit margin over the
period of performance based on the estimated profit margin at the com-
pletion 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 SAB No. 101.
Following discussions with the SEC's staff, it was 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 in 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 of accounting on these long-term service contracts to be
in accordance with SEC SAB No. 101 or 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. The Company has applied this change
in accounting methods to its original Form 10-Q filing for the quarterly
period ended June 27, 2002 (filed August 19, 2002) to eliminate the
deferral of such cost or profits on service contracts. The previous change
did not have any effect on the Company's revenues. As a result of the
aforementioned re-audit, it was determined that revenue on certain
contracts should also have been revised.
The effects of the revisions are presented in the June 27, 2002 and June
28, 2001 unaudited quarterly financial data in the tables below. The "As
Reported" numbers are taken from the previously filed Form 10-Q for the
quarterly periods ended June 27, 2002 and June 28, 2001.
Three Months Ended (Unaudited) Six Months Ended (Unaudited)
------------------------------ ----------------------------
June 27, June 27, June 27, June 27,
2002 2002 2002 2002
Statement of Operations Data: As Reported As Revised As Reported As Revised
- ----------------------------- ----------- ---------- ----------- ----------
Revenues $595,011 $594,396 $1,139,790 $1,136,737
(Loss) earnings before income taxes and
minority interest (114) (729) 12,430 9,377
(Benefit) provision for income taxes (38) (206) 4,251 2,867
Minority interest 1,429 1,398 2,692 3,585
Net (loss) earnings (1,505) (1,921) 5,487 2,925
Common stockholders' share of net
(loss) earnings (2,001) (2,417) 4,510 1,948
Common stockholders' share of net
(loss) earnings per common share:
Basic (loss) earnings per share $ (0.19) $ (0.23) $ 0.42 $ 0.18
Diluted (loss) earnings per share $ (0.19) $ (0.23) $ 0.39 $ 0.17
Three Months Ended (Unaudited) Six Months Ended (Unaudited)
------------------------------ ----------------------------
June 28, June 28, June 28, June 28,
2001 2001 2001 2001
Statement of Operations Data: As Reported As Revised As Reported As Revised
- ----------------------------- ----------- ---------- ----------- ----------
Revenues $476,900 $476,611 $916,973 $915,590
Cost of services 449,657 449,657 865,252 864,915
Earnings before income taxes and
minority interest 10,427 10,138 18,141 17,095
Provision for income taxes 4,082 4,086 7,136 6,873
Minority interest 934 635 1,545 1,111
Net (loss) earnings 5,411 5,417 9,460 9,111
Common stockholders' share of net
earnings 4,843 4,849 8,341 7,992
Common stockholders' share of net
earnings per common share:
Basic earnings per share $ 0.46 $ 0.46 $ 0.79 $ 0.76
Diluted earnings per share $ 0.44 $ 0.44 $ 0.75 $ 0.72
June 27, 2002 June 27, 2002
Unaudited Unaudited
Balance Sheet Data: As Reported As Revised
- ------------------- ----------- ----------
Accounts receivable, net of allowance for
doubtful accounts $351,878 $340,193
Other current assets 50,047 54,429
Total assets 621,603 614,300
Accrued liabilities 217,491 217,350
Other liabilities and deferred credits 49,210 48,853
Deficit (50,928) (57,733)
Note 3. Other Current Assets
Other current assets as of June 27, 2002 and December 27, 2001 included
$20.8 million and $8.8 million of inventories on long-term contracts,
respectively.
Note 4. Accrued Liabilities
Accrued liabilities as of June 27, 2002 and December 27, 2001 included
$119.3 million and $106.1 million of accrued salaries, respectively.
Note 5. 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 June 27, Redeemable December 27,
Shares Value 2002 Shares Value 2001
------ ----- ---- ------ ----- ----
ESOP Shares 2,954,885 $53.25 $157,348 2,995,783 $47.00 $140,802
4,122,953 $51.25 211,301 4,146,727 $44.75 185,566
--------- -------- --------- --------
7,077,838 $368,649 7,142,510 $326,368
========= ======== ========= ========
Other Shares 286,217 $27.76 $ 7,944 286,217 $24.34 $ 6,967
========= ======== ========= ========
Note 6. 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 7. 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. For the three months ended June 27, 2002,
weighted average stock options outstanding of 970 thousand were not in-
cluded in the computation of diluted EPS because to do so would have been
antidilutive. Therefore, the diluted loss per share for the three months
ended June 27, 2002 was computed in the same manner as the basic loss per
share.
Three Months Ended Six Months Ended
------------------ ----------------
June 27, June 28, June 27, June 28,
2002 2001 2002 2001
---- ---- ---- ----
Weighted average shares outstanding for basic EPS 10,662 10,559 10,654 10,552
Effect of dilutive securities:
Stock options - 547 912 509
------ ------ ------ ------
Weighted average shares outstanding for diluted EPS 10,662 11,106 11,566 11,061
====== ====== ====== ======
Note 8. 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, which includes assembled workforce of $4.6 million as of June 27,
2002, previously classified as an intangible asset as of December 27, 2001.
The total carrying amount for goodwill is $107.8 million and $103.2 million
as of June 27, 2002 and December 27, 2001, respectively. 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. The Company 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 half of 2002 for these intangible assets totaled $1.0 million.
Estimated aggregate amortization expense for these intangible assets for
the next five years totals: $2.1 million in each of 2002 and 2003, $2.0
million in 2004, and $0.5 million in 2005 and 2006, respectively. The
following table presents these intangible assets, net of accumulated
amortization, as of June 27, 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 $ 1,543
Core and developed technology 14,800 5,800
-------- --------
$ 16,503 $ 7,343
======== ========
The table above excludes capitalized software that is not covered by SFAS
No. 142. Capitalized software, net of accumulated amortization totals $10.8
million and $12.4 million as of June 27, 2002 and December 2001,
respectively. The following table presents adjusted net income and earnings
per share for the three and six months ended June 28, 2001, in comparison
to the results for the three and six months ended June 27, 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 Six Months Ended
------------------ ----------------
June 27, June 28, June 27, June 28,
2002 2001 2002 2001
(Revised - (Revised - (Revised - (Revised -
See Note 2) See Note 2) See Note 2) See Note 2)
----------- ----------- ----------- -----------
Common stockholders' share of net (loss)
earnings $ (2,417) $ 4,849 $ 1,948 $ 7,992
Add back: Goodwill amortization - 548 - 1,057
Add back: Assembled workforce amortization - 134 - 267
---------- ------- ------- -------
Adjusted common stockholders' share of net
(loss) earnings $ (2,417) $ 5,531 $ 1,948 $ 9,316
========== ======= ======= =======
Basic earnings per share:
Common stockholders' share of net (loss) earnings $ (0.23) $ 0.46 $ 0.18 $ 0.76
Goodwill amortization - 0.05 - 0.10
Assembled workforce amortization - 0.01 - 0.03
---------- ------- ------- -------
Adjusted common stockholders' share of net
(loss) earnings $ (0.23) $ 0.52 $ 0.18 $ 0.89
========== ======= ======= =======
Diluted earnings per share:
Common stockholders' share of net (loss)
earnings $ (0.23) $ 0.44 $ 0.17 $ 0.72
Goodwill amortization - 0.05 - 0.10
Assembled workforce amortization - 0.01 - 0.02
---------- ------- ------- -------
Adjusted common stockholders' share of net
(loss) earnings $ (0.23) $ 0.50 $ 0.17 $ 0.84
========== ======= ======= =======
Note 9. 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 exting-
uishment of debt be classified as extraordinary only if they meet criteria
in Accounting Principles Board Opinion No. 30, thus distinguishing tran-
sactions that are part of recurring operations from those that are unusual
or infrequent, or that meet the criteria for classification as an extra-
ordinary 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, "Ex-
tinguishments 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 tran-
sactions 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 fi-
nancial condition.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred and states that an entity's
commitment to a plan, by itself, does not create a present obligation to
others that meets the definition of a liability. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. Provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. Management does not expect SFAS No. 146 to have a
material impact on the Company's results of operations or financial
condition.
Note 10. 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 revised 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") operates 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 Six Months Ended
------------------ ----------------
June 27, 2002 June 28, 2001 June 27, 2002 June 28, 2001
(Revised - See (Revised - See (Revised - See (Revised - See
Note 2) Note 2) (c) Note 2) Note 2) (c)
------- ----------- ------- -----------
Revenues
- --------
DSS $242,663 $203,411 $ 467,201 $391,265
DI 178,683 131,428 343,134 250,085
DTS 160,044 125,711 299,256 243,290
ADVMED 13,006 16,061 27,146 30,950
-------- -------- ---------- --------
$594,396 $476,611 $1,136,737 $915,590
======== ======== ========== ========
Operating Profit (Loss) (a)
- ---------------------------
DSS $ 17,729 $ 14,156 $ 32,657 $ 23,568
DI 10,804 8,536 18,015 17,063
DTS 4,923 2,194 8,666 7,200
ADVMED 114 1,399 (619) 1,696
-------- -------- ---------- --------
33,570 26,285 58,719 49,527
Corporate general and administrative 7,216 7,199 14,834 14,026
Interest income (172) (159) (240) (453)
Interest expense 6,963 8,032 14,156 16,409
Goodwill amortization - 959 - 1,850
Amortization of other intangibles of acquired companies 519 779 1,037 1,799
Minority interest included in operating profit (1,398) (635) (3,585) (1,111)
Other miscellaneous (b) 21,171 (28) 23,140 (88)
-------- -------- ---------- --------
(Loss) earnings before income taxes and minority interest $ (729) $ 10,138 $ 9,377 $ 17,095
June 27 2002,
(Revised - See December 27,
Note 2) 2001 (c)
------- --------
Identifiable Assets
-------------------
DSS $279,995 $290,733
DI 94,192 94,464
DTS 127,251 100,573
ADVMED 23,370 26,880
Corporate 89,492 85,790
-------- --------
$614,300 $598,440
======== ========
(a) Defined as the excess of revenues over operating expenses and certain
non-operating expenses.
(b) Other miscellaneous includes $15.8 million for the write-off of an
investment in an unconsolidated affiliate in the second quarter of 2002
(see Note 1).
(c) Data has been revised to give recognition to the current reportable segment
structure.
Note 11. Contingencies and Litigation
The Company is a guarantor on a fixed price services contract for non-emergency
transportation brokerage services. Management perceives the exposure of
financial losses on this guarantee could possibly be in the range of $4.0
million to $12.5 million over the next twelve months. At this time, management
does not believe a reserve is required because no claim has been asserted and
one is not considered probable.
Note 12. Subsequent Events
During the third quarter of 2002, the Company entered into an agreement with an
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 condensed consolidated 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 "Revision of Financial Statements") for
the three and six months ended June 27, 2002 and the comparable periods for
2001.
The Company realigned the DynCorp Information Systems LLC ("DIS") strategic
business segment effective January 2002 into the DynCorp Systems and Solutions
("DSS") strategic business segment (see Note 10 to the Consolidated Condensed
Financial Statements), and therefore the DIS results of operations and financial
position have been included in the DSS financial information.
Revision of Financial Statements
- --------------------------------
The Company previously issued financial statements for the three and six months
ended June 27, 2002 and June 28, 2001 in which it had reflected the change in
accounting methods discussed below. Subsequent to the issuance of these
financial statements, the Company had a re-audit of its financial statements for
the three fiscal years ended December 27, 2001, December 28, 2000, and December
30, 1999 by its new independent accountants and it was determined that revenue
recognition was also impacted by the accounting change. Certain fixed price
service contracts and other service contracts had calculated revenue using cost
incurred in relation to total estimated cost at completion as a measurement of
progress toward completion. Revenue was adjusted in order to comply with the
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which prescribes recognizing
revenue on a straight-line basis over the contract period or by other
appropriate methods to measure services provided. As a result, revenue was
adjusted for the three and six month periods ended June 27, 2002 and June 28,
2001.
As reported in the previously filed Form 10-Q for the period ended June 27,
2002, the Company had discussions with the staff of the 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 SAB No. 101.
Following discussions with the SEC's staff, it was 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 in 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 or 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. The Company has
applied this change in accounting methods to its original Form 10-Q filing for
the quarterly period ended June 27, 2002 (filed August 19, 2002) to eliminate
the deferral of such cost or profits on service contracts. The previous change
did not have any effect on the Company's revenues. As a result of the
aforementioned re-audit, it was determined that revenue on certain contracts
should also have revised.
As a result of the revisions described above, reported common stockholders'
share of net loss increased by $0.4 million, from $(2.0) million to $(2.4)
million for the three months ended June 27, 2002. Reported common stockholders'
share of net earnings decreased by $2.6 million, from $4.5 million to $1.9
million for the six months ended June 27, 2002. Reported common stockholders'
share of net earnings remained at $4.8 million for the three months ended June
28, 2001 and decreased by $0.3 million, from $8.3 million to $8.0 million for
the six months ended June 28, 2001. Reported common stockholders' share of net
loss per diluted share increased from $(0.19) to $(0.23) for the three months
ended June 27, 2002. Reported common stockholders' share of net earnings per
diluted share decreased from $0.39 to $0.17 for the six months ended June 27,
2002. Reported common stockholders' share of net earnings per diluted share
remained at $0.44 for the three months ended June 28, 2001 and decreased from
$0.75 to $0.72 for the six months ended June 28, 2001.
The effects of the revisions for the change in accounting method on certain
long-term service contracts on the June 27, 2002 and June 28, 2001 financial
data are presented in Note 2 to these Consolidated Condensed Financial
Statements.
Revenues and Operating Profit
- -----------------------------
Revenues for the three months ended June 27, 2002 increased by $117.8 million,
or 24.7%, to $594.4 million as compared to $476.6 million for the same period in
2001. Revenues for the six months ended June 27, 2002 increased by $221.1
million, or 24.2%, to $1.1 billion as compared to $915.6 million for the same
period in 2001. Operating profit was $33.6 million and $58.7 million for the
three and six months ended June 27, 2002, increases of $7.3 million, or 27.7%,
and $9.2 million, or 18.6%, respectively from the same periods in 2001.
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 Expense
(Other Income) on the Consolidated Condensed Statements of Operations. See the
"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 and revision of financial statements. 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 half of 2001
that did not continue in the first half of 2002 and increased profit due to
additional revenue in the first half of 2002 for contract costs that were
recognized in a prior period.
DSS had revenues of $242.7 million and $467.2 million in the three and six
months ended June 27, 2002, compared to revenues of $203.4 million and $391.3
million in the same periods in 2001. The increases in revenue in the second
quarter and first half of 2002 of $39.3 million, or 19.3%, and $75.9 million, or
19.4%, respectively resulted primarily from the start-up of two new contracts
and increased tasking on existing contracts. The two new contracts consisted of
one which started in the third quarter of 2001 for updated office automation,
including desktop computers, servers, and networks, for the Federal Bureau of
Investigation ("FBI") and which provided the majority of the increase in
revenues, and the other to manage and operate the
infrastructure facilities, hardware, software and systems relating to non-EDGAR
systems at the SEC. These two contracts provided combined revenues of $42.0
million and $90.4 million in the three and six months ended June 27, 2002. Also,
contributing to the revenue growth was expansion of a Department of Defense
("DoD") program for vaccine production, growth in a contract that provides
battlefield simulation and virtual training system support services and
maintenance for the U.S. Army, and growth in a DoD contract that provides
security background investigations that was awarded in the second quarter of
2000. Partially offsetting these increases in revenue was the completion of a
subcontract providing operations management to the Department of Energy ("DoE")
in September 2001. Revenues for the three and six months ended June 28, 2001 for
this subcontract were $23.5 million and $48.3 million, respectively. Also
offsetting these increases in revenues for DSS was the divesture of DynCorp
Management Resources, Inc. ("DMR") in December 2001, which provided $7.3 million
and $14.4 million for the three and six months ended June 28, 2001.
For the second quarter and six months ended June 27, 2002, operating profit for
DSS increased by $3.6 million, or 25.3%, and $9.1 million, or 38.6%,
respectively, to $17.7 million and $32.7 million, respectively. The operating
profit increases for DSS resulted primarily from the new FBI contract and, to a
lesser extent, the new SEC contract discussed above. These two contracts
provided combined operating profits of $3.1 million and $4.9 million for the
three and six months ended June 27, 2002. In addition, operating profit
increased due to increased tasking and a larger award fee pool on the vaccine
production, battlefield simulation, and the security background investigations
contracts that are all noted above. Also contributing to the increase in
operating profits were the losses on the DMR contracts in the three and six
months ended June 28, 2001 that did not continue in 2002. Partially offsetting
these increases to operating profit was the completion of the DoE subcontract in
the third quarter of 2001, which is noted above. Operating profit on this DoE
subcontract for the three and six months ended June 28, 2001 was $0.4 million
and $1.4 million, respectively.
DynCorp International's ("DI") second quarter and six-month 2002 revenues grew
by 36.0% and 37.2% to $178.7 million and $343.1 million, respectively, as
compared to the same prior year periods of $131.4 million and $250.1 million,
respectively. The increase in revenues resulted primarily from growth in a
contract that provides maintenance, storage, and security support of war reserve
materials to the United States Central Command Air Forces, growth on a contract
with the U.S. Armed Forces that started up in the second half of 2001 that
provides maintenance and parts to military aircraft, increased tasking on a
contract with the Department of State ("DoS") in support of the government's
drug eradication program, primarily in South America, and increased tasking on a
contract which provides combat service support augmentation and Force Provided
Training Modules primarily to the U.S. Army. DI also commenced performance on a
new commercial subcontract in Saudi Arabia involving repair and maintenance of
Saudi military aircraft, which was awarded in the fourth quarter of 2001 and
became fully operational in 2002. This contract provided revenues of $5.7
million and $12.1 million in the three and six months ended June 27, 2002. In
addition, DI was also awarded a new contract with the U.S. Air Force in March
2002 supporting aerial counter-drug surveillance missions in central South
America and the Caribbean and including providing base operations support for
personnel and aircraft. This contract provided $4.8 million in the first half of
2002. Partially offsetting the increases in revenues was the decreased manning
requirements on the DoS international police task force contract in the second
quarter of 2002.
DI's second quarter and six-month 2002 operating profits grew by 26.6% and 5.6%
to $10.8 million and $18.0 million, respectively, as compared to the same prior
year periods of $8.5 million and $17.1 million, respectively. The increases in
operating profits resulted from the increased tasking on several contracts and
the new contracts as mentioned above. DI's operating profit was also positively
impacted due to additional revenue on contract costs that were recognized in a
prior period. Partially offsetting the increases in operating profits was the
decreased manning requirements on the DoS international police task force
contract in the second quarter of 2002. The contract, which provides combat
service support augmentation and Force Provided Training Modules primarily to
the U.S. Army, is expected to be substantially complete by the end of 2002. This
contract provided revenues of $16.1 million and $22.1 million and operating
profits of $0.8 million and $1.1 million, respectively, in the three and six
months ended June 27, 2001. Management expects that the new contracts discussed
above will offset the lost revenue and operating profit.
DynCorp Technology Services' ("DTS") revenues for the three and six months ended
June 27, 2002, grew 27.3% and 23.0%, respectively, to $160.0 million and $299.3
million, respectively, compared to $125.7 million and $243.3 million for the
comparable periods in 2001. The increases in the DTS revenues resulted from new
contracts and increased tasking on existing contracts. DTS was awarded a new
contract in the second quarter of 2002 with the National Aeronautics and Space
Administration ("NASA"), which provides base operations and maintenance support
for the Johnson Space Center. This contract provided $8.3 million in revenues in
the second quarter of 2002. DTS was also awarded a contract to provide repair
and maintenance to the California Department of Forestry helicopters in the
first quarter of 2002, which provided $4.9 million in revenues in the first half
of 2002. In addition, revenues increased due to increased tasking on two U.S.
Air Force contracts providing aircraft maintenance and base operations support.
One of these contracts is at Andrews AFB and was awarded in the first quarter of
2001 and the other is at Vance AFB and was awarded in October 2000. Revenues
also increased due to increased tasking on a U.S. Military Sealift Command
contract, which manages, operates, and maintains non-combat oceangoing U.S. Navy
ships and on a contract that provides range operations and maintenance support
to the U.S. Navy. DTS reported revenue increases at Fort Rucker due to increased
contract requirements that have resulted in additional personnel and the
negotiation of a new collective bargaining agreement that resulted in a higher
wage and fringe package for the employees. This contract provided $12.4 million
and $16.7 million for the second quarter and six-month revenue increases in
2002. Management expects revenue growth on a U.S. Air Force contract that
provides base operations and support services at Maxwell AFB, which will become
fully operational in the second half of 2002.
DTS operating profits for the three and six months ended June 27, 2002, grew
124.4% and 20.4%, respectively, to $4.9 million and $8.7 million, respectively,
compared to $2.2 million and $7.2 million for the comparable periods in 2001.
DTS operating profits increased due to the new contracts and increased tasking
on the contracts discussed above. Operating profits grew faster than revenues
for the three months ended June 27, 2002 due to improved profit margins on some
of DTS' base operations and aviation support services contracts.
AdvanceMed ("ADVMED") reported revenues of $13.0 million and $27.1 million in
the three and six months ended June 27, 2002, respectively, as compared to $16.1
million and $31.0 million in the same prior year periods. ADVMED's operating
profits (loss) were $0.1 million and $(0.6) million in the three and six months
ended June 27, 2002, respectively, as compared to $1.4 million and $1.7 million
in the comparable periods 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 and the successful completion
of two tasks that review Medicaid and Medicare claims data. These lost revenues
will be replaced in part by two task awards, which will provide support services
to Medicaid and Medicare, and will begin operations in the third quarter of
2002. 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.
Cost of Services
- ----------------
Cost of services as a percentage of revenue remained consistent for the three
and six months ended June 27, 2002, as compared to the same periods in 2001.
Cost of services (as revised - see "Revision of Financial Statements" discussion
above) was 94.6% and 94.8% of revenue for the three and six months ended June
27, 2002, respectively, as compared to 94.3% and 94.5%, respectively, for the
comparable periods in 2001. Cost of services was $562.5 million and $1.1
billion, respectively, compared to $449.7 million and $864.9 million for the
comparable periods in 2001, increases of $112.9 million and $212.8 million,
respectively. Cost of services as a percentage of revenue was higher in 2002 due
to higher balances of deferred costs that were expensed in 2002 compared to 2001
due to the revision of financial statements as described above and in Note 2 to
the Consolidated Condensed Financial Statements. Offsetting these increases in
cost of services as a percentage of revenue as compared to 2001 were lower
percentages due to DTS operating profits growing faster than revenues from
improved profit margins on some of its base operations and aviation support
services contracts. Cost of services for the Company includes mainly direct
labor, direct overhead, and direct facility costs.
Corporate General and Administrative Expense
- --------------------------------------------
Corporate general and administrative expense was relatively unchanged at $7.2
million for the second quarter of 2002 as compared to the same period in 2001
and increased slightly in the first six months of 2002 to $14.8 million as
compared to $14.0 million in the same period in 2001. Corporate general and
administrative expense as a percentage of revenue was 1.2% and 1.3% for the
three and six months ended June 27, 2002 and 1.5% for the same periods in 2001.
The slight increase in corporate general and administrative expense was due to
costs associated with the management efforts to explore the potential sale of
the Company 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 $7.0 million and $14.2 million, respectively, for the three
and six months ended June 27, 2002, compared to $8.0 million and $16.4 million
for the comparable periods in 2001. Interest expense as a percentage of revenue
was 1.2% for the three and six months ended June 27, 2002, as compared to 1.7%
and 1.8% for the comparable periods in 2001. The decrease in interest expense
was attributable to lower average debt levels and lower average interest rates
in the three and six months of 2002 as compared to the same periods in 2001. The
average levels of indebtedness were approximately $280.5 million and $285.7
million in the six months ended June 27, 2002 and June 28, 2001, respectively.
Amortization of Intangibles of Acquired Companies
- -------------------------------------------------
Amortization of intangibles of acquired companies was $0.5 million and $1.0
million for the second quarter and first six months of 2002, respectively, as
compared to $1.7 million and $3.6 million for the comparable periods of 2001.
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
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". The
provisions of SFAS No. 142 eliminated amortization of goodwill, including
assembled workforce which is now considered 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 8 to the Consolidated Condensed Financial
Statements included in this Quarterly Report on Form 10-Q/A, Amendment No.1 to
show what the impact would have been on the second quarter and first half of
2001 financial results if SFAS No. 142 had been adopted at the beginning of
fiscal 2001.
Other Expense (Other Income)
- ----------------------------
Other expense (other income) was $18.1 million and $19.9 million for the three
and six months ended June 27, 2002 and consists mostly of the Company's share of
the estimated net losses of unconsolidated affiliates, and the write-off of an
investment in an unconsolidated affiliate.
The Company periodically evaluates the recoverability of its equity investments,
in accordance with Accounting Principles Board No. 18, "The Equity Method of
Accounting for Investments in Common Stock," and if circumstances arise where a
loss in value is considered to be other than temporary, the Company will record
a write-down of its investment to fair value. The Company's recoverability
analysis is based on the projected undiscounted cash flows of the investments,
which is the lowest level of cash flow information available, or other
appropriate methods. During the second quarter of 2002, the Company recorded a
non-recurring, write-off of approximately $15.8 million, which represented the
net balance of a certain investment, which was stated in excess of its net
realizable value. The total charge was included in Other Expense (Other Income)
on the Consolidated Condensed Statement of Operations at June 27, 2002.
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 "Revision of Financial Statements" discussion above) decreased by
$4.3 million and $4.0 million for the three and six months ended June 27, 2002,
respectively, from the comparable periods in 2001. The decreases were due to
lower pretax income in both the three and six months ended June 27, 2002
partially offset by a higher effective tax rate in the first six months of 2002,
compared to the same periods in 2001. The Company's effective tax rate
approximated 49.5% for the six months ended June 27, 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 $7.2 billion at June 27, 2002 compared to $6.8 billion
at December 27, 2001, a net increase of $0.4 billion. The backlog at June 27,
2002 consisted of $2.3 billion for DSS, $2.2 billion for DI, $2.6 billion for
DTS, and $0.1 billion for ADVMED compared to December 27, 2001 backlog of $2.4
billion for DSS, $2.2 billion for DI, $2.0 billion for DTS, and $0.2 billion for
ADVMED. A large part of the increase was attributable to the $0.5 billion win on
a fifteen - year DTS contract with the U.S. Air Force in the second quarter of
2002. This cost plus contract begins in October 2002 and will provide support to
the Air Force Command and Air Combat Command operations at the Nevada Test and
Training Range.
Working Capital
- ---------------
Working capital (as revised - see "Revision of Financial Statements" discussion
above), defined as current assets less current liabilities, was $158.0 million
at June 27, 2002 compared to $144.7 million at December 27, 2001, an increase of
$13.4 million, or 9.2%. The ratio of current assets to current liabilities at
June 27, 2002 and December 27, 2001 was 1.6. The increase in working capital was
primarily a result of increased revenue and strong customer collections, which
resulted in a higher cash and cash equivalents balance at June 27, 2002 compared
to December 27, 2001, and increases in the other current asset balance, which
was due to increased inventory on a FBI contract. Partially offsetting these
increases in cash and cash equivalents and other current assets was a larger
current portion of the Senior Secured Credit Agreement Term A debt as of June
27, 2002 and increases in certain accrued expenses.
Cash Flows from Operating Activities
- ------------------------------------
Cash provided by operations was $41.1 million in the first six months of 2002,
an increase of $46.7 million from the comparable period in 2001. The major
components of the increase were higher collections of receivables, higher
accounts payable, and higher operating profits, excluding non-cash net losses of
unconsolidated affiliates of $2.2 million and a non-cash reserve of an
investment in an unconsolidated affiliate of $15.8 million in the second quarter
of 2002. In the first six months of 2001, $5.5 million was used in operations.
The major components of the $5.5 million were a decrease in current liabilities
and certain other liabilities of $39.1 million, offset by net earnings of $8.0
million, and a decrease in current assets and certain other assets of $11.4
million.
Cash Flows from Investing Activities
- ------------------------------------
Investing activities used funds of $4.4 million in the six months ended June 27,
2002, as compared to cash used by investing activities of $1.4 million in the
six months ended June 28, 2001. The use of funds in the first half of 2002
resulted mostly from the purchase of property and equipment of $4.0 million,
compared to the purchase of property and equipment in the same period of 2001 of
$3.3 million.
Cash Flows from Financing Activities
- ------------------------------------
Financing activities used funds of $10.7 million during the six months ended
June 27, 2002 and included several short-term borrowings and subsequent payments
of a cumulated sum of $63.0 million under the Senior Secured Credit Agreement
Revolving Credit Facility, maturing December 9, 2004. In the second quarter
2002, the Company made installment payments of $1.3 million and $6.3 million on
the Senior Secured Credit Agreement Term A Loan, maturing December 9, 2004, in
February and May respectively, and prepaid $3.2 million on the Senior Secured
Credit Agreement Term B Loan, maturing December 9, 2006. During the first half
of 2001, financing activities provided funds of $0.1 million and included
several short-term borrowing and subsequent payments of a cumulated sum of
$159.3 million under the Senior Secured Credit Agreement Revolving Credit
Facility.
Earnings before Interest, Taxes, Depreciation, and Amortization
- ---------------------------------------------------------------
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA") (as
revised - see "Revision of Financial Statements" discussion above) as defined by
management, consists of net earnings before income tax provision (benefit), 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
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. EBITDA has not been adjusted to give affect to the
depreciation and amortization attributable to minority interest shareholders.
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 Six Months Ended
------------------ ----------------
June 27, June 28, June 27, June 28,
2002 (Revised 2001 (Revised 2002 (Revised 2001 (Revised
- See Note 2) - See Note 2) - See Note 2) - See Note 2)
------------- ------------- ------------- -------------
Net (loss) earnings $(1,921) $ 5,417 $ 2,925 $ 9,111
Depreciation and amortization 2,874 5,536 7,757 10,325
Interest expense, net 6,791 7,873 13,916 15,956
(Benefit) provision for income taxes (206) 4,086 2,867 6,873
Amortization of deferred debt expense (525) (887) (1,047) (1,359)
Debt issue discount (135) (12) (291) (23)
-------- --------- --------- ---------
EBITDA $ 6,878 $ 22,013 $ 26,127 $ 40,883
EBITDA (as defined above) decreased by $15.1 million, or 68.8%, to $6.9 million
for the second quarter of 2002 as compared to the comparable period in 2001. For
the first six months of 2002, EBITDA decreased by $14.8 million, or 36.1%, to
$26.1 million as compared to the first six months of 2001. The decreases in
EBITDA in the three and six month periods in 2002, as compared to the similar
periods in 2001, are primarily attributable to the non-recurring write-off of
the investment in an unconsolidated affiliate of $15.8 million in the second
quarter of 2002 and offset partially by the higher operating profits, as
discussed above.
Recent Developments
- -------------------
The Board of Directors authorized management in the first quarter of 2002 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.
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 June 27, 2002 due to the short
maturities of these instruments.
As of June 27, 2002 the Company's total debt was $274.1 million, a decrease of
$10.5 million from $284.6 million as of December 27, 2001, primarily due to the
February and May 2002 payments of $1.3 million and $6.3 million, respectively,
made on the Term A Loan and the April 2002 prepayment of $3.2 million on the
Term B Loan. These payments were 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 $62.5 million under Term A Loans maturing December 9,
2004, $73.7 million under Term B Loans maturing December 9, 2006, and has a
$90.0 million revolving line of credit, which, at June 27, 2002, had no
borrowings. Installment payments of $1.3 million and $6.3 million were paid on
the Term A Loans in February and May 2002, respectively. The Term A Loans are to
be repaid in eleven quarterly installments of $6.3 million, which began in May
2002. A prepayment of $3.2 million was paid on the Term B Loan in April 2002.
The Term B Loans are scheduled 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 $11.0 million and $11.1 million at June 27, 2002 and December 27, 2001,
respectively, under the line of credit. The amount available was $79.0 million
and $78.9 million, respectively, as of June 27, 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 $38.2 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 Company is a guarantor on a fixed price services contract for non-emergency
transportation brokerage services. Management perceives the exposure of
financial losses on this guarantee could possibly be in the range of $4.0
million to $12.5 million over the next twelve months. At this time, management
does not believe a reserve is required because no claim has been asserted and
one is not considered probable.
Chart Outlining Future Financial Commitments
- --------------------------------------------
The following table sets forth the Company's total contractual cash obligations
for the remaining six months of 2002 and over the next four years and thereafter
(in thousands):
Cash Obligations Due by Year
----------------------------
July -
Contractual December
Cash Obligation Total 2002 2003 2004 2005 2006 Thereafter
- --------------- ----- ---- ---- ---- ---- ---- ----------
Long-term Debt $274,146 $12,547 $ 25,002 $28,083 $26,228 $47,500 $134,786
Operating Leases 227,468 24,649 42,968 36,790 27,600 25,643 69,818
Maximum Liability to
Repurchase ESOP
Shares 368,649 18,697 27,802 30,032 27,674 23,842 240,602
Liability to Repurchase
Other Redeemable
Common Stock 7,944 - 11,600 - - - -
-------- ------- --------- ------- ------- ------- --------
Total Contractual Cash
Obligations $878,207 $55,893 $ 107,372 $94,905 $81,502 $96,985 $445,206
======== ======= ========= ======= ======= ======= ========
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
$227.5 million, including $24.6 million for the remaining six months of 2002. Of
the $24.6 million 2002 minimum lease payments, $7.3 million related to DIS
leases, $5.2 million related to a U.S. Postal Service contract, and $3.5 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
$368.6 million as of June 27, 2002, based on the independently determined fair
value as of May 24, 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 June 27, 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 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 when a 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 June 27, 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 half of 2002, the
Company's net earnings would have been approximately $119.1 thousand lower, or a
change of 4.1%. 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 six months ended June 27, 2002 resulted
in additional increases in accumulated other comprehensive income of $0.3
million. This swap is perfectly effective at its objective, and accordingly,
there are no existing gains or losses as of June 27, 2002 that are expected to
be reclassified into earnings within the next twelve months. The Company 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 $8.7 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 Federal Systems, Inc.,
a subsidiary of GTE Corporation, 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 Corporation 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 $8.7 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 June 27, 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
$5.2 million at June 27, 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 June 27, 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
10.1 Amendment on May 1, 2002 of Patrick C. FitzPatrick's November 1, 2001
Employment Agreement (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).
(b) Reports on Form 8-K
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.
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 8, 2002 /S/ Patrick C. FitzPatrick
---------------- --------------------------
Patrick C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: November 8, 2002 /S/ John J. Fitzgerald
---------------- ----------------------
John 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 8, 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 8, 2002 /S/ Patrick C. FitzPatrick
---------------- --------------------------
Patrick C. FitzPatrick
Senior Vice President and Chief Financial Officer