UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 12, 2002
(January 1, 2002)
DynCorp
(Exact name of registrant as specified in its charter)
Delaware 1-3879 36-2408747
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
11710 Plaza America Drive, Reston, Virginia 20190
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 261-5000
Item 5. -- Other Events and Regulation FD Disclosure.
On January 1, 2002, the registrant realigned its strategic business segments
from five to four segments. Footnote 21 to the registrant's financial statements
as set forth in Item 8 of its Form 10-K/A for 2001, Amendment No. 2 has been
revised accordingly. The revised Item 8 is attached as Exhibit 99.1.
Item 7. -- Financial Statements and Exhibits.
(c) Exhibits
Exhibit 99.1 Revised Item 8 of Form 10-K/A for 2001, Amendment No. 2
(filed herewith)
Exhibit 99.2 Schedule II - Valuation and Qualifying Accounts for the
Years Ended December 27, 2001, December 28, 2000, and
December 30, 1999 (filed herewith)
Exhibit 99.3 Consent of Deloitte & Touche LLP (filed herewith)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DynCorp
Date: November 12, 2002 /s/ Patrick C. FitzPatrick
Patrick C. FitzPatrick
Senior Vice President &
Chief Financial Officer
Exhibit 99.1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
DynCorp:
We have audited the accompanying consolidated balance sheets of DynCorp (a
Delaware corporation) and subsidiaries (the "Company"), as of December 27, 2001
and December 28, 2000, and the related consolidated statements of operations,
cash flows, and stockholders' equity for the years ended December 27, 2001,
December 28, 2000, and December 30, 1999. Our audits aso included the financial
statement schedule referred to in the Index at Item 7(c), Exhibit 99.2. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 27, 2001
and December 28, 2000, and the results of its operations and its cash flows for
the years ended December 27, 2001, December 28, 2000, and December 30, 1999 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 2 and Note 21, the accompanying financial statements have
been revised.
Deloitte & Touche LLP
McLean, Virginia
October 11, 2002
(November 7, 2002 as to Note 21)
DynCorp and Subsidiaries
Consolidated Balance Sheets
As of the Fiscal Years Ended
(In thousands)
December 27, December 28,
2001 (Revised - 2000 (Revised -
See Note 2) See Note 2)
Assets
Current Assets:
Cash and cash equivalents $ 15,078 $ 12,954
Accounts receivable and contracts in process, net 345,358 332,583
Prepaid income taxes 2,158 1,153
Other current assets 35,775 28,101
Total Current Assets 398,369 374,791
Property and Equipment, at cost:
Land 0 22
Buildings and leasehold improvements 11,436 13,805
Machinery and equipment 36,122 37,772
47,558 51,599
Accumulated depreciation and amortization (26,599) (23,833)
Net Property and Equipment 20,959 27,766
Intangible Assets, net 130,425 135,244
Deferred Income Taxes -- 10,013
Other Assets 48,687 38,942
Total Assets $598,440 $586,756
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Consolidated Balance Sheets
As of the Fiscal Years Ended
(In thousands, except share amounts)
December 27, December 28,
2001 (Revised - 2000 (Revised -
See Note 2) See Note 2)
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt $ 20,123 $ 124
Accounts payable 19,420 27,574
Deferred revenue and customer advances 6,195 7,631
Accrued income taxes 932 6,895
Accrued expenses 207,029 198,330
Total Current Liabilities 253,699 240,554
Long-term Debt 264,482 283,889
Deferred Income Taxes 10,134 -
Other Liabilities and Deferred Credits 34,634 86,673
Contingencies and Litigation (Note 20)
Temporary Equity:
Redeemable common stock at redemption value
ESOP shares, 7,142,510 and 7,504,653 shares issued
and outstanding in 2001 and 2000, respectively,
subject to restrictions 326,368 238,346
Other redeemable common stock, 286,217 and 426,217
shares issued and outstanding in 2001 and 2000 6,967 7,984
Stockholders' Equity:
Common stock, par value ten cents per share, authorized
20,000,000 shares; issued 5,296,146
and 4,758,897 shares in 2001 and 2000, respectively 530 476
Paid-in surplus 138,052 134,638
Accumulated other comprehensive (loss) income (1,081) 3
Reclassification to temporary equity for redemption value
greater than par value (332,596) (245,540)
Deficit (59,681) (118,125)
Common stock held in treasury, at cost; 2,196,853
and 2,264,625 shares in 2001 and 2000, respectively (43,068) (42,142)
Total Liabilities and Stockholders' Equity $598,440 $586,756
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Consolidated Statements of Operations
For the Fiscal Years Ended
(In thousands, except per share amounts)
December 27, December 28, December 30,
2001 (Revised - 2000 (Revised - 1999 (Revised -
See Note 2) See Note 2) See Note 2)
Revenues $1,955,973 $1,805,155 $1,345,281
Costs and expenses:
Cost of services 1,810,273 1,778,329 1,280,239
Corporate general and administrative 29,456 29,350 21,741
Interest expense 31,521 41,408 18,943
Interest income (657) (1,471) (1,393)
Amortization of intangibles of acquired companies 6,394 14,922 11,408
Other income, net of miscellaneous other expenses (19,370) (532) (875)
Total costs and expenses 1,857,617 1,862,006 1,330,063
Earnings (loss) from continuing operations before income
taxes, minority interest, extraordinary item, and cumulative
effect of change in accounting principle 98,356 (56,851) 15,218
Provision (benefit) for income taxes 35,060 (20,827) 4,640
Earnings(loss) from continuing operations before minority
interest, extraordinary item, and cumulative effect of
change in accounting principle 63,296 (36,024) 10,578
Minority interest 2,462 2,622 2,968
Earnings loss) from continuing operations before
extraordinary item and cumulative effect of change
in accounting principle 60,834 (38,646) 7,610
Extraordinary loss from early extinguishment of
debt, net of income taxes of $862 -- -- 1,601
Earnings (loss) from continuing operations before cumulative
effect of change in accounting principle 60,834 (38,646) 6,009
Cumulative effect of change in accounting principle,
net of income taxes of $2,568 -- 4,770 --
Net earnings (loss) $60,834 $(43,416) $6,009
Accretion of other redeemable common stock to redemption value 2,390 1,842 94
Common stockholders' share of net earnings (loss) $58,444 $(45,258) $5,915
Common stockholders' share of net earnings (loss) per common share:
Basic earnings (loss) per share:
Common stockholders' share of earnings from continuing operations $5.53 $(3.86) $0.75
Extraordinary loss -- -- (0.16)
Cumulative effect of change in accounting principle -- (0.46) --
Common stockholders' share of net earnings-basic $5.53 $(4.32) $0.59
Diluted earnings (loss) per share:
Common stockholders' share of earnings from continuing operations $5.26 $(3.86) $0.74
Extraordinary loss -- -- (0.16)
Cumulative effect of change in accounting principle -- 0.46 --
Common stockholders' share of net earnings-diluted $5.26 $(4.32) $0.58
Weighted-average number of shares outstanding for basic 10,559 10,477 10,044
earnings per share
Weighted-average number of shares outstanding for diluted earnings 11,113 10,477 10,273
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Fiscal Years Ended
(In thousands)
December 27, December 28, December 30,
2001 (Revised - 2000 (Revised - 1999 (Revised
See Note 2) See Note 2) - See Note 2)
Cash Flows from Operating Activities:
Common stockholders' share of net earnings (loss) $ 58,444 $ (45,258) $ 5,915
Adjustments to reconcile common stockholders' share of net
earnings (loss) to net cash provided by operating activities:
Depreciation and amortization 19,910 27,054 13,561
Accretion of other redeemable common stock to redemption value 2,390 1,842 94
Cumulative effect of change in accounting principle -- 4,770 --
Subordinated Notes issued in fulfillment of pay-in-kind interest -- 3,397 --
Gain on divested business (17,442) -- --
Purchased in-process research and development -- -- 6,400
Deferred income taxes 29,434 (35,279) 2,298
Changes in reserves for divested business - other (164) -- (2,000)
Capitalized costs incurred on existing contracts -- -- (2,473)
(Reversal) establishment of preacquisition contingency reserves (42,744) 76,166 --
Changes in pension asset and other postretirement benefit obligations 1,775 2,688 --
Other 2,591 (1,774) 1,687
Change in current assets and liabilities, net of acquisitions and
dispositions:
(Increase) decrease in accounts receivable and contracts in process (22,656) 25,523 (37,919)
(Increase) decrease in other current assets (19,302) (1,670) (340)
Increase in current liabilities except notes payable and current
portion of long-term debt and reclassification from long-term
liabilities (4,127) 1,592 26,612
Cash provided by operating activities 8,109 59,051 13,835
Cash Flows from Investing Activities:
Sale of property and equipment 5,203 30,685 610
Purchase of property and equipment (7,070) (20,960) (13,878)
Capitalized cost of new financial and human resource systems -- -- (5,969)
Capitalized cost of software (3,243) -- --
Deferred income taxes from "safe harbor" leases -- (597) (481)
Increase (decrease) in investment in unconsolidated subsidiaries 500 (1,230) 1,363
Assets and liabilities of acquired business -- (1,620) (167,504)
Proceeds from business divestiture -- 2,300 --
Other 814 (496) 884
Cash (used in) provided by investing activities (3,796) 8,082 (184,975)
Cash Flows from Financing Activities:
Treasury stock purchased (2,182) -- (7,208)
Payments on indebtedness (274,057) (406,618) (253,491)
Proceeds from debt issuance 274,050 344,005 428,552
Proceeds from issuance of redeemable common stock -- -- 6,048
Payments received on ESOT loans -- 2,958 10,577
Loans to ESOT -- (300) (11,082)
Other -- 119 (687)
Cash (used in) provided by financing activities (2,189) (59,836) 172,709
Net Increase in Cash and Cash Equivalents 2,124 7,297 1,569
Cash and Cash Equivalents at Beginning of the Fiscal Year 12,954 5,657 4,088
Cash and Cash Equivalents at End of the Fiscal Year $ 15,078 $ 12,954 $ 5,657
Supplemental Information of Noncash Investing Activities:
The Company completed the merger of its wholly-owned subsidiary, DMR, with
TekInsight.com, Inc. on December 27, 2001. The Company obtained a 40% ownership
interest in DynTek, Inc. and recognized a gain on disposition of $17.4 million.
The Company's ownership interest in DynTek, Inc. was recorded at $19.4 million,
which reflects the $17.4 million gain, net book value of the assets disposed,
and liabilities incurred.
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Fiscal Years Ended
(In thousands)
Reclassification Accumulated
of Redemption Deficit Unearned Other
Common Paid-in Value Greater (Revised- Treasury ESOP Comprehensive
Stock Surplus than Par Value See Note 2) Stock Shares (Loss) Income
--------------------------------------------------------------------------------------
Balance, December 31, 1998 $498 $127,216 $(183,140) $(78,782) $(35,640) $(2,153) $(10)
Employee compensation plans (option
exercises, restricted stock plan,
incentive bonus) 7 22 - - (214) - -
Stock issued under mezzanine financing 43 6,006 - - - - -
Treasury stock purchased - - - - (7,208) - -
Payment received on ESOT note - - - - - 10,577 -
Loans to ESOT - - - - - (11,082) -
Reclassification to redeemable common
stock (57) - (5,105) - - - -
Accretion of other redeemable common
stock to redemption value - 94 (94) (94) - - -
Translation adjustment - - - - - - 1
Net earnings (Revised-See Note 2) - - - 6,009 - - -
---- -------- ---------- --------- --------- -------- --------
Balance, December 30, 1999 (Revised-
See Note 2) 491 133,338 (188,339) (72,867) (43,062) (2,658) (9)
Employee compensation plans (option
exercises, restricted stock plan,
incentive bonus) - (542) - - 920 - -
Payment received on ESOT note - - - - - 2,958 -
Loans to ESOT - - - - - (300) -
Reclassification to redeemable common
stock (15) - (55,359) - - - -
Accretion of other redeemable common
stock to redemption value - 1,842 (1,842) (1,842) - - -
Translation adjustment and other - - - - - - 12
Net loss (Revised-See
Note 2) - - - (43,416) - - -
---- -------- ---------- --------- --------- -------- --------
Balance, December 28, 2000 (Revised-
See Note 2) 476 134,638 (245,540) (118,125) (42,142) - 3
Employee compensation plans (option
exercises, restricted stock plan,
incentive bonus, Savings' Plans
contributions) 1 1,024 - - (926) - -
Reclassification to redeemable common
stock 53 - (84,666) - - - -
Accretion of other redeemable common
stock to redemption value - 2,390 (2,390) (2,390) - - -
Adjustment to fair value of derivative
financial instrument - - - - - - (918)
Cumulative effect of change in
accounting principle - (See Note 7) - - - - - - (100)
Translation adjustment and other - - - - - - (66)
Net earnings (Revised - See Note 2) - - - 60,834 - - -
---- -------- ---------- --------- --------- -------- --------
Balance, December 27, 2001 (Revised-
See Note 2) $530 $138,052 $(332,596) $(59,681) $(43,068) $ - $(1,081)
==== ======== ========== ========= ========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
DynCorp and Subsidiaries
Notes to Consolidated Financial Statements
December 27, 2001 and December 28, 2000
(Revised - See Note 2)
(Dollars in thousands, except per share amounts or where otherwise noted)
(1) The Company and Summary of Significant Accounting Policies
Description of Business and Organization:
DynCorp, a Delaware corporation, (the "Company") provides diversified
management, technical and professional services primarily to U.S. Government
customers throughout the United States and internationally. Organized in 1946,
the Company provides services to various branches of the U.S. Departments of
Defense, Energy, State, and Justice, the Drug Enforcement Agency, the National
Institute of Health, the Defense Information Systems Agency, the National
Aeronautics and Space Administration and various other U.S., state and local
government agencies, commercial clients and foreign governments. Generally,
these services are provided under both prime contracts and subcontracts, which
may be fixed-price, time-and-material or cost-type contracts depending on the
work requirements and other individual circumstances. These services encompass a
wide range of management, technical and professional services.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. All majority-owned subsidiaries have been
included in the financial statements. Investments in which the Company owns a
20.0% to 50.0% ownership interest are accounted for by the equity method while
investments of less than 20.0% ownership are accounted for under the cost
method. Outside investors' interest in the majority-owned subsidiaries is
reflected as minority interest. Effective in 1999, the Company's fiscal year is
the 52 or 53-week period ending the last Thursday in December. Previously, the
Company had a calendar year end.
Use of Estimates:
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Estimates include accrued liabilities such as contract losses,
litigation reserves, and incentive compensation awards, which are not paid out
until the following year. Actual results could differ from those estimates.
Contract Accounting (Revised - See Note 2):
Revenues for cost-reimbursement contracts are recorded as reimbursable costs are
incurred, including a pro-rata share of the contractual fees. For
time-and-material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable costs incurred.
For long-term fixed price production contracts, revenue is recognized at a rate
per unit as the units are delivered. Revenue from other long-term fixed price
contracts is recognized ratably over the contract period or by other appropriate
methods to measure services provided. Contract costs are expensed as incurred
except for certain limited long-term contracts noted below. For long-term
contracts which are specifically described in the scope section of American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") No. 81-1, "Accounting for Performance of Construction Type and Certain
Production-Type Contracts," or other appropriate accounting literature the
Company applies the percentage of completion method. Under the percentage of
completion method, income is recognized at a consistent profit margin over the
period of performance based on estimated profit margins at completion of the
contract. This method of accounting requires estimating the total revenues and
total contract cost at completion of the contract. During the performance of
long-term contracts, these estimates are periodically reviewed and revisions are
made as required. The impact on revenue and contract profit as a result of these
revisions is included in the periods in which the revisions are made. This
method can result in the deferral of costs, including start-up costs, or the
deferral of profit on these contracts. Because the Company assumes the risk of
performing a fixed price contract at a set price, the failure to accurately
estimate ultimate costs or to control costs during performance of the work could
result, and in some instances has resulted, in reduced profits or losses for
such contracts. Estimated losses on contracts at completion are recognized when
identified.
Disputes arise in the normal course of the Company's business on projects where
the Company is contesting with customers for collection of funds because of
events such as delays, changes in contract specifications and questions of cost
allowability or collectibility. Such disputes are recorded at the lesser of
their estimated net realizable value or actual costs incurred, and only when
realization is probable and can be reliably estimated. Claims against the
Company are recognized where loss is considered probable and reasonably
determinable in amount. Because there are estimates and judgments involved, the
actual results could be different from those estimates. Accounts receivable
balances related to such disputed items were immaterial at December 27, 2001,
December 28, 2000, and December 30, 1999.
Accounts Receivable:
It is the Company's policy to provide reserves for the collectibility of
accounts receivable when it is determined that it is probable that the Company
will not collect all amounts due and the amount of the reserve requirement can
be reasonably estimated.
Property and Equipment:
The Company computes depreciation using either the straight-line or double
declining balance method. The estimated useful lives used in computing
depreciation are buildings, 15-33 years; machinery and equipment, 3-15 years;
and leasehold improvements, the lesser of the useful life or the remaining term
of the lease. Depreciation expense was $7,394 for 2001, $7,044 for 2000, and
$5,412 for 1999.
Cost of property and equipment sold or retired and the related accumulated
depreciation or amortization are removed from the accounts in the year of
disposal, and any gains or losses are reflected in the consolidated statements
of operations. Expenditures for maintenance and repairs are charged to expense
as incurred, and major additions and improvements are capitalized.
Intangible Assets:
The major classes of intangible assets, net of accumulated amortization as of
December 27, 2001 and December 28, 2000 are summarized below (in millions):
2001 2000
Amortization (Revised - See (Revised - See
Period Note 2) Note 2)
Goodwill 10 to 40 years $ 103.2 $108.0
Capitalized software 8 years 12.4 9.0
Core and developed technology 5 years 4.5 6.1
Contracts acquired up to 10 years 0.2 0.6
Assembled workforce 7 years 4.6 5.6
Patent 17 years 5.5 5.9
Total net intangibles $130.4 $135.2
Intangible assets are being amortized using the straight-line method for the
periods noted above. Intangible asset amortization expense was $8,363, $16,524,
and $12,586 in 2001, 2000, and 1999, respectively. Intangible asset amortization
expense for 1999 includes $1.2 million acceleration of goodwill amortization due
to impairment. Intangible asset accumulated amortization of $65,055 and $65,742
has been recorded through December 27, 2001 and December 28, 2000, respectively.
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for impairment, the
Company estimates the future cash flows expected to result from the use of the
asset. If impaired, the Company will write down the asset to its fair market
value. If the asset is held for sale, the Company reviews its fair value less
cost to sell. In 1999, the Company expensed $1.7 million related to impaired
assets including the $1.2 million noted above.
The Company will adopt the Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," beginning on December 28, 2001,
as required. The provisions of SFAS No. 142 eliminate amortization of goodwill
and identifiable intangible assets with indefinite lives and require an
impairment assessment at least annually by applying a fair-value based test.
Derivative Financial Instruments:
The Company is exposed to market risk from changes in interest rates and, to a
limited extent, foreign currency exchange rates that could affect its results of
operations and financial condition or cash flows. The Company manages its
exposure to these market risks through normal operating and financing activities
and, when deemed appropriate, hedges these risks through the use of derivative
financial instruments. The Company uses the term hedge to mean a strategy
designed to manage risks of volatility in rate movements on certain assets,
liabilities or anticipated transactions by creating a relationship in which
gains or losses on derivative instruments are expected to counterbalance the
losses or gains on the assets, liabilities or anticipated transactions exposed
to such market risks. The Company uses derivative financial instruments as a
risk management tool and not for trading or speculative purposes.
Recently Issued Accounting Standards:
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. The provisions of SFAS
No. 142 eliminate amortization of goodwill and identifiable intangible assets
with indefinite lives and require an impairment assessment at least annually by
applying a fair-value based test. Such testing requires a fair-value based
assessment by reporting unit (which is defined as an operating segment or
component of an operating segment) to determine if goodwill is impaired at the
reporting unit level. SFAS No. 141 includes guidance relating to identification
of intangible assets that should be recognized apart from goodwill. The Company
is required to adopt SFAS No. 142 for fiscal year 2002 (the beginning of the
fiscal year after December 15, 2001). The Company anticipates an annual increase
to common stockholders' share of net earnings of approximately $2.9 million (net
of tax), or $0.26 per diluted share, from the elimination of goodwill and
assembled workforce amortization. The Company has completed the first step of
the transitional impairment test in accordance with the provisions of SFAS No.
142 and has concluded that there has been no impairment of such assets as of the
beginning of fiscal year 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. In August
2001, the FASB issued No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 and Accounting
Principles Board ("APB") No. 30 by establishing a single accounting model for
long-lived assets to be disposed of by sale. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years. Management does not expect SFAS
No. 143 or SFAS No. 144 to have a material impact on the Company's results of
operations or financial condition.
Consolidated Statements of Cash Flows:
The Company considers all highly liquid investments purchased with a remaining
maturity of three months or less to be cash equivalents.
Investing and financing activities include the following:
2001 2000 1999
Acquisitions of businesses:
Assets acquired $ - $ 4,403 $ 212,642
Liabilities assumed - (2,783) (45,138)
Cash acquired - - 36
Net cash $ - $ 1,620 $ 167,540
In 2000, the Company acquired certain assets and liabilities of a company that
developed and marketed proprietary decision-support software and provided
related consulting services to evaluate and profile performance of providers
engaged in healthcare. The Company also acquired GTE Information Systems LLC in
1999. The purchase price of these acquisitions has been allocated to the assets
acquired and liabilities assumed based on estimated fair value at the date of
acquisition, under the purchase method of accounting.
Comprehensive Income:
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which requires the presentation and disclosure
of comprehensive income. For the year ended December 27, 2001, total
comprehensive income was $59.8 million and includes, in addition to net income,
translation adjustment and other of $0.07 million, an adjustment to fair value
of the derivative financial instruments of $0.9 million, and the cumulative
effect of a change in accounting principle of $0.1 million for the adoption of
SFAS No. 133 (see Note 7). Translation adjustment and other of $(0.01) million
is the only component of comprehensive income for the year ended December 28,
2000, other than net income.
Reclassifications:
Certain prior year information has been reclassified to conform to the current
year presentation.
(2) Change in Accounting Method and Revision of Financial Statements
Subsequent to the issuance of the Company's financial statements for the year
ended December 27, 2001 on April 11, 2002, the Company revised certain
information in the Consolidated Financial Statements for the fiscal years ended
December 30, 1999, December 28, 2000 and December 27, 2001 following discussions
with the staff of the Securities and Exchange Commission ("SEC") regarding its
method of accounting for certain long-term service contracts and the related
applicability of the percentage of completion method to service contracts with
the Federal Government. Previously, the Company followed the historical
industry-wide practice of recording income from long-term service contracts
using the percentage of completion method, in accordance with the AICPA "Audit
and Accounting Guide, Audits of Federal Government Contractors," which
incorporates as an appendix AICPA SOP No. 81-1, "Accounting for Performance of
Construction Type and Certain Production-Type Contracts." Under this method,
income is recognized at a consistent profit margin over the period of
performance based on the estimated profit margin at the completion of the
contract. Such a method has resulted in deferral of costs, including start-up
costs, and deferral of profits on certain contracts. Under SOP No. 81-1, revenue
can be recognized based on costs incurred as a measurement of progress towards
completion, which can differ from other revenue recognition methods such as
those outlined in SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." Following discussions with the SEC's
staff, it has been determined that percentage of completion accounting should be
applied to long-term contracts which are specifically described in the scope
section of AICPA SOP No. 81-1 and other appropriate accounting literature. All
other long-term service contracts, even those with the Federal Government,
should not apply the percentage of completion method. Accordingly, the Company
changed its method for accounting on these long-term service contracts to be in
accordance with SEC SAB No. 101 and other applicable generally accepted
accounting principles. As a result of these changes, profit margins on a given
long-term service contract could now fluctuate from one accounting period to
another due to fluctuations in the revenue earned and costs incurred in a given
accounting period.
In accordance with the SEC Staff's guidance, the Company has applied this change
in accounting method retroactively to January 2000 (the effective date of SAB
No. 101) and to the acquisition of DIS in December 1999. As a result, the
financial statements of the Company for the fiscal years ended December 30,
1999, December 28, 2000, and December 27, 2001 have been revised to eliminate
the deferral of such costs or profits on service contracts and to adjust
revenue. Revenue was adjusted for certain fixed price service contracts and
other service contracts, which had used cost incurred in relation to total
estimated cost at completion as a measurement of progress towards completion
under percentage of completion, in order to comply with SEC SAB No. 101, which
prescribes recognizing revenue on a straight-line basis over the contract period
or by other appropriate methods to measure services provided. The Company also
intends to amend its previously filed Form 10-Q for the three months ended March
28, 2002. The cumulative effect of the change in accounting principle on prior
years resulted in a one-time, non-cash reduction to net earnings of $4.8
million, net of taxes of $2.6 million, or $0.46 per diluted share, in 2000. The
change in accounting method did not have any effect on the Company's cash flows
in 2002, 2001, 2000, and 1999.
In the original 2001 Form 10-K/A filed on May 15, 2002, the Company had revised
certain information in the Consolidated Financial Statements for the fiscal
years ended December 30, 1999 and December 28, 2000 following discussions with
the staff of the SEC regarding accounting principles articulated in SFAS No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises" and APB
No. 16, "Business Combinations" as they related to the Company's acquisition of
DIS from GTE Corporation in December 1999.
When the Company purchased DIS in December 1999, issues existed relating to the
financial performance of certain DIS contracts and realization of certain DIS
receivables. The Company disclosed in its 1999 Form 10-K that its purchase
accounting was preliminary. During 2000, the Company continued its evaluation of
the status of contracts at the date of acquisition. Primarily in the third
quarter of 2000, the Company finalized its evaluation of the impact of the
future cash flows related to the contracts based on information obtained through
that quarter and recorded an increase to reserves through a purchase accounting
adjustment. The purchase accounting adjustment also resulted in an increase to
goodwill and deferred tax assets. At the end of the third quarter of 2001, the
Company reversed a significant amount of the contract loss reserves as a result
of entering into a modification of one of the contracts acquired. This was also
accounted for as a purchase accounting adjustment, which resulted in a decrease
to goodwill and deferred tax assets.
According to SFAS No. 38, the allocation period for purchase accounting
adjustments ends when the acquiring enterprise is no longer waiting for
information that it has arranged to obtain and that is known to be available or
obtainable at the acquisition date. Items identified during the initial purchase
period as "preacquisition contingencies" shall be included in the allocation of
the purchase price based on the fair value of the contingency. The Company
previously believed that the allocation period related to these preacquisition
contingencies was still open during those periods. Although the Company stated
in its 1999 Form 10-K that the purchase price allocation was preliminary, after
discussions with the SEC's staff, the Company has determined that the allocation
period for these preacquisition contingencies was no longer open in 2000 and
2001, and therefore the adjustments made should have been accounted for directly
through the statement of operations, rather than as an adjustment to the
original purchase accounting. As a result, the financial statements of the
Company for the year ended December 28, 2000 and the nine months ended September
27, 2001 were revised to reflect the adjustments directly in the statements of
operations. In addition, the 1999 financial statements were revised for the
allocation of the DIS purchase price with respect to the valuation of an
acquired contract in progress.
The effects of the revisions for the change in accounting method on long-term
service contracts on the 2001, 2000, and 1999 financial data, and on the 2001
and 2000 unaudited quarterly financial data are presented in the tables below.
The "As Reported" numbers are taken from the previously filed 2001 Form 10-K/A
and include the revisions to 2000 and 1999 results related to the acquisition of
DIS as previously disclosed.
2001 2001 2000 2000 1999 1999
As As As As As As
Reported Revised Reported Revised Reported Revised
Statement of Operations Data:
Revenues $1,960,375 $1,955,973 $1,809,109 $1,805,155 $1,345,281 $1,345,281
Cost of services 1,813,991 1,810,273 1,781,825 1,778,329 1,280,239 1,280,239
Amortization of intangibles of
acquired companies 6,234 6,394 14,762 14,922 11,408 11,408
Earnings (loss) from continuing
operations before income taxes,
minority interest, extraordinary
item, and cumulative effect of
change in accounting principle 99,200 98,356 (56,233) (56,851) 15,218 15,218
Provision (benefit) for income taxes 34,750 35,060 (20,936) (20,827) 4,653 4,640
Minority interest 3,538 2,462 3,515 2,622 2,968 2,968
Net earnings (loss) 0,912 60,834 (38,812) (43,416) 5,996 6,009
Common stockholders' share of net
earnings (loss) 58,522 58,444 (40,654) (45,258) 5,902 5,915
Common stockholders' share of net
earnings (loss) per common share:
Basic earnings (loss) per share $5.54 $5.53 $(3.88) $(4.32) $0.59 $0.59
Diluted earnings (loss) per share $5.27 $5.26 $(3.88) $(4.32) $0.57 $0.58
Balance Sheet Data:
Accounts receivable, net of allowance
for doubtful accounts $353,990 $345,358 $335,621 $332,583 $355,020 $358,811
Prepaid income taxes 2,126 2,158 1,139 1,153 6,558 6,572
Other current assets 37,310 35,775 34,707 28,101 26,348 17,684
Intangible assets, net of accumulated
amortization 126,107 130,425 130,766 135,244 143,266 147,904
Deferred income tax asset - - 10,339 10,013 - -
Other Assets 49,330 48,687 40,203 38,942 51,511 51,511
Total assets 604,900 598,440 593,495 586,756 629,155 628,934
Accrued income taxes 603 932 6,474 6,895 2,100 2,100
Accrued expenses 208,666 207,029 200,006 198,330 131,274 130,989
Deferred income tax liability 8,648 10,134 - - 6,784 6,835
Other liabilities and deferred credits 36,603 34,634 87,566 86,673 38,409 38,409
Deficit (55,012) (59,681) 113,534) (118,125) (72,880) (72,867)
2001 Quarters
(Unaudited and As Revised)
First Quarter Second Quarter Third Quarter Fourth Quarter
As As As As As As As As
Reported Revised Reported Revised Reported Revised Reported Revised
Statement of Operations Data:
Revenues $440,073 $438,979 $476,900 $476,611 $504,113 $502,856 $539,289 $537,527
Gross profit 23,257 23,721 25,687 26,954 75,032 73,856 22,408 21,169
Earnings from continuing operations before
income taxes and minority interest 6,533 6,957 8,911 10,138 59,426 58,210 24,330 23,051
Provision for income taxes 2,546 2,787 3,430 4,086 21,221 20,060 7,553 8,127
Minority interest 611 476 934 635 925 532 1,068 819
Net earnings 3,376 3,694 4,547 5,417 37,280 37,618 15,709 14,105
Common stockholders' share of net earnings 2,825 3,143 3,979 4,849 36,652 36,990 15,066 13,462
Common stockholders' share of net earnings
per common share:
Basic earnings per share $0.27 $0.30 $0.38 $0.46 $3.47 $3.50 $1.42 $1.27
Diluted earnings per share $0.26 $0.29 $0.36 $0.44 $3.30 $3.33 $1.35 $1.20
Balance Sheet Data:
Accounts receivable, net of allowance for
doubtful accounts $314,825 $309,501 $322,910 $317,297 $316,653 $309,783 $353,990 $345,358
Other current assets 40,280 36,237 36,900 34,288 39,134 36,477 39,436 37,933
Intangible assets, net of accumulated
amortization 127,908 132,346 125,495 129,893 124,672 129,030 126,107 130,425
Other assets 49,284 47,852 46,163 44,886 38,184 37,062 49,330 48,687
Total assets 568,224 561,863 562,349 557,245 557,650 551,360 604,900 598,440
Accrued expenses 156,965 155,904 160,482 160,107 163,463 161,956 209,269 207,961
Other liabilities and deferred credits 85,590 84,562 86,719 85,392 38,782 39,571 45,251 44,768
Deficit (110,710) (114,982) (106,733) (110,135) (67,569) (73,142) (55,012) (59,681)
2000 Quarters (a)
(Unaudited and As Revised)
First Quarter Second Quarter Third Quarter Fourth Quarter
As As As As As As As As
Reported Revised Reported Revised Reported Revised Reported Revised
Statement of Operations Data:
Revenues $428,500 $428,311 $445,302 $446,498 $467,673 $468,760 $467,634 $461,586
Gross profit (loss) 19,650 15,217 25,024 24,374 (48,191) (49,487) 30,801 36,722
Earnings (loss) from continuing
operations before income taxes,
minority interest, and cumulative
effect of change in accounting
principle (54) (4,527) 4,367 3,677 (69,199) (70,535) 8,653 14,534
Provision (benefit) for income taxes (313) (1,786) 1,520 1,020 (24,717) (24,794) 2,574 4,733
Minority interest 577 577 635 764 625 304 1,678 977
Net earnings (loss) (318) (8,088) 2,212 1,893 (45,107) (46,045) 4,401 8,824
Common stockholders' share of net
earnings (loss) (742) (8,512) 1,775 1,456 (45,590) (46,528) 3,903 8,326
Common stockholders' share of net
earnings (loss) per common share:
Basic earnings (loss) per share $(0.07) $(0.82) $0.17 $0.14 $(4.34) $(4.43) $0.36 $0.79
Diluted earnings (loss) per share $(0.07) $(0.82) $0.17 $0.14 $(4.34) $(4.43) $0.36 $0.79
Balance Sheet Data:
Accounts receivable, net of allowance
for doubtful accounts $331,910 $332,637 $337,726 $339,649 $335,588 $338,598 $335,621 $332,583
Other current assets 36,813 20,018 39,746 21,057 32,876 11,736 35,846 29,254
Intangible assets, net of accumulated
Amortization 138,723 143,321 136,038 140,596 135,043 139,561 130,766 135,244
Other assets 52,987 51,206 44,704 43,096 61,560 60,125 50,542 48,955
Total assets 606,537 593,286 604,550 590,735 623,996 608,949 593,495 586,756
Accrued expenses 141,457 135,830 148,480 142,396 163,499 157,361 206,480 205,225
Other liabilities and deferred credits 46,015 46,066 35,809 35,989 82,377 82,236 87,566 86,673
Deficit (73,591) (81,266) (71,969) (79,881) (117,716) (126,484) (113,534) (118,125)
(3) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate the
value:
Accounts receivable and contracts in process, net, prepaid income taxes,
accounts payable and accrued income taxes - The carrying amount approximates the
fair value due to the short maturity of these instruments.
Long-term debt and other liabilities and deferred credits - The carrying values
of the Company's Senior Secured Credit Agreement Loans, Revolving Credit
Facility, and the 15% Subordinated Notes approximated their fair values at
December 27, 2001 and December 28, 2000. The fair value of the Company's 9 1/2%
Senior Subordinated Notes, based on the current rate as if the issue date was
December 27, 2001 and December 28, 2000, was $102.2 million and $81.0 million,
respectively, as compared to a book value of $99.7 million and $99.6 million as
of December 27, 2001 and December 28, 2000, respectively. For the remaining
long-term debt (see Note 5) and other liabilities and deferred credits, the
carrying amounts approximate the fair values.
(4) Accounts Receivable and Contracts in Process, Net
The components of accounts receivable and contracts in process were as follows
for the years ending December 27, 2001 and December 28, 2000:
2001 (Revised - 2000 (Revised -
See Note 2) See Note 2)
U.S. Government:
Billed and billable $282,266 $254,731
Recoverable costs and accrued profit on
progress completed but not billed 17,026 22,763
Retainage due upon completion of contract 1,048 2,006
300,340 279,500
Other Customers (primarily subcontracts from
U.S. Government prime contracts and
contracts with state, local and
quasi-government agencies):
Billed and billable (less allowance for
doubtful accounts of $6,637 in 2001 and
$2,804 in 2000) 37,315 49,157
Recoverable costs and accrued profit
on progress completed but not billed 7,703 3,926
45,018 $53,083
$345,358 $332,583
Billed and billable include amounts earned and contractually billable at
year-end, but which were not billed because customer invoices had not yet been
prepared at year-end. Recoverable costs and accrued profit on progress completed
but not billed is composed primarily of amounts recognized as revenues, but
which are not contractually billable at the balance sheet dates. It is expected
that all amounts outstanding at December 27, 2001 will be collected within one
year except for approximately $6.3 million.
(5) Long-term Debt
At December 27, 2001 and December 28, 2000, long-term debt consisted of:
2001 2000
Senior Secured Credit Agreement - Term A Loan $ 70,000 $ 70,000
Senior Secured Credit Agreement - Term B Loan 76,900 76,900
Senior Secured Credit Agreement - Revolving Credit Facility -- --
15% Subordinated Notes 37,903 37,349
9-1/2% Senior Subordinated Notes 99,674 99,627
Notes Payable 128 137
284,605 284,013
Less current portion 20,123 124
$264,482 $283,889
Debt maturities as of December 27, 2001, were as follows:
2002 $ 20,123
2003 25,005
2004 28,083
2005 29,400
2006 47,500
Thereafter 134,494
$284,605
On December 10, 1999, the Company and its wholly-owned subsidiary, Dyn Funding
Corporation, entered into a Senior Secured Credit Agreement (the "Credit
Agreement") with a group of financial institutions. Under the Credit Agreement,
the Company borrowed $100.0 million under Term A Loans maturing December 9,
2004, $100.0 million under Term B Loans maturing December 9, 2006, and $23.8
million under a $90.0 million revolving line of credit maturing December 9,
2004. Of the total borrowings under the Credit Agreement, $125.0 million was
used for partial payment of the purchase price for GTE Information Systems LLC.
An additional $112.0 million of the borrowings was used to make an optional
redemption of Dyn Funding Corporation's outstanding 7.486% Fixed Rate Contract
Receivable Collateralized Notes, Series 1997-1, Class A and to reduce
irrevocably Dyn Funding Corporation's Floating Rate Contract Receivable
Collateralized Notes, Series 1997-1, Class B. The remainder was used to pay
transactional expenses and for general corporate operating purposes. Upon the
closing of the Credit Agreement, the Company terminated its previous revolving
line of credit facility.
The Credit Agreement stipulates that the Company must maintain certain financial
ratios, including specified ratios of earnings to fixed charges, debt to
earnings, and accounts receivable to borrowings, under the Credit Agreement.
On December 10, 1999, the Company incurred an extraordinary loss of $2.5 million
($1.6 million after tax or $0.16 for basic and diluted earnings per share) in
connection with the early retirement of the $50.0 million 7.486% Fixed Rate
Contract Receivable Collateralized Notes. The extraordinary loss was comprised
of the payment of a yield maintenance premium and the write-off of associated
debt issuance costs.
On December 28, 2000, the Company voluntarily repaid $30.0 million of Term A
Loans, prepaying all scheduled principal installments due in 2001 and partially
prepaying the scheduled principal installment due in February 2002. As a
consequence of this prepayment, the Term A Loans are to be repaid in an
installment of $1.3 million in February 2002 and then eleven quarterly
installments of $6.3 million beginning in May 2002. On March 7, 2000, the
Company voluntarily repaid $7.1 million of Term B Loans, prepaying all scheduled
principal payments of Term B Loans from February 2001 through December 2004, and
partially prepaying the scheduled principal payment due in February 2005. On
December 28, 2000, the Company voluntarily repaid $15.0 million of Term B Loans,
prepaying the remaining scheduled principal payment due in February 2005 and
partially prepaying the scheduled principal payment due in May 2005. As a
consequence of these prepayments, the Term B Loans are to be repaid in an
installment of $5.7 million in May 2005 and then six quarterly installments of
$11.9 million beginning in August 2005. At the option of the Company, borrowings
under the Credit Agreement bear interest at either LIBOR or a base rate
established by the bank, plus a margin that varies based upon the Company's
ratio of debt to earnings.
The Company is charged a commitment fee of 0.5% per annum on unused commitments
under the revolving line of credit. As of December 27, 2001 and December 28,
2000, there were no borrowings and $11.1 million and $9.5 million of letters of
credit were outstanding, respectively, under the revolving line of credit. The
amount available under the revolving line of credit was $78.9 million and $80.5
million, respectively, as of December 27, 2001 and December 28, 2000. The
Company also has $7.2 million in outstanding surety obligations for performance
and payment bonds supporting various contracts. These bonds are partially
collateralized with letters of credit, the value which is included in $11.1
million noted above.
On December 10, 1999, the Company entered into an agreement with various
financial institutions for the sale of $40.0 million face value of the Company's
subordinated pay-in-kind notes due in 2007, with an estimated fair value of
$33.9 million ("Subordinated Notes"), and for the sale of 426,217 shares of the
Company's stock with an estimated fair value of $6.1 million (see Note 9). The
proceeds were used for payment of the balance of the purchase price for GTE
Information Systems LLC. The Subordinated Notes bear interest at 15.0% per
annum, payable semi-annually. The Company may, at its option, prior to December
15, 2004, pay the interest in cash or in additional Subordinated Notes. The
Subordinated Notes are redeemable, in whole or in part, at the option of the
Company, on or after December 15, 2000 at a redemption price that ranges from
114.0% in 2000 to 100.0% in 2006 and thereafter. The Subordinated Notes are
general unsecured obligations of the Company and will be subordinated in right
of payment to all existing and future senior debt of the Company and to the
Senior Subordinated Notes. On December 28, 2000, the Company paid $3.2 million
cash interest on the Subordinated Notes. On December 26, 2001, two of the
holders sold 140,000 of these shares on the Company's internal market and those
shares are no longer subject to the put right. This transaction reduced
Temporary Equity on the Consolidated Balance Sheet by $5.7 million.
On March 17, 1997, the Company issued $100.0 million of 9 1/2% Senior
Subordinated Notes ("Senior Subordinated Notes") with a scheduled maturity in
2007. Interest is payable semi-annually, in arrears, on March 1 and September 1
of each year. The Senior Subordinated Notes are redeemable, in whole or in part,
at the option of the Company, on or after March 1, 2002 at a redemption price
which ranges from 104.8% in 2002 to 100.0% in 2005 and thereafter. In addition,
the Company may redeem up to 35.0% of the aggregate principal amount of the
Senior Subordinated Notes (at a redemption price of 109.5%) with proceeds
generated from a public offering of equity, provided at least 65.0% of the
original aggregate amount of the Senior Subordinated Notes remains outstanding.
The Senior Subordinated Notes are general unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future senior
debt of the Company.
The Credit Agreement and the indentures for the Subordinated Notes and Senior
Subordinated Notes contain customary restrictions on the ability of the Company
to undertake certain activities, such as the incurrence of additional debt, the
payment of dividends on, or the repurchase of, the Company's common stock, the
merger of the Company into another company, the sale of substantially all the
Company's assets, and the acquisition of the stock or substantially all the
assets of another company. The Credit Agreement also stipulates that the Company
cannot exceed a certain level of capital expenditures and must maintain certain
financial ratios, including specified ratios of earnings to fixed charges, debt
to earnings, and accounts receivable to borrowings under the Credit Agreement.
At December 27, 2001 and December 28, 2000, the Company was in compliance with
these covenants.
The Company acquired the headquarters property of Technology Applications, Inc.
("TAI") on November 12, 1993, in conjunction with its acquisition of TAI, and
assumed a mortgage on the property of $3.3 million bearing interest at 8.0% per
annum. On February 29, 2000, the Company sold the property for $10.5 million in
cash and simultaneously entered into a lease agreement for the property. The
8.0% mortgage was repaid with proceeds from the sale of the property.
Deferred debt issuance costs are being amortized using the effective interest
rate method over the term of the related debt. At December 27, 2001, and
December 28, 2000, unamortized deferred debt issuance costs were $8,105 and
$10,071, respectively and amortization for 2001, 2000, and 1999 was $1,966,
$2,300, and $1,210, respectively. Amortization of debt issue discount was $601,
$43, and $39 in 2001, 2000, and 1999, respectively.
Cash paid for interest was $31,692 for 2001, $31,458 for 2000, and $16,209 for
1999.
(6) Accrued Expenses
At December 27, 2001 and December 28, 2000, accrued expenses consisted of the
following:
2001 (Revised - 2000 (Revised -
See Note 2) See Note 2)
Salaries and wages $ 96,348 $ 79,216
Insurance reserve 30,511 25,298
Interest 4,541 7,279
Payroll and miscellaneous taxes 9,726 19,925
Accrued contingent liabilities and
and operating reserves 12,598 16,734
Other accrued expenses 53,305 49,878
$207,029 $198,330
(7) Derivative Financial Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133," on December 29, 2000. SFAS No. 133 requires the transition adjustment, net
of the tax effect, resulting from adopting these Statements to be reported in
net income or other comprehensive income, as appropriate, as the cumulative
effect of a change in accounting principle. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income based on the guidelines stipulated in SFAS No. 133. The adoption of the
standard did not have a material impact on the Company's results of operations,
financial condition or cash flows, but did reduce accumulated other
comprehensive income by $0.1 million, or $0.01 per diluted share, for the
cumulative effect of a change in accounting principle. The adjustments to fair
value of the derivative instruments during 2001 resulted in additional decreases
in accumulated other comprehensive income of $0.9 million.
The Company has managed its exposure to changes in interest rates by effectively
capping at 7.5% the base interest rate on a notional amount of $100.0 million of
its LIBOR indexed debt until February 2002. This option had no value at the
transition date of SFAS No. 133. In December 2000, the Company entered into a
two year and 28-day swap agreement, wherein the Company pays approximately 6.2%
annualized interest on a notional amount of $35.0 million on a quarterly basis
beginning on January 4, 2001 and ending on January 6, 2003. The objective of
this transaction is to neutralize the cash flow variability on designated
portions of the Company's Senior Secured Credit Agreement Term A and Term B
loans, which have a floating-rate, that may be caused by fluctuations in market
interest rates. The adjustments to fair value of this derivative instrument
during 2001 resulted in additional decreases in accumulated other comprehensive
income of $0.9 million. This swap is perfectly effective at its objective, and
accordingly, there are no existing gains or losses as of December 27, 2001 that
are expected to be reclassified into earnings within the next twelve months.
(8) Employee Stock Ownership Plan
In September 1988, the Company established an Employee Stock Ownership Plan
("ESOP"). The Company borrowed $100.0 million and loaned the proceeds, on the
same terms as the Company's borrowings, to the ESOP to purchase 4,123,711 shares
of common stock of the Company. The ESOP acquired additional shares from 1993
through 2001 either through contributions of stock from the Company, or
contributions of cash from the Company with which the ESOP then purchased shares
either from the Company, on the Internal Market, or directly from other
stockholders. From time to time, the Company loaned additional funds to the ESOP
to buy shares, and the ESOP issued notes to the Company in like amounts. The
notes, and related accrued interest, were paid in full as of June 29, 2000.
In 1999, the ESOP utilized 1999 contributions and loans to make the required
principal and interest payments on the aforementioned notes, pay administrative
fees, purchase 95,735 shares of stock on the internal market and purchase
273,139 shares of stock from other stockholders. In 2000, the ESOP utilized 2000
contributions and loans to make the required principal and interest payments on
the aforementioned notes, pay administrative fees, purchase 27,490 shares of
stock on the internal market and purchase 25,175 shares of stock from other
stockholders. The ESOP covered a majority of the employees of the Company.
Participants in the ESOP become fully vested after four years of service.
Effective January 1, 2001, the Company established two new plans: the Savings
and Retirement Plan and the Capital Accumulation and Retirement Plan
(collectively, the "Savings Plans"). At the same time, the ESOP was merged into
the two plans. The Company stock accounts of participants in the ESOP were
transferred to one or the other of the Savings Plans' trusts, and Savings Plans
participants have the same distribution and put rights for these ESOP shares as
they had in the ESOP. See Note 13 for discussion of the Savings Plans. At
December 27, 2001 the Savings Plans owned 8,869,936 shares, or 84.3% of total
outstanding shares, of which 7,142,510 shares had ESOP put options. In 2000 and
1999, cash contributions to the ESOP were $13,350 and $13,220, respectively and
were charged to Cost of Services and Corporate General and Administrative
Expenses. In 2001 the Company made cash contributions to the Savings Plans
totaling $20,975 (the employer match and supplemental contribution). The
employer match of $18,793 included in this total was charged to Cost of Services
and Corporate General and Administrative Expenses and the supplemental
contribution of $2,182 in this total was charged to Treasury Stock.
(9) Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary Equity at the
redemption value at each balance sheet date and consists of the following:
Balance at Balance at
Redemption December Redemption December
Shares Value 27, 2001 Shares Value 28, 2000
ESOP Shares 2,995,783 $47.00 $140,802 3,313,729 $35.25 $116,809
4,146,727 $44.75 185,566 4,190,924 $29.00 121,537
7,142,510 $326,368 7,504,653 $238,346
Other Redeemable
Common Stock 286,217 $24.34 $ 6,967 426,217 $18.73 $ 7,984
ESOP Shares
In accordance with ERISA regulations and the ESOP documents, the respective
Trust may purchase and the Company is obligated to purchase vested common stock
shares from ESOP participants (see Note 8) at the fair value (as determined by
an independent appraiser) until such time as the Company's common stock is
publicly traded. The shares initially bought by the investors, including the
ESOP, in 1988 were bought at a "control price," reflecting the higher price that
buyers typically pay when they buy an entire company (as the ESOP and other
investors did in the 1988 Leveraged Buy-Out). A special provision in the ESOP
permits participants to receive a "control price" when they sell these shares
back to the Company under the ESOP's "put option" provisions. This "control
price," as determined by the trustee was $47.00 per share as of December 27,
2001. The additional shares obtained by the ESOP in 1994 through 2001 were at a
"minority interest price," reflecting the lower price that buyers typically pay
when they are buying shares of a company in the market place. Participants do
not have the right to sell these shares at the "control price". The minority
interest price as determined by the trustee was $44.75 per share as of December
27, 2001. Participants receive their vested shares upon retirement, becoming
disabled, or death over a period of one to five years and for other reasons of
termination over a period of one to ten years, all as set forth in the Plan
documents. The ESOP Trust ("ESOT") or the Company purchases participants' shares
at the applicable price, utilizing cash available from the Company's
contributions and loans (see Note 8). The participant can elect to retain
distributed ESOP shares instead of a participant put. Based on fair values of
$47.00 and $44.75 per share as of December 27, 2001, the estimated maximum
contingent liability to repurchase shares from the ESOP participants upon death,
disability, retirement and termination is as follows: $19,996 in 2002, $24,340
in 2003, $26,292 in 2004, $24,228 in 2005, $20,873 in 2006 and $210,639
thereafter. Under the Subscription Agreement with the ESOP dated September 9,
1988, the Company is permitted to defer put options if, under Delaware law, the
capital of the Company would be impaired as a result of such repurchase. As
explained above in Note 8, the ESOP was merged into the Savings Plans effective
January 1, 2001. All rights and obligations of the ESOP and its participants
remain intact in the Savings Plans.
Other Redeemable Common Stock
On December 10, 1999, the Company entered into an agreement with various
financial institutions for the sale of 426,217 shares of the Company's stock and
Subordinated Notes (see Note 5). Under a contemporaneous registration rights
agreement, the holders of these shares of stock will have a put right to the
Company commencing on December 10, 2003, at a price of $40.53 per share, unless
one of the following events has occurred prior to such date or the exercise of
the put right: (1) an initial public offering of the Company's common stock has
been consummated; (2) all the Company's common stock has been sold; (3) all the
Company's assets have been sold in such a manner that the holders have received
cash payments; or (4) the Company's common stock has been listed on a national
securities exchange or authorized for quotation on the NASDAQ National Market
System for which there is a public market of at least $100 million for the
Company's common stock. If, at the time of the holders' exercise of the put
right the Company is unable to pay the put price because of financial covenants
in loan agreements or other provisions of law, the Company will not honor the
put at that time, and the put price will escalate for a period of up to four
years, at which time the put must be honored. The escalation rate increases
during such period until the put is honored, and the rate varies from an
annualized factor of 22.0% for the first quarter after the put is not honored up
to 52.0% during the sixteenth quarter. The annual accretion in the fair value of
these shares is reflected as a reduction of Common Stockholders' Share of Net
Earnings on the Consolidated Statements of Operations. On December 26, 2001, two
of the holders sold 140,000 of these shares on the Company's internal market and
those shares are no longer subject to the put right.
In conjunction with the acquisition of TAI in November 1993, the Company issued
put options on 125,714 shares of common stock. The holder could, at any time
commencing on December 31, 1998 and ending on December 31, 2000, sell these
shares to the Company at a price per share equal to the greater of $17.50; or,
if the stock is publicly traded, the market value at a specified date; or, if
the Company's stock is not publicly traded, the ESOP control price at the time
of exercise. On January 12, 1999, the holder exercised the put option on these
shares at the applicable price of $24.25 per share.
Following are the changes in Redeemable Common Stock for the three years ended
December 27, 2001:
Redeemable Common Stock
Other ESOP Total
Balance, December 31, 1998 $ 3,049 $180,812 $183,861
Exercise of put option (3,049) - (3,049)
Shares purchased by the Company - (1,899) (1,899)
Shares purchased by the ESOP - 6,466 6,466
Shares purchased on the Internal
Market - 2,319 2,319
Shares released from collateral - 10,577 10,577
Shares pledged as collateral - (11,082) (11,082)
ESOP diversification (a) - (753) (753)
Issuance of common stock with put rights 6,048 - 6,048
Adjustment of shares to fair value 94 (3,466) (3,372)
Balance, December 30, 1999 6,142 182,974 189,116
Shares purchased by the ESOP - 568 568
Shares purchased on the Internal Market - 612 612
Shares released from collateral - 2,958 2,958
Shares pledged as collateral - (300) (300)
Adjustment of shares to fair market value 1,842 51,534 53,376
Balance, December 28, 2000 7,984 238,346 246,330
Shares purchased by/contributed to the
Savings Plans - (11,569) (11,569)
Shares sold on the Internal Market (3,407) (2,420) (5,827)
Shares purchased on the Internal Market - 1,598 1,598
ESOP diversification (a) - (1,046) (1,046)
Adjustment of shares to fair market value 2,390 101,459 103,849
Balance, December 27, 2001 $6,967 $326,368 $333,335
(a) Under diversification rules, as defined by the Plan, ESOP participants have
the option of receiving a distribution of up to 25.0% of their aggregate
accounts, in order to convert Company stock into another type of investment. The
option extends over a five-year period beginning after the participant has
reached age 55 and has ten years of participation in the ESOP. At the sixth
year, the distribution right increases to 50.0% of the participant's account
less any amounts previously paid.
(10) Common Stock
At December 27, 2001, common stock includes shares issued to outside investors,
officers and directors, current and former employees, the ESOP, and the Savings
Plans, as well as any ESOP or Savings Plan shares that have been distributed in
kind to former participants in the plans.
(11) Restricted Stock
The Company had a Restricted Stock Plan (the "Plan") under which management and
key employees could be awarded shares of common stock based on the Company's
performance. The Company initially reserved 1,023,037 shares of common stock for
issuance under the Plan. Under the Plan, Restricted Stock Units ("units") were
granted to participants who were selected by the Compensation Committee of the
Board of Directors. Each unit entitled the participant upon achievement of the
performance goals (as defined in the Plan) to receive one share of the Company's
common stock. Units could not be converted into shares of common stock until the
participant's interest in the Units had vested. Vesting occurred upon completion
of the specified periods as set forth in the Plan. All units granted under the
Plan have vested or have been forfeited and all vested shares have been
subsequently distributed or deferred until a future distribution date. Of the
deferred shares, 105,898 remain to be distributed.
(12) Acquisitions and Dispositions
On December 27, 2001, the Company completed the merger of its wholly-owned
subsidiary, DynCorp Management Resources, Inc. ("DMR"), the Company's state and
local government services subsidiary, into TekInsight.com, Inc. The merger
between TekInsight.com Inc. and DMR formed the new entity DynTek, Inc. DynTek,
Inc. is a public company listed on NASDAQ under the symbol DYTK. DynTek, Inc. is
a provider of information technology and outsourced management services to state
and local governments serving customers across 17 states. On a pro forma basis,
DynTek, Inc. had revenues of approximately $77.2 million for the fiscal year
ended June 30, 2001.
The Company received 18,336,664 shares of class B common stock of DynTek, Inc.
These shares are not registered, but the Company has the right to require
DynTek, Inc. to register the shares. An independent appraisal of these shares
resulted in a value of $31.0 million for these shares at December 27, 2001. This
transaction resulted in a gain on the sale of approximately $29.1 million;
however, under GAAP the Company recognized only 60% of the gain or $17.4 million
for this non-monetary transaction because the Company has a 40% ownership
interest in the new entity, DynTek, Inc.
The $17.4 million gain on the disposal of DMR is partially offset by DMR's $13.4
million operating loss. Since the Company has a 40% interest in DynTek, Inc. and
does not have control, it will account for its investment on the equity basis of
accounting going forward. The Company has the right to appoint people to three
of the seven director positions on the board of DynTek, Inc.
As part of the merger agreement, the Company has contract obligations for
several outstanding performance bonds on certain DMR contracts, which total
approximately $3.4 million as of December 27, 2001. DynTek, Inc. has agreed to
make its best effort to replace the bonds with its own obligations. The Company
is also obligated to the Commonwealth of Virginia for satisfactory performance
on DMR's contract to provide non-emergency medical transportation services in
Virginia. Should DynTek, Inc. default on the Virginia contracts and/or any of
the performance bonds, it could result in financial losses for the Company.
In the first quarter of 2002, the Company paid $2.6 million to DynTek, Inc. in
resolution of a dispute concerning the adequacy of DMR's working capital at the
time of closing. The Company recorded the $2.6 million payment as a liability at
December 27, 2001, and included the $2.6 million payment in its calculation of
the gain on the sale. DynTek, Inc. is currently seeking additional financing.
In September 2000, the Company purchased for $2.5 million certain assets and
liabilities of a company which develops and markets proprietary decision-support
software and provides related consulting services to evaluate and profile
performance of healthcare providers. The purchase price has been allocated to
the assets acquired and liabilities assumed based on preliminary estimated fair
value at the date of acquisition, under the purchase method of accounting.
Goodwill, net of accumulated amortization, associated with this purchase is $2.7
and $2.9 million as of December 27, 2001 and December 28, 2000, respectively and
is being amortized over 15 years.
On December 10, 1999, the Company acquired GTE Information Systems LLC, a
subsidiary of GTE Corporation, for $167.5 million in cash and has accounted for
the acquisition as a purchase. The purchase price was allocated to the assets
acquired and the liabilities assumed based on estimated fair value at the date
of acquisition. On December 13, 1999, the name of GTE Information Systems LLC
was changed to DynCorp Information Systems LLC ("DIS"). It operates as a
separate subsidiary of the Company. Operating results for DIS have been included
from the date of acquisition. Goodwill, net of accumulated amortization,
associated with this purchase is $57.2 and $59.6 million as of December 27, 2001
and December 28, 2000, respectively, and is being amortized over 30 years.
The following unaudited pro forma combined financial information presents the
historical results of operations of the Company and DIS, with pro forma
adjustments as if DIS had been acquired as of the beginning of the period
presented. The unaudited pro forma information is not necessarily indicative of
what the results of operations actually would have been if the transaction had
occurred as of the beginning of the period, or of future results of operations.
The unaudited pro forma information does not reflect purchase accounting
adjustments for any preacquisition contingencies or losses.
1999
(Unaudited and Revised -
See Note 2)
Revenue $1,560,971
Net earnings $ 4,164
Basic earnings per share $ 0.42
Diluted earnings per share $ 0.41
(13) Savings Plans
In 2000 and 1999, the Company had a Savings and Retirement Plan ("SARP") which
was intended to qualify under section 401(k) of the Internal Revenue Code
("IRC"). The plan allowed eligible employees to defer 1.0% to 15.0% of their
compensation on a pretax basis for contribution to their SARP accounts. In 1996,
the Company began matching 100.0% of the first 1.0% of employee deferrals and
25.0% of the next 4.0% of employee contributions, provided the employee
contribution was invested in Company stock funds. Matching contributions are
invested in additional shares of the Company's common stock.
Effective January 1, 2001, the Company revised its SARP to establish two plans:
the Savings and Retirement Plan and the Capital Accumulation and Retirement Plan
("Savings Plans"), which are intended to qualify under section 401(k) of the
IRC. At the same time, the ESOP was merged into the two plans. The Company stock
accounts of participants in the ESOP were transferred to one or the other of the
Savings Plans, and Savings Plan participants have the same distribution and put
rights for these ESOP shares as they had in the ESOP. Substantially all
employees participate in one of the two Savings Plans.
Under the revised Savings and Retirement Plan, the Company may make a matching
contribution of 50.0% of the first 8.0% of compensation deferred by the employee
and an additional matching contribution of 50.0% of the first 3.0% of
compensation so deferred which is invested in the Company stock investment fund;
the Company may also make a discretionary contribution of 1.0% of compensation
on behalf of eligible participants. All Company contributions are invested in
the Company stock investment fund for such participants. Under the Capital
Accumulation and Retirement Plan, the initial Company matching contribution is
25.0% of the first 8.0% of compensation deferred by the employee, and the
additional matching contribution for investments in the Company stock investment
fund is the same. Under the Capital Accumulation and Retirement Plan, the
Company may also make a discretionary contribution of 2.0% of compensation. All
Company contributions, other than those used to pay administrative expenses are
either in the form of Company stock or cash to be used by the Savings Plans to
acquire Company stock. Beginning in January 2001, the Plans allow eligible
employees to defer 1.0% to 18.0% of their compensation on a pretax basis for
contribution to their Savings Plans' accounts.
In 2001, the Company contributed $2,182 to the Savings Plans to cover the
difference between the control price and the minority interest price on the ESOP
shares which were put back to the Company during 2001 under the ESOP's "put
option" provisions. This amount was recorded as an increase to Treasury Stock on
the Consolidated Balance Sheet in 2001, due to the put obligation on the shares
being removed at the time the shares were purchased back by the Company.
The Company has expensed approximately $2,617, and $1,937 in 2000, and 1999,
respectively, related to the employer matching contributions to the SARP. These
amounts were charged to Cost of Services and Corporate General and
Administrative Expenses.
In 2001, the Company expensed approximately $18,792 for the employer match into
the Savings Plans which was charged to Cost of Services and Corporate General
and Administrative Expenses.
(14) Income Taxes
As prescribed by SFAS No. 109, "Accounting for Income Taxes," the Company
utilizes the asset and liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Valuation allowances are
provided if required.
Earnings (loss) from continuing operations before income taxes, minority
interest, extraordinary item (see Note 5), and cumulative effect of change in
accounting principle (see Note 2) were derived from the following:
Fiscal Years Ended
2001 (Revised - 2000 (Revised - 1999 (Revised -
See Note 2) See Note 2) See Note 2)
Domestic operations $ 96,895 $ (57,248) $ 14,489
Foreign operations 1,461 397 729
$ 98,356 $ (56,851) $ 15,218
The provision (benefit) for income taxes consisted of the following:
Fiscal Years Ended
2001 (Revised - 2000 (Revised - 1999 (Revised -
See Note 2) See Note 2) See Note 2)
Current:
Federal $ 5,017 $ 11,525 $ 1,564
Foreign 546 1,700 120
State 437 471 636
6,000 13,696 2,320
Deferred:
Federal 29,060 (34,793) 4,465
Foreign - - -
State 374 (486) (2,167)
29,434 (35,279) 2,298
Valuation Allowance:
Federal - - -
State (374) 756 22
(374) 756 22
Total $ 35,060 $ (20,827) $ 4,640
The components of deferred taxes are as follows:
December 27, 2001 December 28, 2000
(Revised - See Note 2) (Revised - See Note 2)
Deferred tax liabilities:
Employee benefits $ (450) $ (901)
Contract revenue recognition (15,094) (8,154)
Other, net (6,693) (847)
Total deferred tax liabilities (22,237) (9,902)
Deferred tax assets:
Deferred compensation 1,029 1,085
Operating reserves and other accruals 19,880 35,372
Depreciation and amortization 443 1,620
Benefit of state tax on temporary
differences state net operating
loss carryforwards 5,140 5,514
Total deferred tax assets 26,492 43,591
Total temporary differences before
valuation allowances 4,255 33,689
Valuation Allowances:
State (5,140) (5,514)
Total temporary differences affecting
tax provision (885) 28,175
"Safe harbor" leases (3,903) (4,035)
Acquired postretirement benefit plan
liability 3,056 4,055
Net deferred tax (liability) asset $ (1,732) $28,195
No valuation allowance was required for the Company's federal deferred tax
assets at December 27, 2001 and December 28, 2000. State valuation allowances
represent reserves for income tax benefits, which are not recognized due to
uncertainty regarding future earnings in the applicable states. The net deferred
tax asset includes current deferred tax assets of $8,402 and $18,182 as of
December 27, 2001 and December 28, 2000, respectively, which are included in
Other Current Assets on the Consolidated Balance Sheets.
The Company's U.S. federal income tax returns have been cleared with the IRS
through 1997.
Cash paid for income taxes was $12,084 for 2001, $5,514 for 2000, and $4,942 for
1999.
The tax provision (benefit) differs from the amounts obtained by applying the
statutory U.S. federal income tax rate to the earnings from continuing
operations before minority interest. The differences are reconciled as follows:
Fiscal Years Ended
2001(Revised - 2000(Revised - 1999(Revised -
See Note 2) See Note 2) See Note 2)
Expected federal income tax provision
(benefit) $ 34,425 $ (19,898) $ 5,326
Minority interest not included in
tax provision (405) (519) (446)
State and local income taxes, net
of federal income tax benefit
(provision) 284 482 (1,637)
Nondeductible amortization of
intangibles and other costs 601 590 1,160
Foreign income tax provision 546 1,700 120
Foreign and fuel tax credits (592) (2,614) (54)
Other, net 201 (568) 171
Tax provision (benefit) $ 35,060 $(20,827) $ 4,640
The Company has state net operating loss carryforwards available to offset
future taxable income. Following are the net operating losses by year of
expiration:
Year of Expiration State Net Operating Losses
2001 $ 607
2002 727
2003 1,079
2004 5,290
2005 956
Through 2020 62,181
$ 70,840
(15) Pension and Postretirement Benefits Plans
Multi-employer Pension Plan
Union employees who normally are not participants in the ESOP or Savings Plans
may be covered by multi-employer pension plans under which the Company pays
fixed amounts, generally based on hours worked, according to the provisions of
the various labor contracts. In 2001, 2000, and 1999, the Company expensed
$5,063, $4,077, and $3,954, respectively, for these plans. Under the Employee
Retirement Income Security Act of 1974 as amended by the Multi-employer Pension
Plan Amendments Act of 1980, an employer is liable upon withdrawal from or
termination of a multi-employer plan for its proportionate share of the plan's
unfunded vested benefits liability. Based on information provided by the
administrators of the majority of these multi-employer plans, the Company does
not believe there is any significant amount of unfunded vested liability under
these plans.
Defined Benefit Pension Plans
On December 11, 1999, the Company's subsidiary, DIS, established the DIS Pension
Plan for Salaried Employees, which is a noncontributory defined benefit pension
plan sponsored by DIS, covering a majority of DIS's employees. The benefits to
be paid under this plan are generally based on years of credited service and
average final earnings. DIS' funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plan's benefit obligation to employees upon their retirement. The assets of the
plan consist primarily of corporate equities, government securities, and
corporate debt securities.
Certain participants who terminate from the Company as a result of a reduction
in work force receive Involuntary Separation Payments ("ISEP") from the DIS
Pension Plan for Salaried Employees, based on salary and length of service.
Also on December 11, 1999, certain of DIS's union employees began participating
in the DynCorp Information Systems LLC Union Pension Plan, which is a
noncontributory defined benefit pension plan. DIS union employees are also
eligible for a postretirement healthcare and life insurance benefit plan,
sponsored by DIS.
Postretirement Benefit Plan
On December 11, 1999, a majority of DIS's then-current employees became covered
under a postretirement healthcare and life insurance benefit plan sponsored by
DIS. The determination of benefit cost for the postretirement health plan is
generally based on comprehensive hospital, medical and surgical benefit plan
provisions.
The following is a reconciliation of the benefit obligations, plan assets, and
funded status of the Company's Defined Benefit Pension and Union Pension Plans
and Postretirement Benefit Plan:
Change in Benefit Obligation: Pension Benefits Postretirement Benefits
2001 2000 2001 2000
Benefit obligation at beginning
of year $37,455 $44,448 $22,632 $21,608
Service cost 3,148 2,943 78 188
Interest cost 3,302 3,633 1,552 1,631
Actuarial loss (gain) 6,722 (3,761) (913) 779
Participant contributions - - 102 96
ISEP benefits paid (2,228) (563) - -
Other benefits paid (6,348) (9,245) (1,327) (1,670)
Benefit obligation at end of year $42,051 $37,455 $22,124 $22,632
Change in Plan Assets: Pension Benefits Postretirement Benefits
2001 2000 2001 2000
Fair value of assets at beginning
of year $50,540 $57,604 $ 7,021 $12,090
Actual return on plan assets (1,962) 2,744 (2,996) -
Employer contributions - - 1,226 (3,495)
Employee contributions - - 102 96
ISEP benefits paid (2,228) (563) - -
Other benefits paid (6,348) (9,245) (1,327) (1,670)
Fair value of assets at end
of year $40,002 $50,540 $ 4,026 $ 7,021
Funded Status Reconciliation: Pension Benefits Postretirement Benefits
2001 2000 2001 2000
Funded status $(2,049) $13,085 $(18,098) $(15,611)
Unrecognized prior service cost 2 - - -
Unrecognized net actuarial
(gain) loss 11,615 (1,564) 4,102 1,545
Net prepaid (unfunded) benefit
cost $ 9,568 $11,521 $(13,996) $(14,066)
Assumptions: Pension Benefits Postretirement Benefits
2001 2000 2001 2000
Discount rate 7.3% 7.5% 7.3% 7.5%
Varying rates of increase in
compensation levels
based on age 4.8% 5.0% N/A N/A
Expected weighted-average
long-term rate of return
assets 9.0% 9.0% 6.8% 6.8%
Assumed health care cost trend rate:
Post-65 claim group N/A N/A 6.3% 6.5%
Pre-65 claim group N/A N/A 6.3% 6.5%
Net periodic pension cost and postretirement benefit costs included the
following:
Pension Benefits Postretirement Benefits
2001 2000 2001 2000
Service cost $ 3,146 $ 2,943 $ 78 $ 188
Interest cost 3,302 3,633 1,552 1,631
Expected return on plan
assets (4,496) (4,942) (474) (765)
Net periodic pension cost $ 1,952 $ 1,634 $ 1,156 $ 1,054
For the postretirement benefit plan the health care cost trend rates are assumed
to decline gradually by 0.3% until the ultimate rate of 5.5% is reached in 2004
for post-65 and pre-65 claim groups and will remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point
Increase Decrease
Effect on total of service and interest
cost components $ 89 $ (81)
Effect on accumulated postretirement
benefit obligation $ 1,223 $(1,111)
(16) Net Earnings (Loss) Per Common Share
Basic earnings (loss) per common share ("EPS") is computed by dividing common
stockholders' share of net earnings (loss) by the weighted-average number of
common shares outstanding and contingently issuable shares. The weighted-average
number of common shares outstanding includes issued shares less shares held in
treasury and any unallocated ESOP shares. Shares earned and vested but unissued
under the Restricted Stock Plan are contingently issuable shares whose condition
for issuance have been satisfied and as such have been included in the
calculation of basic EPS. Diluted EPS is computed similarly except the
denominator is increased to include the weighted-average number of stock
warrants and options outstanding, assuming the treasury stock method.
The following is a reconciliation of shares for basic EPS to shares for diluted
EPS for the fiscal years ended:
2001 2000 1999
Weighted-average shares outstanding for basic EPS 10,559 10,477 10,044
Effect of dilutive securities:
Stock options 554 - 229
Weighted-average shares outstanding for
diluted EPS 11,113 10,477 10,273
(17) Incentive and Deferred Compensation Plans
The Company has several formal incentive compensation plans that provide for
incentive payments of cash and stock to officers and key employees. Incentive
payments under these plans are based upon operational performance, individual
performance, or a combination thereof, as defined in the plans. In 2000, the
chief executive officer was awarded 25,000 shares of the Company's stock under
the Company's Long-Term Incentive Stock Plan, which would vest entirely and be
distributable at such time as, but only in the event that, the price of common
stock exceeded $40.00 per share by a date no later than December 31, 2002. In
December 2001, these 25,000 options vested when the common stock traded at
$40.50 per share on the Company's internal market. The expense of $1,013 was
recorded in December 2001, when the restrictions on the shares lapsed.
In November 2001 the Company entered into three-year employment agreements with
certain executives specifying annual salaries and incentive plan target bonuses
and providing for payment of salary and pro-rated bonuses following termination.
The employment agreements also provide, in the event of involuntary termination
without cause, for consulting payments and non-compete payments for a period of
thirty months, and, if the executive is terminated in connection with a change
in control of the Company, payment of an additional lump-sum amount.
The Company has several types of deferred compensation plans for certain
executives. In 1998 the Company established the Key Executive Share-Option
Compensation Plan, which offers certain executives and key management employees
the opportunity to defer any selected portion of annual salary and bonuses. The
Company has recorded an asset and a liability at the fair market value of the
investments made with the deferrals in the amount of $1.5 million and $1.0
million as of December 27, 2001 and December 28, 2000, respectively. The related
investment asset is treated as a trading security under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and therefore
the related fluctuations in the fair market value are charged to Corporate
General and Administrative Expenses and Cost of Services.
In 1997 the Company established the Supplemental Executive Retirement Plan,
which offers certain executives additional retirement benefits in the form of a
ten-year certain stream of payments based on a percentage of final year annual
compensation. The plan also includes pre- and post-retirement lump sum death
benefit provisions. The Company has recorded a liability in the amount of $2.6
million and $2.4 million as of December 27, 2001 and December 28, 2000,
respectively, for these retirement balances.
In 1980, the Company began allowing certain executives to defer any amount of
their base salary in excess of the Social Security wage base until retirement or
any set date more than five years in the future. These balances are to be paid
out in either lump sums or over a certain number of years up to ten years as
agreed to in the original deferred compensation agreements with each executive.
The deferred balances earn interest based on a rate equal to the average
interest rates of interest paid for one-year certificates of deposit. There have
not been any additional deferrals since 1988. The Company has recorded a
liability in the amount of $0.2 million as of December 27, 2001 and December 28,
2000, which includes all future pay-outs and accrued interest.
(18) Stock Option Plans
In March 1999, the Company adopted a Long-Term Incentive Stock Plan, which
authorizes the grant of performance-based stock and cash incentive compensation
in the form of non-qualified stock options, stock appreciation rights,
restricted stock, performance grants and awards, and other stock-based grants
and awards. Specific terms relating to the grant are set by the Compensation
Committee at the time of the grant. Stock options granted under the Plan permit
optionees to purchase a designated number of shares of common stock at an
exercise price set by the Committee, which establishes vesting and exercise
provisions to be set forth in individual option agreements. The exercise price
may not be lower than the fair market value of the shares as of the time the
option is granted. Following an action by the Compensation Committee in February
2001, options granted during 1999 and 2000 will generally vest over a six-year
period or over a lesser period if certain stock price targets are met in future
years. Options that are not exercised within ten-years of the grant date will
expire.
The Company adopted a non-qualified Stock Option Plan in 1995, whereby options
could be granted to officers, directors, and other key employees to purchase a
maximum of 1,250,000 common shares at an option price not less than the most
recently determined fair market value as of the grant date. The grants are
exercisable only when vested and vest proportionately over a period of four or
five years, depending on the date of the grant. Options that are not exercised
within ten or seven years from the date of the grant, depending on the date of
the grant, shall expire. The fair value of each option grant is equal to the
Formula Price at the date of grant. The Company's ability to grant options under
the 1995 Stock Option Plan ended on June 30, 2001.
Stock option activity was as follows:
2001 2000 1999
- ------------------------------- --------- --------- ----------
Outstanding, beginning of year 1,625,000 1,603,150 1,238,600
Granted 339,200 447,000 468,750
Exercised (42,764) (95,813) (5,400)
Canceled or terminated (56,586) (329,337) (98,800)
- ------------------------------- ---------- ---------- ----------
Outstanding, December 27, 28,
and 30 1,864,850 1,625,000 1,603,150
Exercisable 973,535 698,450 590,200
Average price
Outstanding, beginning of year $20.82 $20.29 $18.69
Granted 29.78 23.50 24.38
Exercised 20.05 17.04 17.26
Canceled or terminated 23.77 22.95 19.82
Outstanding, end of year 22.38 20.82 20.29
Weighted-average grant date fair value of options was $6.51, $6.25, and $6.10
for 2001, 2000, and 1999, respectively.
The following table summarizes information about stock options outstanding at
December 27, 2001:
Weighted-Average Weighted-Average Remaining
Range of Prices Number Outstanding Exercise Price Contractual Life
- --------------- ------------------- ---------------- ------------------------
$14.90 - 19.00 598,700 $16.85 1.15
20.00 - 23.25 316,500 21.65 6.07
23.50 - 24.50 672,650 23.89 8.07
31.00 - 31.50 277,000 31.49 9.57
The following table summarizes information about stock options exercisable at
December 27, 2001:
Range of Prices Number Exercisable Weighted-Average Exercise Price
- ---------------- ------------------- -------------------------------
$14.90 - 19.00 586,700 $16.81
20.00 - 23.25 202,950 21.46
23.50 - 24.50 182,885 24.01
31.00 - 31.50 1,000 31.50
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company
has elected to account for its employee stock option plan under APB Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for this plan. Had compensation cost for the plan been
determined based on the fair value at the grant date consistent with SFAS No.
123, common stockholders' share of net earnings (loss) and earnings (loss) per
share would have been as follows:
2001 (Revised - 2000 (Revised - 1999 (Revised
Fiscal Years Ended See Note 2) See Note 2) - See Note 2)
Common stockholders' share of
net earnings
(loss)
As reported $58,444 $(45,258) $ 5,915
Pro forma $56,840 $(46,863) $ 4,141
Basic earnings (loss) per share
As reported $ 5.53 $ (4.32) $ 0.59
Pro forma $ 5.38 $ (4.47) $ 0.41
Diluted earnings (loss) per share
As reported $ 5.26 $ (4.32) $ 0.58
Pro forma $ 5.11 $ (4.47) $ 0.40
The minimum value is estimated on the date of grant assuming a five year
expected life of the options, a volatility factor of zero, a dividend yield of
zero, and risk-free interest rates of 5.01%, 6.28%, and 5.78% for 2001, 2000,
and 1999, respectively.
(19) Leases
Future minimum lease payments required under operating leases that have
remaining noncancellable lease terms in excess of one year at December 27, 2001
are summarized below:
Fiscal Years Ending
2002 $ 46,963
2003 42,968
2004 36,790
2005 27,600
2006 25,643
Thereafter 69,818
Total minimum lease payments $249,782
Rent expense for leases of $40,734, $42,426, and $34,769 for 2001, 2000, and
1999, respectively, has been charged to Cost of Services and Corporate General
and Administrative Expense. Of these 2001 rent expenses, approximately $21.5
million was directly charged to cost reimbursable contracts. Of the future
minimum lease payments, approximately $155.9 million are expected to be directly
charged to cost reimbursable contracts.
(20) Contingencies and Litigation
The Company and its subsidiaries and affiliates are involved in various claims
and lawsuits, including contract disputes and claims based on allegations of
negligence and other tortuous conduct. The Company is also potentially liable
for certain personal injury, tax, environmental, and contract dispute issues
related to the prior operations of divested businesses. In addition, certain
subsidiary companies are potentially liable for environmental, personal injury,
and contract and dispute claims. In most cases, the Company and its subsidiaries
have denied, or believe they have a basis to deny, liability, and in some cases
have offsetting claims against the plaintiffs, third parties, or insurance
carriers. The total amount of damages currently claimed by the plaintiffs in
these cases is estimated to be approximately $7.0 million (including
compensatory punitive damages and penalties). The Company believes that the
amount that will actually be recovered in these cases will be substantially less
than the amount claimed. After taking into account available insurance, the
Company believes it is adequately reserved with respect to the potential
liability for such claims. The estimates set forth above do not reflect claims
that may have been incurred but have not yet been filed. The Company has
recorded such damages and penalties that are considered to be probable
recoveries against the Company or its subsidiaries.
In September, 2000, the Company became aware of significant errors in
preacquisition estimates of the cost to complete a major ten-year federal
government telephone installation and operation contract that was undertaken in
1998 by GTE Information Systems LLC, now known as DynCorp Information Systems
LLC, a wholly-owned subsidiary of the Company ("DIS"). The Company acquired GTE
Information Systems LLC from Contel, Inc., a subsidiary of GTE, Inc., in
December 1999. As a consequence of these errors, the Company recorded a loss
reserve for the contract in the amount of $69.0 million, which had a remaining
balance of $53.8 million at December 28, 2000. Effective August 1, 2001, DIS and
the federal government customer entered into a bilateral modification of the
contract as a consequence of which the Company reduced the previously recorded
loss reserve by $44.7 million effective in the third quarter 2001. This
reduction resulted from the government's elimination of certain future
liabilities from the contract, an increase in future billing rates for calls,
and a decrease in future call revenue shared with the government agency. On
August 10, 2001, the Company instituted suit against GTE, Inc. claiming breaches
of the acquisition agreement representations and warranties and for other
relief.
On September 11, 2001, DynCorp and three of its wholly-owned subsidiaries were
served with a civil action filed in the United States District Court for the
District of Columbia on behalf of certain Ecuadorian citizens and an alleged
class that could consist of at least 10,000 such unnamed citizens, alleging
personal injury, property damage and wrongful death as a consequence of the
spraying of narcotic crops along the Colombian border adjacent to Ecuador. The
action seeks a declaratory judgment and injunctive relief as well as unspecified
compensatory and punitive damages. Spraying operations are conducted under a
Company subsidiary contract with the United States Department of State in
cooperation with the Colombian government. No spraying operations are conducted
in Ecuador, although the complaint alleges that sprayed material has drifted
across the border into Ecuador. All operations of the Company's subsidiary in
Colombia are conducted in accordance with specific instructions from the
Department of State using equipment and spray material provided by the United
States government. The State Department has publicly stated that the spray
material has been demonstrated not to be toxic to human beings. The Company and
its subsidiaries have placed their insurance carriers on notice and tendered
defense. The Company and its subsidiaries intend to vigorously defend against
all allegations. The Company does not expect any losses due to this litigation.
Regarding environmental issues, neither the Company, nor any of its
subsidiaries, is named a Potentially Responsible Party (as defined in the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"))
at any site. The Company, however, did undertake, as part of the 1988
divestiture of a petrochemical engineering subsidiary, an obligation to install
and operate a soil and water remediation system at a subsidiary research
facility site in New Jersey and also is required to pay the costs of continued
operation of the remediation system. In addition, the Company, pursuant to the
1995 sale of its commercial aviation business, is responsible for the costs of
the clean up of environmental conditions at certain designated sites. Such costs
may include the removal and subsequent replacement of contaminated soil,
concrete, and underground storage tanks, that existed prior to the sale of the
commercial aviation business. The resolution of these matters is not expected to
have a material impact on the Company's results of operations or financial
condition. The Company believes it has adequate accruals for any liability it
may incur arising from the designated sites.
The Company has been advised by the purchasers of two former subsidiaries
(DynAir Tech of Florida, Inc. and DynAir Services Inc.) of environmental claims
by Dade County, Florida, arising out of the former subsidiaries' conduct of
business at Miami International Airport ("MIA"). Claims for indemnification are
being asserted against the Company pursuant to divestiture agreements entered
into in 1995. The Company has assumed defense of these allegations with a full
reservation of rights. A lawsuit was filed in April 2001 by Dade County in
Florida State Court against DynAir Tech's successor-in-interest, Sabretech,
Inc., and 16 other defendants, but neither Sabretech nor any other named
defendant has been served. DynAir Services is not presently a named defendant,
although it is one of an additional 200 companies that the County has identified
as having possible responsibility for contamination at MIA. Under the terms of
the DynAir Tech divestiture agreement, the purchaser is responsible for the
first $125,000 of cost incurred as a result of such claims; however, the Company
is required to assume full responsibility for all costs to the extent claims
exceed $125,000 up to an aggregate maximum amount of $2.5 million. If the
Company is required to indemnify under the DynAir Services divestiture
agreement, it would be responsible for all related costs. The County's complaint
specifies $200.0 million of incurred and $250.0 million of future damages
against the named defendants. Defense has been tendered to certain of the
Company's insurance carriers, although no coverage determination has been made.
Both DynAir Services and Sabretech are represented by environmental defense
counsel and intend to vigorously defend against the allegations. At this time,
the Company cannot reasonably determine the exposure, if any, to possible losses
from these claims.
The Company is a party to other civil and contractual lawsuits that have arisen
in the normal course of business for which potential liability, including costs
of defense, constitutes the remainder of the $7.0 million discussed above. The
estimated probable liability (included in Other Liabilities and Deferred Credits
on the Consolidated Balance Sheet) for these issues is approximately $4.0
million and is substantially covered by insurance. All of the insured claims are
within policy limits and have been tendered to and accepted by the applicable
carriers. The Company has recorded an offsetting asset (included in Other Assets
on the Consolidated Balance Sheet) of $3.3 million at December 27, 2001 for
these items.
The Company has recorded its best estimate of the aggregate liability that will
result from these matters. While it is not possible to predict with certainty
the outcome of litigation and other matters discussed above, it is the opinion
of the Company's management, based in part upon opinions of counsel, insurance
in force, and the facts currently known, that liabilities in excess of those
recorded, if any, arising from such matters would not have a material adverse
effect on the results of operations, consolidated financial condition or
liquidity of the Company over the long-term. However, it is possible that the
timing of the resolution of individual issues could result in a significant
impact on the operating results and/or liquidity for one or more future
reporting periods.
The major portion of the Company's business involves contracting with
departments and agencies of, and prime contractors to, the U.S. Government, and
such contracts are subject to possible termination for the convenience of the
government and to audit and possible adjustment to give effect to unallowable
costs under cost-type contracts or to other regulatory requirements affecting
both cost-type and fixed-price contracts. Payments received by the Company for
allowable direct and indirect costs are subject to adjustment and repayment
after audit by government auditors if the payments exceed allowable costs. A
majority of the audits have been completed on the Company's incurred contract
costs through 1999. The Company has included an allowance for excess billings
and contract losses in its financial statements that it believes is adequate
based on its interpretation of contracting regulations and past experience.
There can be no assurance, however, that this allowance will be adequate. The
Company is aware of various costs questioned by the government, but cannot
determine the outcome of the audit findings at this time. In addition, the
Company is occasionally the subject of investigations by various investigative
organizations, resulting from employee and other allegations regarding business
practices. In management's opinion, there are no outstanding issues of this
nature at December 27, 2001 that will have a material adverse effect on the
Company's consolidated financial condition, results of operations, or liquidity.
(21) Business Segments (Revised)
Effective January 2002, the Company realigned its five strategic business
segments into four segments. DynCorp Information and Enterprise Technology
("DI&ET") (except for a contract which provides maintenance and operations
support to the Strategic Petroleum Reserve ("SPR Contract")) 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, 2000, and 1999 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. The SPR Contract was incorporated into
DynCorp Technical Services ("DTS"), which 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.
The Company evaluates performance based primarily on operating profit, but also
evaluates return on net assets and days sales outstanding. Operating profit is
the excess of revenues over cost of services and certain non-operating income
and expenses included in Other Income, net of Other Miscellaneous Expenses on
the Consolidated Statements of Operations.
The Company derived 96.0%, 98.0%, and 97.0% of its revenues from contracts and
subcontracts with the U.S. Government in 2001, 2000, and 1999, respectively.
Prime contracts comprised 87.6% of revenue in 2001, 78.7% of revenue in 2000,
and 74.6% of revenue in 1999. Prime contracts with the Department of Defense
("DoD") represented 49.0% of revenue in 2001, 44.0% of revenue in 2000, and
40.0% of revenue in 1999. In 2001 and 2000, the Company's second largest
customer was the Department of State, comprising 11.0% of revenue. In 1999, the
Company's second largest customer was the Department of Energy, comprising 14.0%
of revenue. No other customer accounted for more than 10.0% of revenues in any
year.
Revenue, operating profit, identifiable assets, capital expenditures, and
depreciation and amortization by segment are presented below:
Fiscal Years Ended
2001(Revised - 2000(e)(Revised -
See Note 2) See Note 2) 1999(e)
Revenue
DSS $ 827,369 $ 829,119 $ 587,501
DTS 521,450 452,286 370,184
DI 545,836 459,085 333,619
ADVMED 61,318 64,665 53,977
$1,955,973 $1,805,155 $1,345,281
Operating Profit (Loss)
DSS (a) (b) $ 103,933 $ (21,440) $ 26,082
DTS 18,803 17,099 17,001
DI 38,094 25,068 19,383
ADVMED 2,652 3,692 621
163,482 24,419 63,087
Corporate general and administrative 29,456 29,350 21,741
Interest expense 31,521 41,408 18,943
Interest income (657) (1,471) (1,393)
Goodwill amortization (c) 3,089 4,167 2,947
Amortization of other intangibles
of acquired companies (d) 3,305 10,755 8,461
Costs associated with divested
businesses - 148 286
Minority interest included in
operating profit (loss) (2,462) (2,622) (2,968)
Other miscellaneous 874 (465) (148)
Earnings (loss) from continuing
operations before income taxes,
minority interest, extraordinary
item, and cumulative effect of
change in accounting principle $ 98,356 $ (56,851) $ 15,218
(a) 2001 includes a $17.4 million gain on disposition of DMR (see Note 12).
(b) 2001 includes $44.7 million of income primarily from revised loss estimates
due to contract modifications in 2001 on a contract acquired with the
purchase of DIS. 2000 includes a $76.2 million charge primarily from revised
loss estimates on the same contract.
(c) 1999 includes a write-off of the unamortized goodwill balance of an impaired
investment.
(d) 1999 includes write-off of in-process research and development.
Fiscal Years Ended
2001 2000(e)
(Revised - (Revised -
See Note 2) See Note 2)
Identifiable Assets
DSS $290,733 $289,260
DTS 100,573 107,550
DI 94,464 83,588
ADVMED 26,880 26,815
Corporate 85,790 79,543
$598,440 $586,756
Fiscal Years Ended
2001 2000(e) 1999(e)
Capital Expenditures
DSS $ 4,421 $ 15,315 $ 9,045
DTS 461 2,141 2,223
DI 387 251 296
ADVMED 227 843 93
Corporate 1,574 2,410 2,221
$ 7,070 $ 20,960 $ 13,878
2001(Revised - 2000(e)(Revised -
Depreciation and Amortization See Note 2) See Note 2) 1999(e)
DSS $ 9,270 $ 18,287 $ 6,540
DTS 1,212 1,106 1,951
DI 749 240 182
ADVMED 1,264 559 949
Corporate 7,415 6,862 3,939
$ 19,910 $ 27,054 $ 13,561
DMR's results of operations and financial position have been included in all of
the DSS segment balances noted above. DMR reported revenues of $41.9 million,
$27.0 million and $24.5 million in 2001, 2000, and 1999, respectively. DMR's
operating results were $4.0 million, $0.1 million, and $(1.4) million in 2001,
2000, and 1999, respectively. DMR's 2001 operating results include the gain on
disposition of $17.4 million, which is offset by $13.4 million loss from
operations. Capital expenditures for DMR were $1.2 million, $0.2 million, and
$0.1 million in 2001, 2000, and 1999, respectively. Depreciation and
amortization for DMR totaled $0.4 million, $0.2 million, $0.1 million in 2001,
2000, and 1999, respectively. DMR's identifiable assets were $0.0 million, $5.2
million, and $6.8 million in 2001, 2000, and 1999, respectively.
The equity in net income of investees accounted for by the equity method
included in operating profit and the amount of investment in equity method
investees included in identifiable assets for each segment is presented below:
Fiscal Years Ended
2001 2000 1999
Equity in Investees' Earnings
DTS $2,396 $2,366 $2,114
DI 935 - -
$3,331 $2,366 $2,114
Investment in Equity Investees
DTS $1,462 $3,695 $2,490
DI 935 - -
DSS - 25 -
$2,397 $3,720 $2,490
The Company provides services in foreign countries under contracts with the U.S.
Government and foreign customers.
The risks associated with the Company's foreign operations relating to foreign
currency fluctuation and political and economic conditions in foreign countries
have not had a significant negative impact to the Company.
The Company's foreign operations are significantly influenced by the U.S.
Government's foreign policy and funding for such operations. Revenues in foreign
countries under contracts with the U.S. Government represent approximately 98%
of all foreign operations revenue for 2001 and 99% for 2000 and 1999. Revenue
from foreign operations by segment was as follows:
Fiscal Years Ended
2001 2000
(Revised - (Revised -
See Note 2) See Note 2) 1999
Foreign Operations Revenue
DSS $ 32,076 $ 23,357 $ 5,656
DTS 15,471 15,967 14,794
DI 304,616 344,529 234,787
ADVMED - 955 2,455
$ 352,163 $ 384,808 $ 257,692
(e) Data has been revised to give recognition to the current reportable segment
structure in 2002.
(22) Quarterly Financial Data (Unaudited)
A summary of quarterly financial data for 2001 and 2000 is as follows:
2001 Quarters 2000 Quarters (a)
(Unaudited and Revised - (Unaudited and Revised -
See Note 2) See Note 2)
First Second Third Fourth First Second Third Fourth
Revenues $438,979 $476,611 $502,856 $537,527 $428,311 $446,498 $468,760 $461,586
Gross profit (loss) (a) 23,721 26,954 73,856 21,169 15,217 24,374 (49,487) 36,722
Earnings (loss) from continuing operations
before income taxes, minority interest,
and cumulative effect of change in
accounting principle 6,957 10,138 58,210 23,051 (4,527) 3,677 (70,535) 14,534
Minority interest 476 635 532 819 577 764 304 977
Cumulative effect of change in accounting
principle - - - - 4,770 - - -
Net earnings (loss) 3,694 5,417 37,618 14,105 (8,088) 1,893 (46,045) 8,824
Common stockholders' share of net earnings
(loss) per common share:
Basic earnings (loss) per share $0.30 $0.46 $3.50 $1.27 $(0.82) $0.14 $(4.43) $0.79
Diluted earnings (loss) per share $0.29 $0.44 $3.33 $1.20 $(0.82) $0.14 $(4.43) $0.79
(a) 2000 fourth quarter includes $1.1 million of closedown costs on an operation
which supported the Department of Justice.
DMR's quarterly revenue and operating results were the following:
($ thousands)
2001 Quarters (a)(b) 2000 Quarters
(Unaudited) (Unaudited)
First Second Third Fourth First Second Third Fourth
Revenue $7,134 $7,270 $13,925 $13,601 $6,555 $7,127 $6,107 $7,194
Gross (loss)
profit $(40) $(524) $577 $(13,369) $486 $211 $(737) $116
(a) 2001 fourth quarter includes a $9.4 million loss on a DMR contract providing
non-emergency medical transportation services in the Commonwealth of Virginia.
(b) 2001 fourth quarter gross loss does not include the gain on disposition of
DMR of $17.4 million (see Note 12).
(23) Subsequent Events
During the second quarter of 2002, the Company recorded a $15.8 million loss on
an investment due to an other than temporary decline in its value. Also
regarding that same investment, in the third quarter of 2002 the Company entered
into an agreement with the investee pursuant to which the Company and its
investee agreed to settle all disputes between them. As part of the agreement,
the Company agreed to loan $5.0 million to the investee which was fully reserved
for in the third quarter of 2002.
Exhibit 99.2
DynCorp and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Fiscal Years Ended, 2001, 2000 and 1999
(Dollars in thousands)
Balance at Charged to Write-off of
Beginning Costs and Uncollectible Balance At End
Description of Period Expenses Accounts Other of Period
- ----------- --------- -------- -------- ----- ---------
Year Ended December 27, 2001
allowance for doubtful accounts $ 2,804 $ 2,605 $ (667) $1,895 $ 6,637
Year Ended December 28, 2000
allowance for doubtful accounts $ 3,156 $ 220 $ (588) $ 16 $ 2,804
Year Ended December 30, 1999
allowance for doubtful accounts $ 1,126 $ 1,434 $ (130) $ 726 $ 3,156
Exhibit 99.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-
38034 of DynCorp on Form S-8 of our report dated October 11, 2002 (November 7,
2002 as to Note 21)(which report expresses an unqualified opinion and includes
an explanatory paragraph related to the revision of the financial statements)
appearing in this Report on Form 8-K.
/s/ Deloitte & Touche LLP
McLean, Virginia
November 7, 2002