UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-3879
DynCorp
(Exact name of registrant as specified in its charter)
Delaware 36-2408747
(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
2000 Edmund Halley Drive, Reston, VA 22091-3436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 264-0330
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
17% Redeemable Pay-In-Kind Class A Preferred Stock, par value $0.10
per share
(Title of class)
16% Pay-In-Kind Junior Subordinated Debentures due 2003
(Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. The registrant's voting stock
is not publicly traded; therefore the aggregate market value of
the 2.5% of outstanding voting stock held by nonaffiliates is not
available.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date. 7,425,963 shares of common stock having a par
value of $0.10 per share were outstanding March 15, 1995.
TABLE OF CONTENTS
1994 FORM 10-K
Item
Part I
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
Part II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
8. Financial Statements and Supplementary Data
Report of Independent Public Accountants
Financial Statements
Consolidated Balance Sheets
Assets
Liabilities, Redeemable Common Stock and Stockholders' Equity
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
Part III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and
Management
13. Certain Relationships and Related Transactions
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
PART I
ITEM 1. BUSINESS
General Information
The Company provides diversified management, technical and
professional services to government and commercial customers
throughout the United States and, to a limited extent, in certain
foreign countries. Generally, these services are provided under
written contracts which may be fixed-price, time-and-material or
cost-type depending on the work requirements and other
individual circumstances. For business reporting purposes, these
operations are classified into two sectors, Government and
Commercial. (In 1992, the Company had reported on four operating
groups: Government, Applied Sciences, Commercial Aviation and
Postal Operations.)
The Government Sector provides services to all branches of
the Department of Defense and to NASA, the Department of State,
the Department of Energy, the Environmental Protection Agency,
the Centers for Disease Control, the National Institutes of
Health, the Postal Service and other U.S. Government agencies and
foreign governments. These services encompass a wide range of
management, technical and professional services covering the
following areas:
Information and Engineering Technology includes software
development and maintenance, computer center operations, data
processing and analysis, database administration,
telecommunications support and operations, maintenance and
operation of integrated electronic systems and networking of
electronic systems in a local and wide area environment.
Energy, Environment and National Security Programs include
environmental regulation development, quality assurance
studies and research, and management of information relating
to the proper handling of hazardous materials and substances,
alternative energy research and evaluation, energy security
studies and assessments.
Aerospace Technology includes engineering, maintenance,
modification, operational and logistical support of military
aircraft; technical and evaluation services at test and
training ranges; engineering, manufacturing and installation
of aircraft system upgrades; structural repairs that extend
airframe life for the aging fleet of military and civil
aircraft; ground based logistical support and staff
augmentation; and engineering and technical services for
high-technology space and missile systems programs.
Enterprise Management includes the operation, maintenance and
management of major governmental and private enterprises and
installations, ranging from the turnkey responsibility for
operation of all aspects of a single base (such as a military
installation) to assumption of responsibility for the
staffing of particular functions at various locations for a
single customer. Disciplines included within operational
responsibility vary, but generally include scientific
support, operation of sophisticated electronic and mechanical
systems, construction and demolition, environmental
remediation and the handling of and accountability for
inventories of equipment and materials/supplies and other
property. Also included are testing and evaluation of
military hardware systems at government test ranges,
collection and processing of data, maintenance of targets,
ranges and laboratory facilities, developmental testing of
complex weapon systems, security systems work and technology
transfer into commercial applications.
Advanced Technology Services currently provides data
processing and management and operations of facilities in
support of the U.S. Postal Service Remote Encoding System and
biomedical and health care research and support services
under a contract with the National Institutes of Health.
Further, Advanced Technology Services will serve as an
incubator for new businesses and/or possible future business
in new market areas which focus on emerging technologies or
novel processing applications.
The Commercial Sector provides ground support, line
maintenance and aircraft repair services to various commercial
airline customers, both domestic and international. These
services are provided at over 50 airports and include the
following functional areas:
Ground support services at commercial airports include cargo
handling, cabin cleaning, line maintenance, ticketing and
passenger handling and boarding services. Auxiliary support
services include bus and limousine operation, security,
baggage service and passenger screening operations. They
also include into-plane fueling services and the management
and operation of tank farms and fuel distribution systems.
Aircraft repair includes maintenance checks, component
overhaul, heavy structural maintenance, airframe and systems
maintenance and modification on a wide variety of passenger
and cargo aircraft, including wide body aircraft. The
Company has three major aircraft maintenance overhaul
facilities (Miami, Florida, Amarillo, Texas and Phoenix,
Arizona).
Industry Segments
The Company has one line of business, which is to provide
management, technical and professional services to commercial and
government organizations in support of the customers' facilities
or operations.
Backlog
The Company's backlog of business (including estimated value
of option years on government contracts) was $2.206 billion at
the close of 1994, compared to a year-end 1993 backlog of $2.772
billion. Several procurements originally scheduled for 1994 were
delayed into 1995 and, as a result, in the first two and one-half
months of 1995, $503 million of new contract awards were added to
the Company's backlog. Of the total backlog at December 31,
1994, $1.299 billion is expected to produce revenues after 1995.
Contracts with the U.S. Government are generally written for
periods of three to five years. Because of appropriation
limitations in the federal budget process, firm funding is
usually made for only one year at a time, with the remainder of
the years under the contract expressed as a series of one-year
options. The Company's experience has been that the Government
generally exercises these options. U.S. Government contracts
contain standard provisions for termination at the convenience of
the U.S. Government, pursuant to which the Company is generally
entitled to recover costs incurred, settlement expenses, and
profit on work completed to termination.
The Company's ground support service contracts with airlines
generally run for one to three years. Some contracts are
terminable on short notice, but the Company's experience has been
that few airlines choose to exercise this option given the
difficulty of integrating a replacement provider into the
airlines' schedule. The Company is usually paid for its ground
services at a fixed contract rate on a per-flight basis (every
takeoff and landing). For heavy aircraft maintenance services,
carriers solicit bids for the required services. Awards are made
on the basis of price, quality of service and past performance.
For routine line maintenance, the Company charges a flat rate
based on the service and the frequency of visits.
Competition
The general fields in which the Company conducts business are
all highly competitive, with competition based on a variety of
factors including, but not limited to, price, service and past
experience. Competitors of the Company vary in size with some
having a larger financial resource base. However, the Company
believes that it has been awarded many contracts because of its
technical know-how and past service record. Some of the major
competitors of the Company are as follows:
Government Sector Commercial Sector
Brown and Root AMR Services, Inc.
CDSI ASI-Dial
Computer Science Corp. Dalfort Aviation Inc.
EG&G Hudson General Corp.
E Systems Lockheed-Martin
Johnson Controls Ogden Aviation Services
Lockheed-Martin Page Avjet
SAIC
Tracor
Foreign Operations
The Company has a minority investment in an unaffiliated
company in Saudi Arabia. Discussions are currently underway
regarding the sale of the Company's minority interest to one or
more of the other Saudi stockholders. In addition, the Company
in 1993 established operations in Mexico and Russia. None of
these foreign operations is material to the Company's financial
position or results of operations.
Other activities of the Company presently include the
providing of services within the United States to certain foreign
customers, especially airlines. These services for foreign
customers are generally paid for in United States dollars. The
Company also performs services in foreign countries under
contracts with the U.S. Government and the United Nations.
The risks associated with the Company's foreign operations in
regard to foreign currency fluctuation, and political and
economic conditions in foreign countries, are not significant.
Incorporation
The Company was incorporated in Delaware in 1946.
Employees
The Company had approximately 23,600 employees at December 31,
1994.
ITEM 2. PROPERTIES
The Company is a service-oriented company, and as such the
ownership or leasing of real property is an activity which is not
material to an understanding of the Company's operations.
Properties owned or leased include office facilities, hangars,
warehouses used in connection with the storage of inventories and
fabrication of materials associated with various services
rendered and servicing facilities used in the Company's
commercial aviation operations. None of the properties is
unique; however, several of the leases constitute a partially
exclusive right to operate at certain airports. All of the
Company's owned facilities are located within the United States.
In the opinion of management, the facilities employed by the
Company are adequate for the present needs of the business.
Reference is made to the Consolidated Financial Statements and
Notes, included elsewhere in this Annual Report on Form 10-K, for
additional information concerning capital expenditures and lease
commitments for property.
ITEM 3. LEGAL PROCEEDINGS
This item is incorporated herein by reference to Note 18 to
the Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the fourth quarter of 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
DynCorp's common stock is not publicly traded. There were
approximately 394 record holders of DynCorp common stock at
December 31, 1994. In addition, the DynCorp Employee Stock
Ownership Plan Trust owns stock on behalf of approximately 30,000
present and former employees of the Company. Cash dividends have
not been paid on the common stock since 1988.
ITEM 6. SELECTED FINANCIAL DATA
The following table of selected financial data of the Company
should be read in conjunction with the Company's Consolidated
Financial Statements included elsewhere in this Annual Report on
Form 10-K. (Dollars in thousands except per share data.)
Years Ended December 31,
1994 1993 1992 1991 1990
Revenues $1,022,072 $953,144 $911,422 $807,186 $717,391
Loss before extraordinary item $ (12,831) $(13,414) $(20,816) $(12,595) $(14,417)
Extraordinary gain (loss) (a) - - (2,526) 192 726
Net Loss $ (12,831) $(13,414) $(23,342) $(12,403) $(13,691)
Net loss for common stockholders $ (12,831) $(13,414) $(24,301) $(17,583) $(18,752)
Earnings (loss) per common share:
Primary -
Loss before extraordinary item $ (2.12) $ (2.87) $ (4.49) $ (3.97) $ (4.28)
Extraordinary gain (loss) (a) - - (0.49) 0.04 0.15
Net loss $ (2.12) $ (2.87) $ (4.98) $ (3.93) $ (4.13)
Fully Diluted $ (2.12) $ (2.87) $ (4.98) $ (3.93) $ (4.13)
Cash dividends per common share $ - $ - $ - $ - $ -
YEAR-END DATA
Long-term debt (excluding
current maturities) $ 230,608 $ 216,425 $ 199,762 $ 121,251 $ 103,584
Redeemable preferred stock $ - $ - $ - $ 24,884 $ 19,705
Redeemable common stock $ 2,288 $ 2,200 $ - $ - $ -
Stockholders' equity $ 7,250 $ 6,166 $ 3,884 $ 26,598 $ 27,416
Total assets $ 402,330 $ 382,456 $ 348,273 $ 316,361 $ 289,354
<FN>
(a) The extraordinary gain (loss) in 1992, 1991 and 1990 results from the
early extinguishment of debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
In June, 1994, the Company announced its intent to restructure
its government operations to better serve its customers and
address the declining business base of certain of the existing
operating units. A detailed implementation plan was developed
during the second half of the year and the new organization was
substantially in place by January 1995. The restructuring
resulted primarily in the elimination and/or consolidation of
business units in order to achieve improved efficiency and
economy of scale. Additionally, the Company acquired the
following businesses during the year.
CBIS Federal, Inc., which provides full life cycle integrated
information solutions, primarily to civilian agencies of the
federal government.
A 25% interest in Composite Technology Inc., a Texas based
aerospace technology company that specializes in repair of
aircraft components through the use of composite materials.
A 25% interest in Gateway Passenger Services LP, a California
based airport ground handling operation expected to provide
expansion opportunities into the Pacific rim area and Hawaii.
In August, the Company initiated the Asset Management Program,
which delineates management's plan to replace its high interest
rate Junior Subordinated Debentures utilizing proceeds from the
refinancing of equipment, expansion of the receivable backed
financing, tighter control of cash disbursements, and the sale of
certain assets. See Liquidity and Capital Resources for further
explanation.
The Company ended the year with revenues in excess of $1
billion, and continued to improve gross profit and margins.
However, as in 1993, several unusual items, primarily commercial
aviation maintenance operating losses and the recognition of
asset impairment related to this unit, the write-off of an
investment in a 50.1% owned subsidiary, expenses related to
divested businesses and the pay-in-kind interest differential
yielded a net loss for the year. The table below reflects the
proforma effect of the above mentioned items on the Company's
earnings had these items not been incurred (dollars in
thousands):
Years Ended December 31,
1994 1993
Loss before income taxes and minority interest $(16,907) $(11,133)
Commercial Sector - aircraft maintenance losses 5,351 6,629
Commercial Sector - aircraft maintenance
facilities asset impairment 9,492 -
Write-offs related to acquisitions/investments 5,499 3,602
Divested business expenses 2,318 293
PIK interest differential on debentures (a) 3,811 4,092
Proforma earnings before income taxes
and minority interest $ 9,564 $ 3,483
(a) Estimated reduction in interest expense if refinanced at current market
rate (11.5% and 10.5% in 1994 and 1993 respectively) for cash pay debt.
Revenues from the Department of Defense were $551 million in
1994 compared to $543 million in 1993 and $538 million in 1992.
These revenues represented 53.9% of total 1994 revenues compared
to 56.9% in 1993 and 59.0% in 1992. This represents the
Company's fourth year of its strategic long range plan to
continue to grow or maintain its defense business while focusing
primarily on the growth of non-defense business.
Following is a three-year summary of operations, cash flow and
long-term debt (in thousands):
Years Ended December 31,
1994 1993 1992
Operations
Revenues $ 1,022,072 $ 953,144 $ 911,422
Gross profit 43,868 39,557 28,146
Selling and corporate administrative (17,199) (18,267) (20,476)
Interest, net (23,150) (23,099) (22,458)
Aircraft maintenance impairment (9,492) - -
Other (10,934) (9,324) (5,860)
Loss before income taxes, minority
interest and extraordinary item $ (16,907) $ (11,133) $ (20,648)
Cash Flow
Net loss $ (12,831) $ (13,414) $ (23,342)
Depreciation and amortization 27,077 19,818 19,372
Pay-in-kind interest 15,329 13,142 6,590
Working capital items (26,818) (7,704) (7,559)
Other 215 (1,222) 283
Cash provided (used) by operations 2,972 10,620 (4,656)
Investing activities (22,214) (15,611) (18,130)
Financing activities 8,840 7,817 26,868
Increase (decrease) in cash
and short-term investments $ (10,402) $ 2,826 $ 4,082
December 31,
Long-term Debt (including current maturities) 1994 1993 1992
Junior Subordinated Debentures $ 102,659 $ 86,947 $ 73,489
Contract Receivable Collateralized Notes 100,000 100,000 100,000
Mortgages payable 22,285 23,416 19,436
Other notes payable and capitalized leases 9,008 9,899 9,507
$ 233,952 $ 220,262 $ 202,432
The following discussion of the Company's results of operations
is directed toward the two operating sectors, Government and
Commercial.
Results of Operations
Revenues - Revenues for 1994 were $1,022.1 million compared to
1993 revenues of $953.1 million, an increase of $69.0 million
(7.2%) with the Government Sector contributing $41.5 million and
the Commercial Sector adding $27.5 million. The increase in the
Government Sector's revenue was primarily attributable to
businesses acquired in October 1994, and November and December
1993 ($52.5 million), new contract awards or contracts which were
in the start-up phase in 1993 but were fully operational in 1994
($73.3 million) and a retroactive adjustment on one contract for
wage increases mandated by the Department of Labor under the
Service Contract Act ($7.0 million). These increases were offset
by declines from contracts lost in recompetition and reduced
level of effort on existing contracts. Revenue for the
Commercial Sector's aircraft maintenance operations and ground
support services operations were $73.1 million and $130.3
million, respectively, up $15.8 million and $11.7 million over
1993 revenues.
Revenues for 1993 were $953.1 million compared to 1992 revenues
of $911.4 million, an increase of $41.7 million (4.6%). The
Government Sector had an increase of $49.1 million (6.7%) while
the Commercial Sector had a decrease of $7.4 million (4.0%). The
increase in Government Sector's revenue includes approximately
$15.1 million from businesses acquired in December 1992 and
November and December 1993, $16.0 million from the Postal
contracts which were in the start-up phase in 1992 but were fully
operational in 1993, and $17.9 million from new contract awards
offset partially by contracts completed and/or not renewed. The
overall decline in Commercial Sector's 1993 revenue resulted from
low volume in the aircraft maintenance activities and the impact
of relocating the Miami, Florida maintenance operation to a new
hanger facility; offset partially by increases in ground support
services. Aircraft maintenance 1993 revenue decreased to $57.3
from $74.3 million in 1992 while ground support services' 1993
revenue increased to $118.6 million from $109.0 million in 1992.
Cost of Services/Gross Margins - Cost of services was 95.7% of
revenues in 1994, 95.8% in 1993 and 96.9% in 1992 which resulted
in gross margins of $43.9 million (4.3%), $39.6 million (4.1%)
and $28.1 million (3.1%), respectively. Both the Government and
Commercial Sectors' margins increased from that of the prior
year. The increase in Government Sector's gross margin was
attributable to acquisitions consummated in November and
December, 1993 and October, 1994, and new contract awards which
were partially offset by decreases related to lost contracts,
reduced level of effort on existing contracts and increased costs
incurred in support of proposal efforts. Commercial Sector's
gross margin as a percent of revenue was up 1.4% over 1993. The
ground services and fueling operations increase of 1.4% was due
to several factors including improved operations and an
adjustment to the depreciable lives of certain assets (see Note 4
to the Consolidated Financial Statements included elsewhere in
the Annual Report on Form 10-K). The aircraft maintenance
operations reflected an improvement of 2.8%, but still had a
negative margin of 6.4%, primarily because of inadequate workload
to cover fixed costs. See Liquidity and Capital Resources for
further comments.
Government Sector's 1993 gross margins were improved while the
Commercial Sector's 1993 margins declined from those of the prior
year. The improvement in Government Sector's gross margins was
principally due to improved profit performance on new contracts
started in 1992 and the early part of 1993 (in particular the
Postal and the Department of Energy contracts). Commercial
Sector's decline in gross margin was the result of reduced volume
in the aircraft maintenance activities, offset partially by
improved gross margins of the ground support activities.
Aircraft maintenance had gross margin losses of $6.6 million in
1993 compared to $0.4 million in 1992. Also contributing to the
decline in Commercial Sector's margins were approximately $0.6
million of costs associated with the relocation of the Miami,
Florida aircraft maintenance operations to larger hangar
facilities at the Miami, Florida airport.
Selling and Corporate Administrative - Selling and corporate
administrative expenses as a percentage of revenues were 1.7%,
1.9% and 2.2% in 1994, 1993 and 1992, respectively. The decrease
of $1.1 million in 1994 from 1993 is attributable to cost
reductions associated with Commercial Sector's general and
administrative functions and also a decrease in Restricted Stock
Plan expense due to the award of fewer shares in 1994.
There were both increases and decreases in 1993 over 1992 of the
various elements and components of these expenses; however, the
two most significant factors contributing to the decrease of $2.2
million from 1992 were cost reductions made in Commercial
Sector's general and administrative expenses and a decrease in
Government Sector's marketing and bid and proposal costs from the
unusually high amount incurred in 1992 on a contract proposal for
the Department of Energy's Strategic Petroleum Reserve in
Louisiana.
Interest - Interest expense was $25.6 million in 1994, virtually
unchanged from $25.5 million in 1993. Increases resulting from
the compounding of the pay-in-kind interest on the Junior
Subordinated Debentures and the inclusion of a full year of
interest on mortgages assumed in conjunction with an acquisition
in the fourth quarter of 1993 were offset by the reversal of
interest accruals resulting from a favorable settlement with the
Internal Revenue Service of the Company's tax liability for the
period 1985-1988.
Interest expense in 1993 of $25.5 million was $0.6 million higher
than 1992. This small increase was primarily the result of the
Contract Receivable Collateralized Notes being outstanding for
the full year of 1993 compared to approximately eleven months in
1992, interest on the mortgage for the Corporate office building
was for the full year of 1993 compared to five months in 1992 and
an increase in the amount of capitalized leases outstanding, all
of which were partially offset by a reduction in the accrual of
interest on possible payments of federal income taxes.
The net increase in interest income in 1994 over that of 1993 is
due to the compounding of interest on the 17% Cummings Point
Industries, Inc. note receivable, offset by decreases due to the
recording in 1993 of prior years' interest income (and offsetting
bank fee expense) on cash balances in various operating accounts.
Interest income in 1993 was approximately the same as that in
1992 with increases from the interest on the Cummings Point
Industries note receivable and the above noted prior year
adjustments being offset by decreases resulting from lower
balances of excess funds available for investment.
Other - The increase in other expense in 1994 as compared to 1993
is attributable to the write-off of the Company's 50.1%
investment in an unconsolidated subsidiary, an increase in the
provision for nonrecovery of commercial receivables and accrual
of adjustments for legal fees and environmental costs related to
divested businesses. These increases were partially offset by an
adjustment to reserves for legal and other expenses associated
with events which predated the Company's acquisition of another
business.
The increase in 1993 over 1992 is caused primarily by the
accelerated amortization of cost in excess of net assets of an
acquired business and the initial accrual of legal and other
costs mentioned above.
Years Ended December 31,
(In thousands)
Other Expense consists of: 1994 1993 1992
Amortization of costs in excess
of net assets acquired $ 3,813 $ 4,830 $ 3,793
Provision for nonrecovery of receivables 2,526 1,141 965
ESOP Repurchase Premium 1,323 1,507 2,787
Write-off of investment in
unconsolidated subsidiary 3,250 - -
Legal and other expense accruals
associated with an acquired business (1,830) 2,070 -
Environmental costs of divested
businesses (347) 366 1,000
Gain on sale of warrants obtained in
divestitures - - (756)
Other divested business adjustments 2,665 (73) (1,600)
Miscellaneous (466) (517) (329)
Total Other $10,934 $ 9,324 $ 5,860
Income Taxes - During 1994, the Company reached a favorable
settlement with the IRS of disputes over tax deductions related
to the leveraged buyout in 1988. This settlement was approved
by the IRS in February 1995, and applicable tax reserves were
reversed in the fourth quarter of 1994.
In 1994, the federal tax benefit resulted from the reversal of tax
reserves for the IRS examination and the tax benefit of operating
losses, net of a valuation allowance, less the federal tax
provision of a majority owned subsidiary required to file a
separate Federal return. In 1993 and 1992, the Company did not
record any Federal income tax benefit because of
the uncertainty regarding the level of future income. The
Federal tax provision recognized in those years was that of a
majority owned subsidiary which is required to file a separate
return. Additionally, the Company recognized a foreign income
tax provision in 1994, 1993 and 1992 and a state tax credit in
1992.
Cash Flow
Cash and short-term investments were $12.4 million at December
31, 1994, down from $22.8 million at the prior year-end. Working
capital at December 31, 1994, was $91.1 million compared to $73.8
million at December 31, 1993. The increase in working capital
was primarily the result of growth in business volume, an
increase of accounts receivable and acquisitions. The 1994 ratio
of current assets to current liabilities was 1.63 compared to
1.53 in 1993. At December 31, 1994, $8.7 million of cash and
short-term investments and $124.2 million of accounts receivable
were restricted as collateral for the Contract Receivable
Collateralized Notes.
In 1994, operating activities produced cash flow of $3.0
million compared to $10.6 million in 1993 and a negative $4.7
million in 1992. The principal reason for this decline was the
increased requirement for working capital noted above.
In 1994, investing activities used $22.2 million of cash, of
which $15.3 million was used for the acquisition of businesses
(see Note 17 to the Consolidated Financial Statements included
elsewhere in this Annual Report on Form 10-K) and another $7.4
million was used for the purchase of property and equipment.
In addition, $0.9 million of contract phase-in costs were incurred
and deferred. These costs will be amortized over the duration of
the contracts. In 1993, investing activities used $15.6 million of
cash which included $10.9 million for acquisitions and $5.4 million
for the purchase of property and equipment.
In 1994, financing activities provided cash of $8.8 million.
The sale of stock to the Employee Stock Ownership Plan
contributed $17.1 million. Cash of $5.1 million was used for
payments on indebtedness and $3.2 million was used to purchase
treasury stock. In 1993, financing activities provided cash of
$7.8 million. Payments of $16.1 million were received on the
loan to the ESOP, $6.4 million was used for payments on
indebtedness and $2.0 million was used to purchase treasury
stock. The treasury stock purchases are primarily to meet ERISA
requirements to repurchase ESOP shares when there is no
alternative public market.
Liquidity and Capital Resources
At December 31, 1994, the Company's debt totaled $234.0
million compared to $220.3 million the prior year-end and $202.4
million at December 31, 1992. The increase in debt resulted from
pay-in-kind interest of $15.3 million on the Junior Subordinated
Debentures. The Company had a net decrease in cash and short-
term investments of $10.4 million in 1994 and an increase of $2.8
million and $4.1 million in 1993 and 1992, respectively. The
decrease for 1994 was caused to a large degree by net investments
in acquired businesses of $15.3 million and an increase in
accounts receivable and contracts in process of $16.5 million.
The latter increase was largely attributable to a delay in
finalizing the terms on a new contract and an internal disruption
in a government finance office, both of which occurred in the
fourth quarter of 1994. The Company's cash flow was favorably
impacted in 1994, 1993 and 1992 through the utilization of pay-
in-kind (PIK) interest on the Junior Subordinated Debentures and
the sale of stock to the Employee Stock Ownership Plan (ESOP)
totalling $32.4 million, $29.2 million and $22.7 million,
respectively.
The only significant debt maturing in the next two years is
the mortgage of approximately $19 million on the Corporate
Office. This debt was retired in March 1995 through a sale-
leaseback of the facility; see Note 20 to the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K.
Annualized interest expense at January 1, 1995 is approximately
$28.4 million of which $8.6 million of interest on the Junior
Subordinated Debentures is payable in kind (interest becomes
payable in cash effective with the December 31, 1995 payment).
The Company believes that it can achieve the increased cash
flow required to meet its future cash debt and interest
obligations (including annualized interest exclusive of the PIK
interest) by continued profit improvement, curtailment of
aircraft maintenance losses, reduced debt service cost and
continuation of its contribution to the ESOP. The Company plans
to continue its Value Improvement Program which was initiated in
late 1992 to reduce and/or eliminate operating costs and loss
operations, curtail the losses in Commercial Sector's aircraft
maintenance operations and to improve the gross margins in the
Government Sector. To reduce its debt service costs, the Company
intends to reduce its high interest rate Junior Subordinated
Debentures utilizing proceeds from the refinancing of equipment
($23.5 million completed in February 1995; see Note 20 to the
Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K), expansion of the collateralized
receivable financing (estimated $20.0 - $25.0 million), tighter
management control of working capital (estimated $20.0 million), the
sale of assets (estimated $5 million) and the collection of notes
receivable (estimated $10.0 million). These sources are expected
to provide approximately $80 million cash which the Company plans
to use to repurchase the PIK securities. The Company and the
ESOP have an agreement in principle under which the ESOP will
continue during 1995 to purchase Company common stock to fund the
ESOP retirement benefit. Other possible sources of cash flow to
retire debt are cash from future operations and the sale or
divestiture of other operating units. From time to time, the
Company receives inquiries to buy the Company and/or one or more
of its significant subsidiaries. With the exception of the
commercial aircraft maintenance business, the Company is not
soliciting any such offers, nor does it have any such offers in
hand. On the other hand, the Company treats such inquiries
seriously and attempts to determine if any such proposals are in
the best interests of the shareholders.
The Company continues to evaluate its alternatives in respect
to the unsatisfactory performance by the Commercial Sector's
aircraft maintenance unit which posted its fourth consecutive
year of operating losses. The Company has engaged an investment
advisor to market the maintenance unit. The status of the unit
presently remains unresolved pending the outcome of discussions
with potential investors and a major customer. These discussions
could result in one of a number of alternatives, including the
consummation of a joint venture, the procurement of long-term
contracts, sale of the entire unit or, worst case, the failure to
negotiate any transaction at all. Current management projections
indicate that the maintenance unit should be profitable in 1995.
The Company believes that if it is unable to consummate a
satisfactory resolution through any of these alternatives, the
most likely course of action would be to consolidate its
operations by closing one of the heavy maintenance facilities.
In management's opinion, no single alternative (i.e. entering
into a joint venture, the curtailment of operations or shut down
of one or more facilities, or the divestiture of the unit as a
whole) is more or less likely to occur; however, the Company
believes that it has suffered at least a partial impairment of
its investment in this unit. Accordingly, it has recorded an
estimate of the applicable goodwill ($5.2 million) and other
assets ($4.3 million) that would be written down in the event the
consolidation or shut-down of one of the facilities becomes
necessary. This does not fully reserve for the potential write-
off that would be necessary for the complete closure or sale of
the business in the event that the Company is unable to curtail
the operating losses in the future.
Selected financial operating data of the commercial aircraft
maintenance unit is as follows (in thousands except number of
employees):
1994 1993 1992
Revenues $ 73,045 $ 57,288 $ 74,253
Operating losses $ (5,351) $ (6,629) $ (428)
Asset impairment provision $ (9,492) $ - $ -
Net assets (after write-down) including
Goodwill at December 31 $ 30,315 $ 44,354 $ 43,328
Backlog at December 31 $ 12,730 $ 11,368 $ -
Number of employees 634 701 631
Although the Company has made some progress to diversify into
non-defense business activities, the Company is still heavily
dependent on the Department of Defense. Due to the procurement
cycles of its customers (generally three to five years), the
Company's revenues and margins are subject to continual
recompetition. In a typical annual cycle approximately 20% to
30% of the Company's business will be recompeted and the Company
will bid on several new contracts. Existing contracts can be
lost or rewon at lower margins at any time and new contracts can
be won. The net outcome of this bidding process, which in any
one year can have a dramatic impact on future revenues and
earnings, is impossible to predict. Also, if the U.S. Government
budget is reduced or spending shifts away from locations or
contracts for which the Company provides services, the Company's
success in retaining current contracts or obtaining new contracts
could be significantly reduced. The Company's Commercial
Services business is likewise highly competitive and subject to
the economic conditions of the domestic and foreign airline
industry.
In summary, the Company continues to be highly leveraged, and
its ability to meet its future debt service and working capital
requirements is dependent upon increased future earnings and cash
flow from operations, the expansion of an accounts receivable
facility financing, continuation of ESOP stock purchases in lieu
of cash retirement contributions and the reduction of its debt
expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is contained in the
Company's Consolidated Financial Statements and Financial
Statement Schedules included elsewhere in this Annual Report on
Form 10-K.
Report of Independent Public Accountants
To DynCorp:
We have audited the accompanying consolidated balance sheets of
DynCorp (a Delaware corporation) and subsidiaries as of December
31, 1994 and 1993, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1994. These
financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform an 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, the financial statements referred to above
present fairly, in all material respects, the financial position
of DynCorp and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules
listed in Item 14 of the Form 10-K are presented for purposes of
complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules
have been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial
statements taken as a whole.
Washington, D.C.,
March 21, 1995.
ARTHUR ANDERSEN LLP
DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
1994 1993
Assets
Current Assets:
Cash and short-term investments (includes restricted
cash and short-term investments of $8,748 in 1994
and $17,632 in 1993) (Notes 2 and 5) $ 12,404 $ 22,806
Notes and current portion of long-term receivables (Note 2) 393 235
Accounts receivable and contracts in process
(Notes 2, 3 and 5) 208,519 177,470
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 6,354 6,467
Deferred income taxes (Note 12) 2,698 -
Other current assets 5,094 6,851
Total Current Assets 235,462 213,829
Long-term Receivables, due through 2004 (Note 2) 1,594 274
Property and Equipment, at cost (Notes 1, 4 and 16):
Land 5,394 5,539
Buildings and leasehold improvements 34,321 33,498
Machinery and equipment 68,803 64,907
108,518 103,944
Accumulated depreciation and amortization (48,156) (42,996)
Net property and equipment 60,362 60,948
Intangible Assets, net of accumulated amortization
(Notes 1, 11 and 17) 94,792 93,890
Other Assets (Notes 2 and 5) 10,120 13,515
Total Assets $402,330 $382,456
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
1994 1993
Liabilities, Redeemable Common Stock and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt
(Notes 2 and 5) $ 3,344 $ 3,837
Accounts payable (Note 2) 25,529 25,376
Deferred revenue and customer advances (Note 1) 5,389 2,178
Accrued income taxes (Notes 1 and 12) 30 3,074
Accrued expenses (Note 6) 110,091 105,578
Total Current Liabilities 144,383 140,043
Long-term Debt (Notes 2, 5 and 17) 230,608 216,425
Deferred Income Taxes (Notes 1 and 12) 1,210 1,269
Other Liabilities and Deferred Credits (Note 2) 16,591 16,353
Total Liabilities 392,792 374,090
Commitments, Contingencies and Litigation (Notes 16 and 18) - -
Redeemable Common Stock
redemption value per share of $18.20 in 1994 and
$17.50 in 1993, 125,714 shares issued and outstanding
(Note 7) 2,288 2,200
Stockholders' Equity (Note 8)
Capital stock, par value ten cents per share -
Preferred stock, Class C, 18% cumulative,
convertible, $24.25 liquidation value,
123,711 shares authorized and issued and outstanding 3,000 3,000
Common stock, authorized 15,000,000 shares;
issued 7,894,569 shares in 1994
and 5,015,139 shares in 1993 789 502
Common stock warrants 11,486 15,119
Unissued common stock under restricted stock plan 9,923 10,395
Paid-in surplus 118,068 95,983
Retained earnings (deficit) (118,256) (105,425)
Common stock held in treasury, at cost; 459,309
shares and 173,988 warrants in 1994 and 285,987
shares and 178,100 warrants in 1993 (8,817) (5,840)
Cummings Point Industries Note Receivable (Note 9) (8,943) (7,568)
Total stockholders' equity 7,250 6,166
Total Liabilities, Redeemable Common Stock
and Stockholders' Equity $402,330 $382,456
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31
(Dollars in thousands except per share data)
1994 1993 1992
Revenues (Note 1) $1,022,072 $953,144 $911,422
Costs and expenses:
Cost of services (Note 4) 978,204 913,587 883,276
Selling and corporate administrative 17,199 18,267 20,476
Interest expense 25,618 25,538 24,876
Interest income (2,468) (2,439) (2,418)
Aircraft maintenance facilities - consolidation
and asset impairment (Note 21) 9,492 - -
Other (Note 11) 10,934 9,324 5,860
Total costs and expenses 1,038,979 964,277 932,070
Loss before income taxes, minority interest
and extraordinary item (16,907) (11,133) (20,648)
Provision (benefit) for income taxes (Note 12). (5,206) 1,329 168
Loss before minority interest and extraordinary item(11,701) (12,462) (20,816)
Minority interest (Note 1) 1,130 952 -
Loss before extraordinary item (12,831) (13,414) (20,816)
Extraordinary loss from early extinguishment
of debt (Note 5) - - 2,526
Net loss (12,831) (13,414) (23,342)
Preferred Class A dividends declared and paid and
accretion of discount - - 959
Net loss for common stockholders $ (12,831)$ (13,414)$(24,301)
Loss Per Common Share (Note 14)
Primary and fully diluted:
Loss before extraordinary item $ (2.12)$ (2.87) $ (4.49)
Extraordinary item (0.49)
Net loss for common stockholders $ (2.12)$ (2.87) $ (4.98)
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31
(Dollars in thousands)
Unissued
Common Cummings
Stock Employee Point
Under Retained Stock Industries
Preferred Common Stock Restricted Paid-in Earnings Treasury Ownership Note
Stock Stock Warrants Stock Plan Surplus (Deficit) Stock Plan Loan Receivable
Balance, December 31, 1991 $3,000 $ 474 $15,119 $ 9,688 $101,483 $ (67,710) $(3,241) $(32,215) $ -
Pay-in-kind Preferred Stock
Class A dividends (934)
Accretion of Preferred Stock
Class A discount and
discount and issuance costs (25)
Stock issued under Restricted
Stock Plan (Note 8) 17 (3,011) 2,994
Purchase of Preferred Stock Class A (8,047)
Treasury stock purchased (Note 8) (3,448)
Stock issued under the Management
Employees Stock Purchase Plan (Note 8) (22) 151
Accrued compensation (Note 8) 3,264
Payments received on Employee Stock
Ownership Plan (ESOP) (Note 10) 16,099
Cummings Point Industries note receivable
(Note 9) (5,500)
Accrued interest on note receivable (Note 9) (910)
Net loss (23,342)
Balance December 31, 1992 3,000 491 15,119 9,941 96,408 (92,011) (6,538) (16,116) (6,410)
Stock issued under Restricted
Stock Plan (Note 8) 11 (1,781) 1,770
Treasury stock purchased (Note 8) (1,980)
Stock issued under the Management
Employees Stock Purchase Plan (Note 8) 5 41
Accrued compensation (Note 8) 2,235
Payments received on Employee Stock
Ownership Plan (Note 10) 16,116
Contribution of stock to ESOP (Note 10) 437
Stock issued in conjunction with acquisition
(Note 17) (2,200) 2,200
Accrued interest on note receivable
(Note 9) (1,158)
Net loss (13,414)
Balance December 31, 1993 3,000 502 15,119 10,395 95,983 (105,425) (5,840) - (7,568)
Stock issued under Restricted
Stock Plan (Note 8) 9 (1,694) 1,685
Treasury stock purchased (Note 8) (57) (276) (2,690)
Stock issued under the Management Employees
Stock Purchase Plan (Note 8) (2) 32
Warrants exercised (Note 8) 147 (3,576) 3,797 (319)
Accrued compensation (Note 8) 1,222
Contribution of stock to ESOP (Note 10) 131 16,969
Accrued interest on note receivable (Note 9) (1,375)
Adjust redeemable common stock
to fair market value (Note 7) (88)
Net loss (12,831)
Balance December 31, 1994 $3,000 $ 789 $11,486 $ 9,923 $118,068 $(118,256) $(8,817) $ - $ (8,943)
See accompanying notes.
DynCorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31
(Dollars in thousands)
1994 1993 1992
Cash Flows from Operating Activities:
Net loss $(12,831) $(13,414) $(23,342)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 27,077 19,818 19,372
Pay-in-kind interest on Junior
Subordinated Debentures (Note 5) 15,329 13,142 6,590
Loss on purchase of Junior
Subordinated Debentures (Note 5) - - 2,526
Deferred income taxes (2,258) 521 (2,114)
Accrued compensation under Restricted
Stock Plan 1,222 2,235 3,264
Noncash interest income (1,375) (1,158) (910)
Other 2,626 (2,820) (2,483)
Change in assets and liabilities, net
of acquisitions and dispositions:
Increase in accounts receivable and contracts
in process (16,495) (9,698) (14,904)
(Increase) decrease in inventories 113 (326) 280
(Increase) decrease in other current assets (1,250) 1,159 2,797
Increase (decrease) in current liabilities
except notes payable and current portion
of long-term debt (9,186) 1,161 4,268
Cash provided (used) by operating activities 2,972 10,620 (4,656)
Cash Flows from Investing Activities:
Sale of property and equipment 2,406 1,422 1,262
Proceeds received from notes receivable 98 558 1,353
Purchase of property and equipment (7,364) (5,423) (11,400)
Increase in notes receivable (Note 9) - - (5,934)
Increase in investments in affiliates - (99) (1,888)
Deferred income taxes from "safe harbor"
leases (Note 12) (499) (441) (314)
Assets and liabilities of acquired businesses
(excluding cash acquired) (Notes 1 and 17) (15,312) (10,890) (905)
Other (1,543) (738) (304)
Cash used by investing activities (22,214) (15,611) (18,130)
Cash Flows from Financing Activities:
Purchase of Class A Preferred Stock and
Junior Subordinated Debentures (Note 5) - - (42,466)
Treasury stock purchased (Note 8) (3,182) (1,980) (3,448)
Payment on indebtedness (5,110) (6,365) (41,040)
Refinancing proceeds (Note 5) - - 100,000
Deferred financing expenses (Note 5) - - (1,524)
Dividends paid on Class A Preferred Stock - - (861)
Treasury stock sold 159 46 108
Reduction in loan to Employee Stock Ownership
Plan (Note 10) - 16,116 16,099
Sale of stock to Employee Stock Ownership
Plan (Note 10) 17,100 - -
Other (127) - -
Cash provided by financing activities 8,840 7,817 26,868
Net Increase (Decrease) in Cash and Short-term
Investments (10,402) 2,826 4,082
Cash and Short-term Investments at Beginning
of the Year 22,806 19,980 15,898
Cash and Short-term Investments at End
of the Year $ 12,404 $ 22,806 $ 19,980
See accompanying notes.
DynCorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994
(1) Summary of Significant Accounting Policies
Principles of Consolidation -- All majority-owned subsidiaries have
been included in the financial statements and all significant
intercompany accounts and transactions have been eliminated. Outside
investors' interest in the majority owned subsidiaries is reflected
as minority interest. Investments less than 50% owned are accounted
for using the equity method of accounting.
Contract Accounting -- Contracts in process are stated at the lower
of actual cost incurred plus accrued profits or net estimated
realizable value of incurred costs, reduced by progress billings.
The Company records income from major fixed-price contracts,
extending over more than one accounting period, using the percentage-
of-completion method. During performance of such contracts,
estimated final contract prices and costs are periodically reviewed
and revisions are made as required. The effects of these revisions
are included in the periods in which the revisions are made. On
cost-plus-fee contracts, revenue is recognized to the extent of costs
incurred plus a proportionate amount of fee earned, and on time-and-
material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable
costs incurred. Losses on contracts are recognized when they become
known. Disputes arise in the normal course of the Company's business
on projects where the Company is contesting with customers for
additional funds because of events such as delays or changes in
contract specifications. For fixed-price contracts, such disputes,
whether claims or unapproved changes in the process of negotiation,
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.
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 reserve requirement can be reasonably estimated.
Property and Equipment -- The Company computes depreciation and
amortization using both straight-line and accelerated methods. The
estimated useful lives used in computing depreciation and
amortization on a straight-line basis are: building, 15-33 years;
machinery and equipment, 3-20 years; and leasehold improvements, the
lesser of the useful life or the term of the lease.
Accelerated depreciation is based on a 150% declining
balance method with light-duty vehicles assigned a three-year life
and machinery and equipment assigned a five-year life. Depreciation
and amortization expense was $8,964,000 for 1994, $9,670,000 for
1993, and $9,275,000 for 1992 (See also Note 4).
Cost of property and equipment sold or retired and the related
accumulated depreciation or amortization is removed from the accounts
in the year of disposal, and any gains or losses are reflected in the
consolidated statement of operations. Expenditures for maintenance
and repairs are charged to expense as incurred, and major additions
and improvements are capitalized.
Intangible Assets -- At December 31, 1994, intangible assets consist
of $91,824,000 of unamortized goodwill and $2,968,000 of value
assigned to contracts. Goodwill is being amortized on a straight-
line basis over periods up to forty years. Amortization expense
(including impairment write-off in 1994; see Note 21) was
$11,051,000, $3,990,000 and $2,953,000 in 1994, 1993 and 1992,
respectively. Amounts allocated to contracts are being amortized
over the lives of the contracts for periods up to ten years.
Amortization of amounts allocated to contracts was $2,051,000,
$3,555,000 and $4,566,000 in 1994, 1993 and 1992, respectively.
Cumulative amortization of $27,167,000 and $33,771,000 has been
recorded through December 31, 1994, of goodwill and value assigned to
contracts, respectively.
The Company assesses and measures impairment of intangible assets
including goodwill based on several factors including the probable
fair market value, probable future cash flows and net income and the
aggregate value of the business as a whole (See Note 21, Commercial
Aircraft Maintenance Facilities - Consolidation and Asset Impairment).
Income Taxes -- As prescribed by Statement of Financial Accounting
Standards (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.
Postretirement Health Care Benefits -- The Company provides no
significant postretirement health care or life insurance benefits to
its retired employees other than allowing them to continue as a
participant in the Company's plans with the retiree paying the full
cost of the premium. The Company has determined, based on an
actuarial study, that it has no liability under Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
Postemployment Benefits -- The Company has no liability under
Statement of Financial Accounting Standard 112, "Employers'
Accounting for Postemployment Benefits," as it provides no benefits
as defined.
New Accounting Pronouncements -- The Financial Accounting Standards
Board issued Statement 114, "Accounting by Creditors for Impairment
of a Loan," and Statement 115, "Accounting for Certain Investments in
Debt and Equity Securities," in May 1993 and Statement 119,
"Disclosure About Derivative Financial Instruments," in October
1994. Statement 114 is required to be adopted in 1995 and Statements
115 and 119 in 1994. The Company holds no significant financial
instruments of the nature described in these pronouncements and
therefore believes the statements will not have a material effect on its
results of operations or financial condition.
The Company has adopted Statement of Position (SOP) 93-6,"Employers
Accounting for Employee Stock Ownership Plans," issued in November
1993 and effective for financial statements issued after December 15,
1993.
Consolidated Statement of Cash Flows -- For purposes of this
Statement, short-term investments which consist of certificates of
deposit and government repurchase agreements with a maturity of
ninety days or less are considered cash equivalents.
Cash paid for income taxes was $1,567,000 for 1994, $1,232,000
for 1993 and $4,054,000 for 1992.
Cash paid for interest, excluding the interest paid under the
Employee Stock Ownership Plan term loan, was $11,098,000 for 1994,
$11,706,000 for 1993 and $17,212,000 for 1992.
Noncash investing and financing activities consist of the
following (in thousands):
1994 1993 1992
Acquisitions of businesses:
Assets acquired $31,302 $31,675$ 3,524
Liabilities assumed (15,990)(17,198)(1,248)
Stock issued - (2,200) -
Notes issued and other liabilities - (1,382) (592)
Cash acquired - (5) (779)
Net cash 15,312 10,890 905
Pay-in-kind interest on Junior
Subordinated Debentures (Note 5) 15,329 13,142 6,590
Unissued common stock under
restricted stock plan (Note 8) 1,222 2,235 3,264
Capitalized equipment leases
and notes secured by property and equipment 3,088 5,294 1,792
Mortgage note assumed (Note 5) - - 19,456
(2) 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 Accounts Payable - The carrying amount
of accounts receivable and accounts payable approximates their
fair value due to the short maturity of these instruments.
Notes and long-term receivables - The carrying value is net of
valuation allowances and approximates the fair value of those
instruments.
Investments (included in "Other Assets") - The Company had
an investment in convertible debentures and preferred stock
of an untraded company. Based on the financial statements
of this business, the carrying value of these investments
approximated their fair value.
Long-term debt and other liabilities - The fair value of the
Company's long-term debt is based on the quoted market price for
its Junior Subordinated Debentures and the current rate as if the
issue date was December 31, 1994 for its Collateralized Notes.
For the remaining long-term debt (see Note 5) and other
liabilities the carrying amount approximates the fair value.
Cummings Point Industries, Inc. Note Receivable - The carrying
value approximates the fair value. (See Note 9.)
The estimated fair values of the Company's financial instruments
are as follows (in thousands):
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term
investments $ 12,404 $12,404 $ 22,806 $ 22,806
Accounts receivable 208,519 208,519 177,470 177,470
Notes and long-term receivables 1,987 1,987 509 509
Investments - - 2,000 2,000
Accounts Payable 25,529 25,529 25,376 25,376
Long-term debt and other
liabilities 232,830 228,951 218,758 229,012
Cummings Point note receivable 8,943 8,943 7,568 7,568
(3) Accounts Receivable and Contracts in Process
The components of accounts receivable and contracts in process were
as follows (in thousands):
1994 1993
U.S. Government:
Billed and billable $111,950 $ 83,822
Recoverable costs and accrued profit on progress
completed but not billed 28,546 25,473
Retainage due upon completion of contracts 4,046 1,287
144,542 110,582
Commercial Customers:
Billed and billable (less allowances for doubtful
accounts of $3,992 in 1994 and $1,469 in 1993) 49,786 43,660
Recoverable costs and accrued profit on progress
completed but not billed 14,191 23,228
63,977 66,888
$208,519 $177,470
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 not billed is composed primarily of amounts
recognized as revenues, but which are not contractually billable at
the balance sheet dates.
The Company performs substantial services for the commercial
aviation industry. Receivables from domestic and foreign airline and
leasing companies were approximately $35,226,000 and $38,700,000 at
December 31, 1994 and 1993, respectively.
(4) Depreciation of Property and Equipment
During 1994 the Company revised its estimate of the useful lives of
certain of the Commercial Sector's machinery and equipment to conform
to its actual experience with fixed asset lives. It was determined
the useful lives of these assets ranges from three to ten years as
compared to the two to seven year lives previously utilized. The
effect of this change was to reduce depreciation expense and net loss
for the year ended December 31, 1994 by approximately $2,115,000 or
$0.31 per share.
(5) Long-term Debt
At December 31, 1994 and 1993, long-term debt consisted of (in
thousands):
1994 1993
Contract Receivable Collateralized Notes,
Series 1992-1 $100,000 $100,000
Junior Subordinated Debentures, net of
unamortized discount of $4,793 and $5,175 102,658 86,947
Mortgages payable (see Note 20) 22,285 23,416
Notes payable, due in installments through
2002, 9.98% weighted average interest rate 6,993 6,689
Capitalized equipment leases 2,016 3,210
233,952 220,262
Less current portion 3,344 3,837
$230,608 $216,425
Debt maturities as of December 31, 1994, were as follows (in
thousands):
1995 ($18,206 extinguished with non-current assets $ 21,550
subsequent to December 31, 1994, Note 20)
1996 2,995
1997 102,327
1998 1,317
1999 339
Thereafter 105,424
$233,952
On January 23, 1992, the Company's wholly owned subsidiary, Dyn
Funding Corporation (DFC), completed a private placement of
$100,000,000 of 8.54% Contract Receivable Collateralized Notes,
Series 1992-1 (the "Notes"). The Notes are collateralized by the
right to receive proceeds from certain U.S. Government contracts and
certain eligible accounts receivable of commercial customers of the
Company and its subsidiaries. Credit support for the Notes is
provided by overcollateralization in the form of additional
receivables. The Company retains an interest in the excess balance
of receivables through its ownership of the common stock of DFC.
Additional credit and liquidity support is provided to the Notes
through a cash reserve fund. Interest payments are made monthly with
monthly principal payments beginning February 28, 1997. (The period
between January 23, 1992 and January 30, 1997 is referred to as the
Non-Amortization Period.) The notes are projected to have an average
life of five years and two months and to be fully repaid by July 30,
1997.
Upon receiving the proceeds from the sale of the Notes, DFC
purchased from the Company an initial pool of receivables for
$70,601,000, paid $1,524,000 for expenses and deposited $3,000,000
into a reserve fund account and $24,875,000 into a collection account
with Bankers Trust Company as Trustee pending additional purchases of
receivables from the Company. Of the proceeds received from DFC, the
Company used $38,112,000 to pay the outstanding balances of the
Employee Stock Ownership Plan term loan and revolving loan facility
under the Restated Credit Agreement and $33,280,000 was used for the
redemption of all of the outstanding Class A Preferred Stock plus
accrued dividends (the redemption price per share was $25.00 plus
accrued dividends of $.66). The Company expensed $1,432,000
(reported as an extraordinary loss) of unamortized deferred debt
expense pertaining to the term loan and revolving loan facility which
was paid in full. The Company also charged $8,047,000 of unamortized
discount and deferred issuance costs associated with the redemption
of the Class A Preferred Stock to paid-in surplus.
On an ongoing basis, cash receipts from the collection of the
receivables are used to make interest payments on the Notes, pay a
servicing fee to the Company, and purchase additional receivables
from the Company. Beginning February 28, 1997, instead of purchasing
additional receivables, the cash receipts will be used to repay
principal on the Notes. During the Non-Amortization Period, cash in
excess of the amount required to purchase additional receivables and
meet payments on the Notes is to be paid to the Company subject to
certain collateral coverage tests. The receivables pledged as
security for the Notes are valued at a discount from their stated
value for purposes of determining adequate credit support. DFC is
required to maintain receivables, at their discounted values, plus
cash on deposit at least equal to the outstanding balance of the
Notes.
Commencing March 30, 1994, the Notes may be redeemed in whole, but
not in part, at the option of DFC at a price equal to the principal
amount of the Notes plus accrued interest plus a premium (as
defined).
Mandatory redemption (payment of the Notes in full plus a premium)
is required in the event that (i) the collateral value ratio test is
equal to or less than .95 as of three consecutive monthly
determination dates and the Company has not substituted receivables
or deposited cash into the collection account to bring the collateral
value ratio above .95; or (ii) three special redemptions are required
within any consecutive 12-month period; or (iii) the aggregate stated
value of all ineligible receivables which have been ineligible
receivables for more than 30 days exceeds 7% of the aggregate
collateral balance and the collateral value ratio is less than 1.00.
Special redemption (payment of a portion of the Notes plus a
premium) is required in the event that the collateral value ratio
test is less than 1.00 as of two consecutive monthly determination
dates and the Company has not substituted receivables or deposited
cash into the collection account to bring the collateral value ratio
to 1.00.
Also, DFC may not purchase additional eligible receivables if the
Company has an interest coverage ratio (as defined) of less than
1.10; or if the Company has more than $40 million of scheduled
principal debt (as defined) due within 24 months prior to the
amortization date or $20 million of scheduled principal debt due
within 12 months prior to the amortization date.
At December 31, 1994, $8,748,000 of cash and short-term investments
and $124,220,000 of accounts receivable are restricted as collateral
for the Notes.
In September 1994, the Company negotiated an agreement which
provides for a $5,000,000 revolving letter of credit facility.
Advances under the letter of credit will bear interest at a per annum
interest rate equal to 1% plus the prime interest rate established by
the bank. For each letter of credit issued, the Company must assign
a cash collateral deposit in favor of the bank for 100% of the face
value of the letter of credit. The Company will pay a fee of 1.5%
per annum computed on the face amount of the letter of credit for the
period the letter of credit is scheduled to be outstanding. As of
December 31, 1994, $2,900,000 was on deposit in conjunction with this
letter of credit.
The Junior Subordinated Debentures (Debentures) mature on June 30,
2003, and bear interest of 16% per annum, payable semi-annually. The
effective interest rate, considering the original issue discount, is
19.4%. The Company may, at its option, prior to September 9, 1995,
pay the interest either in cash or issue additional Debentures. The
Debentures are subject to annual mandatory redemption beginning June
30, 1999. The Company may, at its option, redeem in whole or in
part, at any time, the Debentures at their face value plus accrued
interest. During 1994, 1993 and 1992, $15,329,000, $13,142,000 and
$6,590,000, respectively, of additional Debentures were issued in
lieu of cash interest payments.
Using a lottery selection method, the Company called for partial
redemption of $10,000,000 face value plus accrued interest for cash
redemption on August 10, 1992. The lottery resulted in redeeming
$9,698,000 face value of the Debentures. Open market purchases
during 1992 retired $219,000 of the Debentures. The related
unamortized discount, deferred debt expense and other expenses, net of
applicable income taxes, were reported as an extraordinary loss in
1992.
The Company obtained title to its corporate office building on July
31, 1992 by assuming a mortgage of $19,456,000. At the Company's
option, the interest on the mortgage may be computed from time to
time under one of three methods based on the Certificate of Deposit
Rate, LIBOR Rate or the Prime Rate, all as defined. Also, the
Company was required to pay additional interest through May 27, 1993.
The additional interest was the difference between a fixed rate of
9.36% and a floating rate based upon an imputed amount of
$31,900,000. The original mortgage maturity date was May 27, 1993;
however, as provided, the Company extended the mortgage to March 27,
1995 with an increase in the interest rate of 1/2% per annum plus an
extension fee (based on the principal amount of the mortgage
outstanding) of .42% on May 27, 1993 and .50% on March 27, 1994, all
as defined (see Note 20 Subsequent Events).
The Company acquired the Alexandria, VA headquarters of Technology
Applications, Inc. on November 12, 1993, in conjunction with the
acquisition of TAI. A mortgage of $3,344,000 bearing interest at 8%
per annum was assumed. Payments are made monthly and the mortgage
matures in April 2003. Additionally, a $1,150,000 promissory note
was issued. The note bears interest at 7% per annum. Payments under
the note shall be made quarterly through October 1998.
Deferred debt issuance costs are being amortized using the
effective interest rate method over the terms of the related debt.
At December 31, 1994, unamortized deferred debt issuance costs were
$1,015,000 and amortization for 1994, 1993 and 1992 was $324,000,
$328,000 and $420,000, respectively.
(6) Accrued Expenses
At December 31, 1994 and 1993, accrued expenses consisted of the
following (in thousands):
1994 1993
Salaries and wages $ 51,180 $ 43,698
Insurance 9,675 17,202
Interest 4,716 6,233
Payroll and miscellaneous taxes 10,205 10,412
Accrued contingent liabilities and
operating reserves 24,586 19,028
Other 9,729 9,005
$110,091 $105,578
(7) Redeemable Common Stock
In conjunction with the acquisition of Technology Applications,
Inc. in November 1993, the Company issued put options on 125,714
shares of common stock. The holder may, 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 fair
market value at the time of exercise.
(8) Stockholders' Equity
Class C Preferred Stock is convertible, at the option of the
holder, into one share of common stock, adjusted for any stock
splits, stock dividends or redemption. At conversion, the holders of
Class C Preferred Stock are also entitled to receive such warrants as
have been distributed to the holders of the common stock. Dividends
accrue at an annual rate of 18%, compounded quarterly. At December
31, 1994, cumulative dividends of $6,948,000 have not been recorded
or paid. Dividends will be payable only when cash dividends are
declared with respect to common stock and only in an aggregate amount
equal to the aggregate amount of dividends that such holders would
have been entitled to receive if such Class C Preferred Stock had
been converted into common stock. Each holder of Class C Preferred
Stock is entitled to one vote per share on any matter submitted to
the holders of common stock for stockholder approval. In addition,
so long as any Class C Preferred Stock is outstanding, the Company is
prohibited from engaging in certain significant transactions without
the affirmative vote of the holders of a majority of the outstanding
Class C Preferred Stock.
The Company initially issued warrants to the Class C Preferred
stockholders and to certain common stockholders to purchase a maximum
of 5,891,987 shares of common stock of the Company. Each warrant is
exercisable to obtain one share of common stock. The stockholder may
exercise the warrant and pay in cash the exercise price of $0.25 for
one share of common stock or may sell back to the Company a
sufficient number of the exercised shares to equal the value of the
warrants to be exercised. (The shares sold back to the Company
during 1994 were valued by the Board of Directors at $11.86 per
share.) During 1994, 1,471,470 warrants were exercised. Rights under
the warrants lapse no later than September 9, 1998.
The Company has a Restricted Stock Plan (the Plan) under which
management and key employees may 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) are granted to participants
who are selected by the Compensation Committee of the Board of
Directors. Each Unit will entitle the participant upon achievement
of the performance goals (all as defined) to receive one share of the
Company's common stock. Units cannot be converted into shares of
common stock until the participant's interest in the Units has
vested. Vesting occurs upon completion of the specified periods as
set forth in the Plan. In 1994, 1993 and 1992, the Company accrued
as compensation expense $1,222,000, $2,235,000 and $3,264,000,
respectively, under the Plan which was charged to cost of services
and corporate administrative expenses.
The Company had a Management Employees Stock Purchase Plan (the
Stock Purchase Plan) whereby employees in management, supervisory or
senior administrative positions could purchase shares of the
Company's common stock along with warrants at current fair value.
The Board of Directors was responsible for establishing the fair
value for purposes of the Stockholders Agreement and the Management
Employees Stock Purchase Plan. The Stock Purchase Plan was
discontinued in 1994. Treasury stock, which the Company acquired
from terminated employees who had previously purchased the stock from
the Company, was issued to employees purchasing stock under the Stock
Purchase Plan.
In accordance with ERISA regulations and the Employee Stock
Ownership Plan Documents, the ESOP Trust or the Company are obligated
to purchase vested common stock shares from ESOP participants (see
Note 10) at the fair value (as determined by an independent
appraiser) as long as the Company's common stock is not publicly
traded. Participants receive their vested shares upon retirement,
becoming totally 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. In the event the fair
value of a share is less than $27.00, the Company is committed to pay
through December 31, 1996, up to an aggregate of $16,000,000, the
difference (Premium) between the fair value and $27.00 per share. As
of December 31, 1994, the Company has purchased 427,307 shares from
participants and has expended $3,969,000 of the $16,000,000
commitment. Based on the fair value of $18.20 per share at December
31, 1994, the Company estimates a total Premium of $8,500,000 and an
aggregate annual commitment to repurchase shares from the ESOP
participants upon death, disability, retirement and termination as
follows; $5,400,000 in 1995, $4,000,000 in 1996, $3,300,000 in 1997,
$6,300,000 in 1998, $5,800,000 in 1999 and $58,800,000 thereafter.
The fair value is charged to Treasury Stock at the time of
repurchase. The estimated Premium of $8,500,000 has been recorded as
Other Expense in the Consolidated Statement of Operations in 1989
through 1994 (see Note 11).
Under the DynCorp Stockholders Agreement which expired on March 11,
1994, the Company was committed, upon an employee's termination of
employment, to purchase common stock shares held by employees
pursuant to the merger (Management Investor Shares), through the
Stock Purchase Plan or through the Restricted Stock Plan. The share
price at December 31, 1994 for Management Investor shares and Stock
Purchase shares was $14.60 per common share and $14.35 ($14.60 per
common share less warrant exercise price of $0.25) for each
unexercised warrant. The price established for each Restricted Stock
Plan common share is the fair market value as set forth in the
appraisal of shares held by the ESOP. At December 31, 1994, 262,914
common shares were outstanding and 1,755,397 warrants were
unexercised. The share price for Restricted Stock Plan shares
($18.20 at December 31, 1994) is the fair value as set forth in the
appraisal of shares held by the ESOP. However, the Company may not
purchase more than $250,000 of Management Investor shares or
Restricted Stock shares in any fiscal year without the approval of
the Class C Preferred stockholders. A new Stockholders' agreement,
adopted March 11, 1994, contains similar repurchase obligations and
expires March 10, 1999.
(9) Cummings Point Industries Note Receivable
The Company loaned $5,500,000 to Cummings Point Industries, Inc.
("CPI"), of which Capricorn Investors, L.P. ("Capricorn") owns more
than 10%. The indebtedness is represented by a promissory note (the
"Note"), bearing interest at the annual rate of 17%, which provides
that interest is payable quarterly but that interest payments may not
be payable in cash but may be added to the principal of the Note.
The Note is subordinated to all senior debt of CPI. The Note, which
was issued February 12, 1992, was due three months thereafter;
however, the Company, at its option, has extended and may further
extend the maturity date in three month increments to no later than
February 12, 1996. By separate agreement and as security to the
Company, Capricorn has agreed to purchase the Note from the Company
upon three months' notice, for the amount of outstanding principal
plus accrued interest. As additional security, Capricorn's purchase
obligation is collateralized by certain common stock and warrants
issued by the Company and owned by Capricorn. The note has been
reflected as a reduction in stockholders' equity.
(10) Employee Stock Ownership Plan
In September 1988, the Company established an Employee Stock
Ownership Plan (the Plan). The Company borrowed $100 million and
loaned the proceeds, on the same terms as the Company's borrowings,
to the Plan to purchase 4,123,711 shares of common stock of the
Company (the "ESOP loan"). The common stock purchased by the Plan
was held in a collateral account as security for the ESOP loan from
the Company. The Company was obligated to make contributions to the
Plan in at least the same amount as required to pay the principal and
interest installments under the Plan's borrowings. The Plan used the
Company contributions to repay the principal and interest on the ESOP
loan. As the ESOP loan was liquidated, shares of the Company's
common stock were released from the collateral account and allocated
to participants of the Plan. As of December 31, 1993, the loan has
been fully repaid.
In accordance with subsequent amendments to the Employee Stock
Ownership Plan, the Company contributed an additional 25,000 shares
of common stock in December 1993 and in 1994 contributed cash of
$17,435,000 which the ESOP used to acquire 1,312,459 shares and to
pay interest and administrative expenses. The Company has an
agreement in principle with the ESOP to contribute up to $18,000,000
in cash or stock in 1995 to satisfy its funding obligations.
The Plan covers a majority of the employees of the Company.
Participants in the Plan become fully vested after four years of
service. All of the 5,461,170 shares acquired by the ESOP have been
either issued or allocated to participants as of December 31, 1994.
The Company recognizes ESOP expense each year based on contributions
committed to be made to the Plan. The Company's cash contributions
were determined based on the ESOP's debt service and other expenses.
Stock contributions are determined in accordance with the amended
agreement. In 1994, cash contributions to the ESOP were $17,435,000;
1993 cash and stock contributions were $16,608,000 and $437,000
respectively, and 1992 cash contributions were $17,275,000. These
amounts were charged to cost of services and selling and corporate
administrative expenses (including interest on the ESOP term loan of
$491,000 and $1,450,000 in 1993 and 1992, respectively).
(11) Other Expenses
Years Ended December 31,
(In thousands)
1994 1993 1992
Amortization of costs in excess
of net assets acquired $3,813 $4,830 $ 3,793
Provision for nonrecovery of
receivables 2,526 1,141 965
ESOP Repurchase Premium (Note 8) 1,323 1,507 2,787
Write-off of investment in
unconsolidated subsidiary (a) 3,250 - -
Legal and other expense accruals
associated with an acquired
business (1,830) 2,070 -
Environmental costs of divested
businesses (347) 366 1,000
Gain on sale of warrants obtained in
divestitures - - (756)
Other divested business
adjustments 2,665 (73) (1,600)
Miscellaneous (466) (517) (329)
Total Other $10,934 $9,324 $ 5,860
(a) In June 1994 the Company paid an additional $1,250,000 to
increase its holdings in an unconsolidated subsidiary from 40%
to 50.1% and the subsidiary concurrently borrowed $6.0 million
from another investor. The total acquisition cost exceeded
the underlying equity in net assets by $2,582,000. The
subsidiary's stockholders' agreement defined certain trigger
events which, upon their occurrence, transferred control of
the subsidiary from DynCorp to the other shareholders. These
trigger events occurred in the fourth quarter of 1994 and the
subsidiary's lenders called the loans in 1995. These actions,
coupled with financial and cash flow projections provided by
the subsidiary's management, have caused the Company to
determine that its investment has been permanently impaired.
As such, $3,250,100 representing the investment and excess
purchase price has been charged to Other Expense.
(12) Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Earnings (loss) before income taxes and minority interest (but
including extraordinary item - see Note 5) were derived from the
following (in thousands):
1994 1993 1992
Domestic operations $(15,297) $(11,240) $(23,378)
Foreign operations (1,610) 107 204
$(16,907) $(11,133) $(23,174)
The provision (benefit) for income taxes (and including
extraordinary item - see Note 5) consisted of the following (in
thousands):
1994 1993 1992
Current:
Federal $(3,061) $ 723 $ 416
Foreign 54 170 168
State 59 (85) 193
(2,948) 808 777
Deferred:
Federal (2,199) 500 (416)
State (59) 21 (193)
(2,258) 521 (609)
Total $(5,206) $ 1,329 $ 168
The components of and changes in deferred taxes are as follows (in
thousands):
Deferred Deferred Deferred
Dec. 31, Expense Dec. 31, Expense Dec. 31, Expense
1994 (Benefit) 1993 (Benefit) 1992 (Benefit)
Increase due to federal rate change $ 402 $ - $ 402 $ (402) $ - $ -
Benefit of state tax on temporary differences
and state net operating loss carryforwards 5,574 (716) 4,858 (1,135) 3,723 (2,211)
Benefit of foreign, targeted jobs and AMT
tax credit carryforwards 2,812 (282) 2,530 (1,073) 1,457 -
Difference between book and tax method of
accounting for depreciation and amortization (167) (223) (390) 1,020 630 (398)
Difference between book and tax method of
accounting for income on U.S. Government
contracts (9,395) 551 (8,844) 1,195 (7,649) 2,988
Deferred compensation expense 4,069 1,347 5,416 (113) 5,303 (2,344)
Operating reserves and other accruals 25,389 (7,816) 17,573 (2,644) 14,929 (6,200)
Difference between book and tax method of
accounting for certain employee benefits 496 223 719 (1,243) (524) 73
Amortization of intangibles (1,073) 925 (148) (204) (352) (945)
Other, net (234) 55 (179) 173 (6) 186
Net deferred tax asset before
valuation allowance 27,873 (5,936) 21,937 (4,426) 17,511 (8,851)
Federal valuation allowance (14,262) 2,962 (11,300) 3,812 (7,488) 6,031
State valuation allowance (5,574) 716 (4,858) 1,135 (3,723) 2,211
Total temporary differences affecting
tax provision 8,037 (2,258) 5,779 521 6,300 (609)
Deferred taxes from "safe harbor"
lease transactions (6,549) (499) (7,048) (441) (7,489) (314)
Net deferred tax asset (liability) $ 1,488 $(2,757) $(1,269) $ 80 $(1,189) $ (923)
The tax provision (benefit) differs from the amounts
obtained by applying the statutory U.S. Federal income tax rate
to the pre-tax loss amounts. The differences can be reconciled
as follows (in thousands):
1994 1993 1992
Expected Federal income tax benefit $(5,917) $(3,785) $(7,879)
Valuation allowance 2,962 3,812 6,031
State and local income taxes, net of
Federal income tax benefit - (42) -
Reversal of tax reserves for IRS examination (4,069) - -
Nondeductible amortization of intangibles
and other costs 2,331 1,552 2,300
Foreign income tax 54 84 99
Foreign, targeted job and fuel tax credits (734) (359) (222)
Other, net 167 67 (161)
Tax provision (benefit) $(5,206) $1,329 $ 168
During 1994, the Company reached a favorable settlement with
the IRS of disputes over tax deductions related to the leveraged
buyout in 1988. This settlement was formally approved by the IRS in
February 1995. Applicable tax reserves were reversed in the
fourth quarter of 1994.
In 1994, the federal tax benefit resulted from reversal of
tax reserves for the IRS examination and the tax benefit for
operating losses, net of a valuation allowance, less the federal tax
provision of a majority owned subsidiary required to file a separate.
Federal return. In 1993 and 1992 the Company did not record any
Federal income tax benefit because of the uncertainty regarding the
the level of future income. The Federal tax provision recognized in
those years was that of a majority owned subsidiary which is
required to file a separate return. Additionally, the Company
recognized a foreign income tax provision in 1994, 1993 and 1992 and
a state tax credit in 1992.
The Company's U.S. Federal income tax returns have been
cleared through 1984. The Internal Revenue Service completed an
examination of the Company's tax returns for the period 1985-88
and proposed several adjustments, the most significant of which
related to deductions taken by the Company for expenses incurred
in the 1988 leveraged buyout. The Company and the IRS settled
these proposed adjustments in 1994. Taxes and accrued interest
associated with these adjustments, which have not yet been
assessed, are approximately $6,000,000.
The Company has state net operating losses and various tax
credit carryforwards available to offset future taxable income
and income taxes. Following are the net operating losses and
foreign, targeted jobs and AMT tax credits by year of expiration
(in thousands):
Year of ATM Tax Targeted Jobs Foreign State Net
Expiration Credits Tax Credits Tax Credits Operating Losses
1996 81
1998 6,254
1999 272
2000 338
2003 55
2006 249
2007 314
2008 119 16,302
2009 118
No Expiration 1,659
$1,659 $ 800 $ 353 $22,949
(13) Pension Plans
Union employees who are not participants in the ESOP are covered
by multiemployer pension plans under which the Company pays fixed
amounts, generally per hours worked, according to the provisions of
the various labor contracts. In 1994, 1993 and 1992, the Company
expensed $2,440,000, $2,400,000 and $2,693,000, respectively, for
these plans. Under the Employee Retirement Income Security Act of
1974 as amended by the Multiemployer Pension Plan Amendments Act of
1980, an employer is liable upon withdrawal from or termination of a
multiemployer 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 multiemployer plans,
the Company does not believe there is any significant amount of
unfunded vested liability under these plans.
The Company makes contributions to a defined benefit pension plan
for employees working on one U.S. government contract. The plan is
accounted for in accordance with the requirements of Statement of
Financial Accounting Standards No. 87. The pension plan had assets
of $6,761,000 and projected benefit obligations of $7,607,000 at
September 30, 1994 (the plan's fiscal year end). This pension plan
remains in effect regardless of changes in contractors which may
occur as a result of the recompetition process.
(14) Loss Per Common Share
Primary loss per share is based on the weighted average number
of common and dilutive common equivalent shares outstanding during
the period. In addition, 1994 and 1993 include as outstanding
common stock, shares earned and vested but unissued under the
Restricted Stock Plan. For years 1994, 1993 and 1992 the
outstanding warrants and shares which would be issued under the
assumed conversion of Class C Preferred Stock have been excluded
from the calculation of loss per share as their effect is
antidilutive because of the losses incurred during the periods (see
also Note 8). The loss per common share for 1994, 1993 and 1992
includes the effect of the unpaid dividends on the Class C Preferred
Stock ($1,606,000 in 1994, $1,347,000 in 1993 and $1,129,000 in
1992) and, in addition, for 1992 the dividends paid on Class A
Preferred Stock. The average number of shares used in determining
primary loss per share was 6,802,012 in 1994, 5,141,319 for 1993
and 5,102,621 for 1992.
(15) Incentive Compensation Plans
The Company has several formal incentive compensation plans which
provide for incentive payments 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. Incentive compensation expense was $7,979,000
for 1994, $7,067,000 for 1993 and $6,058,000 for 1992.
(16) Leases
The Company has capitalized all significant leases which meet the
criteria for classification as capital leases, principally leases
for vehicles and equipment. Capitalized leases are amortized over
the shorter of the useful lives of the assets or the lease term.
Future minimum lease payments required under operating leases that
have remaining noncancellable lease terms in excess of one year at
December 31, 1994 and capitalized leases are summarized below:
Operating Capitalized
Leases Leases
Years Ending December 31,
1995 $11,174 $ 1,021
1996 8,659 661
1997 7,572 509
1998 6,672 105
1999 5,844 -
Thereafter 12,093 -
Total minimum lease payments $52,014 2,296
Less interest on capitalized leases 281
Present value of capitalized leases
as of December 31, 1994 (Note 5) $ 2,015
Net rent expense for leases, excluding amounts for capitalized
leases, was $22,117,000 for 1994, $16,553,000 for 1993 and
$14,706,000 for 1992.
(17) Acquisitions
On October 31, 1994, the Company acquired all of the issued and
outstanding shares of stock of CBIS Federal Inc. (CBIS) for a cash
payment of $8,159,000 including out of pocket costs. CBIS,
headquartered in Fairfax, Virginia, provides a full range of
services across the life cycle of information solutions and services
primarily to federal government civilian agencies and also to the
Department of Defense and state and local governments. The
acquisition was accounted for as a purchase and $5,868,000 of
goodwill was recorded which will be amortized over 40 years.
On November 12, 1993 the Company acquired Technology Applications,
Inc. Aggregate cash paid, notes issued and mortgages assumed
totaled $11,419,000 and 125,714 shares of common stock valued at
$2,200,000 were issued. The Company also acquired certain assets of
Science Management Corporation ("SMC") and NMI Systems Inc. ("NMI")
on February 18, 1993 and December 10, 1993, respectively, for an
aggregate of $5,352,000 in cash, notes and other liabilities.
The 1993 acquisitions were accounted for as purchases.
Goodwill of $6,083,000 was recorded and is being amortized over
periods up to 40 years. The allocation period for the NMI
acquisition still remains open at December 31, 1994 pending
resolution of certain billing rates used on U.S. Government
contracts.
Consolidated revenues, loss before extraordinary item, net loss
and loss per share for the years ended December 31, 1994 and 1993,
adjusted on an unaudited pro forma basis as if the above
acquisitions had been consummated at the beginning of the respective
periods, are as follows (in thousands except per share amounts):
1994 1993
Revenues $1,074,060 $1,066,043
Loss before extraordinary item $ ( 12,050) $ (12,282)
Net loss for common stockholders $ (13,656) $ (13,629)
Net loss per common share $ (2.01) $ (2.71)
Additionally, in June 1994, the Company paid an aggregate $4.0
million for a 25% interest in each of Composite Technology, Inc.
(CTI) and Gateway Passenger Services, L.P. Goodwill of $1,750,000
was recorded and will be amortized over periods up to 40 years.
(18) Commitments, Contingencies and Litigation
The Company is involved in various claims and lawsuits, including
contract disputes and claims based on allegations of negligence and
other tortious conduct. The Company is also potentially liable for
certain environmental, personal injury, tax and contract dispute
issues related to the prior operations of divested businesses. In
most cases, the Company has denied, or believes it has a basis to
deny liability, and in some cases has offsetting claims against the
plaintiffs or third parties.
Damages currently claimed by the various plaintiffs for these
items which may not be covered by insurance aggregate approximately
$22,000,000 (including compensatory and possible punitive damages
and penalties).
A former subsidiary, which discontinued its business activities in
1986, has been named as one of many defendants in civil lawsuits
which have been filed in various state courts against manufacturers,
distributors and installers of asbestos products. (The subsidiary
had discontinued the use of asbestos products prior to being
acquired by the Company.) The Company has also been named as a
defendant in several of these actions. At the beginning of 1992,
403 claims had been filed and during the year 1,785 additional
claims were filed with 73 claims being settled. In 1993, 709
additional claims were filed and 1,273 were settled. In 1994, 1,135
new claims were filed with 353 claims being settled. Defense has
been tendered to and accepted by the Company's insurance carriers.
The former subsidiary was a nonmanufacturer that installed or
distributed industrial insulation products. Accordingly, the
Company strongly believes that the subsidiary has substantial
defenses against alleged secondary and indirect liability. The
Company has provided a reserve for the estimated uninsured legal
costs to defend the suits and the estimated cost of reaching
reasonable no-fault liability settlements. The amount of the
reserve has been estimated based on the number of claims filed and
settled to date, number of claims outstanding, current estimates of
future filings, trends in costs and settlements, and the advice of
the insurance carriers and counsel.
The Company has retained certain liability in connection with its
1989 divestiture of its major electrical contracting business,
Dynalectric Company ("Dynalectric"). The Company and Dynalectric were
sued in 1989 by a former Dynalectric subcontractor. The subcontractor
has alleged that its subcontract to furnish certain software and
services in connection with a major municipal traffic signalization
project was improperly terminated by Dynalectric Company and that
Dynalectric is liable to the former subcontractor for a variety of
additional claims, the aggregate dollar amount of which have not
been formally recited in the subcontractor's complaint. Dynalectric
has also filed certain counterclaims against the former
subcontractor. The Company and Dynalectric believe that they have
valid defenses, and/or that any liability would be more than offset
by recoveries under the counterclaims. The Company has established
reserves for the contemplated defense costs and for the cost of
obtaining enforcement of arbitration provisions contained in the
contract.
The Company is a party to other civil lawsuits which have arisen
in the normal course of business for which potential liability,
including costs of defense, are covered by insurance policies.
The major portion of the Company's business involves contracting
with departments and agencies of, and prime contractors to, the U.S.
government and as such 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. In management's opinion, there are no outstanding
issues of this nature at December 31, 1994 that would have a
material adverse effect on the Company's consolidated financial
position or results of operations.
The Company has recorded its best estimate of the liability that
will result from these matters. While it is not possible to predict
with certainty the outcome of the 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 presently 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 or consolidated financial
position of the Company.
The Company is highly leveraged, and its ability to meet its future
debt service and working capital requirements is dependent upon
increased future earnings and cash flow from operations, the expansion
of an accounts receivable facility financing, continuation of ESOP
stock purchases in lieu of cash retirement contributions and the
reduction of its debt expense.
(19) Business Segment
The Company operates in one line of business: that of providing
management, technical and professional services to industry and
government organizations primarily to support the customers'
facilities and/or operations on a turn-key (full) service basis.
The Company has no significant foreign operations or assets
outside the United States. The largest single customer of the
Company is the U.S. Government. The Company had prime contract
revenues from the U.S. Government of $723 million in 1994, $663
million in 1993 and $674 million in 1992. Included in revenues from
the U.S. Government are revenues from the Department of Defense of
$551 million in 1994, $543 million in 1993 and $538 million in 1992.
No other customer accounted for more than 10% of revenues in any
year.
(20) Subsequent Events
On February 7, 1995, the Company sold its Corporate headquarters
to RREEF America Reit Corp. C and entered into a 12-year lease with
RREEF as the landlord. The proceeds from the sale-leaseback were
used to satisfy the mortgage on the building which was due to mature
on March 27, 1995. Since the Company had the intent to discharge
its obligation under the mortgage with noncurrent assets, the amount
has been included in long-term debt at December 31, 1994.
In separate transactions on January 20 and February 7, 1995, the
Company secured $24 million of equipment financing. The proceeds
raised will serve to reduce the balance of the 16% Subordinated
Debentures outstanding.
(21) Aircraft Maintenance Facilities - Consolidation and Asset
Impairment
The Company continues to evaluate its alternatives in respect to
the unsatisfactory performance by the Commercial Sector's aircraft
maintenance unit which posted its fourth consecutive year of
operating losses. The Company has engaged an investment advisor to
market the maintenance unit. The status of the unit presently
remains unresolved pending the outcome of discussions with potential
investors and a major customer. These discussions could result in
one of a number of alternatives, including the consummation of a
joint venture, the procurement of long-term contracts, sale of the
entire unit or, worst case, the failure to negotiate any transaction
at all. Current management projections indicate that the maintenance
unit should be profitable in 1995. The Company believes that if it
is unable to consummate a satisfactory resolution through any of
these alternatives, the most likely course of action would be to
consolidate its operations by closing one of the heavy maintenance
facilities. In management's opinion, no single alternative (i.e.
entering into a joint venture, the curtailment of operations or shut
down of one or more facilities, or the divestiture of the unit as a
whole) is more or less likely to occur; however, the Company
believes that it has suffered at least a partial impairment of its
investment in this unit. Accordingly, it has recorded an estimate
of the applicable goodwill ($5.2 million) and other assets ($4.3
million) that would be written down in the event the consolidation
or shut-down of one of the facilities becomes necessary. This does
not fully reserve for the potential write-off that would be
necessary for the complete closure or sale of the business in the
event that the Company is unable to curtail the operating losses in
the future.
Selected financial operating data of the commercial aircraft
maintenance unit is as follows (in thousands except number of
employees):
1994 1993 1992
Revenues $73,045 $57,288 $74,253
Operating losses $(5,351) $(6,629) $ (428)
Asset impairment provision $(9,492) $ - $ -
Net assets (after write-down)
including Goodwill
at December 31 $30,315 $44,354 $43,328
Backlog at December 31 $12,730 $11,368 $ -
Number of employees 634 701 631
(22) Quarterly Financial Data (Unaudited)
A summary of quarterly financial data for 1994 and 1993 is as
follows (in thousands, except per share data):
1994 Quarters 1993 Quarters
First Second Third Fourth First Second Third Fourth
Revenues $259,537 $248,551 $244,928 $269,056 $231,560 $235,567 $239,013 $247,005
Gross profit 10,815 11,757 8,892 12,404 6,726 9,507 8,219 15,104
Earnings (loss) before income
taxes and minority interest (1,156) (259) (3,686) (11,806) (6,015) (2,548) (2,953) 383
Minority interest 249 311 226 344 118 386 113 335
Net loss for common stockholders (1,589) (930) (4,245) (6,067) (6,186) (2,979) (3,854) (395)
Loss per common share:
Primary and fully diluted:
Net loss for common
stockholders (0.36) (0.21) (0.59) (0.82) (1.26) (0.65) (0.82) (0.15)
Quarterly data may not equal annual totals due to rounding
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None