FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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. Employer
incorporation or organization) Identification No.)
2000 Edmund Halley Drive, Reston, VA 20191-3436
(Address of principal executive offices) (Zip Code)
(703) 264-0330
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. 9,009,636 shares of
common stock having a par value of $0.10 per share were outstanding at March 27,
1997.
DYNCORP
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets -
March 27, 1997 and December 31, 1996
Consolidated Condensed Statements of Operations -
Three Months Ended March 27, 1997 and March 28, 1996
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 27, 1997 and March 28, 1996
Consolidated Statement of Permanent Stockholders' Equity
Notes to Consolidated Condensed Financial Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computations of Earnings Per Common Share
PART I. FINANCIAL INFORMATION
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 27, 1997 AND DECEMBER 31, 1996
(Dollars in thousands)
March 27,
1997 December 31,
Unaudited 1996
Current Assets:
Cash and cash equivalents $ 64,138 $ 25,877
Accounts receivable and contracts in process (Note 2) 186,893 187,679
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 873 1,030
Other current assets 15,633 10,009
Total current assets 267,537 224,595
Property and Equipment (net of accumulated depreciation
and amortization of $18,034 in 1997 and $16,737 in 1996) 19,294 19,084
Intangible Assets (net of accumulated amortization
of $43,577 in 1997 and $43,028 in 1996) 48,379 48,927
Other Assets (Notes 2, 5 and 8) 79,202 76,146
Total Assets $ 414,412 $ 368,752
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 27, 1997 AND DECEMBER 31, 1996
(Dollars in thousands, except per share amounts)
March 27,
1997 December 31,
Unaudited 1996
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt $ 523 $ 628
Accounts payable 37,431 42,716
Advances on contracts in process 6,381 6,002
Accrued liabilities 96,191 99,499
Total current liabilities 140,526 148,845
Long-Term Debt (Notes 5 and 9) 202,551 103,555
Other Liabilities and Deferred Credits (Note 8) 79,621 79,513
Contingencies and Litigation (Note 8) - -
Temporary Equity (Note 3):
Redeemable Common Stock -
ESOP Shares, 6,670,442 and 6,165,957
shares issued and outstanding in 1997 and 1996,
respectively, subject to restrictions 146,433 136,343
Other, 125,714 shares issued and outstanding in
1997 and 1996, respectively 2,979 2,979
Permanent Stockholders' Equity (Note 4):
Preferred Stock, Class C 18% cumulative, convertible,
$24.25 liquidation value (liquidation value
including unrecorded dividends of $14,147 in 1996),
123,711 shares authorized,
issued and outstanding in 1996 - 3,000
Common Stock, par value ten cents per share, authorized
20,000,000 shares; issued 3,856,218 shares in 1997
and 3,315,673 shares in 1996 386 332
Common Stock Warrants 3,925 11,139
Paid-in Surplus 122,766 148,234
Reclassification to temporary equity for redemption value
greater than par value (148,734) (138,694)
Deficit (98,948) (101,259)
Common Stock Held in Treasury, at cost; 1,642,738 shares
and 170,716 warrants in 1997 and 1,514,482 shares and
170,716 warrants in 1996 (28,012) (25,235)
Unearned ESOP Shares (9,081) -
Total Liabilities and Stockholders' Equity $ 414,412 $ 368,752
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
UNAUDITED
Three Months Ended
March 27, March 28,
1997 1996
Revenues:
Information and Engineering Technology $ 63,956 $ 71,012
Aerospace Technology 104,594 85,530
Enterprise Management 102,587 85,184
Total revenues 271,137 241,726
Costs and expenses:
Cost of services 259,794 230,997
Corporate selling and administrative 4,439 4,460
Interest income (361) (614)
Interest expense 2,983 2,580
Other 277 566
Total costs and expenses 267,132 237,989
Earnings before income taxes and minority interest 4,005 3,737
Provision for income taxes (Note 6) 1,286 1,200
Earnings before minority interest 2,719 2,537
Minority interest 408 296
Net earnings $ 2,311 $ 2,241
Preferred Class C dividends not declared
or recorded (Note 4) - (534)
Common stockholders' share of earnings $ 2,311 $ 1,707
Weighted average number of common shares
outstanding and dilutive common stock
equivalents (Note 7) 11,078,153 12,231,005
Common stockholders' share of earnings
per common share - primary and fully diluted $ 0.21 $ 0.14
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
UNAUDITED
Three Months Ended
March 27, March 28,
1997 1996
Cash Flows from Operating Activities:
Net earnings $ 2,311 $ 2,241
Adjustments to reconcile net earnings from operations
to net cash used:
Depreciation and amortization 2,650 2,145
Payment of income taxes on gain on sale of
Commercial Aviation business - (13,990)
Other 9 (485)
Changes in current assets and liabilities, net of
acquisitions:
Increase in current assets except
cash, cash equivalents and notes receivable (4,912) (3,659)
Decrease in current liabilities except notes payable
and current portion of long-term debt (8,195) (11,801)
Cash used by operating activities (8,137) (25,549)
Cash Flows from Investing Activities:
Sale of property and equipment 23 1
Purchase of property and equipment (1,360) (1,502)
Decrease in cash on deposit for letters of credit - 2,070
Other (116) (14)
Cash (used) provided by investing activities (1,453) 555
Cash Flows from Financing Activities:
Treasury stock purchased (268) (3,153)
Payment on indebtedness (595) (313)
Proceeds from issuance of Senior Notes (Note 5) 99,484 -
Stock released to Employee Stock Ownership Plan 1,297 503
Loan to Employee Stock Ownership Plan (Note 4) (10,379) -
Deferred financing expenses (Note 5) (3,502) (1,209)
Common stock and warrants purchased from
investors (Note 4) (37,819) -
Other (367) 1
Cash provided (used) from financing activities 47,851 (4,171)
Net Increase (Decrease) in Cash and Cash Equivalents 38,261 (29,165)
Cash and Cash Equivalents at Beginning of the Period 25,877 31,151
Cash and Cash Equivalents at End of the Period $ 64,138 $ 1,986
Supplemental Cash Flow Information:
Cash paid for income taxes $ 804 $ 14,040
Cash paid for interest $ 4,169 $ 2,106
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PERMANENT STOCKHOLDERS' EQUITY
(Dollars in thousands)
UNAUDITED
Adjustment for
Common Redemption Value Unearned
Preferred Common Stock Paid-in Greater than Treasury ESOP
Stock Stock Warrants Surplus Par Value Deficit Stock Shares
Balance, December 31, 1996 $ 3,000 $ 332 $11,139 $148,234 $(138,694) $(101,259) $ (25,235) $ -
Stock issued under
Restricted Stock Plan 8 93
Treasury stock issued 233
Treasury stock purchased (665) (231)
Stock warrants and options exercised 1 (17) 105
Loans to the Employee Stock
Stock Ownership Plan (Note 4) (10,379)
Payment received on ESOP note 1,298
Class C Preferred Stock converted
and warrants exercised (Note 4) (3,000) 95 (2,007) 5,119
Common stock and warrants
purchased (Note 4) (5,190) (30,120) (2,779)
Net earnings 2,311
Reclassification to Redeemable
Common Stock ( 50) (10,040)
Balance, March 27, 1997 $ - $ 386 $ 3,925 $122,766 $(148,734) $ (98,948) $ (28,012) $ (9,081)
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. The unaudited consolidated condensed financial statements included herein
have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, the unaudited consolidated condensed
financial statements included herein reflect all adjustments necessary to
present fairly the financial position, the results of operations and the
cash flows for such interim periods. The results of operations for such
interim periods are not necessarily indicative of the results for the
full year.
2. At March 27, 1997, $109,670,000 of accounts receivable are restricted as
collateral for the Contract Receivable Collateralized Notes, Series
1992-1. Additionally, $3,000,000 of cash is restricted as collateral for
the Notes and has been included in Other Assets on the balance sheet at
March 27, 1997.
The Notes are scheduled to begin principal amortization on May 30, 1997;
however, the Company has secured financing to satisfy the maturing
obligations of the debt (see Notes 4 and 9). At March 27, 1997, the debt
remains classified as long-term.
Accounts receivable are net of an allowance for doubtful accounts of
$229,000 in 1997 and 1996.
3. Common stock which is redeemable has been reflected as Temporary Equity at
each balance sheet date and consists of the following:
Balance at Balance at
Redeemable March 27, Redeemable December 31,
Shares Value 1997 Shares Value 1996
ESOP Shares 3,520,037 $23.70 $ 83,424,877 3,520,037 $23.70 $ 83,424,877
3,150,405 $20.00 63,008,100 2,645,920 $20.00 52,918,400
6,670,442 $ 146,432,977 6,165,957 $ 136,343,277
Other Shares 125,714 $23.70 $ 2,979,422 125,714 $23.70 $ 2,979,422
4. In February 1997, the Employee Stock Ownership Trust purchased from
certain investors in Capricorn Investors, L.P. all of the Company's Class
C Preferred Stock. The purchase price for the securities was $18,567,000,
of which $10,290,000 was a note from the ESOP that was guaranteed by the
Company. The ESOP subsequently converted the Class C Preferred Stock and
exercised the attached warrants, upon which the Company issued 949,642
shares of common stock to the ESOP. The unpaid balance on the note
receivable from the ESOP, representing 455,473 shares, is reflected as a
reduction in stockholders equity at March 27, 1997.
Concurrent with the ESOP's purchase of the Class C Preferred Stock, the
Company purchased 128,345 shares of common stock and 1,806,147 common
stock warrants from the other investors in Capricorn Investors, L.P. The
purchase price for these securities was $37,819,000, of which $18,910,000
was paid in cash and short-term notes were issued for the balance.
5. 0n March 17, 1997, the Company closed on the issuance of $100,000,000 of
9.5% Senior Subordinated Notes due 2007. The notes are unsecured
obligations of the Company and will be subordinated in right of payment to
all existing and future senior debt of the Company. Interest is payable
semi-annually on March 1 and September 1 of each year, commencing on
September 1, 1997.
The proceeds received, $99,484,000, net of a discount, were used to fund
the Company's purchase of common stock and warrants from outside
investors, to make a loan to the ESOP to repay the note to certain of the
Capricorn investors (plus accrued interest) for the purchase of the Class
C Preferred Stock (see Note 4), to fund partially the retirement of the
Contract Receivable Collateralized Notes (see Notes 2 and 9) and to pay
transaction fees.
6. The provision for income taxes in 1996 and 1995 is based upon an estimated
annual effective tax rate, including the impact of differences between the
book value of assets and liabilities recognized for financial reporting
purposes and the basis recognized for tax purposes.
7. The weighted average number of common shares outstanding includes issued
shares or shares issuable under the Restricted Stock Plan, less shares held
in treasury and any unallocated ESOP shares. For the three months ended
March 27, 1997, approximately 2,321,000 unexercised warrants and 129,000
stock options have been included as share equivalents using the treasury
stock method.
SFAS No. 128, "Earnings per Share," was issued in February 1997 and is
effective for financial statements issued after December 15, 1997.
The statement establishes new standards for computing and presenting
earnings per share ("EPS") and will require restatement of prior years.
This statement simplifies the standards for computing EPS previously
found in APB Opinion 15. It replaces the presentation of primary
and fully diluted EPS with a presentation of basic and diluted EPS,
requires a dual presentation on the face of the income statement and
requires a reconciliation of basic EPS computation to diluted EPS.
Had SFAS No. 128 been effective for financial statements issued
March 27, 1997, basic and diluted EPS would have been $0.27
and $0.21, respectively.
8. The Company and its subsidiaries and affiliates are involved in various
claims and lawsuits, including contract disputes and claims based on
allegations of negligence and other tortious conduct. The Company is
also potentially liable for certain personal injury, tax, environmental
and contract dispute issues related to the prior operations of divested
businesses. In addition, certain subsidiary companies are potentially
liable for environmental, personal injury and contract and dispute claims.
In most cases, the Company and its subsidiaries have denied, or believe
they have a basis to deny liability, and in some cases have offsetting
claims against the plaintiffs, third parties or insurance carriers.
The total amount of damages currently claimed by the plaintiffs in these
cases is estimated to be approximately $127,000,000 (including compensatory
punitive damages and penalties). The Company believes that the amount
that will actually be recovered in these cases will be substantially
less than the amount claimed. After taking into account available
insurance, the Company believes it is adequately reserved with respect
to the potential liability for such claims. The estimates set forth
above do not reflect claims that may have been incurred but have not yet
been filed. The Company has recorded such damages and penalties
that are considered to be probable recoveries against the Company or
its subsidiaries.
Asbestos Claims
An acquired and inactive subsidiary, Fuller-Austin Insulation Company
("Fuller-Austin"), which discontinued its business activities in 1986, has
been named as one of many defendants in civil lawsuits which have been
filed in certain state courts beginning in 1986 (principally Texas) against
manufacturers, distributors and installers of products allegedly containing
asbestos. Fuller-Austin was a non-manufacturer that installed and
occasionally distributed industrial insulation products. Fuller-Austin had
discontinued the use of asbestos-containing products prior to being
acquired by the Company in 1974. These claims are not part of a class
action.
The claimants generally allege injuries to their health caused by
inhalation of asbestos fibers. Many of the claimants seek punitive damages
as well as compensatory damages. The amount of damages sought is impacted
by a multitude of factors. These include the type and severity of the
disease sustained by the claimant (i.e., mesothelioma, lung cancer, other
types of cancer, asbestosis or pleural changes); the occupation of the
claimant; the duration of the claimant's exposure to asbestos-containing
products; the number and financial resources of the defendants; the
jurisdiction in which the claim is filed; the presence or absence of other
possible causes of the claimant's illness; the availability of legal
defenses, such as the statute of limitations; and whether the claim was
made on an individual basis or as part of a group claim.
Claim Exposure
As of May 2, 1997, 14,111 plaintiffs have filed claims against
Fuller-Austin and various other defendants. Of these claims, 3,203 have
been dismissed, 3,690 have been resolved without an admission of liability
at an average cost of $3,590 per claim (excluding legal defense costs) and
an additional 618 claims have been settled in principle (subject to future
processing and funding) at a average cost of $2,019 per claim.
The following is a summary of claims filed against Fuller-Austin through
May 2, 1997:
Y e a r s
1993
& Prior 1994 1995 1996 1997(1) Total
Claims Filed 2,921 1,136 4,522 4,122 1,410 14,111
Claims Dismissed (79) (21) (1,035) (1,459) (609) (3,203)
Claims Resolved (1,224) (394) (182) (1,828) (62) (3,690)
Settlements in process (618)
Claims Outstanding at May 2, 1997 6,600
(1) As of May 2, 1997
In connection with these claims, Fuller-Austin's primary insurance carriers
have incurred approximately $21,400,000 (including $9,400,000 of legal
defense costs, but excluding $1,250,000 for settlements in process) to
defend and settle the claims and, in addition, judgments have been entered
against Fuller-Austin for jury verdicts of $6,500,000 which have not been
paid and which are under appeal by Fuller-Austin. Through March 27,1997,
the Company and Fuller-Austin have charged to expense approximately
$12,500,000 consisting of $6,200,000 of charges under retrospectively rated
insurance policies and $6,300,000 of reserves for potential uninsured legal
and settlement costs related to these claims. These charges substantially
eliminate any further exposure for retrospectively determined premium
payments under the retrospectively rated insurance policies.
Fuller-Austin has continued its strategy to require direct proof that
claimants had exposure to asbestos-containing products as the result of
Fuller-Austin's operations. This has resulted in an increase in claim
settlements and a decrease in litigation defense activities. However,
perceived changes in the nature of new claims filed have caused
Fuller-Austin and its insurers to reevaluate Fuller-Austin's approach to
claims settlement. Consequently, there is a potential for an increased
level of trial activity which Fuller-Austin believes will reduce the
overall cost of asbestos personal injury claims in the long run by
requiring claimants to present and prove clear evidence of substantial
asbestos-related impairment and exposure to Fuller-Austin's operations, and
by denying recovery to claimants who are unimpaired or who did not have
significant exposure to Fuller-Austin's operations.
Further, the level of filed claims has become significant only since 1992,
and therefore, Fuller-Austin has a relatively brief history (compared to
manufacturers and suppliers) of claims volume and a limited data file upon
which to estimate the number or costs of claims that may be received in the
future. Also, effective September 1, 1995, the State of Texas (where most
of these claims have been filed) enacted tort reform legislation which
Fuller-Austin believes will ultimately curtail the number of
unsubstantiated asbestos claims filed against the subsidiary in Texas.
The Company and its defense counsel have analyzed the 14,111 claim filings
incurred through May 2, 1997. Based on this
analysis and consultation with its professional advisors, Fuller-Austin has
estimated its cost, including legal defense costs, to be $16,350,000 for
claims filed and still unsettled and $38,500,000 as its minimum estimate of
future costs of unasserted claims, including legal defense costs. No upper
limit of exposure can presently be reasonably estimated. The Company
cautions that these estimates are subject to significant uncertainties,
including the future effect of tort reform legislation enacted in Texas and
other states, the success of Fuller-Austin's litigation strategy, the size
of jury verdicts, success of appeals in process, the number and financial
resources of future plaintiffs, and the actions of other defendants. During
1996, approximately 40 claims, with approximately 700 more being prepared
for filing, were filed in another state where Fuller-Austin had performed a
significant amount of its business. Although the claims filed against
Fuller-Austin in states other than Texas have been included in the claims
summary table set forth above, exposure for these claims has not been
included in the Company's estimates and neither the Company nor its defense
counsel are able to reasonably predict the outcome of these cases or the
incidence of the 700 or other future claims that may be filed. Therefore,
actual claim experience may vary significantly from such estimates,
especially if certain Texas appeals are decided unfavorably to
Fuller-Austin and/or the level of claims filed in other states increases.
At March 27, 1997 and December 31, 1996, Fuller-Austin recorded an
estimated liability for future indemnity payments
and defense costs related to currently unsettled claims and minimum
estimated future claims of $55,000,000 (recorded as long-term liability).
Insurance Coverage
Defense has been tendered to and accepted by Fuller-Austin's primary
insurance carriers, and by certain of the Company's primary insurance
carriers that issued policies under which Fuller-Austin is named as an
additional insured; however, only one such primary carrier has partially
accepted defense without a reservation of rights. The Company believes that
Fuller-Austin has at least $7,725,000 in unexhausted primary coverage (net
of deductibles and self-insured retentions, but including disputed
coverage) under its liability insurance policies to cover the unsettled
claims, verdicts and future unasserted claims and defense costs. The
primary carriers also have unlimited liability for defense costs (presently
running at the annual rate of approximately $1,500,000) until such time as
the primary limits under these policies are exhausted. When the primary
limits are exhausted, liability for both indemnity and legal defense will
be tendered to the excess coverage carriers, all of which have been
notified of the pendency of the asbestos claims. The Company and
Fuller-Austin have approximately $490,000,000 of additional excess and
umbrella insurance that is generally responsive to asbestos claims. This
amount excludes approximately $92,000,000 of coverage issued by insolvent
carriers. After the $7,725,000 of unexhausted primary coverage, the Company
has $35,700,000 of excess coverage in place excluding a $35,000,000
layer of insolvent coverage for policy years 1979 through 1984 (the
"Insolvent Layer"). All of the Company's and Fuller-Austin's liability
insurance policies cover indemnity payments and defense fees and expenses
subject to applicable policy terms and conditions.
Coverage Litigation
The Company and Fuller-Austin have instituted litigation in Los Angeles
Superior Court, California, against their primary and excess insurance
carriers, to obtain declaratory judgments from the court regarding the
obligations of the various carriers to defend and pay asbestos claims. The
issues in this litigation include the aggregate liability of the carriers,
the triggering and drop-down of excess coverage to cover the Insolvent
Layer and allocation of losses among multiple carriers including insolvent
carriers and various other issues related to the interpretation of the
policy contracts. All of the carrier defendants have filed general
denial answers.
Although there can be no assurances as to the outcome of this litigation,
management believes that it is probable that the Company and Fuller-Austin
will prevail in obtaining judicial rulings confirming the availability of a
substantial portion of the coverage. Currently, the Company has excess
coverage under policies issued by solvent carriers of approximately
$497,725,000 ($7,725,000 in primary coverage and $490,000,000 in excess
coverage). Based on a review of the independent ratings of these carriers,
the Company believes that a substantial portion of this coverage will
continue to be available to meet the claims. Fuller-Austin recorded in
Other Assets $55,000,000 (not including reserves of $6,200,000 and
$6,400,000, respectively) at March 27, 1997 and December 31, 1996,
representing the amount that it expects to recover from its insurance
carriers for the payment of currently unsettled and estimated future
claims.
The Company cautions, however, that even though the existence and aggregate
dollar amounts of insurance are not generally being disputed, such
insurance coverage is subject to interpretation by the court and the timing
of the availability of insurance payments could, depending upon the outcome
of the litigation and/or negotiation, delay the receipt of insurance
company payments and require Fuller-Austin to assume responsibility for
making interim payment of asbestos defense and indemnity costs.
While the Company and Fuller-Austin believe that they have recorded
sufficient liability to satisfy Fuller-Austin's reasonably anticipated
costs of present and future plaintiffs' suits, it is not possible to
predict the amount or timing of future suits or the future solvency of its
insurers. In the event that currently unsettled and future claims exceed
the recorded liability of $55,000,000, the Company believes that the
judicially determined and /or negotiated amounts of excess and umbrella
insurance coverage that will be available to cover additional claims will
be significant; however, it is unable to predict whether or not such
amounts will be adequate to cover all additional claims without further
contribution by Fuller-Austin.
The Company has recorded its best estimate of the aggregate liability that
will result from these matters. While it is not possible to predict with
certainty the outcome of litigation and other matters discussed above, it
is the opinion of the Company's management, based in part upon opinions of
counsel, insurance in force and the facts currently known, that liabilities
in excess of those recorded, if any, arising from such matters would not
have a material adverse effect on the results of operations, consolidated
financial position or liquidity of the Company over the long-term. However,
it is possible that the timing of the resolution of individual issues could
result in a significant impact on the operating results and/or liquidity
for one or more future reporting periods.
The major portion of the Company's business involves contracting with
departments and agencies of, and prime contractors to, the U.S. Government,
and such contracts are subject to possible termination for the convenience
of the government and to audit and possible adjustment to give effect to
unallowable costs under cost-type contracts or to other regulatory
requirements affecting both cost-type and fixed-price contracts. Payments
received by the Company for allowable direct and indirect costs are subject
to adjustment and repayment after audit by government auditors, if the
payments exceed allowable costs. Audits have been completed on the
Company's incurred contract costs through 1986 and are continuing for
subsequent periods. The Company has included an allowance for excess
billings and contract losses in its financial statements that it believes
is adequate based upon its interpretation of contracting regulations and
past experience. There can be no assurance, however, that this allowance
will be adequate. The Company is aware of various costs questioned by the
government, including issues related to the recoverability of certain of
its ESOP contributions, but cannot determine the outcome of the audit
findings at this time. In addition, the Company is occasionally the subject
of investigations by the Department of Justice and other investigative
organizations, resulting from employee and other allegations regarding
business practices. In management's opinion, there are no outstanding
issues of this nature at March 27, 1997, that will have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
9. Subsequent Events - On April 18,1997, the Company's wholly-owned subsidiary
Dyn Funding Corporation ("DFC") entered into an agreement with Prudential
Insurance Company of America and Columbia Life Insurance Company, Inc. to
purchase from DFC up to $140,000,000 of Contract Receivable Collateralized
Notes, Series 1997-1. The notes consist of a $50,000,000 Class A Fixed Rate
Note, which was issued at closing, and a $90,000,000 Class B Variable
Rate Note, which has yet to be utilized. These notes contain terms and
conditions substantially identical to those of the Contract Receivable
Collateralized Notes, Series 1992-1. Utilizing the proceeds from the
issuance of the Senior Notes and the proceeds from the new Contract
Receivable Collateralized Class A Fixed Rate Note, the Contract Receivable
Collateralized Notes, Series 1992-1 were retired.
Upon the closing of the Series 1997-1 Notes, the Company reduced the
available amounts under its term note facility with Citicorp
North America, Inc. from $50,000,000 to $15,000,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of financial condition and results of operations
should be read in conjunction with the 1996 Form 10-K.
Working capital at March 27, 1997 was $127.0 million compared to $75.8 million
at December 31, 1996, an increase of $51.2 million. This increase is due
primarily to the funds from the closing of the 9.5% Senior Notes which are
designated to be used to retire the Contract Receivable Collateralized Notes in
April 1997 (see Note 9 to the Consolidated Financial Statements and comments
below).
At March 27, 1997, $109.7 million of accounts receivable are restricted as
collateral for the Contract Receivable Collateralized Notes Series 1992-1.
Cash used by operations was $8.1 million in the first quarter of 1997, as
compared to $25.5 million in the first quarter of 1996. The decrease in cash
used is attributable to the payment of $14.0 million of income taxes on the gain
on the sale of the Commercial Aviation business in the first quarter of 1996.
Investing activities used funds of $1.5 million in the first quarter of 1997,
principally for the purchase of property and equipment. During the first quarter
of 1996, cash provided by investing activities was $0.6 million with cash
released from deposit for letters of credit exceeding cash used for the purchase
of property and equipment.
Financing activities provided funds of $47.9 million in the first quarter of
1997 which consist primarily of the proceeds from the sale of the 9.5% Senior
Notes less funds utilized to make a loan to the Employee Stock Ownership Plan to
fund the purchase of the Class C Preferred Stock, to fund the Company's purchase
of common stock and warrants from investors and to pay transaction fees
associated with the placement of the Notes.
On April 18, 1997, the Company's wholly-owned subsidiary Dyn Funding Corporation
("DFC") entered into an agreement with Prudential Insurance Company of America
and Columbia Life Insurance Company, Inc. to purchase from DFC up to $140.0
million of Contract Receivable Collateralized Notes, Series 1997-1. The notes
consist of a $50.0 million Class A Fixed Rate Note, which was issued at closing,
and a $90.0 million Class B Variable Rate Note, which has yet to be utilized.
These notes contain terms and conditions substantially identical to those of the
Contract Receivable Collateralized Notes, Series 1992-1. Utilizing the proceeds
from the issuance of the Senior Notes and the proceeds from the new Contract
Receivable Collateralized Class A Fixed Rate Note, the Contract Receivable
Collateralized Notes, Series 1992-1 were retired.
Upon the closing of the Series 1997-1 Notes, the Company reduced the available
amounts under its term note facility with Citicorp North America, Inc. from
$50.0 million to $15.0 million.
At March 27, 1997, backlog (including option years on government contracts) was
$3.150 billion compared to $3.002 billion at December 31, 1996, a net increase
of $148.0 million, attributable to contract wins, extensions and add-ons.
Results of Operations
Revenues for the first quarter of 1997 were $271.1 million, up $29.4 million
(12.2%) from $241.7 million in the first quarter of 1996. Revenues for Aerospace
Technology (AT) and Enterprise Management (EM) for the first quarter were $104.6
million and $102.6 million, respectively, an increase of $19.1 million and $17.4
million over the comparable period in 1996. Information and Engineering
Technology's (I&ET) revenues for the first quarter were $63.9 million, down $7.1
million, from $71.0 million in the first quarter of 1996. Increases in AT's
revenues were attributable to a State Department contract in support of the
Bosnian peacekeeping initiative which was awarded in February 1996 and phased in
later in the year, but which was fully operational in 1997 as well as increases
in the level of effort on several existing contracts. In EM, reductions in
revenue due to contract losses were more than offset by revenues from a large
Department of Energy subcontract which was awarded in August 1996, but which was
fully operational in 1997. In I&ET, revenues attributable to the acquisition of
Data Management Design, Inc. in June 1996, and new IDIQ type contracts were more
than offset by the decrease in revenues due to the completion and phase-out of a
large contract with the Postal Service in 1996.
Cost of Services was 95.8% of revenue for the first quarter of 1997 as compared
to 95.6% of revenue for the comparable period in 1996, resulting in gross
margins of $11.3 million (4.2%) and $10.7 million (4.4%), respectively. The same
contract wins and losses which affected revenues similarly affected gross
margin. Additionally, the Company has charged $0.5 million to Cost of Services
in the first quarter of 1997, representing a partial write-off of certain
purchased software as the result of net realization concerns.
Interest income in the first quarter of 1997 was less than the comparable period
in 1996 due to lower cash and cash equivalent balances and related yields
throughout the quarter.
Interest expense was $3.0 million in the first quarter of 1997, up from $2.6
million in 1996, principally due to the accrual of interest on the 9.5% Senior
Notes from the closing date, March 17, 1997, through the end of the first
quarter.
Other expense consists of the following major items (in thousands):
Three Months Ended
March 27, March 28,
1997 1996
Amortization of costs in excess
of net assets acquired $ 402 $ 377
Provision for nonrecovery of
receivables 1 106
Miscellaneous (126) 83
$ 277 $ 566
The provision for income taxes in 1996 and 1995 is based upon an estimated
annual effective tax rate, including the impact of differences between the book
value of assets and liabilities recognized for financial reporting purposes and
the basis recognized for tax purposes.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
This item is incorporated herein by reference to Note 8 to the Consolidated
Condensed Financial Statements included elsewhere in this quarterly Report on
Form 10-Q.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Computations of Earnings Per Common Share
(b) Reports on Form 8-K
None filed
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNCORP
Date: May 12, 1997 P.C. FitzPatrick
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: May 12, 1997 J.J. Fitzgerald
J.J. Fitzgerald
Vice President and Controller
Date: May 12, 1997 G.A. Dunn
G.A. Dunn
Vice President