FORM 10-Q
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 June 26, 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 (IRS 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. 9,023,814 shares of
common stock having a par value of $0.10 per share were outstanding at June 26,
1997.
DYNCORP
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets -
June 26, 1997 and December 31, 1996 3-4
Consolidated Condensed Statements of Operations -
Three and Six Months Ended June 26, 1997 and June 27, 1996 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 26, 1997 and June 27, 1996 6
Consolidated Statement of Permanent Stockholders' Equity 7
Notes to Consolidated Condensed Financial Statements 8-13
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
Exhibit 11 - Computations of Earnings Per Common Share 18
PART I. FINANCIAL INFORMATION
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 26, 1997 AND DECEMBER 31, 1996
(Dollars in thousands)
June 26,
1997 December 31,
Unaudited 1996
Assets
Current Assets:
Cash and cash equivalents $ 32,923 $ 25,877
Accounts receivable and contracts in process (Note 2) 182,226 187,679
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 1,460 1,030
Other current assets 14,860 10,009
Total current assets 231,469 224,595
Property and Equipment (net of accumulated depreciation
and amortization of $20,851 in 1997 and $16,737 in 1996) 20,084 19,084
Intangible Assets (net of accumulated amortization
of $44,120 in 1997 and $43,028 in 1996) 47,836 48,927
Other Assets (Notes 2 and 8) 78,226 76,146
Total Assets $377,615 $368,752
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 26, 1997 AND DECEMBER 31, 1996
(Dollars in thousands, except per share amounts)
June 26,
1997 December 31,
Unaudited 1996
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt $ 891 $ 628
Accounts payable 39,928 42,716
Advances on contracts in process 2,623 6,002
Accrued liabilities 106,891 99,499
Total current liabilities 150,333 148,845
Long-Term Debt (Notes 2 and 5) 152,948 103,555
Other Liabilities and Deferred Credits (Note 8) 79,296 79,513
Contingencies and Litigation (Note 8) - -
Temporary Equity (Note 3):
Redeemable Common Stock -
ESOP Shares, 6,735,509 and 6,165,957
shares issued and outstanding in 1997 and 1996,
respectively, subject to restrictions 148,790 136,343
Other, 125,714 shares issued and outstanding in
1997 and 1996 3,017 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 3,805,439 shares in 1997
and 3,315,673 shares in 1996 381 332
Common Stock Warrants 3,891 11,139
Paid-in Surplus 122,805 148,234
Reclassification to temporary equity for redemption
value greater than par value (151,121) (138,694)
Deficit (96,913) (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 (28,028) (25,235)
Unearned ESOP Shares (7,784) -
Total Liabilities and Stockholders' Equity $377,615 $368,752
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
UNAUDITED
Three Months Ended Six Months Ended
June 26, June 27, June 26, June 27,
1997 1996 1997 1996
Revenues:
Information and Engineering Technology $ 70,909 $66,488 $135,117 $137,502
Aerospace Technology 113,441 93,850 218,035 179,378
Enterprise Management 104,875 89,292 207,462 174,476
Intercompany eliminations (530) - (782) -
Total revenues 288,695 249,630 559,832 491,356
Costs and Expenses:
Costs of services 276,374 235,948 536,168 466,945
Corporate selling and administrative 4,353 4,352 8,792 8,812
Interest income (637) (362) (998) (976)
Interest expense 3,907 2,516 6,891 5,096
Other 1,018 284 1,294 850
Total costs and expenses 285,015 242,738 552,147 480,727
Earnings from continuing operations
before income taxes and minority interest 3,680 6,892 7,685 10,629
Provision for income taxes (Note 6) 1,442 3,013 2,728 4,213
Earnings from continuing operations
before minority interest 2,238 3,879 4,957 6,416
Minority interest 203 326 611 622
Earnings from continuing operations 2,035 3,553 4,346 5,794
Earnings from discontinued operations,
net of income taxes - 865 - 865
Net earnings $ 2,035 $ 4,418 $ 4,346 $ 6,659
Preferred Class C dividends not
declared or recorded (Note 4) - (558) - (1,092)
Common stockholders' share of earnings $ 2,035 $ 3,860 $ 4,346 $ 5,567
Weighted average number of common
shares outstanding and dilutive
common stock equivalents (Note 7) 10,415,954 11,676,927 10,796,531 11,740,392
Common stockholders' share of earnings
per common share - primary and fully diluted
Continuing operations $ 0.20 $ 0.26 $ 0.40 $ 0.40
Discontinued operations - 0.07 - 0.07
$ 0.20 $ 0.33 $ 0.40 $ 0.47
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
UNAUDITED
Six Months Ended
June 26, June 27,
1997 1996
Cash Flows from Operating Activities:
Net earnings $ 4,346 $ 6,659
Adjustments to reconcile net earnings from
operations to net cash provided (used):
Depreciation and amortization 5,043 4,079
Payment of income taxes on gain on sale of
Commercial Aviation business - (13,990)
Gain from discontinued operation - (865)
Increase in reserves for divested businesses 125 -
Proceeds from insurance settlement for asbestos
claims 1,000 -
Other (344) (469)
Changes in current assets and liabilities, net
of acquisitions:
Increase in current assets except cash, cash
equivalents and notes receivable (60) (6,389)
Increase (decrease) in current liabilities
except notes payable and current portion of
long term debt 1,104 (11,561)
Cash provided (used) by operating activities 11,214 (22,536)
Cash Flows from Investing Activities:
Sale of property and equipment 51 360
Purchase of property and equipment (2,926) (2,908)
Assets and liabilities of acquired businesses
(excluding cash acquired) - (1,805)
Increases in investment in unconsolidated
subsidiaries (677) (300)
Increase in cash on deposit for letters of credit - 2,584
Other (122) (189)
Cash used by investing activities (3,674) (2,258)
Cash Flows from Financing Activities:
Treasury stock purchased (284) (4,271)
Payment on indebtedness (463) (625)
Retirement of Contract Receivable
Collateralized Notes 1992-1 (98,500) -
Proceeds from Contract Receivable
Collateralized Notes 1997-1 50,000 -
Proceeds from issuance of Senior Notes (Note 5) 99,484 -
Stock released to Employee Stock Ownership Plan 2,595 503
Loan to Employee Stock Ownership Plan (Note 4) (10,379) -
Deferred financing expenses (4,767) (1,281)
Borrowing under line of credit - 5,000
Common stock and warrants purchased from
investors (Note 4) (37,819) -
Other (361) 6
Cash used by financing activities (494) (668)
Net Increase (Decrease) in Cash and Cash
Equivalents 7,046 (25,462)
Cash and Cash Equivalents at Beginning of
the Period 25,877 31,151
Cash and Cash Equivalents at End of the Period $ 32,923 $ 5,689
Supplemental Cash Flow Information:
Cash paid for income taxes (Note 6) $ 2,229 $ 16,981
Cash paid for interest $ 5,938 $ 4,810
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 (573)
Treasury stock issued 233
Treasury stock purchased (232)
Stock warrants and options
exercised 3 (51) 145
Loans to the Employee Stock
Stock Ownership Plan (Note 4) (10,379)
Payment received on ESOP note 2,595
Class C Preferred Stock
converted and warrants
exercised (Note 4) (3,000) 95 (2,007) 5,119
Common stock purchased and
warrants exercised (Note 4) (5,190) (30,120) (2,794)
Net earnings 4,346
Reclassification to Redeemable
Common Stock (57) (12,427)
Balance, June 26, 1997 $ - $ 381 $ 3,891 $122,805 $(151,121) $ (96,913) $ (28,028) $ (7,784)
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 normal recurring adjustments
necessary to present fairly the financial position, the results of
operations and the cash flows for such interim periods. The results of
operations for such interim periods are not necessarily indicative of the
results for the full year.
2. On April 18, 1997, the Company's wholly-owned subsidiary Dyn Funding
Corporation (" DFC ") entered into agreements with Prudential Insurance
Company of America and Columbine Life Insurance Company, Inc. to purchase
from DFC up to $140,000,000 of Contract Receivable Collateralized Notes,
Series 1997-1. The five year, $50,000,000 Class A Fixed Rate Note, which
bears interest at 7.486%, was issued at closing, and the $90,000,000 Class
B Variable Rate Note, which was also issued, 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 9.5% Senior Notes (see Note 5) and the
proceeds from the new Contract Receivable Collateralized Class A Fixed Rate
Note, the Contract Receivable Collateralized Notes, Series 1992-1 were
retired.
On May 15, 1997, the Company amended and restated its term note facility
with Citicorp North America to provide for a $15,000,000 letter of credit
and revolving loan facility.
At June 26, 1997, $64,074,000 of accounts receivable are restricted as
collateral for the Contract Receivable Collateralized Notes, Series 1997-1.
Additionally, $1,500,000 and $3,000,000 of cash is restricted as collateral
for the Series 1997-1 Notes and Series 1992-1 Notes at June 26, 1997 and
December 31, 1996, respectively, and has been included in Other Assets on
the balance sheet.
Trade accounts receivable are net of an allowance for doubtful accounts of
$503,000 and $229,000 at June 26, 1997 and December 31, 1996, respectively.
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 June 26, Redeemable December 31,
Shares Value 1997 Shares Value 1996
ESOP Shares 3,520,037 $24.00 $ 84,480,888 3,520,037 $23.70 $ 83,424,877
3,215,472 $20.00 64,309,440 2,645,920 $20.00 52,918,400
6,735,509 $ 148,790,328 6,165,957 $ 136,343,277
Other Shares 125,714 $24.00 $ 3,017,136 125,714 $23.70 $ 2,979,422
4. On February 5, 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 paid by a note from the ESOP that was guaranteed
by the Company. The ESOP subsequently converted the Class C Preferred
Stock and exercised the related 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 390,406 shares, is reflected as a
reduction in stockholders' equity at June 26, 1997.
Concurrent with the ESOP's purchase of the Class C Preferred Stock, the
Company purchased 128,345 shares of common stock and 1,806,141 common
stock warrants from other investors in Capricorn Investors, L.P. at a cost
of $19.55 for each common share or warrant. The total 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 Note 2) and to pay
transaction fees.
6. The provision for income taxes in 1997 and 1996 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.
The $16,981,000 of cash paid for income taxes in 1996 includes $13,990,000
related to the gain on the sale of the Commercial Aviation business.
7. The weighted average number of common shares outstanding includes issued
shares or shares issuable under the Restricted Stock Plan, plus common
stock equivalents, less shares held in treasury and any pledged ESOP
shares. Common stock equivalents consist of shares subject to stock
options and unexercised warrants, less the number of shares assumed to be
purchased from the proceeds.
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 tortuous conduct. The Company is also
potentially liable for certain personal injury, tax, environmental and
contract dispute issues related to the prior operations of divested
businesses. In addition, certain subsidiary companies are potentially
liable for environmental, personal injury and contract and dispute claims.
In most cases, the Company and its subsidiaries have denied, or believe
they have a basis to deny, liability and in some cases have offsetting
claims against the plaintiffs, third parties or insurance carriers. As of
June 26, 1997, the total amount of damages currently claimed by the
plaintiffs in these cases is estimated to be approximately $135,000,000
(including compensatory and punitive damages and penalties). This amount
includes estimates for claims which have been filed without specified
dollar amounts or for amounts that are in excess of recoveries customarily
associated with the stated causes of actions; such amount does not include
estimates for claims that may have been incurred but have not yet been
asserted. 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 and opinions of
legal and other experts, the Company believes it is adequately reserved
with respect to the potential liability for such claims. The Company has
recorded such damages and penalties that are considered to be probable
recoveries against the Company or its subsidiaries. The Company's
accounting policy is to accrue an estimate of the future legal costs that
will be incurred to defend against claims and disputed issues asserted
against the Company. This policy has been applied consistently for all
significant legal issues for each period presented.
The Company estimates that the aggregate potential liability for claims
asserted as of June 26, 1997 ranges from $8,500,000 to $135,000,000,
excluding amounts for claims that may have been incurred but have not yet
been asserted, and has accrued aggregate reserves of $29,400,000 for such
claims, excluding approximately $2,000,000 in additional reserves. Such
estimates reflect management's 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
herein, the Company's management believes, 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. As of
June 26, 1997, the Company estimates that it has primary and excess
insurance coverage, excluding approximately $92,000,000 in excess coverage
underwritten by insolvent carriers, of more than $507,600,000. It is
possible, however, that the timing of the resolution of individual issues
could result in a significant impact on the operating results and/or
liquidity of one or more future reporting periods.
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 July 18, 1997, 15,025 plaintiffs have filed claims against
Fuller-Austin and various other defendants. Of these claims, 3,219 have
been dismissed, 3,740 have been resolved without an admission of liability
at an average cost of $3,566 per claim (excluding legal defense costs) and
an additional 383 claims have been settled in principle (subject to future
processing and funding) at a average cost of $1,882 per claim.
The following is a summary of claims filed against Fuller-Austin through
July 18, 1997:
Years
1993
& Prior 1994 1995 1996 1997 Total
Claims Filed 2,921 1,136 4,522 4,122 2,324 15,025
Claims Dismissed (79) (21) (1,035) (1,459) (625) (3,219)
Claims Resolved (1,224) (394) ( 182) (1,828) (112) (3,740)
Settlements in process ( 383)
Claims Outstanding at July 18, 1997 7,683
In connection with these claims, Fuller-Austin's primary insurance carriers
have incurred approximately $23,400,000 (including $10,100,000 of legal
defense costs, but excluding $720,000 for settlements in process) to defend
and settle the claims and, in addition, jury verdict judgments have been
entered against Fuller-Austin in the aggregate amount of $6,500,000 which
have not been paid and which are under appeal by Fuller-Austin. Through
June 26,1997, 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 of requiring direct proof that
claimants were exposed 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 15,025 claim filings
incurred through July 18, 1997. Based on this analysis and consultation
with its professional advisors, Fuller-Austin has estimated its cost,
including legal defense costs, to be $17,700,000 for claims filed and still
unsettled and $37,300,000 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 significant
business operations. 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 June 26, 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 $7,600,000 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 $7,600,000 of unexhausted primary coverage, the Company
has $35,700,000 of excess coverage in place before entering 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. 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 $54,000,000 and $55,000,000 (not
including reserves of $5,900,000 and $6,400,000, respectively) at June 26,
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.
Government Contracting
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 June 26, 1997, that will have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
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 June 26, 1997 was $81.1 million compared to $75.8 million
at December 31, 1996, an increase of $5.3 million.
At June 26, 1997, $64.1 million of accounts receivable are restricted as
collateral for the Contract Receivable Collateralized Notes Series 1997-1.
Cash provided by operations was $11.2 million in the first six months of 1997,
as compared to $22.5 million of cash used in the first six months of 1996.
Excluding the effect of changes in current assets and liabilities and, in 1996,
the payment of taxes on the gain on the sale of the Commercial Aviation
business, operating activities produced a positive cash flow of $10.2 million in
1997 as compared to $9.4 million in 1996. The decrease in cash flow attributable
to reduced earnings from continuing operations was offset by an increase in
non-cash charges, primarily depreciation and amortization, and also insurance
proceeds received related to the Company's asbestos liability coverage.
Investing activities used funds of $3.7 million in the first six months of 1997,
principally for the purchase of property and equipment. During the first six
months of 1996, cash used for investing activities was $2.3 million with cash
used for the purchase of property and equipment exceeding cash released from
deposit for letters of credit.
Financing activities used funds of $0.5 million in the first six months of 1997.
The proceeds from the issuance of the 9.5% Senior Notes and the Contract
Receivable Collateralized Notes Series 1997-1 were used to retire the Contract
Receivable Collateralized Notes Series 1992-1, 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 Senior Notes.
The company engaged in the aforementioned equity repurchases in order to
eliminate the potential effect of certain preferential voting rights given the
Class C Preferred Stock in the Company's certificate of incorporation; to reduce
the equity holdings and voting capacity of a large outside stockholder; to
reduce the outstanding and fully diluted equity of the company; to provide
treasury shares for future issuance to employees under the Company's various
compensation and benefit plans without the need for issuance of new shares; and
to provide additional shares for the ESOP, which can only acquire shares by
purchase from the Company or other stockholders. The ESOP's purpose for engaging
in the aforementioned transaction was to acquire shares for the allocation to
participants' accounts in 1997 and 1998. In addition to converting a portion of
the Company's total capitalization from equity capitalization to debt
capitalization, the transactions reduced the Company's fully diluted equity,
thus impacting the Company's earnings per share.
At June 26, 1997, backlog (including option years on government contracts) was
$3.0 billion, unchanged from December 31, 1996.
Results of Operations
Revenues for the second quarter and first half of 1997 were $288.7 million and
$559.8 million, respectively, as compared to $249.6 million and $491.4 million
for the comparable periods in 1996, an increase of $39.1 million and $68.5
million, respectively. Revenues for the second quarter of 1997 increased over
the second quarter of 1996 for each of the three business areas. Information and
Engineering Technology (I&ET), Aerospace Technology (AT) and Enterprise
Management (EM) reported revenues of $70.9 million, $113.4 million and $104.9
million, respectively, for the second quarter of 1997 as compared to $66.5
million, $93.8 million and $89.3 million for the same quarter in 1996. Revenues
for the first half of 1997 for AT and EM were $218.0 million and $207.5 million,
an increase of $38.6 million and $33.0 million, respectively, over the same
period in 1996. I&ET's revenues for the first half of 1997 were $135.1 million,
down $2.4 million from $137.5 million for the first half of 1996. Increases in
AT's second quarter and first half revenues were attributable to a State
Department contract in support of the Bosnian and Haitian peacekeeping
initiatives which were awarded in February and October 1996, respectively, and
phased in later in the year, but which were fully operational in 1997, as well
as increases in the level of effort on several existing contracts. In EM, second
quarter and first half reductions in revenues 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. For the second
quarter, increases in I&ET's revenues attributable to the acquisition of Data
Management Design, Inc. ("DMDI") in June of 1996 and new IDIQ type contracts
offset decreases in revenues due to the completion and phase-out of a large
contract with the Postal Service. However, for the first half of 1997, decreases
in revenues attributable to the aforementioned contract loss, coupled with the
reduction in the level of effort on existing contracts, exceeded increases in
revenues attributable to acquisitions or new contract awards.
Cost of sales for the second quarter and first half of 1997 was 95.7% and 95.8%
of revenue as compared to 94.5% and 95.0% for the comparable periods in 1996.
This resulted in gross margins of $12.3 million (4.3%) for the second quarter of
1997 as compared to $13.7 million (5.5%) for the second quarter of 1996 and
$23.7 million (4.2%) and $24.4 million (5.0%) for the first half of 1997 and
1996, respectively. Contract losses, reduced level of effort on existing
contracts, decreased absorption of G&A on certain contracts and poor performance
attributable to the DMDI acquisition, certain contracts acquired late in 1996
and other new business ventures all contributed to the deterioration in gross
margin and offset any increases attributable to new contract awards. Further
eroding gross margin was a $0.5 million charge representing the partial
write-off of certain purchased software as a result of net realization concerns
and $0.4 million of residual losses recorded in conjunction with the closure of
the Company's operations in Mexico
Interest income for the second quarter of 1997 was increased over the second
quarter of 1996 due to greater interest yields on higher cash and cash
equivalent balances resulting from the refinancing activity early in the year.
However, for the first half, interest income is only slightly higher than the
first half of 1996, due to elevated cash balances early in the prior year
generated from the proceeds from the sale of the Commercial Aviation business.
Interest expense was $3.9 million and $6.9 million for the second quarter and
first half of 1997, respectively, up from $2.5 million and $5.1 million for the
comparable periods in 1996, primarily due to increased levels of indebtedness
and at a slightly higher effective rate of interest.
Other consists of the following major items (in thousands):
Three Months Ended Six Months Ended
June 26, June 27, June 26, June 27,
1997 1996 1997 1996
Amortization of costs
in excess of net assets
acquired $397 $377 $799 $755
Provision for non-
recovery of receivables 292 - 293 106
Environmental costs
associated with a
business divested in 1985 125 - 125 -
Miscellaneous 204 (93) 77 (11)
$1,018 $284 $1,294 $850
The provision for income taxes in 1997 and 1996 is based upon an estimated
annual effective 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.
The Company had federal and state deferred tax assets of $8.0 million at June
26, 1997 that have not been recognized because of the uncertainty of achieving
future earnings in either the time frame or in the particular state jurisdiction
needed to realize the tax benefit.
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: August 11, 1997 /s/ P. C. FitzPatrick
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: August 11, 1997 /s/ J. J. Fitzgerald
J.J. Fitzgerald
Vice President and Controller