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 September 25, 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,ifchanged 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. 9,050,408 shares of
common stock having a par value of $0.10 per share were outstanding at November
1, 1997.
DYNCORP
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets -
September 25, 1997 and December 31, 1996 3-4
Consolidated Condensed Statements of Operations -
Three and Nine Months Ended September 25, 1997 5
and September 26, 1996
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 25, 1997 and September 26, 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 4. Results of Votes of Security Holders 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
SEPTEMBER 25, 1997 AND DECEMBER 31, 1996
(Dollars in thousands)
September 25,
1997 December 31,
Unaudited 1996
Assets
Current Assets:
Cash and cash equivalents $ 26,329 $ 25,877
Accounts receivable and contracts in process (Note 2) 187,270 187,679
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 6,670 1,030
Other current assets 10,043 10,009
-------- --------
Total current assets 230,312 224,595
Property and Equipment (net of accumulated depreciation
and amortization of $22,674 in 1997 and $16,737 in 1996) 20,387 19,084
Intangible Assets (net of accumulated amortization
of $44,662 in 1997 and $43,028 in 1996) 47,293 48,927
Other Assets (Notes 2 and 8) 80,489 76,146
-------- --------
Total Assets $ 378,481 $ 368,752
======== ========
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 25, 1997 AND DECEMBER 31, 1996
(Dollars in thousands, except per share amounts)
September 25,
1997 December 31,
Unaudited 1996
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt $ 1,139 $ 628
Accounts payable 35,404 42,716
Advances on contracts in process 7,434 6,002
Accrued liabilities 105,589 99,499
-------- ---------
Total current liabilities 149,566 148,845
Long-Term Debt (Notes 2 and 5) 152,585 103,555
Other Liabilities and Deferred Credits (Note 8) 78,925 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 3,852,522 shares in 1997
and 3,315,673 shares in 1996 385 332
Common Stock Warrants 3,859 11,139
Paid-in Surplus 122,613 148,234
Reclassification to temporary equity for redemption
value greater than par value (151,121) (138,694)
Deficit (92,826) (101,259)
Common Stock Held in Treasury, at cost; 1,642,848
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 (9,284) -
---------- ----------
Total Liabilities and Stockholders' Equity $ 378,481 $ 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 Nine Months Ended
September 25, September 26, September 25, September 26,
1997 1996 1997 1996
Revenues:
Information and Engineering Technology $ 66,521 $ 63,882 $ 201,638 $ 201,383
Aerospace Technology 111,506 97,686 329,541 277,065
Enterprise Management 106,501 85,400 313,964 259,876
Intercompany eliminations (696) - (1,478) -
---------- ---------- ---------- ----------
Total revenues 283,832 246,968 843,665 738,324
---------- ---------- ---------- ----------
Costs and Expenses:
Costs of services 269,851 233,817 806,018 700,761
Corporate selling and administrative 4,062 4,504 12,855 13,315
Interest income (463) (336) (1,460) (1,312)
Interest expense 3,730 2,548 10,621 7,644
Other 555 470 1,850 1,321
---------- ---------- ---------- ----------
Total costs and expenses 277,735 241,003 829,884 721,729
---------- ---------- ---------- ----------
Earnings from continuing operations
before income taxes and minority interest 6,097 5,965 13,781 16,595
Provision for income taxes (Note 6) 1,623 2,357 4,351 6,570
---------- ---------- ---------- ----------
Earnings from continuing operations
before minority interest 4,474 3,608 9,430 10,025
Minority interest 387 367 997 990
---------- ---------- ---------- ----------
Earnings from continuing operations 4,087 3,241 8,433 9,035
Earnings from discontinued operations,
net of income taxes - - - 865
---------- ---------- ---------- ----------
Net earnings $ 4,087 $ 3,241 $ 8,433 $ 9,900
========== ========== ========== ==========
Preferred Class C dividends not
declared or recorded (Note 4) - (583) - (1,675)
---------- ---------- ---------- ----------
Common stockholders' share of earnings $ 4,087 $ 2,658 $ 8,433 $ 8,225
========== ========== ========== ==========
Weighted average number of common shares
outstanding and dilutive common stock
equivalents (Note 7) 10,457,765 11,686,090 10,694,237 11,724,925
========== ========== ========== ==========
Common stockholders' share of earnings per
common share - primary and fully diluted
Continuing operations $ 0.39 $ 0.23 $ 0.79 $ 0.63
Discontinued operations - - - 0.07
----- ----- ----- -----
$ 0.39 $ 0.23 $ 0.79 $ 0.70
===== ===== ===== =====
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
UNAUDITED
Nine Months Ended
September 25, September 26,
1997 1996
Cash Flows from Operating Activities:
Net earnings $ 8,433 $ 9,900
Adjustments to reconcile net earnings from operations
to net cash provided (used):
Depreciation and amortization 7,254 6,167
Payment of income taxes on gain on sale of Commercial
Aviation business - (13,990)
Gain from discontinued operations - (865)
Increase in reserves for divested or acquired businesses 325 -
Proceeds from insurance settlement for asbestos claims 1,488 -
Other (744) (1,417)
Changes in current assets and liabilities, net of acquisitions:
Increase in current assets except cash, cash equivalents and
notes receivable (5,327) (340)
Decrease in current liabilities except notes payable
and current portion of long term debt (195) (1,578)
-------- --------
Cash provided (used) by operating activities 11,234 (2,123)
-------- --------
Cash Flows from Investing Activities:
Sale of property and equipment 57 636
Purchase of property and equipment (4,462) (3,972)
Assets and liabilities of acquired businesses
(excluding cash acquired) - (1,805)
Increases in investment in unconsolidated
subsidiaries (3,351) (511)
Increase in notes receivable (168) -
Decrease in cash on deposit for letters of credit - 6,244
Other (210) (248)
-------- --------
Cash (used) provided by investing activities (8,134) 344
-------- --------
Cash Flows from Financing Activities:
Treasury stock purchased (284) (9,791)
Payment on indebtedness (664) (1,003)
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) (11,879) -
Deferred financing expenses (5,080) (1,304)
Common stock and warrants purchased from investors (Note 4) (37,819) -
Other (501) 17
-------- --------
Cash used by financing activities (2,648) (11,578)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents $ 452 $(13,357)
Cash and Cash Equivalents at Beginning of the Period 25,877 31,151
-------- --------
Cash and Cash Equivalents at End of the Period $ 26,329 $ 17,794
======== ========
Supplemental Cash Flow Information:
Cash paid for income taxes (Note 6) $ 2,534 $ 17,307
======== ========
Cash paid for interest $ 11,449 $ 7,594
======== ========
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 11 (799)
Treasury stock issued 233
Treasury stock purchased (232)
Stock warrants and options exercised 4 (83) 179
Loans to the Employee
Stock Ownership Plan (Note 4) (11,879)
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 8,433
Reclassification to Redeemable
Common Stock ( 57) (12,427)
-------- -------- --------- --------- ---------- ---------- ---------- --------
Balance, September 25, 1997 $ - $ 385 $ 3,859 $122,613 $(151,121) $ (92,826) $ (28,028) $(9,284)
======== ======== ========= ========= ========== ========== ========== ========
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 $140.0 million of Contract Receivable Collateralized Notes,
Series 1997-1. The five year, $50.0 million Class A Fixed Rate Note, which
bears interest at 7.486%, was issued at closing,and the $90.0 million 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 five year,$15.0 million letter
of credit and revolving loan facility.
At September 25, 1997, $60.8 million of accounts receivable are
restricted as collateral for the Contract Receivable Collateralized Notes,
Series 1997-1. Additionally, $1.5 million and $3.0 million of cash is
restricted as collateral for the Series 1997-1 Notes and Series 1992-1
Notes at September 25, 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
$0.5 million and $0.2 million at September 25,1997 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 September 25, 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
========= ============= ========== =============
In accordance with ERISA regulations and the Employee Stock Ownership Plan
documents, the ESOP Trust or the Company is obligated to purchase vested
common stock shares from ESOP participants at the fair value as long as
the Company's common stock is not publicly traded. However, under the
Subscription Agreement with the ESOP dated September 9, 1988, the Company
is permitted to defer put options if, under Delaware law, the capital
of the Company would be impaired as a result of such repurchase.
In conjunction with the acquisition of Technology Applications, Inc. in
1993, the Company issued put options on 125,714 shares of common stock.
The holder may, at any time commencing on December 31, 1988 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 value at the time of exercise.
4. On January 23, 1997, the Company entered into an agreement with Capricorn
Investors, L.P. ("Capricorn") in which Capricorn agreed to waive its
rights to nominate directors of the Company and also waived certain voting
rights of the Company's then-outstanding Class C Preferred Stock.In return
for these waivers, the Company paid a fee and authorized Capricorn to
distribute a substantial portion of the shares of common stock and
warrants and all of the outstanding shares of Class C Preferred Stock
to its investors. On February 5, 1997, the Employee Stock Ownership Trust
purchased from certain of these investors all of the Company's Class
C Preferred Stock. The purchase price for the securities was $18.6
million, of which $10.3 million 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. 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 Capricorn investors at a cost of $19.55 for each common share or
warrant. The total purchase price for these securities was $37.8 million,
of which $18.9 million was paid in cash and short-term notes were
issued for the balance.
On August 15, 1997, the Company loaned the ESOP an additional $1.5 million
to pay administrative expenses and fund stock repurchase obligations.
The unpaid balance on the notes receivable from the ESOP, is reflected as
a reduction in stockholders' equity at September 25, 1997.
5. On March 17, 1997, the Company closed on the issuance of $100.0 million 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, $99.5 million, 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. Additionally, in the
third quarter of 1997, a federal tax benefit was recorded to reverse tax
valuation reserves for deferred taxes as realization has been assured.
The $17.3 million of cash paid for income taxes in 1996 includes
$14.0 million 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 (reflected as Unearned ESOP Shares on the balance sheet).
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
September 25, 1997, the total amount of damages currently claimed by the
plaintiffs in these cases is estimated to be approximately $132.0 million
(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 September 25, 1997 ranges from $8.5 million to $132.0
million, excluding amounts for claims that may have been incurred but have
not yet been asserted, and has accrued aggregate reserves of $29.4
million for such claims, excluding approximately $2.0 million 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 September 25, 1997, the Company estimates that it
has primary and excess insurance coverage, excluding approximately $92.0
million in excess coverage underwritten by insolvent carriers, of more than
$507.4 million. 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 October 21, 1997, 15,560 plaintiffs have filed claims against
Fuller-Austin and various other defendants. Of these claims, 3,256 have
been dismissed and 3,804 have been resolved without an admission of
liability at an average cost of $3,531 per claim, excluding legal defense
costs.
The following is a summary of the number of claims filed against
Fuller-Austin:
Y e a r s
1993
& Prior 1994 1995 1996 1997 Total
----------------------------------------------------------
Claims Filed 2,921 1,136 4,522 4,122 2,859 15,560
Claims Dismissed (79) (21) (1,035) (1,459) (662) (3,256)
Claims Resolved (1,224) (394) ( 182) (1,828) (176) (3,804)
Claims Outstanding, as of October 21, 1997 8,500
=======
In connection with these claims, Fuller-Austin's primary insurance carriers
have incurred approximately $24.3 million (including $10.8 million of
legal defense costs) to defend and settle the claims and, in addition, jury
verdict judgments have been entered against Fuller-Austin in the aggregate
amount of $6.5 million which have not been paid and which are under
appeal by Fuller-Austin. Through September 25, 1997, the Company and
Fuller-Austin have charged to expense approximately $12.5 million
consisting of $6.2 million of charges under retrospectively rated
insurance policies and $6.3 million 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. Consequently, while settlements of meritorious
claims are considered, 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, in court, 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 15,560 claim filings
incurred through October 21, 1997. Based on this analysis and consultation
with its professional advisors, Fuller-Austin has estimated its cost,
including legal defense costs, to be $17.8 million for claims filed and
still unsettled and $37.2 million 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 September 25, 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 $55.0 million (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 $7.4 million 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 $1.5 million) 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 $490.0 million of additional excess and
umbrella insurance that is generally responsive to asbestos claims. This
amount excludes approximately $92.0 million of coverage issued by insolvent
carriers. After the $7.4 million of unexhausted primary coverage, the
Company has $35.7 million of excess coverage in place before entering a
$35.0 million segment of insolvent coverage for policy years 1979 through
1984 (the "Insolvent Segment"). 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
Segment 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 $54.0 million and $55.0 million (not
including reserves of $5.2 million and $6.4 million, respectively) at
September 25, 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 $55.0 million, 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 September 25, 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 September 25, 1997 was $80.7 million compared to $75.8
million at December 31, 1996, an increase of $5.3 million.
At September 25, 1997, $60.8 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 nine months of 1997, as
compared to $2.1 million of cash used in the nine 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 $16.8 million in 1997 as compared to
$13.8 million in 1996. The decrease in cash flow attributable to reduced
earnings from continuing operations was more than 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 $8.1 million in the nine months of 1997,
principally for the purchase of property and equipment and to fund the Company's
47% interest in an equity investee. During the nine months of 1996, cash
provided by investing activities was $0.3 million with cash used for
acquisitions and the purchase of property and equipment offset by cash released
from deposit for letters of credit.
Financing activities used funds of $2.6 million in the nine 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 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 improving the Company's earnings per share.
At September 25, 1997, backlog (including option years on government contracts)
was $3.8 billion, as compared to $3.0 billion at December 31, 1996. The
increase is primarily attributable to a large U.S. Air Force contract won in
recompetition to provide maintenance and repair work on DoD weapons systems and
equipment at various locations worldwide.
Results of Operations
Revenues for the third quarter and nine months of 1997 were $283.8 million and
$843.7 million, respectively, as compared to $247.0 million and $738.3 million
for the comparable periods in 1996, an increase of $36.8 million and $105.4
million, respectively. Revenues for the third quarter and nine months of 1997
increased over the comparable periods in 1996 for each of the three business
areas. Information and Engineering Technology (I&ET), Aerospace Technology (AT)
and Enterprise Management (EM) reported revenues of $66.5 million, $111.5
million and $106.5 million, respectively, for the third quarter of 1997 as
compared to $63.9 million, $97.7 million and $85.4 million for the same quarter
in 1996. Revenues for nine months of 1997 for I&ET, AT and EM were $201.6
million, $329.5 million and $314.0 million, an increase of $0.3 million, $52.5
million and $54.1 million, respectively, over the same period in 1996. Increases
in I&ET's revenues for the third quarter attributable to new Indefinite
Delivery/Indefinite Quantity ("IDIQ") contract awards and new business ventures
offset decreases attributable to the phase-out of a large contract with the
Postal Service and decreases in sales volume. For the nine months of 1997,
revenues attributable to the acquisition of Data Management Design, Inc.
("DMDI") in June of 1996 and new contracts were offset by decreases in revenues
due to the aforementioned contract phase-out and reductions in the level of
effort on existing contracts. Increases in AT's third quarter and nine month
revenues were attributable to new contract awards and increases in the level of
effort on several existing contracts as well as a State Department contract in
support of the Haitian peacekeeping initiative which was awarded in October 1996
and phased in later in the year, but which was fully operational in 1997. In EM,
third quarter and nine month increases in revenues were primarily from a large
Department of Energy subcontract which was awarded in August 1996 and was fully
operational in 1997. The increases were partly offset by reductions in revenues
due to contract losses.
Cost of sales for the third quarter and nine months of 1997 was 95.1% and 95.5%
of revenue as compared to 94.7% and 94.9% for the comparable periods in 1996.
This resulted in gross margins of $14.0 million (4.9%) for the third quarter of
1997 as compared to $13.2 million (5.3%) for the third quarter of 1996. For the
nine month period in 1997 and 1996, gross margin was $37.6 million, but, as a
percentage, gross margin decreased from 5.1% in 1996 to 4.5% in 1997. The
deterioration in gross margin in 1997 as compared to 1996 attributable to
contract losses, reduced level of effort on existing contracts, lower indirect
expense ceilings on certain cost plus contracts and poor performance
attributable to the DMDI acquisition, certain contracts acquired late in 1996
and other new business ventures (totaling approximately $7.9 million) offset any
increases attributable to new contract awards (approximately $4.9 million).
Additionally, many of the new IDIQ contracts awarded require increased admin-
istrative oversight and sales effort and subsequently yield lower profit margins
than sole source direct contract awards which have historically comprised the
majority of the Company's business. Further eroding gross margin for the nine
months ended September 25, 1997, were 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 third quarter and nine months of 1997 increased over
the comparable periods in 1996 due to greater interest yields on higher cash and
cash equivalent balances resulting from the refinancing activity early in the
year.
Interest expense was $3.7 million and $10.6 million for the third quarter and
nine months of 1997, respectively, up from $2.5 million and $7.6 million for the
comparable periods in 1996, due to increased levels of indebtedness at a
slightly higher effective rate of interest.
Other consists of the following major items (in thousands):
Three Months Ended Nine Months Ended
Sept.25, Sept. 26, Sept.25, Sept. 26,
1997 1996 1997 1996
Amortization of costs in excess
of net assets acquired $397 $402 $1,196 $1,157
Provision for non-recovery of
receivables - - 293 106
Environmental costs associated
with a business divested in 1985 - - 125 -
Legal accrual associated with a
business acquired in 1994 200 - 200 -
Miscellaneous (42) 68 36 58
------ ------ ------- -------
$555 $470 $1,850 $1,321
====== ====== ======= =======
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. Additionally, in the third quarter of
1997, a federal tax benefit was recorded to reverse tax valuation reserves for
deferred taxes as realization has been assured.
The Company has provided a valuation allowance state deferred
tax assets of $5.5 million at September 25, 1997 due to 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 4. Results of Votes of Security Holders
An annual meeting of the Company's stockholders was held on July 23, 1997. The
sole item presented was the election of directors, and three current directors
were re-elected to three-year terms as Class III directors. The voting results
are set forth below.
Nominee Votes For Withheld
T. Eugene Blanchard 8,463,041 366,965
Paul V. Lombardi 8,398,328 431,678
Dudley C. Mecum II 8,437,786 392,220
The following directors continued in office: Dan R. Bannister, Russell E.
Dougherty, Paul G. Kaminski, David L. Reichardt, and Herbert S. Winokur, Jr.
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: November 10, 1997 P.C. FitzPatrick
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: November 10, 1997 J.J. Fitzgerald
J.J. Fitzgerald
Vice President and Controller