SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of 1934
For the fiscal year ended December 31, 1998 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 Identification No.)
incorporation or organization)
2000 Edmund Halley Drive, Reston, Virginia 20191-3436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 264-0330
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. The registrant's voting stock is not publicly traded;
therefore the aggregate market value of approximately 2% of outstanding voting
stock held by nonaffiliates is not available.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 10,053,118 shares of
common stock having a par value of $0.10 per share were outstanding February 25,
1999.
TABLE OF CONTENTS
1998
FORM 10-K
Item Page
Part I
1. Business 1-3
2. Properties 3
3. Legal Proceedings 3
4. Submission of Matters to a Vote of Security Holders 3
Part II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters 3-5
6. Selected Financial Data 5-6
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-13
8. Financial Statements and Supplementary Data
Report of Independent Public Accountants 14
Financial Statements
Consolidated Balance Sheets
Assets 15
Liabilities and Stockholders' Equity 16
Consolidated Statements of Operations 17
Consolidated Statements of Permanent Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20-38
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 38
Part III
10.Directors and Executive Officers of the Registrant 39-41
11.Executive Compensation 41-44
12.Security Ownership of Certain Beneficial Owners and Management 44-45
13.Certain Relationships and Related Transactions 45-46
Part IV
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46-54
PART I
ITEM 1. BUSINESS
General Information
DynCorp (the "Company") provides diversified management, technical and
professional services primarily to U.S. Government customers throughout the
United States and internationally. Generally, these services are provided under
both prime contracts and subcontracts, which may be fixed-price,
time-and-material or cost-type contracts depending on the work requirements and
other individual circumstances.
The Company provides services to various branches of the Department of
Defense ("DoD") and to the Department of Energy ("DoE"), NASA, the Department of
State, the Department of Justice and various other U.S., state and local
government agencies, commercial clients and foreign governments. These services
encompass a wide range of management, technical and professional services
covering the following areas:
Information and Engineering Technology ("I&ET") designs, develops,
supports and integrates software and hardware systems to provide
customers with comprehensive solutions for information management and
engineering needs. I&ET also provides software and hardware maintenance,
computer center operations, data processing and analysis, database
administration, telecommunications support and operations, maintenance
and operation of integrated electronic systems, and integration of
electronic systems in local and wide area networks. In addition, this
business area provides services in support of nuclear safeguards and
security research and development. Revenues for 1998, 1997, and 1996 were
$332.6 million, $276.4 million, and $265.2 million, respectively.
Aerospace Technology's ("AT") services include technical and evaluation
services at test and training ranges; the design, engineering, and
installation of aircraft system upgrades; corrosive repairs and
structural modifications that extend airframe life for the aging fleet of
military aircraft; ground based logistics support and staff augmentation;
engineering and technical services for high-technology space and missile
systems programs; and aircraft maintenance, modification, logistics and
fleet management. These services are provided to the U.S. Government as
well as the United Nations and other foreign organizations at various
locations throughout the world depending on the customer's requirements.
Revenues for 1998, 1997, and 1996 were $490.2 million, $449.0 million,
and $383.3 million, respectively.
Enterprise Management ("EM") provides full service, "turn-key" solutions
for the management, operation and maintenance of federal facilities. EM
manages large-scale facilities, using computerized work management and
scheduled maintenance systems to perform roads and grounds maintenance,
civil engineering and custodial services, landfill recycling, disposal
operations, and vehicle and heavy equipment maintenance. Other services
of this business unit include testing and evaluation of military hardware
systems at government test ranges, collection and processing of data,
maintenance of targets, ranges and laboratory facilities, health
services, operation of military and commercial ships, developmental
testing of complex weapons systems, security systems work, and technology
transfer into commercial applications. Revenues for 1998, 1997, and 1996
were $410.9 million, $420.6 million, and $373.0 million, respectively.
Industry Segments
For business segment reporting, Information and Engineering Technology,
Aerospace Technology and Enterprise Management each constitute reportable
business segments.
Backlog
The Company's backlog of business, which includes awards under both prime
contracts and subcontracts, as well as the estimated value of option years on
government contracts, was $4.1 billion at December 31, 1998, compared to
December 31, 1997 backlog of $3.6 billion, a net increase of $0.5 billion. The
increase resulted from new contract wins in 1998 and growth in several existing
contracts. The backlog at December 31, 1998 consisted of $1.8 billion for AT,
$1.7 billion for EM, and $0.6 billion for I&ET compared to December 31, 1997
backlog of $1.4 billion for AT and $1.1 billion for both EM and I&ET. Of the
total backlog at December 31, 1998, $3.0 billion is expected to produce revenues
after 1999: AT and EM $1.3 billion, and I&ET $0.4 billion.
Contracts with the U.S. Government are generally written for periods of
three to five years with some Federal contracts now being awarded with options
up to eight and ten years. Because of appropriation limitations in the federal
budget process, firm funding is usually made for only one year at a time, and,
in some cases, for periods of less than one year, with the remainder of the
years under the contract expressed as a series of one-year options. The
Company's experience has been that the Government generally exercises these
options. Amounts included in backlog are based on the contract's total awarded
value and the Company's estimates regarding the amount of the award that will
ultimately result in the recognition of revenue. These estimates are based on
the Company's experience with similar awards and similar customers. Estimates
are reviewed periodically and appropriate adjustments are made to the amounts
included in backlog and unexercised contract options. Historically, these
adjustments have not been significant. In 1998, 72% of the Company's prime
contract revenue was from the U.S. Government, 40% attributable to the
Department of Defense.
During 1998, the Company was awarded significant indefinite delivery,
indefinite quantity ("IDIQ") contracts with GSA and NASA to provide
comprehensive desktop computer, server and intra-center communication support.
These contracts were multiple awards and have estimated values in the billions
of dollars. The Company's backlog at December 31, 1998 does not include any
value for these contracts because the Company has not received any contract
tasks and cannot reasonably estimate the future revenues from these contracts.
Competition
The markets that the Company services are highly competitive. In each of its
business areas, the Company's competition is quite fragmented, with no single
competitor holding a significant market position. The Company experiences
vigorous competition from industrial firms, university laboratories, non-profit
institutions, and U.S. Government agencies. Many of the Company's competitors
are large, diversified firms with substantially greater financial resources and
larger technical staffs than the Company has available. Government agencies also
compete with and are potential competitors of the Company because they can
utilize their internal resources to perform certain types of services that might
otherwise be performed by the Company. A majority of the Company's revenues is
derived from contracts with the U.S. Government and its prime contractors, and
such contracts are awarded on the basis of negotiations or competitive bids
where price is a significant factor.
Foreign Operations
Activities of the Company presently include providing services in foreign
countries under contracts with the U.S. Government, the United Nations, and
other foreign customers. None of these foreign operations is material to the
Company's financial position or results of operations.
The risks associated with the Company's foreign operations in regard to
foreign currency fluctuation and political and economic conditions in foreign
countries have not been significant.
Incorporation
The Company was incorporated in Delaware in 1946. With more than 16,000
employees worldwide, the Company is one of the largest
employee-owned companies in the United States.
Employees
At December 31, 1998, the Company had 15,041 full-time and 1,237 part-time
employees. Approximately 3,262 employees were located outside of the United
States. Of the Company's U.S. employees, 3,550 are covered by various collective
bargaining agreements with labor unions.
At year-end, the Company had approximately 338 vacant positions, a majority
of which were for Information Technology ("IT") professionals. The scarcity of
IT professionals is a common predicament within the industry. The Company is
actively recruiting to fill these vacancies utilizing extensive advertising,
participation in job fairs, sign-on bonuses, and other recruitment incentives.
Forward Looking Statements
This annual report on Form 10-K contains statements which, to the extent
that they are not recitations of historical fact, constitute "forward-looking
statements" that are based on management's expectations, estimates, projections
and assumptions. Words such as "expects," "anticipates," "plans," "believes,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements that include, but are not limited to,
projections of future performance, assessment of contingent liabilities and
expectations concerning liquidity, cash flow and contract awards. Such
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These statements are not
guarantees of future performance and involve certain risks and uncertainties
that are difficult to predict. Therefore, actual future results and trends may
differ materially from what is forecast in forward-looking statements due to a
variety of factors, including the Company's successful execution of internal
performance plans; the outcome of litigation in process; labor negotiations;
changing priorities or reductions in the U.S. Government defense budget; and
termination of government contracts due to unilateral government action.
ITEM 2. PROPERTIES
The Company is primarily a service-oriented company and, as such, the
ownership or leasing of real property is an activity that is not material to an
understanding of the Company's operations. The Company owns one office building
located in Alexandra, Virginia and, in addition, leases numerous commercial
facilities used in connection with the various services rendered to its
customers, including its corporate headquarters, a 149,000 square foot facility
under a 12-year lease. None of the properties is unique. In the opinion of
management, the facilities employed by the Company are adequate for the present
needs of the business.
The Company has signed a lease with the developer of a to-be-constructed
building in Reston, Virginia for the 12-year lease of 197,353 square feet of
space for consolidation of several offices near the Company's corporate
headquarters. Occupancy is anticipated in December 1999. This space will replace
some existing space, the leases on which will expire at the end of 1999.
ITEM 3. LEGAL PROCEEDINGS
This item is incorporated herein by reference to Note 21 to the
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
DynCorp's common stock is not publicly traded. However, the Company has
established an Internal Market to provide liquidity for its stockholders.
Shares available for trading in the Internal Market are registered under the
Securities Act of 1933. The Internal Market generally permits stockholders to
sell shares of common stock on four predetermined days each year, subject to
purchase demand.
Sales of common stock on the Internal Market are made at established prices
for the common stock determined pursuant to the formula and valuation process
described below (the "Formula Price") to active employees and directors of the
Company, subject to state securities regulations, and to the trustees of the
Savings and Retirement Plan ("SARP") and the Employee Stock Ownership Plan
("ESOP"), as well as the administrator of the Employee Stock Purchase Plan
("ESPP"), who may purchase shares of common stock for their respective trusts
and plans.
If the aggregate purchase orders exceed the number of shares available for
sale, the Company may, but is not obligated to, sell authorized but unissued
shares of common stock on the Internal Market. Further, the following
prospective purchasers will have priority, in the order listed:
- the administrator of the ESPP;
- the trustee of the SARP;
- eligible employees and directors, on a pro rata basis; and
- the trustees of the ESOP.
If the aggregate number of shares offered for sale on the Internal Market is
greater than the aggregate number of shares sought to be purchased, offers by
stockholders to sell 500 shares or less, or up to the first 500 shares if more
than 500 shares are offered, will be accepted first. If, however, there are
insufficient purchase orders to support the primary allocation of 500 shares,
then the purchase orders will be allocated equally among all of the proposed
sellers up to the first 500 shares offered for sale by each seller. Thereafter,
a similar procedure will be applied to the next 10,000 shares offered by each
remaining seller, and offers to sell in excess of 10,500 shares will then be
accepted on a pro-rata basis. As an alternative to this procedure, the Company
may, but is not required to, purchase excess shares offered for sale in the
Internal Market. All sellers on the Internal Market (other than the Company and
its retirement plans) will pay a commission equal to one percent of the
proceeds from such sales. Purchasers on the Internal Market pay no commission.
The market price of the common stock is established pursuant to the
valuation process described below, which uses the formula set forth below to
determine the Formula Price at which the Common Stock trades in the Internal
Market. The Formula Price is reviewed on a quarterly basis, generally in
conjunction with Internal Market trade dates.
The Formula Price per share of common stock is the product of seven times
the operating cash flow ("CF"), where operating cash flow is represented by
earnings before interest, taxes, depreciation and amortization of the Company
for the four fiscal quarters immediately preceding the date on which a price
revision is made, multiplied by a market factor ("Market Factor" denoted MF)
plus the non-operating assets at disposition value (net of disposition costs)
("NOA"), minus the sum of interest bearing debt adjusted to market and other
outstanding securities senior to common stock ("IBD"), the whole divided by the
number of shares of common stock outstanding at the date on which a price
revision is made, on a fully diluted basis assuming exercise of all outstanding
options and shares deferred under a former restricted stock plan ("ESO"). The
Market Factor is a numeric factor which reflects existing securities market
conditions relevant to the valuation of such stock. The Formula Price of the
common stock, expressed as an equation, is as follows:
[(CFx7)MF+NOA-IBD]
Formula Price = ------------------
ESO
The Board of Directors believes that the valuation process and Formula
result in a fair price for the common stock within a broad range of financial
criteria. Other than quarterly review and possible modification of the Market
Factor, the Board of Directors will not change the Formula unless (i) in the
good faith exercise of its fiduciary duties and after consultation with its
professional advisors, the Board of Directors determines that the formula no
longer results in a stock price which reasonably reflects the value of the
Company on a per share basis, or (ii) a change in the Formula or the method of
valuing the common stock is required under applicable law.
The following table sets forth the Formula Price for the common stock and
the Market Factor by quarter since the adoption of the Formula by the Board of
Directors in August 1995.
Quarter Ended Formula Price ($) Market Factor
------------- ---------------- -------------
December 31, 1995 14.50 2.14
March 28, 1996 14.50 2.14
June 27, 1996 15.00 1.36
September 26, 1996 16.75 1.15
December 31, 1996 19.00 1.15
March 27, 1997 20.00 1.27
June 26, 1997 20.00 1.27
September 25, 1997 20.00 1.27
December 31, 1997 20.00 1.23
April 2, 1998 21.00 1.29
July 2, 1998 22.50 1.33
October 1, 1998 23.25 1.30
December 31, 1998 20.00 1.16
Prior to August 1995, the market value of the common stock was established
periodically by the Board of Directors for purposes of repurchases under a
former stockholders agreement. Based on the Board's review of valuations set by
the ESOP Trust, the price per share by quarter was as follows:
March 30, 1995 $14.90
June 29, 1995 $14.90
September 28, 1995 $14.90
There were approximately 665 record holders of DynCorp common stock at
December 31, 1998. The DynCorp Employee Stock Ownership Plan Trust owns stock on
behalf of approximately 31,600 current and former employees of the Company. In
addition, the Company's Savings and Retirement Plan holds 554,192 shares. Cash
dividends have not been paid on the common stock since 1988.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary selected historical financial data
derived from the audited Consolidated Financial Statements of the Company for
each of the five years presented. During these periods, the Company paid no cash
dividends on its Common Stock. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited Consolidated Financial Statements and
related notes thereto, included elsewhere in this Annual Report on Form 10-K.
(Dollars in thousands, except per share data.)
Years Ended December 31,
1998 (a) 1997(b) 1996(c) 1995(d) 1994(e)(f)
----------- ---------- ---------- ------- ----------
Statement of Operations Data:
Revenues $1,233,707 $1,145,937 $1,021,453 $908,725 $818,683
Cost of services $1,173,151 $1,096,246 $ 970,163 $871,317 $783,121
Corporate general and administrative $ 18,630 $ 17,785 $ 18,241 $ 18,705 $ 16,887
Interest expense $ 14,144 $ 12,432 $ 10,220 $ 14,856 $ 14,903
Earnings from continuing operations
before extraordinary item and certain
other expenses (g) $ 15,585 $ 15,579 $ 12,774 $ 12,974 $ 1,966
Earnings (loss) from continuing operations
before extraordinary item (h) $ 15,055 $ 7,422 $ 11,949 $ 5,274 $ (352)
Net earnings (loss) $ 15,055 $ 7,422 $ 14,629 $ 2,368 $(12,831)
Common stockholders' share of earnings (loss) $ 15,055 $ 7,422 $ 12,345 $ 453 $(14,437)
EBITDA (i) $ 45,226 $ 29,274 $ 34,948 $ 17,841 $ 25,933
Earnings (loss) per share from continuing
operations before extraordinary
item for common stockholders
Basic $ 1.47 $ 0.83$ 1.14 $ 0.40 $ (0.29)
Diluted $ 1.43 $ 0.70$ 0.82 $ 0.29 $ (0.29)
Common stockholders' share of earnings (loss)
Basic $ 1.47 $ 0.83$ 1.46 $ 0.05 $ (2.12)
Diluted $ 1.43 $ 0.70$ 1.05 $ 0.04 $ (2.12)
Balance Sheet Data:
Total assets $ 379,238 $ 390,122 $ 368,752 $375,490 $396,000
Long-term debt excluding current maturities $ 152,121 $ 152,239 $ 103,555 $104,112 $230,444
Redeemable common stock $ 183,861 $ 154,840 $ 139,322 $135,894 $130,828
<FN>
(a) 1998 includes reversal of $670 reserve for asbestos litigation (see notes
14 and 21(a)), $1,177 accrual for subcontractor suit (see notes 14 and
21(a)), reversal of $2,500 reserve for contract compliance issues, and
$2,159 expense for the replacement of core systems.
(b) 1997 includes $7,800 accrual of costs related to asbestos litigation (see
Notes 14 and 21(a)), $2,488 reversal of income tax valuation allowance and
$2,055 reversal of accrued interest related to IRS examinations and
potential disallowance of deductions (see Note 15).
(c) 1996 includes $3,299 accrual for supplemental pension and other fees
payable to retiring officers and a member of the Board of Directors (see
Note 14), $1,286 write-off of cost in excess of net assets acquired of an
unconsolidated subsidiary (see Note 14), $1,250 credit for a revised
estimate of the ESOP Put Premium (see Notes 7 and 14) and $4,067 reversal
of income tax valuation allowance (see Note 15).
(d) 1995 includes $7,707 reversal of income tax valuation allowance, $4,362
accrued for losses and reserves related to the Company's Mexican operation,
$2,400 accrual of legal fees related to the defense of a lawsuit filed by a
subcontractor of a former electrical contracting subsidiary and $5,300
accrued for uninsured costs related to claims against a former subsidiary
for alleged use of asbestos containing products.
(e) Restated for the discontinuance of the Commercial Aviation business.
(f) 1994 includes $3,250 write-off of investment in unconsolidated subsidiary,
$2,665 accrual of legal fees related to the defense of a lawsuit filed by a
subcontractor of a former electrical contracting subsidiary, $1,830 credit
for reversal of legal costs associated with an acquired business and $4,069
reversal of income tax reserves.
(g) Certain other expenses include costs and expenses associated with divested
businesses of $530 in 1998, $8,157 in 1997, $825 in 1996, $7,700 in 1995,
and $2,318 in 1994 (see Note 14).
(h) The extraordinary loss in 1995 of $2,886 resulted from the early extinguish-
ment of debt.
(i) EBITDA (earnings from continuing operations before extraordinary item and
before interest, taxes, depreciation and amortization), while not a measure
under generally accepted accounting principles ("GAAP"), is a standard
measure of financial performance in industry. EBITDA should not be
considered in isolation or as an alternative to net earnings (loss),
earnings (loss) from continuing operations, cash flows from operating
activities, or any other measure of performance under GAAP. EBITDA has been
adjusted for the amortization of deferred debt expense and debt issuance
discount which are included in "interest expense" in the Consolidated
Statements of Operations and included in "depreciation and amortization" in
the Consolidated Statements of Cash Flows. Amortization of deferred debt
expense was $721 in 1998, $706 in 1997, $829 in 1996, and $743 in 1995.
Amortization of debt issuance discount was $36 in 1998 and $26 in 1997.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion and analysis provides information management
believes is relevant to an assessment and understanding of DynCorp and
subsidiaries' (collectively, the Company) consolidated results of operations and
financial condition for the three years ended December 31, 1998. The discussion
should be read in conjunction with the Company's audited consolidated financial
statements and accompanying notes.
Overview
The Company provides diversified management, technical, and professional
services primarily to U.S. Government customers throughout the United States and
internationally. The Company's customers include various branches of the
Department of Defense and the Department of Energy, NASA, the Department of
State, the Department of Justice, and various other U.S., state, and local
government agencies, commercial clients and foreign governments.
Revenue and Operating Profit
In 1998, revenue increased by $87.8 million, or 7.7%, from 1997 compared to
a $124.5 million, or 12.2% increase in 1997 revenue over 1996. Operating profit,
defined as the excess of revenues over operating expenses and certain
nonoperating expenses, increased by $9.1 million, or 18.7% from 1997 compared to
a $2.6 million, or 5.1% decrease in 1997 operating profit from 1996. The
operating profit was $57.7 million, $48.6 million, and $51.2 million in 1998,
1997, and 1996, respectively.
Aerospace Technology ("AT") revenues were $490.2 million in 1998 compared to
$449.0 million in 1997, an increase of $41.2 million or 9.2%. Operating profit
increased by $2.3 million to $19.1 million, or 13.7% from $16.8 million in 1997.
The increase in both revenues and operating profit was attributable to new
contract wins and growth in several existing contracts. The AT business unit was
awarded a new contract with the United Nations to provide support services in
Angola, new Department of State contracts providing protective services in
Kosovo, Bosnia, and Haiti, and a contract with Kuwait providing repair and
maintenance on jets. A new contract, which became operational in the fourth
quarter, providing technical and support services for the United States Air
Force also contributed to AT's growth. Increased services on existing contracts
and the development and installation of a new information system at Fort Rucker
also contributed to the twelve months revenue increase. Partially offsetting
these increases in revenues were reduced business volumes in the System
Engineering and Technical Services Area. This reduction was the result of
several contract completions and the lack of new contract wins for this area.
The AT business unit increased backlog by 28.6% to $1.8 billion at December
31, 1998 over 1997, primarily due to the aforementioned contract wins and
winning a contract recompetition at Fort Rucker Army base. Management believes
the growth experienced in the AT business area in 1998 will continue into 1999.
However, the nature of the procurement process and the volume of the Company's
business, which is subject to recompetition annually, can have a dramatic impact
on revenues and operating profit. Additionally, the U.S. Government has the
right to terminate contracts for convenience or may reduce the volume of
services provided.
Aerospace Technology revenues increased 17.0% to $449.0 million in 1997 as
compared to $383.3 million in 1996. Operating profit increased by 24.9% from
$13.5 million in 1996 to $16.8 million in 1997. Increased level of effort on
State Department contracts in support of the government's drug eradication
program and the Haitian peacekeeping initiative, which were awarded late in
1996 but were fully operational in 1997, contributed significantly to the
increase in both revenues and operating profit. Additionally, numerous
smaller contract awards further added to AT's increased revenues and improved
operating margin. Other existing contracts, one with the Air Force to provide
maintenance and repair work on DoD weapons systems and equipment at various
locations worldwide and another with the Army to maintain a fleet of
rotary-wing aircraft, further augmented AT's revenues.
Enterprise Management ("EM") revenues were $410.9 million in 1998 compared
to $420.6 million in 1997, a decrease of $9.7 million or 2.3%. Operating profit,
however, increased by $2.5 million, or 12.8% to $22.8 million from $20.3 million
in 1997. The slight decrease in revenue resulted from reduced level of services
on several contracts due to funding cutbacks as well as the completion of
several contracts. Partially offsetting the lost business were new contracts
with the Department of Justice (Immigration and Naturalization Service), the
addition of the operations of two more ships in the marine services area, and
the acquisition of FMAS Corporation, a medical outcome measurement and data
abstraction services company.
The increase in EM's operating profit resulted from increased margins on the
new business noted above. EM also received an award fee on one of its contracts,
which was greater than previously accrued, and enjoyed good performance from
most on-going contracts.
In July 1998, EM was informed that its customer at the Rocky Flats location
would not exercise the remaining two one-year options on its contract. This
event did not have a significant financial impact on 1998. This contract was
expected to generate revenues of $35.0 to $50.0 million per year and operating
profit of $2.0 to $3.0 million for the next two years. The award of two
significant logistic support contracts from the U.S. Postal Service will
partially offset the lost business in those future years.
EM reported increased revenues of $420.6 million in 1997 as compared to
$373.0 million in 1996, up 12.8%. Operating profit increased $2.6 million or
14.7 % to $20.3 million from $17.7 million in 1996. A large Department
of Energy subcontract to provide facility and infrastructure support at the
DoE's Hanford, Washington site, as well as other new business and
contract wins, all contributed significantly to EM's revenues and operating
profit increases in 1997.
The EM business unit increased backlog by 54.5% to $1.7 billion at December
31, 1998 over 1997, primarily due to the aforementioned contract wins, and the
acquisition by EM of FMAS. Management expects revenues for 1999 to be
approximately the same as 1998 revenues. However, the nature of the procurement
process and the volume of the Company's business, which is subject to
recompetition annually, can have a dramatic impact on revenues and operating
profit. Additionally, the U.S. Government has the right to terminate contracts
for convenience or may reduce the volume of services provided.
Information and Engineering Technology's ("I&ET") revenues were $332.6
million in 1998, a 20.3% increase over 1997 revenues of $276.4 million.
Operating profit increased $4.2 million, or 36.5% to $15.7 million from $11.5
million in 1996. The increases in revenues and operating profit were
attributable to new indefinite delivery/indefinite quantity ("IDIQ") contract
tasks and sole source contracts for the Department of Defense, Environmental
Protection Agency, and the Health Care Finance Administration. Increased volume
on a subcontract to the U. S. Postal Service, new state contract business, and
increased tasking and level of effort on several existing contracts also
contributed to I&ET's revenue and operating profit increases.
I&ET's 1997 revenues of $276.4 million were a 4.2% increase over 1996
revenues of $265.2 million; however, operating profit declined $8.5 million to
$11.5 million from $20.0 million in 1996. Increases in revenue attributable to
numerous IDIQ contract awards, the acquisition of Data Management Design, Inc.
("DMDI") in June of 1996 and other new business ventures were partially offset
by the phase-out of a large contract with the U.S. Postal Service. Operating
profit was adversely impacted by a number of factors including contract losses,
start-up costs, and software development costs incurred in support of new
businesses, poor performance attributable to the DMDI business as well as other
contracts acquired late in 1996 and fee disputes. Further eroding operating
profit was the write-off of software, which the Company acquired late in 1996 in
order to bid a contract that was not subsequently awarded to the Company.
Additionally, many of the new IDIQ contracts awarded required increased
administrative oversight and sales effort and yield lower profit margins than
sole source direct contract awards which have historically constituted the
majority of the Company's business.
Management believes I&ET's revenues will continue showing growth in 1999.
However, there are no assurances, because the contract base comprises many IDIQ
contracts which require continuous marketing. Additionally, the U.S. Government
has the right to terminate contracts (including orders under IDIQ contracts) for
convenience.
Corporate General and Administrative
Corporate general and administrative expenses increased in 1998 by $0.8
million, or 4.5% over 1997, to $18.6 million as compared to $17.8 million and
$18.2 million in 1997, and 1996, respectively. Corporate general and
administrative expense as a percentage of revenue was 1.5% in 1998, 1.6% in
1997, and 1.8% in 1995. The higher expense in 1998 was primarily the result of
the Company's design and development of new financial and human resource
software packages, as discussed below under Year 2000. The expenses, $2.2
million for the resystemization effort, and increases in other expenses were
offset by the $2.5 million reversal of reserves for old contract compliance
issues, which were settled in the Company's favor during 1998. The comprehensive
resystemization effort is projected to add approximately $4.2 million to
corporate general and administrative expense in 1999. The reduction, as a
percentage of revenue, in corporate general and administrative expense was
primarily the result of increased revenues that did not require any incremental
increases to general and administrative expenses.
Interest Expense and Interest Income
Interest expense was $14.1 million in 1998, up from $12.4 million in 1997.
The increase is due to the greater level of outstanding indebtedness throughout
1998. The average level of outstanding indebtedness was $163.0 million in 1998,
as compared to $150.9 million in 1997. Levels of indebtedness increased due to
the FMAS acquisition, payments to settle the Fuller-Austin bankruptcy, and
growth requirements (see working capital and cash flow discussion). Offsetting
the increase in interest expense attributable to the greater level of
outstanding indebtedness was a refund of $0.7 million of interest assessed in
prior years by the Internal Revenue Service on the Company's Federal income
taxes.
Interest expense in 1997 was $12.4 million, up from $10.2 million in 1996.
The Company issued $100.0 million of 9 1/2% Senior Notes in March 1997 and $50.0
million of 7.486% Contract Receivable Collateralized Notes in April 1997,
utilizing the proceeds to retire the maturing $100.0 million of 8.54% Contract
Receivable Collateralized Notes and to repurchase certain of the Company's
common stock and warrants. Offsetting the increase in interest expense
attributable to the newly issued debt was the reversal of $2.1 million of
interest related to the Internal Revenue Service's examination and the potential
disallowance of certain deductions.
Interest income was $1.6 million, $2.0 million, and $1.8 million in 1998,
1997, and 1996, respectively. The fluctuations are primarily attributable to the
balance of cash and short-term investments throughout any given year. The
twelve-month average balance of cash and short-term investments was $10.9
million in 1998, $25.0 million in 1997, and $20.0 million in 1996, resulting in
higher interest yields in 1997 and 1996 than in 1998.
Other Expense
Other expense decreased in 1998 by $7.6 million or 74.0% to $2.7 million in
1998 compared to $10.3 million and $5.5 million in 1997 and 1996, respectively.
The lower expense in 1998 mostly resulted from a nonrecurring charge in 1997 for
a $7.8 million increase in reserves for asbestos litigation resulting from a
subsidiary's agreement in principle to settle globally approximately 11,000
pending asbestos personal injury claims and unknown future claims pursuant to
Section 524(g) of the U.S. Bankruptcy Code and a related contingent settlement
agreement between the Company and the subsidiary for the release of the Company
from any subsidiary asbestos liability (see Notes 14 and 21(a) to the
Consolidated Financial Statements and the discussion of "Liquidity and Capital
Resources" which follows). In 1996, other expense included nonrecurring costs
related to the retirement of several of the Company's officers as well as the
write-off of cost in excess of assets associated with a minority investment (see
Note 14 to the Consolidated Financial Statements).
Income Taxes
The provision for income taxes is based on reported earnings, adjusted to
reflect the impact of temporary differences between the book value of assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes. In 1998 the Company reversed foreign taxes provided
in prior years due to their expected utilization as foreign tax credits.
Additionally, $2.5 million and $4.1 million of tax valuation reserves were
reversed in 1997 and 1996, respectively. Based on current projections,
management estimates tax payments, net of tax refunds, of $13.0 million in 1999.
No valuation allowance for deferred federal tax assets was deemed necessary
at December 31, 1998. The Company has provided a valuation allowance for
deferred state tax assets of $4.7 million at December 31, 1998 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.
Working Capital and Cash Flows
Working capital, defined as current assets less current liabilities, was
$90.7 million at December 31, 1998 compared to $90.4 million at December 31,
1997, an increase of $0.3 million. This increase is primarily the result of an
increase in accounts receivable, attributable to increased revenues as discussed
above, and slow collections on several contracts due to start-up of new
contracts. The ratio of current assets to current liabilities at December 31,
1998 was 1.48 compared to 1.58 at December 31, 1997. The slight decrease
resulted from higher levels of short-term borrowing at December 31, 1998
compared to December 31, 1997. The increase in accounts receivable, the
acquisition of FMAS, and the Fuller-Austin bankruptcy settlement contributed to
the need for the higher levels of short-term borrowing.
Cash used by operations was $7.8 million in 1998 as compared to $9.9 million
provided by operations in 1997, an increase in cash used of $17.7 million. The
increase resulted mostly from the aforementioned increases in accounts
receivable. Also contributing to the increase in cash used by operations was the
settlement of the Fuller-Austin bankruptcy, which used $8.5 million. In 1997,
cash provided by operations increased by $5.1 million from $4.8 million cash
provided by operations in 1996. The increase was attributable to the absence in
1997 of tax payments related to the gain on the 1995 sale of the Commercial
Aviation business offset by a decrease in net earnings in 1997 compared to 1996.
Investing activities used funds of $20.1 million in 1998, principally for
the acquisition of FMAS, the purchase of property and equipment, and the
purchase of new software for internal use as part of the Company's Year 2000
plan. The Company has capitalized $5.7 million of internal use software and
anticipates capitalizing another $4.9 million over the next year. In 1997,
investing activities used funds of $8.3 million, attributable to the purchase of
property and equipment, funding of the Company's 47% interest in a minority
owned company, and a loan to the same company. In 1996, cash of $2.7 million was
provided, with additional proceeds from the sale of the Commercial Aviation
business, as well as the release of cash on deposit as collateral for letters of
credit partially offset by acquisitions and capital expenditures.
Financing activities provided funds of $7.4 million in 1998. The proceeds
from the draw on the Class B Notes were used to fund working capital needs. In
1997, financing activities utilized funds of $3.0 million. The proceeds from the
issuance of the 9 1/2% Senior Notes and the 7.486% Contract Receivable
Collateralized Notes were used to retire the maturing 8.54% Contract Receivable
Collateralized Notes, to make a loan to the ESOP to fund the purchase of the
Class C Preferred Stock, to fund the Company's purchase of common stock and
warrants from certain investors, and to pay transaction fees associated with the
placement of the Senior Notes and amendments to the terms of the Company's
revolving line of credit. In 1996, $11.8 million of cash was used for financing
activities, principally the purchase of treasury shares, but also payment on
indebtedness and fees associated with securing a line of credit.
Liquidity and Capital Resources
The Company's primary source of cash and cash equivalents is from
operations. The Company's principal customer is the U.S. Government. This
provides for a dependable flow of cash from the collection of accounts
receivable. Additionally, many of the contracts with the U.S. Government provide
for progress billings based on costs incurred. These progress billings reduce
the amount of cash that would otherwise be required during the performance of
these contracts.
At the close of 1996, the Company's debt totaled $104.2 million. The 8.54%
Contract Receivable Collateralized Notes, Series 1992-1, constituted $100.0
million of this total and were scheduled to mature in May 1997. Due to the
maturity of these notes, the Company embarked on a comprehensive plan to
refinance the maturing debt and to recapitalize the Company.
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 ESOP subsequently converted the Class
C Preferred Stock into common shares and common share warrants and exercised the
related warrants. Concurrently with the ESOP's purchase, the Company acquired a
sizable number of its outstanding common shares and common stock warrants from
other Capricorn investors. The purchase price of these securities was $56.4
million ($19.55 per common share or warrant), of which half, $28.2 million, was
paid in cash ($9.3 million and $18.9 million, was paid by the ESOP and the
Company, respectively) and short-term notes were issued for the balance (notes
issued by the ESOP and the Company were $9.3 million and $18.9 million,
respectively).
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 diluted earnings per share.
On March 17, 1997, the Company closed on the issuance of $100.0 million of 9
1/2% Senior Subordinated Notes due 2007 (see Note 5 to the Consolidated
Financial Statements). 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. A five-year $50.0 million Class A Fixed Rate Note, bearing
interest at 7.486% was issued at closing and a $90.0 million Class B Variable
Rate Note was also issued (see Note 5 to the Consolidated Financial Statements).
The proceeds from these transactions were used to retire the maturing Contract
Receivable Collateralized Notes, to pay the Company's short-term notes and make
a loan to the ESOP to enable it to pay the short-term notes (plus accrued
interest) issued to certain Capricorn investors and to pay various transaction
fees.
At December 31, 1998, the Company's debt totaled $160.3 million compared to
$152.7 million at December 31, 1997. The increase resulted from higher levels of
short-term borrowing contributed by the FMAS acquisition, the Fuller-Austin
bankruptcy, and increases in accounts receivable, as previously noted.
At December 31, 1998, $87.9 million of accounts receivable were restricted
as collateral for the 7.486 % Contract Receivable Collateralized Notes (the
"Notes"). At December 31, 1998, $1.5 million of cash was restricted as
collateral for the Notes and has been included in Other Assets on the
accompanying Consolidated Balance Sheet.
The Company had a $15.0 million line of credit that it utilized throughout
1998, never exceeding $8.9 million in borrowings at any given point in time. At
December 31, 1998, there was $0.9 million borrowings under this line of credit.
The facility does provide credit support for letters of credit, and at December
31, 1998, the amount available for borrowing was reduced by $6.1 million due to
the collateralization of outstanding letters of credit.
The Company also has available up to $90.0 million of Floating Rate Contract
Receivable Collateralized Notes, Series 1997-1, Class B (the "Class B Notes")
under the April 1997 indenture. At December 31, 1998, the Company had sufficient
unused receivable collateral to draw down approximately $68.0 million. The
notes, when drawn, bear interest at the LIBOR rate plus 70 basis points and two
business days are required to access the funds. At December 31, 1998, $7.0
million was outstanding on the Class B Notes.
The Company has embarked on a comprehensive resystemization effort (see
"Year 2000") and had expenditures in 1998 of $7.9 million, of which $5.7 million
was capitalized and $2.2 million was expensed. The Company is projecting
expenditures in 1999 of $10.8 million. The resystemization will necessitate
replacing most of the Company's desktop workstations over the next two years, at
a cost of approximately $4.0 million annually through 2000.
The Board of Directors has issued an enabling resolution that provides for
the repurchase of up to 500,000 shares of the Company's common stock at a price
not to exceed the current market price, subject to all applicable financial
covenants. Management continuously reviews alternative uses of excess cash and
debt capacity in terms of acquisitions, dividends, repurchase of shares and
other financial matters.
The Company anticipates contributing approximately $13.0 million in cash to
the Employee Stock Ownership Plan ("ESOP") in 1999. The amount of the Company's
annual contribution to the ESOP is determined by and within the discretion of
the Board of Directors and may be in the form of cash, common stock, or other
qualifying securities. In accordance with ERISA requirements and the ESOP
documents, in the event that an employee participating in the ESOP is
terminated, retires, dies, or becomes disabled while employed by the Company,
the ESOP Trust or the Company is obligated to repurchase shares of common stock
distributed to such former employee under the ESOP ("ESOP Participant Puts"),
until such time as the common stock becomes "readily tradable stock," as defined
in the ESOP plan document. (See Note 7 to the Consolidated Financial
Statements.)
To the extent the ESOP Participant Puts, debt service, administrative
expenses, and interest exceed the Company's 1999 contribution, the Company will
fund the ESOP Participant Puts by former employees. The Company projects these
payments to be $1.0 to $2.0 million in 1999.
In conjunction with the acquisition of Technology Applications, Inc. in
November 1993, the Company issued put options on 125,714 shares of common stock.
On January 12, 1999, the holder exercised the put option on those 125,714 shares
at a price of $24.25 per share. The Company's repurchase of this common stock
used cash of $3.0 million.
On December 10, 1998, pursuant to the terms of a Global Settlement Agreement
among the Company, its wholly- owned inactive subsidiary, Fuller-Austin
Insulation Company ("Fuller-Austin"), a committee representing various asbestos
claimants, and the legal representative of unknown future asbestos claimants,
the Company transferred and conveyed all of its interests in Fuller-Austin to an
unrelated independent bankruptcy settlement trust ("Trust") established in
accordance with Section 524(g) of the U.S. Bankruptcy Code. The Trust was
established pursuant to a Confirmation Order entered jointly on November 13,
1998 by the United States District and Bankruptcy Courts in Wilmington,
Delaware. The Trust is part of a Plan of Reorganization of Fuller-Austin
approved in the Confirmation Order for the resolution of present and future
asbestos personal injury and other claims against Fuller-Austin. In
consideration of the transfer and certain other payments by DynCorp to the Trust
aggregating approximately $8.5 million (a portion of which was recorded in prior
years including $7.8 million reserved by the Company in 1997 in anticipation of
the Global Settlement), both the Trust and Fuller-Austin have given DynCorp full
indemnification with respect to all present and future asbestos claims arising
from the operations of Fuller-Austin. The Confirmation Order also channels all
present and future asbestos claims related to Fuller-Austin's operations to the
Trust. (See Note 21(a) to the Consolidated Financial Statements for the history
of the Fuller-Austin asbestos claims and other circumstances related to the
Global Settlement and Fuller-Austin bankruptcy filing.)
Year 2000
The "Year 2000" issue ("Y2K") concerns the inability of some computer
software and hardware to accommodate "00" in the two digit data field used to
identify the year. The principal Y2K risk to the Company would come from an
extended failure of one or more of its core systems (financial, payroll, and
human resources). The Company's core systems have operated, for the last eight
years, on commercial off-the-shelf software in a distributed PC environment.
A Year 2000 analysis of the Company's core systems software has been
completed. Key software packages were found to be non-compliant, prompting a
replacement of these packages with a new software package. The implementation is
underway with a projected completion date of December 1999. The implementation
phase of the project is on schedule at the end of the fourth quarter of 1998.
Total expenditures for this resystemization as of December 31, 1998 have been
$7.9 million. The Company anticipates additional expenditures in excess of $10.8
million in 1999.
In the event the replacement of core systems cannot be completed before the
end of the fourth quarter of 1999, a contingency plan calling for installation
of an updated compliant version of the Company's current financial software
package and remediation of the Company's current human resource and payroll
software package is in place which will ensure that the Company's core systems
will continue to operate.
The core systems assessment included contact with third-party
telecommunications, employee benefits, insurance, and other providers. Letters
have been obtained from these providers, who generally state that they are
working on the Y2K problem. Follow-up contacts are planned in 1999 to ascertain
progress by these providers.
A Year 2000 Program Management Plan has been developed and put in place to
address other Y2K compliance issues. A multifunctional task group is overseeing
assessment and remediation or replacement efforts in the areas of core systems,
network and office automation, and field information and non-information
systems. The assessment and remediation/replacement phases are well under way,
and no major problems have yet been identified that would materially affect the
Company's ability to perform on any of its significant contracts. These
assessments include third-party service providers and other vendors on whom a
given contract might depend.
One area of possible vulnerability that is being addressed is the payment
capability of the various government payment offices receiving and processing
invoices from a given contract site. While the readiness of government financial
systems is considered "mission critical" by the government, the specific
readiness of many government payment offices is not known. Efforts have been
started by the Company to assess this issue. A letter received in late December
from the Defense Finance and Accounting Service office in Arlington, Virginia,
stated that 77% of the payment offices are Y2K compliant, with 100% compliance
expected by March 31, 1999.
Another assessment being pursued by contract sites is on
government-furnished equipment (GFE). If GFE is critical to performance on a
contract and is not compliant, a failure could affect contract performance.
While this may not be material to the Company as a whole, individual contracts
are ensuring that non-compliant GFE is assessed and remediation responsibilities
are delineated.
An employee awareness program was initiated in mid-1998 that is intended to
inform employees and managers of the potential for Y2K problems. In addition to
creating general awareness, this program is intended to address "home grown"
office automation systems and stand alone PC's. None of these types of systems
is considered mission critical to the Company as a whole.
Infrastructure items that may have Y2K compliance problems such as desktop
workstations, network components, and servers, are being systematically repaired
or replaced as part of the normal infrastructure replacement strategy. The
annual expenditures for these components are not significantly above levels that
can be expected in the normal course of business. Depreciation and amortization
expenses for the resystemization and for these infrastructure components are
allowable costs under government contracts.
The Company held a Y2K symposium during the third quarter of 1998 for
employees that are involved in contract negotiations and implementations as well
as employees who purchase technology products for the Company. Recommended
clauses for contracts and purchases have been adopted and are being used to
protect the Company from inappropriate litigation.
In summary, the primary Y2K vulnerability for the Company is possible
failure of core systems. The resystemization effort is a top priority within
DynCorp, with dedicated teams and incentive plans for keeping these employees
throughout the project. Contingency plans are in place in the event of a delay.
Millennium Coordinators are overseeing the Y2K effort at each business unit, and
a multi-functional team of executives, headed by the Y2K Program Director and
chaired by the Corporate Chief Information Officer acts as a Y2K steering
committee. This team includes representation from Internal Audit, Risk
Management, the Law Department, Finance, and Resystemization. While assessments
are still underway at the contract level, progress is being made to complete
assessments and impact analyses in the first half of 1999.
Environmental Matters
Neither the Company nor any of its subsidiaries has been named as a
Potentially Responsible Party (as defined in the Comprehensive Environmental
Response, Compensation, and Liability Act) at any site. The Company has incurred
costs for the installation and operation of a soil and water remediation system
and for the clean up of environmental conditions at certain other sites (see
Note 21(b) to the Consolidated Financial Statements). The Company's liability,
in the aggregate, with respect to these matters is not deemed to be material to
the Company's results of operations or financial condition.
Market Risk
The Company's only use of derivative financial instruments is to manage its
exposures to fluctuations in interest rates and foreign exchange rates. The
Company does not hold or issue derivative financial instruments for trading
purposes. At December 31, 1998, the amounts of such derivative financial
instruments, as well as the amounts of gains and losses recorded during the
year, were not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is contained in the Company's
Consolidated Financial Statements and Financial Statement Schedules included
elsewhere in this Annual Report on Form 10-K.
Report of Independent Public Accountants
To DynCorp:
We have audited the accompanying consolidated balance sheets of DynCorp (a
Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, permanent stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DynCorp and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedules I and II, listed in Item 14 of
the Form 10-K, are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
Washington, D.C.,
February 26, 1999 /s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
DynCorp and Subsidiaries
Consolidated Balance Sheets
(In thousands)
December 31,
1998 1997
---- ----
Assets
- ------
Current Assets:
Cash and cash equivalents $ 4,088 $ 24,602
Accounts receivable and contracts in process, net 258,216 202,758
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 769 1,090
Prepaid income taxes 4,204 6,702
Other current assets 11,025 11,969
-------- --------
Total Current Assets 278,302 247,121
Property and Equipment, at cost:
Land 621 1,621
Buildings and leasehold improvements 11,845 11,659
Machinery and equipment 33,616 28,752
-------- --------
46,082 42,032
Accumulated depreciation and amortization (27,538) (22,412)
-------- --------
Net Property and Equipment 18,544 19,620
-------- --------
Intangible Assets, net of accumulated amortization 57,847 47,049
Other Assets 24,545 76,332
-------- --------
Total Assets $379,238 $390,122
======== ========
See accompanying notes to the consolidated financial statements.
DynCorp and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31,
1998 1997
---- ----
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes payable and current portion of long-term debt $ 8,145 $ 450
Accounts payable 66,885 46,109
Deferred revenue and customer advances 2,542 2,947
Accrued income taxes 1,934 1,619
Accrued expenses 108,117 105,627
------- -------
Total Current Liabilities 187,623 156,752
Long-term Debt 152,121 152,239
Deferred Income Taxes 12,498 14,060
Other Liabilities and Deferred Credits 15,146 69,845
Contingencies and Litigation - -
Temporary Equity:
Redeemable common stock at redemption value
ESOP shares, 7,082,422 and 6,887,119 shares issued
and outstanding in 1998 and 1997, respectively,
subject to restrictions 180,812 151,823
Other, 125,714 shares issued and outstanding in 1998 and 1997 3,049 3,017
Permanent Stockholders' Equity:
Common stock, par value ten cents per share, authorized 20,000,000 shares;
issued 4,976,423 shares in 1998
and 4,784,770 shares in 1997 498 478
Common stock warrants - 1,259
Paid-in Surplus 127,206 125,412
Reclassification to temporary equity for redemption value (183,140) (154,138)
Deficit (78,782) (93,837)
Common stock held in treasury, at cost; 2,005,728 shares
in 1998 and 1,677,511 shares and 170,716 warrants in 1997 (35,640) (28,703)
Unearned ESOP shares (2,153) (8,085)
-------- --------
Total Liabilities and Stockholders' Equity $379,238 $390,122
======== ========
See accompanying notes to the consolidated financial statements.
DynCorp and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31
(In thousands, except per share amounts)
1998 1997 1996
---- ---- ----
Revenues $1,233,707 $1,145,937 $1,021,453
---------- ---------- ----------
Costs and expenses:
Cost of services 1,173,151 1,096,246 970,163
Corporate general and administrative 18,630 17,785 18,241
Interest expense 14,144 12,432 10,220
Interest income (1,600) (2,018) (1,752)
Other expense 2,687 10,349 5,474
---------- ---------- ----------
Total costs and expenses 1,207,012 1,134,794 1,002,346
---------- ---------- ----------
Earnings from continuing operations before income taxes and
minority interest 26,695 11,143 19,107
Provision for income taxes 9,559 2,282 5,893
---------- ---------- ----------
Earnings from continuing operations before minority interest 17,136 8,861 13,214
Minority interest 2,081 1,439 1,265
---------- ---------- ----------
Earnings from continuing operations 15,055 7,422 11,949
Gain on sale of discontinued operations, net of income taxes - - 2,680
---------- ---------- ----------
Net earnings $ 15,055 $ 7,422 $ 14,629
========== ========== ==========
Preferred Stock Class C dividends not declared or recorded - - (2,284)
---------- ---------- ----------
Common stockholders' share of earnings $ 15,055 $ 7,422 $ 12,345
========== ========= ==========
Earnings per common share:
Basic Earnings Per Share:
Continuing operations $ 1.47 $ 0.83 $ 1.41
Discontinued operations - - 0.32
Class C Preferred dividends - - (0.27)
---------- --------- ----------
Common stockholders' share of earnings $ 1.47 $ 0.83 $ 1.46
========== ========= ==========
Diluted Earnings Per Share:
Continuing operations $ 1.43 $ 0.70 $ 1.02
Discontinued operations - - 0.23
Class C Preferred dividends - - (0.20)
---------- --------- ----------
Common stockholders' share of earnings $ 1.43 $ 0.70 $ 1.05
========== ========= ==========
Weighted average number of shares
outstanding for basic earnings per share 10,242 8,985 8,462
Weighted average number of shares
outstanding for diluted earnings per share 10,514 10,638 11,736
See accompanying notes to the consolidated financial statements.
DynCorp and Subsidiaries
Consolidated Statements of Permanent Stockholders' Equity
For the Years Ended December 31,
(In thousands)
Adjustment for
Common Redemption Unearned
Preferred Commom Stock Paid-in Value Greater Treasury ESOP
Stock Stock Warrants Surplus than Par Value Deficit Stock Shares
--------- ------ -------- -------- -------------- ------- -------- --------
Balance, December 31, 1998 $3,000 $159 $11,305 $148,089 $(135,110) $(115,888) $(21,084) $ (503)
Stock issued under Restricted Stock Plan - 11 - (40) - - 75 -
Treasury stock purchased - - - - - - (4,226) -
Warrants and stock options exercised - 7 (166) 185 - - - -
Recalssification from Temporary Equity - 166 - - 32,972 - - -
Shares purchsesed on Employee Stock Ownership
Plan on Internal Market - (13) - - (1,874) - - -
Payment received by Employee Stock Ownership
Plan note - - - - - - - 503
Reclassificatiion to Redeemable Common Stock - 2 - - (34,682) - - -
Net Earnings - - - - - 14,629 - -
------ ---- ------- -------- --------- --------- -------- ------
Balance, December 31, 1996 3,000 332 11,139 148,234 (138,694) (101,259) (25,235) -
Stock issued underRestricted Stock Plan - 13 - (802) - - - -
Treasury stock issued - - - - - - 233 -
Treasury stock purchased - - - - - - (907) -
Warrants & stock options exercised - 111 (2,683) 2,981 - - - -
Class C Preferred Stock converted & warrants
exercised (3,000) 95 (2,007) 5,119 - - - -
Common stock purchased and warrants exercise - - (5,190) (30,120) - - (2,794) -
Loans to Employee Stock Ownership Plan - - - - - - - (13,274)
Payments recieved on Employee Stock Ownership
Plan note - - - - - - - 5,189
Net earnings - - - - - 7,422 - -
Reclassification to Redeemable Common Stock - (73) - - (15,444) - - -
------ ----- ------- -------- --------- --------- -------- -------
Balance, December 31, 1997 - 478 1,259 125,412 (154,138) (93,837) (28,703) (8,085)
Employee compensation plans (option exercises,
restricted stock plan, incentive bonus) - 4 - 891 - - (960) -
Treasury stock purchased - - - - - - (6,386) -
Warrants & stock options exercised - 35 (1,259) 903 - - 409 -
Payment received on Employee Stock Ownership
Plan note - - - - - - - 5,932
Reclassification to Redeemable Common Stock - (19) - - (29,002) - - -
Net earnings - - - - - 15,055 - -
------ ----- ------- -------- --------- --------- -------- -------
Balance, December 31, 1998 - $498 - $127,206 $(183,140) $(78,782) $(35,640) $(2,153)
====== ===== ======= ======== ========= ========= ======== =======
See accompanying notes to the consolidated financial statements.
DynCorp and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31,
(In thousands)
1998 1997 1996
---- ---- ----
Cash Flows from Operating Activities:
Net earnings $ 15,055 $ 7,422 $ 14,629
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 8,825 9,888 9,467
Payment of income taxes on gain on sale of the
Commercial Aviation business - - (13,990)
Gain on sale of discontinued operations - - (2,680)
Deferred income taxes 1,463 4,165 1,478
Proceeds from insurance settlement for asbestos claims 1,462 1,488 -
Change in reserve for divested business - Fuller-Austin (10,797) 7,800 -
Changes in reserves for divested business - Other (1,698) 357 825
Other (63) (882) (848)
Change in assets and liabilities, net of acquisitions and dispositions:
Increase in accounts receivable and contracts
in process (52,416) (15,311) (6,864)
Decrease (increase) in inventories 321 (60) 353
Increase in other current assets (1,284) (1,245) (1,867)
Increase (decrease) in current liabilities except notes payable
and current portion of long-term debt 31,380 (3,685) 4,345
-------- -------- --------
Cash (used) provided by operating activities (7,752) 9,937 4,848
-------- -------- --------
Cash Flows from Investing Activities:
Sale of property and equipment 1,293 318 1,093
Proceeds received from notes receivable - 4 3
Purchase of property and equipment (4,797) (5,110) (5,310)
Cost of software for new core systems (5,598) - -
Deferred income taxes from "safe harbor" leases (257) (309) (316)
Increase in investment in unconsolidated subsidiaries (302) (2,038) (169)
Increase in notes receivable to equity investee - (867) -
Assets and liabilities of acquired businesses
(excluding cash acquired) (10,239) - (2,801)
Proceeds from sale of discontinued operations - - 3,050
Decrease in cash on deposit for letters of credit - - 6,244
Other (231) (255) (113)
-------- -------- --------
Cash (used) provided by investing activities (20,131) (8,257) 1,681
-------- -------- --------
Cash Flows from Financing Activities:
Treasury stock purchased (6,194) (923) (9,712)
Payment on indebtedness (20,371) (1,708) (1,264)
Retirement of Contract Receivable Collateralized Notes 1992-1 - (98,500) -
Proceeds from Contract Receivable Collateralized Notes 1997-1 28,113 50,000 -
Proceeds from issuance of Senior Notes - 99,484 -
Common stock and warrants purchased from investors - (37,819) -
Payments on ESOP loans 5,933 5,189 503
Loans to Employee Stock Ownership Plan - (13,274) -
Deferred financing expenses - (5,080) (1,310)
Other (112) (324) (20)
------- ------- --------
Cash provided (used) by financing activities 7,369 (2,955) (11,803)
------- ------- --------
Net Decrease in Cash and Cash Equivalents (20,514) (1,275) (5,274)
Cash and Cash Equivalents at Beginning of the Year 24,602 25,877 31,151
------- -------- --------
Cash and Cash Equivalents at End of the Year $ 4,088 $ 24,602 $ 25,877
======= ======== =========
See accompanying notes to the consolidated financial statements.
DynCorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
(Dollars in thousands, except per share amounts or where otherwise noted)
(1) Summary of Significant Accounting Policies
Organization -- The Company provides diversified management, technical and
professional services to primarily U.S. Government customers throughout the
United States and internationally.
Principles of Consolidation -- All majority-owned subsidiaries have been
included in the financial statements and all significant intercompany accounts
and transactions have been eliminated. Outside investors' interest in the
majority-owned subsidiaries is reflected as minority interest. Investment
ownerships of 50% or less are accounted for using the equity method of
accounting.
Accounting Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from these estimates.
Contract Accounting -- Contracts in process are stated at the lower of actual
cost incurred plus accrued profits or net estimated realizable value of incurred
costs, reduced by progress billings. The Company records income from major
fixed-price contracts, extending over more than one accounting period, using the
percentage-of-completion method. During performance of such contracts, estimated
final contract prices and costs are periodically reviewed and revisions are made
as required. The effects of these revisions are included in the periods in which
the revisions are made. On cost-plus-fee contracts, revenue is recognized to the
extent of costs incurred plus a proportionate amount of fee earned, and on
time-and-material contracts, revenue is recognized to the extent of billable
rates times hours delivered plus material and other reimbursable costs incurred.
Losses on contracts are recognized when they become known. Disputes arise in the
normal course of the Company's business on projects where the Company is
contesting with customers for collection of funds because of events such as
delays, changes in contract specifications and questions of cost allowability or
collectibility. Such disputes, whether claims or unapproved change orders in the
process of negotiation, are recorded at the lesser of their estimated net
realizable value or actual costs incurred and only when realization is probable
and can be reliably estimated. Claims against the Company are recognized where
loss is considered probable and reasonably determinable in amount.
Accounts Receivable -- It is the Company's policy to provide reserves for the
collectibility of accounts receivable when it is determined that it is probable
that the Company will not collect all amounts due and the amount of reserve
requirement can be reasonably estimated.
Property and Equipment -- The Company computes depreciation using the
straight-line method. The estimated useful lives used in computing depreciation
are buildings, 15-33 years; machinery and equipment, 3-20 years; and leasehold
improvements, the lesser of the useful life or the term of the lease.
Depreciation expense was $4,781 for 1998, $4,881 for 1997 and $4,310 for 1996.
Cost of property and equipment sold or retired and the related accumulated
depreciation or amortization is removed from the accounts in the year of
disposal, and any gains or losses are reflected in the consolidated statements
of operations. Expenditures for maintenance and repairs are charged to expense
as incurred, and major additions and improvements are capitalized.
Intangible Assets -- At December 31, 1998, intangible assets consist of $43,946
of unamortized goodwill, $6,864 of value assigned to a patent pending, $5,897 of
capitalized software, and $1,140 of value assigned to contracts. In 1997,
intangible assets consist of $45,140 of unamortized goodwill, $299 of
capitalized software, and $1,610 of value assigned to contracts. Goodwill is
being amortized on a straight-line basis over periods from ten to forty years
($41,925 forty years, $141 thirty years, $1,751 fifteen years and $129 ten
years). Amortization expense was $1,575, $1,560 (see Note 14) and $2,814 (see
Note 14 (c)) in 1998, 1997 and 1996, respectively. Amounts allocated to
contracts are being amortized over the lives of the contracts for periods up to
ten years. Amortization of amounts allocated to contracts was $847 in 1998 and
$617 in 1997 and 1996. Cumulative amortization of $19,734 and $31,976 has been
recorded through December 31, 1998, of goodwill and value assigned to contracts,
respectively.
Long-Lived Assets, identifiable intangibles, and goodwill are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
impairment, the Company estimates the future cash flows expected to result from
the use of the asset. If impaired, the Company would write down the asset to its
fair market value. If the asset is held for sale, the Company reviews its fair
value less cost to sell.
Derivative Financial Instruments -- The Company has a policy to use derivative
financial instruments to manage its exposures to fluctuations in interest rates
and foreign exchange rates as warranted. The Company does not hold or issue
derivative financial instruments for trading purposes. There were no such
financial instruments held during 1998.
New Accounting Pronouncements -- In March 1998, the American Institute of
Certified Public Accountants ("AICPA") issued Statement of Position No. ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which will be effective for fiscal years beginning after December
15, 1998. The Statement of Position requires the capitalization of certain costs
incurred in connection with developing or obtaining software for internal use
after the date of adoption. During 1998, the Company adopted SOP No. 98-1 and
has capitalized $5.7 million of internal use software, primarily related to the
design and development of financial and human resource software packages.
AICPA SOP No. 98-5, "Reporting on the Costs of Start-up Activities", was issued
in April 1998 and is effective for fiscal years beginning after December 15,
1998. The statement provides guidance on the financial reporting of start-up
costs and organization costs and requires costs of start-up activities to be
expensed as incurred. The Company believes that the adoption of this statement
will not have a material impact on the Company's financial statements.
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. The
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company is required to adopt the
provisions of the standard during the first quarter of 2000. Because of the
Company's minimal use of derivatives, the Company does not expect that the
adoption of the new standard will have a material impact on the results of
operations or financial condition.
Consolidated Statements of Cash Flows -- For purposes of these statements,
short-term investments, which consist of government treasury bills and time
deposits with a maturity of ninety days or less, are considered cash
equivalents. At December 31, 1998, checks not yet presented for payment of $23.0
million in excess of cash balances were included in accounts payable on the
accompanying balance sheet. The Company had sufficient funds available to cover
these outstanding checks when they were presented for payment. Cash and
short-term investments at December 31, 1998 and 1997, excludes $1.5 million of
restricted cash which is classified as Other Assets.
Investing and financing activities include the following:
1998 1997 1996
---- ---- ----
Acquisitions of businesses:
Assets acquired $ 11,185 $ - $ 4,998
Liabilities assumed (946) - (1,498)
Cash acquired - - (699)
--------- --------- ---------
Net cash $ 10,239 $ - $ 2,801
------- ----------- -------
Capitalized equipment leases and
notes secured by property and equipment $ - $ 626 $ -
The Company acquired FMAS Corporation in 1998 and Data Management Design, Inc.
in 1996.
Comprehensive Income - Effective January 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income," which requires the
presentation and disclosure of comprehensive income. Net income is the only
component of the Company's comprehensive income for the years ended December 31,
1998, 1997, and 1996.
Classification -- Consistent with industry practice, assets and liabilities
relating to long-term contracts and programs are classified as current although
a portion of these amounts is not expected to be realized within one year.
Certain prior year information has been reclassified to conform to the current
year presentation.
(2) Discontinued Operations
During 1995, the Company sold all of its subsidiaries engaged in the
commercial aircraft maintenance and ground handling activities, i.e., the
Commercial Aviation business. At December 31, 1995, certain contingencies
existed regarding the final sales prices of both the maintenance and ground
handling businesses. Additionally, the Company retained certain contingent
liabilities, which included general warranties and representations and certain
specific issues regarding environmental, insurance and tax matters. During 1996,
the Company recorded a gain of $2,680 net of income taxes of $768 related to the
resolution of some of these outstanding issues as well as the adjustment of
estimated reserves recorded at disposition.
The sale of the subsidiaries resulted in a partial termination of the ESOP
and termination of all active participants of the subsidiaries. These employees
were entitled to put their ESOP shares (approximately 493,000 shares) sooner
than had been previously anticipated. These shares have been included in the
estimated annual repurchase commitment reported in Note 7, Redeemable Common
Stock.
(3) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
the value:
Accounts Receivable, Prepaid Income Taxes, Accounts Payable and Accrued
Income Taxes - The carrying amount approximates the fair value due to the short
maturity of these instruments.
Long-term debt and other liabilities and deferred credits - The fair value
of the Company's 7.486% Contract Receivable Collateralized Notes and the Senior
Notes, based on the current rate as if the issue date were December 31, 1998 and
1997, is $154.4 and $153.4 million, respectively, as compared to a book value of
$149.5 million in 1998 and 1997. For the remaining long-term debt (see Note 5)
and other liabilities and deferred credits, the carrying amount approximates the
fair value.
(4) Accounts Receivable and Contracts in Process
The components of accounts receivable and contracts in process were as
follows at December 31:
1998 1997
----------- ------------
U.S. Government:
Billed and billable $158,190 $119,538
Recoverable costs and accrued profit on progress
completed but not billed 23,374 25,462
Retainage due upon completion of contracts 2,641 2,034
-------- --------
184,205 147,034
-------- --------
Other Customers (primarily subcontracts from
U.S. Government prime contractors and contracts with state,
local and quasi-government agencies):
Billed and billable (less allowance for doubtful accounts
of $1,126 in 1998 and $476 in 1997) 54,520 37,104
Recoverable costs and accrued profit on progress completed
but not billed 19,491 18,620
-------- --------
74,011 55,724
-------- --------
$258,216 $202,758
======== ========
Billed and billable include amounts earned and contractually billable at
year-end but which were not billed because customer invoices had not yet been
prepared at year-end. Recoverable costs and accrued profit not billed is
composed primarily of amounts recognized as revenues, but which are not
contractually billable at the balance sheet dates. It is expected that all
amounts at December 31, 1998 will be collected within one year except for
approximately $8,530.
(5) Long-term Debt
At December 31, 1998 and 1997, long-term debt consisted of:
1998 1997
------------- ------------
91/2% Senior Notes $ 99,546 $ 99,510
7.486% Contract Receivable Collateralized Notes, Series 1997-1, Class A 50,000 50,000
Floating Rate Contract Receivable Collateralized Notes, Series
1997-1, Class B 7,000 -
8% Mortgage payable 2,729 3,100
Notes payable 991 79
------- ---------
160,266 152,689
Less current portion 8,145 450
------- ---------
$ 152,121 $ 152,239
========= =========
Debt maturities as of December 31, 1998, were as follows:
1999 $ 8,145
2000 166
2001 180
2002 50,195
2003 2,034
Thereafter 99,546
---------
$ 160,266
=========
On March 17, 1997, the Company closed on the issuance of $100.0 million of 9
1/2% Senior Subordinated Notes ("Senior Notes") with a scheduled maturity in
2007. Interest is payable semi-annually, in arrears, on March 1 and September 1
of each year. The Senior Notes are redeemable, in whole or in part, at the
option of the Company, on or after March 1, 2002 at a redemption price which
ranges from 104.75% in 2000 to 100.00% in 2005 and thereafter. In addition, at
any time prior to March 1, 2000, the Company may redeem up to 35% of the
aggregate principal amount of the Senior Notes (at a redemption price of
109.50%) with proceeds generated from a public offering of equity, provided at
least 65% of the original aggregate amount of the Senior Notes remains
outstanding. The Senior Notes are general unsecured obligations of the Company
and will be subordinated in right of payment to all existing and future senior
debt of the Company.
On April 18, 1997, the Company's wholly owned subsidiary, Dyn Funding
Corporation ("DFC"), completed a private placement of $50.0 million of 7.486%
Fixed Rate Contract Receivable Collateralized Notes, Series 1997-1, Class A (the
"Class A Notes"). The Class A Notes are collateralized by the right to receive
proceeds from certain U.S. Government contracts and certain eligible commercial
accounts receivable of the Company and its subsidiaries. Credit support for the
Class A Notes is provided by overcollateralization in the form of additional
receivables. The Company retains an interest in the excess balance of the
receivables through its ownership of the common stock of DFC. Interest payments
are made monthly. Principal payments are scheduled to begin March 31, 2002 (the
"Amortization Date"). The period between April 18, 1997 and February 28, 2002 is
referred to as the "Non-Amortization Period".
On an ongoing basis, cash receipts from the collection of the receivables
are used to make interest payments on the Class A Notes, pay a servicing fee to
the Company, and purchase additional receivables from the Company. During the
Non-Amortization Period, cash in excess of the amount required to purchase
additional receivables and meet payments on the Class A Notes is to be paid to
the Company subject to certain collateral coverage tests. The receivables
pledged as security for the Class A Notes are valued at a discount from their
stated value for purposes of determining proper credit support. DFC is required
to maintain receivables, at their discounted values, plus cash on deposit at
least equal to the outstanding balance of the Class A Notes.
The Class A Notes may be redeemed in whole, but not in part, at the option
of DFC at a price equal to the principal, plus accrued interest, plus a premium
(as defined). The indenture also provides for special redemption of the Class A
Notes in the event the collateral value ratio is less than 1.00 and mandatory
redemption in the event the collateral value ratio is less than 0.95 on two
consecutive determination dates and the Company has not substituted receivables
or deposited cash to bring the collateral value ratio to 1.00. Mandatory
redemption is also required in the event three special redemptions are required
within any twelve month period or the aggregate stated value of all ineligible
receivables which have been ineligible for more than 30 days exceed 7% of the
aggregate collateral balance and the collateral value ratio is less than 1.00.
Also issued at closing were $90 million of Floating Rate Contract Receivable
Collateralized Notes, Series 1997-1, Class B (the "Class B Notes"). The Class B
Notes, when drawn, will be subject to the same terms as the Class A Notes. At
December 31, 1998, $7.0 million was outstanding on the Class B Notes.
The proceeds from the issuance of the Senior Notes, net of a discount, and
from the issuance of the Class A Notes were used to retire the maturing 8.54%
Contract Receivable Collateralized Notes, Series 1992-1, to fund the Company's
purchase of common stock and warrants, to make a loan to the ESOP to enable it
to repay notes issued for the purchase of the Company's Class C Preferred Stock
and to pay various transaction fees (see Note 12).
At December 31, 1998, $87,852 of accounts receivable are restricted as
collateral for the Class A Notes. Additionally, $1.5 million of cash (3% of the
balance of the Class A Notes) is restricted and has been included in Other
Assets in the balance sheet.
Upon the closing of the Senior Notes and the Class A Notes, the Company
reduced its revolving credit facility with Citicorp North America, Inc. from $50
million to $15 million. The facility provides funds for working capital and
capital expenditure requirements and also provides for letters of credit for the
Company and its subsidiaries. The agreement contains customary restrictions on
the ability of the Company to undertake certain activities, such as the
incurrance of additional debt, the payment of dividends on or the repurchase of
the Company's common stock, the merger of the Company into another company, the
sale of substantially all the Company's assets, and the acquisition of the stock
or substantially all the assets of another company. The agreement also
stipulates that the Company must maintain certain financial ratios, including
specified ratios of earnings to fixed charges and debt to earnings. The Company
utilized this credit facility throughout 1998, never exceeding $8.9 million in
borrowings at any given period in time. At December 31, 1998, there were $0.9
million of borrowings under this line of credit; in addition, the amount
available was reduced by $6.1 million due to outstanding letters of credit.
The Company acquired the Alexandria, VA headquarters of Technology
Applications, Inc. ("TAI") on November 12, 1993, in conjunction with the
acquisition of TAI. A mortgage of $3,344 bearing interest at 8% per annum was
assumed. Payments are made monthly and the mortgage matures in April 2003.
Deferred debt issuance costs are being amortized using the effective
interest rate method over the term of the related debt. At December 31, 1998,
unamortized deferred debt issuance costs were $4,924 and amortization for 1998,
1997 and 1996 was $721, $706, and $829, respectively. Amortization of debt issue
discount was $36 in 1998 and $26 in 1997.
Cash paid for interest was $13,454 for 1998, $13,076 for 1997, and $9,485
for 1996.
(6) Accrued Expenses
At December 31, 1998 and 1997, accrued expenses consisted of the following:
1998 1997
---- ----
Salaries and wages $ 49,566 $ 42,804
Insurance 21,419 19,878
Interest 1,993 3,103
Payroll and miscellaneous taxes 10,836 10,650
Accrued contingent liabilities and operating reserves
(see Note 21) 17,999 24,017
Other 6,304 5,175
--------- --------
$108,117 $105,627
======== ========
(7) Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary Equity at
the redeemable value at each balance sheet date and consists of the following:
Balance at Balance at
Redeemable December 31, Redeemable December 31,
Shares Value 1998 Shares Value 1997
---------- ---------- ------------ ---------- ---------- ------------
ESOP Shares 3,382,340 $27.75 $ 93,860 3,520,037 $24.00 $ 84,481
3,700,083 $23.50 86,952 3,367,082 $20.00 67,342
--------- --------- -------- ---------
7,082,422 $ 180,812 6,887,119 $ 151,823
========= ========= ========= =========
Other Shares 125,714 $24.25 $ 3,049 125,714 $24.00 $ 3,017
========= ========= ========= =========
ESOP Shares
In accordance with ERISA regulations and the Employee Stock Ownership Plan
(the "Plan") documents, the ESOP Trust or the Company is obligated to purchase
vested common stock shares from ESOP participants (see Note 12) at the fair
value (as determined by an independent appraiser) as long as the Company's
common stock is not publicly traded. The shares initially bought by the ESOP in
1988 were bought at a "control price," reflecting the higher price that buyers
typically pay when they buy an entire company (as the ESOP and other investors
did in the 1988 LBO). A special provision in the ESOP's 1988 agreement permits
participants to receive a "control price" when they sell these shares back to
the Company under the ESOP's "put option" provisions. This "control price",
determined by the appraiser on February 24, 1999, was $27.75 per share as of
December 31, 1998. The additional shares received by the ESOP in 1994 through
1997 were at a "minority interest price", reflecting the lower price that buyers
typically pay when they are buying only a small piece of a company. Participants
do not have the right to sell these shares at the "control price". The minority
interest price determined by the independent appraiser on February 24, 1999, was
$23.50 per share as of December 31, 1998. Participants receive their vested
shares upon retirement, becoming disabled, or death over a period of one to five
years and for other reasons of termination over a period of one to ten years,
all as set forth in the Plan documents. In the event the fair value of a share
is less than $27.00, the Company was committed to pay, through December 31,
1996, up to an aggregate of $16 million, the difference ("Premium") between the
fair value and $27.00 per share. The Company estimated a total Premium of $8.5
million and recorded the Premium as Other Expense in the Consolidated Statements
of Operations in 1989 through 1994 (see Note 14). As of December 31, 1996, the
Company had expended $6,976 of the Premium. In 1996, the Company reversed
$1,250, revising its estimated ESOP Premium. The remaining liability represents
the Company's obligation to honor the Premium commitment to ESOP participants
who were grandfathered due to minor administrative changes in the plan in 1995.
From October 1990 through May 1996, the Company had purchased 633,453 shares
from participants. In June 1996, the ESOP Trust began purchasing participants'
shares at fair value, utilizing the cash available from the Company's
contributions (see Note 12), while the Company continues to pay the premium, if
any. Based on the fair values of $27.75 and $23.50 per share as of December 31,
1998, the estimated aggregate annual commitment to repurchase shares from the
ESOP participants upon death, disability, retirement and termination is as
follows: $7,194 in 1999, $9,414 in 2000, $12,653 in 2001, $15,258 in 2002,
$22,427 in 2003 and $142,107 thereafter. Under the Subscription Agreement with
the ESOP dated September 9, 1988, the Company is permitted to defer put options
if, under Delaware law, the capital of the Company would be impaired as a result
of such repurchase.
Other Shares
In conjunction with the acquisition of TAI in November 1993, the
Company issued put options on 125,714 shares of common stock. The holder
could, at any time commencing on December 31, 1998 and ending on December
31, 2000, sell these shares to the Company at a price per share equal to the
greater of $17.50; or, if the stock is publicly traded, the market value at
a specified date; or, if the Company's stock is not publicly traded, the ESOP
control price at the time of exercise.
On January 12, 1999, the holder exercised the put option on these 125,714
shares of common stock at the applicable price of $24.25 per share.
Management Investors Shares
Common stock held by management investors includes those shares acquired by
management investors pursuant to the merger in 1988, shares earned through the
Restricted Stock Plan (see Note 10) and shares issued through the Management
Employees Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase
Plan allowed employees in management, supervisory or senior administrative
positions to purchase shares of the Company's common stock along with warrants
at current fair value. The Board of Directors was responsible for establishing
the fair value for purposes of the Stockholders Agreement and the Stock Purchase
Plan. The Stock Purchase Plan was discontinued in 1994. Treasury stock, which
the Company acquired from terminated employees who had previously purchased
shares from the Company, was issued to employees purchasing stock under the
Stock Purchase Plan. Under the DynCorp Stockholders Agreement adopted in March
1994 and which expires in March 1999, the Company was committed, upon an
employee's termination of employment, to purchase common stock shares held by
employees pursuant to the merger, through the Stock Purchase Plan or through the
Restricted Stock Plan. In May 1995, the Board of Directors, with the consent of
the Class C Preferred stockholder, approved the establishment of an Internal
Market as a replacement for the resale procedures included in the DynCorp
Stockholders Agreement. In May 1996, the Securities and Exchange Commission
approved the registration of shares for trading on the Internal Market, thus
releasing the Company from its obligation to repurchase any management or
restricted stock shares. Therefore, the management investor shares were
reclassified from Temporary Equity (at the redemption value) to Permanent Equity
(at par value) in 1996.
Following are the changes in Redeemable Common Stock for the three years ended
December 31, 1998:
Redeemable Common Stock
-----------------------
Management
Other ESOP Investors Total
----- ---- ---------- -----
Balance, December 31, 1995 $2,275 $100,481 $33,138 $135,894
Reclassification to permanent equity (33,138) (33,138)
Treasury stock purchased (290) (290)
Shares purchased on Internal Market 1,887 1,887
Adjustment of shares to fair value 704 34,265 34,969
------ -------- ----------- --------
Balance, December 31, 1996 2,979 136,343 - 139,322
Shares purchased on Internal Market 205 205
Shares purchased by ESOP not
collateralized by notes 13,371 13,371
Adjustment of shares to fair value 38 1,904 1,942
------ -------- ----------- --------
Balance, December 31, 1997 3,017 151,823 - 154,840
Shares purchased by ESOP 1,482 1,482
Shares released from collateral 5,798 5,798
ESOP diversification (a) (4,074) (4,074)
Adjustment of shares to fair market value 32 25,783 25,815
------ -------- ----------- --------
Balance, December 31, 1998 $3,049 $180,812 $ - $183,861
====== ======== =========== ========
<FN>
(a) Under diversification rules, as defined by the Plan, ESOP participants have
the option of receiving a distribution of up to 25% of their aggregate
accounts, in order to convert Company stock into another type of
investment. The option extends over a five-year period beginning after the
participant has reached age 55 and has ten years of participation in the
ESOP. At the sixth year, the distribution right increases to 50% of the
participant's account.
</FN>
(8) Preferred Stock, Class C
Dividends on the Class C Preferred Stock accrued at an annual rate of 18%,
compounded quarterly. At December 31, 1996, cumulative dividends of $11,147 had
not been recorded or paid. In February 1997, the ESOP purchased all of the Class
C Preferred Stock, which was immediately converted into Common Stock.
(9) Common Stock
At December 31, 1998, Common Stock includes those shares issued to outside
investors, officers, and current and former employees and any ESOP shares that
have been purchased by the Company and are being held as treasury stock.
(10) Common Stock Warrants and Restricted Stock
The Company initially issued warrants on September 9, 1988 to certain
stockholders to purchase a maximum of 5,891,987 shares of common stock of the
Company. The warrants were recorded at their fair value of $2.43 per warrant and
warrants issued to a lender were recorded at $3.28 per warrant. Each warrant was
exercisable to obtain one share of common stock. The stockholder could exercise
the warrant and pay in cash the exercise price of $0.25 for one share of common
stock or sell back to the Company a sufficient number of the exercised shares to
equal the value of the warrants to be exercised. During 1998, 347,367 warrants
were exercised or canceled. There were no warrants outstanding at December 31,
1998.
The Company had a Restricted Stock Plan (the "Plan") under which management
and key employees could be awarded shares of common stock based on the Company's
performance. The Company initially reserved 1,023,037 shares of common stock for
issuance under the Plan. Under the Plan, Restricted Stock Units ("Units") were
granted to participants who were selected by the Compensation Committee of the
Board of Directors. Each Unit entitled the participant upon achievement of the
performance goals (all as defined) to receive one share of the Company's common
stock. Units could not be converted into shares of common stock until the
participant's interest in the Units had vested. Vesting occurred upon completion
of the specified periods as set forth in the Plan.
(11) Acquisitions
On February 2, 1998, the Company acquired a majority of the net assets of
FMAS Corporation ("FMAS"), a medical outcome measurement and data abstraction
services company headquartered in Rockville, MD, for $10.2 million in cash. FMAS
is a leading provider of proprietary outcome performance measurement systems to
DoD treatment facilities as well as other public and governmental facilities.
The acquisition has been accounted for as a purchase, and $7.1 million of value
assigned to a pending patent, $0.4 million of goodwill, and $ 0.4 million of
value assigned to contracts has been recorded based on allocation of the
purchase price. These amounts will be amortized over 17 years, 15 years, and the
life of the contracts, respectively.
(12) Employee Stock Ownership Plan
In September 1988, the Company established an Employee Stock Ownership Plan
("ESOP"). The Company borrowed $100 million and loaned the proceeds, on the same
terms as the Company's borrowings, to the ESOP to purchase 4,123,711 shares of
common stock of the Company. The ESOP acquired 2,797,812 additional shares, from
1993 through 1996 either through contributions of stock from the Company, or
contributions of cash from the Company with which the ESOP then purchased shares
either from the Company, on the Internal Market, or directly from other
stockholders.
At the beginning of 1997, the ESOP had considerable cash on hand. Utilizing
this cash and loans from the Company, the ESOP purchased all of the Company's
Class C Preferred Stock. The ESOP subsequently converted the Class C Preferred
Stock and exercised the related warrants, at which time the Company issued
949,642 shares of common stock to the ESOP. The purchase price for the Class C
Preferred Stock was $18,566 ($19.55 per share, after exercise of warrants) of
which half was paid in cash ($8,277 on hand and $1,006 loaned from the Company)
and notes were issued for the balance. The notes, plus $89 of accrued interest,
were paid in full by April 2, 1997, with the proceeds of another loan from the
Company. The unpaid balance on these notes from the ESOP, $707, representing
34,829 shares, is reflected as a reduction of stockholders' equity at December
31, 1998.
Utilizing the Company's 1997 contribution as well as subsequent loans, the
ESOP made the required principal and interest payments on the aforementioned
notes, paid administrative fees, purchased 230,320 shares of stock either from
retired or terminated participants or on the Internal Market and purchased
150,434 shares of stock from retired officers of the Company in a transaction
that allowed the ESOP to acquire shares at a below market price. At December 31,
1998, the unpaid balance on these subsequent loans, $1,446, representing 64,480
shares, is also reflected as a reduction in stockholders' equity.
The ESOP covers a majority of the employees of the Company. Participants in
the ESOP become fully vested after four years of service. Of the 8,251,919
shares acquired by the ESOP, 8,152,610 have been either issued or allocated to
participants as of December 31, 1998. The Company recognizes compensation
expense each year based on the cash contribution for the year. In 1998, 1997,
and 1996, cash contributions to the ESOP were $12,600, $11,200, and $13,670,
respectively. These amounts were charged to Cost of Services and Corporate
General and Administrative Expenses.
(13) Savings Plan
The Company has a Savings and Retirement Plan which is intended to qualify
under section 401(k) of the Internal Revenue Code. The plan allows eligible
employees to contribute from 1% to 15% of their income on a pretax basis. In
1996, the Company began matching 100% of the first 1% of employee contributions
and 25% of the next 4% of employee contributions, provided the employee
contribution was invested in the Company's Stock Fund. Matching contributions
are invested in additional shares of the Company's common stock. The Company has
expensed approximately $1,624, $1,224, and $711 in 1998, 1997, and 1996,
respectively, related to these matching contributions.
(14) Other Expenses
Years Ended December 31,
1998 1997 1996
---- ---- ----
Amortization of costs in excess
of net assets acquired (see Note 1) $1,575 $1,560 $1,528
Provision for non-recovery of receivables 900 629 120
ESOP Repurchase Premium (see Note 7) - - (1,250)
Write-off of investment in
unconsolidated subsidiary (c) - - 1,286
Legal and other expense accruals
associated with business discontinued in 1995 - 177 -
Costs associated with businesses discontinued
in 1988 and prior years
o Asbestos liability issues (a) (670) 7,800 -
o Subcontractor suit (b) 1,177 - 750
o Environmental costs (see Note 21(b)) 23 180 75
Termination costs (d) - - 3,299
Miscellaneous (318) 3 (334)
------ ------- ------
Total Other $2,687 $10,349 $5,474
====== ======= ======
<FN>
(a) In connection with the global settlement that transferred ownership of
the Fuller-Austin Insulation Company ("Fuller-Austin") to a
post-Fuller-Austin bankruptcy settlement trust (the "Trust") for the
benefit of present and future asbestos claimants (see Note 21(a)), the
Company reserved an additional $7.8 million in 1997 for the transfer of
certain property and insurance rights to the Trust, and the payment to
the Trust of certain cash consideration. In 1998, a portion
representing excess over future needs was reversed.
(b) Reserves for the estimated costs (primarily legal defense) to resolve a
lawsuit filed by a subcontractor of a former subsidiary (see Note
21(b)).
(c) In 1994, the Company paid $3 million for a 25% interest in Composite
Technology, Inc. ("CTI"). The volume of CTI's business has declined and
in 1996 the Company determined the goodwill associated with this
investment had been impaired, and, accordingly, the unamortized balance
at December 31, 1996, was written off.
(d) During 1996, several senior executives and a member of the Board of
Directors announced their intentions to either retire or step down from
their positions with the Company. In conjunction with this action, the
Company accrued $3.3 million, representing commitments to these
individuals for supplemental pension benefits, consulting fees,
payments due under a covenant not to compete, remuneration for the
waiver of certain preferred stock and Board of Directors voting rights,
as well as accrued life insurance premiums payable.
</FN>
(15) Income Taxes
As prescribed by SFAS No. 109, "Accounting for Income Taxes", the Company
utilizes the asset and liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Valuation allowances are
provided if required.
Earnings (loss) from continuing operations before income taxes and minority
interest were derived from the following:
Years Ended December 31,
1998 1997 1996
---- ---- ----
Domestic operations $ 26,909 $ 11,422 $ 19,102
Foreign operations (214) (279) 5
-------- -------- --------
$ 26,695 $ 11,143 $ 19,107
======== ======== ========
The provision (benefit) for income taxes consisted of the following:
Years Ended December 31,
1998 1997 1996
---- ---- ----
Current:
Federal $ 7,616 $ (1,926) $4,286
Foreign 22 43 (81)
State 458 - 210
------- -------- ------
8,096 (1,883) 4,415
------- -------- ------
Deferred:
Federal 2,933 6,653 3,939
Foreign (1,470) - 1,100
State 298 499 (436)
-------- -------- ------
1,761 7,152 4,603
-------- -------- ------
Valuation Allowance:
Federal - (2,488) (4,067)
State (298) (499) 942
-------- ------- ------
(298) (2,987) (3,125)
-------- ------- ------
Total $ 9,559 $ 2,282 $5,893
======= ======= ======
The components of deferred taxes are as follows:
Dec. 31, Dec. 31,
1998 1997
---- ----
Deferred tax liabilities:
Employee benefits $ (2,223) $ (2,220)
Contracts revenue recognition (13,280) (15,385)
Intangible amortization (249) (549)
Depreciation and other amortization (493) (199)
Other, net (132) (234)
--------- ---------
Total deferred tax liabilities (16,377) (18,587)
-------- --------
Deferred tax assets:
Deferred compensation 1,251 1,733
Operating reserves and other accruals 10,763 13,954
Increase due to federal rate change 335 335
Benefit of state tax on temporary
differences and state net operating
loss carryforwards 4,736 5,034
------ -------
Total deferred tax assets 17,085 21,056
------ ------
Total temporary differences
before valuation allowances 708 2,469
Valuation allowances:
State (4,736) (5,034)
------- -------
Total temporary differences
affecting tax provision (4,028) (2,565)
------- -------
"Safe harbor" leases (5,113) (5,370)
------- ---------
Net deferred tax liability $(9,141) $ (7,935)
======== =========
No Federal valuation allowance was required for the Company's deferred tax
assets at December 31, 1998, and 1997. State valuation allowances represent
reserves for income tax benefits, which are not recognized due to uncertainty
regarding future earnings in the applicable states. The net deferred tax
liability includes current deferred tax assets of $3,357 and $6,125 as of
December 31, 1998 and 1997, respectively, which are included in Other Current
Assets on the consolidated balance sheets.
The Company's U.S. Federal income tax returns have been cleared with the IRS
through 1993.
Cash paid for income taxes was $7,338 for 1998, $2,676 for 1997, and $20,680
for 1996 ($14.0 million of which related to the gain on the sale of the
Commercial Aviation business).
The tax provision differs from the amounts obtained by applying the statutory
U.S. Federal income tax rate to the earnings from continuing operations. The
differences are reconciled as follows:
Years Ended December 31,
1998 1997 1996
---- ---- ----
Expected Federal income tax provision $9,343 $3,900 $ 6,688
Valuation allowance - (2,488) (4,067)
State and local income taxes, net of
Federal income tax benefit 297 - 465
Nondeductible amortization of intangibles
and other costs 724 726 1,165
Foreign income tax (1,448) 43 1,016
Foreign and fuel tax credits (27) (31) (16)
Other, net 670 132 642
------ ------ ------
Tax provision $9,559 $2,282 $5,893
====== ====== ======
The Company has state net operating loss carryforwards available to offset
future taxable income. Following are the net operating losses by year of
expiration:
Year of State Net
Expiration Operating Losses
1998 $ 484
1999 987
2000 1,328
2001 943
2002 2,099
Through 2012 57,048
-------
$62,889
=======
(16) Pension Plans
Union employees who are not participants in the ESOP are covered by
multiemployer pension plans under which the Company pays fixed amounts,
generally per hours worked, according to the provisions of the various labor
contracts. In 1998, 1997, and 1996, the Company expensed $3,538, $3,451, and
$2,837, respectively, for these plans. Under the Employee Retirement Income
Security Act of 1974 as amended by the Multiemployer Pension Plan Amendments Act
of 1980, an employer is liable upon withdrawal from or termination of a
multiemployer plan for its proportionate share of the plan's unfunded vested
benefits liability. Based on information provided by the administrators of the
majority of these multiemployer plans, the Company does not believe there is any
significant amount of unfunded vested liability under these plans.
(17) Earnings Per Common Share
The Company has adopted SFAS No. 128, "Earnings per Share", which became
effective for financial statements for periods ended after December 15, 1997.
The statement establishes new standards for computing and presenting earnings
per share ("EPS") and requires restatement of prior periods.
Basic EPS is computed by dividing earnings, after deducting the effect of
unpaid dividends on the Class C Preferred Stock, by the weighted average number
of common shares outstanding and contingently issuable shares. The weighted
average number of common shares outstanding includes issued shares less shares
held in treasury and any unallocated ESOP shares. Shares earned and vested but
unissued under the Restricted Stock Plan are contingently issuable shares whose
condition for issuance have been satisfied and as such have been included in the
calculation of basic EPS. Diluted EPS is computed similarly except the
denominator is increased to include the weighted average number of stock
warrants and options outstanding, assuming the treasury stock method.
The following is a reconciliation of shares for basic EPS to shares for diluted
EPS as of December 31:
1998 1997 1996
---- ---- ----
Weighted average shares outstanding for basic EPS 10,242 8,985 8,462
Effect of dilutive securities:
Warrants 131 1,524 3,240
Stock options 141 129 34
------ ------ ------
Weighted average shares outstanding for diluted EPS 10,514 10,638 11,736
====== ====== ======
(18) Incentive Compensation Plans
The Company has several formal incentive compensation plans that provide for
incentive payments to officers and key employees. Incentive payments under these
plans are based upon operational performance, individual performance, or a
combination thereof, as defined in the plans. Incentive compensation expense of
$7,511 for 1998, $6,510 for 1997, and $6,367 for 1996 has been charged to Cost
of Services and Corporate General and Administrative Expenses.
(19) Stock Option Plan
The Company adopted an incentive stock option plan in 1995, whereby options
could be granted to officers and other key employees to purchase a maximum of
1,250,000 common shares at an option price not less than the most recently
determined fair market value as of the grant date. The grants are exercisable
only when vested and vest proportionately over a period of seven or five years,
depending on the date of the grant. Options that are not exercised within ten or
seven years from the date of the grant, depending on the date of the grant,
shall expire. The fair value of each option grant is equal to the Formula Price
at the date of grant.
Stock option activity was as follows:
1998 1997 1996
- ----------------------------------------------- -------------------------------------------------------------
Outstanding January 1 878,000 789,900 318,000
Granted 389,500 145,000 488,000
Exercised (16,900) (9,000) (600)
Canceled or terminated (12,000) (47,900) (15,500)
- -------------------------------------------------------------------------------------------------------------
Outstanding December 31 1,238,600 878,000 789,900
Exercisable 365,360 199,600 64,900
Average price
Outstanding, beginning of
Year $17.05 $16.55 $14.90
Granted 22.13 19.48 17.57
Exercised 14.90 14.90 14.90
Canceled or terminated 16.17 16.61 14.90
Outstanding, end of year 18.69 17.05 16.55
Weighted average grant date fair
value of options 14.87
- -------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1998:
Weighted-Average
Range of Number Weighted-Average Remaining
Prices Outstanding Exercise Price Contractual Life
- -------------------------------------------------------------------------------------------------------------
$14.50 - 19.00 781,100 $16.86 4.16
20.00 - 23.25 457,500 21.81 6.32
- -------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options exercisable at
December 31, 1998:
Range of Number Weighted-Average
Prices Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------
$14.50 - 19.00 350,560 $16.47
20.00 - 23.25 14,800 20.00
- -------------------------------------------------------------------------------------------------------------
Pursuant to SFAB No. 123, "Accounting for Stock-Based Compensation", the Company
has elected to account for its employee stock option plan under APB Opinion No.
25 "Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized for this plan. Had compensation cost for the plan been
determined based on the fair value at the grant date consistent with SFAB No.
123, common stockholders' share of net earnings and earnings per share would
have been as follows:
Years Ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Common stockholders' share of
net earnings
As reported $15,055 $7,422 $12,345
Pro forma 14,900 7,145 12,091
Basic earnings per share
As reported 1.47 0.83 1.46
Pro forma 1.45 0.80 1.43
Diluted earnings per share
As reported 1.43 0.70 1.05
Pro forma 1.42 0.67 1.03
The minimum value is estimated on the date of grant assuming a five year
expected life of the options, a volatility factor of zero, a dividend yield of
zero, and a risk-free interest rate of 4.6%, 5.7%, and 6.2%, for 1998, 1997, and
1996, respectively.
(20) Leases
Future minimum lease payments required under operating leases that have
remaining noncancellable lease terms in excess of one year at December 31, 1998
are summarized below:
Years Ending December 31,
-------------------------
1999 $ 13,400
2000 7,871
2001 6,689
2002 6,523
2003 6,496
Thereafter 42,038
--------
Total minimum lease payments $ 83,017
========
Net rent expense for leases of $31,138 for 1998, $21,577 for 1997, and
$21,797 for 1996 has been charged to Cost of Services and Corporate General and
Administrative Expense.
(21) Contingencies and Litigation
The Company and its subsidiaries and affiliates are involved in various
claims and lawsuits, including contract disputes and claims based on allegations
of negligence and other tortuous conduct. The Company is also potentially liable
for certain personal injury, tax, environmental, and contract dispute issues
related to the prior operations of divested businesses. In addition, certain
subsidiary companies are potentially liable for environmental, personal injury,
and contract and dispute claims. In most cases, the Company and its subsidiaries
have denied, or believe they have a basis to deny liability, and in some cases
have offsetting claims against the plaintiffs, third parties or insurance
carriers. The total amount of damages currently claimed by the plaintiffs in
these cases is estimated to be approximately $78.1 million (including
compensatory punitive damages and penalties). The Company believes that the
amount that will actually be recovered in these cases will be substantially less
than the amount claimed. After taking into account available insurance, the
Company believes it is adequately reserved with respect to the potential
liability for such claims. The estimates set forth above do not reflect claims
that may have been incurred but have not yet been filed. The Company has
recorded such damages and penalties that are considered to be probable
recoveries against the Company or its subsidiaries.
(a) Asbestos Claims
An acquired and inactive subsidiary, 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 (principally Texas)
beginning in 1986 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.
At December 31, 1997, Fuller-Austin had recorded an estimated liability for
future indemnity payments and defense costs related to currently unsettled
claims and minimum estimated future claims of $50.2 million (recorded on a
consolidated basis by the Company in Other Liabilities and Deferred Credits).
Fuller-Austin recorded in Other Assets $50.2 million, representing the amount
that it expected to recover from its insurance carriers for the payment of
currently unsettled and estimated and future claims.
Effective September 4, 1998, Fuller-Austin Insulation Company
("Fuller-Austin"), a former subsidiary of the Registrant (the "Company"), filed
a Plan of Reorganization (the "Plan") under Chapter 11 of the United States
Bankruptcy Code (the "Code") in the United States Bankruptcy Court for the
District of Delaware. Fuller-Austin, which had been acquired by a subsidiary of
the Company in 1974, discontinued its business activities in 1986. Thereafter it
was named as one of many defendants in civil lawsuits that were filed in certain
state courts (principally Texas) against manufacturers, distributors, and
installers of products containing asbestos. The claimants generally alleged
injuries caused by inhalation of asbestos fibers.
The filing of the Plan followed a year of negotiations among a committee
representing asbestos claimants (the "Committee"), a legal representative of the
unknown future claimants (the "Legal Representative"), Fuller-Austin, and the
Company. As a consequence of these negotiations, the Plan was developed as part
of a pre-packaged filing by Fuller-Austin under Section 524(g) of the Code.
Section 524(g) is designed to deal specifically with the resolution under the
Code of obligations of debtors that have asbestos liability.
In furtherance of the Plan and the proposed global settlement,
representatives of Fuller-Austin, the Company as Fuller-Austin's parent and sole
stockholder, the Committee, and the Legal Representative previously reached a
separate agreement in principle (the "Release Agreement"), contingent on
approval of the Plan by the Bankruptcy Court, under which the Company would be
released from any and all present and future liability for Fuller-Austin
asbestos liability, in consideration of the transfer of certain Company property
(including all the outstanding stock of Fuller-Austin) and certain insurance
rights to the Fuller-Austin settlement trust, and the payment to the trust of
certain cash consideration. The total amount reserved for this purpose at
December 31, 1997 was $14.0 million, in anticipation of the settlement under the
Release Agreement.
Effective December 10, 1998, pursuant to the terms of a Confirmation Order
entered jointly on November 13, 1998 by the United States District and
Bankruptcy Courts in Wilmington, Delaware, and the terms of the Release
Agreement, the Company transferred and conveyed all of its interests in
Fuller-Austin (including all of Fuller-Austin's liabilities) to a trust (the
"Trust") established by the Confirmation Order in accordance with Section 524(g)
of the Code. The Trust is part of the Plan approved in the Confirmation Order
for the resolution of present and future asbestos personal injury and other
claims against Fuller-Austin. As part of the Confirmation Order, the Courts
issued an injunction channeling all future asbestos claims against Fuller-Austin
or the Company to the Trust. The Trust has also undertaken to indemnify the
Company against any and all future asbestos and other liability related to
Fuller-Austin or the past ownership of Fuller-Austin by the Company.
Effective December 11, 1998, this liability and this asset were reversed,
based on the de-consolidation of Fuller-Austin in accordance with the Plan and
Confirmation Order. The decreases in the balance sheet resulting from this
de-consolidation of Fuller-Austin is as follows:
Cash and cash equivalents $ 8,476
Property and equipment $ 1,248
Other assets $44,462
Accrued liabilities $ 8,464
Other liabilities and deferred credits $45,722
Under the terms of the Release Agreement, the Trust will continue to have
access on an exclusive basis to certain Company insurance aggregating as much as
$251,500 and issued during the periods 1974 through 1986, under which
Fuller-Austin is an additional insured.
(b) General Litigation
The Company has retained certain liability in connection with its 1989
divestiture of its major electrical contracting business, Dynalectric Company
("Dynalectric"). The Company and Dynalectric were sued in 1988 in Bergen County
Superior Court, New Jersey, by a former Dynalectric joint venture
partner/subcontractor (subcontractor). The subcontractor has alleged that its
subcontract to furnish certain software and services in connection with a major
municipal traffic signalization project was improperly terminated by Dynalectric
and that Dynalectric fraudulently diverted funds due, misappropriated its trade
secrets and proprietary information, fraudulently induced it to enter the joint
venture, and conspired with other defendants to commit acts in violation of the
New Jersey Racketeering Influenced and Corrupt Organization Act. The aggregate
dollar amount of these claims has not been formally recited in the
subcontractor's complaint. Dynalectric has also filed certain counterclaims
against the former subcontractor. The Company and Dynalectric believe that they
have valid defenses, and/or that any liability would be offset by recoveries
under the counterclaims. The Company and Dynalectric were found by a Special
Master to have committed certain discovery abuses, but no monetary amount of
sanctions has yet been assessed. The Company and Dynalectric expect to file an
appeal with respect to this finding. In late 1997, the state court granted
Dynalectric's Motion to Compel Arbitration that originally had been filed in
1988. The arbitration proceeding commenced in July 1998 and concluded October 1,
1998. The ruling of the arbitrator is expected during the 1st half of, 1999. The
Company believes that it has established adequate reserves for the contemplated
defense costs and for the cost of obtaining enforcement of arbitration
provisions contained in the contract.
In November, 1994, the Company acquired an information technology business
which was involved in various disputes with federal and state agencies,
including two contract default actions and a qui tam suit by a former employee
alleging improper billing of a federal government agency customer. The Company
has contractual rights to indemnification from the former owner of the acquired
subsidiary with respect to the defense of all such claims and litigation, as
well as all liability for damages when and if proven. In October 1995, one of
the federal agencies asserted a claim against the subsidiary and gave the
Company notice that it intended to withhold payments against the contract under
which the claim arose. To date, the agency has withheld approximately $3.0
million due the Company under one of the aforementioned disputes. This
subsidiary has submitted a demand for indemnification to the former owner of the
subsidiary, which has been denied. The subsidiary recently received an
arbitration award confirming that it is entitled to indemnification.
As to environmental issues, neither the Company, nor any of its
subsidiaries, is named a Potentially Responsible Party (as defined in the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA))
at any site. The Company, however, did undertake, as part of the 1988
divestiture of a petrochemical engineering subsidiary, an obligation to install
and operate a soil and water remediation system at a subsidiary research
facility site in New Jersey and also is required to pay the costs of continued
operation of the remediation system. In addition, the Company, pursuant to the
1995 sale of its Commercial Aviation Business, is responsible for the costs of
clean-up of environmental conditions at certain designated sites. Such costs may
include the removal and subsequent replacement of contaminated soil, concrete,
and underground storage tanks, that existed prior to the sale of the Commercial
Aviation Business.
The Company is a party to other civil and contractual lawsuits that have
arisen in the normal course of business for which potential liability, including
costs of defense, constitutes the remainder of the $78.1 million discussed
above. The estimated probable liability for these issues is approximately $10.0
million and is substantially covered by insurance. All of the insured claims are
within policy limits and have been tendered to and accepted by the applicable
carriers. The Company has recorded an offsetting asset (Other Assets) and
liability (Other Liabilities and Deferred Credits) of $10.0 million at December
31, 1998 for these items.
The Company has recorded its best estimate of the aggregate liability that
will result from these matters. While it is not possible to predict with
certainty the outcome of litigation and other matters discussed above, it is the
opinion of the Company's management, based in part upon opinions of counsel,
insurance in force, and the facts currently known, that liabilities in excess of
those recorded, if any, arising from such matters would not have a material
adverse effect on the results of operations, consolidated financial 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 1995
with the exception of two contracts. Reports on several completed audits have
not been issued pending resolution of minor items. The Company has included an
allowance for excess billings and contract losses in its financial statements
that it believes is adequate based on its interpretation of contracting
regulations and past experience. There can be no assurance, however, that this
allowance will be adequate. The Company is aware of various costs questioned by
the government, but cannot determine the outcome of the audit findings at this
time. In addition, the Company is occasionally the subject of investigations by
various investigative organizations, resulting from employee and other
allegations regarding business practices. In management's opinion, there are no
outstanding issues of this nature at December 31, 1998 that will have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
(22) Business Segments
The Company has three reportable segments, Information and Engineering
Technology (I&ET), Aerospace Technology (AT) and Enterprise Management (EM).
These three reportable segments are strategic business units that provide
distinctly different services to a variety of customers. I&ET designs, develops,
supports and integrates software and systems to provide customers with
comprehensive solutions for information management and engineering needs. AT
provides services ranging from aviation maintenance to multifaceted aerospace
sciences, technology and avionics engineering. EM offers a full range of
technical services from facilities management to security systems, ship
operations, the development of work management and maintenance systems and
engineering and logistics services.
The Company evaluates performance based primarily on operating profit, but
also evaluates return on net assets and days' sales outstanding. Operating
profit is the excess of revenues over operating expenses and certain
nonoperating expenses.
The Company derived 95% of its revenues in 1998 and 97% in 1997 and 1996
from contracts and subcontracts with the U.S. Government. Prime contracts
comprised 72% of revenue in 1998 and 1997 and 79% of revenue in 1996. Prime
contracts with the Department of Defense ("DoD") represented 40%, 45%, and 50%
of revenue in 1998, 1997, and 1996, respectively. In 1998, the Company's second
largest customer was the Department of Energy, comprising 17% of revenue. No
other customer accounted for more than 10% of revenues in any year.
Revenue, operating profit, identifiable assets, capital expenditures, and
depreciation and amortization by segment are presented below:
Years Ended December 31,
1998 1997 1996
---- ---- ----
Revenue
I&ET $ 332,550 $ 276,384 $ 265,219
AT 490,240 448,963 383,252
EM 410,917 420,590 372,982
---------- ---------- ----------
$1,233,707 $1,145,937 $1,021,453
========== ========== ==========
Operating Profit
I&ET $ 15,729 $ 11,496 $ 19,994
AT 19,106 16,804 13,451
EM 22,828 20,289 17,728
---------- ---------- ----------
57,663 48,589 51,173
---------- ---------- ----------
Corporate general and administrative 18,630 17,785 18,241
Interest expense 14,144 12,432 10,220
Interest income (1,600) (2,018) (1,752)
Goodwill amortization (a) 1,575 1,560 2,814
Costs associated with divested businesses 530 8,157 825
Minority interest included in operating profit (2,081) (1,439) (1,265)
Termination costs (Note 14) - - 3,299
Acquisition costs 1,336 2,203 1,241
ESOP put premium - - (1,250)
Other miscellaneous (1,566) (1,234) (307)
----------- ----------- ----------
Earnings from continuing operations
before income taxes and minority interest $ 26,695 $ 11,143 $ 19,107
========== ========== ==========
<FN>
(a) 1996 includes write off of the unamortized goodwill balance of an investment
that was impaired.
</FN>
As of December 31,
1998 1997 1996
---- ---- ----
Identifiable Assets
I&ET $ 145,371 $ 118,016 $ 105,363
AT 95,810 75,239 76,681
EM 93,427 70,026 64,637
Other (a) - 51,575 55,093
Corporate 44,630 75,266 66,978
---------- ---------- --------
$ 379,238 $ 390,122 $368,752
========== ========== ========
<FN>
(a) 1997 and 1996 include assets related to probable insurance
indemnification recoveries pertaining to a former subsidiary (see Note
21(a)).
</FN>
Years Ended December 31,
1998 1997 1996
---- ---- ----
Capital Expenditures
I&ET $ 1,443 $ 1,976 $ 3,606
AT 889 885 823
EM 862 740 384
Corporate 1,603 1,509 497
-------- -------- --------
$ 4,797 $ 5,110 $ 5,310
======== ======== ========
Depreciation and Amortization
I&ET $ 3,756 $ 5,651 $ 3,775
AT 1,199 1,349 2,337
EM 1,981 1,432 1,525
Corporate 1,889 1,456 1,830
-------- -------- -------
$ 8,825 $ 9,888 $ 9,467
======== ======== =======
The equity in net income of investees accounted for by the equity method
included in operating profit and the amount of investment in equity method
investees included in identifiable assets for each segment is presented below:
As of December 31,
1998 1997 1996
---- ---- ----
Equity Investees Earnings
AT $ 208 $ 92 $ 17
EM 1,355 1,038 659
-------- --------- ----------
$ 1,563 $ 1,130 $ 676
======== ========= ==========
At December 31,
1998 1997 1996
--------- --------- ---------
Investment in Equity Investees
AT $ 1,696 $ 1,568 $ 1,566
EM 2,440 2,266 230
--------- -------- ----------
$ 4,136 $ 3,834 $ 1,796
======== ======== =========
(23) Quarterly Financial Data (Unaudited)
A summary of quarterly financial data for 1998 and 1997 is as follows:
1998 Quarters 1997 Quarters
--------------------------------------------------------------------------------------------
First Second Third Fourth(a) First Second Third(b) Fourth(c)
Revenues $297,873 $303,602 $316,358 $315,874 $271,137 $288,695 $283,832 $302,273
Gross profit 13,937 15,675 16,297 14,647 11,343 12,321 13,981 12,045
Earnings (loss) from continuing
operations before income taxes,
minority interest and
extraordinary item 4,859 5,853 7,196 8,787 4,005 3,680 6,097 (2,639)
Minority interest 420 528 485 648 408 203 387 441
Net earnings (loss) 2,663 3,195 4,026 5,171 2,311 2,035 4,087 (1,011)
Earnings (loss) per common share:
Basic earnings (loss) per share $ 0.27 $ 0.31 $ 0.39 $ 0.50 $ 0.27 $ 0.23 $ 0.46 $ (0.11)
Diluted earnings (loss) per share $ 0.25 $ 0.30 $ 0.38 $ 0.50 $ 0.21 $ 0.20 $ 0.39 $ (0.11)
<FN>
(a) 1998 Fourth Quarter includes:
- - $2,500 reversal of reserve for contract compliance issues
(b) 1997 Third Quarter includes:
- $2,488 reversal of income tax valuation allowance (see Note 15)
(c) 1997 Fourth Quarter includes:
- $7,800 of costs related to asbestos litigation (see Notes 14 and 21(a))
- $2,055 reversal of accrued interest related to IRS examinations and
potential disallowance of deductions
<FN>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are:
Name Age Position
Dan R. Bannister 68 Director and Chairman of the Board
T. Eugene Blanchard 68 Director
Russell E. Dougherty 78 Director
Paul G. Kaminski 56 Director
Paul V. Lombardi 57 Director, President and Chief Executive Officer*
Dudley C. Mecum II 64 Director
David L. Reichardt 56 Director, Senior Vice President and General Counsel*
Herbert S. Winokur, Jr. 55 Director and Chairman of the Executive Committee
Robert B. Alleger, Jr. 53 Vice President, Technical Services*
John J. Fitzgerald 45 Vice President and Controller*
Patrick C. FitzPatrick 59 Senior Vice President and Chief Financial Officer*
Paul T. Graham 32 Vice President and Treasurer
H. Montgomery Hougen 63 Vice President and Secretary and Deputy General
Counsel
Roxane P. Kerr 50 Senior Vice President, Human Resources and
Administration *
Marshall S. Mandell 56 Senior Vice President, Business Development *
Carl H. McNair, Jr. 65 Vice President, Enterprise Management *
Ruth Morrel 44 Vice President, Law and Compliance
Henry H. Philcox 57 Vice President and Chief Information Officer
Robert G. Wilson 57 Vice President and General Auditor
* Officers designated by an asterisk are deemed to be "officers" for purposes of
Rule 16a-1(f), as promulgated in Release No. 34-28869.
DIRECTORS
Dan R. Bannister Director since 1985
Mr. Bannister, age 68, is Chairman of the Board. He served as President of
the Company from 1984 until 1997 and as Chief Executive Officer from 1985 until
1997. In 1997, he was elected Chairman of the Board; he is an active employee of
the Company. He is a director of ITC Training Corporation. His term as a
director expires in 2001.
T. Eugene Blanchard Director since 1988
Mr. Blanchard, age 68, served as Senior Vice President and Chief Financial
Officer from 1979 to 1997, when he retired as an employee of the Company. He is
the Chairman of the Company's Employee Stock Ownership Plan Committee. He is a
director of Landmark Systems Corporation. His term as a director expires in
2000.
Russell E. Dougherty Director since 1989
General Dougherty, age 78, is a retired attorney, formerly with the law
firm of McGuire, Woods, Battle & Boothe. He is a retired General, United States
Air Force, who served as Commander-in-Chief, Strategic Air Command and Chief of
Staff, Allied Command, Europe. From 1980 to 1986, he served as Executive
Director of the Air Force Association and Publisher of Air Force Magazine. He
was formerly a member of the Defense Science Board; trustee of the Institute for
Defense Analysis; and trustee of The Aerospace Corp. His term as a director
expires in 1999.
Paul G. Kaminski Director since 1997
Mr. Kaminski, age 56, also served as a director of the Company from 1988
until 1994. He is President and Chief Executive Officer of Technovation, Inc.
(consulting and investment banking). He served in the United States Department
of Defense as Under Secretary of Defense for Acquisition and Technology from
1994 to 1997. He was Chairman and Chief Executive Officer of Technology
Strategies & Alliances (strategic partnership consulting) from 1993 to 1994. He
is a director of General Dynamics Corporation. His term as a director expires in
2001. Paul V. Lombardi Director since 1994 Mr. Lombardi, age 57, has served as
President and Chief Executive Officer since 1997. He served as Chief Operating
Officer from 1995 to 1997; as Executive Vice President from 1994 to 1997; as
Vice President 1992 to 1994; as President of Federal Sector 1994 to 1995; and as
President of Government Services Group 1992 to 1994. He was Senior Vice
President and Group General Manager, Planning Research Corporation from 1990 to
1992. He is a director of Avid Medical Systems, Inc. His term as a director
expires in 2000.
Dudley C. Mecum II Director since 1988
Mr. Mecum, age 64, is a Managing Director of Capricorn Holdings LLC (a
private investment company). He was a partner, G. L. Ohrstrom & Co.(an
investment firm) from 1989 to 1997. He served as Group Vice President and
Director, Combustion Engineering, Inc. from 1985 to 1988, and previously as Vice
Chairman, Peat, Marwick & Mitchell. He is a director of Citigroup, Travelers
Property and Casualty Inc., Lyondell, Inc., Vicorp Restaurants Inc., Metris
Companies Inc., CCC Information Services Group, Inc., and Suburban Propane
Partners LLP. His term as a director expires in 2000.
David L. Reichardt Director since 1988
Mr. Reichardt, age 56, has served as Senior Vice President and General
Counsel of the Company since 1986. He served as President of Dynalectric
Company, a former subsidiary of the Company, from 1984 to 1986 and as Vice
President and General Counsel of DynCorp from 1977 to 1984. His term as a
director expires in 2001.
Herbert S. Winokur, Jr. Director since 1988
Mr. Winokur, age 55, served as Chairman of the Board from 1988 to 1997. He
is Chairman and Chief Executive Officer of Capricorn Holdings, Inc. (a private
investment company). He was formerly Senior Executive Vice President and
Director, Penn Central Corporation. He is a director of ENRON Corporation; NAC
Re Corporation; Mrs. Fields Holdings, Inc.; The WMF Group Ltd.; and CCC
Information Services Group, Inc. His term as a director expires in 2001.
OTHER EXECUTIVE OFFICERS
In addition to those executive officers named above, who are included among the
directors, the Company's executive officers include:
Robert B. Alleger, Jr., age 53, Vice President, Technical Services, has served
in that capacity since 1996. He served as President of the Aerospace Technology
strategic business unit from 1996 through 1998 and as President of the Technical
Services sector since January 1, 1999. He was Vice President, Systems Support
Services, Lockheed Martin Services, Inc. from 1992 to 1996 and Vice President,
Business Development, GE Government Services, General Electric Company from 1989
to 1992.
John J. Fitzgerald, age 45, Vice President and Controller, has served in that
capacity since 1997. He was Vice President and Controller, PRC, Inc. from 1992
to 1997; Chief Financial Officer and Treasurer of American Safety Razor Company
from 1990 to 1992; Vice President and Controller of American Bank Stationery
Company from 1988 to 1990; and Chief Financial Officer and Treasurer of
Physician's Pharmaceutical Services, Inc. from 1986 to 1988.
Patrick C. FitzPatrick, age 59, Senior Vice President and Chief Financial
Officer, has served in that capacity since 1997. He also served as
Treasurer from March to November, 1997. He was Chief Financial Officer,
American Mobile Satellite Corporation from 1996 to 1997; Senior Vice
President and Chief Financial Officer of PRC Inc. from 1992 to 1996; and
President and Chief Operating Officer of Oxford Real Estate Management
Services from 1990 to 1992.
Paul T. Graham, age 32, Vice President and Treasurer, has served in that
capacity since 1997. He was Finance Manager of the Company from 1992 to 1994,
Assistant Treasurer from 1994 to 1997, and Director of Finance from 1995 to
1997.
H. Montgomery Hougen, age 63, Vice President and Secretary and Deputy General
Counsel, has served as a Vice President since 1994 and as Corporate Secretary
and Deputy General Counsel since 1984.
Roxane P. Kerr, age 50, Senior Vice President, Human Resources and
Administration, has served in that capacity since March, 1998. She was Director,
Human Resources, North America, LucasVerity Plc from 1993 to 1998 and a private
human resources consultant from 1992 to 1993.
Marshall S. Mandell, age 56, Senior Vice President, Business Development, has
served in that capacity since November 1998. He served as Vice President,
Business Development from 1994 until 1998. He also served as Acting President of
the Information and Engineering Technology strategic business unit from 1997 to
1998. He served as Vice President, Business Development, Applied Sciences Group
from 1992 to 1994. He was Senior Vice President, Eastern Computers, Inc. from
1991 to 1992 and President, Systems Engineering Group, Ogden/Evaluation Research
Corporation from 1984 to 1991.
Carl H. McNair, Jr., age 65, Vice President has served in that capacity since
1994 and served as President of the Enterprise Management strategic business
unit from 1994 until January 1, 1999. He served as President, Support Services
Division from 1990 to 1994. He is a director of Air Methods Corporation.
Ruth Morrel, age 44, Vice President, Law and Compliance, has served in that
capacity since 1994. She served as Group General Counsel from 1984 to 1994.
Henry H. Philcox, age 57, Vice President and Chief Information Officer, has
served in that capacity since 1995. He was Chief Information Officer of the
Internal Revenue Service from 1990 to 1995.
Robert G. Wilson, age 57, Vice President and General Auditor, has served in that
capacity since 1985.
STOCKHOLDERS AGREEMENT
Under the terms of the New Stockholders Agreement (the "Stockholders
Agreement"), which was adopted by substantially all management stockholders and
expires on March 10, 1999, the management stockholders and outside investors who
control approximately 32% of the voting stock on a fully diluted basis agreed to
the following procedure for election of directors. Capricorn Investors, LP
("Capricorn"), an entity under the control of Mr. Winokur, on behalf of itself
and the other outside investors, was entitled to nominate four of the total
number of directors; Company management was entitled to nominate four directors;
and the two groups would agree on a ninth director, for whom all of the parties
have agreed to vote. All of the current directors and the nominees listed above
were initially selected by this process. Effective January 23, 1997, Capricorn
waived its right to nominate directors, but not its obligation to vote in
accordance with the Shareholders Agreement, and Capricorn is no longer a holder
of the Company's stock.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes that all required persons filed all required
reports under Section 16 of the Securities Exchange Act in a timely manner.
Item 11. Executive Compensation
The following table sets forth information regarding annual and
long-term compensation for the chief executive officer and the other four most
highly compensated executive officers of the Company. The table does not include
information for any fiscal year during which a named executive officer did not
hold such a position with the Company.
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------
Long Term
Compensation
Annual compensation Awards
- ---------------------------------------------------------------------------------------------------------------------
Other Securities
annual underlying All other
Name and principal position Salary ($) Bonus compen-sation options/SARs (#) compensation
(a) Year (c) ($) (1) ($) (f) ($) (2)
(b) (d) (e) (i)
- ---------------------------------------------------------------------------------------------------------------------
Paul V. Lombardi 1998 342,104 14,168
President & Chief 1997 332,789 160,000 177 -- 8,148
Executive Officer 1996 279,614 148,000 -- 90,000 11,126
- ------------------------------- -------- ----------- ------------- ------------- ------------------ -----------------
- ------------------------------- -------- ----------- ------------- ------------- ------------------ -----------------
Dan R. Bannister 1998 233,025 259,927
Chairman of the Board 1997 275,481 25,000 174 -- 14,215
(formerly President & 1996 326,105 235,000 -- 100,000 17,397
Chief Executive Officer)
- ------------------------------- -------- ----------- ------------- ------------- ------------------ -----------------
- ------------------------------- -------- ----------- ------------- ------------- ------------------ -----------------
David L. Reichardt 1998 248,947 16,591
Senior Vice President & 1997 245,082 90,000 244 -- 11,578
General Counsel 1996 219,464 99,000 -- 75,000 9,564
- ------------------------------- -------- ----------- ------------- ------------- ------------------ -----------------
- ------------------------------- -------- ----------- ------------- ------------- ------------------ -----------------
Patrick C. FitzPatrick 1998 248,947 10,781
Senior Vice President & 1997 241,933 90,000 -- 100,000 10,900
Chief Financial Officer 1996 -- -- -- -- --
- ------------------------------- -------- ----------- ------------- ------------- ------------------ -----------------
- ------------------------------- -------- ----------- ------------- ------------- ------------------ -----------------
Marshall S. Mandell 1998 212,724 10,739
Senior Vice President, 1997 204,248 73,300 364 -- 9,996
Business Development 1996 179,246 80,000 -- 30,000 9,182
- ------------------------------- -------- ----------- ------------- ------------- ------------------ -----------------
(1) Column (d) reflects bonuses earned and expensed during year, whether
paid during or after such year. 1998 bonuses, to be paid in 1999, have
not been calculated as of the date of this filing. Since 1996, 20% of
executive bonuses have been paid in shares of Common Stock, valued at
then-current market value.
(2) Column (i) includes special one-time payments in the aggregate amount
of $249,536 to Mr. Bannister. Column (i) also includes respective
individual's pro rata share of the Company's contribution to the
Employee Stock Ownership Plan ("ESOP") and Company-matching
contributions to the Savings and Retirement Plan ("SARP") and the
imputed income for Company-paid premiums for life insurance. These
amounts are:
- ----------------------- ------------------------------- ----------------------------- --------------------------------
ESOP contributions ($) SARP contributions ($) Imputed Income ($) (1)
---------------------- ---------------------- ------------------
Name 1998(2) 1997 1996 1998 1997 1996 1998 1997 1996
- ----------------------- ---------- --------- ---------- --------- ---------- -------- ---------- ---------- ----------
Mr. Lombardi 4,320 4,197 5,075 3,000 2,850 900 6,848 1,101 5,151
- ----------------------- ---------- --------- ---------- --------- ---------- -------- ---------- ---------- ----------
Mr. Bannister -- -- 5,075 2,709 3,800 1,250 7,682 10,415 11,072
- ----------------------- ---------- --------- ---------- --------- ---------- -------- ---------- ---------- ----------
Mr. Reichardt 4,320 4,197 5,075 3,125 1,269 913 9,146 6,112 3,575
- ----------------------- ---------- --------- ---------- --------- ---------- -------- ---------- ---------- ----------
Mr. FitzPatrick 4,320 4,197 -- 2,338 1,267 -- 4,122 5,437 --
- ----------------------- ---------- --------- ---------- --------- ---------- -------- ---------- ---------- ----------
Mr. Mandell 4,320 4,197 5,075 2,143 2,361 1,306 4,277 3,438 2,801
- ----------------------- ---------- --------- ---------- --------- ---------- -------- ---------- ---------- ----------
(1) Includes imputed income for premiums paid by the Company for
supplemental executive retirement plan life insurance and term life
insurance, the amount of which is computed according to Internal
Revenue Service tables.
(2) Individual allocation of 1998 ESOP contribution has been estimated.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ------------------------ --------------------------------------------------------------------- ------------------------
Potential realizable
value at assumed
annual rates of stock
price appreciation for
Individual Grants option term
- ------------------------ --------------------------------------------------------------------- ------------------------
Number of Percent of total
securities options/ SARs
underlying granted to Exercise or
options/SARs employees in base price Expiration
Name granted (#) fiscal year ($/Share) date 5% ($) 10% ($)
(a) (b) (c) (d) (e) (f) (g)
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
Mr. Lombardi 0 n/a n/a n/a n/a n/a
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
Mr. Bannister 0 n/a n/a n/a n/a n/a
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
Mr. Reichardt 0 n/a n/a n/a n/a n/a
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
Mr. FitzPatrick 0 n/a n/a n/a n/a n/a
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
Mr. Mandell 40,000 7.8 20.00 3/16/08 377,400 956,100
- ------------------------ ------------------ ------------------- --------------- -------------- ----------- ------------
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
- ----------------------- ----------------- --------------- ------------------------------ -----------------------------
Number of securities
underlying unexercised Value of unexercised
options/SARs at fiscal in-the-money options/ SARs
year-end (#) at fiscal year-end ($)
Shares acquired
on exercise(#) Value Exercisable/ Exercisable/
Name (b) realized ($) Unexercisable Unexercisable
(a) (c) (d) (e)
- ----------------------- ----------------- --------------- ------------------------------ -----------------------------
Mr. Lombardi -- -- 64,000 66,000 222,400 206,600
- ----------------------- ----------------- --------------- --------------- -------------- --------------- -------------
Mr. Bannister -- -- 75,000 90,000 288,900 292,600
- ----------------------- ----------------- --------------- --------------- -------------- --------------- -------------
Mr. Reichardt -- -- 45,000 55,000 151,500 163,500
- ----------------------- ----------------- --------------- --------------- -------------- --------------- -------------
Mr. FitzPatrick -- -- 20,000 80,000 10,000 40,000
- ----------------------- ----------------- --------------- --------------- -------------- --------------- -------------
Mr. Mandell -- -- 17,500 65,000 63,250 75,500
- ----------------------- ----------------- --------------- --------------- -------------- --------------- -------------
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has established a Supplemental Executive Retirement Plan
for certain senior executives, including the five individuals named above,
whereby the individuals (or their beneficiaries) receive payments having an
aggregate amount equal to 150% of the sum of their final annual salary rate plus
their final target annual bonus, paid over the ten-year period following their
normal retirement, disability retirement, and, in some cases, early retirement.
Upon their death following such retirement, the individuals' beneficiaries also
receive an additional aggregate lump-sum payment equal to one-half of the
foregoing amount. In the event of their death prior to retirement, the
individuals' beneficiaries receive, in lieu of the foregoing payments, an
aggregate lump-sum payment equal to 100% of the sum of their final annual salary
rate plus their final target annual bonus. The Company funds some of such
payments through split-dollar life insurance policies.
CHANGE-IN-CONTROL AGREEMENTS
The Company has entered into change-in-control agreements with Messrs.
Lombardi, Reichardt, FitzPatrick, and Mandell (the "Severance Agreements"). Each
Severance Agreement provides that certain benefits, including a lump-sum
payment, will be triggered if the executive is terminated following a change in
control of the Company, unless termination occurs under those circumstances set
forth in the Severance Agreements. A change in control would occur if the
Company were to be substantially acquired by a new owner or if a majority of the
Board of Directors were replaced. The Severance Agreements currently expire on
December 31, 1999 but are subject to annual automatic renewal unless terminated
by the Board of Directors. The amount of such lump-sum payment would be 2.99
times the sum of the executive's annual salary and the average incentive
compensation for the three prior years. Other benefits include payment of
incentive compensation not yet paid for the prior year and a pro rata portion of
incentive compensation awards for the current year. Each Severance Agreement
also provides a reduction if the proposed payments exceed the amount the Company
is entitled to deduct on its federal income tax return. The Severance Agreements
also provide that the Company will reimburse the individual for legal fees and
expenses incurred by the executive as a result of termination.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company receive an annual retainer fee of
$16,500 as directors and $2,750 for each committee on which they serve. The
Company also pays non-employee directors a meeting fee of $1,000 for attendance
at each Board meeting and $500 for attendance at committee meetings. Directors
are reimbursed for expenses incurred in connection with attendance at meetings
and other Company functions.
In 1998, 5,000 stock options, having an exercise price equal to the
then-current fair market value, were awarded to each of Messrs. Blanchard,
Dougherty, Kaminski, and Mecum, pursuant to the Company's 1995 Stock Option
Plan.
DIRECTORS AND OFFICERS LIABILITY INSURANCE
The Company has purchased and paid the premium for insurance in respect
of claims against its directors and officers and in respect of losses for which
the Company may be required or permitted by law to indemnify such directors and
officers. The directors insured are the directors named herein and all directors
of the Company's subsidiaries. The officers insured are all officers and
assistant officers of the Company and its subsidiaries. There is no allocation
or segregation of the premium as regards specific subsidiaries or individual
directors and officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee are current or former
employees of or have a business or other relationship with the Company. No
executive officer of the Company serves on the board of directors or
compensation committee of any entity (other than subsidiaries of the Company)
whose directors or executive officers served on the Board of Directors or
Compensation Committee of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of February 26, 1999, the Company had 10,068,576 shares of Common
Stock outstanding, which constituted all the outstanding voting securities of
the Company. If all shares issuable upon exercise of all vested and unvested
options and shares issuable as a result of expiration of deferrals under a
former Restricted Stock Plan were to be issued, the outstanding voting
securities following such events (the "fully diluted shares") would consist of
11,575,330 shares of Common Stock. The following tables show beneficial
ownership of outstanding voting shares as a percentage of currently outstanding
stock and beneficial ownership of issued and issuable shares as a percentage of
common stock on a fully diluted basis assuming all such exercises and issuances.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table presents information as of February 26, 1999,
concerning the only beneficial owner of five percent or more of the outstanding
shares of the Company's common stock.
------------------------------------------------------- ------------------------- -----------------
Name and address of Amount & nature of Percent of
beneficial owner ownership shares
------------------------------------------------------- -----------------
------------------------------------------------------- ------------------------- -----------------
DynCorp Employee Stock Ownership Plan Trust 7,181,467 71.3%
c/o DynCorp Direct (1)
2000 Edmund Halley Dr.
Reston, VA 20191-3436
------------------------------------------------------- ------------------------- -----------------
(1) The Trust holds these shares for the accounts of approximately 31,600
participants. The Trustees vote the shares in accordance with
instructions received from participants.
SECURITY OWNERSHIP OF MANAGEMENT
The following table presents information as of February 26, 1999,
concerning the beneficial ownership of the Company's common stock by directors
and named executive officers and all directors and officers as a group. Shares
include those held on behalf of the individuals in the ESOP and SARP.
- --------------------------------------- -------------------------------------------------------------- -------------
Amount & nature of ownership
- --------------------------------------- --------------------------------------------------------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
Name and title of beneficial owner Outstanding Obtainable within Total Percent of
shares 60 days (1) shares (2)
- --------------------------------------- ---------------- -------------------- ------------- ----------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
D. R. Bannister 259,605 164,711 424,316 Direct }3.7%
Chairman of the Board & Director 9,702 9,702 Indirect
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
T. E. Blanchard(3) 50,384 46,800 97,184 Direct *
Director 12,631 12,631 Indirect
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
R. E. Dougherty 4,000 0 4,000 Direct *
Director
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
P. C. FitzPatrick 1,372 30,000 31,372 Direct *
Senior Vice President & Chief 3,623 3,623 Indirect
Financial Officer
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
P. G. Kaminski 0 1,000 1,000 Direct *
Director
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
P. V. Lombardi 23,525 78,000 101,525 Direct *
President, Chief Executive Officer & 7,004 7,004 Indirect
Director
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
M. S. Mandell 4,667 25,500 30,167 Direct *
Vice President, Business Development 2,728 2,728 Indirect
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
D. C. Mecum II 2,825 0 2,825 Direct *
Director
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
- --------------------------------------- ---------------- ------------------- -------------- ---------- -------------
D. L. Reichardt 37,657 60,000 97,657 Direct *
Senior Vice President, General 7,423 7,423 Indirect
Counsel & Director
- --------------------------------------- ---------------- ------------------- -------------- ---------- -------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
H. S. Winokur, Jr. 35,639 0 35,639 Direct }3.8%
Director 409,773 409,773 Indirect
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
All directors and officers as a group 476,697 467,811 944,508 Direct }12.5%
503,257 503,257 Indirect
- --------------------------------------- ---------------- -------------------- ------------- ---------- -------------
(1) Column reflects shares issuable upon exercise of vested options and
expiration of deferral periods under former Restricted Stock Plan.
(2) Percentages include aggregate direct and indirect shares. An asterisk
indicates that beneficial ownership is less than one percent of the
class.
(3) Mr. Blanchard disclaims beneficial ownership of 40,000 shares owned by
his spouse.
Item 13. Certain Relationships and Related Information
Mr. Blanchard serves as Trustee and Chairman of the Administrative
Committee for the Company's Employee Stock Ownership Plan. Following his
retirement as Chief Financial Officer in February, 1997, until December, 1997,
he also provided occasional consulting services relating to his former
employment. He is compensated at an hourly fee rate and is reimbursed for
expenses.
Total fees paid in 1998 were $55,650.
General Dougherty was, until the end of 1998, an attorney with the law
firm of McGuire, Woods, Battle & Boothe, which firm has been retained by the
Company from time to time to provide various legal services.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. All financial statements.
2. Financial statement Schedules.
Schedule I - Condensed Financial Information of Registrant
DynCorp (Parent Company)
Balance Sheets
Assets
Liabilities and Stockholders' Equity
Statements of Operations
Statements of Cash Flows
Notes to Condensed Financial Statements
Schedule II - Valuation and Qualifying Accounts for the Years Ended December
31, 1998, 1997 and 1996.
All other financial schedules not listed have been omitted since the required
information is included in the Consolidated Financial Statements or the notes
thereto, or is not applicable or required.
3. Exhibits
Exhibit Description
3.1 Certificate of Incorporation, as currently in effect, consisting of
Amended and Restated Certification of Incorporation (incorporated by
reference to Registrant's Form 10-K/A for 1995, File No. 1-3879)
3.2 Registrant's By-laws as amended to date (incorporated by reference to
Registrant's Form S-1, File No. 1-3879)
4.1 Indenture and supplement, dated April 18, 1997 between Dyn Funding
Corporation (a wholly-owned subsidiary of the Registrant) and Bankers
Trust Company relating to Contract Receivable Collateralized Notes
(incorporated by reference to Registrant's Post-Effective Amendment
No. 1 on Form S-2 to Form S-1, File No. 33-59279)
4.2 Registration Rights Agreement, dated as of March 17, 1997, among the
Registrant, and BT Securities Corporation and Citicorp Securities,
Inc.(incorporated by reference to Registrant's Form S-4,File
No. 333-25355)
4.3 Indenture, dated March 17, 1997, between the Registrant and United
States Trust Company of New York relating to the 9 1/2% Senior Sub-
ordinated Notes due 2007 (incorporated by reference to Registrant's
Form S-4, File No. 333-25355)
4.4 Specimen Common Stock Certificate (incorporated by reference to
Registrant's Form 10-K for 1988, File No. 1-3879)
4.5 Statement Respecting Warrants and Lapse of Certain Restrictions
(incorporated by reference to Registrant's Form 10-K for 1988,
File No. 1-3879)
4.6 Article Fourth of the Amended and Restated Certificate of Incorporation
(incorporated by reference to Registrant's Form 10-K for 1992, File
No. 1-3879)
4.7 Second Amended and Restated Credit Agreement by and among Citicorp
North America, Inc., certain Lenders, and the Registrant dated May
15, 1997 (incorporated by reference to Registrant's Form S-4, File
No. 333-25355)
4.8 Stockholders Agreement (incorporated by reference to Registrant's Form
S-1, File No. 33-59279)
10.1 Deferred Compensation Plan (incorporated by reference to
Registrant's Form 10-K for 1987, File No. 1-3879)
10.2 Management Incentive Plan (incorporated by reference to registrant
Form 10-K for 1997)
10.3 Executive Incentive Plan (incorporated by reference to registrant
Form 10-K for 1997)
10.4 Severance Agreements (incorporated by reference to Exhibits (c)(4)
through (c)(12) to Schedule 14D-9 filed by Registrant January 25,
1988)
10.5 Amendment to Severance Agreement of Paul V. Lombardi, Vice President,
Government Services Group and currently President & Chief Executive
Officer (incorporated by reference to Registrant's Form 10-K for
1993, File No. 1-3879)
10.6 Amendment to Severance Agreement of Patrick C. FitzPatrick, Senior Vice
President and Chief Financial Officer (incorporated by reference to
Registrant's Form 10-K for 1996, File No. 1-3879)
10.7 Amendment to Severance Agreement of David L. Reichardt, Senior Vice
President and General Counsel (incorporated by reference to
Registrant's Form 10-K for 1996, File No. 1-3879)
10.8 Restricted Stock Plan (incorporated by reference to Registrant's Form
10-K/A for 1995, File No. 1-3879)
10.9 1995 Stock Option Plan, as amended (incorporated by reference to
Registrant's Form 10-K for 1997)
21 Subsidiaries of the Registrant (filed herewith)
23 Consent of Independent Public Accountants (filed herewith)
(b) Reports on Form 8-K
December 24, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DYNCORP
March 10, 1999 By:
/s/ Paul V. Lombardi
P. V. Lombardi
President and Chief
Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
P. V. Lombardi President and Director March 10, 1999
/s/ P.V. Lombardi (Chief Executive Officer)
P. C. FitzPatrick Senior Vice President - March 10, 1999
/s/ P.C. FitzPatrick Chief Financial Officer
D. L. Reichardt Senior Vice President - March 10, 1999
/s/ D.L. Reichard General Counsel and Director
J.J. Fitzgerald Vice President and Controller March 10, 1999
/s/ J. J. Fitzgerald (Chief Accounting Officer)
D. R. Bannister Director March 10, 1999
/s/ D.R. Bannister
T. E. Blanchard Director March 10, 1999
/s/ T.E. Blanchard
H. S. Winokur, Jr. Director March 10, 1999
/s/ H.S. Winokur, Jr.
D. C. Mecum II Director March 10, 1999
/s/ D.C. MecumII
R. E. Dougherty Director March 10, 1999
/s/ R.E. Dougherty
P. G. Kaminski Director March 10, 1999
/s/ P.G. Kaminski
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
(Dollars in thousands)
December 31,
1998 1997
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 1,844 $ 18,591
Accounts receivable and contracts in process,
net of allowance for doubtful accounts 79,089 40,694
Inventories of purchased products and supplies 547 548
Other current assets 12,188 10,005
-------- --------
Total current assets 93,668 69,838
Investment in and advances to subsidiaries and affiliates 62,800 80,869
Property and Equipment, net of accumulated depreciation
and amortization 7,706 7,780
Intangible Assets, net of accumulated amortization 29,628 30,775
Other Assets 13,679 8,982
----------- ----------
Total Assets $207,481 $198,244
======== ========
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries
are an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements".
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Balance Sheets
(Dollars in thousands)
December 31,
1998 1997
---- ----
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $23,424 $17,078
Advances on contracts in process 753 661
Accrued liabilities 63,163 71,304
-------- --------
Total current liabilities 87,340 89,043
Long-Term Debt 99,545 99,510
Other Liabilities and Deferred Credits 8,746 12,465
Temporary Equity:
Redeemable Common Stock, at Redemption Value -
ESOP 180,812 151,823
Other 3,049 3,017
Permanent Stockholders' Equity:
Common Stock 498 478
Common Stock Warrants - 1,259
Paid-in Surplus 127,206 125,412
Adjustment for redemption value greater than par value (183,140) (154,138)
Deficit (78,782) (93,837)
Common Stock Held in Treasury (35,640) (28,703)
Unearned ESOP Shares (2,153) (8,085)
---------- ------------
Total Liabilities and Stockholders' Equity $207,481 $198,244
======== ========
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries are
an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements."
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Operations
(Dollars in thousands)
For the Years Ended December 31,
1998 1997 1996
---- ---- ----
Revenues $632,690 $594,379 $588,978
-------- -------- --------
Costs and Expenses:
Cost of services 605,302 570,324 565,582
Corporate selling and administrative 9,363 9,808 11,323
Interest expense 8,991 6,382 1,089
Interest income (12,087) (2,375) (1,162)
Other expense 17,261 27,773 18,373
-------- -------- --------
628,830 611,912 595,205
Loss from continuing operations before
income taxes, and equity in net income of
subsidiaries (3,860) (17,533) (6,227)
Benefit for income taxes (599) (7,709) (3,994)
--------- -------- --------
Earnings (loss) from continuing operations before
equity in net income of subsidiaries 4,459 (9,824) (2,233)
Equity in net income of subsidiaries 10,596 17,246 14,182
-------- -------- ---------
Earnings from continuing operations 15,055 7,422 11,949
Earnings from discontinued operations, net of
income taxes - - 2,680
--------- --------- ---------
Net earnings $ 15,055 $ 7,422 $ 14,629
========== ======== ========
Preferred Class C dividends not declared or recorded - - (2,284)
---------- --------- ---------
Common stockholders' share of earnings $ 15,055 $ 7,422 $ 12,345
========== ========= =========
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries are
an integral part of these statements.
See accompanying "Notes to Condensed Financial Statements."
DynCorp (Parent Company)
Schedule I - Condensed Financial Information of Registrant
Statements of Cash Flows
(Dollars in thousands)
For the Years Ended December 31,
1998 1997 1996
Cash Flows from Operating Activities:
Net earnings $ 15,055 $ 7,422 $ 14,629
Adjustments to reconcile net earnings from operations
to net cash (used) provided by operating activities:
Depreciation and amortization 3,727 3,530 3,600
Payment of income taxes on gain on sale of
discontinued operations - - (13,990)
Loss from discontinued operations - - (2,680)
Deferred income taxes 1,463 1,785 787
Change in reserves of businesses divested in 1988 (1,698) 8,157 825
Other 1,374 (323) (327)
Change in assets and liabilities, net of acquisitions and dispositions:
(Increase) decrease in accounts receivable and
contracts in process (38,395) (16,892) 4,367
Decrease (increase) in inventories 2 363 255
Increase in other current assets (1,883) (1,808) (1,523)
Decrease in current liabilities except notes
payable and current portion of long-term debt (6,396) (7,909) (9,652)
-------- -------- --------
Cash (used) provided by continuing operations (26,751) (5,675) (3,709)
Cash used by discontinued operations - - -
------------ --------- -------------
Cash (used) provided by operating activities (26,751) (5,675) (3,709)
--------- -------- ---------
Cash Flows from Investing Activities:
Sale of property and equipment 327 249 859
Purchase of property and equipment, net of capitalized leases (2,082) (3,464) (1,452)
Cost of software for new core system (5,598) - -
Assets and liabilities of acquired businesses - - (1,707)
Proceeds from sale of discontinued operations - - 3,050
Investing activities of discontinued operations - - -
Increase in investments in affiliates 18,068 (867) -
Decrease (increase) in cash on deposit for letters of credit - - 6,244
Other (1,670) (276) (232)
----------- ----------- --------
Cash (used) provided from investing activities 9,045 (4,358) 6,762
----------- ----------- --------
Cash Flows from Financing Activities:
Treasury stock purchased (6,194) (923) (9,712)
Payment on indebtedness - (722) (842)
Proceeds from issuance of Senior Notes - 99,484 -
Common stock and warrants purchased from investors - (37,819) -
Redemption of Junior Subordinated Debentures - - -
Stock released to Employee Stock Ownership Plan 7,378 5,189 503
Loans to Employee Stock Ownership Plan - (13,274) -
Deferred financing expenses (73) (4,120) (1,310)
Other financing transactions (152) (209) (20)
Change in intercompany balances, net - (41,743) 737
------------ --------- -----------
Cash provided (used) from financing activities 959 5,863 (10,644)
---------- --------- --------
Net (Decrease) Increase in Cash and Short-term Investments (16,747) (4,170) (7,591)
Cash and Short-term Investments at Beginning of the Year 18,591 22,761 30,352
--------- --------- ---------
Cash and Short-term Investments at End of the Year $ 1,844 $ 18,591 $ 22,761
========= ======== ========
The "Notes to Consolidated Financial Statements" of DynCorp and Subsidiaries are
an integral part of these statements. See accompanying "Notes to Condensed
Financial Statements."
DynCorp (Parent Company)
Schedule I - Notes to Condensed Financial Statements
December 31, 1998
(Dollars in thousands except where otherwise noted)
1. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the Condensed Financial Statements of the Registrant do not include
all of the information and notes normally included with financial statements
prepared in accordance with generally accepted accounting principles. It is,
therefore, suggested that these Condensed Financial Statements be read in
conjunction with the Consolidated Financial Statements and Notes included
elsewhere in this Annual Report on Form 10-K.
2. Long-term Debt
At December 31, 1998 and 1997, long-term debt consisted of:
1998 1997
----- ------
9 1/2% Senior Notes, due 2007 $99,546 $99,510
3. Accounts Receivable
The Company's wholly-owned subsidiary, Dyn Funding Corporation ("DFC"), was
established in January, 1992 to facilitate the issuance of $100.0 million of
8.54% Contract Receivable Collateralized Notes and to purchase eligible accounts
receivable from the Company and its subsidiaries. In April 1997, DFC completed a
private placement of $50.0 million of 7.486% Fixed Rate Contract Receivable
Collateralized Notes (the "Notes"). Utilizing the proceeds from the issuance of
the Notes and a portion of the proceeds from the 9 1/2% Senior Notes, the
Company retired the maturing 8.54% Contract Receivable Collateralized Notes. On
an ongoing basis, the cash received by DFC from collection of the receivables is
used to make interest payments on the Notes, pay a servicing fee to the Company
and purchase additional receivables from the Company (see Note 5 to Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K).
The Company receives 97% of the face value of the accounts receivable sold
to DFC. The Company records the 3% discount from the face value of the accounts
receivable as an expense at the time of sale. In 1997 and 1996, the Company
recorded as expense $16.7 million and $17.2 million which is reflected in "Other
Expense" in the accompanying "Statements of Operations" (in the "Consolidated
Statements of Operations" of DynCorp and Subsidiaries this expense is offset by
the gain recognized by DFC).
DynCorp and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
Balance at Charged to Write-off of Balance
Beginning Costs and Uncollectible at End of
Description of Period Expenses Accounts Other Period
Year Ended December 31, 1998
Allowance for doubtful accounts $ 476 $ 900 $(234) $ (16) $1,126
Year Ended December 31, 1997
Allowance for doubtful accounts $ 229 $ 629 $(382) $ - $ 476
Year Ended December 31, 1996
Allowance for doubtful accounts $ 9 $ 120 $ - $ 100 (1) $ 229
(1) Balance recorded at acquisition of Data Management Design, Inc.