FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 1999 Commission file number 1-3879
DynCorp
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(Exact name of registrant as specified in its charter)
Delaware 36-2408747
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2000 Edmund Halley Drive, Reston, VA 20191-3436
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(Address of principal executive offices) (Zip Code)
(703) 264-0330
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(Registrant's telephone number, including area code)
Former fiscal year - December 31
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(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 11, 1999
----- ------------------------------
Common Stock, $0.10 Par Value 10,022,854
DYNCORP AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED APRIL 1, 1999
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
April 1, 1999 and December 31, 1998 3-4
Consolidated Condensed Statements of Operations for
Three Months Ended April 1, 1999 and April 2, 1998 5
Consolidated Condensed Statements of Cash Flows for
Three Months Ended April 1, 1999 and April 2, 1998 6
Consolidated Statement of Stockholders' Equity 7
Notes to Consolidated Condensed Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I. FINANCIAL INFORMATION
-----------------------------
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
APRIL 1, 1999 AND DECEMBER 31, 1998
(In thousands)
April 1,
1999 December 31,
Unaudited 1998
--------- ------------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 12,377 $ 4,088
Accounts receivable and contracts in process, net 258,302 257,670
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 638 769
Other current assets 17,820 15,775
-------- --------
Total current assets 289,137 278,302
Property and Equipment (net of accumulated
depreciation and amortization of $29,071 in 1999
and $27,538 in 1998) 18,764 18,544
Intangible Assets (net of accumulated amortization
of $50,857 in 1999 and $50,030 in 1998) 62,287 58,796
Other Assets 32,367 23,596
-------- --------
Total Assets $402,555 $379,238
======== ========
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
APRIL 1, 1999 AND DECEMBER 31, 1998
(In thousands, except share amounts)
April 1,
1999 December 31,
Unaudited 1998
--------- ------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes payable and current portion of
long-term debt $ 27,251 $ 8,145
Accounts payable 55,179 66,885
Deferred revenue and customer advances 3,175 2,542
Accrued liabilities 118,991 110,051
-------- --------
Total current liabilities 204,596 187,623
Long-Term Debt 152,090 152,121
Other Liabilities and Deferred Credits 35,231 27,644
Contingencies and Litigation
Temporary Equity:
Redeemable Common Stock -
ESOP Shares, 7,168,510 and 7,082,422 shares
issued and outstanding in 1999 and 1998,
respectively, subject to restrictions 182,835 180,812
Other, 125,714 shares issued and outstanding
in 1998 - 3,049
Stockholders' Equity:
Common Stock, par value ten cents per share,
authorized 20,000,000 shares; issued
5,021,541 shares in 1999 and 4,976,423 shares
in 1998 502 498
Paid-in Surplus 127,216 127,216
Accumulated other comprehensive income (7) (10)
Reclassification to temporary equity for
redemption value greater than par value (182,118) (183,140)
Deficit (74,891) (78,782)
Common Stock Held in Treasury, at cost;
2,168,697 shares in 1999 and 2,005,728 shares
in 1998 (39,556) (35,640)
Unearned ESOP Shares (3,343) (2,153)
--------- ---------
Total Liabilities and Stockholders' Equity $402,555 $379,238
========= =========
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
UNAUDITED
Three Months Ended
------------------
April 1, 1999 April 2, 1998
------------- -------------
Revenues $311,886 $297,873
Costs and Expenses:
Costs of services 295,369 283,936
Corporate general and administrative 5,417 5,267
Interest income (777) (349)
Interest expense 4,054 3,794
Other 235 366
--------- ---------
Total costs and expenses 304,298 293,014
Earnings before income taxes and minority interest 7,588 4,859
Provision for income taxes 2,594 1,776
--------- ---------
Earnings before minority interest 4,994 3,083
Minority interest 1,103 420
--------- ---------
Net earnings $ 3,891 $ 2,663
========= =========
Basic earnings per share $ 0.38 $ 0.27
Diluted earnings per share $ 0.38 $ 0.25
Weighted average number of shares outstanding for
basic earnings per share 10,176 10,000
Weighted average number of shares outstanding for
diluted earnings per share 10,328 10,463
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Three Months Ended
------------------
April 1, 1999 April 2, 1998
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Cash Flows from Operating Activities:
Net earnings $ 3,891 $ 2,663
Adjustments to reconcile net earnings from
operations to net cash provided (used):
Depreciation and amortization 2,310 2,088
Other (142) 536
Changes in current assets and liabilities, net
of acquisitions:
Increase in current assets except cash and
cash equivalents (2,520) (19,280)
Decrease in current liabilities excluding
notes payable and current portion of
long-term debt (2,491) (1,320)
--------- ----------
Cash provided (used) by operating activities 1,048 (15,313)
Cash Flows from Investing Activities:
Sale of property and equipment 13 4
Purchase of property and equipment (1,453) (832)
Assets and liabilities of acquired business - (10,000)
Increases in investment in unconsolidated
affiliates (951) (478)
Capitalized cost of new financial and human
resource systems (4,311) (1,845)
Other (26) 200
-------- ---------
Cash used by investing activities (6,728) (12,951)
Cash Flows from Financing Activities:
Treasury stock purchased (4,149) (50)
Payment on indebtedness (47,456) (161)
Proceeds from borrowings 66,522 20,000
Payment received on Employee Stock
Ownership Plan note 1,057 1,659
Loan to Employee Stock Ownership Plan (2,247) -
Other 242 (80)
------- --------
Cash provided from financing activities 13,969 21,368
Net Increase (Decrease) in Cash and Cash
Equivalents 8,289 (6,896)
Cash and Cash Equivalents at Beginning of
the Period 4,088 24,602
-------- --------
Cash and Cash Equivalents at End of the
Period $12,377 $17,706
======= =======
Supplemental Cash Flow Information:
Cash paid for income taxes $ 1,292 $ 730
======= =======
Cash paid for interest $ 5,568 $ 7,438
======= =======
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
UNAUDITED
Adjustment for Accumulated
Redemption Value Unearned Other
Common Paid-in Greater than Treasury ESOP Comprehensive
Stock Surplus Par Value Deficit Stock Shares Income
------ ------- ---------------- ------- -------- -------- -------------
Balance, December 31, 1998 $ 498 $127,216 $(183,140) $(78,782) $(35,640) $(2,153) $(10)
Employee compensation plans (option
exercises, restricted stock plan,
incentive bonus) 233
Treasury stock purchased (4,149)
Loans to the Employee Stock Ownership Plan (2,247)
Payment received on Employee Stock
Ownership Plan note 1,057
Reclassification to Redeemable Common Stock 4 1,022
Other 3
Net earnings 3,891
----- -------- ---------- --------- --------- -------- ------
Balance, April 1, 1999 $ 502 $127,216 $(182,118) $(74,891) $(39,556) $(3,343) $ (7)
===== ======== ========== ========= ========= ======== ======
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
APRIL 1, 1999
UNAUDITED
Note 1. Basis of Presentation
The unaudited consolidated condensed financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these condensed financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, the unaudited consolidated condensed
financial statements included herein reflect all adjustments (consisting
of normal recurring adjustments) necessary to present fairly the financial
position, the results of operations and the cash flows for such interim
periods. The results of operations for such interim periods are not
necessarily indicative of the results for the full year. Certain amounts
presented for prior periods have been reclassified to conform to the 1999
presentation.
Note 2. Accounts Receivable and Contracts in Process
At April 1, 1999 and December 31, 1998, $114.2 million and $87.9 million,
respectively, of accounts receivable were restricted as collateral for the
7.486% Contract Receivable Collateralized Notes. Additionally, $1.5
million of cash was restricted as collateral for the Notes and has been
included in Other Assets on the accompanying Consolidated Condensed
Balance Sheets at April 1, 1999 and December 31, 1998.
Accounts receivable are net of an allowance for doubtful accounts of
$0.2 million at April 1, 1999 and $1.1 million at December 31, 1998.
Note 3. Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary Equity at
each balance sheet date and consists of the following:
Balance at Balance at
Redeemable April 1, Redeemable December 31,
Shares Value 1999 Shares Value 1998
------ ---------- ---------- ------ ---------- -----------
ESOP Shares 3,382,340 $27.75 $ 93,860 3,382,340 $27.75 $ 93,860
3,786,170 $23.50 88,975 3,700,082 $23.50 86,952
--------- -------- --------- --------
7,168,510 $182,835 7,082,422 $180,812
========= ======== ========= ========
Other Shares 125,714 $24.25 $ 3,049
======= ========
In accordance with the Employee Retirement Income Security Act regulations
and the Employee Stock Ownership Plan ("ESOP") documents, the Company is
obligated, unless the ESOP Trust purchases the shares, to purchase
distributed common stock shares from ESOP participants on retirement or
termination at fair value as long as the Company's common stock is not
publicly traded. However, under the Subscription Agreement with the ESOP
dated September 9, 1988, the Company is permitted to defer put options if,
under Delaware law, the capital of the Company would be impaired as a
result of such repurchase.
In conjunction with the acquisition of Technology Applications, Inc. in
1993, the Company issued put options on 125,714 shares of common stock. 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.
Note 4. Employee Stock Ownership Plan
From time to time, the Company makes collateralized loans to the Employee
Stock Ownership Trust to purchase shares, pay administrative expenses, and
to pay off expiring loans. During the first quarter of 1999, the Company
loaned the ESOP $2.2 million. The unpaid loan balance, reflected as a
reduction of stockholders' equity, was $3.3 million and $2.2 million at
April 1, 1999 and December 31, 1998, respectively. The unpaid loan
balances represented 144,658 shares at April 1, 1999, and 99,309 shares at
December 31, 1998.
Note 5. Income Taxes
The provision for income taxes in 1999 and 1998 is based upon an estimated
annual effective tax rate, including the impact of differences between the
book value of assets and liabilities recognized for financial reporting
purposes and the basis recognized for tax purposes.
Note 6. Earnings Per Share
The following table sets forth the reconciliation of shares for basic EPS
to shares for diluted EPS. Basic EPS is computed by dividing earnings 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
has 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.
Three Months Ended
------------------
April 1, April 2,
1999 1998
-------- --------
Weighted average shares outstanding for
basic EPS 10,176 10,000
Effect of dilutive securities:
Warrants - 341
Stock options 152 122
------ ------
Weighted average shares outstanding for
diluted EPS 10,328 10,463
====== ======
Note 7. Recently Issued Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. ("SOP") 98-5, "Reporting on the
Costs of Start-up Activities," which became 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 adoption of
this statement, effective January 1, 1999, did not have a material impact
on the Company's financial statements.
AICPA SOP No. 98-9, "Software Revenue Recognition," was issued in December
1998. SOP No. 98-9 amends SOP No. 97-2 to require recognition for
multiple-element arrangements by means of the "residual method" in certain
circumstances. The provisions of SOP No. 98-9 that extend the deferral of
certain passages of SOP No. 97-2 became effective December 15, 1998. All
provisions are effective for transactions entered into in fiscal years
beginning after March 15, 1999. Earlier application for financial
statements or information that has not been issued is permitted and
retroactive application is prohibited. SOP No. 98-9 is not expected to have
a material impact on the Company's consolidated results of operations or
financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. 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.
Note 8. Business Segments
Effective January 1, 1999, DynCorp realigned its three Strategic Business
Segments into two focused sectors. The Company's Information and
Engineering Technology Unit and most of its Enterprise Management Unit were
combined to become DynCorp Information and Enterprise Technology. Aerospace
Technology and the remaining parts of Enterprise Management were combined
to become DynCorp Technical Services. The purpose of this realignment was
to provide focus and clarity to the Company's businesses and enable the
Company to better serve its customers by concentrating technical services
and information technology competencies in individual single business unit
structures. Information for business segments for the first quarter of 1998
has been restated to give effect to this change.
Revenues, operating profit and identifiable assets for the Company's two
business segments for the first quarter of 1999 and the comparable period
for 1998 are presented below:
Three Months Ended
------------------
April 1, April 2,
1999 1998
-------- --------
Revenues
--------
DynCorp Information and Enterprise Technology $155,456 $151,799
DynCorp Technical Services 156,430 146,074
-------- --------
$311,886 $297,873
======== ========
Operating Profit (a)
--------------------
DynCorp Information and Enterprise Technology $ 8,970 $ 7,939
DynCorp Technical Services 6,960 5,560
-------- --------
15,930 13,499
Corporate general and administrative 5,417 5,267
Interest income (777) (349)
Interest expense 4,054 3,794
Goodwill amortization 393 393
Minority interest included in operating profit (1,103) (420)
Amortization of intangibles of acquired companies 384 324
Other miscellaneous (26) (369)
--------- ---------
Earnings from continuing operations
Before income taxes and minority interest $ 7,588 $ 4,859
========= =========
April 1, December 31,
1999 1998
-------- ------------
Identifiable Assets
-------------------
DynCorp Information and Enterprise Technology $188,737 $193,094
DynCorp Technical Services 148,250 141,514
Corporate 65,568 44,630
-------- --------
$402,555 $379,238
======== ========
(a) Defined as the excess of revenues over operating expenses and certain
nonoperating expenses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of DynCorp and its subsidiaries
(collectively, the "Company"). The discussion should be read in conjunction with
the interim condensed consolidated financial statements and notes thereto and
the Company's annual report on Form 10-K for the year ended December 31, 1998.
Results of Operations
- ---------------------
The Company provides diversified management, technical and professional services
to primarily U.S. Government customers throughout the United States of America
and internationally. The Company's customers include various branches of the
Department of Defense, 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. The following discusses
the Company's results of operations for the three months ended April 1, 1999 and
the comparable period for 1998.
Revenues and Operating Profit
- -----------------------------
Revenues for the first quarter of 1999 were $311.9 million, compared to $297.9
million for the comparable period in 1998, an increase of $14.0 million or 4.7%.
Operating profit, defined as the excess of revenues over operating expenses and
certain non-operating expenses, was $15.9 million for the first quarter of 1999,
compared to $13.5 million for the first quarter of 1998, an increase of $2.4
million, or 17.8%.
DynCorp Information and Enterprise Technology reported revenues of $155.5
million for the first quarter of 1999 compared to $151.8 million for the same
quarter in 1998, an increase of $3.7 million or 2.4%. Operating profit increased
by $1.1 million to $9.0 million, or 13.9% from $7.9 million in the first quarter
of 1998. The increase in revenues in the first quarter of 1999 compared to the
first quarter of 1998 resulted from higher volume of state contract business,
increased volume on a contract with the U.S. Postal Service, and increased
tasking and performance of indefinite delivery/indefinite quantity ("IDIQ")
contracts for the Department of Defense, the General Services Administration,
and the Health Care Finance Administration. Also contributing to the revenue
increase was the impact of full quarter results for FMAS, a medical outcome
measurement and data abstraction services company acquired in February 1998.
Partially offsetting these increases in revenues was the loss in a recompetition
of significant portions of the work scope of an enterprise contract at the DoE
Rocky Flats location, and a reduction in the level of services on an enterprise
contract at the Hanford location due to funding cutbacks.
DynCorp Information and Enterprise Technology has been notified that two
contracts are being terminated for convenience by the customer. These contracts
are expected to end during the second quarter. Revenue and operating profit for
these two contracts during the first quarter were $12.4 million and $0.8
million, respectively. It is management's opinion that new business and growth
of existing business will replace the revenue loss. The expected net profit from
these contracts was not significant.
DynCorp Information and Enterprise Technology's increase in operating profit,
first quarter 1999 vs. first quarter 1998, resulted from increased profits on
the aforementioned state contracts, the contract with the U.S. Postal Service,
and improved profitability on previously awarded IDIQ contracts. Also
contributing was increased profits on an Immigration and Naturalization Service
contract. These increased profits more than offset the decrease in profits from
the loss of an enterprise contract at the Rocky Flats location.
DynCorp Technology Services first quarter 1999 revenues were $156.4 million
compared to $146.1 million for the first quarter of 1998, an increase of $10.3
million, or 7.1%. Operating profit increased by $1.4 million to $7.0 million, or
25.0% from $5.6 million in the first quarter of 1998. The increase in revenues
resulted from increased level of effort on a contract providing technical and
support services for the United States Air Force at Columbus AFB, which was
awarded late in 1998 but was fully operational in the first quarter of 1999,
growth in two State Department contracts with Qatar and Kuwait, and increases in
the purchase of reimbursable materials.
DynCorp Technology Services' increase in operating profit first quarter 1999 vs.
first quarter 1998 resulted from the increased level of effort on the United
States Air Force contract and the growth in the State Department contracts. Also
contributing to the higher operating profits, were no bid and proposal costs at
Fort Rucker in the first quarter of 1999 vs. the first quarter of 1998. Fort
Rucker was won in a recompetition in 1998.
Cost of Services
- ----------------
Cost of Services for the first quarter 1999 was 94.7% of revenue as compared to
95.3% for the comparable period in 1998. This resulted in gross margins of $16.5
million for the first quarter of 1999 as compared to $13.9 million for the first
quarter of 1998. The same contract wins and losses that affected revenues and
operating profits similarly effected gross margin.
Corporate General and Administrative
- ------------------------------------
Corporate general and administrative expense for the first quarter of 1999 was
$5.4 million, compared to $5.3 million for the comparable period in 1998, an
increase of $0.1 million. The slight increase in the first quarter corporate
general and administrative expense primarily resulted from the Company's design
and development of new financial and human resource software packages as
described below under Year 2000.
Interest Expense
- ----------------
Interest expense was $4.1 million in the first quarter of 1999, up from $3.8
million in the first quarter of 1998. The increase was principally due to
additional borrowings in 1999 from the utilization of the Company's line of
credit. The additional borrowings were primarily used to fund the Company's
working capital needs.
Income Taxes
- ------------
The provision for income taxes in 1999 and 1998 is based upon an estimated
annual effective tax rate, including the impact of differences between the book
value of assets and liabilities recognized for financial reporting purposes and
the basis recognized for tax purposes. The provision for income taxes increased
by $0.8 million for the three months ended April 1, 1999 from the comparable
period in 1998 as a result of the increase in 1999 pre-tax income. The Company's
effective tax rate approximated 40% for the three months ended April 1, 1999.
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 April 1, 1999, unchanged from December
31, 1998. The backlog at April 1, 1999 consisted of $2.1 billion for DynCorp
Technical Services and $2.0 billion for DynCorp Information and Enterprise
Technology compared to December 31, 1998 backlog of $2.0 billion for DynCorp
Technical Services and $2.1 billion for DynCorp Information and Enterprise
Technology. The Company has been awarded significant indefinite delivery,
indefinite quantity ("IDIQ") contracts with GSA and NASA to provide
comprehensive desktop computer, server and intra-center communication support.
The Company's backlog at April 1, 1999 does not include any significant value
for these contracts because the Company cannot reasonably estimate the future
revenues from these contracts.
Working Capital and Cash Flow
- -----------------------------
Working capital, defined as current assets less current liabilities, was $84.5
million at April 1, 1999 compared to $90.7 million at December 31, 1998, a
decrease of $6.2 million. This decrease was primarily the result of the
additional borrowings against the Contract Receivable Collateralized Class B
Variable Rate Note.
Cash provided by operations was $1.0 million in the first three months of 1999,
as compared to $15.3 million cash used the same year-ago quarter. During the
first quarter of 1998, the implementation of a new procedure for payment by the
Defense Finance and Accounting Service ("DFAS") caused significant delays in
payment on certain of the Company's contracts with the Defense Department. As
the implementation at DFAS progressed, delays in payments have become less
significant. This event was primarily responsible for the change in operating
cash for the first quarter of 1999 compared to the first quarter of 1998.
Investing activities used funds of $6.7 million in the three months ended April
1, 1999 principally for the purchase of property and equipment, and the
capitalized cost of new software for internal use as part of the Company's Year
2000 plan. The Company has capitalized $11.6 million of internal use software
and anticipates capitalizing another $1.1 million over the next nine months.
During the first three months of 1998, investing activities used funds of $13.0
million, principally for the acquisition of FMAS and for the purchase of new
software for internal use.
Financing activities provided net funds of $14.0 million in the first quarter of
1999, which consisted primarily of additional borrowing against the Contract
Receivable Collateralized Class B Variable Rate Note, as described above. The
proceeds were used to make a loan to the Employee Stock Ownership Plan, to fund
the Company's purchase of common stock from investors, and to finance working
capital needs. During the first quarter of 1998, financing activities provided
funds of $21.4 million which consisted primarily of $20.0 million borrowed
against the Contract Receivable Collateralized Class B Variable Rate Note to
finance working capital needs.
The Company expects to acquire additional shares of its stock from ESOP stock
puts and other investors during the remainder of the year. The amounts of stock
purchases is dependent upon the number of puts exercised, the amount of excess
sellers vs. buyers, if any, in the Company's internal market, and limitations on
stock repurchases in the Company's debt agreements.
Earnings before Interest, Taxes, Depreciation, and Amortization
- ---------------------------------------------------------------
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA") as
defined by management, consists of net earnings before income tax provision, net
interest expense, and depreciation and amortization. EBITDA represents a measure
of the Company's ability to generate cash flows and does not represent net
income or cash flows from operating, investing and financing activities as
defined by generally accepted accounting principles ("GAAP"). EBITDA is not a
measure of performance or financial condition under GAAP, but is presented to
provide additional information about the Company to the reader. EBITDA should be
considered in addition to, but not as a substitute for, or superior to, measure
of financial performance reported in accordance with GAAP. EBITDA has been
adjusted for the amortization of deferred debt expense and debt issue discount
which are included in "interest expense" in the Consolidated Statements of
Operations and included in "amortization and depreciation" in the Consolidated
Statements of Cash Flows. Readers are cautioned that the Company's definition of
EBITDA may not necessarily be comparable to similarly titled captions used by
other companies due to the potential inconsistencies in the method of
calculation. The following presentation represents the Company's computation of
EBITDA (in thousands):
Three Months Ended
------------------
April 1, April 2,
1999 1998
-------- --------
Net earnings $ 3,891 $2,663
Depreciation and amortization 2,310 2,088
Interest expense, net 3,277 3,445
Income taxes 2,594 1,776
Amortization of deferred debt expense (186) (177)
Debt issue discount (9) (8)
-------- -------
EBITDA $11,877 $9,787
======== =======
Year 2000 Readiness Disclosure
- ------------------------------
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).
A Year 2000 analysis of the Company's core financial, human resources and
payroll systems software was conducted in 1997. The software packages were found
to be non-compliant, prompting a replacement of these packages. The
implementation of the replacement package is underway with a projected
completion date of July 1999 for human resources and payroll and December 1999
for the financial systems. Deployment of the new human resources and payroll
systems was completed for the DTS strategic business area in January 1999. Total
capitalized expenditures for the resystemization effort were $11.6 million as of
April 1, 1999. The Company anticipates additional capitalized expenditures of
$1.1 million for the remainder of 1999.
In the event the replacement of core systems cannot be completed before the end
of the fourth quarter of 1999, a contingency plan has been activated to install
an updated compliant version of the Company's current financial software package
in all locations that may not be converted by year-end. Six conversions have
already been completed, and the remaining conversions will be completed by the
fall of 1999.
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 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. 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. Efforts have been started by the Company to
assess this issue. A letter received in late December from the DFAS office in
Arlington, Virginia stated that 77% of the payment offices are Y2K compliant,
with 100% compliance expected by March 31, 1999. A recent check of the DFAS web
site indicated that May 31, 1999 is the target date for full compliance for all
DoD payment systems and contingency plans are being developed to assure that Y2K
does not adversely affect DFAS' ability to make payments.
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.
No major problems have yet been identified that would materially affect the
Company's ability to perform on any of its significant contracts.
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.
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 being executed 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 Manager and
chaired by the Corporate Chief Information Officer acts as a Y2K steering
committee. 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. Once the assessments of contracts and tasks that represent some 80% of
company revenue are completed and evaluated, appropriate "what-if" scenarios and
contingency planning will begin.
Forward Looking Statements
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This Form 10-Q 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 provision 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.
PART II - OTHER INFORMATION
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ITEM 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
Exhibit 3.2 - Registrant's by-laws as amended to date.
(b) Reports on Form 8-K
On February 26, 1999, the Company filed a report on Form 8-K reporting item
8, "change in fiscal year".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNCORP
Date: May 13, 1999 /s/ P. C. FitzPatrick
---------------------------
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: May 13, 1999 /s/ J. J. Fitzgerald
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J.J. Fitzgerald
Vice President
and Corporate Controller