UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 25, 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 1-11075
DAMES & MOORE GROUP
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4316617
- --------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
911 Wilshire Blvd., Suite 700, Los Angeles, California 90017
--------------------------------------------------------------
(Address, including Zip Code, of Principal Executive Offices)
(213) 996-2200
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(Registrant's Telephone Number, Including Area Code)
_______________________________________
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
----- -----
As of February 1, 1999, 18,330,254 shares of the registrant's common stock,
$0.01 par value, were issued and outstanding.
Part I. Financial Information
Item 1. Financial Statements
DAMES & MOORE GROUP
Condensed Consolidated Statements of Financial Position
(In thousands, except share and per share amounts)
(Unaudited)
Assets Dec. 25, Mar. 27,
1998 1998
-------- --------
Current:
Cash and cash equivalents $ 16,516 $ 9,493
Marketable securities 471 1,031
Accounts receivable, net of allowance
for doubtful accounts of: $6,115 and $3,408 217,901 135,298
Billed contract retentions 15,341 10,992
Unbilled 96,128 55,844
-------- --------
329,370 202,134
Deferred income taxes 9,076 4,303
Prepaid expenses and other assets 23,639 11,168
Inventories 6,404 -
-------- --------
Total current assets 385,476 228,129
Property and equipment, net 58,403 23,397
Goodwill of acquired businesses, net 149,749 117,849
Investments in affiliates 9,544 4,868
Other assets 32,309 12,118
-------- --------
$635,481 $386,361
======== ========
Liabilities and shareholders' equity
Current:
Current portion of long-term debt $ 15,336 $ 9,614
Accounts payable 51,864 31,990
Accrued payroll and employee benefits 40,440 26,364
Current income taxes payable 8,163 6,864
Accrued expenses and other liabilities 56,401 23,727
-------- --------
Total current liabilities 172,204 98,559
Long-term debt 302,845 132,010
Other long-term liabilities 15,714 5,883
Contingencies
Shareholders' equity:
Preferred stock, $0.01 par value,
shares authorized: 1,000,000
shares issued: none
Common stock and capital in excess of $0.01
par value, shares authorized: 54,000,000
shares issued: 22,781,000 and 22,740,000 108,040 107,512
Retained earnings 97,956 104,952
Treasury stock: 4,451,000 and 4,573,000 (59,373) (61,157)
Accumulated other comprehensive income (1,422) (1,289)
Other shareholders' equity (483) (109)
--------- ---------
Total shareholders' equity 144,718 149,909
--------- ---------
$635,481 $386,361
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
DAMES & MOORE GROUP
Condensed Consolidated Statements of Earnings and Loss
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
--------------------- ---------------------
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1998 1997 1998 1997
--------- --------- --------- ---------
Gross revenues $287,434 $174,974 $740,190 $522,959
Direct costs of
outside services 115,136 56,249 286,101 161,195
--------- --------- --------- ---------
Net revenues 172,298 118,725 454,089 361,764
--------- --------- --------- ---------
Operating expenses:
Salaries and related costs 122,042 82,157 319,467 251,941
General expenses 31,078 21,821 82,978 66,885
Depreciation and amortization 3,695 2,368 8,909 6,785
Amortization of goodwill 1,394 1,135 3,828 3,440
Acquisition related restruct-
uring and other charges - - 28,276 -
--------- --------- --------- ---------
158,209 107,481 443,458 329,051
--------- --------- --------- ---------
Earnings from operations 14,089 11,244 10,631 32,713
Investment and other income 295 190 428 537
Interest expense (5,654) (2,640) (12,896) (7,644)
--------- --------- --------- ---------
Earnings (loss) before
income taxes 8,730 8,794 (1,837) 25,606
Income taxes 3,439 3,641 474 10,617
--------- --------- --------- ---------
Earnings (loss) before
extraordinary item 5,291 5,153 (2,311) 14,989
Extraordinary item (less
applicable income tax
benefit of $1,737) - - (2,850) -
--------- --------- --------- ---------
Net earnings (loss) $ 5,291 $ 5,153 $ (5,161) $ 14,989
========= ========= ========= =========
Cash dividends declared
per share $ 0.03 $ 0.03 $ 0.09 $ 0.09
========= ========= ========= =========
Basic earnings (loss) per share
Earnings (loss) before
extraordinary item $ 0.29 $ 0.29 $ (0.12) $ 0.84
Extraordinary item - - (0.16) -
--------- --------- --------- ---------
$ 0.29 $ 0.29 $ (0.28) $ 0.84
========= ========= ========= =========
Weighted average number
of shares 18,218 17,873 18,244 17,882
========= ========= ========= =========
Diluted earnings (loss) per share
Earnings (loss) before
extraordinary item $ 0.29 $ 0.29 $ (0.12) $ 0.83
Extraordinary item - - (0.16) -
--------- --------- --------- ---------
$ 0.29 $ 0.29 $ (0.28) $ 0.83
========= ========= ========= =========
Weighted average number
of shares 18,299 18,031 18,244 18,040
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
DAMES & MOORE GROUP
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
--------------------
Dec. 25, Dec. 26,
1998 1997
--------- ---------
Cash flows from operating activities:
Net (loss) earnings $ (5,161) $ 14,989
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 13,285 10,472
Non-cash special charges 27,370 -
Loss from equity investments 773 366
Deferred income taxes (3,937) 1,777
Change in assets and liabilities, net of
effects of purchases of businesses:
Marketable securities - 5,984
Accounts receivable (54,562) (23,285)
Prepaid expenses and other assets 316 (377)
Income tax receivable (8,280) (472)
Accounts payable and accrued expenses 15,130 5,631
--------- ---------
Net cash (used in) provided by operating activities (15,066) 15,085
--------- ---------
Cash flows from investing activities:
Purchases of businesses, net of cash acquired (130,556) (13,232)
Purchases of property and equipment (12,970) (6,802)
Investments and other assets (6,362) 8
Proceeds from sales of investments and other property 1,297 6,911
--------- ---------
Net cash (used in) investing activities (148,591) (13,115)
--------- ---------
Cash flows from financing activities:
Repayments on lines of credit (178,534) (21,002)
Debt issuance costs (3,838) -
Proceeds from lines of credit 355,080 21,000
Issuance of common stock 423 245
Stock repurchased (798) (367)
Dividends (1,653) (1,622)
--------- ---------
Net cash provided by (used in) financing activities 170,680 (1,746)
--------- ---------
Net increase in cash and cash equivalents 7,023 224
Cash and cash equivalents, beginning of period 9,493 12,726
--------- ---------
Cash and cash equivalents, end of period $ 16,516 $ 12,950
========= =========
Supplemental disclosures of cash flow information:
Interest paid $ 12,635 $ 9,228
Income tax paid 9,129 9,634
Non cash investing activities - business acquisitions 18,306 2,392
The accompanying notes are an integral part of the condensed consolidated
financial statements.
DAMES & MOORE GROUP
Notes to Condensed Consolidated Financial Statements
(In thousands, except share amounts)
Note 1 - Basis of Presentation:
The accompanying condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and disclosures
included in the Company's 1998 annual report to shareholders and Form 8-K/A
dated July 31, 1998. The condensed consolidated financial statements
include all adjustments (consisting only of normal recurring items) which
management considers necessary to present fairly the financial position of
the Company as of December 25, 1998 and March 27, 1998; and the results of
operations for the three-month periods and the nine-month periods ended
December 25, 1998 and December 26, 1997. Certain items in the prior
year's financial statements have been reclassified to be consistent with
the 1999 fiscal year presentation.
The results of operations for the interim periods are not necessarily
indicative of operating results to be expected for the full year.
Fiscal Year:
The Company uses a 52-53 week fiscal year ending the last Friday in March.
The nine-month periods ended December 25, 1998 and December 26, 1997 were
each comprised of 39 weeks.
Note 2 - Radian Acquisition:
On July 31, 1998, the Company acquired all of the membership interests of
Radian International LLC ("Radian"), a multinational engineering, consulting
and construction firm. The purchase price of $117 million in cash is subject
to a post-closing adjustment. The purchase price in excess of the fair value
of the net assets acquired, plus estimated office closure costs of $2,912,
and severance costs of $2,008 are classified as goodwill and are being
amortized over 40 years.
The following schedule summarizes unaudited pro forma results of operations
as if the acquisition of Radian had occurred at the beginning of fiscal 1998.
Certain adjustments, such as goodwill, increased interest expense and income
tax have been reflected.
Three Months Ended Nine Months Ended
--------------------- --------------------
Dec. 25, Dec. 26, Dec. 25, Dec. 26,
1998 1997 1998 1997
-------- -------- --------- --------
Net revenues $172,298 $158,627 $515,743 $490,414
======== ======== ========= ========
Earnings (loss) before
extraordinary item $ 5,291 $ 1,522 $ (3,858) $ 6,073
======== ======== ========= ========
Earnings per share before
extraordinary item
Basic $ 0.29 $ 0.09 $ (0.21) $ 0.34
======== ======== ========= ========
Diluted $ 0.29 $ 0.08 $ (0.21) $ 0.34
======== ======== ========= ========
Net earnings (loss) $ 5,291 $ 1,522 $ (6,708) $ 6,073
======== ======== ========= ========
Earnings per share
Basic $ 0.29 $ 0.09 $ (0.37) $ 0.34
======== ======== ========= ========
Diluted $ 0.29 $ 0.08 $ (0.37) $ 0.34
======== ======== ========= ========
DAMES & MOORE GROUP
Notes to Condensed Consolidated Financial Statements
(In thousands, except share amounts)
Note 2 - Radian Acquisition: (continued)
The pro forma information is intended to show how the acquisitions might have
affected historical results of operations if the transaction had occurred at
the beginning of the periods presented. The pro forma results are not
necessarily indicative of the periods presented or to be expected in the
future.
The acquisition has been accounted for as a purchase. Results of operations
have been included in the consolidated financial statements from the date of
acquisition.
Note 3 - Acquisition Restructuring and Other Charges:
During the second quarter of fiscal 1999, the Company took a charge for
purchased in-process research and development technology that had not reached
technological feasibility of $15,271. Additionally, the Company began
consolidation of certain facilities and operations primarily as a result of
the Radian acquisition, resulting in a charge of $9,213. This charge
consisted of $2,699 for lease termination, $3,635 for severance costs, and
$2,879 for unamortized goodwill and other costs related to the closure of
certain business units that were operating at a loss and were duplicative of
Radian's capabilities. Other charges also included $3,792 for consolidation
of certain of the Company's operational activities and other job related
costs. Approximately $6,271 remains to be expended at December 25, 1998 to
complete the restructuring.
Note 4 - Inventories:
Inventories at December 25, 1998 consisted of the following:
Raw materials and supplies $2,904
Work-in-progress 2,536
Finished goods 964
-------
Total $6,404
=======
Note 5 - Long-Term Debt:
The funding of the Radian acquisition resulted in the early extinguishment of
the Company's Senior Notes and certain bank lines of credit. Pre-payment
obligations and deferred financing costs resulted in a pretax charge of
$4,587; after the tax benefit of $1,737, the extraordinary charge was
$2,850, or ($.16) per share, basic and diluted.
The Company's amended long-term debt facility includes a term commitment of
$265,000 and a revolving commitment of $75,000. Interest is charged under
several options, including a base rate or at LIBOR, plus the applicable
margin, at the Company's option. Interest is payable quarterly for base
rate borrowings and for LIBOR borrowings the earlier of the last day of the
interest rate period or three months from the first day of the interest
rate period. The agreement contains limitations on additional
indebtedness, sales of assets, acquisitions and capital expenditures, as
well as maintenance of certain financial ratios. The term loan requires
quarterly principal payments commencing on June 30, 1999, with $40,000 of
the unpaid balance due on June 30, 2004 and the remaining unpaid balance
of $94,500 due in full on December 31, 2004. The revolving commitment
matures on June 30, 2004. Furthermore, mandatory principal pre-payments
or commitment reductions are required in the event of the occurrence of
certain transactions, as defined in the agreement.
DAMES & MOORE GROUP
Notes to Condensed Consolidated Financial Statements
(In thousands, except share amounts)
Note 6 - Shareholders' Equity:
During the first three quarters of fiscal 1999, the Company declared
quarterly cash dividends of $0.03 per share on its common stock, totaling
$1,653. Under the Company's Amended and Restated 1991 Long-Term Incentive
Plan, it issued 65,891 shares of Restricted Stock of which 33,110 shares were
from treasury stock and repurchased 6,743 shares of Restricted Stock; and
stock options for 12,873 common shares were exercised.
The Company's Board of Directors authorized the Company to purchase up to
2,500,000 shares of its common stock on the open market. During the first
three quarters the Company reacquired 66,535 shares of its common stock. As
of December 25, 1998, the Company has repurchased 1,913,922 shares and
reissued 1,131,538 shares.
Note 7 - Comprehensive (Loss) Income:
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130 "Reporting of Comprehensive Income", effective with its fiscal year 1999.
SFAS No. 130 established standards for the reporting and display of
comprehensive income and its components. Other comprehensive income of the
Company consists of adjustments in the fair value of marketable securities,
foreign currency translation adjustments, and minimum pension liability
adjustment. SFAS No. 130 does not affect the measurement of the items
included in other comprehensive income; it affects only where those items are
displayed and how they are described.
Comprehensive income is as follows:
Nine Months Ended
----------------------
Dec. 25, Dec. 26,
1998 1997
--------- ---------
Net (loss) earnings $ (5,161) $ 14,989
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gain on marketable securities (252) 34
Foreign currency translation adjustments 47 (478)
Minimum pension liability adjustment 72 -
--------- ---------
(133) (444)
--------- ---------
Comprehensive (loss) income $ (5,294) $ 14,545
========= =========
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in thousands)
From time to time, the Company or its representatives may make forward-looking
statements in this report or elsewhere relating to such matters as anticipated
financial performance, including projections of revenues, expenses, earnings,
liquidity, capital resources or other financial items; business plans,
objectives and prospects; technological developments; Year 2000 readiness;
and similar matters. Forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 frequently are identified
by the use of terms such as "expect", "believe", "estimate", "may", "should",
"will" or similar expressions.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experiences to differ materially from the anticipated
results or other expectations expressed in the forward-looking statements
made by the Company or its representatives. The risks and uncertainties
that may affect the operations, performance, development and results of the
Company's business include the following, among other factors: (a) the
ability to attract and retain qualified professional personnel; (b) potential
liability for engineering services; (c) potential liability for consulting
services relating to toxic and hazardous materials and the ability to insure
such risks; (d) dependence on environmental regulation including decreased
revenues that may result from a reduction in laws, regulations and programs
related to environmental issues or from changes in governmental policies
regarding the funding, implementation or enforcement of such laws,
regulations and programs; (e) increasing competition faced by the Company in
its service areas; (f) periodic fluctuations in general business conditions,
and in demand for the types of services provided by the Company, and
(g) foreign operations which expose the Company to political, economic and
other uncertainties such as fluctuating currency values and exchange
controls of foreign countries.
Acquisitions and Operations
During the first quarter of fiscal year 1999, the Company acquired Signet
Testing Laboratories, Inc., a materials engineering and testing firm focused
on the areas of structural steel and concrete testing and inspections.
During the second quarter of fiscal year 1999, the Company acquired all of
the membership interests of Radian International LLC ("Radian"), a leading
multinational engineering, consulting and construction firm. A number of
smaller acquisitions were also completed during this fiscal year.
All acquisitions have been accounted for as purchases; accordingly, the
difference between the purchase cost and the fair value of the net assets of
acquired businesses are amortized on a straight-line basis over the period of
estimated benefit not exceeding 40 years. Results of operations for all
acquisitions have been included in the consolidated financial statements from
the date of the respective acquisition.
Results of Operations
Third Quarter 1999 Compared with Third Quarter 1998
The Company uses a 52-53 week fiscal year ending the last Friday in March.
The third quarters for both fiscal years 1999 and 1998 were comprised of 13
weeks.
1999 Increase 1998
-------- -------- --------
Net Revenues $172,298 45.1% $118,725
The 45.1% increase in net revenues in the third quarter of fiscal 1999 as
compared to the third quarter of fiscal 1998 is a result of the Company's fiscal
1998 and 1999 acquisitions, which contributed $54,595 of the increase, or 46.0%.
Net revenue growth was experienced in the transportation division; however,
general engineering and consulting and process and chemical engineering
declined.
1999 Increase 1998
-------- -------- --------
Salaries and Related Costs $122,042 48.6% $ 82,157
Salaries and related costs increased by 48.6% in the third quarter of fiscal
1999 as compared to the third quarter of fiscal 1998. Acquisitions completed in
fiscal 1998 and 1999 represent all of the increase. Salaries and related costs
represent 70.8% and 69.2% of net revenues for the third quarters of fiscal 1999
and 1998, respectively.
1999 Increase 1998
-------- -------- --------
General Expenses $ 31,078 42.4% $ 21,821
Acquisitions completed in fiscal 1998 and 1999 accounted for the increase in
general expenses. As a percentage of net revenues, general expenses represent
18.0% and 18.4% of net revenues for the third quarters of fiscal 1999 and fiscal
1998, respectively.
1999 Increase 1998
-------- -------- --------
Depreciation and Amortization $ 3,695 56.0% $ 2,368
Acquisitions completed in fiscal 1998 and 1999 accounted for the increase in
depreciation and amortization. Depreciation and amortization represent 2.1% and
2.0% of net revenues for the third quarters of fiscal 1999 and 1998,
respectively.
1999 Increase 1998
-------- -------- --------
Amortization of Goodwill $ 1,394 22.8% $ 1,135
Amortization of goodwill increased $259 due to fiscal 1998 and 1999
acquisitions; future acquisitions will continue this trend.
1999 Increase 1998
-------- -------- --------
Earnings from Operations $ 14,089 25.3% $ 11,244
The increase in earnings from operations is due to fiscal 1998 and 1999
acquisitions. The Company's operating margin as a percentage of net revenues
were 8.2% and 9.5% for the third quarters of 1999 and 1998, respectively.
1999 Increase 1998
-------- -------- --------
Investment and Other Income $ 295 55.3% $ 190
The increase in investment and other income reflects earnings from fiscal 1999
acquisitions which has been partially offset by losses from the Company's joint
ventures.
1999 Increase 1998
-------- -------- --------
Interest Expenses $ 5,654 114.2% $ 2,640
The Company's funding of acquisitions and joint ventures have been financed with
long-term debt. The Company's borrowings have increased from $139,929 at
December 26, 1997 to $318,181 at December 25, 1998, resulting in higher interest
costs. See "Liquidity and Capital Resources".
1999 Decrease 1998
-------- -------- --------
Income Taxes $ 3,439 (5.6%) $ 3,641
Income taxes as a percentage of earnings before income taxes were 39.4% and
41.4% for the third quarters of 1999 and 1998, respectively. The Company's U.S.
tax returns were finalized in the third quarter of both fiscal years, which
resulted in adjustments to the quarters' tax rate. Additionally, the
acquisition of Radian resulted in lower state taxes during the current period.
1999 Increase 1998
-------- -------- --------
Net Earnings $ 5,291 2.7% $ 5,153
Net earnings as a percentage of net revenues were 3.1% and 4.3% for the third
quarters of 1999 and 1998, respectively. The decrease as a percentage of net
revenues is primarily due to increased interest costs resulting from debt
financing for acquisitions and joint ventures.
First Three Quarters 1999 Compared with First Three Quarters 1998
The Company uses a 52-53 week fiscal year ending the last Friday in March.
The first three quarters for both fiscal years 1999 and 1998 were each
comprised of 39 weeks.
1999 Increase 1998
-------- -------- --------
Net Revenues $454,089 25.5% $361,764
The 25.5% increase in net revenues in the first three quarters of fiscal 1999
as compared to the first three quarters of fiscal 1998 is primarily a result
of fiscal 1998 and 1999 acquisitions, which contributed $96,820 of the
increase, or 26.8%. Growth in net revenues was also experienced in the
transportation and construction divisions, which were offset by declines in
the general engineering and consulting, and process and chemical engineering
divisions.
1999 Increase 1998
-------- -------- --------
Salaries and Related Costs $319,467 26.8% $251,941
Salaries and related costs increased by 26.8% in the first three quarters of
fiscal 1999 as compared to the first three quarters of fiscal 1998.
Acquisitions completed in fiscal 1998 and 1999 represent $70,898 of this
increase, or 28.1%. Staffing has been adjusted based on the net revenue
pattern, which resulted in a net reduction of salaries, bonuses and profit
sharing. Salaries and related costs represent 70.4% and 69.6% of net revenues
for the first three quarters of fiscal 1999 and fiscal 1998, respectively.
1999 Increase 1998
-------- -------- --------
General Expenses $ 82,978 24.1% $ 66,885
Acquisitions completed in fiscal 1998 and 1999 accounted for the increase in
general expenses. As a percentage of net revenues, general expenses represent
18.3% and 18.5% of net revenues for the first three quarters of fiscal 1999
and fiscal 1998, respectively.
1999 Increase 1998
-------- -------- --------
Depreciation and Amortization $ 8,909 31.3% $ 6,785
Fiscal 1998 and 1999 acquisitions were responsible for $2,332 of the increase,
or 34.4% in depreciation and amortization. This increase is offset by a
decline in depreciation and amortization expense for the Company's remaining
assets as they become fully depreciated. Depreciation and amortization
represents 2.0% and 1.9% of net revenues for the first three quarters of
fiscal 1999 and fiscal 1998, respectively.
1999 Increase 1998
-------- -------- --------
Amortization of Goodwill $ 3,828 11.3% $ 3,440
Amortization of goodwill increased due to the Company's fiscal 1998 and 1999
acquisitions; future acquisitions will continue this trend.
1999 Increase 1998
-------- -------- --------
Acquisition Related Restructuring
and Other Charges $ 28,276 100.0% -
See Note 3 to the Condensed Consolidated Financial Statements.
1999 Decrease 1998
-------- -------- --------
Earnings from Operations $ 10,631 (67.5%) $ 32,713
Earnings from operations decreased 67.5% for the first three quarters of
fiscal 1999 as compared to the first three quarters of fiscal 1998 due
primarily to acquisition related restructuring and other charges of $28,276
(see Note 3 to the Condensed Consolidated Financial Statements). The
Company's operating margin as a percentage of net revenues before these
charges was 8.6% and 9.0% for the first three quarters of fiscal 1999 and
fiscal 1998, respectively.
1999 Decrease 1998
-------- -------- --------
Investment and Other Income $ 428 (20.3%) $ 537
The decline in investment and other income is primarily due to a decline in
earnings from the Company's joint ventures.
1999 Increase 1998
-------- -------- --------
Interest Expense $ 12,896 68.7% $ 7,644
The Company's funding of acquisitions, investments and joint ventures have been
financed with long-term debt. Accordingly, interest expense has increased. See
"Liquidity and Capital Resources".
1999 Decrease 1998
-------- -------- --------
Income Taxes $ 474 (95.5%) $ 10,617
Goodwill amortization related to stock acquisitions, not deductible for tax
purposes, coupled with losses from foreign corporations where no tax benefit
has been recognized, has resulted in the Company being in a taxable position
despite its loss before income taxes for the first three quarters of fiscal
1999. Income tax expense as a percentage of earnings before income taxes was
41.5% for the first three quarters of fiscal 1998.
1999 Increase 1998
-------- -------- --------
Extraordinary Item $ 2,850 100.0% -
See Note 5 to the Condensed Consolidated Financial Statements.
1999 Decrease 1998
-------- -------- --------
Net (Loss) Earnings $ (5,161) (134.4%) $ 14,989
The Company's net loss for the first three quarters of fiscal 1999 was
primarily a result of the acquisition related restructuring and other charges
and extraordinary item previously discussed.
Liquidity and Capital Resources
Cash and cash equivalents total $16,516 at December 25, 1998, compared to $9,493
at March 27, 1998. The Company's working capital of $213,272 at December 25,
1998 has grown from $129,570 at March 27, 1998. The primary sources of cash
during the first three quarters of 1998 consisted of funds from the new credit
facilities net of issuance costs and existing borrowings of $172,708. The
primary use of cash in the first three quarters of 1999 consisted of
acquisitions totaling $130,556.
Net cash used by operating activities for the first three quarters of 1999
totaled $15,066 as compared to cash provided of $15,085 for the first three
quarters of 1998. The extraordinary item, acquisition restructuring, and other
charges used cash of approximately $5,508. Estimated income taxes paid for
fiscal 1999 are now a receivable due to the Company's net loss position. The
balance of the use of funds is from growth of accounts receivable in fiscal 1999
from the construction and transportation division which have also experienced
revenue growth and the company's acquisitions. In fiscal 1998, marketable
securities were sold, while none were sold in fiscal 1999.
Investing activities reflects the Company's acquisition and venture programs.
The Company's acquisition of Radian in fiscal 1999 was the largest use of funds
and a significantly larger purchase price than fiscal 1998 acquisitions.
Funding of several ventures was also larger in fiscal 1999 as compared to fiscal
1998.
The new financing obtained by the Company repaid existing indebtedness
and funded the purchase of Radian, provided the funds from financing activities.
The Company has a credit facility of $340,000 in U.S. dollars (see Note 5),
offshore foreign currencies or foreign domestic currencies, and for the issuance
of letters of credit and purchase of foreign currency exchange contracts. As of
December 25, 1998, under these lines, the Company had borrowings and guaranteed
obligations of $317,893, and standby letters of credit totaling $12,877
principally for project performance, advance payment guarantees and the
Company's domestic insurance program.
While the Company anticipates continuing capital requirements to support growth
and diversification of services, management believes cash generated from
operations and the existing debt structure will be sufficient to meet operating
requirements for the foreseeable future.
Year 2000
General. Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. Any programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in the computer shutting down or performing incorrect computations.
As a result, before December 31, 1999, computer systems and software used by
many companies may need to be upgraded to comply with such "Year 2000" problems.
In certain situations, a Year 2000 problem could adversely impact: (a) the
reliability of the company's internal information management systems, such as
accounting systems, e-mail and desktop computers, (b) the physical operation
of systems used by the Company which have embedded technology, such as elevator
and telephone systems, security systems and other physical office infrastructure
or (c) the Company's ability to interface with third parties, such as receiving
payments from customers or supplies from vendors on a timely basis. Such issues
could arise from internal Year 2000 problems in software used by the Company or
from external Year 2000 problems encountered by third parties.
State of Readiness. Two of the Company's three core financial and
administrative software systems have been upgraded to be Year 2000 compliant.
The Company has tested these programs for Year 2000 compliance and both systems
are currently operational. The third core system is the financial and
administrative software system of one of the recently acquired subsidiaries,
Radian. The Company expects to complete the upgrade of this core system and
have the system fully tested and operational by July 1999. All of the Company's
core hardware has also been tested and is Year 2000 compliant.
The Company currently is examining infrastructure issues on an office-by-office
basis. The Company has begun updating its voice and data communication systems
and expects to complete this process by late fall. In the general course of
its business, the Company also has updated and will continue to update its desk-
top software applications. Such updated applications are Year 2000 compliant.
The Company has more than 250 offices worldwide, virtually all of which are
leased. The Company has not reviewed the Year 2000 readiness of the spaces it
leases with each of its landlords. Such problems may include the malfunctioning
of various building systems, including elevators, security systems, and air
conditioning and heating systems.
During the course of 1999, the Company intends to discuss with its major
customers, suppliers and financial institutions the potential impact the Year
2000 issue will have on their systems, including possible delays in receiving
payments from customers resulting from Year 2000 problems affecting such
customers' accounting and payable systems. The Company also intends to
contact its major vendors to assess their Year 2000 readiness. The possible
effects of the Year 2000 issue on these parties are beyond the control
of the Company.
Costs. To date, the Company had incurred external costs of approximately $450
with respect to addressing Year 2000 issues. Much of this cost arises from the
purchase of new hardware and software, which the Company would have purchased as
part of its regular and routine upgrading of systems. The Company is unable to
estimate additional external costs for addressing Year 2000 issues at this time,
other than it expects to spend approximately $800 to update PBX equipment at
its offices. The Company does not know the current internal costs expended on
Year 2000 issues and has not estimated the internal costs of remediation, but
does not expect such costs to be material. The Company plans to assess such
internal costs before the Company's Form 10-K filing in June. While the
Company does not expect the external and internal costs to be material, there
can be no guarantee that such costs will be immaterial, and actual results
could differ materially from those anticipated.
Risks. The Company does not anticipate that the costs of its Year 2000 issues
or the risks to the Company which might arise from the Year 2000 problem are
likely to be material. The risk associated with the Company's third core system
not being compliant, however, is that Radian's financial and administrative
systems will not function causing delays in processing payroll, accounts
receivable and other financial and administrative systems. Similarly, if the
Company's desktop software applications are not compliant, employees will not be
able to use such applications. If the Company's customers are not Year 2000
compliant, the Company risks not being paid on time, and if its suppliers,
vendors and internal voice and data systems are not compliant, the Company risks
not being able to service its customers. However, the Company does not have
control over third parties, and as a result, cannot currently estimate to what
extent future operating results may be adversely affected by the failure of
third parties to successfully address their Year 2000 issues. Problems
encountered by the Company's major customers and suppliers arising from the
Year 2000 issue could have a material adverse effect on the Company's financial
condition, liquidity and results of operations. Additionally, the federal
government is a significant customer of the Company. At this time, the Company
cannot predit the impact on its consolidated financial condition, liquidity and
results of operations of the U.S. federal government's Year 2000 readiness. If
the federal government is unable to make payments due to its Year 2000 problems,
this may have a material impact on the Company's financial condition, liquidity
and results of operations. In addition, if the Company's plans to address the
Year 2000 issue are not successfully or timely implemented, the Company may need
to devote more resources to the process and additional costs may be incurred,
which could have a material adverse effect on the Company's financial condition,
liquidity and results of operations.
Worst Case Scenario. It is not presently possible to describe a reasonably
likely "worst case Year 2000 scenario" without making numerous assumptions.
The Company presently believes that a most likely worst case scenario would make
it necessary for the Company to replace some suppliers or contractors, rearrange
some work plans, or perhaps interrupt some office and field activities.
Assuming this worst case scenario is correct, the Company believes that such
circumstances could have a materially adverse effect on its financial condition
or results of operations.
Contingency Plan. The Company currently does not have contingency plans in
place in the event that it does not complete all of its Year 2000 remediation,
some of its systems are not Year 2000 compliant or some of its major customers
and vendors are not Year 2000 compliant. However, it expects to have completed
sufficient compliance work by the end of the summer and to have sufficient time
to identify those areas for which contingency plans will be necessary, and it
will create those contingency plans as necessary at that time. Any future
contingency plan will be based on its best estimates of numerous factors, which,
in turn, will be derived by relying on numerous assumptions about future events.
However, there can be no assurance that these assumptions or estimates will
have been correctly made, that the Company will have anticipated all relevant
factors or that there will not be increased costs associated with the Company's
Year 2000 problems. Additionally, there can be no assurance that any
contingency plans implemented by the Company would be adequate to meet the
Company's needs without materially impacting its operations, that any such plan
would be successful or that the Company's results of operations would not be
materially and adversely affected by the delays and inefficiencies inherent in
conducting operations in an alternative manner.
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
Not applicable.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 4.1 Amended and Restated Credit Agreement among Dames &
Moore Group, as Borrower, The Several Lenders from Time to Time
Parties Hereto and Canadian Imperial Bank of Commerce, as
Administrative Agent, dated as of October 22, 1998.
Exhibit 27.1 Financial Data Schedule (included only in the
electronic filing).
(b) There have been no reports on Form 8-K filed during the quarter of
which this report on Form 10-Q is being filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAMES & MOORE GROUP
Date: February 2, 1999 /s/ ARTHUR C. DARROW
-----------------------------
Arthur C. Darrow
President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 2, 1999 /s/ MARK A. SNELL
-----------------------------
Mark A. Snell
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 2, 1999 /s/ LESLIE S. PUGET
-----------------------------
Leslie S. Puget
Corporate Controller
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
4.1 Amended and Restated Credit Agreement among Dames & Moore Group,
as Borrower, The Several Lenders from Time to Time Parties Hereto
and Canadian Imperial Bank of Commerce, as Administrative Agent,
dated as of October 22, 1998.
27 Financial Data Schedule, which is included only in the electronic
submission to the Securities and Exchange Commission.