DYNCORP

 

 

Filing Type: 

10-K

Filing Date:

Mar 29 2000

 

 

Ticker:

 

CIK

30770

State:

VA

Country:

USA

 

 

Date Printed:

Dec 6 2000

 

 

 

 

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 30, 1999 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)

11710 Plaza America Drive, Reston, Virginia                   20190

(Address of principal executive offices)                    (Zip Code)

 

Registrant's telephone number, including area code:  (703) 261-5000

 

Former address:  2000 Edmund Halley Drive, Reston, Virginia  20191

 

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 7% 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.  10,413,708  shares of common stock having a par value of $0.10 per share were outstanding March 28, 2000.

 

 

 

 

 

TABLE OF CONTENTS

 

1999

 

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          6-14

    8. Financial Statements and Supplementary Data

       Report of Independent Public Accountants   15

       Financial Statements

          Consolidated Balance Sheets

Assets                                                   16

Liabilities and Stockholders' Equity                     17

          Consolidated Statements of Operations    18

          Consolidated Statements of Cash Flows   19

          Consolidated Statements of Stockholders' Equity    20

          Notes to Consolidated Financial Statements  21-37

    9. Changes in and Disagreements with Accountants on

          Accounting and Financial Disclosures         37

 

       Part III

 

    10.Directors and Executive Officers of the Registrant    38-40

    11.Executive Compensation                           40-43

    12.Security Ownership of Certain Beneficial Owners and 

       Management                                              43-44

    13.Certain Relationships and Related Transactions        44

 

       Part IV

 

    14.Exhibits, Financial Statement Schedules, and Reports on 

       Form 8-K                                                   45-48

 

 

 

PART I

 

ITEM 1. BUSINESS

 

General Information

 

DynCorp and  subsidiaries  (collectively  the  "Company")  provides  diversified management, technical and professional services  primarily  to  U.S.  Government customers  throughout   the  United  States  and  internationally.  The  Company provides services to various branches of  the  Department  of  Defense,  Energy, State,  Justice,  and  Agriculture, the  Drug  Enforcement Agency, the National  Institute of  Health,  the  Defense  Information  Systems  Agency, the  National Aeronautics and Space Administration and various other  U.S.,  state  and  local government agencies, commercial  clients  and  foreign  governments.  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.  These services encompass a wide range of management, technical and professional  services  covering  the  following areas:

 

       DynCorp Information and Enterprise Technology ("DI&ET"), based in Reston,

       Virginia,   designs,  develops,  supports  and  integrates  software  and

       hardware systems to provide  customers with  comprehensive  solutions for

       information management and engineering needs. DI&ET provides a wide range

       of information  technology  solutions  including  information  technology

       ("IT")  lifecycle  support,  electronic  records  and  media  management,

       network  and  communications  engineering,  seat  management,   metrology

       engineering,   operational   outsourcing,   healthcare   information  and

       technology services and security and intelligence programs.  Revenues for

       fiscal  years ended 1999,  1998,  and 1997 were  $635.9  million,  $633.1

       million, and $553.3 million, respectively.

 

       DynCorp Technical Services ("DTS"),  based in Fort Worth, Texas, delivers

       a myriad of specialized  technical  services including aviation services,

       base  operations,   range  technical  services,   contingency   services,

       international  program,  space and re-entry  system  services,  logistics

       support  services,  personal  and physical  security  services and marine

       services.  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 1999, 1998, and 1997 were $695.5 million,  $600.6 million, and $592.6

       million, respectively.

 

       DynCorp  Information Systems LLC ("DIS"),  based in Chantilly,  Virginia,

       provides a broad  range of  integrated  telecommunications  services  and

       information  technology solutions in the areas of professional  services,

       business systems integration, information infrastructure solutions and IT

       operations  and  support.  DIS  is  DynCorp's   full-service   voice/data

       integrator  and has an established  business base in the Federal  defense

       and  civil  markets.  DIS was  acquired  on  December  10,  1999 from GTE

       Corporation.  Revenue for the twenty days ended  December 30,  1999,  was

       $13.9 million and was included in the Company's  consolidated  results of

       operations.  Full year revenues,  which are not included in the Company's

       results of operations except for the portion representing the twenty days

       ended  December 30, 1999,  as noted above,  were $221.6  million,  $233.6

       million, and $209.4 million, for 1999, 1998 and 1997, respectively.

 

 

 

Industry Segments

 

For business segment  reporting,  DI&ET, DTS and DIS 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 $4.4  billion at  December  30,  1999,  compared  to December 31, 1998 backlog of $4.1 billion,  a net increase of $0.3 billion.  The increase resulted primarily from the acquisition of GTE Information Systems LLC. The backlog at December 30, 1999 consisted of $2.2 billion for DTS, $1.7 billion for DI&ET,  and $0.5  billion for DIS  compared to December  31, 1998 backlog of $2.0  billion  for DTS and $2.1  billion  for  DI&ET.  Of the total  backlog  at December 30, 1999, $3.0 billion is expected to produce  revenues after 2000: DTS $1.5 billion, DI&ET $1.2 billion, and DIS $0.3 billion.

 

Contracts with the U.S. Government are generally written for periods of three to five years with a few Federal contracts 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 in unexercised  contract  options.  Historically,  these  adjustments have not been significant. In 1999, 98.9% of the Company's prime contract revenue was from the U.S. Government, 54.1% 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  30,  1999 does not  include any value for these contracts, except for one  contract  under  GSA, 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

 

The Company  currently  provides  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  relating 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  19,000 employees worldwide,  the Company is one of the largest employee-owned companies in the United States.

 

Employees

 

At December 30, 1999, the Company  employed 17,713 full-time and 1,554 part-time employees.  Approximately  3,163  employees  were located  outside of the United States.  Of  the  Company's  U.S.  employees,  3,671  were  covered  by  various collective bargaining agreements with labor unions.

 

At year-end,  the Company had approximately 497 vacant positions,  a majority of which was for 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

 

Certain  matters  discussed  or  incorporated  by  reference  in this report are forward-looking  statements  within the meaning of the federal  securities laws. Although  the  Company  believes  that  the   expectations   reflected  in  such forward-looking  statements are based upon reasonable assumptions,  there can be no assurance that its  expectations  will be achieved.  Factors that could cause actual  results to differ  materially  from the Company's  current  expectations include the early  termination  of, or failure of a customer to exercise  option periods under, a significant contract;  the inability of the Company to generate actual customer orders under indefinite delivery, indefinite quantity contracts; technological  change;  the  inability of the Company to manage its growth or to execute its internal performance plan; the inability of the Company to integrate the  operations  of  acquisitions;  the  inability of the Company to attract and retain  the  technical  and other  personnel  required  to perform  its  various contracts;  general economic conditions;  and other risks discussed elsewhere in this report and in other filings of the Company with the Securities and Exchange Commission.

 

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  leases  numerous commercial  facilities used in connection with the various services  rendered to its customers.  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.

 

On February 29, 2000, the Company sold an office building located in Alexandria, Virginia  to a third party for $10.5  million,  and  simultaneously  closed on a lease of that property from the new owner. The Company used a portion of the net proceeds to payoff the mortgage on the property.

 

ITEM 3. LEGAL PROCEEDINGS

 

This item is  incorporated  herein by reference  to Note 20 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 1999.

 

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 which have been  registered  for such sale 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 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. The Company may, but is not required to, purchase  shares  offered for sale in the  Internal  Market,  to the extent the number of  shares  offered  exceeds the number sought to be purchased.  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

    April 1, 1999                   23.50                  1.21

    July 1, 1999                    24.50                  1.21

    September 30, 1999       24.00                  1.08

    December 30, 1999        23.50                  1.11

 

 The price at December 30, 1999 is based on third quarter data and has not been  revised to reflect the current valuation.  The ESOP valuation price was $22.75.

 

 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 722 record holders of DynCorp common stock at December 30, 1999. The DynCorp  Employee Stock Ownership Plan Trust owns 7,451,989 shares on behalf of  approximately  33,000 current and former employees of the Company. In addition,  the Company's  Savings and Retirement  Plan holds 763,758  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.)  Reference  to "note" are the footnotes to the audited consolidated financial statements.

 

 

                                                                     Fiscal Year Ended

 

                                                  Dec 30         Dec 31       Dec 31          Dec 31    Dec 31

                                                  1999 (a)       1998(b)      1997(c)        1996(d)    1995(e)

                                                  --------       -------      -------        -------    -------  

 

Statement of Operations Data:

Revenues                                          $1,345,281   $1,233,707  $1,145,937    $1,021,453     $908,725

Cost of services                                  $1,280,239   $1,173,151  $1,096,246    $  970,163     $871,317

Corporate general and administrative              $   21,741   $  18,630   $   17,785    $   18,241     $ 18,705

Interest expense                                  $   18,943   $  14,144   $   12,432    $   10,220     $ 14,856

Earnings from continuing operations

  before extraordinary item and certain

  other expenses (f)                              $    9,487   $  15,585   $   15,579    $   12,774    $  12,974

Earnings from continuing operations

  before extraordinary item (g)                   $    7,590   $  15,055   $    7,422    $   11,949    $   5,274

Net earnings                                      $    5,989   $  15,055   $    7,422    $   14,629    $   2,368

Common stockholders' share of net  earnings       $    5,895   $  15,055   $    7,422    $   12,345    $     453

EBITDA (h)                                        $   42,112   $  45,226   $   29,274    $   34,948    $  17,841

Earnings per share from continuing

  operations before extraordinary

  item for common stockholders

    Basic                                         $     0.75   $    1.47   $     0.83    $    1.14     $    0.40

    Diluted                                       $     0.73   $    1.43   $     0.70    $    0.82     $    0.29

Common stockholders' share of net earnings

    Basic                                         $     0.59   $    1.47   $     0.83    $    1.46     $    0.05

    Diluted                                       $     0.57   $    1.43   $     0.70    $    1.05     $    0.04

Balance Sheet Data:

Total assets                                      $  639,673   $  379,238  $  390,122    $ 368,752     $ 375,490

Long-term debt excluding current maturities       $  334,944   $  152,121  $  152,239    $ 103,555     $ 104,112

Redeemable common stock                           $  189,116   $  183,861  $  154,840    $ 139,322     $ 135,894

 

[FN]

 

(a)    1999 includes  reversal of $2,000  reserve for  favorable  resolution of

         contract compliance issues,  $4,387 for the replacement of core systems,

         DIS in-process R&D write-off $6,400,  settlement of a suit with a former

         electrical  subcontractor $2,200 (see Notes 13 and 20(a)), and write-off

         of cost in excess of net  assets  acquired  of  consolidated  subsidiary

         $1,234.

 

(b)    1998  includes  reversal of $670  reserve for asbestos  litigation  (see

         Notes 13 and 20(a)), $1,177 accrual for subcontractor suit (see Notes 13

         and 20(a)),  reversal of $2,500 reserve for contract  compliance issues,

         and $2,159 expense for the replacement of core systems.

 

(c)    1997 includes  $7,800  accrual of costs  related to asbestos  litigation

         (see  Notes 13 and  20(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 14).

 

(d)    1996 includes  $3,299  accrual for  supplemental  pension and other fees

         payable to  retiring  officers  and a member of the Board of  Directors,

         $1,286  write-off  of  cost  in  excess  of net  assets  acquired  of an

         unconsolidated  subsidiary,  $1,250 credit for a revised estimate of the

         ESOP Put Premium and $4,067 reversal of income tax valuation allowance.

 

(e)    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.

 

(f)     Certain  other  expenses  include costs and expenses  associated  with

         divested  businesses of $1,897 in 1999,  $530 in 1998, $8,157 in 1997,

         $825 in 1996, and $7,700 in 1995, (see Note 13).

 

(g)    The  extraordinary loss, net of income taxes, in 1999 and 1995 of $1,601

         and $2,886, respectively, resulted from the early extinguishment of 

         debt.

 

(h)  EBITDA as  defined by  management  consists  of  earnings  from  continuing

     operations   before   extraordinary   item  and  before  interest,   taxes,

     depreciation and amortization. EBITDA represents a measure of the Company's

     ability to  generate  cash flow and does not  represent  net income or cash

     flow 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, measures of financial  performance reported in accordance with

     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 $1,211 in 1999,  $721 in 1998,

     $706 in 1997, $829 in 1996, and $743 in 1995. Amortization of debt issuance

     discount was $39 in 1999, $36 in 1998 and $26 in 1997.

 

 

 

 

ITEM 7. 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  DynCorp  and subsidiaries' (collectively, the Company) consolidated results of operations and financial  condition  for the fiscal  years  ended  1999,  1998,  and 1997.  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.

 

Effective  January 1, 1999, the Company  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  ("DI&ET").  Aerospace Technology  and the remaining  parts of Enterprise  Management  were combined to become DynCorp Technical  Services ("DTS").  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.  Business segment information for 1998 and 1997 has been restated to give effect to this change.

 

On December 10, 1999, the Company  completed its  acquisition of GTE Information Systems LLC, a subsidiary of GTE Corporation.  On December 13, 1999, the name of the Company  was changed to DynCorp  Information  Systems LLC  ("DIS").  It will operate as a separate subsidiary of the Company. The acquisition was accounted  for as a purchase; accordingly, operating results for DIS have been included  from the date of acquisition.

 

Revenue and Operating Profit

 

In 1999,  revenue increased by $111.6 million,  or 9.0%, from 1998 compared to a $87.8  million,  or 7.7% increase in 1998 revenue over 1997.  Operating  profit, defined  as  the  excess  of  revenues  over  operating   expenses  and  certain nonoperating expenses, increased by $5.4 million, or 9.4%, from 1998 compared to a $9.1  million,  or 18.7%  increase in 1998  operating  profit  from 1997.  The operating  profit was $63.1 million,  $57.7 million,  and $48.6 million in 1999, 1998, and 1997, respectively.

 

DTS revenue and operating  profit showed  continued growth for the twelve months ended December 30, 1999. Revenues were $695.5 million in 1999 compared to $600.6 million  in 1998,  an  increase  of $94.9  million  or 15.8%.  Operating  profit increased  by $5.0 million to $31.5  million,  or 18.8%,  from $26.5  million in 1998. The DTS business unit had increased tasking on State Department  contracts providing  support  services to Kosovo and  East Timor, increased  services on a contract in support of the government's drug eradication program, and  increased services in Qatar.  The increase in both revenue and  operating profit  resulted in part from a contract for the providing of technical and support  services  to the United States Air Force at Columbus AFB.  The 1999 revenue includes  a  full year's revenue from  this  contract, which  became  operational  in  the  fourth quarter of 1998.  Also contributing to the increase in revenue were increases in the purchase of reimbursable materials for the customer at Fort Rucker. Slightly offsetting  these  revenue  increases   were  lower  revenues  on  certain  base operations support contracts.

 

The DTS business  unit  increased  backlog by 10.0% over 1998 to $2.2 billion at December 30, 1999,  primarily due to expansion of several  contracts,  including the  aforementioned  State  Department  contracts,  and the  winning  of several contracts in  recompetition.   Management  believes  the DTS business area  will continue to grow in 2000.  However,  the nature of the procurement  process  and the  volume  of  the  Company's  business,  portions  of  which  are  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 ordered.

 

DTS  revenues  increased  1.4% to $600.6  million in 1998 as  compared to $592.6 million in 1997.  Operating profit increased by 15.3% from $23.0 million in 1997 to $26.5 million in 1998. The increase in both revenues and operating profit was attributable to new contract wins and growth in several existing contracts.  The DTS 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 military  aircrafts.  A new contract,  which became  operational  in the fourth  quarter,  for the providing of technical and support  services  to the  United  States  Air Force at  Columbus  AFB,  and the addition  of the  operations  of two more  ships in the  marine  services  area, contributed  to DTS's growth in 1998  revenues.  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 due to several contract completions.

 

DI&ET  revenues were $635.9  million in 1999, a 0.4% increase over 1998 revenues of $633.1 million. The revenue increase  was  due in  part  to the start-up of a contract with the U.S. Postal Service, which was  awarded in  1998,  but  became operational in 1999, and a sub-contract from the Department  of  Commerce Census Cenus 2000 that was also awarded in 1998 but became  operational in 1999.  DI&ET health information technology services' revenues increased due  to  a  full year impact of FMAS, a medical outcome  measurement  and  data  abstraction  services company acquired in 1998,  and growth in a joint  venture for vaccine technology services to  the  Department  of  Defense.  Also  contributing  to  the  revenue increases were higher volumes  of state and local  contract  business, increased tasking on several indefinite delivery/indefinite  quantity  ("IDIQ") contracts, and new business with the customer at the Norco location.  Partially  offsetting these increases in revenue was the loss in recompetition of significant portions of  the  work scope of an enterprise contract at the Department of Energy  Rocky Flats location. In the twelve  months of  1998, Rocky  Flats' revenue  was $71.0 million.

 

DI&ET's operating profit decreased  slightly to $30.6 million from $31.1 million in 1998, a 1.8% decrease.  The operating profit decrease resulted from losses on two  state  government  contracts,  a write-off  associated  with  a vaccine lab business  that  was divested during 1999, and the loss of a contract at  the DOE Rocky Flats location.  Rocky Flats operating profit for the twelve  months ended December 31, 1998  was  $4.3 million.  Partially offsetting these  decreases  in operating  profit  were  increases due to the start-up of the contracts with the U.S. Postal Service  and the sub-contract from the Department of Commerce Census 2000, the higher volumes in health information technology services, and improved profitability  on  previously  awarded  IDIQ  contracts.   Also  offsetting  the decreases  in  DI&ET's  operating  profit was the receipt of  an  award fee on a contract  that  was  greater than accrued (expected), and  operating  profits on contracts in 1999 which reflected losses in 1998.

 

DI&ET's  revenues  were  $633.1  million  in 1998,  a 14.4%  increase  over 1997 revenues of $553.3 million. Operating profit increased $5.6 million, or 21.7% to $31.1  million  from $25.6  million  in 1997.  The  increases  in  revenues  and operating  profit were  attributable  to new IDIQ contract tasks and sole source contracts with 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  DI&ET's revenue and operating profit increases.

 

Management believes DI&ET's revenues will continue to show small growth in 2000. However,  much of the growth will be dependent upon DI&ET's success in servicing new orders under its IDIQ contracts.  Additionally,  the U.S. Government has the right to  terminate  contracts  for  convenience  or may  reduce  the  volume of services ordered.

 

DIS, which was acquired on December 10, 1999, from GTE Corporation,  had revenue of $13.9 million in the twenty-day  period ended December 30, 1999. Managemenent expects the revenue for 2000 to be greater than the prior year revenue. However, there are no assurances because the  nature of the procurement  process and  the volume  of  the  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 ordered.

 

Corporate General and Administrative

 

Corporate general and administrative expenses increased in 1999 by $3.1 million, or 16.7%,  over 1998,  to $21.7  million as compared to $18.6  million and $17.8 million in 1998 and 1997,  respectively.  Corporate  general and  administrative expense as a percentage of revenue was 1.6% in 1999,  1.5% in 1998,  and 1.6% in 1997.  The higher  expense  in 1999 was  primarily  the result of the  Company's deployment of new financial and human resource software  packages.  The software design and  development  stage of the  project has been  completed,  and related costs have been capitalized as intangible  assets, as discussed below under Year 2000.  $4.4  million of expenses  for the  resystemization  effort and  expenses incurred  related to  potential  acquisitions  were  offset by the $2.0  million reversal of reserves for old contract  compliance issues,  which were settled in the Company's  favor during 1999. The  comprehensive  resystemization  effort is projected  to  add   approximately   $4.2  million  to  corporate   general  and administrative expense in 2000.

 

The increase in corporate general and administrative expense in 1998 compared to 1997  resulted  from the  resystemization  effort,  which added $2.2  million to corporate  general and  administrative  expense.  This expense 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.

 

Interest Expense and Interest Income

 

Interest  expense  for 1999 was  $18.9  million  as  compared  to $14.1  million reported for 1998. The increase in interest  expense was  attributable to higher average debt levels  throughout 1999, $0.5 million  interest expense  associated with settlement of a  subcontractor  suit from a former  electrical  contracting subsidiary,  and a $0.7  million  interest  expense  refund  received  from  the Internal Revenue Service in 1998. The refund,  received in 1998,  decreased 1998 interest expense and therefore  increases the change in 1999 expense compared to 1998. The weighted annual levels of borrowing were approximately  $203.8 million in 1999  compared  to $163.1  million  in 1998.  The  weighted  annual  level of indebtedness increased due to borrowings used to fund the acquisition of DIS and borrowings  used to fund working capital  requirements  (see working capital and cash flow discussion).  Management  expects interest expense to increase in 2000 due to a higher level of indebtedness  resulting from  additional  borrowings of approximately $167.5 million at the end of 1999 for the acquisition of DIS.

 

Interest  expense was $14.1 million in 1998, up from $12.4 million in 1997.  The increase was 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 increased  capital  required for growth in the  Company's  business (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 income was $1.4 million,  $1.6 million, and $2.0 million in 1999, 1998, and 1997,  respectively.  The  fluctuations  are primarily  attributable  to the balance of cash and  short-term  investments  throughout  any given year and the average rates of interest. The twelve-month weighted average balance of cash and short-term  investments  was $19.8 million in 1999,  $10.9 million in 1998,  and $25.0 million in 1997.

 

Other Expense

 

Other  expense  increased by $7.9 million to $10.5  million in 1999  compared to $2.7  million  and $10.3  million  in 1998 and 1997,  respectively.  The  higher expense in 1999 resulted  from expenses of $1.7 million for the  settlement of a suit with a former electrical  subcontractor,  write-off of $1.2 million of cost in excess of net assets  acquired for a business  that was divested in February, 2000,  in-process R&D write-off of $6.4 million  associated with the acquisition of DIS, and higher  amortization  of intangible  assets also associated with the acquisition  of DIS.  The lower  expense in 1998  resulted  from the  absence of charges such as that incurred in 1997. In 1997 the Company increased reserves by $7.8 million 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  13 and  20(a)  to the  Consolidated  Financial Statements  and the  discussion  of  "Liquidity  and  Capital  Resources"  which follows).

 

The Company  anticipates  that other expense will increase in 2000 due to higher goodwill  and  other  intangible   amortization   expense   resulting  from  the acquisition of DIS.

 

Income Taxes

 

The  provision  for income  taxes is based on  reported  earnings,  adjusted  to reflect the impact of permanent differences between the book value of assets and liabilities  recognized  for  financial  reporting  purposes  and  such  amounts recognized for tax purposes.  In 1999,  the Company  reversed state income taxes provided in prior years related to the  favorable  resolution of state tax audit issues.  In 1998, the Company reversed foreign taxes provided in prior years due to their expected utilization as foreign tax credits. Additionally, $2.5 million of tax valuation  reserves were reversed in 1997. Based on current  projections, management estimates tax payments, net of tax refunds, of $13.7 million in 2000.

 

No valuation  allowance for deferred  federal tax assets was deemed necessary at December 30, 1999.  The Company has provided a valuation  allowance for deferred state tax assets of $4.8 million at December 30, 1999 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.

 

Extraordinary Item

 

In the fourth  quarter of 1999,  the  Company  recorded  an  extraordinary  item totaling $1.6 million  (gross  extraordinary  item of $2.5 million net of income tax benefit of $0.9  million).  The charge was recorded in  connection  with the early extinguishment of secured indebtedness due to refinancing of the Company's debt in order to complete the acquisition of DIS.

 

Working Capital and Cash Flows

 

Working capital, defined as current assets less current liabilities,  was $165.2 million at December 30, 1999  compared to $90.7 million at December 31, 1998, an increase of $74.5 million.  This increase is primarily the result of an increase in  accounts  receivable,  attributable  to the  acquisition  of DIS,  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 30, 1999 was 1.7  compared to 1.5 at December  31,  1998.  The increase resulted  from the higher  accounts  receivable  balance at  December  30,  1999 compared to December 31, 1998.

 

For the year ended December 30, 1999,  the Company's  cash flow from  operations was $13.8  million,  increasing  $6.1  million  from $7.8  million  cash used in operations  in 1998.  The increase in cash flow from  operations  was  primarily attributable to the absence in 1999 of payments related to the settlement of the Fuller-Austin  bankruptcy  and from  the  absence  of an  increase  in  accounts receivable  similar to that of 1998, which was caused by increased  revenues and start-up of new contracts.  In 1998 the cash used by operations  resulted mostly from increases in accounts  receivable due to increased revenues and start-up of new contracts.  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  was $9.9  million.  The cash  provided by operations was  attributable  to higher costs and expenses that did not use cash in 1997 such as reserves established for the Fuller-Austin settlement.

 

Cash used in investing  activities  for the year ended December 30, 1999 totaled $185.0  million and  included  acquisition  costs of $167.5  million and capital expenditures of $19.8 million.  Acquisition  costs related to the acquisition of DIS on December 10, 1999.  Capital  expenditures  included $13.9 million for the purchase  of property  and  equipment  and $5.9  million  for new  software  for internal  use as  part  of  the  Company's  Year  2000  plan.  The  Company  has capitalized  a total of $11.7  million of costs related to internal use software on its December 30, 1999 balance sheet. Investing activities used funds of $20.1 million in 1998,  principally  for the  acquisition of FMAS $10.2  million,  the purchase  of  property  and  equipment  $4.8  million,  and the  purchase of new software for internal use as part of the Company's  Year 2000 plan $5.6 million. In 1997,  investing  activities used funds of $8.3 million,  attributable to the purchase of property and equipment  $5.1 million,  and the remainder of the cash used was mostly for funding of the  Company's  47% interest in a minority  owned company, and a loan to the same company.

 

In 1999,  financing  activities  provided funds of $172.7  million.  The Company borrowed  $223.8 million under a Senior Secured Credit  Agreement.  Of the total borrowings  under the credit  agreement,  $125.0  million  was used for  partial payment of the purchase price for DIS. The balance of the borrowings was used to make an optional  redemption  of the  Company's  outstanding  7.486%  Fixed Rate Contract Receivable  Collateralized Notes, Series 1997-1 ("the Notes"), Class A, to  reduce   irrevocably  the  Company's   Floating  Rate  Contract   Receivable Collateralized  Notes, Series 1997-1, Class B and to pay transactional  expenses and for general corporate operating  purposes.  The Company issued $40.0 million face value of its  subordinated  pay-in kind notes for $33.9  million and issued 426,217 shares of the Company's  stock for $6.1 million.  The proceeds were used for payment of the balance of the purchase price for DIS.

 

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.

 

Liquidity and Capital Resources

 

The Company's primary source of cash and cash equivalents is from operations and financing  activities.  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.

 

As of December 30, 1999 the Company's total debt was $343.2 million, an increase of $182.9  million from December 31, 1998,  primarily due to borrowing of $167.5 million used to fund the acquisition of GTE Information Systems, LLC.

 

On December 10, 1999, the Company entered into a Senior Secured Credit Agreement with a group of financial institutions.  Under the Credit Agreement, the Company borrowed  $100.0  million under Term A loans  maturing  December 9, 2004, $100.0 million under Term B loans maturing  December 9, 2006, and $23.8 million under a $90.0  million  revolving  line  of  credit.  Upon  the  closing  of the  Credit Agreement,  the  Company  terminated  its  previous  revolving  line  of  credit facility.

 

The Credit  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 Credit  Agreement also  stipulates that the Company must maintain certain  financial ratios,  including  specified ratios of earnings  to  fixed  charges,  debt to  earnings,  and  accounts  receivable  to borrowings under the Credit Agreement.  At December 30, 1999, the Company was in compliance with these covenants.

 

The Term A Loans are to be  repaid in  sixteen  quarterly  installments  of $6.3 million  beginning in February 2001. The Term B Loans are to be repaid in twenty quarterly  installments of $0.3 million starting in February 2000 and then eight quarterly  installments  of $11.9  million  beginning in February  2005.  At the option of the Company,  borrowings  under the Credit  Agreement bear interest at either LIBOR or a base rate  established by the bank,  plus a margin that varies based upon the Company's ratio of debt to earnings.

 

The Company is charged a commitment fee of 0.5% per annum on unused  commitments under the revolving  line of credit.  At December 30, 1999,  $7.0 million was outstanding under the line of credit and $75.6 million additional was available.

 

On December  10,  1999,  the Company  entered  into an  agreement  with  various financial institutions for the sale of $40.0 million face value of the Company's subordinated  pay-in-kind  notes due 2007, with an estimated fair value of $33.9 million (Senior  Subordinated  Notes), and for the sale of 426,217 shares of the Company's  stock with an estimated  fair value of $6.1 million (see Note 7). The Subordinated  Notes  bear  interest  at 15.0% per annum,  payable  semi-annually in-kind.  The Company may, at its option,  prior to December  15, 2004,  pay the interest in cash or in additional Subordinated Notes. The Subordinated Notes are redeemable,  in whole or in part,  at the  option  of the  Company,  on or after December  15,  2000 at a  redemption  price that  ranges  from 114.0% in 2000 to 100.0% in 2006 and  thereafter.  The  Subordinated  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 and to the Senior Notes.

 

At December 31, 1998,  $87.9 million of accounts  receivable  were restricted as collateral for the 7.486% Contract Receivable  Collateralized 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 notes were paid off on December 10, 1999.

 

The Company had a $15.0 million line of credit that it utilized through December 9, 1999,  never exceeding $8.9 million in borrowings at any given point in time. As noted above, on December 10, 1999, the Company terminated this revolving line of credit facility.

 

The Company has embarked on a  comprehensive  resystemization  effort (see "Year 2000") and had expenditures in 1999 of $10.4 million,  of which $6.0 million was capitalized   and  $4.4  million  was   expensed.   The  Company  is  projecting expenditures  in 2000 of $4.2  million.  The  resystemization  will  necessitate replacing some of the Company's  desktop  workstations  over the next year, at a cost of approximately $4.0 million.

 

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 for purposes of acquisitions,  dividends, repurchase of shares and other financial matters.

 

The Company anticipates contributing  approximately $14.1 million in cash to the Employee  Stock  Ownership  Plan  ("ESOP") in 2000.  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 expense exceed the Company's 2000  contribution,  the Company would fund the ESOP  Participant  Puts. The Company projects these payments to be less than $2.0 million in 2000.

 

On February 29, 2000, the Company sold an office building located in Alexandria, Virginia  to a third party for $10.5  million,  and  simultaneously  closed on a lease of that property from the new owner. The Company used a portion of the net proceeds to payoff the mortgage on the property. The Company anticipates selling other non-strategic assets from time to time in the future.

 

In conjunction with the acquisition of Technology Applications, Inc. in November 1993, the Company  issued put options on 125,714 shares of its common stock.  On January 12, 1999, the former owner of Technology  Applications,  Inc.  exercised the put  option  on the  125,714  shares  at a price of $24.25  per  share.  The Company's repurchase of this common stock required 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.)

 

On  March  17,  1997,  the  Company  issued  $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 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 certain number of the  outstanding  common shares and common stock warrants held by 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.

 

Year 2000 Readiness Disclosure

 

The principal "Year 2000" issue ("Y2K") risk to the Company would have come from an extended failure of one or more of its core systems (financial,  payroll, and human resources).  Replacement of the Company's core financial,  human resources and payroll  systems  software  was  initiated  following  a Year 2000  analysis conducted  in  1997  that  found  these  programs  to be  non-compliant  for the millennium date rollover. Deployment of a new human resources and payroll system was launched and completed  prior to the end of 1999. Due to the large number of conversions  and the need to  convert  the core  systems of DIS,  the  financial systems  implementation  is  now  scheduled  for  completion  in  late  2001.  A contingency  plan was activated to install an updated  compliant  version of the Company's current  financial  software package in all locations where conversion to the new Enterprise  Resource  Planning package was not assured prior to 2000. The updates were  completely  implemented  by November 30, 1999, and no failures were reported during or after the rollover.

 

Total  expenditures  for the Y2K effort were  approximately  $19.5 million as of December 30,  1999,  of which $11.6  million  represented  capitalized  software costs.

 

A Year 2000  Program  Management  Plan was  developed  and a Y2K Project  Office launched in mid-1998 to address other Y2K compliance  issues. A  multifunctional task group oversaw  assessment and  remediation  or  replacement  efforts in the areas of core systems, network and office automation,  and field information and non-information  systems.  No problems  have been found  following  the rollover other  than very  minor,  possibly  Y2K-related  aberrations  that were  quickly addressed,  usually within minutes.  No problems have been found that materially affected the Company's  ability to perform on its significant  contracts.  These assessments  included  third-party service providers and other vendors on whom a given contract might depend.

 

The core systems  assessment  included  initial contact in 1998 with third-party telecommunications,   employee   benefits,   insurance,   and  other  providers. Documentation  obtained  from these  providers  generally  stated that they were addressing  the Y2K problem.  Follow-up  contacts to  ascertain  the progress of these providers was also conducted in late 1999 and no problems were reported.

 

The Company also assessed its vulnerability  arising from payment  capability of the various government payment offices receiving and processing  invoices from a contract  site.  No  problems  surfaced  with  either the  Defense  Finance  and Accounting  Service (DFAS) or the Department of Energy payment  office.  DoD and DoE contracts represent a large portion of the Company's work.

 

The Company also conducted assessments on government furnished equipment ("GFE") at contract sites. No failures affecting contract performance were experienced.

 

Infrastructure items that could have had Y2K compliance problems such as desktop workstations,  network  components,  and servers,  were tested,  and repaired or replaced.  The annual  expenditures for these components were not  significantly above levels that could be expected in the normal course of business,  given the Company's infrastructure replacement plan and budget.

 

In  summary,  the  primary Y2K  vulnerability  for the Company was the  possible failure of core systems. This did not happen, as the resystemization  effort was a top priority within the Company,  with dedicated teams and incentive plans for retaining key employees throughout the project.

 

Assessments at the contract level were completed to the extent  possible.  These assessments included analysis of the readiness of hardware,  software, prime and subcontractors,   customers,  suppliers  and  vendors,  data  dependencies,  and facilities.  These assessments added value in that there were no reported issues on any contracts.

 

Many Y2K-related  actions will have long-term  benefits to the Company.  In 1999 the Company:

 

o   upgraded  much of the  hardware  and  software  company-wide,  bringing the

     Company  to a  higher  level  of  technology,  with the  added  benefit  of

     establishing a more "level playing field"  system-wide that in the long run

     should be easier to maintain;

 

o   developed  an  expertise  in  contingency  planning,  which  is  a  growing

     opportunity in government contracting;

 

o   became much more attuned to software  virus issues and potential  problems,

     has  increased  security  measures  accordingly  and has  been  alerted  to

     investigate other enhanced security precautions; and

 

o   documented its inventories of IT and non-IT equipment.

 

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 20(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.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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. There were no such financial instruments held during 1999.

 

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 30, 1999 and December 31, 1998,  and the related  consolidated  statements of  operations,  cash flows and stockholders'  equity for the year ended  December  30, 1999 and each of the two years in the period ended December 31, 1998. These financial  statements and the schedule referred to below are the  responsibility of the Company's  management. Our  responsibility  is to express an opinion on these financial  statements and schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the 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 30, 1999 and December 31, 1998,  and the results of its  operations and its cash flows for the year ended December 30, 1999 and each of the two years in the period ended  December 31, 1998, in conformity  with  accounting  principles generally accepted in the United States.

 

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic financial  statements  taken as a whole.  Schedule II,  listed in Item 14 of the Form 10-K,  is  presented  for  purposes of complying  with the  Securities  and Exchange  Commission's rules and is not part of the basic financial  statements. This  schedule  has been  subjected to the  auditing  procedures  applied in our audits of the basic financial  statements and, in our opinion,  fairly states in all material  respects the  financial  data  required to be set forth therein in relation to the basic financial statements taken as a whole.

 

Vienna, VA                                       ARTHUR ANDERSEN LLP

March 21, 2000

 

 

 

 

 

 

DynCorp and Subsidiaries

Consolidated Balance Sheets

As of the Fiscal Years Ended

(In thousands)

 

 

                                                         1999          1998

 

 

Assets

Current Assets:

 

 Cash and cash equivalents                $  5,657    $  4,088

 Accounts receivable and contracts in 

  process, net                                     357,411    258,216

 Prepaid income taxes                           6,558        4,204

 Other current assets                           28,582      11,794

 

      Total Current Assets                     398,208    278,302

 

 

Property and Equipment, at cost:

  Land                                                     621           621

  Buildings and leasehold improvements                 28,957         11,845

  Machinery and equipment                   32,800      33,616

 

                                                           62,378      46,082

  Accumulated depreciation and amortization        (21,583)        (27,538)

 

   Net Property and Equipment              40,795      18,544

 

Intangible Assets, net                          149,159     58,796

 

Other Assets                                       51,511      23,596

 

Total Assets                                      $639,673  $379,238

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

 

DynCorp and Subsidiaries

Consolidated Balance Sheets

As of the Fiscal Years Ended

(In thousands, except share amounts)

 

 

Liabilities and Stockholders' Equity               1999    1998

 

Current Liabilities:

 Notes payable and current portion of long-term debt       $ 8,242       $  8,145

 Accounts payable                                    85,357  66,885

 Deferred revenue and customer advances 6,048    2,542

 Accrued income taxes                              2,100    1,934

 Accrued expenses                                  131,274  108,117

 

   Total Current Liabilities                         233,021  187,623

 

Long-term Debt                                      334,944  152,121

 

Deferred Income Taxes                             4,547   12,498

 

Other Liabilities and Deferred Credits         51,171  15,146

 

Contingencies and Litigation                           -           -

 

Temporary Equity:

 Redeemable common stock at redemption value

  ESOP shares, 7,350,937 and 7,082,422 shares issued

    and outstanding in 1999 and 1998, respectively,

    subject to restrictions                        182,974 180,812

  Other, 426,217 and 125,714 shares issued and 

    outstanding in 1999 and 1998, respectively        6,142 3,049

 

Stockholders' Equity:

  Common stock,  par value ten cents per share, 

   authorized 20,000,000 shares; issued 4,908,447

   shares in 1999 and 4,976,423 shares in 1998       491 498

 Paid-in surplus                                       133,338 127,216

 Accumulated other comprehensive income  (9)        (10)

 Reclassification to temporary equity for redemption

   value                                                 (188,339) (183,140)

 Deficit                                                   (72,887)  (78,782)

 Common stock held in treasury, at cost; 2,301,262

   shares in 1999 and 2,005,728 shares 1998      (43,062)        (35,640)

 Unearned ESOP shares                           (2,658)  (2,153)

 

Total Liabilities and Stockholders' Equity $639,673  $379,238

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

 

DynCorp and Subsidiaries

Consolidated Statements of Operations

For the Fiscal Years Ended

(In thousands, except per share amounts)

 

                                                    1999      1998     1997

 

Revenues                               $1,345,281   $1,233,707  $1,145,937

 

 

Costs and expenses:

 

 Cost of services                      1,280,239    1,173,151   1,096,246

 Corporate general and administrative        21,741  18,630        17,785

 Interest expense                        18,943   14,144  12,432

 Interest income                          (1,393)  (1,600) (2,018)

 Other expense                           10,544    2,687   10,349

 

  Total costs and expenses       1,330,074    1,207,012   1,134,794

 

 

Earnings from continuing operations 

  before income taxes, minority 

  interest, and extraordinary item 15,207   26,695  11,143

   Provision for income taxes         4,649     9,559    2,282

 

Earnings from continuing operations

 before minority interest and

 extraordinary item                      10,558   17,136   8,861

   Minority interest                        2,968     2,081    1,439

 

Earnings from continuing operations

  before extraordinary item           7,590    15,055   7,422

Extraordinary loss from early extinguishment 

  of debt, net of income taxes       1,601         -           -

 

 

Net earnings                            $   5,989 $ 15,055 $  7,422

 

 

   Accretion of Mezzanine Shares

   to redeemable value                     94           -           -

 

Common stockholders' share of net earnings  $   5,895   $ 15,055     $  7,422

 

 

Net Earnings per common share:

 

      Basic earnings per share     $   0.59   $   1.47   $        0.83

 

      Diluted earnings per share  $   0.57   $   1.43   $        0.70

 

Weighted average number of shares

 outstanding for basic earnings per share    10,044   10,242       8,985

 

Weighted average number of shares

 outstanding for diluted earnings per share 10,273  10,514        10,638

 

See accompanying notes to the consolidated financial statements.

 

 

 

 

DynCorp and Subsidiaries

Consolidated Statements of Cash Flows

For the Fiscal Years Ended

(In thousands)

 

                                                  1999       1998      1997

 

Cash Flows from Operating Activities:

 Common stockholders' share of net 

  earnings                               $  5,895 $  15,055  $  7,422

 Adjustments to reconcile net earnings

 to net cash provided (used) by operating 

 activities:

  Depreciation and amortization 13,572     8,825     9,888

  Purchased in-process research and

  development                            6,400          -             -

  Deferred income taxes            (7,630)    1,463     4,165

  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                    (2,000)   (1,698)     357

  Capitalized costs incurred on existing

   contracts                               (2,473)        -             -

  Other                                       1,781        (63)      (882)

  Change in assets and liabilities, net

   of acquisitions and dispositions:

  Increase in accounts receivable and

   contracts in process              (37,919) (52,416) (15,311)

  Increase in other current assets (326)      (963)   (1,305)

  Increase (decrease) in current 

   liabilities except notes payable and

   current portion of long-term debt          36,535   31,380        (3,685)

 

  Cash provided (used) by operating 

   activities                                13,835    (7,752)   9,937

 

  Cash Flows from Investing Activities:

   Sale of property and equipment 610       1,293       318

  Proceeds received from notes receivable      -             -   4

  Purchase of property and equipment       (13,878)          (4,797)       (5,110)

  Capitalized cost of new financial and

   human resource systems       (5,969)   (5,598)       -

  Deferred income taxes from "safe harbor"

   leases                                      (481)      (257)     (309)

  Increase in investment in unconsolidated

   subsidiaries                             1,363       (302)   (2,038)

  Increase in notes receivable to equity

   investee                                      -             -         (867)

  Assets and liabilities of acquired

   business (excluding cash acquired)        (167,504)     (10,239)          -

  Other                                         884        (231)     (255)

 

  Cash used by investing activities            (184,975)         (20,131)     (8,257)

 

  Cash Flows from Financing Activities:

 

  Treasury stock purchased        (7,208)   (6,194)    (923)

  Payment on indebtedness     (253,491)             (20,371)        (100,208)

  Proceeds from debt issuance  428,552   28,113  149,484

  Common stock and warrants purchased

   from investors                             -             -      (37,819)

  Proceeds from issues of redeemable 

   common stock                       6,048          -             -

  Payments on ESOP loans         10,577     5,933     5,189

  Loans to ESOP                       (11,082)       -      (13,274)

  Deferred financing expenses          -             -       (5,080)

  Other                                        (687)      (112)     (324)

 

    Cash provided (used) by financing

     activities                             172,709    7,369    (2,955)

 

  Net Increase (Decrease) in Cash and

   Cash Equivalents                     1,569   (20,514)  (1,275)

  Cash and Cash Equivalents at Beginning 

   of the Fiscal Year                     4,088    24,602    25,877

 

  Cash and Cash Equivalents at End of the

   Fiscal Year                           $  5,657  $ 4,088 $  24,602

 

See accompanying notes to the consolidated financial statements.

 

 

 

 

 

                            DynCorp and Subsidiaries

                 Consolidated Statements of Stockholders' Equity

                           For the Fiscal Years Ended

                                 (In thousands)

 

                                                                                                                       Accumulated

                                                                           Adjustment for                   

                                                       Common              Redemption                        Unearned   Other

                                    Preferred  Common  Stock     Paid-in   Value Greater           Treasury    ESOP    Comprehensive

                                    Stock      Stock   Warrants  Surplus   than Par Value  Deficit Stock       Shares  Income

                                   -------------------------------------------------------------------------------------------------

Balance, December 31, 1996             $3,000  $332    $11,139  $148,234   $(138,694)   $(101,259) ($25,235)        -       -

Stock issued under Restricted

  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 &

 warrants exercised                         -     -    (5,190)  (30,120)            -            -   (2,794)        -       -

Loans to ESOP                               -     -          -         -            -            -         -  (13,274)      -

Payment received on ESOP 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)     $(98,837) $(28,703) $(8,085)    $ -

Employee compensation plans (option

 exercises, restricted stock plan,          -     4          -       891            -            -     (960)        -       -

 incentive bonus)

Treasury stock purchased                    -     -          -         -            -            -   (6,386)        -       -

Warrants & stock options exercised          -    35    (1,259)       903            -            -       409        -       -

Payment received on ESOP note               -     -          -         -            -            -         -    5,932       -

Reclassification to Redeemable

 Common Stock                               -  (19)          -         -     (29,002)            -         -        -       -

Translation adjustment                      -     -          -        10            -            -         -        -    (10)

Net earnings                                -     -          -         -            -       15,055         -        -       -

                                       ------  ----      -----  --------   ---------     --------- --------  -------    -----

Balance, December 31, 1998                  -  $498          -  $127,216   $(183,140)    $(78,782) $(35,640) $(2,153)   $(10)

Employee compensation plans (option

 exercises, restricted stock plan,          -     7          -       (6)            -            -     (321)        -       -

 incentive bonus)

Stock issued under Mezzanine financing      -    43          -     6,006            -            -         -        -       -

Treasury stock purchased                    -     -          -         -            -            -   (7,208)        -       -

Warrants & stock options exercised          -     -          -        28            -            -       107        -       -

Payment received on ESOP note               -     -          -         -            -            -         -   10,577       -

Loans to ESOP                               -     -          -         -            -            -         - (11,082)       -

Reclassification to Redeemable Common

 Stock                                      -  (57)          -         -       (5,105)            -         -        -       -

Accretion of mezzanine shares to

 Redeemable value                           -     -          -        94          (94)         (94)         -        -       -

Translation adjustment                      -     -          -         -            -            -         -        -       1

Net earnings                                -     -          -         -            -        5,989         -        -       -

                                          ---  ----        ---  --------   ----------    --------- --------- --------    ----

Balance, December 30, 1999                  -  $491          -  $133,338   $(188,339)    $(72,887) $(43,062) $(2,658)    $(9)

                                          ===  ====        ===  ========   ==========    ========= ========= ========    ====

 

See accompanying notes to the consolidated financial statements.

 

 

 

DynCorp and Subsidiaries

Notes to Consolidated Financial Statements

December 30, 1999

(Dollars in thousands, except per share amounts or where otherwise noted)

 

(1)   The Company and Summary of Significant Accounting Policies

 

Description of Business and Organization:

 

DynCorp, a Delaware corporation (the "Company") provides diversified management, technical  and  professional  services  primarily to U.S.  Government  customers throughout the United States and internationally. Organized in 1946, the Company provides  services to various  branches of the  Departments of Defense,  Energy, State,  Justice,  and  Agriculture,  the Drug Enforcement  Agency,  the National Institute  of Health,  the Defense  Information  Systems  Agency,  the  National Aeronautics  and Space  Administration  and various other U.S.,  state and local government  agencies,  commercial  clients and foreign  governments.  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. These services encompass a wide range of management, technical and professional services.

 

Principles of Consolidation:

 

The consolidated  financial  statements  include the accounts of the Company and its subsidiaries.  All significant  intercompany  transactions and balances have been eliminated in  consolidation.  All  majority-owned  subsidiaries  have been included  in the  financial  statements. Investments in which the Company owns a 20% to 50%  ownership  interest,  are accounted for by the equity  method  while investments of less than 20% ownership are accounted for under the cost  method. Outside investors' interest in the majority-owned  subsidiaries is reflected  as minority interest.  Effective in 1999 the fiscal  year is the  52  or  53  weeks period ending the last Thursday in December.  Previously, the Company had a calendar year-end.

 

Use of 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.  Estimates  include  accrued  liabilities  such as  incentive compensation  awards,  which are not paid out until the following  year.  Actual results could differ from those 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,