-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GGVt5sxdV48avUp6uZo0un9eCUldaghR2B82TBg+LDBvoNysJJTrRpXqt9UEgo6M 9KxQXMpyEwt2SnmOeJ3kVw== 0000030770-00-000016.txt : 20000411 0000030770-00-000016.hdr.sgml : 20000411 ACCESSION NUMBER: 0000030770-00-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991230 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNCORP CENTRAL INDEX KEY: 0000030770 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744] IRS NUMBER: 362408747 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03879 FILM NUMBER: 583842 BUSINESS ADDRESS: STREET 1: 11710 PLAZA AMERICA DRIVE CITY: RESTON STATE: VA ZIP: 20190 BUSINESS PHONE: 7032640330 MAIL ADDRESS: STREET 1: 2000 EDMUND HALLEY DRIVE CITY: RESTON STATE: VA ZIP: 22091-3436 FORMER COMPANY: FORMER CONFORMED NAME: DYNALECTRON CORP DATE OF NAME CHANGE: 19870722 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA EASTERN AVIATION INC DATE OF NAME CHANGE: 19710923 10-K 1 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, extending over more than one accounting period, using the percentage-of-completion method. During performance of such contracts, estimated final contract prices and costs are periodically reviewed and revisions are made as required. The effects of these revisions are included in the periods in which the revisions are made. On cost-plus-fee contracts, revenue is recognized to the extent of costs incurred plus a proportionate amount of fee earned, and on time-and-material contracts, revenue is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred. Losses on contracts are recognized when they become known. Disputes arise in the normal course of the Company's business on projects where the Company is contesting with customers for collection of funds because of events such as delays, changes in contract specifications and questions of cost allowability or collectibility. Such disputes, whether claims or unapproved change orders in the process of negotiation, are recorded at the lesser of their estimated net realizable value or actual costs incurred and only when realization is probable and can be reliably estimated. Claims against the Company are recognized where loss is considered probable and reasonably determinable in amount. Accounts Receivable: It is the Company's policy to provide reserves for the collectibility of accounts receivable when it is determined that it is probable that the Company will not collect all amounts due and the amount of reserve requirement can be reasonably estimated. Property and Equipment: The Company computes depreciation using the straight-line method. The estimated useful lives used in computing depreciation are buildings, 15-33 years; machinery and equipment, 3-20 years; and leasehold improvements, the lesser of the useful life or the term of the lease. Depreciation expense was $5,412 for 1999, $4,781 for 1998 and $4,881 for 1997. Cost of property and equipment sold or retired and the related accumulated depreciation or amortization is removed from the accounts in the year of disposal, and any gains or losses are reflected in the consolidated statements of operations. Expenditures for maintenance and repairs are charged to expense as incurred, and major additions and improvements are capitalized. Intangible Assets: The major classes of intangible assets as of December 30, 1999 and December 31, 1998 are summarized below (in millions): Amortization Period 1999 1998 Goodwill..................... 10 to 40 years $109.8 $44.9 Capitalized Software... 8 years 10.6 5.9 Core & developed technology... 5 years 7.6 - Contracts acquired............ up to 10 years 8.4 1.1 Assembled workforce........... 7 years 6.5 - Patent...................... 17 years 6.3 6.9 ------ ----- Total net intangibles....... $149.2 $58.8 Intangible assets are being amortized using the straight-line method for the periods noted above. Amortization expense was $8,160, $1,575, and $1,560 in 1999, 1998, and 1997, respectively (see Note 13 ). Amortization expense for 1999 includes $1.2 million acceleration of goodwill amortization due to impairment. Accumulated amortization of $55,755 and $50,030 has been recorded through December 30,1999 and December 31, 1998, respectively. Long-lived assets and identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for impairment, the Company estimates the future cash flows expected to result from the use of the asset. If impaired, the Company would write down the asset to its fair market value. If the asset is held for sale, the Company reviews its fair value less cost to sell. In 1999, the Company expensed $1.7 million related to impaired assets including the $1.2 million noted above. Derivative Financial Instruments: The Company has a policy to use derivative financial instruments to manage its exposures to fluctuations in interest rates and foreign exchange rates as warranted. The Company does not hold or issue derivative financial instruments for trading purposes. There were no such financial instruments held during 1999. Recently Issued Accounting Standards: In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities," which became effective for fiscal years beginning after December 15, 1998. The statement provides guidance on the financial reporting of start-up costs and organization costs and requires costs of start-up activities to be expensed as incurred, except for long-term contracts. The adoption of this statement, effective January 1, 1999, did not have a material impact on the Company's financial statements. In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, which deferred the effective date of SFAS 133. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Because of the Company's minimal use of derivatives, the Company does not expect that the adoption of this new standard will have a material impact on its results of operations, financial condition or cash flows. Consolidated Statements of Cash Flows: For purposes of these statements, short-term investments, which consist of government treasury bills and time deposits with a maturity of ninety days or less, are considered cash equivalents. At December 30, 1999, checks not yet presented for payment of $11.1 million in excess of cash balances were included in accounts payable on the accompanying balance sheet. The Company had sufficient funds available to cover these outstanding checks when they were presented for payment. Cash and short-term investments at December 31, 1998, excludes $1.5 million of restricted cash which is classified as Other Assets. Investing and financing activities include the following: 1999 1998 1997 Acquisitions of businesses: Assets acquired $ 212,642 $ 11,185 $ - Liabilities assumed (45,138) (946) - Cash acquired 36 - - ---------- --------- ----------- Net cash $ 167,540 $ 10,239 $ - ---------- --------- ----------- Capitalized equipment leases and notes secured by property and equipment $ - $ - $ 626 The Company acquired GTE Information Systems LLC in 1999 and FMAS Corporation in 1998. Comprehensive Income: Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income," which requires the presentation and disclosure of comprehensive income. Translation adjustment of $(0.01) million is the only component of the Company's comprehensive income for the years ended December 30, 1999 and December 31, 1998 other than net income. Reclassifications: Consistent with industry practice, assets and liabilities relating to long-term contracts and programs are classified as current although a portion of these amounts is not expected to be realized within one year. Certain prior year information has been reclassified to conform to the current year presentation. (2) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value: Accounts receivable and contracts in process, net, prepaid income taxes, accounts payable and accrued income taxes - The carrying amount approximates the fair value due to the short maturity of these instruments. Long-term debt and other liabilities and deferred credits - The carrying value of the Company's Senior Secured Credit Agreement and its 15.0% Senior Subordinated Notes approximated the fair value. The fair value of the Company's Senior Notes, based on the current rate as if the issue date was December 30, 1999 was $92.4 million, as compared to a book value of $99.6 million in 1999. The fair value of the Company's 7.486% Contract Receivable Collateralized Notes and the Senior Notes, based on the current rate as if the issue dates were December 31, 1998 was $154.4 million, as compared to a book value of $149.5 million in 1998. For the remaining long-term debt (see Note 4) and other liabilities and deferred credits, the carrying amount approximates the fair value. (3) Accounts Receivable and Contracts in Process The components of accounts receivable and contracts in process were as follows for the years ending December 30, 1999 and December 31, 1998: 1999 1998 ------ ------ U.S. Government: Billed and billable $238,709 $158,190 Recoverable costs and accrued profit on progress completed but not billed 47,885 23,374 Retainage due upon completion of contract 2,769 2,641 ------- ------- 289,363 184,205 ------- ------- Other Customers (primarily subcontracts from U.S. Government prime contracts and contracts with state, local and quasi-government agencies): Billed and billable (less allowance for doubtful accounts of $3,156 in 1999 and $1,126 in 1998) 52,063 54,520 Recoverable costs and accrued profit on progress completed but not billed 15,985 19,491 -------- -------- 68,048 74,011 -------- -------- $357,411 $258,216 ======== ======== Billed and billable include amounts earned and contractually billable at year-end but which were not billed because customer invoices had not yet been prepared at year-end. Recoverable costs and accrued profit on progress completed but not billed is composed primarily of amounts recognized as revenues, but which are not contractually billable at the balance sheet dates. It is expected that all amounts outstanding at December 30, 1999 will be collected within one year except for approximately $5,892. (4) Long-term Debt At December 30, 1999 and December 31, 1998, long-term debt consisted of: 1999 1998 ------ ------ Senior Secured Credit Agreement - Term A Loan $100,000 $ - Senior Secured Credit Agreement - Term B Loan 100,000 - Senior Secured Credit Agreement - Revolving Credit Facility 6,970 - 15% Senior Subordinated Notes 33,952 - 9 1/2% Senior Notes 99,584 99,546 7.486% Contract Receivable Collateralized Notes, Series 1997-1, Class A - 50,000 Floating Rate Contract Receivable Collateralized Notes, Series 1997-1, Class B - 7,000 8% Mortgage payable 2,575 2,729 Notes payable 105 991 ------- ------- 343,186 160,266 Less current portion 8,242 8,145 -------- -------- $334,944 $152,121 Debt maturities as of December 30, 1999, were as follows: 2000 $ 8,242 2001 26,180 2002 26,195 2003 28,034 2004 26,000 Thereafter 228,535 -------- $343,186 ======== On December 10, 1999, the Company entered into a Senior Secured Credit Agreement (the "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 maturing December 9, 2004. Of the total borrowings under the Credit Agreement, $125.0 million was used for partial payment of the purchase price for GTE Information Systems LLC. An additional $112.0 million of the borrowings was used to make an optional redemption of Dyn Funding Corporation's outstanding 7.486% Fixed Rate Contract Receivable Collateralized Notes, Series 1997-1, Class A and to reduce irrevocably Dyn Funding Corporation's Floating Rate Contract Receivable Collateralized Notes, Series 1997-1, Class B. The remainder was used to pay transactional expenses and for general corporate operating purposes. Upon the closing of the Credit Agreement, the Company terminated its previous revolving line of credit facility. The Credit Agreement 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. On December 10, 1999, the Company incurred an extraordinary loss of $2.5 million ($1.6 million after tax or $0.16 for basic and diluted earnings per share) in connection with the early retirement of the $50.0 million 7.486% Fixed Rate Contract Receivable Collateralized Notes. The extraordinary loss was comprised of the payment of a yield maintenance premium and the write-off of associated debt issuance cost. 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. As of December 30, 1999, $7.0 million of borrowings and $7.4 million of letters of credit were outstanding under the line of credit, and the amount available was $75.6 million. 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 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 proceeds were used for payment of the balance of the purchase price for GTE Information Systems LLC. 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. On March 17, 1997, the Company issued $100.0 million of 9 1/2% Senior Subordinated Notes ("Senior Subordinated 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 104.8% in 2000 to 100.0% in 2005 and thereafter. In addition, at any time prior to March 1, 2000, the Company may redeem up to 35.0% of the aggregate principal amount of the Senior Notes (at a redemption price of 109.5%) with proceeds generated from a public offering of equity, provided at least 65.0% 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. The Credit Agreement and indentures for the Senior Notes and Senior Subordinated Notes 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 Company acquired the Alexandria, VA headquarters of Technology Applications, Inc. ("TAI") on November 12, 1993, in conjunction with the acquisition of TAI. A mortgage of $3,344 bearing interest at 8.0% per annum was assumed. Payments are made monthly and the mortgage matures in April 2003. On February 29, 2000, the Company sold the related property for $10.5 million in cash and simultaneously entered into a lease agreement for the property. The 8.0% mortgage was paid off at this time. Deferred debt issuance costs are being amortized using the effective interest rate method over the term of the related debt. At December 30, 1999, and December 31, 1998, unamortized deferred debt issuance costs were $12,113 and $4,924, respectively and amortization for 1999, 1998 and 1997 was $1,211, $721, and $706, respectively. Amortization of debt issue discount was $39, $36, and $26 in 1999, 1998 and 1997, respectively. Cash paid for interest was $16,209 for 1999, $13,454 for 1998, and $13,076 for 1997. (5) Accrued Expenses At December 30, 1999 and December 31, 1998, accrued expenses consisted of the following: 1999 1998 ---- ---- Salaries and wages $ 73,028 $ 49,566 Insurance 24,147 21,419 Interest 4,345 1,993 Payroll and miscellaneous taxes 12,051 10,836 Accrued contingent liabilities and operating reserves (see Note 20) 10,105 17,999 Other 7,598 6,304 -------- -------- $131,274 $108,117 ======== ======== (6) Employee Stock Ownership Plan In September 1988, the Company established an Employee Stock Ownership Plan ("ESOP"). The Company borrowed $100 million and loaned the proceeds, on the same terms as the Company's borrowings, to the ESOP to purchase 4,123,711 shares of common stock of the Company. The ESOP acquired 2,797,812 additional shares from 1993 through 1996 either through contributions of stock from the Company, or contributions of cash from the Company with which the ESOP then purchased shares either from the Company, on the Internal Market, or directly from other stockholders. At the beginning of 1997, the ESOP had considerable cash on hand. Utilizing this cash and loans from the Company, the ESOP purchased all of the Company's Class C Preferred Stock. The ESOP subsequently converted the Class C Preferred Stock and exercised the related warrants, at which time the Company issued 949,642 shares of common stock to the ESOP. The purchase price for the Class C Preferred Stock was $18,566 ($19.55 per share, after exercise of warrants) of which half was paid in cash ($8,277 on hand and $1,006 loaned from the Company) and notes were issued for the balance. The notes, and related accrued interest, have been paid in full as of December 30, 1999. In 1999, the ESOP utilized 1999 contributions and loans to make the required principal and interest payments on the aforementioned notes, pay administrative fees, purchase 95,735 shares of stock on the internal market and purchase 273,139 shares of stock from other stockholders. At December 30, 1999, the unpaid balance on these subsequent loans, $2,658, representing 101,052 shares, was reflected as a reduction in stockholders' equity. The ESOP covers a majority of the employees of the Company. Participants in the ESOP become fully vested after four years of service. At December 30, 1999, the ESOP owned 7,451,989 shares, of which most has been allocated to participants. The Company recognizes compensation expense each year based on the cash contribution for the year. In 1999, 1998, and 1997, cash contributions to the ESOP were $13,220, $12,600, and $11,200, respectively. These amounts were charged to Cost of Services and Corporate General and Administrative Expenses. (7) Redeemable Common Stock Common stock which is redeemable has been reflected as Temporary Equity at the redeemable value at each balance sheet date and consists of the following: Balance at Balance at Redeemable December 30, Redeemable December 31, Shares Value 1999 Shares Value 1998 ------- ------ ------ ------- ------ ------ ESOP Shares 3,313,729 $27.50 $ 91,128 3,382,340 $27.75 $ 93,860 4,037,208 $22.75 91,846 3,700,082 $23.50 86,952 --------- -------- --------- -------- 7,350,937 $182,974 7,082,422 $180,812 ========= ======== ========= ======== Other Shares 426,217 $14.41 $ 6,142 125,714 $24.25 $ 3,049 ========= ======== ========= ========= ESOP Shares In accordance with ERISA regulations and the Employee Stock Ownership Plan (the "Plan") documents, the ESOP Trust or the Company is obligated to purchase vested common stock shares from ESOP participants (see Note 6) at the fair value (as determined by an independent appraiser) until such time as the Company's common stock is publicly traded. The shares initially bought by the ESOP in 1988 were bought at a "control price," reflecting the higher price that buyers typically pay when they buy an entire company (as the ESOP and other investors did in the 1988 LBO). A special provision in the ESOP's 1988 agreement permits participants to receive a "control price" when they sell these shares back to the Company under the ESOP's "put option" provisions. This "control price", determined by the appraiser on February 21, 2000, was $27.50 per share as of December 30, 1999. The additional shares obtained by the ESOP in 1994 through 1999 were at a "minority interest price", reflecting the lower price that buyers typically pay when they are buying only a small piece of a company. Participants do not have the right to sell these shares at the "control price". The minority interest price determined by the independent appraiser on February 21, 2000, was $22.75 per share as of December 30, 1999. Participants receive their vested shares upon retirement, becoming disabled, or death over a period of one to five years and for other reasons of termination over a period of one to ten years, all as set forth in the Plan documents. The ESOP Trust purchases participants' shares at the applicable price, utilizing cash available from the Company's contributions and loans (see Note 6). The participant can elect to receive stock in kind instead of a participant put. Based on fair values of $27.50 and $22.75 per share as of December 30, 1999, the estimated aggregate annual commitment to repurchase shares from the ESOP participants upon death, disability, retirement and termination is as follows: $8,424 in 2000, $12,559 in 2001, $15,084 in 2002, $17,043 in 2003, $22,649 in 2004 and $107,215 thereafter. Under the Subscription Agreement with the ESOP dated September 9, 1988, the Company is permitted to defer put options if, under Delaware law, the capital of the Company would be impaired as a result of such repurchase. Other Shares On December 10,1999, the Company entered into an agreement with various financial institutions for the sale of 426,271 shares of the Company's stock and Senior Subordinated Notes (see Note 4). Under a contemporaneous registration rights agreement, the holders of these shares of stock will have a put right to the Company commencing on December 10, 2003, at a price of $40.53 per share, unless one of the following events has occurred prior to such date or the exercise of the put right: (1) an initial public offering of the Company's common stock has been consummated; (2) all the Company's common stock has been sold; (3) all the Company's assets have been sold in such a manner that the holders have received cash payments; or (4) the Company's common stock has been listed on a national securities exchange or authorized for quotation on the Nasdaq National Market System for which there is a public market of at least $100 million for the Company's common stock. If, at the time of the holders' exercise of the put right the Company is unable to pay the put price because of financial covenants in loan agreements or other provisions of law, the Company will not honor the put at that time, and the put price will escalate for a period of up to four years, at which time the put must be honored. The escalation rate increases during such period until the put is honored, and the rate varies from an annualized factor of 22% for the first quarter after the put is not honored up to 52% during the sixteenth quarter. In conjunction with the acquisition of TAI in November 1993, the Company issued put options on 125,714 shares of common stock. The holder could, at any time commencing on December 31, 1998 and ending on December 31, 2000, sell these shares to the Company at a price per share equal to the greater of $17.50; or, if the stock is publicly traded, the market value at a specified date; or, if the Company's stock is not publicly traded, the ESOP control price at the time of exercise. On January 12, 1999, the holder exercised the put option on these shares at the applicable price of $24.25 per share. Following are the changes in Redeemable Common Stock for the three years ended December 30, 1999: Redeemable Common Stock ------------------------------------- Other ESOP Total ------ ----- ------ Balance, December 31, 1996 $2,979 $136,343 $139,322 Shares purchased on Internal Market - 205 205 Shares purchased by ESOP not collateralized by notes - 13,371 13,371 Adjustment of shares to fair value 38 1,904 1,942 ------ -------- -------- Balance, December 31, 1997 3,017 151,823 154,840 Shares purchased by ESOP - 1,482 1,482 Shares released from collateral - 5,798 5,798 ESOP diversification (a) - (4,074) (4,074) Adjustment of shares to fair market value 32 25,783 25,815 ------ -------- -------- Balance, December 31, 1998 3,049 180,812 183,861 Exercise of put option (3,049) - (3,049) Shares purchased by the ESOP - 6,466 6,466 Shares purchased on the Internal Market - 2,319 2,319 Shares released from collateral - 10,577 10,577 Shares pledged as collateral - (11,082) (11,082) ESOP diversification (a) - (2,652) (2,652) Issuance of common stock with put rights 6,048 - 6,048 Adjustment of shares to fair value 94 (3,466) (3,372) ------ -------- -------- Balance December 30, 1999 $6,142 $182,974 $189,116 ====== ======== ======== (a) Under diversification rules, as defined by the Plan, ESOP participants have the option of receiving a distribution of up to 25.0% of their aggregate accounts, in order to convert Company stock into another type of investment. The option extends over a five-year period beginning after the participant has reached age 55 and has ten years of participation in the ESOP. At the sixth year, the distribution right increases to 50.0% of the participant's account. (8) Preferred Stock, Class C Dividends on the Class C Preferred Stock accrued at an annual rate of 18.0%, compounded quarterly. At December 31, 1996, cumulative dividends of $11,147 had not been recorded or paid. In February 1997, the ESOP purchased all of the Class C Preferred Stock, which was immediately converted into Common Stock. (9) Common Stock At December 30, 1999, Common Stock includes those shares issued to outside investors, officers and directors, current and former employees and the Savings and Retirement Plan ("SARP"), as well as any ESOP or SARP shares that have been distributed in kind to former participants in the plans. (10) Common Stock Warrants and Restricted Stock The Company initially issued warrants on September 9, 1988 to certain stockholders to purchase a maximum of 5,891,987 shares of common stock of the Company. The warrants were recorded at their fair value of $2.43 per warrant and warrants issued to a lender were recorded at $3.28 per warrant. Each warrant was exercisable to obtain one share of common stock. The stockholder could exercise the warrant and pay in cash the exercise price of $0.25 for one share of common stock or sell back to the Company a sufficient number of the exercised shares to equal the value of the warrants to be exercised. All warrants were either exercised or canceled before their September 9, 1998 expiration date. There were no warrants outstanding at December 30, 1999 and December 31, 1998, respectively. The Company had a Restricted Stock Plan (the "Plan") under which management and key employees could be awarded shares of common stock based on the Company's performance. The Company initially reserved 1,023,037 shares of common stock for issuance under the Plan. Under the Plan, Restri