DynCorp International Inc.
DynCorp International Inc (Form: S-1/A, Received: 05/03/2006 06:03:37)
Table of Contents

As filed with the Securities and Exchange Commission on May 2, 2006

Registration No. 333-128637


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Amendment No. 6

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


DYNCORP INTERNATIONAL INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware   7389   01-0824791
(State or Other Jurisdiction of Incorporation or Organization)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification Number)


8445 Freeport Parkway

Suite 400

Irving, Texas 75063

(817) 302-1460

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Michael J. Thorne

Chief Financial Officer

8445 Freeport Parkway

Suite 400

Irving, Texas 75063

(972) 871-6723

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)


Copies to:

Michael R. Littenberg, Esq.

Schulte Roth & Zabel LLP

919 Third Avenue

New York, NY 10022

Ph: (212) 756-2000

Fax: (212) 593-5955

 

Peter M. Labonski, Esq.

Latham & Watkins LLP

855 Third Avenue, Suite 1000

New York, NY 10022

Ph: (212) 906-1200

Fax: (212) 751-4864


Approximate date of commencement of the proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.   ¨


CALCULATION OF REGISTRATION FEE

 


Title Of Each Class Of

Securities To Be Registered

 

Amount To

Be Registered

 

Proposed Maximum
Offering Price

Per Unit

 

Proposed Maximum

Aggregate

Offering Price

  Amount of
Registration Fee

Class A Common Stock, par value $0.01

  28,750,000(1)   $17.00   $488,750,000(2)   $57,111.25(3)

(1)   Includes shares of Class A common stock issuable upon exercise of an over-allotment option granted to the underwriters.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act.
(3)   A registration fee of $52,965 had been paid previously in connection with this Registration Statement based on an estimated offering price of $450,000,000. An additional registration fee of $4,146.25 has been paid based on an increase of the aggregate offering price of $38,750,000.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.



Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 2, 2006

 

25,000,000 Shares

 

LOGO

 

DynCorp International Inc.

 

Class A Common Stock

 


 

Prior to this offering there has been no public market for our Class A common stock. The initial public offering price of the Class A common stock is expected to be between $15.00 and $17.00 per share. Our Class A common stock has been approved for listing on The New York Stock Exchange under the symbol “DCP.”

 

The underwriters have an option to purchase up to an additional 3,750,000 shares of Class A common stock to cover over-allotments of shares.

 

Investing in our Class A common stock involves risks. See “ Risk Factors ” on page 20.

 

     Price to
Public


   Underwriting
Discounts and
Commissions


   Proceeds to
DynCorp
International


Per Share

   $                $                $            

Total

   $                    $                    $                

 

Delivery of the shares of Class A common stock will be made on or about                     , 2006.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Credit Suisse   Goldman, Sachs & Co.

 


 

Bear, Stearns & Co. Inc.

 


 

CIBC World Markets   Jefferies Quarterdeck   UBS Investment Bank   Wachovia Securities

 

The date of this prospectus is                         , 2006.


Table of Contents

LOGO


Table of Contents

 

TABLE OF CONTENTS

    Page

P ROSPECTUS S UMMARY

  1

R ISK F ACTORS

  20

T HE 2005 A CQUISITION

  34

F ORWARD -L OOKING S TATEMENTS

  37

U SE OF P ROCEEDS

  38

D IVIDEND P OLICY

  40

C APITALIZATION

  41

D ILUTION

  42

S ELECTED H ISTORICAL C ONSOLIDATED F INANCIAL D ATA

  44

P RO F ORMA F INANCIAL I NFORMATION

  47

M ANAGEMENT S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS

  52

B USINESS

  75
    Page

M ANAGEMENT

  90

P RINCIPAL S TOCKHOLDER

  98

C ERTAIN R ELATIONSHIPS AND R ELATED T RANSACTIONS

  100

D ESCRIPTION OF M ATERIAL I NDEBTEDNESS

  102

D ESCRIPTION OF C APITAL S TOCK

  111

S HARES E LIGIBLE FOR F UTURE S ALE

  118

C ERTAIN U.S. F EDERAL T AX C ONSEQUENCES FOR N ON -U.S. H OLDERS

  119

U NDERWRITING

  121

N OTICE TO C ANADIAN R ESIDENTS

  126

V ALIDITY OF THE C LASS A C OMMON S TOCK

  127

E XPERTS

  127

W HERE Y OU C AN F IND M ORE I NFORMATION

  127

 

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

 

 

Dealer Prospectus Delivery Obligation

 

Until                     , 2006, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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MARKET SHARE, ESTIMATED CONTRACT VALUE, RANKING AND OTHER DATA

 

In this prospectus, we refer to information regarding market data obtained from internal sources, market research, publicly available information and industry publications. Estimates are inherently uncertain and the estimates contained herein involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Risk Factors” in this prospectus. See “Risk Factors.”

 

References to our “leading position” in this prospectus are based on:

 

    an analysis prepared by CSP Associates, Inc. (as discussed below) of our revenues as compared with the revenues generated by our direct competitors with respect to the outsourcing of technical services for the U.S. government’s fiscal year ended September 30, 2004, and

 

    contracts awarded, pursuant to the North American Industry Classification System, or NAICS, categories with respect to the specific NAICS categories from which we derive revenue.

 

References to our “leading position” in this prospectus are not based on our percentage of revenues compared to the overall defense budget (for example, greater revenues are generated by government military contractors that also build the equipment that they support and with whom we only compete with respect to the outsourcing of technical services) and do not apply to our commercial customers. In June 2004, our equity sponsor, Veritas Capital, commissioned an independent third party study for a fee by CSP Associates, Inc., to provide market research and competitive analysis as part of Veritas Capital’s evaluation and decision making process with regards to its proposed acquisition of our business. CSP Associates, Inc. provides research and analysis for the defense industry including due diligence on defense-related companies. The CSP Associates, Inc. study was derived from public information, third party government data providers and discussions with our management and major customers and was completed in January 2005.

 

As used herein, except as otherwise indicated in this paragraph, estimated contract values are calculated as the greater of the bid price we submitted or expect to submit for the applicable contract and the sum of our actual revenues under the contract and our estimated revenues from future performance under options requested by the customer. For indefinite delivery, indefinite quantity contracts, the estimated value of such contracts is the sum of our actual revenues under the contract and our estimated revenues from future performance under task orders issued. Funded backlog is the actual amount appropriated by a customer for the payment of goods and services less the actual revenue recorded as of the measurement date under that appropriation. Unfunded backlog is the actual dollar value of unexercised contract options. Anticipated revenues from indefinite delivery, indefinite quantity contracts are not included in unfunded backlog. Backlog is only a measure of funded contract values, and unfunded contract options, less any revenue recognized to that point. Backlog does not take into account any expenses associated with contractual performance and converting backlog into revenue would not reflect net income associated with the contracts.

 

All references to EBITDA margin in this prospectus are defined as the ratio of EBITDA to total revenues. EBITDA is a primary component of certain covenants under our senior secured credit facility and is defined as net income (loss) before interest expense, income taxes, depreciation and amortization. We believe that EBITDA is useful to investors as a way to evaluate our ability to incur and service debt, make capital expenditures and meet working capital requirements. EBITDA does not represent net income or cash flows from operations, as these terms are defined under generally accepted accounting principles, or GAAP, and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP. EBITDA as presented in this prospectus is not necessarily comparable to similarly titled measures reported by other companies.

 

All data with respect to the Department of Homeland Security’s budget was obtained from Budget of the United States Government, Historical Tables, Fiscal Year 2006 . All references to the Department of Homeland Security prior to November 25, 2002 are derived from its predecessor agencies.

 

All references to fiscal years in “Prospectus Summary—Industry Overview” and “Business—Industry Trends” pertain to the fiscal year of the U.S. government, which ends on September 30th of each year.

 

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TRADEMARKS AND TRADE NAMES

 

We own or have the rights to various trademarks and trade names used in this prospectus. This prospectus also includes trade names and trademarks of other companies. We and our subsidiaries hold an exclusive, perpetual, irrevocable, worldwide, royalty-free and fully paid-up license to use the “Dyn International” and “DynCorp International” name in connection with aviation services, security services, technical services and marine services.

 

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Table of Contents

PROSPECTUS SUMMARY

 

The following summary highlights selected information from this prospectus. It does not contain all the information that you should consider in making an investment decision and should be read together with the more detailed information appearing elsewhere in this prospectus, including “Risk Factors” and the consolidated financial statements and related notes. In this prospectus, unless the context requires otherwise, references to the “issuer,” “we,” “our,” “the Company,” “DynCorp International” or “us” refers, as applicable, to DynCorp International Inc., the issuer of the Class A common stock offered hereby, and its consolidated subsidiaries. We refer to our subsidiary, DynCorp International LLC, as our operating company. All references in this prospectus to fiscal years made in connection with our financial statements or operating results refer to our fiscal year ended on the Friday closest to March 31 of such year. For example, “fiscal 2004” refers to our fiscal year ended April 2, 2004. Our narrative discussion of our fiscal 2005 results give pro forma effect to the acquisition of our operating company by Veritas Capital from Computer Sciences Corporation on February 11, 2005 and the Offering Transactions (defined below).

 

Unless the context indicates otherwise, the information in this prospectus relating to us assumes the completion of a 64 for 1 stock split of our common stock prior to the consummation of this offering.

 

Our Company

 

We are a leading provider of specialized mission-critical outsourced technical services to civilian and military government agencies as measured in terms of revenues generated by our direct competitors with respect to the outsourcing of technical services for the U.S. government’s fiscal year ended September 30, 2004. Our leading position is not based on our percentage of revenues compared to the overall defense budget. Our specific global expertise is in law enforcement training and support, security services, base operations, and aviation services and operations. We also provide logistics support for all our services. Our predecessors have provided essential services to numerous U.S. government departments and agencies since 1951. We operated as a separate subsidiary of DynCorp from December 2000 to March 2003 and Computer Sciences Corporation from March 2003 until February 2005. Our current customers include the Department of State; the Army, Air Force, Navy and Marine Corps (collectively, the Department of Defense); and commercial customers and foreign governments. As of December 30, 2005, we had over 14,000 employees in 35 countries, 45 active contracts ranging in duration from three to ten years and over 100 task orders.

 

Our revenues, net income and earnings before interest, taxes, depreciation and amortization, or EBITDA, for fiscal 2004 as compared with fiscal 2003, increased at an annual growth rate of 32.2%, 56.1% and 75.8%, respectively. In fiscal 2005, on a pro forma basis after giving effect to the Offering Transactions described below, we generated revenues, EBITDA and net income of $1.9 billion, $115.4 million and $14.9 million, respectively, as compared with $1.2 billion, $60.1 million and $31.4 million, respectively, in fiscal 2004. Furthermore, our revenues and EBITDA for fiscal 2005 as compared with fiscal 2004 increased at an annual growth rate of 58.2% and 92.1%, respectively, while our net income decreased 52.5% during the same time period. Our fiscal 2005 revenue and EBITDA growth was primarily driven by increasing demand for outsourced technical services and other non-combat-related functions, such as reconstruction, peace-keeping, logistics and other support activities. Our fiscal 2005 net income decline occurred primarily due to higher interest expense and intangible amortization related to the 2005 Acquisition (defined below). For the nine months ending December 30, 2005, on a pro forma basis after giving effect to the Offering Transactions described below, we had revenues, EBITDA and net income of $1.4 billion, $99.8 million and $18.1 million, respectively, as compared with $1.4 billion, $91.0 million and $54.4 million, respectively, for the nine months ended December 31, 2004. Our revenue and EBITDA for the nine months ended December 30, 2005, when compared to the nine months ended December 31, 2004, increased 1.3% and 9.7%, respectively, while our net income decreased 66.7% during the same time period. The decline in our revenue and EBITDA growth rates for these periods was due to our decision to exit a series of contracts to provide security and logistic support to various U.S. government construction projects in the Middle East as a

 

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subcontractor, a decline in construction and equipment purchases and the discontinuation of two contracts providing other support activities. Our net income decline during the nine months ended December 30, 2005 occurred due to higher interest expense and intangible amortization related to the 2005 Acquisition described below.

 

As of December 30, 2005, we had a total backlog of approximately $2.7 billion and, historically, virtually our entire backlog has been converted into revenue at or above stated contract values. Backlog does not take into account any expenses associated with the contracts and converting backlog into revenue would not reflect income associated with contracts. In addition to our backlog as of December 30, 2005, we had $18.5 billion of currently available ceiling under our existing indefinite delivery, indefinite quantity contracts. From the beginning of fiscal 2003 through December 30, 2005, we have won a total of 83%, or $11.8 billion out of $14.1 billion, of the aggregate estimated value of new or renewed contracts on which we bid.

 

Industry Overview

 

Outsourcing is the organizational practice of contracting for services from an external entity while retaining control over assets and oversight of the services being sourced. Consistent with the past 15 years of practice, the U.S. government is expected to continue outsourcing technical services as it downsizes and replaces government employees with more cost-effective commercial vendors. According to the Secretary of Defense, Donald H. Rumsfeld, approximately 300,000 military personnel are performing work that can be outsourced to commercial contractors. The Commercial Activities Panel of the Government Accountability Office reported in fiscal 2002 that outsourcing to commercial providers of non-combat related functions has resulted in savings of 20% or more to the military.

 

In addition to the increase in government spending on outsourcing, particularly among our customers, our end-markets are also growing. The Department of Defense budget for fiscal 2007, excluding supplemental funding relating to operations in Iraq and Afghanistan, has been proposed to Congress at $439.3 billion, representing a 48% increase over fiscal 2001. Fiscal 2005 Department of Defense actual spending excluding supplemental funding relating to operations in Iraq and Afghanistan was $400.1 billion. This growth is expected to continue, with the Department of Defense forecasting its budget to grow to over $499 billion (excluding supplemental funding) by fiscal 2011. The U.S. government budget for international development and humanitarian and international security assistance coordinated by the Department of State has grown from approximately $15 billion in fiscal 2000 to an expected $18 billion in fiscal 2005 and is further projected by the U.S. government to increase to $25 billion in fiscal 2009 (a CAGR of 8.4% from fiscal 2005 to fiscal 2009). These services include law enforcement training, eradication of international narcotics, certain contingency services and security services. Similarly, there has been significant growth in the Department of Homeland Security budget which is estimated at $33 billion for fiscal 2006, which represents a 17% CAGR since fiscal 2000 for the Department of Homeland Security and its predecessor entities.

 

We believe the following industry trends will further increase demand for outsourced services in our target markets:

 

    Transformation of military forces, leading to increases in outsourcing of non-combat functions.

 

    Increased level and frequency of overseas deployment and peace-keeping operations.

 

    Growth in U.S. military budget driven by operations and maintenance spending.

 

    Increased maintenance, overhaul and upgrade needs to support aging military platforms.

 

Business Overview

 

We operate through two core operating divisions, International Technical Services and Field Technical Services.

 

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The following table describes the key service offerings for each of International Technical Services and Field Technical Services and indicates revenues, operating income and depreciation and amortization for fiscal 2005 and the nine months ended December 30, 2005:

 

    

INTERNATIONAL

TECHNICAL SERVICES


  

FIELD TECHNICAL SERVICES


Key Service Offerings

  

Law Enforcement Training —International police training, judicial support, immigration support and base operations

 

International Narcotics Eradication —Drug eradication, host nation pilot and crew training

 

Contingency Services —Peace-keeping support, humanitarian relief, de-mining, worldwide contingency planning and other rapid response services

 

Logistics Support Services —Procurement, parts tracking, property control, inventory and equipment maintenance

 

Security Services —Security for diplomats, personal protection and security system design, installation and operations

 

Military Facility Operations —Facility and equipment maintenance, facility management, engineering, custodial and administrative services

 

Infrastructure Development —Infrastructure engineering and construction management

 

Marine Services —Ship logistics and maintenance, communications services and oil spill response fleet operations

 

Security Technology —Installation, maintenance and upgrades of physical and software access control points and development of security software, smart cards and biometrics

  

Aviation Services —Aircraft fleet maintenance and modifications, depot augmentation, aftermarket logistics support, aircrew services and training

 

Aviation Engineering —Design and kit manufacturing, avionics upgrades, field installations, cockpit/fuselage design and configuration management

 

Aviation Ground Equipment Support —Ground equipment support, maintenance and overhaul, modifications and upgrades

 

Ground Vehicle Maintenance —Maintenance of wheeled and tracked vehicles, scheduling and work flow management

 

Range Services —Information processing, range technical support, test-and-train range operations and maintenance, engineering and analysis

 

    

International

Technical Services (1)


   Field Technical
Services (1)


   DynCorp
International
Inc. (1)


     (dollars in millions)

Fiscal Year ended April 1, 2005

                    

Revenues

   $ 1,232.7    $ 688.2    $ 1,920.9

Operating Income

   $ 71.7    $ 31.4    $ 73.0

Depreciation and Amortization

   $ 6.8    $ 5.4    $ 42.2

Nine months ended December 30, 2005:

                    

Revenues

   $ 896.2    $ 522.0    $ 1,418.2

Operating Income

   $ 48.7    $ 19.0    $ 66.2

Depreciation and Amortization

   $ 23.2    $ 8.4    $ 33.4

(1)   The International Technical Services and Field Technical Services columns exclude pro forma adjustments and the DynCorp International Inc. column includes all pro forma adjustments as well as the charges associated with the DynCorp International home office component. The charges associated with DynCorp International home office component represent assets not included in a reporting segment and are primarily comprised of cash and cash equivalents, deferred tax assets and liabilities, internally developed software, fixed assets, unallocated general corporate costs, and depreciation and amortization related to long-lived assets.

 

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Business Strengths

 

We believe our core strengths include the following:

 

Leading Market Position. We are a leading provider of specialized mission-critical outsourced technical services to civilian and military government agencies as measured in terms of revenues generated by our direct competitors with respect to the outsourcing of technical services for the U.S. government’s fiscal year ended September 30, 2004. Our leading position is not based on our percentage of revenues compared to the overall defense budget. We are one of the few providers with the ability to perform large-scale, complex programs in our targeted service areas. Our global presence and highly specialized personnel enable us to meet our customers’ specifications anywhere in the world with one of the fastest response times in the industry. For example, our operating company’s predecessors were pioneers in the Contract Field Teams program and we believe that we are currently the largest provider of Contract Field Teams services to the Department of Defense. We also are the sole contractor under the International Narcotics and Law Enforcement Air-Wing program, and we believe we have performed in excess of 90% of the dollar value of awarded task orders for the Civilian Police program since its inception.

 

Attractive Industry Fundamentals. Consistent with the past 15 years, the U.S. government is expected to continue to downsize and replace government employees with more cost-effective commercial vendors. In addition, the global deployment of the U.S. military in support of the war on terror and overall military transformation are constraining existing government resources. As a result, outsourcing to private contractors has increased and is expected to continue to do so. The Operation and Maintenance portion of the Department of Defense budget, which includes the majority of the services we provide, is the largest and fastest growing segment of the Department of Defense military spending. Similarly, there has been significant growth in the Department of State and the Department of Homeland Security budgets.

 

Long-Standing and Strong Customer Relationships. Our operating company and its predecessors have been a participant in the Contract Field Teams program for 54 years, and have participated in a number of high-priority U.S. government programs for over a decade. Our key executives have developed long-standing and strong relationships with U.S. military and government officials, and we believe that the longevity and depth of our customer relationships has positioned us as a contractor of choice for our customers.

 

Global Business Development Capability. Our operating company and its predecessors have a long-standing presence in the Middle East. In addition, we have frontline sales and marketing personnel in the United States, Europe, Africa and Asia-Pacific. As of December 30, 2005, we had marketing offices in the following 8 countries: the United Kingdom, Germany, Australia, Afghanistan, Iraq, the United Arab Emirates, Kenya and Italy. We also market through relationships with military and government officials, joint ventures and at international trade shows.

 

Strong and Stable Platform for Growth. We have a growing revenue base derived from 45 active contracts and over 100 active task orders as of December 30, 2005, with different agencies of the U.S. government that are spread over a diverse mix of activities, services and platforms. The terms of our contracts generally range from three to ten years and, as of December 30, 2005, we had a total contracted backlog of approximately $2.7 billion. From March 30, 2002 through December 30, 2005, we won 99.6% of the aggregate dollar value of re-competes on which we bid and, as of December 30, 2005, had bid on or were preparing bids on new and renewal contracts with an estimated value of approximately $10.6 billion.

 

Attractive Cash Flow Dynamics. Due to the nature of the services that we provide, we benefit from low capital expenditure requirements, which contributes to our ability to generate cash flow. We believe that our ability to generate cash flow provides us with a substantial degree of operating flexibility beyond servicing our debt, thereby allowing us to fund our growth initiatives. In addition, due to substantial tax-deductible intangibles and goodwill, we believe we will have favorable tax attributes for the next several years.

 

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Experienced Management Team and Distinguished Board. Our operating company’s senior management team has extensive industry expertise and has been with our operating company and its predecessors for an average of 13 years, with an average of 27 years of experience working in our industry. Many members of our management and our board of directors have had military and government experience and have long-standing relationships with U.S. military and U.S. government officials.

 

Business Strategy

 

Our objective is to leverage our leading market position to further increase our revenues and earnings. We intend to achieve this objective through the following strategies:

 

Exploit Current Business Opportunities and Backlog. As of December 30, 2005, our contracted backlog was approximately $2.7 billion. In addition to servicing our contracted backlog, we intend to leverage our existing contract base to expand the scope of our activities as a result of contract renewals, favorable contract modifications and new task orders. For example, in February 2004, we were awarded a new Civilian Police contract by the Department of State, which expanded our existing program that has been in place since 1994. This contract has an estimated value of $1.75 billion over the five-year term of the program through February 2009. In addition, we plan to expand the scope of services we provide to our existing customers.

 

Capitalize on Industry Trends. We intend to continue to capitalize on the U.S. government’s increasing reliance on outsourcing and increased spending in our targeted end-markets. The Commercial Activities Panel of the Government Accountability Office reported in fiscal 2002 that outsourcing to commercial providers of non-combat related functions has resulted in savings of 20% or more to the military. We believe that we are well positioned to benefit from these trends given our breadth of services and experience, global reach and strong operating performance.

 

Pursue Commercial Business and Foreign Government Opportunities. While we have historically primarily served the U.S. government, we believe there is significant potential to increase the business we generate from commercial and foreign government customers. We believe that commercial customers will increasingly seek out our services as a result of our efforts to bring proven systems, processes and capabilities from our government experience to commercial customers in need of similar services. We believe many foreign governments around the world are demonstrating the same outsourcing trends as the U.S. government. In particular, certain oil- and natural gas-rich nations have indicated a desire to increase spending for security, logistics and aviation services expertise which are often unavailable domestically. We believe our international business acumen, cultural understanding and significant experience in the Middle East and other parts of the world will allow us to effectively compete for such contracts.

 

Expand Domestic Service Offerings. As a subsidiary of Computer Sciences Corporation, we primarily sought to provide our services internationally. We intend to compete for business opportunities domestically, including in the homeland security, domestic aviation, base operations and range services markets.

 

Increase Profitability and Operating Efficiency. We believe that our profitability will continue to improve as we anticipate our customers to shift away from cost reimbursement to time-and-materials contracts and fixed-price contracts. We base our belief on the fact that we are currently bidding on more fixed-price and time-and-material contracts. In addition, although the portion of our revenue comprised of fixed-price contracts decreased from 30% in fiscal 2003 to 24% in fiscal 2004, our recent revenue trends support the fact that fixed-price and time-and-material contracts comprise a greater portion of our revenues. For example, the increased percentage of fixed-price contracts in our business mix was 24% in fiscal 2004 and increased to 27% for the nine months ended December 30, 2005. In addition, time-and-material contracts have increased from 31% of our revenue in fiscal 2003 to 38% for the nine months ended December 31, 2005. As a result of our extensive experience and understanding of the cost and pricing structure in fixed-price and time-and-material contracts, we believe that such contracts have the potential to be more profitable for us than cost-reimbursement contracts. We believe that these recent trends have contributed to a growth in our EBITDA margin from 4.9% in fiscal 2004 to 6.0% for fiscal 2005. Further, we will continue to focus on increasing cash flows and achieving operating efficiencies.

 

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Selectively Pursue Acquisitions. We intend to evaluate and pursue acquisitions on a strategic basis, with a view to increasing our revenues, improving our profitability and strengthening our competitive position through adding complementary skills and customers.

 

Summary of Risk Factors

 

We face certain risks in maintaining our competitive position and implementing our business strategy. Substantially all of our revenues are derived from contracts with the Department of Defense and the Department of State. Changes in Department of Defense and/or Department of State spending or termination of our contracts by the Department of Defense and/or the Department of State could have a material adverse effect on our business, results of operations and financial condition. In addition, we may never receive actual task orders to deliver services under our indefinite delivery, indefinite quantity contracts. Furthermore, political destabilization or insurgency in the regions in which we operate may keep us from continuing to provide services under our contracts or from expanding our service offerings in those regions. An accident or incident involving our employees or third parties also could adversely impact our business.

 

On February 11, 2005, our operating company entered into a $420.0 million senior secured credit facility with various lenders, including Goldman Sachs Credit Partners, L.P., Bear Stearns Corporate Lending Inc. and affiliates of Credit Suisse Securities (USA) LLC and UBS Securities LLC. On February 11, 2005, our operating company sold $320.0 million in aggregate principal amount of senior subordinated notes due 2013. As of December 30, 2005, on a pro forma basis after giving effect to the Offering Transactions and assuming a sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of the prospectus, we would have had aggregate indebtedness of $601.7 million (excluding $7.8 million in outstanding letters of credit). The indenture governing our senior subordinated notes permits us to redeem up to $112.0 in aggregate principal amount of such notes with the proceeds of an equity offering. Based on the foregoing assumption and assuming this offering was consummated on May 5, 2006, approximately 30 days thereafter we intend to redeem $51.9 million of our senior subordinated notes with proceeds from this offering. Our substantial level of indebtedness may make it difficult for us to satisfy our debt obligations and may make it difficult to obtain financing for working capital.

 

None of the net proceeds of the Offering Transactions (as defined below) will be used to further invest in our business. The amount of the distribution to the holder of our Class B common stock which represents a portion of our profit will depend on the distribution date. Based on our accumulated net profits since inception through December 30, 2005, the entire distribution to the holders of our Class B common stock would be a return of capital.

 

Our controlling stockholder will own approximately 56.1% of our then outstanding common stock, assuming the sale of 25.0 million shares of our Class A common stock. If the underwriters’ over-allotment option is exercised in full, our controlling stockholder will own approximately 52.7% of our then outstanding common stock. Our controlling stockholder will continue to be able to control the election of our directors, determine our corporate and management policies and determine without the consent of our other stockholders the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions.

 

We believe that the most significant other risks that we face include:

 

    our limited experience as a stand alone entity;

 

    political and economic events affecting the United States and/or other countries or regions of the world;

 

    our ability to attract and retain customers and to remain competitive in the markets we serve;

 

    our dependence on key personnel; and

 

    other factors discussed below under the caption “Risk Factors.”

 

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Our Sponsor

 

We currently are controlled by The Veritas Capital Fund II, L.P., a private equity investment fund organized and managed by Veritas Capital Management II, L.L.C., a leading private equity firm, and its co-investors, consisting of Veritas Capital Investments II A, LLC and Carlisle Ventures Inc. (an affiliate of the Northwestern Mutual Life Insurance Company). We refer to The Veritas Capital Fund II, L.P. and its affiliates in this prospectus as “Veritas Capital.” Founded by Robert B. McKeon in 1992, Veritas Capital is a leading investor in middle-market government services, defense and aerospace companies. Since its inception, Veritas Capital has invested a majority of its capital under management in businesses that directly serve the government services, defense and aerospace markets. As part of its focus on this industry, Veritas Capital has established a Defense & Aerospace Advisory Council comprised primarily of former high-ranking officials from the Department of State and the Department of Defense. Our sponsor is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. We have been advised by our sponsor that none of its existing portfolio companies currently compete directly or indirectly with us. We have also been advised by our sponsor that although they currently have no agreements to acquire any competing company, they routinely identify potential acquisition targets. We have been informed by our sponsor that they have entered into confidentiality agreements with companies, some of which compete with us, in order to begin their diligence and evaluate potential acquisition targets through either a competitive bidding process or direct negotiations with potential targets. Although the instruments governing our indebtedness contain certain restrictions on our ability to consummate acquisitions, incur additional indebtedness and enter into affiliated transactions, our sponsor may consider combining our operations with those of another company. We have been informed by our sponsor that they are not currently considering or have any arrangements to combine our operations with another entity.

 

Prior to giving effect to this offering, DIV Holding LLC, a company in which Veritas Capital owns 86.0% of the outstanding membership interest, owns all of our common stock. Upon the consummation of the Offering Transactions (as described below) DIV Holding LLC will beneficially own 32.0 million shares, representing 56.1% of our total common stock. Prior to the consummation of this offering we will reclassify our common stock into Class B common stock and authorize Class A common stock offered hereby. DIV Holding LLC will be the only holder of our Class B common stock, and therefore will be the only stockholder entitled to receive the payment of the special Class B distribution and any additional special Class B distribution assuming the exercise of the underwriters’ over-allotment option. See “Dividend Policy.” If DIV Holding LLC distributes the proceeds, Veritas Capital will receive $86.0 million of the $100.0 million special Class B distribution and 86.0% of the amount of any additional special Class B distribution ($24.2 million if the over-allotment option is exercised in full), assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus. Veritas Capital will also receive a $5.0 million transaction fee after giving effect to this offering as consideration for planning, structuring and related services. For further information, see “Principal Stockholder.”

 

The Transactions

 

On February 11, 2005, together with Veritas Capital, we acquired our operating company from Computer Sciences Corporation. The purchase price for the acquisition was $937.0 million after giving effect to a net working capital adjustment in favor of Computer Sciences Corporation in the amount of $65.55 million and $6.1 million of accumulated dividends in connection with the preferred stock issued for satisfaction of the working capital adjustment. Of the $937.0 million purchase price, $775.0 million was paid in cash, $140.6 million was paid to Computer Sciences Corporation in the form of our preferred equity and the remaining amounts were transaction expenses other than $6.1 million in accumulated dividends which is currently owed on the preferred stock issued in connection with the working capital adjustment. An additional preferred equity investment of $50.0 million was made in our parent by The Northwestern Mutual Life Insurance Company. We refer to the foregoing transaction as the “2005 Acquisition” in this prospectus. We entered into a transition services

 

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agreement with Computer Sciences Corporation upon the closing of the 2005 Acquisition. Computer Sciences Corporation performs certain employee benefits advising and consulting services on an hourly basis as necessary. Pursuant to the agreement, Computer Sciences Corporation also continues to perform personnel, accounting, and communication services. We provide all other services without support from Computer Sciences Corporation. The total cost of transition services during fiscal 2005 and the nine months ended December 30, 2005, were $0.4 million and $1.4 million, respectively.

 

See “The 2005 Acquisition” for further information concerning the 2005 Acquisition, including information on the closing purchase price and adjustments.

 

The Northwestern Mutual Life Insurance Company owns 100% of our Series A-1 preferred stock. Computer Sciences Corporation owns 100% of our Series A-2 preferred stock. Assuming a redemption date of May 5, 2006, the Northwestern Mutual Life Insurance Company will receive $59.9 million and Computer Sciences Corporation will receive $168.3 million upon the redemption of our preferred stock, which includes prepayment penalties of $1.5 million and $4.2 million, respectively.

 

Ownership Structure

 

The following chart shows our organizational structure immediately following the consummation of this offering (after giving effect to the automatic conversion of our Class B common stock into Class A common stock):

 

LOGO


(1) All of our U.S. subsidiaries guaranteed payment under the senior subordinated notes. They are also guarantors of our senior secured credit facility.
(2) None of our foreign subsidiaries guaranteed payments under the senior subordinated notes.

 

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As used in this prospectus, we refer to the “Transactions” collectively as (i) the consummation of the 2005 Acquisition, (ii) the borrowings under our senior secured credit facility entered into in connection with 2005 Acquisition, (iii) the issuance of the 9.50% senior subordinated notes due 2013 issued by our operating company, or our senior subordinated notes, and the application of the proceeds therefrom and (iv) the Offering Transactions.

 

The Offering Transactions

 

The following transactions have or will have occurred before the consummation of this offering:

 

(i) the amendment of our existing Certificate of Incorporation or the Amended and Restated Certificate of Incorporation, among other things to reclassify our outstanding shares of common stock into shares of our Class B common stock, and to create a new class of authorized common stock known as the Class A common stock;

 

(ii) the declaration of the special Class B distribution of $100.0 million payable upon the consummation of this offering and an additional special Class B distribution payable on or before June 15, 2006, representing 50% of the aggregate net proceeds that we would receive from the sale of up to 3,750,000 additional shares of our Class A common stock, to the extent that the underwriters exercise their over-allotment option, in each instance, payable to DIV Holding LLC, the only holder of our Class B common stock, and

 

(iii) the waiver from our lenders, including Goldman Sachs Credit Partners L.P. and Bear Stearns Corporate Lending Inc. and affiliates of Credit Suisse Securities (USA) LLC and UBS Securities LLC to permit the declaration and payment of the special Class B distribution and the mandatory prepayment required with proceeds of equity offerings.

 

The following transactions will occur following the consummation of this offering:

 

(i) the redemption of all of our currently outstanding preferred stock, of which approximately $222.5 million in stated amount including accrued and unpaid dividends thereon was outstanding as of the anticipated date of redemption of May 5, 2006 (including preferred stock issued and the accrued and unpaid dividends related to the working capital adjustment);

 

(ii) the payment of a special Class B distribution in the amount of $100.0 million, to the holders of Class B common stock on or before June 15, 2006;

 

(iii) upon the earlier of (i) the payment in full of the special Class B distribution and, if applicable, the additional special Class B distribution or (ii) the expiration of the underwriters over-allotments option, if unexercised, the automatic conversion of all of our outstanding shares of Class B common stock into outstanding shares of Class A common stock on a one-for-one basis;

 

(iv) the redemption, approximately 30 days after the consummation of this offering, of up to $112.0 million of the $320.0 million aggregate principal amount of the senior subordinated notes;

 

(v) the payment of certain prepayment penalties of up to $11.5 million as of December 30, 2005, $5.7 million of which represents the prepayment penalties on our preferred stock and $5.8 million of which represents prepayment penalties on our senior subordinated notes, assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus; and

 

(vi) the payment of certain transaction expenses of approximately $35.0 million, including a fee of $5.0 million paid to Veritas Capital Management II, LLC. See “Use of Proceeds.”

 

The amount of the distribution to the holder of our Class B common stock which represents a portion of our profit will depend on the distribution date. Based on our accumulated net profits since inception through December 30, 2005, the entire distribution to the holders of our Class B common stock would be a return of capital.

 

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Assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and assuming a redemption date of May 5, 2006, holders of our preferred stock will receive $222.5 million, and we will redeem $51.9 million of the $320.0 million aggregate principal amount of the senior subordinated notes. To the extent that the net proceeds we receive from this offering increase above or decrease below the $365.0 million of net proceeds we expect to receive, we will redeem a larger or smaller portion of our senior subordinated notes on a pro rata basis. A $1.00 increase in the assumed initial offering price of $16.00 per share will result in the redemption of $74.8 million in aggregate principal amount of our senior subordinated notes. A $1.00 decrease in the assumed initial offering price of $16.00 per share will result in the redemption of $29.0 million in aggregate principal amount of our senior subordinated notes. To the extent that additional proceeds resulting from a $1.00 increase in the assumed initial offering price of $16.00 per share are used to increase the amount of our senior subordinated notes which are redeemed, pro forma annual interest expense would decrease by approximately $2.2 million, and pro forma annual net income would increase by approximately $1.4 million. To the extent that less proceeds resulting from a $1.00 decrease in the assumed initial offering price of $16.00 per share decrease the amount of our senior subordinated notes which are redeemed, pro forma annual interest expense would increase by approximately $2.2 million, and pro forma annual net income would decrease by approximately $1.4 million. None of the net proceeds of this offering will be used to further invest in our business.

 

Upon the consummation of the Offering Transactions (as described below), without giving effect to the exercise by the underwriters of their over-allotment option, we will be issuing 25.0 million shares of our Class A common stock, representing 43.9% of our then outstanding common stock.

 

If the underwriters’ over-allotment option is exercised to purchase additional shares of our Class A common stock, 50% of the amount of the net proceeds of such exercise will be used to pay an additional special Class B distribution. For more information on the special Class B distribution, see “Dividend Policy.”

 

In this prospectus, we refer to the foregoing transactions occurring immediately before the consummation of this offering, the consummation of the offering and the transactions occurring following consummation of this offering collectively as the “Offering Transactions.”

 

Recent Results

(Unaudited)

 

Our consolidated financial statements for the fiscal year ended March 31, 2006 are not yet available and our independent registered public accounting firm, Deloitte & Touche LLP, has not completed its audit of the consolidated financial statements for such period. Our expectations with respect to our unaudited results for the period discussed below are based upon management estimates. The estimates set forth below were prepared based upon a number of assumptions, estimates and business decisions that are inherently subject to significant business and economic conditions and competitive uncertainties and contingencies, many of which are beyond our control. This summary is not meant to be a comprehensive statement of our unaudited financial results for this period and our actual results may differ from these estimates.

 

We are providing the following estimated results for the three months ended March 31, 2006:

 

    Revenues of between $523.0 million and $553.0 million;

 

    Expenses of between $487.7 million and $511.7 million;

 

    Net income of between $4.3 million and $8.1 million; and

 

    EBITDA of between $48.1 million and $54.1 million.

 

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Revenues

 

We expect our revenues for the three months ended March 31, 2006 to be between $523.0 million and $553.0 million, an increase of between $2.1 million and $32.1 million from the same period last year. The primary reason for this increase is a result of the increase in the number of International Police Liaison Officers deployed in Iraq and Afghanistan in connection with the Civilian Police Program, International Narcotics and Law Enforcement Air-Wing program related to drug eradication in Afghanistan and the addition of the Nigeria airport construction project. These increases offset decreases on the Worldwide Personal Protective Services program in Afghanistan, and the loss of the Oceangraphics contract under DynMarine.

 

Revenues for the three months ended March 31, 2006 as compared to the three months ended December 30, 2005 are expected to decrease between $30.6 million and $0.6 million primarily due to decreases on the International Narcotics and Law Enforcement Air-Wing program due to the timing of helicopter modifications, and on the Worldwide Personal Protective Services contract due to the timing of construction related revenue.

 

Revenues for the fiscal year ended March 31, 2006 are expected to be between $1,941.2 million and $1,971.2 million, an increase of between $20.3 million and $50.3 million as compared to the fiscal year ended April 1, 2005. This increase is primarily due to increased business under the International Narcotics and Law Enforcement Air-Wing program related to the drug eradication efforts in Afghanistan, aviation equipment modifications under the Life Cycle Contractor Support program and new work constructing an airport in Nigeria. These increases in revenues were offset by the decision to exit a series of contracts to provide security and logistics support to various U.S. Government construction projects in the Middle East as a subcontractor, construction and equipment purchases during fiscal 2005 and the discontinuation of the Oceangraphics contract under DynMarine.

 

Expenses

 

We expect expenses, which include cost of services; selling, general and administrative; and depreciation and amortization for the three months ended March 31, 2006 to be between $487.7 million and $511.7 million, a decrease of $16.5 million to an increase of $7.5 million as compared to the same period in fiscal year 2005. The decrease, if any, is due to lower expenses related to several fixed-price construction projects and lower expenses to provide services under several Civilian Police task orders. These expense reductions are partially offset by higher administrative cost as we continue to develop our administrative functions as an independent company. The increase, if any, in expenses is attributable to the additional revenues between the two periods related to us achieving the high end of our revenues estimate, which offsets the factors contributing to an expense decrease as previously described.

 

Expenses for the three months ended March 31, 2006 as compared to the three months ended December 30, 2005 are expected to decrease between $42.4 million and $18.4 million. This reduction is not only due to lower corresponding revenue, but also due to the lower expenses related to several fixed-price construction projects and lower expenses to provide services under several Civilian Police task orders.

 

Expenses for the fiscal year ended March 31, 2006 are expected to be between $1,842.6 million and $1,866.6 million, an increase of between $23.4 million and $47.4 million. This increase results primarily from increased intangible amortization during the current year. Intangible amortization during the current fiscal year is based on the 2005 Acquisition, which included a step-up in basis of our customer related intangible assets resulting in increased amortization. An independent valuation study completed on February 11, 2005 was performed to allocate the purchase price between goodwill and intangible assets. The intangible amortization for 45 of the 52 weeks for the fiscal year ended April 1, 2005 is the allocated portion of the total intangible amortization from the March 2003 purchase of DynCorp by Computer Sciences Corporation. These transactions are described in more detail in Note 3 of the annual consolidated financial statements found elsewhere in this

 

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prospectus. The increase in expenses is also attributable to the additional revenue between the two periods attributable if we achieve the high end of our revenue estimate, as well as the additional administrative cost previously described.

 

Net Income

 

We expect net income for the three months ended March 31, 2006 to be between $4.3 million and $8.1 million, an increase of between $2.1 million and $5.9 million as compared to the same period during the fiscal year ended April 1, 2005. The increase is primarily due to the completion of several fixed-price construction projects and the final negotiation of task orders under the Civilian Police program. These increases are offset by increased interest expense and intangible amortization. The purchase of our operating company by Veritas Capital from Computer Science Corporation closed on February 11, 2005, and therefore the three months ended April 1, 2005 only reflects interest expense and intangible amortization for approximately seven weeks. As a subsidiary of Computer Sciences Corporation, interest expense was at the corporate level, and not allocated down to subsidiaries.

 

Net Income for the three months ended March 31, 2006 as compared to the three months ended December 30, 2005 will increase between $2.7 million and $6.5 million primarily due to favorable performance on completed fixed price construction projects and the final negotiation of task orders under the Civilian Police program.

 

Net income for the fiscal year ended March 31, 2006 is expected to be between $5.8 million and $9.6 million, a decrease of between $50.8 million and $47.0 million as compared to the fiscal year ended April 1, 2005. This decrease is primarily due to significantly higher interest expense and intangible amortization for the full twelve month period ended March 31, 2006 versus interest expense and intangible amortization for approximately seven weeks during the twelve months ended April 1, 2005. During the majority of the twelve months ended April 1, 2005, we were a subsidiary of Computer Science Corporation, and during that time interest expense was recorded at the corporate level only, and not allocated down to subsidiaries. In addition, our intangible amortization in the current year is based on the 2005 Acquisition, which included a step-up in basis of our customer related intangibles resulting in increased amortization during the current year. Partially offsetting higher interest expense and intangible amortization occurring in the current year are higher profits resulting from a greater percentage of revenue derived from higher margin fixed-price and time-and-material contracts, favorable performance on completed fixed-price construction projects, and the final negotiation of fixed-price task orders under the Civilian Police program all occurring during the current year.

 

EBITDA

 

We expect EBITDA for the three months ended March 31, 2006 to be between $48.1 million and $54.1 million, an increase of between $24.5 million and $30.5 million as compared to the three months ended April 1, 2005. The primary reason for this increase is favorable performance on completed fixed-price construction projects and the final negotiation of fixed-price task orders under the Civilian Police program.

 

EBITDA for the three months ended March 31, 2006 as compared to the three months ended December 30, 2005 is expected to increase between $13.7 million and $19.7 million. The primary reason for this increase is favorable performance on completed fixed-price construction projects, and the final negotiation of fixed-price task orders under the Civilian Police program.

 

EBITDA for the fiscal year ended March 31, 2006 is expected to be between $145.0 million and $151.0 million, an increase of between $30.5 million and $36.5 million as compared to fiscal year ended April 1, 2005. The primary reason for the increase is higher revenue mix from higher margin fixed-price or time-and-material

 

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contracts compared to lower margin cost type contracts. In addition, the fiscal year ended March 31, 2006 is expected to be favorably impacted by strong performance on completed fixed-price construction projects and the final negotiation of fixed-price task orders under the Civilian Police program.

 

EBITDA is a primary component of certain covenants under the Company’s senior secured credit facility. In addition, EBITDA does not represent net income or cash flows from operations, as these terms are defined under generally accepted accounting principles in the United States of America (“GAAP”) and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP. EBITDA as presented in this prospectus is not necessarily comparable to similarly titled measures reported by other companies.

 

Our Corporate Information

 

We are a Delaware corporation. Our principal executive offices are located at 8445 Freeport Parkway, Suite 400, Irving, Texas, 75063 and our telephone number is (817) 302-1460. Our website address is http://www.dyncorpinternational.com . We do not incorporate the information on our website into this prospectus and you should not consider it part of this prospectus.

 

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THE OFFERING

 

Issuer

DynCorp International Inc.

 

Common stock offered by the issuer

25,000,000 shares of Class A common stock.

 

Common stock

Immediately following the consummation of this offering, we will have two classes of common stock outstanding: Class A and Class B. Upon either the expiration of, or exercise in full of, the underwriters’ over-allotment and the payment in full of the additional special Class B distribution, if any, the Class B shares of common stock will automatically convert, on a one-for-one basis, into Class A common stock.

 

 

Shares of Class A common stock and shares of Class B common stock will be identical (including with respect to voting rights), except for (i) the initial special Class B distribution which we will pay to DIV Holding LLC upon consummation of the offering; (ii) the convertibility of Class B common stock into Class A common stock after the payment in full of the special Class B distribution as described herein; (iii) the right of the holders of Class B common stock to consent to any changes to our governing documents that would adversely affect the Class B common stock; and (iv) the right to receive an additional special Class B distribution on or before June 15, 2006, representing 50% of the aggregate net proceeds that we would receive from the sale of up to 3,750,000 additional shares of our Class A common stock to the extent that the underwriters exercise their over-allotment option.

 

 

As used in this prospectus, the term “common stock,” when used in reference to our capital structure before the filing of our Amended and Restated Certificate of Incorporation described under the “Offering Transactions,” means our existing single class of common stock, and, when used in reference to our capital structure following the filing of such certificate, means the Class A and Class B common stock, unless otherwise specified.

 

 

Except as otherwise indicated, the number of shares of our common stock disclosed in this prospectus prior to the reclassification of our outstanding shares of common stock into outstanding shares of Class B common stock, as described in “—The Offering Transactions,” reflect the number of shares of Class B common stock into which such shares of common stock would be reclassified assuming such shares were outstanding at the time of such reclassification.

 

Use of proceeds

Assuming an offering of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, we will receive net proceeds from the offering of approximately $365.0 million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, as described in (v) below. A $1.00

 

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increase (decrease) in the assumed initial offering price of $16.00 per share would increase (decrease) the net proceeds of this offering by $23.5 million, assuming the sale of 25.0 million shares of our Class A common stock and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the gross proceeds of $400 million from this offering (i) to redeem all of our currently outstanding preferred stock, of which approximately $222.5 million in stated amount was outstanding as of the anticipated date of redemption of May 5, 2006 (including preferred stock issued and the accrued and unpaid dividends related to the working capital adjustment); (ii) to pay a special Class B distribution in the amount of $100.0 million, assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, to DIV Holding LLC; (iii) for the redemption, approximately 30 days after the consummation of this offering, of up to $112.0 million aggregate principal amount of the senior subordinated notes, which are based on the foregoing assumption and assuming that this offering was consummated on May 5, 2006, would result in the redemption of $51.9 million of such notes; (iv) based on the foregoing assumption, to pay certain prepayment penalties of approximately $11.5 million, as of December 30, 2005, $5.7 million of which represents the aggregate pre-payment penalties on our preferred stock and $5.8 million of which represents prepayment penalties on our senior subordinated notes, assuming an offering of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus; and (v) to pay transaction expenses of approximately $35.0 million, including a fee of $5.0 million paid to Veritas Capital Management II, LLC. To the extent the equity proceeds are insufficient to pay transaction fees and expenses, we may use up to $20.0 million of available cash on hand to pay fees and expenses. None of the net proceeds of this offering will be used to further invest in our business.

 

 

If the underwriters’ over-allotment option is exercised to purchase additional shares, 50% of the amount of the net proceeds of such exercise will be used to pay an additional special Class B distribution on or before June 15, 2006. For more information on the special Class B distribution, see “Dividend Policy.”

 

 

As described under “Certain Relationships and Related Transactions,” assuming an offering of 25.0 million shares of our Class A common stock at $16.00 per share, the mid point of the price range set forth on the cover page of this prospectus, Veritas Capital will receive approximately $91.0 million or 24.9% of the net proceeds of this offering, consisting of $86.0 million of the $100.0 million special Class B distribution and a $5.0 million fee. In addition, to the extent that the over-allotment option was exercised in full, assuming a distribution of the additional special Class B distribution to its equity

 

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holders by DIV Holding LLC, Veritas Capital would receive an additional $24.2 million. The amount of the distribution to the holder of our Class B common stock which represents a portion of our profit will depend on the distribution date. Based on our accumulated net profits since inception through December 30, 2005, the entire distribution to the holders of our Class B common stock would be a return of capital. Assuming a redemption date of May 5, 2006, holders of our preferred stock will receive $222.5 million, and we will redeem $51.9 million of the $320.0 million aggregate principal amount of the senior subordinated notes, assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus.

 

Dividend policy

We do not currently pay dividends on our outstanding common stock. We do not intend to pay cash dividends on our Class A common stock for the foreseeable future.

 

New York Stock Exchange Symbol

“DCP”

 

Risk factors

For a discussion of risks relating to our company, our business and an investment in our Class A common stock, see “Risk Factors” and all other information set forth in this prospectus before investing in our Class A common stock.

 

Unless we specifically state otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option to purchase 3,750,000 additional shares; if the underwriters exercise their over-allotment option in full, the number of shares of our Class A common stock outstanding after the offering will be 60,750,000 irrespective of the initial offering price per share of our Class A common stock offered hereby.

 

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Summary Consolidated Historical and Pro Forma Financial Data

 

On March 7, 2003, DynCorp and its subsidiaries, including our operating company, were acquired by Computer Sciences Corporation. The financial statements included in this prospectus for any period prior to March 7, 2003, the date of the Computer Sciences Corporation acquisition, are referred to as the “original predecessor period” statements. We refer to the financial statements for the period March 8, 2003 to February 11, 2005, the date of the 2005 Acquisition, as the “immediate predecessor period” statements. On February 11, 2005, together with Veritas Capital we acquired our operating company from Computer Sciences Corporation. The 2005 Acquisition has been accounted for using the purchase method of accounting, and the assets acquired and liabilities assumed have been accounted for at their fair market values at the date of consummation based on preliminary estimates. The final allocation of the purchase price may differ from the amount reflected herein, and that difference could be significant.

 

The following table sets forth summary historical consolidated financial and other operating data, and pro forma data for DynCorp International. The summary consolidated historical financial data as of December 30, 2005 and April 1, 2005, for the nine months ended December 30, 2005 and the period February 12, 2005 through April 1, 2005 are derived from our consolidated financial statements for the successor period. The summary consolidated historical financial data for the period April 3, 2004 through February 11, 2005, the nine months ended October 1, 2004 and as of and for the year ended April 2, 2004 and for the period March 8, 2003 through March 28, 2003 are derived from our consolidated financial statements for the immediate predecessor period. The summary consolidated financial information for the period March 30, 2002 through March 7, 2003 have been derived from our consolidated financial statements for the original predecessor period. The summary consolidated financial information as of and for the nine month period ended December 30, 2005 and for the nine month period ended December 31, 2004 have been derived from our unaudited consolidated financial statements during the successor and immediate predecessor period, respectively, which, in our opinion, have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the information included therein.

 

The pro forma statement of operations data for the year ended April 1, 2005 includes the historical results of operations for the successor period February 12, 2005 to April 1, 2005 combined with the historical results of operations for the immediate predecessor period April 3, 2004 to February 11, 2005 and gives effect to the Transactions as if the Transactions had occurred on April 3, 2004. The pro forma statement of operations data for the nine months ended December 30, 2005 gives effect to the Transactions and Offering Transactions as if the Transactions and Offering Transactions had occurred on April 3, 2004. The unaudited pro forma financial data does not necessarily reflect what our results of operations or financial position would have been had the transaction taken place on the date indicated and is not intended to project our results of operations or financial position for any future period or date.

 

The information set forth below should be read in conjunction with the information under “Capitalization,” “Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes and the financial statements included elsewhere in this prospectus.

 

17


Table of Contents
    Original
Predecessor
Period


    Immediate Predecessor Period

    Successor
Period


    Immediate
Predecessor
Period


    Successor
Period


    Pro Forma

 
   

March 30,
2002-

March 7,
2003


   

21 Days

Ended

March 28,

2003


   

Fiscal Year

Ended

April 2,
2004


   

April 3, 2004-
February 11,

2005


   

49 Days

Ended

April 1,

2005


   

Nine

Months

Ended

December 31,

2004


   

Nine

Months

Ended

December 30,

2005


   

Year

Ended

April 1, 2005


   

Nine

Months

Ended

December 30,
2005


 
    (dollars in thousands, except per share data)  

STATEMENT OF OPERATIONS DATA:

                                                                       

Revenues

  $ 859,112     $ 59,240     $ 1,214,289     $ 1,654,305     $ 266,604     $ 1,400,054     $ 1,418,245     $ 1,920,909     $ 1,418,245  
   


 


 


 


 


 


 


 


 


Costs of Services

    787,649       53,482       1,106,571       1,496,109       245,406       1,263,414       1,262,255       1,741,515       1,262,255  

Selling, General and Administrative

    40,316       3,414       48,350       57,755       8,408       46,452       59,874       65,388       57,024  

Depreciation and Amortization

    351       265       8,148       5,922       5,605       5,095       32,763       40,969       32,763  
   


 


 


 


 


 


 


 


 


Total Costs and Expenses

    828,316       57,161       1,163,069       1,559,786       259,419       1,314,961       1,354,892       1,847,872       1,352,042  
   


 


 


 


 


 


 


 


 


Operating Income

    30,796       2,079       51,220       94,519       7,185       85,093       63,353       73,037       66,203  

Interest Expense

    —         —         —         —         8,054       —         42,278       49,701       37,953  

Interest on Mandatory Redeemable Shares

    —         —         —         —         2,182       —         14,149       —         —    

Interest Income

    (43 )     (2 )     (64 )     (170 )     (7 )     (130 )     (166 )     (177 )     (166 )
   


 


 


 


 


 


 


 


 


Net Income (loss) Before Taxes

    30,839       2,081       51,284       94,689       (3,044 )     85,223       7,092       23,513       28,416  

Provision for Income Taxes

    11,973       852       19,924       34,956       60       30,779       5,607       8,628       10,287  
   


 


 


 


 


 


 


 


 


Net Income (loss)

  $ 18,866     $ 1,229     $ 31,360     $ 59,733     $ (3,104 )   $ 54,444     $ 1,485     $ 14,885     $ 18,129  
   


 


 


 


 


 


 


 


 


Net (loss) income per common share: (1)

                                                                       

Basic and diluted

                                  $ (6.21 )           $ 2.97     $ 0.26     $ 0.32  

Weighted average common shares outstanding: (1)

                                                                       

Basic and diluted

                                    500,000               500,000       57,000,000       57,000,000  

Pro forma net (loss) income per share: (2)

                                                                       

Basic and diluted

                                  $ (0.08 )           $ 0.04                  

Pro forma weighted average shares outstanding: (2)

                                                                       

Basic and diluted

                                    38,250,000               38,250,000                  

(1)   Historical predecessor periods do not reflect the 64 for 1 stock split, which will occur prior to the consummation of this offering.
(2)   For the purposes of pro forma earnings per share calculations, we have considered the effects of the $100.0 million special distribution expected to be paid to the holders of our Class B common stock upon consummation of this offering.

 

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Table of Contents
    Original
Predecessor
Period


    Immediate Predecessor Period

  Successor
Period


  Immediate
Predecessor
Period


    Successor
Period


    Pro Forma

 
   

March 30,
2002-

March 7,
2003


   

21 Days

Ended

March 28,
2003


 

Fiscal
Year

Ended

April 2,
2004


   

April 3, 2004-
February 11,

2005


 

49 Days

Ended

April 1,
2005


 

Nine

Months

Ended

December 31,
2004


   

Nine

Months

Ended

December 30,
2005


   

Year

Ended

April 1,
2005


   

Nine

Months

Ended

December 30,

2005


 
    (dollars in thousands, except for backlog, which is in millions)  

OTHER FINANCIAL DATA:

                                                                 

EBITDA (1)(2)

  $ 31,781     $ 2,382   $ 60,072     $ 101,326   $ 13,279   $ 90,960     $ 96,909     $ 115,379     $ 99,759  

Capital Expenditures

    1,011       11     2,047       8,473     244     8,324       1,338       8,717       1,338  

SELECTED OPERATING INFORMATION:

                                                                 

Contract Recompete Win Rate (3)

    79 %     NA     100 %     NA     NA     NA       100 %     100 %     100 %

New Contract Win Rate (3)

    94 %     NA     72 %     NA     NA     88 %     70 %     74 %     70 %

Contracted Backlog (4)

    NA     $ 2,028   $ 2,164       NA   $ 2,040   $ 2,184     $ 2,692     $ 2,040     $ 2,692  

BALANCE SHEET DATA (5) :

                                                                 

Cash and Cash Equivalents

    NA     $ 4,541   $ 6,510       NA   $ 13,474   $ 17,846     $ 24,803       NA     $ 4,792  

Working Capital (6)

    NA       58,295     104,335       NA     200,367     169,746       234,693       NA       217,448  

Total Assets

    NA       481,097     579,829       NA     1,148,193     710,485       1,183,476       NA       1,164,358  

Total Debt

    NA       —       —         NA     826,990     —         875,241       NA       601,713  

Shareholders’ Equity

    NA       354,198     396,573       NA     96,918     483,978       99,063       NA       353,473  

(1)   EBITDA is a primary component of certain covenants under our senior secured credit facility and is defined as net income (loss) before interest expense, income taxes, depreciation and amortization. We believe that EBITDA is useful to investors as a way to evaluate our ability to incur and service debt, make capital expenditures and meet working capital requirements. EBITDA does not represent net income or cash flows from operations, as these terms are defined under generally accepted accounting principles, or GAAP, and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP. EBITDA as presented in this prospectus is not necessarily comparable to similarly titled measures reported by other companies.
(2)   The following table presents a reconciliation of net income to EBITDA for the periods included below:

 

    Original
Predecessor
Period


  Immediate Predecessor Period

 

Successor

Period


    Immediate
Predecessor
Period


 

Successor

Period


  Pro Forma

   

March 30,
2002-

March 7,
2003


 

21 Days

Ended

March 28,

2003


 

Fiscal Year

Ended

April 2,

2004


 

April 3, 2004-
February 11,

2005


 

49 Days

Ended

April 1,

2005


   

Nine

Months

Ended

December 31,

2004


 

Nine

Months

Ended

December 30,
2005


 

Year

Ended

April 1,

2005


 

Nine

Months

Ended

December 30,

2005


    (dollars in thousands)

RECONCILIATION OF NET INCOME (LOSS) TO EBITDA:

                                                       

Net Income (loss)

  $ 18,866   $ 1,229   $ 31,360   $ 59,733   $ (3,104 )   $ 54,444   $ 1,485   $ 14,885   $ 18,129

Income Taxes

    11,973     852     19,924     34,956     60       30,779     5,607     8,628     10,287

Interest Expense

    —       —       —       —       10,236       —       56,427     49,701     37,953

Depreciation and Amortization

    942     301     8,788     6,637     6,087       5,737     33,390     42,165     33,390
   

 

 

 

 


 

 

 

 

EBITDA

  $ 31,781   $ 2,382   $ 60,072   $ 101,326   $ 13,279     $ 90,960   $ 96,909   $ 115,379   $ 99,759
   

 

 

 

 


 

 

 

 

 

(3)   Recompete and new contract win rates are calculated based on the dollar values of such contracts. “NA” reflects no new recompete or new contract awards during the referenced periods.
(4)   Contracted backlog data is as of the end of the applicable period.
(5)   Balance sheet data is as of the end of the applicable period.
(6)   Working capital is defined as current assets, net of current liabilities.

 

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Table of Contents

RISK FACTORS

 

An investment in our Class A common stock involves a high degree of risk. You should carefully consider the following information, together with other information in this prospectus, before buying shares of our Class A common stock. If any of the following risks or uncertainties occurs, our business, financial condition and operating results could be materially adversely affected. In that case, the trading price of our Class A common stock could decline and you may lose all or a part of the money you paid to buy our Class A common stock.

 

Risks Related to Our Business

 

We rely on sales to U.S. government entities. A loss of contracts with the U.S. government, a failure to obtain new contracts or a reduction of sales under existing contracts could adversely affect our operating performance and our ability to generate cash flow to fund our operations.

 

For fiscal 2005 and for the nine months ended December 30, 2005, the Civilian Police, Contract Field Teams and International Narcotics and Law Enforcement contracts accounted for 27.4%, 18.0%, and 8.1%, and 29.5%, 17.6% and 11.7% of our revenues, respectively. The loss of any one of these contracts would significantly and adversely affect our future revenues and earnings. We derived substantially all of our revenues from contracts and subcontracts with the U.S. government and its agencies, primarily the Department of State and the Department of Defense. Contracts with agencies of the Department of State represented 51.3%, 49.6% and 29.4% of our revenues for the nine months ended December 30, 2005, and for fiscal 2005 and 2004, and contracts with agencies of the Department of Defense represented 44.9%, 49.0% and 63.1% of our revenues over the same periods, respectively. The remainder of our revenues represent commercial contracts, including contracts in which we serve as subcontractor to other contractors with the U.S. government. We expect that U.S. government contracts, particularly with the Department of State and the Department of Defense, will continue to be our primary source of revenue for the foreseeable future. Continuation and renewal of our existing government contracts and new government contracts are, among other things, contingent upon the availability of adequate funding for various U.S. government agencies, including the Department of State and the Department of Defense. Changes in U.S. government spending could directly affect our operating performance and lead to an unexpected loss of revenue. Among the factors that could impact U.S. government spending and which would reduce our federal government contracting business are:

 

    a significant decline in, or reapportioning of, spending by the U.S. government, in general, or by the Department of State or the Department of Defense, in particular;

 

    changes, delays or cancellations of U.S. government programs or requirements;

 

    the adoption of new laws or regulations that affect companies that provide services to the U.S. government;

 

    U.S. government shutdowns or other delays in the government appropriations process;

 

    curtailment of the U.S. government’s outsourcing of services to private contractors;

 

    changes in the political climate, including with regard to the funding or operation of the services we provide; and

 

    general economic conditions.

 

These or other factors could cause U.S. government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts in whole or in part, to issue temporary stop work orders or not to exercise options to renew contracts. The loss or significant curtailment of material government contracts, or our failure to renew or enter into new contracts could adversely affect our operating performance and lead to an unexpected loss of revenue.

 

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Table of Contents

Our U.S. government contracts may be terminated by the U.S. government at any time prior to their completion and contain other unfavorable provisions, which could lead to unexpected loss of revenues.

 

Under the terms of our contracts, the U.S. government may unilaterally:

 

    terminate or modify existing contracts;

 

    reduce the value of existing contracts through partial termination;

 

    delay the payment of our invoices by government payment offices;

 

    audit our contract-related costs and fees; and

 

    suspend us from receiving new contracts pending resolution of alleged violations of procurement laws or regulations.

 

The U.S. government can terminate or modify any of its contracts with us either for its convenience or if we default by failing to perform under the terms of the applicable contract. A termination arising out of our default could expose us to liability and adversely affect our operating performance and lead to an unexpected loss of revenue.

 

Our government contracts typically have an initial term of one year with multiple option periods, exercisable at the discretion of the government at previously negotiated prices. The government is not obligated to exercise any option under a contract. Furthermore, the government is required to compete all programs and, therefore, may not automatically renew a contract. In addition, at the time of completion of any of our government contracts, the contract is required to be recompeted if the government still requires the services covered by the contract.

 

If the U.S. government terminates and/or materially modifies any of our contracts or if option periods are not exercised, our failure to replace revenue generated from such contracts would result in lower revenues and would likely adversely affect our earnings, which would have a material adverse effect on our financial condition and results of operations.

 

Our backlog as of December 30, 2005 was approximately $2.7 billion, of which $1.0 billion represented U.S. government funded contracted backlog and $1.7 billion represented U.S. government unfunded backlog. Backlog does not take into account any expenses associated with contractual performance and converting backlog into revenue would not reflect net income associated with the contracts. There can be no assurance that any of the contracts comprising our contracted backlog will result in actual revenue in any particular period or that the actual revenue from such contracts will equal our backlog. Furthermore, there can be no assurance that any contract included in our backlog that generates revenue will be profitable.

 

Our U.S. government contracts are subject to competitive bidding, both upon initial issuance and recompetition. If we are unable to successfully compete in the bidding process or if we fail to receive renewal, it could adversely affect our operating performance and lead to an unexpected loss of revenue.

 

Substantially all of our U.S. government contracts are awarded through a competitive bidding process, including upon renewal, and we expect that this will continue to be the case. There often is significant competition and pricing pressure as a result of this process. The competitive bidding process presents a number of risks, including the following:

 

    we must expend substantial funds and time to prepare bids and proposals for contracts;

 

    we may be unable to estimate accurately the resources and cost that will be required to fund any contract we win, which could result in substantial cost overruns; and

 

    we may encounter expense and delay if our competitors protest or challenge awards of contracts to us, and any such protest or challenge could result in a requirement to resubmit bids on modified specifications or in termination, reduction or modification of the awarded contract.

 

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Table of Contents

The government contracts for which we compete typically have multiple option periods, and if we fail to win a contract or a task order, we generally will be unable to compete again for that contract for several years. For example, we recently have lost task orders for which we competed under our Worldwide Personal Protective Services program in Israel, Haiti and Afghanistan. If we fail to win new contracts or to receive renewal contracts upon recompetition, it may result in additional costs and expenses and possible loss of revenue, and we will not have an opportunity to compete for these opportunities again until the current task orders expire.

 

Political destabilization or insurgency in the regions in which we operate may have a material adverse effect on our operating performance.

 

Certain regions in which we operate are highly unstable. Insurgency activities in the areas in which we operate may cause further destabilization in these regions. There can be no assurance that the regions we operate in will continue to be stable enough to allow us to operate profitably or at all. For fiscal 2005 and for the nine months ended December 30, 2005, respectively, revenues generated from our operations in Iraq and Afghanistan contributed 36.9% and 33.0% of our revenues. Insurgents in Iraq and Afghanistan have targeted installations where we have personnel and have contributed to instability in these countries. This could impair our ability to attract and deploy personnel to perform services in either or both locations. In addition, we have been required to increase compensation to our personnel as an incentive to deploy them to these regions. To date, we have been able to recover this added cost under the contracts, but there is no guarantee that future increases, if required, will be able to be passed on to our customers through our contracts. To the extent that we are unable to pass through such increased compensation costs to our customers, our operating margins would be adversely impacted, which could adversely affect our operating performance. We also may have difficulty obtaining insurance to cover our liabilities in these regions and for third-party general liability. We have been able to obtain insurance to cover our liabilities, however this could change or premiums may become prohibitively expensive. In addition, increased insurgency activities or destabilization, including civil unrest or a civil war in Iraq or Afghanistan, may lead to a determination by the U.S. government to halt our operations in a particular location, country or region and to perform the services using military personnel. Furthermore, in extreme circumstances, the U.S. government may decide to terminate all U.S. government activities including our operations under U.S. government contracts in a particular location, country or region and withdraw all military personnel. This could adversely affect our operating performance and may result in additional costs and expenses and possible loss of revenue.

 

Our indefinite delivery, indefinite quantity contracts are not firm orders for services and we may never receive revenues from these contracts, which could adversely affect our operating performance.

 

Many of our government contracts are indefinite delivery, indefinite quantity contracts, which are often awarded to multiple contractors. Award of an indefinite delivery, indefinite quantity contract does not represent firm orders for services. Generally, under an indefinite delivery, indefinite quantity contract, the government is not obligated to order a minimum of services or supplies from its contractor, irrespective of the total estimated contract value. Furthermore, under an indefinite delivery, indefinite quantity contract, the customer develops requirements for task orders that are competitively bid against all of the contract awardees, usually under a best-value approach. Many contracts also permit the government customer to direct work to a specific contractor. Our Civilian Police and Contract Field Team programs are performed under indefinite delivery, indefinite quantity contracts. A failure to rapidly deploy personnel may cause our customers to decide not to award us additional task orders under these contracts, which would have an adverse effect on our operating performance and may result in additional expenses and possible loss of revenue. For the nine months ended December 30, 2005, and for fiscal 2005, 58.2% and 56.3% of our revenues, respectively, were attributable to indefinite delivery, indefinite quantity contracts.

 

Our cost of performing under time-and-materials and fixed-price contracts may exceed our revenues which would result in a loss on the contracts.

 

Our government contract services have three distinct pricing structures: cost-reimbursement, time-and-materials and fixed-price, representing approximately 35%, 38% and 27% of our revenues, respectively, for the nine months ended December 30, 2005, and approximately 34%, 39% and 27% of our revenues, respectively, for

 

22


Table of Contents

fiscal 2005. With cost-reimbursement contracts, so long as actual costs incurred are within the contract ceiling and allowable under the terms of the contract, we are entitled to reimbursement of the costs plus a stipulated profit. We assume financial risk on time-and-materials and fixed-price contracts, because we assume the risk of performing those contracts at the stipulated prices or negotiated hourly rates. If we do not accurately estimate ultimate costs and control costs during performance of the work, we could lose money on a particular contract or have lower than anticipated margins also assume the risk of damage or loss to government property and we are responsible for third-party claims under fixed-price contracts. We believe that our profitability will continue to improve as we anticipate our customers to shift away from cost reimbursement to time-and-materials contracts and fixed-price contracts. We base our belief on recent trends in our revenues, the nature of the contracts that we are bidding on and the pricing structure in fixed-price and time-and-material contracts. As of December 30, 2005, seven of our 45 active contracts contained incentive based pricing terms. These contracts comprise 19.7% and 17.4% of our revenues, respectively, for fiscal 2005 and the nine months ended December 30, 2005. The failure to meet contractually defined performance standards may result in a loss of a particular contract or lower-than-anticipated margins. This may result in additional costs and expenses and possible loss of revenue.

 

A negative audit or other actions by the U.S. government could adversely affect our operating performance.

 

U.S. government agencies such as the Defense Contract Audit Agency routinely audit and investigate government contractors. These agencies review a contractor’s contract performance, cost structure and compliance with applicable laws, regulations and standards. The Defense Contract Audit Agency also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. In addition, government contract payments received by us for allowable direct and indirect costs are subject to adjustment after audit by government auditors and repayment to the government if the payments exceed allowable costs as defined in the government contracts. Audits have been completed on our incurred contract costs through March 28, 2003, and are continuing for subsequent periods. At any given time, many of our contracts are under review by the Defense Contract Audit Agency and other government agencies. We cannot predict the outcome of such ongoing audits and what, if any, impact such audits may have on our future operating performance.

 

A recent audit report issued by the Defense Contract Audit Agency on our Air-Wing Contract to the Department of State in June 2005 that we received in August 2005 reached the conclusion that we had incorrectly included certain cost elements in base pay for purposes of calculating hazard and post-differential pay, resulting in overbilling of $1.8 million. To the extent this matter is decided against us, we will need to refund the disputed amount and our revenues will be adversely affected.

 

As a U.S. government contractor, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which companies with solely commercial customers are not subject. In addition, if an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. Furthermore, our reputation could suffer serious harm if allegations of impropriety were made against us. If we were suspended or prohibited from contracting with the U.S. government generally, or any significant U.S. government agency, if our reputation or relationship with U.S. government agencies were impaired or if the U.S. government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, it could adversely affect our operating performance and possibly result in additional expenses and possible loss of revenue.

 

Suspension or debarment by the U.S. government could result in our inability to receive government contracts and could adversely affect our future operating performance.

 

As a U.S. government contractor, we must comply with laws and regulations relating to U.S. government contracts, which affect how we do business with our customers. For example, we are subject to the Federal

 

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Table of Contents

Acquisition Regulations, which govern the formation, administration and performance of U.S. government contracts, and many of our contracts performed in the United States are subject to the Service Contract Act which requires hourly employees to be paid certain specified wages and benefits. We include the cost of compliance with the Service Contract Act and other legal requirements in our contract pricing. However, our performance under our U.S. government contracts and our compliance with the terms of those contracts are subject to review by the government. If a government review or investigation uncovers a violation of the Service Contract Act, or improper or illegal activities relating to our U.S. government contracts, we may be subject to civil or criminal penalties or administrative sanctions, including contract termination, the assessment of penalties and suspension or debarment from doing business with U.S. government agencies. If the U.S. government initiates suspension or debarment proceedings against us or if we are indicted for or convicted of illegal activities relating our U.S. government contracts, we may lose our ability to win awards of contracts in the future or receive renewals of existing contracts for a period of time which could adversely affect our future operating performance.

 

An accident or incident involving our employees or third parties could harm our reputation and adversely affect our ability to compete for business and, as a result, adversely affect our operating performance.

 

We are exposed to liabilities arising out of the services we provide. Such liabilities may relate to an accident or incident involving our employees or third parties, particularly where we are deployed on-site at active military installations or in locations experiencing political or civil unrest, or they may relate to an accident or incident involving aircraft or other equipment we have serviced or used in the course of our business. Any of these types of accidents or incidents could involve significant potential claims of injured employees and other third parties, and claims relating to loss of or damage to government or third-party property. The amount of our insurance coverage may not be adequate to cover those claims or liabilities and we may be forced to bear substantial costs from an accident or incident. Substantial claims in excess of our related insurance coverage could adversely affect our operating performance and may result in additional expenses and possible loss of revenue. Moreover, any accident or incident for which we are liable, even if fully insured, may result in negative publicity which could adversely affect our reputation among our customers, including our government customers, and the public, which could result in us losing existing and future contracts or make it more difficult for us to compete effectively, which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

 

The expiration of our collective bargaining agreements could result in increased operating costs or work disruptions, which could potentially affect our operating performance.

 

As of December 30, 2005, we had over 14,000 employees located in 35 countries around the world, approximately 7,500 of whom are located inside the United States. Of these employees, approximately 1,450 are represented by labor unions. As of December 30, 2005, we had approximately 62 collective bargaining agreements. These agreements expire between March 2006 and December 2008. Although we believe that our relationships with these unions and our employees are satisfactory, there can be no assurance that we will not experience labor disruptions associated with the expiration or renegotiation of collective bargaining agreements or otherwise. We could experience a significant disruption of operations and increased operating costs as a result of higher wages or benefits paid to union members, which could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

 

Proceedings against us in domestic and foreign courts could result in legal costs and adversely affect our operating performance.

 

We are involved in various claims and lawsuits from time to time. For example, on September 11, 2001, a class action lawsuit seeking $100 million on behalf of approximately 10,000 citizens of Ecuador was filed against us and several of our affiliates in the U.S. District Court for the District of Columbia. The basis for the action arose from performance of a Department of State contract for the eradication of narcotic plant crops in Colombia. The lawsuit alleges personal injury, property damage and wrongful death as a consequence of the spraying of narcotic crops along the Colombian border adjacent to Ecuador. In the event that a court decides

 

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against us in this lawsuit and we are unable to obtain indemnification from the government and from Computer Sciences Corporation, or contributions from the other defendants, we may incur substantial costs. An adverse ruling in this case also could adversely affect our reputation and have a material affect on our ability to win future government contracts.

 

Other litigation in which we are involved includes wrongful termination and other adverse employment actions, breach of contract, personal injury and property damage actions filed by third parties. Actions involving third-party liability claims generally are covered by insurance; however, in the event our insurance coverage is inadequate to cover such claims, we will be forced to bear the costs arising from a judgment. We do not have insurance coverage for adverse employment and breach of contract actions and we bear all costs associated with such litigation and claims.

 

Competition in our industry could limit our ability to attract and retain customers or employees, which could result in a loss of revenue and/or a reduction in margins, which could adversely affect our operating performance.

 

Given the broad range of services that we provide, we compete with various entities across geographic and business lines. Competitors of our Field Technical Services operating division are typically large defense services contractors, who offer services associated with maintenance, training and other activities. Competitors of our International Technical Services operating division are various solution providers who typically compete in any one of our key business segments. We compete on the basis of a number of factors, including our broad range of services, geographic reach and mobility.

 

Some of our competitors have greater financial and other resources than we do or are better positioned than we are to compete for contract opportunities. For example, original equipment manufacturers that also provide aftermarket support services have a distinct advantage in obtaining service contracts for aircraft that they have manufactured, as they frequently have better access to replacement and service parts as well as an existing technical understanding of the platform they have manufactured. In addition, we are at a disadvantage when bidding for contracts put up for recompetition for which we are not the incumbent provider, because incumbent providers are frequently able to capitalize on customer relationships, technical knowledge and pricing experience gained from their prior service.

 

In addition to the competition we face in bidding for contracts and task orders, we must also compete to attract the skilled and experienced personnel integral to our continued operation. We hire from a limited pool of potential employees, with military and law enforcement experience, specialized technical skill sets and security clearances as prerequisites for many positions. Our failure to compete effectively for employees or excessive attrition among our skilled personnel could reduce our ability to satisfy our customers needs, and increase the costs and time required to perform our contractual obligations. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

 

We depend on Computer Sciences Corporation for certain transitional services. The failure of Computer Sciences Corporation to perform its obligations or the termination of this agreement could adversely impact our operating performance.

 

Our ability to effectively monitor and control our operations depends on the proper functioning of our information technology support systems. Prior to the 2005 Acquisition, support for the business applications and communications technology of our business was provided by a combination of our dedicated resources and centralized Computer Sciences Corporation resources. We entered into a transition services agreement with Computer Sciences Corporation on February 11, 2005, which covered support services for certain operating areas including finance and communications services, internet support and payroll tax reporting. Pursuant to the agreement, Computer Sciences Corporation will continue to perform a portion of our internal finance and personnel accounting, application support services and communications services originally scheduled to terminate on February 11, 2006. This agreement has been extended until May 2006.

 

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If Computer Sciences Corporation fails to provide the information technology support systems services, or upon termination of our transition services agreement, we will be forced to obtain these services from third parties or provide such services ourselves. The failure of Computer Sciences Corporation to perform its obligations or the termination of our transition services agreement could adversely affect our operations, and we may not be able to perform such services by ourselves or source such services from third parties at all or on terms favorable to us. Any failure to develop the necessary systems, resources and controls to operate all the transitional services currently being provided by Computer Sciences Corporation or to obtain such services from third parties could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

 

Loss of our skilled personnel, including members of senior management, may have an adverse effect on our operations and/or our operating performance until we find suitable replacements.

 

Our continued success depends in large part on our ability to recruit and retain the skilled personnel necessary to serve our customers effectively, including personnel with extensive military and law enforcement training and backgrounds. The proper execution of our contract objectives depends upon the availability of quality resources, especially qualified personnel. Given the nature of our business, we have substantial need for personnel that are willing to work overseas, frequently in locations experiencing political or civil unrest, for extended periods of time and often on short notice. We may not be able to meet the need for qualified personnel as such need arises.

 

In addition, we must comply with provisions in U.S. government contracts that require employment of persons with specified work experience and security clearances. An inability to maintain employees with the required security clearances could have a material adverse effect on our ability to win new business and satisfy our existing contractual obligations, and could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

 

The loss of services of any of the members of our senior management could adversely affect our business until a suitable replacement can be found. There may be a limited number of personnel with the requisite skills to serve in these positions and we may be unable to locate or employ such qualified personnel on acceptable terms.

 

If our subcontractors fail to perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted.

 

Many of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services we must provide to our customers. For the nine months ended December 30, 2005 and fiscal 2005, respectively, we paid our subcontractors $180.1 million and $174.9 million, respectively. These subcontractors generally perform niche or specialty services for which they have more direct experience, such as construction or catering services, and the inclusion of these companies on our team during the bidding process may improve the chance of our winning a contract award. Often, we enter into subcontract arrangements in order to meet government requirements to award certain categories of services to small businesses. A failure by one or more of our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as the prime contractor. Such subcontractor performance deficiencies could result in a customer terminating our contract for default. A default termination could expose us to liability and adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

 

Environmental laws and regulations may subject us to significant costs and liabilities which could adversely affect our operating performance.

 

We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include those governing the management and disposal of hazardous substances and wastes and the maintenance of a safe workplace, primarily associated with

 

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our aviation services activities, including painting aircraft and handling substances that may qualify as hazardous waste, such as used batteries and petroleum products. In addition to the U.S. federal laws and regulations, states and other countries where we do business have numerous environmental, legal, and regulatory requirements by which we must abide. We could incur substantial costs, including clean-up costs, as a result of violations of or liabilities under environmental laws. This could adversely affect our operating performance and may result in additional expenses and possible loss of revenue.

 

The requirements of complying with the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002 may strain our resources and distract management.

 

We are subject to the Sarbanes-Oxley Act of 2002, including Section 404. These requirements may place a strain on our systems and resources. The Sarbanes-Oxley Act will require that we maintain and certify that we have effective disclosure controls and procedures and internal control over financial reporting. Pursuant to Section 404, starting with our annual report on Form 10-K for the fiscal year ended March 28, 2008, our management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting and an attestation report of our auditors on our management’s assessment of such internal control. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required to devote additional time and personnel to legal, financial and accounting activities to ensure our ongoing compliance with these reporting requirements. We might not be able to complete the documentation and management assessment required by Section 404 of the Sarbanes-Oxley Act before it becomes applicable to us. In addition, the effort to prepare for these obligations may divert management’s attention from other business concerns, which could adversely affect our operating performance. In addition, we may need to hire additional accounting and financial staff, which we might not be able to do in a timely fashion and which would result in additional expense and distraction of our management’s time and resources.

 

Risks Related to Our Indebtedness

 

Our substantial level of indebtedness may make it difficult for us to satisfy our debt obligations and may adversely affect our ability to obtain financing for working capital, capitalize on business opportunities or respond to adverse changes in our industry.

 

We have substantial indebtedness. As of December 30, 2005, on a pro forma basis after giving effect to the Offering Transactions, we had $601.7 million of total indebtedness, assuming an offering of 25.0 million shares at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and $67.2 million of additional borrowing capacity under our senior secured credit facility (which gives effect to the $7.8 million of outstanding letters of credit). Our substantial indebtedness could have important consequences to you, including the following:

 

    it may be more difficult for us to satisfy our debt obligations;

 

    our ability to obtain additional financing for working capital, debt service requirements, general corporate or other purposes may be impaired;

 

    we must use a substantial portion of our cash flow to pay interest and principal on our indebtedness which will reduce the funds available for other purposes;

 

    we are more vulnerable to economic downturns and adverse industry conditions;

 

    our ability to capitalize on business opportunities and to react to competitive pressures and adverse changes in our industry as compared to our competitors may be compromised due to the high level of indebtedness; and

 

    our ability to refinance indebtedness may be limited.

 

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Our senior secured credit facility, the indenture governing our senior subordinated notes and our preferred stock contain various covenants limiting the discretion of our management in operating our business.

 

Our indenture, senior secured credit facility and the certificates of designation governing our preferred stock contain various restrictive covenants that limit our management’s discretion in operating our business. These instruments limit our ability to engage in, among other things, the following activities:

 

    the incurrence of additional indebtedness or guarantee obligations;

 

    the repayment of indebtedness prior to stated maturities;

 

    the payment of dividends or make certain other restricted payments;

 

    making investments or acquisitions;

 

    the creation of liens or other encumbrances; and

 

    the ability to transfer or sell certain assets or merge or consolidate with another entity.

 

In addition, our senior secured credit facility also requires us to maintain certain financial ratios and limits our ability to make capital expenditures. These financial ratios include a minimum interest coverage ratio and a leverage ratio. The interest coverage ratio is the ratio of EBITDA (as defined in our senior secured credit facility) to cash interest expense for the preceding four quarters. The leverage ratio is a ratio of our debt to our EBITDA for the preceding four quarters. The minimum interest coverage ratio increases from 2:1 to 3.2:1 during the term of the senior secured credit facility. The maximum leverage ratio decreases from 6:1 to 3:1 during the term of the senior secured credit facility. The senior secured credit facility also restricts the maximum amount of our capital expenditures during each year of the term of the senior secured credit facility. Our annual capital expenditures may not exceed $4.0 million during the term of our senior secured credit facility. Capital expenditures are expenditures that are required by generally accepted accounting principles to be included in the purchase of property and equipment.

 

If we fail to comply with the restrictions in the indenture or our senior secured credit facility or any other subsequent financing agreements, a default may allow the creditors under the relevant instruments, in certain circumstances, to accelerate the related debt and to exercise their remedies thereunder, which will typically include the right to declare the principal amount of such debt, together with accrued and unpaid interest and other related amounts immediately due and payable, to exercise any remedies such creditors may have to foreclose on any of our assets that are subject to liens securing such debt and to terminate any commitments they had made to supply us with further funds. Moreover, any of our other debt that has a cross-default or cross-acceleration provision that would be triggered by such default or acceleration would also be subject to acceleration upon the occurrence of such default or acceleration.

 

In addition, the terms of our preferred stock does not allow us to incur or become subject to any indebtedness if such indebtedness would be in excess of total indebtedness permitted to be incurred under a maximum debt incurrence test, which limits our maximum indebtedness to 7.5 times EBITDA, or $904.2 million as of December 30, 2005.

 

Our ability to comply with these covenants may be affected by events beyond our control, and an adverse development affecting our business could require us to seek waivers or amendments of covenants, alternative or additional sources of financing or reductions in expenditures. We cannot assure you that such waivers, amendments or alternative or additional financings could be obtained, or if obtained, would be on terms acceptable to us.

 

Servicing our indebtedness requires a significant amount of cash. Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may be unable to generate sufficient cash flow to service our debt obligations, which could adversely affect our financial condition.

 

Based on our indebtedness and other obligations as of December 30, 2005, we estimate that, assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, for fiscal 2006, our remaining contractual commitments including interest

 

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associated with our indebtedness and other obligations (assuming that our revolving credit facility will be undrawn at the close of fiscal 2006) will be $17.0 million and $224.9 million in the aggregate, respectively, for the remaining three months of fiscal 2006 and the period between April 1, 2006 through the end of fiscal 2010. Our ability to make payments on and to refinance our indebtedness depends on our ability to generate cash. This, to a certain extent, is subject to general economic, political, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

We cannot assure you, however, that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our senior secured facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness, including our senior secured credit facility, on commercially reasonable terms or at all. In addition, the terms of existing or future debt agreements, including our senior secured credit facility and the indenture governing our senior subordinated notes, may restrict us from carrying out any of these alternatives. If we are unable to generate sufficient cash flow or refinance our debt on favorable terms, it could significantly adversely affect our financial condition.

 

Despite our current indebtedness level, we and our subsidiaries may still be able to incur substantially more debt, which could exacerbate the risks associated with our substantial leverage.

 

As of December 30, 2005, we had up to $67.2 million of additional availability under our senior secured credit facility (which gives effect to $7.8 million of outstanding letters of credit). The terms of the senior secured credit facility and our senior subordinated notes do not fully prohibit us or our subsidiaries from incurring additional indebtedness. It is not possible to quantify the specific dollar amount of indebtedness we may incur because our senior secured credit facility does not provide for a specific dollar amount of indebtedness we may incur. Our senior secured credit facility and our senior subordinated notes allow us to incur only certain indebtedness that is expressly enumerated in our senior secured credit facility and the indenture governing our senior subordinated notes. The indebtedness permitted under our senior secured credit facility includes indebtedness which is customary for similar credit facilities. Specific examples of indebtedness permitted under our senior secured credit facility are described further under “Description of Material Indebtedness” and include certain intercompany indebtedness, indebtedness under the senior secured credit facility, the senior subordinated notes, certain refinancing indebtedness, and certain indebtedness with respect to capital leases in an amount that may not exceed $10.0 million. The indenture governing our senior subordinated notes have restrictions that are no more restrictive than the senior secured credit facility. As described under “Description of Material Indebtedness,” if new debt is added to our or our subsidiaries’ current debt levels, the related risks that we now face could intensify.

 

Risks Related to the Offering

 

There is no existing market for our Class A common stock, and we do not know if one will develop to provide you with adequate liquidity. If the stock price fluctuates after this offering, you could lose a significant part of your investment.

 

Prior to this offering, there has not been a public market for our Class A common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the New York Stock Exchange or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our Class A common stock that you buy. The initial public offering price for the shares will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. In addition, the underwriters have an option to purchase up to an additional 3,750,000 shares of Class A common stock. The market price of our Class A common stock may be influenced by many factors, some of which are beyond our control, including:

 

    the failure of securities analysts to cover our Class A common stock after this offering, or changes in financial estimates by analysts;

 

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    the activities of competitors;

 

    future sales of our Class A common stock;

 

    investor perceptions of us and the industry;

 

    our quarterly or annual earnings or those of other companies in our industry;

 

    the public’s reaction to our press releases, our other public announcements and our filings with the Securities and Exchange Commission;

 

    general economic conditions; and

 

    the other factors described elsewhere in these “Risk Factors.”

 

As a result of these factors, you may not be able to resell your shares at or above the initial offering price. In addition, the stock market often experiences extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of a particular company. These broad market fluctuations and industry factors may materially reduce the market price of our Class A common stock, regardless of our operating performance.

 

We are controlled by Veritas Capital, whose interests may not be aligned with yours.

 

Veritas Capital Management II, L.L.C. and its affiliates, The Veritas Capital Fund II, L.P. and Veritas Capital II A, LLC, own 86% of the outstanding membership interest in our controlling stockholder, DIV Holding LLC. Accordingly, after giving effect to the Offering Transactions and the conversion of the Class B common stock into Class A common stock, assuming an offering of 25.0 million shares of our Class A common stock, Veritas Capital will indirectly control approximately 56.1% of our Class A common stock. As a result, our controlling stockholders will continue to be able to control the election of our directors, determine our corporate and management policies and determine without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Three of our thirteen directors are either employees of or advisors to Veritas Capital, as described under “Management.” Veritas Capital will also have sufficient voting power to amend our organizational documents. The interests of Veritas Capital may not coincide with the interests of other holders of our Class A common stock. Additionally, Veritas Capital is in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Veritas Capital may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Veritas Capital continues to own a significant amount of the outstanding shares of our Class A common stock, it will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions. In addition, our Bylaws will provide that so long as Veritas Capital beneficially owns a majority of our then outstanding Class A common stock, the foregoing advance notice procedures for stockholder proposals will not apply to it. Amendment of the provisions described above in our Amended and Restated Certificate of Incorporation generally will require an affirmative vote of our directors, as well as the affirmative vote of at least a majority of our then outstanding voting stock if Veritas Capital beneficially owns a majority of our then outstanding Class A common stock or the affirmative vote of at least 80% of our then outstanding voting stock if Veritas Capital beneficially owns less than a majority of our then outstanding Class A common stock. Amendments to any other provisions of our Amended and Restated Certificate of Incorporation generally will require the affirmative vote of a majority of our then outstanding voting stock. In addition, because we are a controlled company within the meaning of the New York Stock Exchange rules, we will be exempt from the New York Stock Exchange requirements that our board be composed of a majority of independent directors, and that our compensation and corporate governance committees by composed entirely of independent directors.

 

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Even if Veritas Capital no longer controls us in the future, certain provisions of our charter documents and agreements, as well as Delaware law, could discourage, delay or prevent a merger or acquisition at a premium price.

 

Our Amended and Restated Certificate of Incorporation and Bylaws will contain provisions that:

 

    permit us to issue, without any further vote or action by our stockholders, 50,000,000 shares of preferred stock in one or more series and, with respect to each series, to fix the number of shares constituting the series and the designation of the series, the voting powers (if any) of the shares of such series, and the preferences and other special rights, if any, and any qualifications, limitations or restrictions, of the shares of the series;

 

    provide for a classified board of directors serving staggered three-year terms; and

 

    limit our stockholders’ ability to call special meetings.

 

In addition, we intend to adopt a rights plan that grants stockholders the right to purchase from us additional shares at preferential prices in the event of a hostile attempt to acquire control of us.

 

All of the foregoing provisions may impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders.

 

If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our Class A common stock could decline.

 

The perception in the public market that our existing common stockholder, DIV Holding LLC, might sell shares of Class A common stock could depress our market price. Upon the conversion of all Class B common stock into Class A common stock, we will have 57.0 million shares of Class A common stock outstanding, of which 32.0 million shares will be held by DIV Holding LLC, constituting 56.1% of our then outstanding common stock. To the extent that the underwriters exercise their option to purchase up to an additional 3,750,000 shares of Class A common stock to cover over- allotment of shares, we will have 60,750,000 shares of our Class A common stock outstanding. We may sell additional shares of Class A common stock in subsequent public offerings. We also may issue additional shares of common stock to finance future acquisitions. DIV Holding LLC is a party to a registration rights agreement, which grants it rights to require us to effect the registration of its shares of common stock. In addition, if we propose to register any of our common stock under the Securities Act, whether for our own account or otherwise, DIV Holding LLC is entitled to include its shares of common stock in that registration as described under “Certain Relationships and Related Party Transactions.”

 

Prior to this offering, we and our existing holder of Class A common stock will have agreed with the underwriters to a “lock-up” period, meaning that our current stockholder may not, subject to certain other exceptions, sell any of its shares of our Class A common stock without the prior written consent of Credit Suisse Securities (USA) LLC and Goldman, Sachs & Co. until approximately 180 days after the date of this prospectus. Credit Suisse Securities (USA) and Goldman, Sachs & Co., on behalf of the underwriters, may, in their sole discretion, at any time or from time to time and without notice, waive the terms and conditions of the lock-up agreement. In addition, our current stockholder will be subject to the Rule 144 holding period requirement described in “Shares Eligible for Future Sale.” When the lock-up agreements expire, 32.0 million shares of our Class A common stock will become eligible for sale, in some cases subject to the requirements of Rule 144. The market price for shares of our Class A common stock may drop significantly when the restrictions on resale by our existing stockholder lapses. A decline in the price of shares of our Class A common stock might impede our ability to raise capital through the issuance of additional shares of our Class A common stock or other equity securities.

 

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We do not intend to pay dividends on our Class A common stock for the foreseeable future, and the instruments governing our current indebtedness contain various covenants that may limit our ability to pay dividends.

 

We do not intend to pay dividends on our Class A common stock for the foreseeable future. Our board of directors may, in its discretion, modify or repeal our dividend policy. Future dividends, if any, with respect to shares of our Class A common stock will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of directors may deem relevant. Accordingly, we cannot assure you that we will pay dividends in the future or at all.

 

The instruments governing our current indebtedness contain covenants which place limitations on the amount of dividends we may pay, see, “Description of Material Indebtedness.” In addition, under Delaware law, our board of directors may declare dividends only to the extent of our “surplus” (which is defined as total assets at fair market value minus total liabilities, minus statutory capital), or if there is no surplus, out of out net profits for the then current and/or immediately preceding fiscal year.

 

We intend to use a portion of the net proceeds from this offering to pay the special Class B distribution to our existing holder of Class A common stock.

 

We intend to use $100.0 million, or 27.4%, of the net proceeds from this offering ($128.2 million, or 30.4% if the underwriters’ over-allotment option is exercised in full) to pay the special Class B distribution. To the extent that our shares of Class A common stock are sold at a price per share that is below $16.00 and, as a result, we do not generate sufficient proceeds from the offering to pay the distribution and apply the balance of the proceeds as discussed under the caption “Use of Proceeds,” we intend to utilize cash on hand to satisfy our obligation to pay this distribution.

 

None of the proceeds of this offering will be used to invest in our business. Consequently, we will be dependent upon cash flows from our operating activities and availability under our senior secured credit facility as our principal source of liquidity.

 

None of the net proceeds of the Offering Transactions will be used to invest in our business. Accordingly, we will be dependent upon the cash generated from operating activities and availability under our senior secured credit facility to be our principal sources of liquidity. Based on our current level of operations, we believe our cash flow from operations and available borrowings under our senior secured credit facility will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our senior secured credit facility in an amount sufficient to enable us to repay our indebtedness, including the notes, or to fund our other liquidity needs.

 

If you purchase shares of Class A common stock sold in this offering, you will experience immediate and substantial dilution because our existing holder of Class A common stock paid substantially less than the initial public offering price for its shares.

 

Assuming an offering of 25.0 million shares of our Class A common stock if you purchase shares of our Class A common stock in this offering at an initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover page of the prospectus, you will experience immediate and substantial dilution of $22.35 in pro forma net tangible book value per share because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire, based on the net tangible book value per share as of December 30, 2005. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares.

 

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Certain of the underwriters will receive a portion of the offering proceeds through their indirect ownership of DIV Holding LLC, the existing holder of all of our Class A common stock, or through repayment of outstanding indebtedness under our senior secured credit facility.

 

Certain of the underwriters will receive a portion of the offering proceeds through indirect ownership of DIV Holding LLC, the existing holder of all of our Class A common stock, or through repayment of outstanding indebtedness under our senior secured credit facility. Affiliates of Credit Suisse Securities (USA) LLC and CIBC World Markets Corp. have indirect interests of less than 10% each in DIV Holding LLC, our parent and the existing holder of all of our Class A common stock, through investments in the Veritas Capital Fund II, L.P. Credit Suisse Securities (USA) LLC owns interests aggregating approximately 8.1%, through five affiliated funds: Battelle Memorial Institute Pension Fund, L.P., CSFB/Lupton Private Equity Partnership, L.P., CSG Fund Investment Program II, DLJ Fund Investment Partners III, L.P, MERS Investment Partnership, L.P. CIBC World Markets Corp owns such indirect interests, in the amount of approximately 3.75%, through CIBC Capital Corp. (Merchant Banking).

 

Affiliates of Goldman Sachs Credit Partners L.P. and Bear Stearns Corporate Lending Inc. are lenders under our senior secured credit facility and received customary fees upon our entering into the senior secured credit facility in February 2005 and in connection with the first amendment and waiver to the senior secured credit facility entered in January 2006. In addition, affiliates of Credit Suisse Securities (USA) LLC and UBS Securities LLC have outstanding senior secured credit facility commitments. These underwriters, through their affiliates, may be deemed to receive financial benefits as a result of the consummation of this offering beyond the benefits customarily received by underwriters in similar offerings.

 

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THE 2005 ACQUISITION

 

On December 12, 2004, Veritas Capital and its subsidiary, DynCorp International (formerly known as DI Acquisition Corp.), entered into a purchase agreement with Computer Sciences Corporation and DynCorp whereby DynCorp International agreed to acquire our operating company, a wholly owned subsidiary of DynCorp. DynCorp International assigned its rights to acquire our operating company to DI Finance LLC, or DI Finance, its wholly owned subsidiary. Immediately after the consummation of the 2005 Acquisition on February 11, 2005, DI Finance was merged with and into our operating company, our operating company survived the merger and is now a wholly owned subsidiary of DynCorp International. In this section, Computer Sciences Corporation and DynCorp are referred to as the “sellers.”

 

Closing Price and Purchase Price Adjustments

 

The purchase price for the 2005 Acquisition was $937.0 million after giving effect to a net working capital adjustment in favor of Computer Sciences Corporation in the amount of $65.55 million and $6.1 million of accumulated dividends in connection with the preferred stock issued for satisfaction of the working capital adjustment. Of the $937.0 million purchase price, $775.0 million was paid in cash, $140.6 million was paid to Computer Sciences Corporation in the form of our preferred equity, $6.1 million represents accumulated dividends on the preferred stock issued in connection with the working capital adjustment and the remaining amounts were transaction expenses.

 

Following the consummation of this offering, we intend to redeem all of our currently outstanding preferred stock, of which approximately $222.5 million in stated amount including accrued and unpaid dividends thereon, was outstanding as of the anticipated date of redemption of May 5, 2006 (including preferred stock issued and the accrued and unpaid dividend related to the working capital adjustment).

 

In addition to the credit of purchase price for preferred stock of our parent by Computer Sciences Corporation and the additional preferred stock equity investment as discussed above, the 2005 Acquisition was funded by:

 

    borrowings under our senior secured credit facility, consisting of a $345.0 million term loan which was drawn down at closing, and a $75.0 million revolving credit facility;

 

    the senior subordinated notes offering of $320.0 million by our operating companies; and

 

    a common equity investment in us of $86.0 million by Veritas Capital and $14.0 million by the Northwestern Mutual Life Insurance Company.

 

See “Description of Material Indebtedness” for a discussion of the senior secured credit facility and the senior subordinated notes.

 

Purchase Agreement

 

General. The purchase agreement contains customary representations, warranties, covenants and indemnities by, and for the benefit of our parent, Veritas Capital, and the sellers.

 

Indemnification. Sellers’ obligation, which is joint and several, to indemnify us and Veritas Capital for breaches of representations and warranties generally survived until 180 days after the closing of the 2005 Acquisition, except for representations and warranties relating to certain corporate representations and broker representations, which will survive until the applicable statute of limitations, and tax representations that did not survive closing except for the representation relating to our operating company’s status as a disregarded entity, which will survive for three years following the closing of the 2005 Acquisition. The sellers’ obligations to indemnify DynCorp International and its affiliates (including after the closing of the 2005 Acquisition, our operating company) and our obligation, subject to certain exceptions, to indemnify the sellers is subject to a $5.0

 

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million deductible and each individual claim must be at least $50,000 per individual claim. The aggregate indemnification obligations are generally threshold capped at $50.0 million in the aggregate, respectively, subject to certain exceptions.

 

The purchase agreement also provides that the sellers will indemnify us without regard to any time limitation, but subject to the above cap, for any losses incurred by our parent or its affiliates in connection with the Arias litigation, a class action lawsuit seeking $100.0 million filed on September 11, 2001. Upon closing of the 2005 Acquisition, the sellers and our operating company entered into a joint defense agreement pursuant to which both parties will assume joint defense of the litigation. See “Risk Factors—Risks Relating to Our Business—Proceedings against us in domestic and foreign courts could result in legal costs and adversely affect our reputation and ability to compete for business” and “Business—Legal Proceedings” for additional information regarding the Arias litigation.

 

Under the purchase agreement, the sellers agreed to remit to us any amounts actually received by sellers (less related fees) with respect to potential Texas sales tax refunds relating to any contracts that have been assigned by the sellers to our operating company or any subsidiaries thereof.

 

Additional Covenants. The purchase agreement includes customary covenants by the sellers to maintain certain proprietary information about the buyer and its affiliates confidential and by the sellers and certain of their affiliates not to compete with us, our operating company and our affiliates with respect to any of our existing contracts for a period of two years and both parties not to solicit for employment or hire certain of our employees for a period of three years after the closing of the 2005 Acquisition.

 

Under the purchase agreement, the sellers granted to us and our operating company an exclusive, perpetual, irrevocable, worldwide, royalty-free and fully paid-up license to use the “Dyn International” and “DynCorp International” name in connection with aviation services, security services, technical services and marine services.

 

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The following chart shows our organizational structure immediately following the consummation of this offering (after giving effect to the automatic conversion of our Class B common stock into Class A common stock):

 

LOGO

 


(1) All of our U.S. subsidiaries guaranteed payment under the senior subordinated notes. They are also guarantors of our senior secured credit facility.
(2) None of our foreign subsidiaries guaranteed payments under the senior subordinated notes.

 

As used in this prospectus, we refer to the “Transactions” collectively as (i) the consummation of the 2005 Acquisition, (ii) the borrowings under our senior secured credit facility entered into in connection with 2005 Acquisition, (iii) the issuance of the 9.50% senior subordinated notes due 2013 issued by our operating company, or our senior subordinated notes, and the application of the proceeds therefrom and (iv) the Offering Transactions.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Forward-looking statements may include the words “may,” “will,” “plans,” “estimates,” “anticipates,” “believes,” “expects,” “intends” and similar expressions. These forward-looking statements include, among others, the following:

 

    estimates of our fourth quarter results;

 

    estimates of contract values;

 

    anticipated revenues from indefinite delivery, indefinite quantity contracts;

 

    expected percentages of future revenues represented by fixed-price contracts; and

 

    statements covering our business strategy.

 

See “Risk Factors” for examples of factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected or assumed in our forward-looking statements.

 

We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments, or for any other reason, except as required by law.

 

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USE OF PROCEEDS

 

We will receive net proceeds from the offering of approximately $365.0 million after giving effect to the transaction expenses described in (v) below (approximately $421.4 million if the underwriters exercise their overallotment option in full), assuming that 25.0 million shares of our Class A common stock are offered at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the estimated underwriting discount and our estimated expenses of the offering. A $1.00 increase (decrease) in the assumed initial offering price of $16.00 per share would increase (decrease) the net proceeds of this offering by $23.5 million assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. None of the net proceeds of this offering will be used to further invest in our business.

 

Based on the foregoing assumptions, we intend to use the gross proceeds of $400 million from this offering for:

 

(i) the redemption of all of our currently outstanding preferred stock, of which approximately $222.5 million in stated amount including accrued and unpaid dividends thereon was outstanding as of the anticipated date of redemption of May 5, 2006 (including preferred stock issued and the accrued and unpaid dividend related to the working capital adjustment);

 

(ii) to pay a special Class B distribution in the amount of $100.0 million upon consummation of the offering. To the extent that our shares of Class A common stock are sold at a price per share that is below $16.00 and, as a result, we do not generate sufficient proceeds from the offering to pay the distribution and apply the balance of the proceeds as discussed above in “Use of Proceeds,” we intend to use cash on hand to satisfy our obligation to pay this distribution;

 

(iii) the redemption, approximately 30 days after the consummation of this offering, of up to $112.0 million aggregate principal amount of the senior subordinated notes, which based on the foregoing assumption and assuming that this offering was consummated on May 5, 2006, would result in the redemption of $51.9 million of such notes;

 

(iv) the payment of certain prepayment penalties of approximately $11.5 million as of December 30, 2005, $5.7 million of which represents prepayment penalties on our preferred stock and $5.8 million of which represents prepayment penalties on our senior subordinated notes, assuming an offering of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus; and

 

(v) the payment of transaction expenses of approximately $35.0 million which includes a fee of $5.0 million paid to Veritas Capital Management II, LLC. To the extent the equity proceeds are insufficient to pay transaction fees and expenses, we may use up to $20.0 million of available cash on hand to pay fees and expenses.

 

Our existing stockholder, DIV Holding LLC is the only holder of our Class B common stock and, therefore, the only person entitled to receive the special Class B distribution. If the underwriters’ over-allotment option is exercised in full to purchase additional shares, 50% of the amount of the net proceeds of such exercise will be used to pay an additional special Class B distribution upon consummation of the purchase and sale of such additional shares which is expected to occur on or before June 15, 2006. For more information on the special Class B distribution, see “Dividend Policy.”

 

As described under “Certain Relationships and Related Transactions,” assuming an offering of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, Veritas Capital will receive approximately $91.0 million, or 24.9%, of the net proceeds of this offering, consisting of $86.0 million of the $100.0 million special Class B distribution and a $5.0 million

 

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fee. In addition, to the extent that the over-allotment option were exercised in full, assuming a distribution of the additional special Class B distribution to its equity holders by DIV Holding LLC, Veritas Capital would receive an additional $24.2 million. The amount of the distribution to the holder of our Class B common stock which represents a portion of our profit will depend on the distribution date.

 

Upon the earlier of the payment in full of the additional special Class B distribution, if any, or the expiration of the underwriters’ over-allotment option, if unexercised, the Class B common stock will automatically convert, on a one-for-one basis into Class A common stock. The amount of the distribution to the holder of our Class B common stock which represents a portion of our profit will depend on the distribution date. Based on our accumulated net profits since inception through December 30, 2005, the entire distribution to the holders of our Class B common stock would be a return of capital.

 

The senior subordinated notes mature on February 15, 2013. Interest on the senior subordinated notes accrues at the rate of 9.5% per annum (calculated using a 360-day year) and is payable semi-annually on February 15 and August 15 of each year.

 

Assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover of this prospectus, and assuming a redemption date of May 5, 2006, holders of our preferred stock will receive $222.5 million, and we will redeem $51.9 million of the $320.0 million aggregate principal amount of the senior subordinated notes. To the extent that the net proceeds we receive from this offering increase above or decrease below the $365.0 million of net proceeds we expect to receive, we will redeem a larger or smaller portion of our senior subordinated notes on a pro rata basis. A $1.00 increase in the assumed initial public offering price of $16.00 per share will result in the redemption of $74.8 million in aggregate principal amount of our senior subordinated notes. A $1.00 decrease in the assumed initial offering price of $16.00 per share will result in the redemption of $29.0 million in aggregate principal amount of our senior subordinated notes. To the extent that additional proceeds resulting from a $1.00 increase in the assumed initial offering price of $16.00 per share are used to increase the amount of our senior subordinated notes which are redeemed, pro forma annual interest expense would decrease by approximately $2.2 million, and pro forma annual net income would increase by approximately $1.4 million. To the extent that less proceeds resulting from a $1.00 decrease in the assumed initial offering price of $16.00 per share decrease the amount of our senior subordinated notes which are redeemed, pro forma annual interest expense would increase by approximately $2.2 million, and pro forma annual net income would decrease by approximately $1.4 million.

 

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DIVIDEND POLICY

 

Immediately prior to the consummation of this offering, we will declare an initial special Class B distribution of $100.0 million, payable upon the consummation of this offering, and an additional special Class B distribution payable upon the exercise of the underwriters’ overallotment option, representing 50% of the aggregate net proceeds that we would receive from the sale of up to 3,750,000 additional shares of our Class A common stock. We will use $100.0 million of net proceeds from this offering to pay the special Class B distribution. To the extent that our shares of Class A common stock are sold at a price per share that is below $16.00 and, as a result, we do not generate sufficient proceeds from the offering to pay the distribution and apply the balance of the proceeds as discussed under the caption “Use of Proceeds,” we intend to utilize cash on hand to satisfy our obligation to pay this dividend.

 

Upon the earlier of the payment in full of the additional special Class B distribution, if any, or the expiration of the underwriters’ overallotment option, if unexercised, the Class B common stock will automatically convert on a one-for-one basis into Class A common stock.

 

We do not intend to pay cash dividends on our Class A common stock in the foreseeable future. We are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make dividend payments on our Class A common stock. The amounts available to us to pay cash dividends are restricted by our subsidiaries’ debt agreements. The declaration and payment of dividends also is subject to the discretion of our board of directors and depends on various factors, including our net income, financial conditions, cash requirements, future prospects and other factors deemed relevant by our board of directors.

 

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CAPITALIZATION

 

The following table sets forth both our capitalization and cash and cash equivalents as of December 30, 2005:

 

    on an actual basis; and

 

    as adjusted to give effect to the Offering Transactions.

 

This table should be read in conjunction with our financial statements, “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Material Indebtedness” included elsewhere in this prospectus.

 

     As of December 30, 2005

 
     Actual

   

Pro forma

As Adjusted


 
     (unaudited)     (unaudited)  
     (dollars in thousands,  
     except per share data)  

Cash and cash equivalents (1)

   $ 24,803     $ 4,792  
    


 


Long-Term Debt, Including Current Portion:

                

Senior Secured Credit Facility:

                

Revolving Credit Facility (2)

   $ —       $ —    

Term Loan Facility

     342,413       342,413  

Senior Subordinated Notes (3)

     320,000       259,300  

Preferred Stock $.01 par value (3) :

                

actual: 50,000 shares of series A-1 authorized and 50,000 shares issued and outstanding; 300,000 shares of series A-2 authorized and 140,550 shares issued and outstanding

     212,828       —    
    


 


Total Long Term Debt, Including Current Portion

     875,241       601,713  
    


 


Shareholders’ Equity:

                

Common Stock $.01 par value: 500,000 shares authorized and 500,000 shares issued and outstanding

                
     5       —    

Giving effect to the Offering Transactions:

                

Class A Common Stock, $.01 par value: 200,000,000 shares authorized, and 57,000,000 shares issued and outstanding (4)

     —         570  

Additional Paid-In Capital (1) (5)

     100,993       365,428  

Accumulated Deficit

     (1,619 )     (12,209 )

Accumulated Other Comprehensive Loss

     (316 )     (316 )
    


 


Total Shareholders’ Equity (1)

     99,063       353,473  
    


 


Total Capitalization (1)

   $ 974,304     $ 955,186  
    


 



(1)   A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) additional paid-in capital, total shareholders’ equity and total capitalization by $25,000, $25,000 and no effect, respectively, assuming the number of shares offered by us, as set forth on the cover page of the prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(2)   Consists of a five-year revolving credit facility in aggregate principal amount of $75,000. Excludes $7,800 of letters of credit outstanding as of December 30, 2005. See “Description of Material Indebtedness.”
(3)   The pro forma adjustment presented above assumes a redemption of $60,700 of our senior subordinated notes. Assuming a redemption date of May 5, 2006, holders of our preferred stock will receive $222,500, and approximately 30 days after the commencement of the offer, assuming the sale of 25,000 shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, we will redeem $51,900 of the $320,000 aggregate principal amount of the senior subordinated notes.
(4)   Upon the earlier of (i) payment in full of the special Class B distribution and the additional special Class B distribution, if any, or (ii) the expiration of the underwriters over-allotment option, all of our outstanding shares of Class B common stock will automatically convert into outstanding shares of Class A common stock on a one-for-one basis.
(5)   The pro forma data assumes the payment of the special Class B distribution in the amount of $100,000.

 

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DILUTION

 

As of the date of this prospectus, we have one class of common stock. Before the consummation of this offering we will file the Amended and Restated Certificate of Incorporation in order to complete a reclassification in which we will create two classes of common stock, Class A common stock, which will be offered and sold in this offering, and Class B common stock, into which the shares of our existing common stock will be exchanged on the basis that each issued and outstanding share of common stock will be reclassified as issued and outstanding shares of Class B common stock. Upon the expiration of, or the exercise in full of, the underwriters’ over-allotment option and the payment in full of the special Class B distribution and additional special Class B distribution as described herein, the Class B common stock will automatically convert on a one-for-one basis, into Class A common stock and, thereafter, all authorized Class B common stock will be cancelled and retired.

 

Shares of Class A common stock and shares of Class B common stock will be identical (including with respect to voting rights), except for (i) the right to receive the initial special Class B distribution and additional special Class B distribution, assuming the exercise of the underwriters’ over-allotment option, (ii) the convertibility of Class B common stock into Class A common stock on or prior to June 15, 2006, as described herein, (iii) the right of the holders of the Class B common stock to consent to changes to our Amended and Restated Certificate of Incorporation and Bylaws that would adversely affect the Class B common stock and (iv) the right to receive an additional Class B distribution in the event that the underwriters exercise their over-allotment option.

 

Our net tangible book deficit as of December 30, 2005 was $(405.6) million, or $(7.12) per share of common stock. Net tangible book value per share represents the amount of our total tangible assets (which for the purpose of this calculation excludes capitalized debt issuance costs) less total liabilities (which for the purpose of this calculation excludes preferred stock and preferred dividends), divided by the basic weighted average number of shares of common stock outstanding.

 

Assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriters’ discount and estimated offering expenses paid by us, our net tangible book deficit, as adjusted, as of December 30, 2005 would have been $(362.1) million, or $(6.35) per share of common stock. Assuming the occurrence of the Offering Transactions as of December 30, 2005, this represents an immediate decrease in net tangible book deficit of $(0.77) per common share to our existing Class B common stockholder and an immediate dilution of $(22.35) per common share to new investors purchasing our Class A common stock in this offering. The following table illustrates this per share dilution to the later investors:

 

Assumed initial public offering price per share

           $ 16.00  

Net tangible book deficit per share as of December 30, 2005

   $ (7.12 )        

Increase per common share attributable to investors purchasing our Class A common stock in this offering

   $ 0.77          
    


       

As adjusted net tangible book deficit per share after the Offering Transactions

             (6.35 )
            


Dilution in net tangible book deficit per Class A common share to new investors purchasing our Class A common stock in this offering

           $ 22.35  
            


 

A $1.00 increase (decrease) in the assumed initial offering price of $16.00 per share would affect our as adjusted net tangible book deficit by $25.0 million, the net tangible book deficit per share after the Offering Transactions by $0.44 per share, and the dilution per Class A common share to new investors by $(0.44) per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the commissions and discounts and estimated offering expenses payable by us.

 

If the underwriters exercise in full their option to purchase additional shares of our Class A common stock in this offering, the as adjusted net tangible book deficit per common share would be $(5.93) per common share and the dilution to new investors purchasing our Class A common stock in this offering would be $21.93 per common share.

 

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The following table summarizes the differences between the number of shares of Class A common stock purchased from us, the total consideration and the average price per share paid by our existing stockholder and by new investors, based on the assumed initial public offering price of $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting the estimated underwriting discount and estimated offering expenses payable by us:

 

     Shares Purchased

    Total Consideration

    Average Price
Per Share


     Number

   Percent

    Amount

   Percent

   

Class B Stockholder:

   32,000,000    56.14 %   $ 100,000,000    20.00 %   $ 3.13

New Investors Purchasing Class A Common Stock in this Offering

   25,000,000    43.86 %   $ 400,000,000    80.00 %   $ 16.00
    
  

 

  

     

Total

   57,000,000    100.0 %   $ 500,000,000    100.0 %   $ 8.77
    
  

 

  

     

 

A $1.00 increase (decrease) in the assumed initial offering price of $16.00 per share would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and average price per share paid by all shareholders by $25.0 million, $25.0 million and $0.44 per share, respectively, assuming the sale of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the commissions and discounts and estimated offering expenses payable by us.

 

If the underwriters exercise their option to purchase 3,750,000 additional shares of our Class A common stock from us in this offering, the number of shares held by new investors will increase to 28.75 million shares of our Class A common stock, or 47.3% of the total number of shares of our Class A common stock outstanding after this offering.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

Set forth below are selected historical consolidated financial data. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. The selected historical consolidated financial data as of April 1, 2005 and for the period February 12, 2005 through April 1, 2005 are derived from our consolidated financial statements for the successor period. The selected historical consolidated financial data for the period April 3, 2004 through February 11, 2005, for the nine months ended December 31, 2004, as of and for the year ended April 2, 2004 and for the period March 8, 2003 through March 28, 2003 are derived from our consolidated financial statements for the immediate predecessor period. The selected consolidated financial information for the period March 30, 2002 through March 7, 2003 has been derived from our consolidated financial statements for the original predecessor period. The selected consolidated financial information as of and for the nine month period ended December 30, 2005, and for the nine month period ended December 31, 2004 have been derived from our unaudited consolidated financial statements during the successor and immediate predecessor periods, respectively. The selected consolidated financial information for the fiscal years 2002 and 2001 have been derived from our unaudited consolidated financial statements during the original predecessor period. In our opinion, these unaudited consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the information included therein.

 

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    Original Predecessor Period

    Immediate Predecessor Period

    Successor
Period


    Immediate
Predecessor
Period


    Successor
Period


 
    Fiscal Year Ended

   

March 30,
2002-

March 7,
2003


   

21 Days
Ended
March 28,

2003


   

Fiscal Year
Ended
April 2,
2004


   

Period

from

April 3,

2004 to

Feb. 11,

2005


   

49 Days

Ended

April 1,

2005


   

Nine

Months

Ended

December 31,

2004


   

Nine

Months

Ended

December 30,

2005


 
    March 30,
2001


    March 29,
2002


               
    (dollars in thousands, except for backlog, which is in millions, and per share data)  

STATEMENT OF OPERATIONS DATA:

                                                                       

Revenues

  $ 583,907     $ 755,326     $ 859,112     $ 59,240     $ 1,214,289     $ 1,654,305     $ 266,604     $ 1,400,054     $ 1,418,245  
   


 


 


 


 


 


 


 


 


Costs of Services

    529,969       687,088       787,649       53,482       1,106,571       1,496,109       245,406       1,263,414       1,262,255  

Selling, General and Administrative

    30,872       34,544       40,316       3,414       48,350       57,755       8,408       46,452       59,874  

Depreciation and Amortization

    511       1,462       351       265       8,148       5,922       5,605       5,095       32,763  
   


 


 


 


 


 


 


 


 


Operating income

    22,555       32,232       30,796       2,079       51,220       94,519       7,185       85,093       63,353  

Interest Expense

    4       43       —         —         —         —         8,054       —         42,278  

Interest on Mandatory Redeemable Shares

    —         —         —         —         —         —         2,182       —         14,149  

Interest Income

    (75 )     (50 )     (43 )     (2 )     (64 )     (170 )     (7 )     (130 )     (166 )
   


 


 


 


 


 


 


 


 


Net Income (Loss) Before Taxes

    22,626       32,239       30,839       2,081       51,284       94,689       (3,044 )     85,223       7,092  

Taxes on Income

    9,119       11,525       11,973       852       19,924       34,956       60       30,779       5,607  
   


 


 


 


 


 


 


 


 


Net Income (Loss)

  $ 13,507     $ 20,714     $ 18,866     $ 1,229     $ 31,360     $ 59,733     $ (3,104 )   $ 54,444     $ 1,485  
   


 


 


 


 


 


 


 


 


Net (loss) income per common share: (7)

                                                                       

Basic and diluted

                                                  $ (6.21 )           $ 2.97  

Weighted average common shares outstanding: (7)

                                                                       

Basic and diluted

                                                    500,000               500,000  

Pro forma net (loss) income per share: (8)

                                                                       

Basic and diluted

                                                  $ (0.08 )           $ 0.04  

Pro forma weighted average shares outstanding: (8)

                                                                       

Basic and diluted

                                                    38,250,000               38,250,000  

CASH FLOW DATA:

                                                                       

Net Cash (Used in) Provided by Operating Activities

                  $ (10,331 )   $ 12,542     $ (6,756 )   $ (2,092 )   $ (31,240 )   $ (13,147 )   $ 54,162  

Net Cash Used in Investing Activities

                    (920 )     (360,961 )     (2,292 )     (10,707 )     (869,394 )     (8,401 )     (3,538 )

Net Cash Provided by (Used in) Financing Activities

                    13,191       348,854       11,017       14,325       906,072       32,884       (39,295 )

OTHER FINANCIAL DATA:

                                                                       

EBITDA (1)(2)

  $ 23,141     $ 33,744     $ 31,781     $ 2,382     $ 60,072     $ 101,326     $ 13,279     $ 90,960     $ 96,909  

Capital Expenditures

    101       1,181       1,011       11       2,047       8,473       244       8,324       1,338  

SELECTED OPERATING INFORMATION:

                                                                       

Contract Recompete Win Rate (3)

    100 %     31 %     79 %     NA       100 %     NA       NA       NA       100 %

New Contract Win Rate (3)

    85 %     55 %     94 %     NA       72 %     NA       NA       88 %     70 %

Contracted Backlog (4)

  $ 1,929     $ 2,091       NA     $ 2,028     $ 2,164       NA     $ 2,040     $ 2,184     $ 2,692  

BALANCE SHEET DATA (5) :

                                                                       

Cash and Cash Equivalents

  $ 5,923     $ 2,166       NA     $ 4,541     $ 6,510       NA     $ 13,474     $ 17,846     $ 24,803  

Working Capital (6)

    28,547       36,861       NA       58,295       104,335       NA       200,367       169,746       234,693  

Total Assets

    97,239       148,032       NA       481,097       579,829       NA       1,148,193       710,485       1,183,476  

Total Debt

    —         —         NA       —         —         NA       826,990       —         875,241  

Shareholders’ Equity

    —         —         NA       354,198       396,573       NA       96,918       483,978       99,063  

 

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Table of Contents

(1)   EBITDA is a primary component of certain covenants under our senior secured credit facility and is defined as net income (loss) before interest expense, income taxes, depreciation and amortization. We believe that EBITDA is useful to investors as a way to evaluate our ability to incur and service debt, make capital expenditures and meet working capital requirements. EBITDA does not represent net income or cash flows from operations, as these terms are defined under GAAP, and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP. EBITDA as presented in this prospectus is not necessarily comparable to similarly titled measures reported by other companies.

 

(2)   The following table presents a reconciliation of net income to EBITDA for the periods included below.

 

    Original Predecessor Period

  Immediate Predecessor Period

  Successor
Period


    Immediate
Predecessor
Period


  Successor
Period


    Fiscal Year Ended

 

March 30,

2002-

March 7,
2003


  21 Days
Ended
March 28,
2003


 

Fiscal Year
Ended

April 2,
2004


  Period
from April 3,
2004 to
Feb. 11, 2005


  49 Days
Ended
April 1, 2005


   

Nine Months

Ended
December 31,

2004


 

Nine Months

Ended
December 30,

2005


   

March 30,

2001


  March 29,
2002


             
    (dollars in thousands)

RECONCILIATION OF NET INCOME (LOSS) TO EBITDA:

                                                       

Net Income (Loss)

  $ 13,507   $ 20,714   $ 18,866   $ 1,229   $ 31,360   $ 59,733   $ (3,104 )   $ 54,444   $ 1,485

Income Taxes

    9,119     11,525     11,973     852     19,924     34,956     60       30,779     5,607

Interest Expense

    4     43     —       —       —       —       10,236       —       56,427

Depreciation and Amortization

    511     1,462     942     301     8,788     6,637     6,087       5,737     33,390
   

 

 

 

 

 

 


 

 

EBITDA

  $ 23,141   $ 33,744   $ 31,781   $ 2,382   $ 60,072   $ 101,326   $ 13,279     $ 90,960   $ 96,909
   

 

 

 

 

 

 


 

 

 

(3)   Recompete and new contract win rates are calculated based on the dollar values of such contracts. “NA” reflects no new recompeted or new contract awards during the referenced periods.
(4)   Contracted backlog data is as of the end of the applicable period.
(5)   Balance sheet data is as of the end of the applicable period.
(6)   Working capital is defined as current assets, net of current liabilities.
(7)   Historical predecessor periods do not reflect the 64 for 1 stock split, which will occur prior to the consummation of this offering.
(8)   For the purposes of pro forma earnings per share calculations, we have considered the effects of the $100.0 million special distribution expected to be paid to the holders of our Class B common stock upon consummation of this offering.

 

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Table of Contents

PRO FORMA FINANCIAL INFORMATION

 

The following unaudited pro forma condensed consolidated statements of operations for the nine months ended December 31, 2004 and December 30, 2005 and the year ended April 1, 2005 give effect to the Transactions as if they occurred on April 3, 2004. The pro forma statements of operations should be read in conjunction with the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

 

The pro forma consolidated balance sheet as of December 30, 2005 gives effect to the 2005 Acquisition and the Transactions as if they occurred on such date.

 

The pro forma adjustments are described in the notes to the pro forma statements of operations and are based on available information and assumptions that management believes are reasonable. The pro forma statements of operations are not necessarily indicative of our future results of operations or results of operations that would have actually occurred had the Transactions been consummated as of April 3, 2004.

 

The 2005 Acquisition was accounted for under the purchase method, and accordingly, the preliminary purchase price of the 2005 Acquisition was allocated to the net assets acquired based on preliminary estimates of the fair values at the date of the 2005 Acquisition which are subject to future adjustments.

 

The pro forma consolidated financial information should be read in conjunction with “Selected Consolidated Historical Financial Data,” “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all the consolidated historical financial statements included elsewhere in this prospectus.

 

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Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 30, 2005

(dollars in thousands, except per share data)

 

    

December 30,

2005


   

Pro Forma

Adjustments

for the

Offering

Transactions (1)


   

Pro Forma
December 30,

2005


 

Current Assets:


                  

Cash and Cash Equivalents

   $ 24,803     $ (20,011 )   $ 4,792  

Accounts Receivable

     390,969       —         390,969  

Deferred Tax Asset

     1,375       2,766       4,141  

Prepaid Expenses and Other Current Assets

     29,306       —         29,306  
    


 


 


Total Current Assets

     446,453       (17,245 )     429,208  

Property and Equipment, net

     9,737       —         9,737  

Other Assets:


                  

Goodwill

     418,745       —         418,745  

Tradename

     18,318       —         18,318  

Customer related Intangibles, net

     256,504       —         256,504  

Other Intangibles, net

     6,627       —         6,627  

Deferred Financing Costs, net

     17,297       (1,873 )     15,424  

Other Assets

     9,795       —         9,795  
    


 


 


Total Other Assets

     727,286       (1,873 )     725,413  
    


 


 


Total Assets

   $ 1,183,476     $ (19,118 )   $ 1,164,358  
    


 


 


Current Liabilities:


                  

Current portion of Long-Term Debt

   $ 2,588     $ —       $ 2,588  

Accounts Payable

     104,867       —         104,867  

Accrued Payroll and Employee Costs

     55,351       —         55,351  

Accrued Expenses—Related Party

     11,843       —         11,843  

Other Accrued Expenses

     34,330       —         34,330  

Income Taxes

     2,781       —         2,781  
    


 


 


Total Current Liabilities

     211,760       —         211,760  

Long-Term Debt—Less Current Portion

     659,825       (60,700 ) (2)     599,125  

Series A Preferred Stock

     212,828       (212,828 ) (2)     —    

Shareholders’ Equity


                  

Common Stock, $0.01 par value—500,000 Shares authorized; 500,000 Shares issued and Outstanding at December 30, 2005 (3)

     5       565       570  

Additional Paid in Capital (4)

     100,993       264,435       365,428  

Accumulated Deficit

     (1,619 )     (10,590 )     (12,209 )

Accumulated Other Comprehensive Loss

     (316 )     —         (316 )
    


 


 


Total Shareholders’ Equity

     99,063       254,410       353,473  
    


 


 


Total Liabilities and Shareholders’ Equity

   $ 1,183,476     $ (19,118 )   $ 1,164,358  
    


 


 



(1)   Assumes offering proceeds of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the and cash on hand of $20,000 used to redeem $212,800 of our preferred stock, repay up to $112,000 of senior subordinated notes, fund the Class B distribution of $100,000 to the holder of our Class B common stock, pay transaction fees and expenses of approximately $35,000, including a fee of $5,000 paid to Veritas Capital Management II, LLC and pay prepayment penalties of $11,500 as of December 30, 2005, $5,700 of which represents the prepayment penalties on our preferred stock and $5,800 of which represents the prepayment penalties on our senior subordinated notes. Based on our accumulated net profits since inception through December 30, 2005, the entire distribution to the holders of our Class B common stock would be a return of capital. A $1.00 increase (decrease) in the assumed initial offering price of $16.00 per share would increase (decrease) the net proceeds of this offering by $15,800, assuming the number of shares offered by us, as set forth on the cover page of the prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(2)   The pro forma adjustment presented above assumes a redemption of $60,700 of our senior subordinated notes. Assuming a redemption date of May 5, 2006, holders of our preferred stock will receive $222,500, and we will redeem $51,900 of the $320,000 aggregate principal amount of the senior subordinated notes.
(3)   Upon the payment in full of the special Class B distribution, all of our outstanding shares of Class B common stock will automatically convert into outstanding shares of Class A common stock on a one-for-one basis.
(4)   The pro forma data assumes the payment of the special Class B distribution in the amount of $100,000.

 

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Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED APRIL 1, 2005

(dollars in thousands, except per share data)

 

    Immediate
Predecessor


    Successor

    Pro Forma

 
    Period from
April 3, 2004 to
Feb. 11, 2005


    49 Days
Ended
April 1, 2005


    Adjustments for
2005 Acquisition


   

Fiscal

Year Ended
April 1, 2005


    Adjustments
for the
Offering
Transactions


    Pro Forma Fiscal
Year Ended
April 1, 2005


 

Revenues

  $ 1,654,305     $ 266,604     $ —       $ 1,920,909     $ —       $ 1,920,909  
   


 


 


 


 


 


Costs of Services

    1,496,109       245,406       —         1,741,515       —         1,741,515  

Selling, General and Administrative (7)

    57,755       8,408       (775 ) (1)     65,388       —         65,388  

Depreciation and Amortization

    5,922       5,605       29,442 (2)     40,969       —         40,969  
   


 


 


 


 


 


Total Costs and Expenses

    1,559,786       259,419       28,667       1,847,872       —         1,847,872  
   


 


 


 


 


 


Operating Income

    94,519       7,185       (28,667 )     73,037       —         73,037  

Interest Expense

    —         8,054       47,414 (3)     55,468       (5,767 ) (6)     49,701  

Interest on Mandatory Redeemable Shares

    —         2,182       23,395       25,577 (4)     (25,577 ) (6)     —    

Interest Income

    (170 )     (7 )     —         (177 )     —         (177 )
   


 


 


 


 


 


Income (loss) Before Income Taxes

    94,689       (3,044 )     (99,476 )     (7,831 )     31,344       23,513  

Provision (Benefit) for Income Taxes

    34,956       60       (28,475 )     6,541       2,087       8,628 (5)
   


 


 


 


 


 


Net Income (Loss)

  $ 59,733     $ (3,104 )   $ (71,001 )   $ (14,372 )   $ 29,257     $ 14,885  
   


 


 


 


 


 


                                  Pro Forma
Fiscal Year Ended
April 1, 2005


 

Net income per common share:

 

Basic and diluted

    NA     $ (0.10 )     NA     $ (0.45 )     NA     $ 0.26  

Weighted average common shares outstanding (8) :

                                               

Basic and diluted

    NA       32,000,000       NA       32,000,000       25,000,000       57,000,000  

(1)   The annual management fee is $300, $25 of which is reflected under selling, general & administrative, or SG&A, for the successor period and which is offset by management retention bonuses expensed during the successor period of $1,050.
(2)   Reflects the change in intangible amortization related to the adjustment to estimated fair value of intangible assets and the change in estimated lives.
(3)   Represents the increase in interest expense to reflect the new capital structure and the amortization of financing costs over the terms of the corresponding debt.
(4)   Represents a full year of accreted value on our preferred stock and gives effect to the anticipated net working capital adjustment.
(5)   Based on an effective tax rate of 36.7%, which is the expected approximate effective tax rate for successor operations. Interest on mandatory redeemable shares is not tax-deductible.
(6)   Represents the decrease in interest expense assuming a repayment of up to $61,000 of our senior subordinated notes and redemption of $212,828 of our preferred stock from the offering proceeds.
(7)   The pro forma income statement does not include the special cash bonus payment of $3,125 to be paid upon consummation of the offering to our executive officers and certain members of management. The special cash bonus payments have been excluded from the pro forma income statement due to the payments not having a continuing impact on our operations.
(8)   The Successor Period reflects the 64 for 1 stock split of our common stock to occur prior to the consummation of this offering. Upon the payment in full of the special Class B distribution, all of our outstanding shares of Class B common stock will automatically convert into outstanding shares of Class A common stock on a one-for-one basis.

 

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Table of Contents

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED DECEMBER 31, 2004

(dollars in thousands)

 

    Immediate
Predecessor


    Pro Forma

 
    Nine Months
Ended
December 31,
2004


    Adjustments
for 2005
Acquisition


    Nine Months
Ended
December 31,
2004


    Adjustments
for the
Offering
Transactions


   

Pro Forma

Nine Months
Ended
December 31,
2004


 

Revenues

  $ 1,400,054     $ —       $ 1,400,054     $ —       $ 1,400,054  

Costs of Services

    1,263,414       —         1,263,414       —         1,263,414  

Selling, General and Administrative

    46,452       225 (1)     46,677       —         46,677  

Depreciation and Amortization

    5,095       25,453 (2)     30,548       —         30,548  
   


 


 


 


 


Total Costs and Expenses

    1,314,961       25,678       1,340,639       —         1,340,639  
   


 


 


 


 


Operating Income

    85,093       (25,678 )     59,415       —         59,415  

Interest Expense

    —         42,278 (3)     42,278       (4,325 ) (6)     37,953  

Interest on Mandatory Redeemable shares

    —         19,145 (4)     19,145       (19,145 ) (6)     —    

Interest Income

    (130 )     —         (130 )     —         (130 )
   


 


 


 


 


Income (Loss) before Income Taxes

    85,223       (87,101 )     (1,878 )     23,470       21,592  

Provision (Benefit) for Income Taxes

    30,779       (24,528 )     6,251       1,566       7,817 (5)
   


 


 


 


 


Net Income (Loss)

  $ 54,444     $ (62,573 )   $ (8,129 )   $ 21,904     $ 13,775  
   


 


 


 


 


                            Pro Forma
Nine Months
Ended
December 31,
2004


 

Net income per share: (7)

                                       

Basic and diluted

    NA       NA     $ (0.25 )     NA     $ 0.24  

Weighted average common shares outstanding: (7)

                                       

Basic and diluted

    NA       32,000,000       32,000,000       25,000,000       57,000,000  

(1)   Reflects the management fee for nine months.
(2)   Reflects the change in intangible amortization related to the adjustment to estimated fair value of intangible assets and the change in estimated lives.
(3)   Represents the increase in interest expense to reflect the new capital structure and the amortization of financing costs over the terms of the corresponding debt.
(4)   Represents nine months of interest on our preferred stock, including the shares to be issued as a result of the working capital adjustment.
(5)   Based on an effective tax rate of 36.2%, which is the effective tax rate for successor operations. Interest on mandatory redeemable shares is not tax-deductible.
(6)   Represents the decrease in interest expense assuming a repayment of up to $61,000 of our senior subordinated notes and redemption of $212,828 of our preferred stock from the offering proceeds.
(7)   Adjustments for the 2005 Acquisition reflect the 64 for 1 stock split, which will occur prior to the consummation of this offering.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE NINE MONTHS ENDED DECEMBER 30, 2005

(dollars in thousands, except per share data)

 

    Successor

    Pro forma

 
   

Nine Months
Ended 

December 30,

2005


   

Adjustments
for 2005
Acquisition


   

Nine Months
Ended 

December 30,

2005


    Adjustments
for the
Offering
Transactions


   

Pro Forma
Nine Months
Ended 

December 30,

2005


 

Revenues

  $ 1,418,245     $ —       $ 1,418,245     $ —       $ 1,418,245  

Cost of Services

    1,262,255       —         1,262,255       —         1,262,255  

Selling, General and Administrative

    59,874       (2,850 ) (1)     57,024       —         57,024  

Depreciation and Amortization

    32,763       —         32,763       —         32,763  
   


 


 


 


 


Total Costs and Expenses

    1,354,892       (2,850 )     1,352,042       —         1,352,042  
   


 


 


 


 


Operating Income

    63,353       2,850       66,203       —         66,203  

Interest Expense

    42,278       —         42,278       (4,325 ) (4)     37,953  

Interest on Redeemable Shares

    14,149       4,996 (2)     19,145       (19,145 ) (4)     —    

Interest Income

    (166 )     —         (166 )     —         (166 )
   


 


 


 


 


Income (Loss) before Income Taxes

    7,092       (2,146 )     4,946       23,470       28,416  

Provision (Benefit) for Income Taxes

    5,607       3,114       8,721       1,566       10,287  
   


 


 


 


 


Net Income (Loss)

  $ 1,485     $ (5,260 )   $ (3,775 )   $ 21,904     $ 18,129  
   


 


 


 


 


                           

Pro Forma

Nine Months
Ended

December 30,

2005


 

Net income per common share:

 

       

Basic and diluted

  $ 0.05       NA     $ (0.12 )     NA     $ 0.32  

Weighted average common shares outstanding: (5)

                                       

Basic and diluted

    32,000,000       —         32,000,000       25,000,000       57,000,000  

(1)   Reflects the decrease in selling, general and administrative expense related to the management retention bonus expense incurred during the nine months ended December 30, 2005.
(2)   Reflects the estimated interest on our preferred stock issued to Computer Sciences Corporation as part of the purchase price adjustment.
(3)   Based on an effective tax rate of 36.2%, which is the effective tax rate for successor operations. Interest on mandatory redeemable shares is not tax-deductible.
(4)   Represents the decrease in interest expense assuming a repayment of up to $61,000 of our senior subordinated notes and redemption of $212,828 of our preferred stock from the offering proceeds.
(5)   The Successor Period reflects the 64 for 1 stock split of our common stock to occur prior to the consummation of this offering. Upon the payment in full of the special Class B distribution, all of our outstanding shares of Class B common stock will automatically convert into outstanding shares of Class A common stock on a one-for-one basis.

 

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations covers periods prior and subsequent to the acquisition of DynCorp by Computer Sciences Corporation on March 7, 2003 (referred to as the “Computer Sciences Corporation Acquisition”) and the acquisition of our operating company by an entity controlled by the Veritas Capital Fund II, L.P. and its affiliates on February 11, 2005 (referred to as the “2005 Acquisition”). Accordingly, the discussion and analysis of historical operations during the periods prior to the Computer Sciences Corporation Acquisition and the 2005 Acquisition do not reflect the significant impact that these transactions had on us. You should read the following discussion together with the sections entitled “Summary Consolidated Historical and Pro Forma Financial Data,” “Risk Factors,” “Pro Forma Financial Information,” “Selected Historical Consolidated Financial Data” and the financial statements included elsewhere in this prospectus. With respect to certain forward-looking statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, see “Regarding Forward-Looking Statements.”

 

Overview

 

Our Company

 

We are a leading provider of specialized mission-critical outsourced technical services to civilian and military government agencies as measured in terms of revenues generated by our direct competitors with respect to the outsourcing of technical services for the U.S. government’s fiscal year ended September 30, 2004. Our leading position is not based on our percentage of revenues compared to the overall defense budget. Our specific global expertise is in law enforcement training and support, security services, base operations and aviation services and operations. We also provide logistics support for all of our services. Our predecessors have provided critical services to numerous U.S. government departments and agencies since 1951. We operated as a separate subsidiary of DynCorp from December 2000 to March 2003 and Computer Sciences Corporation from March 2003 until February 2005. Our current customers include the Department of State; the Army, Air Force, Navy and Marine Corps (collectively, the Department of Defense); and commercial customers and foreign governments. As of December 30, 2005, we had over 14,000 employees in 35 countries, 45 active contracts ranging in duration from three to ten years and over 100 task orders.

 

Our business strategy is to further increase our revenues and earnings by exploiting current business opportunities, capitalizing on industry trends, pursuing commercial and foreign government opportunities and expanding our domestic service offerings. We have a long-standing record of providing services in support of a broad array of highly complex platforms and systems that are vital to our customers’ operations and, together with our predecessors, have provided support services to the U.S. government for 54 years. We believe that the longevity and depth of our customer relationships have positioned us as a contractor of choice for our customers, creating a unique advantage and opportunity to cross-sell our capabilities to capture additional contract opportunities. The U.S. government is increasing its reliance on outsourcing and has increased spending in our target markets. While we have historically primarily served the U.S. government, we believe there is potential to increase the business we generate from commercial and foreign government customers. In addition, as a subsidiary of Computer Sciences Corporation, we were prevented from pursuing additional domestic programs. As a result of the 2005 Acquisition, we intend to compete for new business opportunities domestically. We do not believe this represents a change in our business operations going forward, but allows us to use our strengths in providing our services internationally to compete effectively for additional domestic business.

 

Our revenues, net income and earnings before interest, taxes, depreciation and amortization, or EBITDA, for fiscal 2004 as compared with fiscal 2003, increased at an annual growth rate of 32.2%, 56.1% and 75.8%, respectively. In fiscal 2005, on a pro forma basis after giving effect to the Offering Transactions, we generated revenues, EBITDA and net income of $1.9 billion, $115.4 million and $14.9 million, respectively, as compared

 

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with $1.2 billion, $60.1 million and $31.4 million, respectively, in fiscal 2004. Furthermore, our revenues and EBITDA for fiscal 2005 as compared with fiscal 2004 increased at an annual growth rate of 58.2% and 92.1%, respectively, while our net income decreased 52.5% during the same time period. Our fiscal 2005 revenue and EBITDA growth has primarily been driven by increasing demand for outsourced technical services and other non-combat-related functions, such as reconstruction, peace-keeping, logistics and other support activities. Our fiscal 2005 net income decline occurred primarily due to higher interest expense and intangible amortization related to the 2005 Acquisition. For the nine months ending December 30, 2005, on a pro forma basis after giving effect to the Offering Transactions, we had revenues, EBITDA and net income of $1.4 billion, $99.8 million and $18.1 million, respectively. Our revenue and EBITDA for the nine months ended December 30, 2005, when compared to the nine months ended December 31, 2004, increased 1.3% and 9.7%, respectively, while our net income decreased 66.7% during the same time period. The decline in our revenue and EBITDA growth rates for these periods was due to our decision to exit a series of contracts to provide security and logistic support to various U.S. government construction projects in the Middle East as a subcontractor, a decline in construction and equipment purchases and the discontinuation of two contracts providing other support activities. Our net income decline during the nine months ended December 30, 2005 occurred due to higher interest expense and intangible amortization related to the 2005 Acquisition. As of December 30, 2005, we had a total backlog of approximately $2.7 billion and, historically, virtually our entire backlog has been converted into revenue at or above stated contract values. Backlog does not take into account any expenses associated with the contracts and converting backlog into revenue would not reflect net income associated with contractual performance. In addition to backlog as of December 30, 2005, we had $18.5 billion of currently available ceiling under our existing indefinite delivery, indefinite quantity contracts. From the beginning of fiscal 2003 through December 30, 2005, we have won a total of 83%, or $11.8 billion out of $14.1 billion, of the aggregate estimated value of new or renewed contracts on which we bid.

 

Operating Environment and Impact of Our Business

 

We are primarily a U.S. government contractor providing a broad range of critical technical services to civilian and military government agencies and to a lesser extent, commercial customers. As a result, our operating performance for any time period is impacted primarily by trends in U.S. government outsourcing, spending, and the awarding of contracts and related payment terms and therefore trends in this market can have a significant effect on our business. The trends we monitor and the impact on our business are discussed below.

 

Increased Outsourcing by U.S. and Foreign Governments. We have seen and benefited from a continued trend toward outsourcing of services by the U.S. government, particularly within the Department of Defense and the Department of State. These outsourcing trends are seen both domestically and internationally and support the increased deployment of U.S. resources overseas. The increase in overseas deployment has been both in frequency and magnitude, and across multiple U.S. government agencies. For example, our International Technical Services division has witnessed strong growth as a result of the U.S. government’s trend toward outsourcing critical functions. Outside of the U.S. government we are seeing other countries, particularly the United Kingdom and Australia, follow the U.S. government trend to outsource services. We believe that this provides additional markets for our existing services. Our International Technical Services operating division primarily provides outsourced law enforcement training, drug eradication, global logistics, base operations and personal physical security services to government and commercial customers in foreign jurisdictions. Since fiscal 2001, International Technical Services has grown revenues from $264.7 million to $1,232.7 million for fiscal 2005, or 64.2% of our total revenues. Although we expect to continue to see increases in government outsourcing for the foreseeable future, particularly in government technical support services and other non-combat related functions, the adoption of new laws or regulations that affect companies that provide services to the federal government or curtailment of the federal government’s outsourcing of services to private contractors would significantly alter this positive trend.

 

Increased Spending by Our Customers. The Department of Defense budget for fiscal 2007, excluding supplemental funding relating to operations in Iraq and Afghanistan, has been proposed to Congress at $439.3

 

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billion, representing a 48% increase over fiscal 2001. Fiscal 2005 Department of Defense actual spending excluding supplemental funding relating to operations in Iraq and Afghanistan was $400.1 billion. The U.S. government budget for international development and humanitarian and international security assistance coordinated by the Department of State has grown from approximately $15 billion in fiscal 2000 to an expected $18 billion in fiscal 2005 and is further projected by the U.S. government to increase to $25 billion in fiscal 2009 (a CAGR of 8.4%) from fiscal 2005 to fiscal 2009. As a result of the U.S. military’s presence in the Middle East and abroad, we believe that this trend will continue for the foreseeable future and that we are well positioned to benefit from this trend. Among the factors that could impact U.S. government spending and which would reduce our U.S. government contracting business are: a significant decline in, or reapportioning of, spending by the U.S. government, in general, or by the Department of Defense or the Department of State.

 

Shift to More Multiple Awards in Indefinite Delivery, Indefinite Quantity Contracts. The trend in the service segment of the U.S. government has been to award more multiple award indefinite delivery, indefinite quantity contracts. We expect these trends to continue. Strong customer relationships combined with strong past performance will increase the probability of earning a customer’s business under multiple award indefinite delivery, indefinite quantity contracts, as well as winning new procurements. In fiscal 2005 and for the nine months ended December 30, 2005, 56.3% and 58.2% of our revenues were attributable to indefinite delivery, indefinite quantity contracts. Traditional government contracts typically have a base year award plus four to nine option years, limiting the competition to the 5-10 year contract cycle. Under multiple award indefinite delivery, indefinite quantity contracts, the customer has the ability to compete for the work more frequently among the contract holders, or even move the work on a sole source basis to one of the other providers. This trend toward multiple award indefinite delivery, indefinite quantity contracts could increase the volatility in our revenue.

 

Shift from Cost Type Contracts to Time-and-Material or Fixed-Price Contracts. Our government contract services have three distinct pricing structures: cost-reimbursement, time-and-materials and fixed-price, representing approximately 35%, 38% and 27% of our revenues, respectively, for the nine months ended December 30, 2005, and approximately 34%, 39% and 27% of our revenues, respectively, for fiscal 2005. We believe that our profitability will continue to improve as we anticipate our customers to shift away from cost reimbursement to time-and-materials contracts and fixed-price contracts. We base our belief on recent trends in our revenues, the nature of the contracts that we are bidding on and the pricing structure in fixed-price and time-and-material contracts. We assume financial risk on time-and-materials and fixed-price contracts, because we assume the risk of performing those contracts at the stipulated prices or negotiated hourly rates. If we do not accurately estimate ultimate costs and control costs during performance of the work, we could lose money on a particular contract or have lower than anticipated margins. The movement from cost type contracts to time-and-material or fixed-price contracts, while increasing our risk, allows us the opportunity to earn higher margins.

 

Increased Maintenance, Overhaul, and Upgrades Needed to Support Aging Military Platforms. Another trend we monitor to determine our future strategies is the age and use of weapon systems. The high visibility/high cost new weapons systems tend to be the target of budget reductions, while the Operation and Maintenance budget continues to grow as a percentage of the total budget. The Operation and Maintenance portion of the Department of Defense budget, which includes the majority of the services we provide, is the largest and fastest growing segment of Department of Defense military spending. Also, as the purchase of new weapons systems are delayed or cancelled, the current weapon systems continue to age and require increased maintenance. This aging, combined with the increased use of the equipment, often in harsh environments, provides opportunities for the services we offer.

 

Competition. We believe that the favorable industry trends that could drive our future profitability may also attract additional competition by certain existing and potential competitors. Given the broad range of services that we provide, we compete with various entities across geographic and business lines. Some of our competitors have greater financial and other resources than we do or are better positioned than we are to compete for contract opportunities. In addition, we are at a disadvantage when bidding for contracts put up for recompetition for which we are not the incumbent provider, because incumbent providers are frequently able to capitalize on customer relationships, technical knowledge and pricing experience gained from their prior service.

 

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Factors Affecting Our Results of Operations

 

Our future results of operations will be affected by the following factors, which may cause our results of operations to differ from those discussed under “Results of Operations.”

 

Debt Service . During the predecessor periods, working capital was provided by our parent at the time, and therefore there was no debt and minimal interest expense on our financial statements. As of December 30, 2005, on a pro forma basis after giving effect to the Offering Transactions, and assuming an initial offering of 25.0 million shares of our Class A common stock at $16.00 per share, the midpoint of the range set forth on the cover page of this prospectus, we would have had $601.7 million of outstanding debt, which generates significant interest expense. Approximately $53.3 million per year of our cash flow will be required for interest and principal payments annually for fiscal 2007 through 2010. This will limit the amount of cash that is available for working capital requirements, or other uses.

 

Stand-Alone Operating Costs. During fiscal 2004, we paid Computer Sciences Corporation $12.7 million, and during the period from April 3, 2004, through February 11, 2005, we paid Computer Sciences Corporation $11.9 million for executive oversight and other services such as treasury, tax, insurance, legal, consolidation accounting, public affairs and information technology. In addition, under the transition services agreement, we have incurred approximately $1.4 million of expenses during the nine months ended December 30, 2005. We have put in place people and/or other resources to provide the services previously provided by corporate resources from either Computer Sciences Corporation (March 8, 2003 through February 11, 2005) or DynCorp (prior to March 7, 2003). While a one-to-one comparison is difficult due to organizational differences, in total, our SG&A forecast for fiscal 2006 is slightly lower than the actual expenditures from fiscal 2005.

 

Purchase Accounting Adjustments. The 2005 Acquisition was accounted for under the purchase method and, accordingly, the preliminary purchase price of the 2005 Acquisition was allocated to the net assets acquired based on preliminary estimates of the fair values at the date of the 2005 Acquisition and are subject to future adjustments. We have engaged a third party to provide an independent appraisal of the fair values of certain intangible assets. We have received preliminary estimates for the intangible assets, and the amounts will be finalized with the anticipated completion of the third-party review during the second quarter of fiscal 2006.

 

2005 Working Capital Adjustment. The purchase price for the 2005 Acquisition was $937.0 million after giving effect to a net working capital adjustment in favor of Computer Sciences Corporation in the amount of $65.55 million and $6.1 million of accumulated dividends in connection with the preferred stock issued for satisfaction of the working capital adjustment. Of the $937.0 million purchase price, $775.0 million was paid in cash, $140.6 million was paid to Computer Sciences Corporation in the form of our preferred equity, $6.1 million in accumulated dividends on the preferred stock issued in connection with the working capital adjustment and the remaining amounts were transaction expenses.

 

Explanation of Reporting Periods and Basis of Presentation

 

On March 7, 2003, DynCorp and its subsidiaries, including our operating company, were acquired by Computer Sciences Corporation. The formation of our reorganized operating company is the result of transfers of net assets and other wholly owned legal entities by entities under Computer Sciences Corporation and DynCorp’s common control. The financial statements prior to March 7, 2003 are referred to as the “original predecessor period” statements.

 

On February 11, 2005, our operating company was sold by Computer Sciences Corporation to an entity controlled by Veritas Capital. The financial statements from March 8, 2003 to February 11, 2005, the period of Computer Sciences Corporation ownership, are referred to as the “immediate predecessor period” statements. We refer to financial statements from and after February 12, 2005 as the “successor period” statements.

 

The historical financial statements and information included herein include the consolidated accounts of DynCorp International and its subsidiaries. This presentation is on the historical cost basis of accounting with the

 

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application of purchase accounting related to the Computer Sciences Corporation Acquisition and the 2005 Acquisition in the applicable periods presented. Information from the original predecessor period represents the consolidated financial position of our operating company for the period prior to the Computer Sciences Corporation Acquisition on March 7, 2003. This presentation is on the historical cost basis of accounting without the application of purchase accounting related to the Computer Sciences Corporation Acquisition in those periods presented.

 

The DynCorp International financial statements for the period from April 3, 2004 to February 11, 2005, fiscal 2004, the 21 days ended March 28, 2003 and the period from March 30, 2002 to March 7, 2003 are based on the historical assets, liabilities, sales and expenses of our operating company, including the allocation to our operating company of a portion of our corporate expenses and income taxes. During the period from March 30, 2002 to March 7, 2003, the 21 days ended March 28, 2003, fiscal 2004 and the period from April 3, 2004 to February 11, 2005, our operating company’s predecessor parents allocated $11.8 million, $0.6 million, $12.7 million and $11.9 million, respectively, of expenses it incurred for providing executive oversight and corporate headquarter functions, consolidation accounting, treasury, tax, legal, public affairs, human resources, information technology and other services. Of the $11.8 million, $10.0 million and $1.8 million were allocated to SG&A, and costs of services, respectively. Of the $600,000, $550,000 and $50,000 were allocated to SG&A and costs of services, respectively. Of the $12.7 million, $9.4 million and $3.3 million were allocated to SG&A and costs of services, respectively. Of the $11.9 million, $9.8 million and $2.1 million were allocated to SG&A and costs of services, respectively. These allocations are considered to be reasonable reflections of the utilization of services provided or the benefit received by our operating company. Computer Sciences Corporation continues to perform certain of these functions under a transition services agreement. For a discussion on our transition services agreement, see “2005 Acquisition—Transition Services Agreement.”

 

The results of operations for the 21-day period (March 8, 2003 to March 28, 2003), the 49-day period (February 12, 2005 to April 1, 2005), the nine months ended December 31, 2004 and the nine months ended December 30, 2005, are not necessarily indicative of the results to be expected for a full year or any future period. We have not addressed the 21-day period under the “Results of Operations” as this period did not include any meaningful trends, results or developments not otherwise reflected in the period from March 30, 2002 to March 7, 2003. We have addressed the 49-day period from February 12, 2005 to April 1, 2005 (successor period), in summary only and not compared it to a prior period due to the limited duration on this period and lack of a comparable prior period.

 

The 2005 Acquisition

 

On December 12, 2004, we and our equity sponsor Veritas Capital, entered into a purchase agreement with Computer Sciences Corporation and DynCorp whereby we agreed to acquire our operating company, a wholly owned subsidiary of DynCorp. We assigned our rights to acquire our operating company to DI Finance LLC, or DI Finance, our wholly owned subsidiary. Immediately after the consummation of the 2005 Acquisition, DI Finance was merged with and into our operating company, our operating company survived the merger and is now our wholly owned subsidiary.

 

As a result of the 2005 Acquisition, our assets and liabilities have been adjusted to their preliminary estimated fair value as of the closing. The excess of the total purchase price over the value of our assets at the closing of the 2005 Acquisition has been allocated to goodwill and other intangible assets, some of which will be amortized, and will be subject to annual impairment review.

 

Backlog

 

We track contracted backlog in order to assess our current business development effectiveness and to assist us in forecasting our future business needs and financial performance. Backlog consists of orders and options under our contracts. We define contracted backlog as the estimated value of contract awards received from

 

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customers that have not been recognized as sales. Our backlog consists of funded and unfunded backlog. Funded backlog is based upon amounts actually appropriated by a customer for payment of goods and services less actual revenue recorded as of the measurement date under that appropriation. Unfunded backlog is the actual dollar value of unexercised contract options. Most of our U.S. government contracts allow the customer the option to extend the period of performance of a contract for a period of one or more years. These options may be exercised at the sole discretion of the customer. It has been our historical experience, however, that the customer had exercised contract options.

 

Because of appropriation limitations in the federal budget process, firm funding for our contracts is usually made for only one year at a time, with the remainder of the years under the contract expressed as a series of one-year options. As is the case with the base period of our U.S. government contracts, option periods are subject to the availability of funding for contract performance. The U.S. government is legally prohibited from ordering work under a contract in the absence of funding. Our historical experience has been that the government generally has funded the option periods of our contracts.

 

The following table sets forth our contracted backlog as of the dates indicated:

 

     March 28,
2003


  

April 2,

2004


  

April 1,

2005


   December 30,
2005


     (dollars in millions)

Funded Backlog

   $ 467    $ 991    $ 1,140    $ 1,053

Unfunded Backlog

     1,561      1,173      900      1,639
    

  

  

  

Total Backlog

   $ 2,028    $ 2,164    $ 2,040    $ 2,692
    

  

  

  

 

For additional information on backlog, see “Business—Backlog.”

 

Fiscal Periods

 

We use a 52/53-week fiscal year ending on the closest Friday to March 31. The period from April 3, 2004 to February 11, 2005 is a 45-week period. The fiscal year ended April 2, 2004 was a 53-week year. The period from March 30, 2002 to March 7, 2003 included 49 weeks. During the original predecessor period, DynCorp used a calendar year. Accordingly, the financial statements covered by that period were restated to 52/53-week fiscal year ends.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis, including those relating to revenue recognition and cost estimation on long-term contracts, determination of goodwill and customer-related intangible assets, goodwill impairment and accounting for contingencies and litigation. Our estimates and assumptions have been prepared on the basis of the most current available information. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could materially differ from these estimates under different assumptions and conditions.

 

We have several critical accounting policies that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

 

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Typically, the circumstances that make these judgments complex and difficult have to do with making estimates about the effect of matters that are inherently uncertain. Our critical accounting estimates are as follows:

 

Revenue Recognition and Cost Estimation on Long-Term Contracts

 

We provide our services under cost-reimbursement, time-and-materials and fixed-price contracts. The form of contract, rather than the type of service offering, is the primary determinant of revenue recognition. Revenues are recognized when persuasive evidence of an arrangement exists, services or products have been provided to the client, the sales price is fixed or determinable, and collectibility is reasonably assured. For fiscal 2005 and the nine months ended December 30, 2005, approximately 34%, 39%, 27% and approximately 35%, 38% and 27% of our revenues were derived from cost-reimbursement, time-and-materials and fixed-price contracts, respectively. For more information on our contract types, see “Business—Contract Types.”

 

Revenue on fixed-price contracts is generally recognized ratably over the contract period, measured by methods appropriate to the services or products provided. Such “output measures” include: period of service, such as for aircraft fleet maintenance; units delivered, such as vehicles; and units produced, such as aircraft for which modification has been completed.

 

Revenue on fixed-price construction or production-type contracts, when they occur, is recognized on the basis of the estimated percentage of completion. Progress towards completion is typically measured based on achievement of specified contract milestones, when available, or based on costs incurred as a proportion of estimated total costs. Profit in a given period is reported at the expected profit margin to be achieved on the overall contract. This method can result in the deferral of costs or profit on these contracts. Management regularly reviews project profitability and underlying estimates. Revisions to the estimates at completion are reflected in results of operations as a change in accounting estimate in the period in which the facts that give rise to the revision become known by management. Revenue on fixed-unit contracts that have a duration of less than six months is recognized on the completed contract method. Work in progress is classified as a component of inventory.

 

We provide for anticipated losses on contracts by a charge to income during the period in which the losses are first identified. Amounts billed but not yet recognized as revenue under certain types of contracts are deferred. Unbilled receivables are stated at estimated realizable value. Contract costs on U.S. government contracts, including indirect costs, are subject to audit and adjustment by negotiations between us and government representatives. Substantially all of our indirect contract costs have been agreed upon through 2004. Contract revenues on U.S. government contracts have been recorded in amounts that are expected to be realized upon final settlement.

 

Contract costs are expensed as incurred, except as described above and on certain other production-type fixed-price contracts, where costs are deferred until such time that associated revenue is recognized.

 

Client contracts may include the provision of more than one of our services. For revenue arrangements with multiple deliverables, revenue recognition includes the proper identification of separate units of accounting and the allocation of revenue across all elements based on relative fair values.

 

Many of our contracts are time-and-materials or fixed hourly/daily rate contracts. For these contracts, revenue is recognized each month based on actual hours/days charged to the program during that month multiplied by the fixed hourly/daily rate in the contract for the type of labor charged. Any material or other direct charges are recognized as revenue based on the actual direct cost plus Defense Contract Audit Agency-approved indirect rates.

 

Cost-reimbursement type contracts can be either Cost Plus Fixed Fee, or Cost Plus Award Fee. Revenue recognition for these two contract types is very similar. In both cases, revenue is based on actual direct cost plus

 

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Defense Contract Audit Agency-approved indirect rates. In the case of Cost Plus Fixed Fee, the fixed fee is recognized based on the ratio of the fixed fee for the contract to the total estimated cost of the contract. In the case of Cost Plus Award Fee contracts, the fee is made up of two components, base fee and award fee. Base fee is recognized in the same manner as the fee on Cost Plus Fixed Fee contracts. The award fee portion is recognized based on an average of the last two award fee periods or award experience for similar contracts for new contracts that lack specific experience.

 

Determination of Goodwill and Customer-Related Intangible Assets

 

The Computer Sciences Corporation Acquisition was accounted for under the purchase method and, accordingly, the purchase price was allocated to the net assets acquired based on estimates of the fair values at the acquisition date. In addition, Computer Sciences Corporation obtained an independent appraisal of the fair values for certain intangible assets. In order to determine the appropriate value of goodwill to be allocated to us, an estimate was made of the relative fair value of our operating company to the remaining portion of DynCorp as of March 7, 2003. The value of the intangible assets reflected in the balance sheet is the sum of the independently appraised value of the customer contracts and related customer relationships for contracts being performed by us, less amortization expense.

 

The 2005 Acquisition was accounted for using the purchase method of accounting. This method requires estimates to determine the fair values of assets and liabilities acquired, including judgments to determine any acquired intangible assets such as customer-related intangibles, as well as assessments of the fair value of existing assets such as property and equipment. Liabilities acquired can include reserves for litigation and other contingency reserves established prior to or at the time of acquisition, and require judgment in ascertaining a reasonable value. Third-party valuation firms will assist management in the appraisal of certain assets and liabilities, but even those determinations would be based on significant estimates provided by us, such as forecasted revenues or profits on contract-related intangibles. Numerous factors are typically considered in the purchase accounting assessments, which are conducted by our professionals from legal, finance, human resources, information systems, program management and other disciplines. In addition, purchase price allocations are subject to refinement until all pertinent information is obtained. The purchase agreement established a procedure for determining the net working capital adjustment after the closing, with any dispute regarding such calculations to be resolved by an independent accounting firm. The purchase price for the 2005 Acquisition was $937.0 million after giving effect to a net working capital adjustment in favor of Computer Sciences Corporation in the amount of $65.55 million. We issued to Computer Sciences Corporation 65,550 shares of our preferred stock as payment for the working capital adjustment. The preferred shares issued accumulate dividends from the date of acquisition, February 11, 2005. Of the $937.0 million purchase price, $775.0 million was paid in cash, $140.6 million was paid to Computer Sciences Corporation in the form of our preferred equity and the remaining amounts were transaction expenses other than the $6.1 million in accumulated dividends which is currently owed on the preferred stock issued in connection with the working capital adjustment. The adjustment to the purchase price was recorded as an adjustment to goodwill. Upon consummation of this offering, we intend to redeem all of our currently outstanding preferred stock and the preferred stock issued to Computer Sciences Corporation, see “Use of Proceeds.”

 

Accounting for Contingencies and Litigation

 

We are subject to various claims and contingencies associated with lawsuits, insurance, tax and other issues arising out of the normal course of business. The consolidated financial statements reflect the treatment of claims and contingencies based on our view of the expected outcome. We consult with legal counsel on issues related to litigation and seek input from other experts and advisors with respect to matters in the ordinary course of business. If the likelihood of an adverse outcome is probable and the amount is estimable, we accrue a liability in accordance with SFAS No. 5, “Accounting for Contingencies.” Significant changes in the estimates or assumptions used in assessing the likelihood of an adverse outcome could have a material effect on our consolidated financial results.

 

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Results of Operations

 

The following tables set forth, for the periods indicated, our historical results of operations, both in dollars and as a percentage of revenues:

 

     Immediate
Predecessor Period


    Successor Period

 
    

Nine Months Ended

December 31, 2004


   

Nine Months Ended

December 30, 2005


 
     (dollars in thousands)  

Revenues

   $ 1,400,054     100.0 %   $ 1,418,245     100.0 %
    


       


     

Costs of Services

     1,263,414     90.2       1,262,255     89.0  

Selling, General and Administrative Expenses

     46,452     3.3       59,874     4.2  

Depreciation and Amortization

     5,095     0.4       32,763     2.3  
    


 

 


 

Total Costs and Expenses

     1,314,961     93.9 %     1,354,892     95.5 %
    


 

 


 

Interest Expense

     —       —         42,278     3.0  

Interest on Mandatory Redeemable Shares

     —       —         14,149     1.0  

Interest Income

     (130 )   0.0       (166 )   0.0  
    


 

 


 

Income Before Taxes

     85,223     6.1       7,092     0.5  

Provision for Income Taxes

     30,779     2.2       5,607     0.4  
    


 

 


 

Net Income

   $ 54,444     3.9 %   $ 1,485     0.1 %
    


 

 


 

 

   

Original
Predecessor

Period


    Immediate Predecessor Period

   

Successor

Period


   

Pro Forma for

the Year Ended

April 1, 2005


 
   

Period from

March 30, 2002

to March 7, 2003


   

For the Fiscal

Year