DynCorp International Inc.
Delta Tucker Holdings, Inc. (Form: 10-Q, Received: 11/14/2011 13:51:53)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission File Number: 333-173746

 

 

DELTA TUCKER HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware   27-2525959

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3190 Fairview Park Drive, Suite 700, Falls Church, Virginia 22042

(571) 722-0210

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes    x      No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes    x      No    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   þ   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes    ¨      No    x

As of November 14, 2011 the registrant had 100 shares of its Class A common stock outstanding.

 

 

 


Table of Contents

DELTA TUCKER HOLDINGS, INC.

TABLE OF CONTENTS

 

         Page  

PART I. FINANCIAL INFORMATION

  
  Disclosure Regarding Forward-Looking Information      2   
  Calendar Year and Predecessor/Successor Periods      3   

Item 1.

  Financial Statements   

Delta Tucker Holdings, Inc.

  
  Unaudited Condensed Consolidated Financial Statements   
 

Unaudited Condensed Consolidated Statement of Operations—Three Months Ended September 30, 2011 and October 1, 2010

     4   
 

Unaudited Condensed Consolidated Statement of Operations—Nine Months Ended September 30, 2011

     4   
 

Unaudited Condensed Consolidated Statement of Operations— For The Period From April 1, 2010 (Inception) Through October 1, 2010

     4   
 

Unaudited Condensed Consolidated Balance Sheets—September 30, 2011 and December 31, 2010

     5   
 

Unaudited Condensed Consolidated Statement of Cash Flows—Nine Months Ended September 30, 2011

     6   
 

Unaudited Condensed Consolidated Statement of Cash Flows— For The Period From April 1, 2010 (Inception) Through October 1, 2010

  
 

Unaudited Condensed Consolidated Statement of Equity— Nine Months Ended September 30, 2011

     7   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     8   

DynCorp International, Inc.

  
  Unaudited Condensed Consolidated Financial Statements   
 

Unaudited Condensed Consolidated Statements of Operations—Six Months Ended July 2, 2010

     37   
 

Unaudited Condensed Consolidated Statements of Operations—Three Months Ended July 2, 2010

     37   
 

Unaudited Condensed Consolidated Statement of Cash Flows—Six Months Ended July 2, 2010

     38   
 

Unaudited Condensed Consolidated Statement of Equity— Six Months Ended July 2, 2010

     39   
 

Notes to Unaudited Condensed Consolidated Financial Statements

     40   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      57   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      78   

Item 4.

  Controls and Procedures      79   

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      79   

Item 1A.

  Risk Factors      79   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      80   

Item 3.

  Defaults Upon Senior Securities      80   

Item 5.

  Other Information      80   

Item 6.

  Exhibits      80   

 

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Table of Contents

Disclosure Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created by the Private Securities Litigation Reform Act of 1995 under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties. Statements regarding the amount of our backlog and estimated total contract values are other examples of forward-looking statements. We caution that these statements are further qualified by important economic, competitive, governmental, international and technological factors that could cause our business, strategy, projections or actual results or events to differ materially, or otherwise, from those in the forward-looking statements. These factors, risks and uncertainties include, among others, the following:

 

the future impact of mergers, acquisitions, joint ventures or teaming agreements;

 

our substantial level of indebtedness and changes in availability of capital and cost of capital;

 

the outcome of any material litigation, government investigation, government audit or other regulatory matters;

 

policy and/or spending changes implemented by the Obama Administration, any subsequent administration or Congress;

 

termination or modification of key United States (“U.S.”) government or commercial contracts, including subcontracts;

 

changes in the demand for services that we provide or work awarded under our contracts, including without limitation, the Civilian Police, International Narcotics and Law Enforcement, Worldwide Personal Protection Services and Logistics Civil Augmentation Program (“LOGCAP IV”) contracts;

 

pursuit of new commercial business in the U.S. and abroad;

 

activities of competitors and the outcome of bid protests;

 

changes in significant operating expenses;

 

impact of lower than expected win rates for new business;

 

general political, economic, regulatory and business conditions in the U.S. or in other countries in which we operate;

 

acts of war or terrorist activities;

 

variations in performance of financial markets;

 

the inherent difficulties of estimating future contract revenue and changes in anticipated revenue from indefinite delivery, indefinite quantity contracts;

 

the timing or magnitude of any award fee granted under our government contracts, including, but not limited to, LOGCAP IV;

 

changes in expected percentages of future revenue represented by fixed-price and time-and-materials contracts, including increased competition with respect to task orders subject to such contracts;

 

termination or modification of key subcontractor performance or delivery;

 

statements covering our business strategy, those described in “Item 1A. Risk Factors” of this Quarterly Report and under “Risk Factors” in our Registration Statement on Form S-4 (File No. 333-173746) declared effective by the SEC on June 21, 2011 and other risks detailed from time to time in our reports filed with the Securities and Exchange Commission (“SEC”); and

 

other risks detailed from time to time in our reports posted to our website or made available publicly through other means.

Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and therefore, there can be no assurance that any forward-looking statement contained herein will prove to be accurate. We assume no obligation to update the forward-looking statements.

 

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Calendar Year and Predecessor/Successor Periods

We report the results of our operations using a 52-53 week basis ending on the Friday closest to December 31. Included in this Quarterly Report are (a) our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2011 and the related statements of equity, and cash flow for the nine months ended September 30, 2011 and (b) our unaudited condensed consolidated statement of operations for the three months ended October 1, 2010 and the period from April 1, 2010 (Inception) to October 1, 2010, and cash flow for the period from April 1, 2010 (Inception) to October 1, 2010. The unaudited condensed consolidated balance sheet is included for the periods as of September 30, 2011 and December 31, 2010. Also included are the unaudited condensed consolidated statements of operations for the three and six months ended July 2, 2010 and the related statements of equity, and cash flow for the six months ended July 2, 2010 for DynCorp International Inc. We acquired DynCorp International Inc. by merger on July 7, 2010. These financials are included in order to provide a historical financial perspective. DynCorp International Inc.’s historical fiscal year presentation was comprised of twelve consecutive fiscal months ended on the Friday closest to March 31 of each fiscal year. DynCorp International Inc.’s last completed fiscal year, prior to the merger on July 7, 2010, ended on April 2, 2010 (fiscal year 2010). For clarity in this Quarterly Report on Form 10-Q, we refer to the fiscal periods of DynCorp International Inc. that ended prior to the merger as those of the “Predecessor”.

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DELTA TUCKER HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Amounts in thousands)    Three
Months  Ended
September 30,
2011
    Three
Months Ended
October  1,
2010
    Nine
Months Ended
September 30,
2011
    For The  Period
From

April 1, 2010
(Inception)

Through
October 1, 2010
 

Revenue

   $ 935,393      $ 841,046      $ 2,738,441      $ 841,046   

Cost of services

     (845,345     (759,026     (2,500,412     (759,026

Selling, general and administrative expenses

     (47,644     (40,474     (117,005     (40,474

Merger expenses incurred by Delta Tucker Holdings, Inc.

     —          —          —          (51,722

Depreciation and amortization expense

     (12,255     (12,345     (38,229     (12,345

Earnings from equity method investees

     3,894        5,126        11,830        5,126   

Impairment of equity method investment

     (76,647     —          (76,647     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (42,604     34,327        17,978        (17,395

Interest expense

     (22,836     (22,409     (69,537     (22,409

Bridge commitment fee

     —          —          —          (7,963

Loss on early extinguishment of debt

     —          —          (2,397     —     

Interest income

     29        280        168        280   

Other income, net

     685        462        4,792        462   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (64,726     12,660        (48,996     (47,025

Benefit (provision) for income taxes

     23,878        (5,255     17,787        9,344   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (40,848     7,405        (31,209     (37,681

Noncontrolling interest

     (780     (554     (2,185     (554
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Delta Tucker Holdings, Inc.

   $ (41,628   $ 6,851      $ (33,394   $ (38,235
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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DELTA TUCKER HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

     As of  
(Amounts in thousands, except share data)    September 30,
2011
    December 31,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 85,458      $ 52,537   

Restricted cash

     14,847        9,342   

Accounts receivable, net of allowances of $883 and $558, respectively

     785,559        782,095   

Prepaid expenses and other current assets

     97,703        150,613   
  

 

 

   

 

 

 

Total current assets

     983,567        994,587   

Property and equipment, net

     23,958        26,497   

Goodwill

     679,371        679,371   

Tradename, net

     43,705        43,839   

Other intangibles, net

     321,802        355,129   

Other assets, net

     66,335        163,932   
  

 

 

   

 

 

 

Total assets

   $ 2,118,738      $ 2,263,355   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 5,212      $ 5,700   

Accounts payable

     276,824        297,821   

Accrued payroll and employee costs

     117,297        99,295   

Deferred income taxes

     96,509        90,726   

Accrued liabilities

     132,666        147,859   

Income taxes payable

     124        3,471   
  

 

 

   

 

 

 

Total current liabilities

     628,632        644,872   

Long-term debt, less current portion

     966,394        1,018,512   

Long-term deferred taxes

     10,105        36,900   

Other long-term liabilities

     28,933        45,745   
  

 

 

   

 

 

 

Total liabilities

     1,634,064        1,746,029   

Commitments and contingencies

    

Equity:

    

Common stock, $0.01 par value – 1,000 shares authorized and 100 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively.

     —          —     

Additional paid-in capital

     550,831        550,492   

Accumulated deficit

     (71,045     (37,659

Accumulated other comprehensive income (loss)

     142        142   
  

 

 

   

 

 

 

Total equity attributable to Delta Tucker Holdings, Inc.

     479,928        512,975   

Noncontrolling interest

     4,746        4,351   
  

 

 

   

 

 

 

Total equity

     484,674        517,326   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,118,738      $ 2,263,355   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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DELTA TUCKER HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

(Amounts in thousands)    Nine Months
Ended September 30,
2011
    For The  Period
From

April 1, 2010
(Inception)

Through
October 1, 2010
 

Cash flows from operating activities

    

Net (loss) income

   $ (31,209   $ (37,681

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     39,486        12,582   

Loss on early extinguishment of debt

     2,397        —     

Amortization of deferred loan costs

     6,275        1,880   

Allowance for losses on accounts receivable

     958        —     

Loss on impairment of equity method investment

     76,647        —     

Earnings from equity method investees

     (15,089     (5,885

Distributions from affiliates

     16,346        5,687   

Deferred income taxes

     (21,013     109,830   

Other

     (75     552   

Changes in assets and liabilities:

    

Restricted cash

     (5,505     (1,778

Accounts receivable

     (4,422     (88,044

Prepaid expenses and other current assets

     (13,327     (85,088

Accounts payable and accrued liabilities

     (35,723     16,900   

Income taxes receivable

     48,618        (1,499
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     64,364        (72,544
  

 

 

   

 

 

 

Cash flows from investing activities

    

Merger consideration for shares

     —          (869,043

Purchase of property and equipment, net

     (1,877     (3,801

Proceeds from sale of property, plant, and equipment

     44        —     

Purchase of software

     (2,310     (1,389

Deconsolidation of equity method investee (see Note 1)

     —          (938

Payments received from equity method investment on note receivable (see Note 1)

     —          138,001   

Disbursements made to equity method investee on note receivable (see Note 1)

     —          (150,198

Return of capital from equity method investees

     9,147        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     5,004        (887,368
  

 

 

   

 

 

 

Cash flows from financing activities

    

Borrowings on long-term debt

     214,300        1,296,900   

Payments on long-term debt

     (266,906     (819,143

Equity contribution from Affiliates of Cerberus

     —          550,927   

Capital contribution from noncontrolling interest

     500        —     

Payments of deferred financing cost

     (3,282     (49,092

Borrowings under other financing arrangements

     —          5,445   

Borrowing related to financed insurance

     44,252        —     

Payments related to financed insurance

     (24,166     (1,408

Payment of dividends to noncontrolling interest

     (1,145     (788
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (36,447     982,841   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     32,921        22,929   

Cash and cash equivalents, beginning of period

     52,537        —     
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 85,458      $ 22,929   
  

 

 

   

 

 

 

Income taxes received, net

   $ 44,745      $ 597   

Interest paid

   $ (74,186   $ (9,589

See notes to unaudited condensed consolidated financial statements.

 

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DELTA TUCKER HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Nine Months Ended September 30, 2011

 

000,00 000,00 000,00 000,00 000,00 000,00 000,00 000,00
(Amounts in thousands)    Common
Stock
     Additional
Paid-in
Capital
     Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
     Total
Equity
Attributable
to Delta
Tucker
Holdings,
Inc.
    Noncontrolling
Interest
    Total
Equity
 

Balance at December 31, 2010

     —         $ —         $ 550,492       $ (37,659   $ 142       $ 512,975      $ 4,351      $ 517,326   

Comprehensive income:

                    

Net (loss) income

           —           (31,209     —           (31,209     —          (31,209

Currency translation adjustment, net of tax

           —           —          —           —          —          —     
           

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

           —           (31,209     —           (31,209     —          (31,209

Noncontrolling interest

           —           (2,185     —           (2,185     —          (2,185
           

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to Delta Tucker Holdings, Inc.

           —           (33,394     —           (33,394     —          (33,394

Net income and comprehensive income attributable to noncontrolling interest

           —           —          —           —          2,185        2,185   

DIFZ issuance of shares to Palm

           —           —          —           —          500        500   

DIFZ financing, net of tax

           339         8        —           347        —          347   

Dividends declared to noncontrolling interest

     —           —           —           —          —           —          (2,290     (2,290
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     —         $ —         $ 550,831       $ (71,045   $ 142       $ 479,928      $ 4,746      $ 484,674   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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DELTA TUCKER HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation and Accounting Policies

Basis of Presentation

We are a leading provider of specialized, mission-critical professional and support services for the U.S. military, non-military U.S. governmental agencies and foreign governments. Our specific global expertise is in law enforcement training and support, security services, base and logistics operations, intelligence training, rule of law development, construction management, platform services and operations, and linguist services. We also provide logistics support for all our services. Unless the context otherwise indicates, references herein to “we,” “our,” “us,” or “the Company” refer to Delta Tucker Holdings, Inc. and our consolidated subsidiaries. Delta Tucker Holdings, Inc., through its subsidiaries (together, the Company), provides defense and technical services and government outsourced solutions primarily to U.S. government agencies domestically and internationally. Primary customers include the U.S. Department of Defense (“DoD”) and U.S. Department of State (“DoS”), but also include other government agencies, foreign governments and commercial customers.

The Company was incorporated in the state of Delaware on April 1, 2010. On July 7, 2010, DynCorp International Inc. (“DynCorp International”) completed a merger with Delta Tucker Sub, Inc., a wholly owned subsidiary of the Company. Pursuant to the Agreement and Plan of Merger dated as of April 11, 2010, Delta Tucker Sub, Inc. merged with and into DynCorp International, with DynCorp International becoming the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”). Holders of DynCorp International’s stock received $17.55 in cash for each outstanding share and since Cerberus Capital Management, L.P. (“Cerberus”) indirectly owns all of our outstanding equity, DynCorp International’s stock is no longer publicly traded as of the Merger.

The unaudited condensed consolidated financial statements include the accounts of the Company and our domestic and foreign subsidiaries. These consolidated financial statements have been prepared, without audit, pursuant to accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

Certain information and footnote disclosures normally included in financial statements, prepared in accordance with GAAP, have been condensed or omitted pursuant to such rules and regulations. However, we believe that all disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and the related notes thereto included in the Company’s Registration Statement on Form S-4 (File No. 333-173746) (the “Registration Statement”) which was declared effective by the SEC on June 21, 2011.

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to fairly present our financial position at September 30, 2011 and December 31, 2010, the results of operations during the three and nine months ended September 30, 2011, and the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, and cash flows during the nine months ended September 30, 2011 and for the period from April 1, 2010 (Inception) through October 1, 2010, have been included. The results of operations during the three and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full calendar year or for any future periods. We use estimates and assumptions required for preparation of the financial statements. The estimates are primarily based on historical experience and business knowledge and are revised as circumstances change. However, actual results could differ from the estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of both our domestic and foreign subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company has investments in joint ventures that are variable interest entities (“VIEs”). The VIE investments are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Codification (“ASC”) 810 — Consolidation . In cases where the Company has (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE, the Company consolidates the entity. Alternatively, in cases where all of the aforementioned criteria are not met, the investment is accounted for under the equity method.

 

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The Company classifies its equity method investees in two distinct groups based on management’s day-to-day involvement in the operations of each entity and the nature of each joint venture’s business. If the joint venture is deemed to be an extension of one of our Business Area Teams (“BATs”) and operationally integral to the business, our share of the joint venture’s earnings is reported within operating income in “Earnings from equity method investees” in the consolidated statement of operations. If the Company considers our involvement less significant, our share of the joint venture’s net earnings is reported in “Other income, net” in the consolidated statement of operations.

Economic rights in active joint ventures that are operationally integral are indicated by the ownership percentages in the table listed below.

 

Global Linguist Solutions LLC

     51.0

Contingency Response Services LLC

     45.0

Global Response Services LLC

     51.0

Partnership for Temporary Housing LLC

     40.0

Economic rights in an active joint venture that the Company does not consider operationally integral are indicated by the ownership percentage in the table listed below.

 

Babcock DynCorp Limited

     44.0

Global Linguist Solutions Deconsolidation

We deconsolidated GLS effective July 7, 2010. We continued to consolidate GLS after the implementation of ASU 2009-17 through the date of the Merger based on the related party relationship between us and McNeil Technologies Inc. (“McNeil”), our GLS joint venture partner. Through the date of the Merger, our largest stockholder, Veritas Capital LP (“Veritas”), owned the majority of McNeil. This related party relationship ended on the date of Merger resulting in the deconsolidation of GLS on that date.

Noncontrolling interest

We record the impact of our partner’s interest in less than wholly owned consolidated joint ventures as noncontrolling interest. Currently DynCorp International FZ-LLC (“DIFZ”) is our only consolidated joint venture for which we do not own 100% of the entity. Noncontrolling interest is presented on the face of the statement of operations as an increase or reduction in arriving at “Net income attributable to Delta Tucker Holdings, Inc.” Noncontrolling interest on the balance sheet is located in the equity section. See Note 10 of the Delta Tucker Holdings, Inc. financial statements for further information regarding DIFZ.

Accounting Policies

There have been no material changes to our significant accounting policies, as compared to the significant accounting policies described in our Registration Statement for the period from April 1, 2010 (Inception) to December 31, 2010, except for the adoption of Financial Accounting Standards Update (“ASU”) 2009-13 (“ASU 2009-13”) — Revenue Recognition Multiple-Deliverable Revenue as discussed in “Accounting Developments” and “Other Contracts or Contract Elements” below.

Other Contracts or Contract Elements

Multiple-element arrangements involve multiple obligations in various combinations to perform services, deliver equipment or materials, grant licenses or other rights, or take certain actions. We evaluate all deliverables in an arrangement to determine whether they represent separate units of accounting. For contracts in execution prior to January 1, 2011, arrangement consideration is allocated among the separate units of accounting based on their relative fair values. Fair values are established by evaluating vendor specific

 

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objective evidence (“VSOE”) or third-party evidence if available. Due to the customized nature of our arrangements, VSOE and third-party evidence is generally not available, resulting in applicable arrangements being accounted for as one unit of accounting.

For non-U.S. government contracts executed or materially modified after January 1, 2011, arrangement consideration is allocated among the separate units of accounting based on their relative selling price. Relative selling price is established by evaluating VSOE, third-party evidence, or management’s best estimate of selling price. Due to the customized nature of our arrangements, VSOE and third-party evidence is generally not available resulting in applicable arrangements being accounted for using management’s best estimate of selling price to identify the applicable units of accounting.

Accounting Developments

Pronouncements Implemented

In October 2009, the FASB issued ASU No. 2009-13 — Revenue Recognition Multiple-Deliverable Revenue Arrangements . This update (i) removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, (ii) replaces references to “fair value” with “selling price” to distinguish from the fair value measurements required under the fair value measurements and disclosures guidance, (iii) provides a hierarchy that entities must use to estimate the selling price, (iv) eliminates the use of the residual method for allocation, and (v) expands the ongoing disclosure requirements. The impact of this ASU is limited to new or materially modified non-U.S. government contracts. The amendments in this update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We adopted ASU No. 2009-13 as of January 1, 2011. The adoption of this ASU did not have a material effect on our consolidated financial position and results of operations.

In October 2009, the FASB issued ASU No. 2009-14 — Certain Revenue Arrangements That Include Software Elements, which updates ASC 985 — Software , and clarifies which accounting guidance should be used for purposes of measuring and allocating revenue for arrangements that contain both tangible products and software, and where the software is more than incidental, to the tangible product as a whole. The amendments in this update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We adopted ASU No. 2009-14 as of January 1, 2011.The adoption of this ASU did not have a material effect on our consolidated financial position and results of operations.

Pronouncements Not Yet Implemented

On May 12, 2011, the FASB issued ASU No. 2011-04 — Fair Value Measurements . The ASU was issued as a joint effort by the FASB and International Accounting Standards Board (“IASB”) to develop a single converged fair value framework. The ASU provides guidance on how and when to measure fair value and the required disclosures. There are few differences between the ASU and the international counterpart. While the ASU is largely consistent with existing fair value measurement principles under U.S. GAAP, it expands ASC 820’s existing disclosure requirements for fair value measurements and makes other amendments. Many of these amendments are being made to eliminate unnecessary wording differences between U.S. GAAP and IFRS. However, some could change how the fair value measurement guidance in ASC 820 is applied. The ASU is effective for interim and annual periods beginning after December 15, 2011, for public entities. Management does not believe that the adoption of this ASU will have a material effect on our consolidated financial position and results of operations.

In June 2011, the FASB issued ASU No. 2011-05 — Presentation of Comprehensive Income . The ASU amends FASB Codification Topic 220, Comprehensive Income , to eliminate the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in stockholders’ equity, require presentation of each component of net income and each component of OCI (and their respective totals) either in a single continuous statement or in two separate statements, and require presentation of reclassification adjustments on the face of the statement. The amendments do not change the option to present components of OCI either before or after related income tax effects; they do not change the items that must be reported in OCI, when an item of OCI should be reclassified to net income, or the computation of earnings per share. On October 21, 2011, the FASB decided to propose a deferral of the new requirement to present reclassifications of other comprehensive income on the face of the income statement. Companies would still be required to adopt the other requirements contained in the new accounting standard for the presentation of comprehensive income. The amendments made should be applied retrospectively and become effective for SEC registrants for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted. Management does not believe that the adoption of this ASU will have a material effect on our consolidated financial position and results of operations.

 

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In September 2011, the FASB issued ASU No. 2011-09 — Disclosures about an Employer’s Participation in a Multiemployer Plan , which amends FASB ASC 715-80, Compensation—Retirement Benefits—Multiemployer Plans , to call for additional disclosures about the commitments an employer has made to a multiemployer plan and the potential future cash flow implication of participation in such a plan. Specifically, the additional disclosures require information concerning (1) identification of the multiemployer plans in which an employer participates, (2) the level of employer participation, including the amount of contributions made, (3) the financial condition of the plans, and (4) the nature of an employer’s commitments to the plans. Additional disclosures are required in respect of plans for which information is not publicly available from the plan’s annual report filed with the Internal Revenue Service. The amendments to FASB ASC 715-80 do not alter existing recognition and measurement guidance, which require recognition as pension or other postretirement benefit cost of the required contribution to the plan and application of the provisions of FASB ASC Topic 450, Contingencies , if it is probable or reasonably possible that withdrawal from a plan could give rise to an obligation, or that the contribution to a plan would be increased to cover a shortfall in funds necessary to maintain the required level of benefit coverage. The revised disclosure requirements should be applied retrospectively for fiscal years ending after December 15, 2011, for public entities. Early application is permitted. Management does not believe that the adoption of this ASU will have a material effect on our consolidated financial position and results of operations.

On September 15, 2011, the FASB issued ASU No.2011-08, which gives entities Testing Goodwill for Impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. The ASU is effective for all entities for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. Management does not believe that the adoption of this ASU will have a material effect on our consolidated financial position and results of operations.

Note 2 — Goodwill and other Intangible Assets

The following table provides information about our goodwill balances for our three segments, Global Stabilization and Development Solutions (“GSDS”), Global Platform Support Solutions (“GPSS”) and Global Linguist Solutions LLC (“GLS”):

 

000,00 000,00 000,00 000,00
(Amounts in thousands)    GSDS      GPSS      GLS      Total  

Goodwill balance as of December 31, 2010

   $ 119,386       $ 559,985       $ —         $ 679,371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Goodwill balance as of September 30, 2011

   $ 119,386       $ 559,985       $ —         $ 679,371   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables provide information about changes relating to certain intangible assets:

 

     As Of September 30, 2011  
(Amounts in thousands, except years)    Weighted
Average
Remaining
Useful Life
(Years)
     Gross
Carrying
Value
     Accumulated
Amortization
    Net  

Other intangible assets:

          

Customer-related intangible assets

     7.8       $ 350,912       $ (49,550   $ 301,362   

Other

     5.1         30,116         (9,676     20,440   
     

 

 

    

 

 

   

 

 

 

Total other intangibles

      $ 381,028       $ (59,226   $ 321,802   
     

 

 

    

 

 

   

 

 

 

Tradenames:

          

Finite-lived

     3.6       $ 869       $ (222   $ 647   

Indefinite-lived

        43,058         —          43,058   
     

 

 

    

 

 

   

 

 

 

Total tradenames

      $ 43,927       $ (222   $ 43,705   
     

 

 

    

 

 

   

 

 

 

 

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     As Of December 31, 2010  
(Amounts in thousands, except years)    Weighted
Average
Remaining
Useful Life
(Years)
     Gross
Carrying
Value
     Accumulated
Amortization
    Net  

Other intangible assets:

          

Customer-related intangible assets

     9.2       $ 350,913       $ (20,003   $ 330,910   

Other

     6.1         28,093         (3,874     24,219   
     

 

 

    

 

 

   

 

 

 

Total other intangibles

      $ 379,006       $ (23,877   $ 355,129   
     

 

 

    

 

 

   

 

 

 

Tradenames: :

          

Finite-lived

     4.8       $ 869       $ (88   $ 781   

Indefinite-lived

        43,058         —          43,058   
     

 

 

    

 

 

   

 

 

 

Total tradenames

      $ 43,927       $ (88   $ 43,839   
     

 

 

    

 

 

   

 

 

 

Amortization expense for customer-related intangibles, other intangibles, and finite-lived tradenames was $11.4 million and $35.5 million during the three and nine months ended September 30, 2011, respectively. Amortization expense for customer-related intangibles, other intangibles, and finite-lived tradenames was $11.5 million and $11.5 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively.

The following table outlines an estimate of future amortization based upon the finite-lived intangible assets owned as of September 30, 2011:

 

(Amounts in thousands)    Amortization Expense  (1)  

Estimate for three month period ended December 30, 2011

   $ 11,435   

Estimate for calendar year 2012

     45,217   

Estimate for calendar year 2013

     43,535   

Estimate for calendar year 2014

     42,894   

Estimate for calendar year 2015

     41,198   

Thereafter

   $ 138,170   

 

(1) The future amortization is inclusive of the finite-lived intangible-assets and finite-lived tradenames.

 

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Note 3 — Composition of Certain Financial Statement Captions

The following tables present financial information of certain consolidated balance sheet captions.

Prepaid expenses and other current assets — Prepaid expenses and other current assets were:

 

     As Of  
(Amounts in thousands)    September 30, 2011      December 31, 2010  

Prepaid expenses

   $ 45,672       $ 34,801   

Prepaid income taxes

     4,070         54,927   

Inventories

     8,250         11,034   

Assets held for sale

     11,084         10,485   

Work-in-process

     3,346         5,132   

Joint venture receivables

     9,640         5,005   

Favorable contracts

     8,266         23,096   

Other current assets

     7,375         6,133   
  

 

 

    

 

 

 

Total prepaid expenses and other current assets

   $ 97,703       $ 150,613   
  

 

 

    

 

 

 

Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets. Prepaid income taxes represent refunds expected through the remainder of the year related to our change in accounting method for taxes. We value our inventory at lower of cost or market. Assets held for sale is made up of seven helicopters, valued at $8.1 million, that are not deployed on existing programs as of September 30, 2011, and aircraft parts inventory related to the loss of the Life Cycle Support Services (“LCCS”) Navy contract.

As of December 31, 2010, we had 15 helicopters, of which six were included in Property and equipment, net and nine were included in Prepaid expenses and other current assets as assets held for sale. In March 2011, we entered into an agreement to sell two of the 15 helicopters. We sold the two helicopters in the second quarter of calendar year 2011.

Property and equipment, net — Property and equipment, net were:

 

     As Of  
(Amounts in thousands)    September 30, 2011     December 31, 2010  

Helicopters

   $ 8,087      $ 8,087   

Computers and other equipment

     9,775        9,119   

Leasehold improvements

     7,605        6,953   

Office furniture and fixtures

     4,738        4,598   
  

 

 

   

 

 

 

Gross property and equipment

     30,205        28,757   

Less accumulated depreciation

     (6,247     (2,260
  

 

 

   

 

 

 

Total property and equipment, net

   $ 23,958      $ 26,497   
  

 

 

   

 

 

 

Depreciation expense was $1.3 million and $4.0 million during the three and nine months ended September 30, 2011, respectively, including certain depreciation amounts classified as Cost of services. Depreciation expense was $1.1 million and $1.1 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively, including certain depreciation amounts classified as Cost of services. The six helicopters that are included with Property and equipment were placed in service in January 2011.

Other assets, net — Other assets, net were:

 

     As Of  
(Amounts in thousands)    September 30, 2011      December 31, 2010  

Deferred financing costs, net

   $ 39,689       $ 45,080   

Investment in affiliates

     19,058         107,217   

Palm promissory notes, long-term portion

     5,180         5,482   

Phoenix retention asset

     —           3,128   

Other

     2,408         3,025   
  

 

 

    

 

 

 

Total other assets

   $ 66,335       $ 163,932   
  

 

 

    

 

 

 

 

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Deferred financing cost is amortized through interest expense. Amortization related to deferred financing costs was $2.1 million and $6.3 million during the three and nine months ended September 30, 2011, respectively. Amortization related to deferred financing costs was $2.0 million and $2.0 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively. Deferred financing costs were reduced during the nine months ended September 30, 2011 by $2.4 million related to the pro rata write–off of financing costs to loss on early extinguishment of debt as a result of the $48.6 million prepayment on the term loan. As a result of the acceleration of the retention bonus expense resulting from the restructurings of the Phoenix entity in the first quarter, the Phoenix retention asset was reduced to zero during the nine months ended September 30, 2011. Investment in affiliates was reduced during the nine months ended September 30, 2011 by a $1.5 million and by a $7.7 million return of capital from the Contingency Response Services LLC (“CRS”) joint venture and the GLS joint venture, respectively.

Accrued payroll and employee costs — Accrued payroll and employee costs were:

 

     As Of  
(Amounts in thousands)    September 30, 2011      December 31, 2010  

Wages, compensation and other benefits

   $ 91,595       $ 77,713   

Accrued vacation

     24,723         20,608   

Accrued contributions to employee benefit plans

     979         974   
  

 

 

    

 

 

 

Total accrued payroll and employee costs

   $ 117,297       $ 99,295   
  

 

 

    

 

 

 

Other accrued liabilities — Accrued liabilities were:

 

     As Of  
(Amounts in thousands)    September 30, 2011      December 31, 2010  

Deferred revenue

   $ 5,250       $ 8,179   

Insurance expense

     36,057         22,342   

Interest expense

     12,447         23,380   

Unfavorable contract liability

     7,142         14,653   

Contract losses

     14,399         21,451   

Legal matters

     4,222         17,403   

Subcontractor retention

     6,489         14,574   

Financed insurance

     29,974         9,888   

Other

     16,686         15,989   
  

 

 

    

 

 

 

Total other accrued liabilities

   $ 132,666       $ 147,859   
  

 

 

    

 

 

 

The Company recorded $40.5 million during the quarter related to finance insurance as the renewal policy ended in June 2011. Deferred revenue is primarily due to payments in excess of revenue recognized. Contract losses relate to accrued losses recorded on certain contracts.

Other liabilities — Other long-term liabilities were:

 

     As Of  
(Amounts in thousands)    September 30, 2011      December 31, 2010  

Unfavorable contract liability

   $ 8,205       $ 19,418   

Unrecognized tax benefit

     2,614         3,098   

Unfavorable lease accrual

     5,361         6,963   

Long-term contract loss

     9,232         11,143   

Other

     3,521         5,123   
  

 

 

    

 

 

 

Total other liabilities

   $ 28,933       $ 45,745   
  

 

 

    

 

 

 

 

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Note 4 — Income Taxes

The provision for income taxes consists of the following:

 

(Amounts in thousands)   

Three Months

Ended

September 30, 2011

   

Three Months

Ended

October 1, 2010

   

Nine Months

Ended

September 30, 2011

   

For The Period
From

April 1, 2010
(Inception)

Through

October 1, 2010

 

Current portion:

        

Federal

   $ (461   $ (98,969   $ (461   $ (112,907

State

     166        (4,066     522        (4,727

Foreign

     615        678        2,094        678   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 320      $ (102,357   $ 2,155      $ (116,956
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred portion :

        

Federal

   $ (23,531   $ 104,715      $ (19,339   $ 104,715   

State

     (656     2,918        (539     2,918   

Foreign

     (11     (21     (64     (21
  

 

 

   

 

 

   

 

 

   

 

 

 
     (24,198     107,612        (19,942     107,612   
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

   $ (23,878   $ 5,255      $ (17,787   $ (9,344
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred tax assets and liabilities are reported as:

 

(Amounts in thousands)    As Of  
   September 30, 2011     December 31, 2010  

Current deferred tax liabilities

   $ (96,509   $ (90,726

Non-current deferred tax liabilities

     (10,105     (36,900
  

 

 

   

 

 

 

Deferred tax liabilities, net

   $ (106,614   $ (127,626
  

 

 

   

 

 

 

A reconciliation of the statutory federal income tax rate to our effective rate is provided below:

 

     Three Months
Ended
September 30, 2011
    Nine Months
Ended
September 30, 2011
    Three Months
Ended
October 1, 2010
    For The Period  From
April 1, 2010
(Inception)

Through
October 1, 2010
 

Statutory rate

     35.0     35.0     35.0     35.0

State income tax, less effect of federal deduction

     0.8     0.3     1.9     0.5

Noncontrolling interests

     1.0     2.1     —          0.0

Acquisition cost

     —          —          2.0     (7.2 %) 

Uncertain tax positions

     —          —          —          (7.7 %) 

Other

     0.1     (1.1 %)      2.6     (0.7 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective tax rate

     36.9     36.3     41.5     19.9
  

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2011, we had U.S. federal and state net operating losses of approximately $107.7 and $263.4 million. As of December 31, 2010 we had approximately $94.3 million and $250.5 million in U.S. federal and state net operating losses. Our federal net operating losses will begin to expire in 2030, and our state net operating losses will begin to expire in 2015. Approximately $1.4 million of the state net operating loss expires in 2015. The remainder will not begin to expire until 2020 or later. Additionally, at September 30, 2011, we had foreign tax credit carry forwards of approximately $19.2 million that will begin to expire in 2017. We expect to fully utilize our federal and state net operating losses as well as our foreign tax credit carry forwards prior to their expiration.

 

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In evaluating our need for a valuation allowance on deferred taxes, including net operating loss and foreign tax credit carry forwards, we assessed such factors as the scheduled reversal of deferred tax liabilities, including the impact of available carry back and carry forward periods, projected future taxable income and available tax planning strategies. Based on this assessment, we concluded that no valuation allowance was necessary as of September 30, 2011.

As of September 30, 2011 and December 31, 2010, we had $12.4 million and $12.9 million of total unrecognized tax benefits, respectively, of which $2.6 million and $3.1 million, respectively, was recorded as a liability with the remaining recorded as an offset to the net operating loss deferred tax asset. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of September 30, 2011 and December 31, 2010, was $6.1 million and $6.6 million, respectively. It is expected that the amount of unrecognized tax benefits will change in the next twelve months; however, we do not expect the change to have a material impact on the results of operations or our financial position.

Note 5 — Accounts Receivable

Accounts receivable, net consisted of the following:

 

     As Of  
(Amounts in thousands)    September 30, 2011      December 31, 2010  

Billed

   $ 287,380       $ 298,804   

Unbilled

     498,179         483,291   
  

 

 

    

 

 

 

Total accounts receivable

   $ 785,559       $ 782,095   
  

 

 

    

 

 

 

Unbilled receivables as of September 30, 2011 and December 31, 2010 include $22.5 million and $31.3 million, respectively, related to costs incurred on projects for which we have been requested by the customer to begin work under a new contract or extend work under an existing contract and for which formal contracts or contract modifications have not been executed at the end of the respective periods. There were no contract claims included in the amount as of September 30, 2011. Contract claims as of December 31, 2010 were $0.1 million. The balance of unbilled receivables consists of costs and fees billable immediately, upon contract completion or other specified events. All of the unbilled receivables are expected to be billed and collected within one year, except items that may result in a request for equitable adjustment or a formal claim.

Note 6—Fair Value of Financial Assets and Liabilities

ASC 820 – Fair Value Measurements and Disclosures establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

   

Level 1, defined as observable inputs such as quoted prices in active markets;

 

   

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 

   

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of September 30, 2011, we measured cash equivalents, including restricted cash, at fair value on a recurring basis. Cash equivalents consist of petty cash, cash in-bank and short-term, highly liquid, income-producing investments with original maturities of 90 days or less. This asset is categorized as a Level 1 input as required by ASC 820.

 

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Fair Value of Financial Instruments

Our financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, and borrowings. The fair values of cash and cash equivalents, accounts and notes receivable, accounts payable and current portion of long-term debt approximated carrying values because of the short-term nature of these instruments. Our estimate of fair values for our long-term debt is based on third-party quoted market price.

 

     September 30, 2011      December 31, 2010  

(Amounts in thousands)

   Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

10.375% senior unsecured notes

   $ 455,000       $ 396,988       $ 455,000       $ 464,555   

Senior secured credit facility

     510,757         500,542         562,875         567,378   

9.5% senior subordinated notes

     637         616         637         637   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 966,394       $ 898,146       $ 1,018,512       $ 1,032,570   

Note 7 — Long-Term Debt

Long-term debt consisted of the following:

 

     As of  
(Amounts in thousands)    September 30, 2011     December 31, 2010  

9.5% Senior subordinated notes

   $ 637      $ 637   

Term loan

     515,969        568,575   

10.375% Senior unsecured notes

     455,000        455,000   

Outstanding revolver borrowings

     —          —     
  

 

 

   

 

 

 

Total indebtedness

     971,606        1,024,212   

Less current portion of long-term debt

     (5,212     (5,700
  

 

 

   

 

 

 

Total long-term debt

   $ 966,394      $ 1,018,512   

The current portion of long-term debt as of September 30, 2011 and December 31, 2010 was $5.2 million and $5.7 million, respectively, which is comprised of quarterly principal payments of $1.3 million and $1.4 million, respectively. Quarterly principal payments reflect an adjustment for a pre-payment of $48.6 million on the term loan made in March 2011.

Senior Credit Facility

We entered into a senior secured credit facility on July 7, 2010 (the “Senior Credit Facility”), with a banking syndicate and Bank of America, NA as Agent, and amended the Senior Credit Facility on August 10, 2011. The description below reflects the Senior Credit Facility, as amended.

Our Senior Credit Facility is secured by substantially all of our assets and is guaranteed by substantially all of our subsidiaries. It provides for a six year, $570 million term loan facility (“Term Loan”) and a four year, $150 million revolving credit facility (“Revolver”), including a $100 million letter of credit subfacility. As of September 30, 2011 and December 31, 2010, the additional available borrowing capacity under the Senior Credit Facility was approximately $109.4 million and $109.0 million, respectively, which gives effect to $40.6 million and $41.0 million, respectively, in letters of credit. The maturity date on the Term Loan is July 7, 2016 and the maturity date on the Revolver is July 7, 2014. Amounts borrowed under our Revolver are used to fund operations. During the three months ended September 30, 2011, we had no Revolver borrowings.

Interest Rates on Term Loan & Revolver

Both the Term Loan and Revolver bear interest at one of two options, based on our election, using either the (i) base rate (“Base Rate”) as defined in the Senior Credit Facility plus an applicable margin or the (ii) London Interbank Offered Rate (“Eurocurrency Rate”) as defined in the Senior Credit Facility plus an applicable margin. The applicable margin for the Term Loan is fixed at 3.5% for the Base Rate option and 4.5% for the Eurocurrency Rate option. The applicable margin for the Revolver ranges from 3.0% to 3.5% for the Base Rate option or 4.0% to 4.5% for the Eurocurrency Rate option based on our outstanding Secured Leverage Ratio at the

 

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end of the quarter. The Secured Leverage Ratio is calculated by the ratio of total secured consolidated debt (net of up to $50 million of unrestricted cash and cash equivalents) to consolidated earnings before interest, taxes, and depreciation & amortization (“Consolidated EBITDA”), as defined in the Senior Credit Facility. Interest payments on both the Term Loan and Revolver are payable at the end of the interest period as defined in the Senior Credit Facility, but not less than quarterly.

The Base Rate is equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; provided that in no event shall the Base Rate be less than 1.00% plus the Eurocurrency Rate applicable to one month interest periods on the date of determination of the Base Rate. The variable Base Rate has a floor of 2.75%.

The Eurocurrency Rate is the rate per annum equal to the British Bankers Association London Interbank Offered Rate (“BBA LIBOR”) as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) two Business Days prior to the commencement of such interest period. The variable Eurocurrency rate has a floor of 1.75%. As of September 30, 2011 and December 31, 2010, the applicable interest rate for our Term Loan was 6.25%.

Interest Rates on Letter of Credit Subfacility and Unused Commitment Fees

The letter of credit subfacility bears interest at the applicable margin for Eurocurrency Rate Loans, which ranges from 4.0% to 4.5%. The unused commitment fee on our Revolver ranges from 0.50% to 0.75% depending on the Secured Leverage Ratio, as defined in the Senior Credit Facility. Payments on both the letter of credit subfacility and unused commitments are payable quarterly in arrears. As of September 30, 2011 and December 31, 2010, the applicable interest rates for our letter of credit subfacility and unused commitment fees were 4.5% and 0.75%, respectively, for both periods. All of our letters of credit are also subject to a 0.25% fronting fee.

Principal Payments

Our Term Loan facility provides for quarterly principal payments of $1.4 million that began in December 2010. Additionally, there is an annual excess cash flow requirement, which is defined in the Senior Credit Facility. This excess cash flow requirement begins in calendar year 2012, based on our annual financial results in calendar year 2011, and could result in an additional principal payment. Our normal quarterly principal payments would be reduced by the amount of any additional principal payment from the excess cash flow requirement. Furthermore, certain transactions can trigger mandatory principal payments such as tax refunds, a disposition of a portion of the business or a significant asset sale.

During the three and nine months ended September 30, 2011, pursuant to our Term Loan facility, we made quarterly principal payments of $1.3 million and $4.0 million for the Senior Credit Facility. In addition, we made a $48.6 million principal prepayment in March 2011. Deferred financing costs associated with the prepayment totaling $2.4 million were expensed and are included in Loss on early extinguishment of debt in our consolidated statement of operations for the nine months ended September 30, 2011. There were no penalties associated with this prepayment and our quarterly payments were decreased to $1.3 million from $1.4 million beginning April 2011. Subsequent to the three months ended September 30, 2011, the Company completed another principal prepayment in October 2011 of $48.7 million on the Term Loan facility. This payment eliminated all future quarterly principal payments until maturity. No penalties were associated with the prepayment.

 

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Covenants

The Senior Credit Facility contains financial, as well as non-financial, affirmative and negative covenants that we believe are usual and customary. The negative covenants in the Senior Credit Facility include, among other things, limits on our ability to:

 

   

declare dividends and make other distributions;

 

   

redeem or repurchase our capital stock;

 

   

prepay, redeem or repurchase certain of our indebtedness;

 

   

grant liens;

 

   

make loans or investments (including acquisitions);

 

   

incur additional indebtedness;

 

   

modify the terms of certain debt;

 

   

restrict dividends from our subsidiaries;

 

   

change our business or business of our subsidiaries;

 

   

merge or enter into acquisitions;

 

   

sell our assets;

 

   

enter into transactions with our affiliates; and

 

   

make capital expenditures.

In addition, the Senior Credit Facility stipulates a maximum total leverage ratio and a minimum interest coverage ratio that must be maintained.

The total leverage ratio is the Consolidated Total Debt as defined in the Senior Credit Facility, less unrestricted cash and cash equivalents (up to $50 million) to Consolidated EBITDA as defined in the Senior Credit Facility, for the applicable period. Our total leverage ratio could not be greater than 5.5 to 1.0 for the period of July 3, 2010 to September 30, 2011. After June 29, 2012, the maximum total leverage ratio diminishes either quarterly or semi-annually.

The interest coverage ratio is the ratio of Consolidated EBITDA to Consolidated Interest Expense, as defined in the Senior Credit Facility. The interest coverage ratio must not be less than 1.7 to 1.0 for the period of July 3, 2010 to September 30, 2011. The minimum interest ratio increases either quarterly or semi-annually beginning June 29, 2012.

The fair value of our borrowings under our Senior Credit Facility approximated 98.0% and 100.8% of the carrying amount based on quoted values as of September 30, 2011 and December 31, 2010, respectively.

On August 10, 2011, DynCorp International Inc. entered into an amendment to the Senior Credit Facility (the “Amendment”). The Amendment re-set leverage and interest covenant levels. Under the terms of the Amendment, the maximum total leverage ratio steps up to 5.50x through the period ending June 29, 2012 and steps down to 3.25x over time, the amount of unrestricted cash permitted to be netted from the calculation of the total leverage ratio is $50.0 million, and the minimum interest coverage ratio is 1.70x through the period ending June 29, 2012 and steps up to 2.25x over time.

Senior Unsecured Notes

On July 7, 2010, DynCorp International Inc. completed an offering of $455 million in aggregate principal of 10.375% senior unsecured notes due 2017 (the “Senior Unsecured Notes”). The initial purchasers were Bank of America Securities LLC, Citigroup Global Markets Inc., Barclays Capital Inc. and Deutsche Bank Securities Inc. The Senior Unsecured Notes were issued under an indenture dated July 7, 2010 (the “Indenture”), by and among us, the guarantors party thereto (the “Guarantors”), including DynCorp International, and Wilmington Trust FSB, as trustee. The Senior Unsecured Notes mature on July 1, 2017. Interest on the Senior Unsecured Notes is payable on January 1 and July 1 of each year, and commenced on January 1, 2011.

 

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In connection with the issuance of the Senior Unsecured Notes, we entered into a registration rights agreement, pursuant to which we agreed, among other things, to offer to exchange the Senior Unsecured Notes for a new issue of substantially identical notes that have been registered under the Securities Act of 1933, as amended. Under this registration rights agreement, we were required to file an exchange offer registration statement and have it declared effective by the SEC within 300 days following July 7, 2010, which was May 3, 2011. Because the exchange offer registration statement did not go effective until June 21, 2011, we were required to pay additional interest to holders of the Senior Unsecured Notes in an amount equal to 0.25% per annum of the principal amount thereof from May 4, 2011 to June 21, 2011. We paid such additional interest of $183,264 to holders of the Senior Unsecured Notes on July 1, 2011 in compliance with the registration rights agreement. On July 26, 2011, we completed the exchange offer and approximately $454.6 million of registered Senior Unsecured Notes were issued in exchange for the old Senior Unsecured Notes.

The Senior Unsecured Notes contain various covenants that restrict our ability to enter into certain transactions. These include, but are not limited to, covenants that restrict our ability to incur additional indebtedness, make certain payments, including declaring or paying certain dividends, purchase or retire certain equity interests, retire subordinated indebtedness, make certain investments, sell assets, engage in certain transactions with affiliates, create liens on assets, make acquisitions and engage in mergers or consolidations. The aforementioned restrictions are considered to be in place unless we achieve investment grade ratings by both Moody’s Investor Services and Standard and Poor’s.

We can redeem the Senior Unsecured Notes, in whole or in part, at defined redemption prices, plus accrued interest through the redemption date. The Indenture requires us to repurchase the Senior Unsecured Notes at defined prices in the event of certain asset sales and change of control events.

The fair value of the Senior Unsecured Notes is based on their quoted market value. As of September 30, 2011 and December 31, 2010, the quoted market value of the Senior Unsecured Notes was approximately 87.25% and 102.1%, respectively, of stated value.

Call and Put Options

We can redeem the Senior Unsecured Notes, in whole or in part, at defined redemption prices, plus accrued interest through the redemption date. The Indenture Agreement requires us to repurchase the Senior Unsecured Notes at defined prices in the event of certain asset sales and change of control events.

Note 8 — Commitments and Contingencies

Commitments

We have operating leases for the use of real estate and certain property and equipment which are either non-cancelable or cancelable only by the payment of penalties or cancelable upon one month’s notice. All lease payments are based on the lapse of time but include, in some cases, payments for insurance, maintenance and property taxes. There are no purchase options on operating leases at favorable terms, but most leases have one or more renewal options. Certain leases on real estate are subject to annual escalations for increases in base rents, utilities and property taxes. Lease rental expense was $35.8 million and $91.5 million during the three and nine months ended September 30, 2011, respectively. Lease rental expense was $22.9 million and $22.9 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively. We have no significant long-term purchase agreements with service providers.

Contingencies

General Legal Matters

We are involved in various lawsuits and claims that have arisen in the normal course of business. In most cases, we have denied, or believe we have a basis to deny liability. Related to these matters, we have recorded reserves totaling approximately $4.2 million in “Other accrued liabilities” as of September 30, 2011. Liabilities in excess of those recorded, if any, arising from such matters may have a material effect on our results of operations, consolidated financial condition or liquidity.

 

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Pending Litigation and Claims

On December 4, 2006, December 29, 2006, March 14, 2007 and April 24, 2007, four lawsuits were served, seeking unspecified monetary damages against DynCorp International LLC and several of its former affiliates in the U.S. District Court for the Southern District of Florida, concerning the spraying of narcotic plant crops along the Colombian border adjacent to Ecuador. Three of the lawsuits, filed on behalf of the Provinces of Esmeraldas, Sucumbíos, and Carchi in Ecuador, allege violations of Ecuadorian law, international law, and statutory and common law tort violations, including negligence, trespass, and nuisance. The fourth lawsuit, filed on behalf of citizens of the Ecuadorian provinces of Esmeraldas and Sucumbíos, alleges personal injury, various counts of negligence, trespass, battery, assault, intentional infliction of emotional distress, violations of the Alien Tort Claims Act and various violations of international law. The four lawsuits were consolidated, and based on our motion granted by the court, the case was subsequently transferred to the U.S. District Court for the District of Columbia. On March 26, 2008, a First Amended Consolidated Complaint was filed that identified 3,266 individual plaintiffs. On January 12, 2010, 1,256 of the plaintiffs have been dismissed by court orders and, on September 15, 2010, the Provinces of Esmeraldas, Sucumbíos, and Carchi were dismissed by court order. The amended complaint does not demand any specific monetary damages; however, a court decision against us, although we believe to be remote, could have a material effect on our results of operations and financial condition, if we are unable to seek reimbursement from the DoS. The aerial spraying operations were and continue to be managed by us under a DoS contract in cooperation with the Colombian government. The DoS contract provides indemnification to us against third-party liabilities arising out of the contract, subject to available funding.

A lawsuit filed on September 11, 2001, and amended on March 24, 2008, seeking unspecified damages on behalf of twenty-six residents of the Sucumbíos Province in Ecuador, was brought against our operating company and several of its former affiliates in the U.S. District Court for the District of Columbia. The action alleges violations of the laws of nations and U.S. treaties, negligence, emotional distress, nuisance, battery, trespass, strict liability, and medical monitoring arising from the spraying of herbicides near the Ecuador-Colombia border in connection with the performance of the DoS, International Narcotics and Law Enforcement contract for the eradication of narcotic plant crops in Colombia. On January 12, 2010, fifteen of the plaintiffs have been dismissed by court order. The terms of the DoS contract provide that the DoS will indemnify our operating company against third-party liabilities arising out of the contract, subject to available funding. We are also entitled to indemnification by Computer Sciences Corporation in connection with this lawsuit, subject to certain limitations. Additionally, any damage award would have to be apportioned between the other defendants and our operating company. We believe that the likelihood of an unfavorable judgment in this matter is remote and that, even if that were to occur, the judgment is unlikely to result in a material effect on our results of operations or financial condition as a result of the third party indemnification and apportionment of damages described above.

Arising out of the litigation described in the preceding two paragraphs, on September 22, 2008, we filed a separate lawsuit against our aviation insurance carriers seeking defense and coverage of the referenced claims. On November 9, 2009, the court granted our Partial Motion for Summary Judgment regarding the duty to defend, and the carriers have paid the majority of the litigation expenses. In a related action, the carriers filed a lawsuit against us on February 5, 2009, seeking rescission of certain aviation insurance policies based on an alleged misrepresentation by us concerning the existence of certain of the lawsuits relating to the eradication of narcotic plant crops. On May 19, 2010, our aviation insurance carriers filed a complaint against us seeking reformation of previously provided insurance policies and the elimination of coverage for aerial spraying. The Company believes that the claims asserted by the insurance carriers are without merit and unlikely to result in a material effect on our results of operations or financial condition.

In November 2009, a U.S. grand jury indicted one of our subcontractors, Agility, on the Logistics Civil Augmentation Program (“LOGCAP IV”) contract, on charges of fraud and conspiracy, alleging that it overcharged the U.S. Army on $8.5 billion worth of contracts to provide food to soldiers in Iraq, Kuwait and Jordan. These allegations were in no way related to the work performed under LOGCAP IV. Effective December 16, 2009, we removed Agility as a subcontractor on the LOGCAP IV contract and terminated the work under existing task orders. In April 2010, Agility filed an arbitration demand, asserting claims for breach of a joint venture agreement, breach of fiduciary duty and unjust enrichment. Agility is seeking a declaration that it is entitled to a 30% share of the LOGCAP IV fees over the life of the contract. We believe our right to remove Agility was justified and no joint venture agreement exists between the parties. The case is currently in arbitration. We believe the case is without merit and we intend to vigorously defend against Agility’s claims, however, based on the size of the LOGCAP IV contract and Agility’s claim, a negative outcome may have a material effect on our consolidated financial position, results of operations or cash flows.

 

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U.S. Government Investigations

We primarily sell our services to the U.S. government. These contracts are subject to extensive legal and regulatory requirements, and we are occasionally the subject of investigations by various agencies of the U.S. government who investigate whether our operations are being conducted in accordance with these requirements, including as previously disclosed in our periodic filings, the Special Inspector General for Iraq Reconstruction report regarding certain reimbursements and the U.S. Department of State Office of Inspector General’s records subpoena with respect to the Civilian Police (“CivPol”) contract. Such investigations, whether related to our U.S. government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and many result in no adverse action against us. We do not believe that any adverse actions arising from such matters would have a material effect on our results of operations, consolidated financial condition or liquidity over the long term.

As previously disclosed, we identified certain payments made on our behalf by two subcontractors to expedite the issuance of a limited number of visas and licenses from a foreign government’s agencies that may raise compliance issues under the U.S. Foreign Corrupt Practices Act. We retained outside counsel to investigate these payments. In November 2009, we voluntarily brought this matter to the attention of the U.S. Department of Justice and the SEC. We are cooperating with the government’s review of this matter. We are also continuing our evaluation of our internal policies and procedures. We cannot predict the ultimate consequences of this matter at this time, nor can we reasonably estimate the potential liability, if any, related to this matter. However, based on the facts currently known, we do not believe that this matter will have a material effect on our business, financial condition, results of operations or cash flow.

On August 16, 2005, we were served with a Department of Justice Federal Grand Jury Subpoena seeking documents concerning work performed by a former subcontractor, Al Ghabban, in 2002-2005. Specifically, during the 2002-2005 timeframe Al Ghabban performed line haul trucking work to transport materials throughout the Middle Eastern theater on the War Reserve Materials Program. In response to the subpoena in 2005, we provided the requested documents to the Department of Justice, and the matter was subsequently closed in 2005 without any action taken. In April 2009, we received a follow up telephone call concerning this matter from the Department of Justice Civil Litigation Division. Since that time, we have had several discussions with the government regarding the civil matter. In response to recent requests, we have provided additional information to the Department of Justice Civil Litigation Division. We are fully cooperating with the government’s review. If our operations are found to be in violation of any laws or government regulations, we may be subject to penalties, damages or fines, any or all of which could adversely affect our financial results.

U.S. Government Audits

Our contracts are regularly audited by the Defense Contract Audit Agency (“DCAA”) and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The government also reviews the adequacy of our internal controls and policies, including our accounting, estimating, purchasing, and property systems. Any costs found to be improperly allocated or charged to a specific contract will not be reimbursed. The DCAA will in some cases issue a Form 1 representing the non-conformance of such costs or requirements as it relates to our government contracts. If the Company is unable to provide sufficient evidence of the costs in question, the costs could be suspended or disallowed which could be material to our financial statements. Government contract payments received by us for direct and indirect costs are subject to adjustment after government audit and repayment to the government if the payments exceed allowable costs as defined in the government regulations.

The Defense Contract Management Agency (“DCMA”) formally notified us of non-compliance with Cost Accounting Standard 403, Allocation of Home Office Expenses to Segments, on April 11, 2007. We issued a response to the DCMA on April 26, 2007 with a proposed solution to resolve the area of non-compliance, which related to the allocation of corporate general and administrative costs between our divisions. On August 13, 2007, the DCMA notified us that additional information would be necessary to justify the proposed solution. We issued responses on September 17, 2007, April 28, 2008 and September 10, 2009 and the matter is pending resolution. Based on facts currently known, we do not believe the matters described in this and the preceding paragraph will have a material effect on our results of operations or financial condition.

 

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We have received several letters from the DCAA with draft audit results related to their examination of certain incurred, invoiced and collected costs on our Civilian Police program for periods ranging from April 17, 2004 through April 2, 2010. The draft audit results identified multiple issues where the DCAA has asserted certain instances of potential deviations from the explicit terms of the contract or from certain provisions of government regulations. The draft audit results apply an extrapolation methodology to estimate a potential exposure amount for the issues which when aggregated for all letters totals approximately $138.4 million. Although the extrapolated amounts would be material to our results of operations, cash flows and financial condition, we do not believe the draft audit results and resulting extrapolation are an appropriate basis to determine a range of potential exposure. We have provided responses to the DCAA for each letter, in which we have articulated our position on each issue and have attempted to answer their questions and provide clarification of the facts to resolve the issues raised. In the few instances where we believe the issues identified were valid or represent a probable contingency, we have recorded a liability for approximately $0.2 million as of September 30, 2011. There are a number of issues raised by the DCAA for which we believe the DCAA did not consider all relevant facts. We strongly believe these issues will be resolved in our favor and thus represent loss contingencies that we consider remote. For the remaining issues, we believe the DCAA did not consider certain contractual provisions and long-standing patterns of dealing with the customer. Since we cannot predict the DCAA’s acceptance of our initial responses and the ultimate outcome related to these remaining issues, we believe these items represent loss contingencies that we consider reasonably possible. At this time, we do not have a basis to estimate a range of loss for these reasonably possible contingencies. We continue to work with the DCAA to resolve any remaining questions they may have and provide clarification of the facts and circumstances surrounding the issues.

Contract Matters

In 2009, we terminated for cause a contract to build the Akwa Ibom International Airport for the State of Akwa Ibom in Nigeria. Consequently, we terminated certain subcontracts and purchase orders the customer advised us it did not want to assume. Based on our experience with this particular Nigerian state government customer, we believe the customer may challenge our termination of the contract for cause and initiate legal action against us. Our termination of certain subcontracts not assumed by the customer, including our actions to recover against advance payment and performance guarantees established by the subcontractors for our benefit is being challenged in certain instances. Although we believe our right to terminate this contract and such subcontracts was justified and permissible under the terms of the contracts, and we intend to vigorously contest any claims brought against us arising out of such terminations, if courts were to conclude that we were not entitled to terminate one or more of the contracts and damages were assessed against us, such damages could have a material effect on our results of operations or financial condition. At this time, any such damages are not estimable.

Credit Risk

We are subject to concentrations of credit risk primarily by virtue of our accounts receivable. Departments and agencies of the U.S. federal government account for all but minor portions of our customer base, minimizing this credit risk. Furthermore, we continuously review all accounts receivable and recorded provisions for doubtful accounts.

Risk Management Liabilities and Reserves

We are insured for domestic worker’s compensation liabilities and a significant portion of our employee medical costs. However, we bear risk for a portion of claims pursuant to the terms of the applicable insurance contracts. We account for these programs based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for which claims have not been reported. These loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. We limit our risk by purchasing stop-loss insurance policies for significant claims incurred for both domestic worker’s compensation liabilities and medical costs. Our exposure under the stop-loss policies for domestic worker’s compensation and medical costs is limited based on fixed dollar amounts. For domestic worker’s compensation and employer’s liability under state and federal law, the fixed dollar amount of stop-loss coverage is $1.0 million per occurrence on most policies; but, $0.25 million on a California based policy. For medical costs, the fixed dollar amount of stop-loss coverage is from $0.25 million to $0.75 million for total costs per covered participant per calendar year.

Note 9 — Segment Information

We have three operating and reportable segments, Global Stabilization and Development Solutions (“GSDS”), Global Platform Support Solutions (“GPSS”), and Global Linguist Solutions (“GLS”). Two of our segments, GSDS and GPSS, are wholly-owned. Our third segment, GLS, is a 51% owned joint venture. While we do not have control over the performance of GLS, our senior management, including our chief executive officer, who is our chief operating decision maker, regularly review GLS’ operating results and metrics to make decisions about resources to be allocated to the segment and assess performance; thus, GLS is classified as an operating segment.

 

 

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Our GPSS operating segment provides services domestically and in foreign countries under contracts with the U.S. government and some foreign customers, whereas our GSDS and GLS operating segments primarily provide services in foreign countries with the U.S. government as the primary customer. All three segments operate principally within a regulatory environment subject to governmental contracting and accounting requirements, including Federal Acquisition Regulations, Cost Accounting Standards and audits by various U.S. federal agencies. In order to realign measurement of true business performance with segment presentation, we excluded certain costs that are not directly allocable to business units from the segment results and included these costs in headquarters.

The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the consolidated financial statements:

 

(Amounts in thousands)    Three Months
Ended

September 30,
2011
    Three
Months
Ended
October 1,
2010
    Nine
Months
Ended

September 30,
2011
    For The
Period From
April 1, 2010
(Inception)
Through

October 1,
2010
 

Revenue

        

Global Stabilization and Development Solutions

   $ 589,561      $ 511,087      $ 1,763,315      $ 511,087   

Global Platform Support Solutions

     340,183        326,024        964,219        326,024   

Global Linguist Solutions

     89,524        147,694        314,675        147,694   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reportable segments

   $ 1,019,268      $ 984,805      $ 3,042,209      $ 984,805   

Headquarters (1)

     5,649        3,935        10,907        3,935   

Global Linguist Solutions deconsolidation (4)

     (89,524     (147,694     (314,675     (147,694
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

   $ 935,393      $ 841,046      $ 2,738,441      $ 841,046   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

        

Global Stabilization and Development Solutions

   $ 16,940      $ 18,091      $ 48,146      $ 18,091   

Global Platform Support Solutions

     31,873        31,071        80,651        31,071   

Global Linguist Solutions

     7,740        9,760        23,208        9,760   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reportable segments

   $ 56,553      $ 58,922      $ 152,005      $ 58,922   

Headquarters (2)

     (91,417     (14,835     (110,819     (66,557

Global Linguist Solutions deconsolidation (4)

     (7,740     (9,760     (23,208     (9,760
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating (loss) income

   $ (42,604   $ 34,327      $ 17,978      $ (17,395
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

        

Global Stabilization and Development Solutions

   $ 74      $ 62      $ 205      $ 62   

Global Platform Support Solutions

     18        4        55        4   

Global Linguist Solutions

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reportable segments

   $ 92      $ 66      $ 260      $ 66   

Headquarters

     12,163        12,279        37,969        12,279   

Global Linguist Solutions deconsolidation (4)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization (3)

   $ 12,255      $ 12,345      $ 38,229      $ 12,345   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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  (1) Represents revenue earned on shared services arrangements for general and administrative services provided to unconsolidated joint ventures.
  (2) Headquarters operating expense primarily relate to amortization of intangible assets and other costs that are not allocated to segments and are not billable to our U.S. government customers. During the three months ended September 30, 2011 we recognized an impairment on our equity method investment in GLS. See Note 10 to the Delta Tucker Holdings, Inc. financial statements for further discussion.
  (3) Excludes amounts included in “Cost of services” of $0.4 million and $1.3 million during the three and nine months ended September 30, 2011, respectively. Excludes amounts included in “Cost of services” of $0.2 million and $0.2 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively.
  (4) The Company deconsolidated Global Linguist Solutions effective July 7, 2010.

The following is a summary of the assets of the reportable segments reconciled to the amounts reported in the consolidated financial statements:

 

(Amounts in thousands)    As Of  
     September 30,
2011
    December 31,
2010
 

Assets

    

Global Stabilization and Development Solutions

   $ 809,167      $ 881,093   

Global Platform Support Solutions

     809,690        788,586   

Global Linguist Solutions

     103,646        123,940   
  

 

 

   

 

 

 

Total reportable segments

   $ 1,722,503      $ 1,793,619   

Headquarters (1)

     499,881        593,676   

Global Linguist Solutions deconsolidation (2)

     (103,646     (123,940
  

 

 

   

 

 

 

Total assets

   $ 2,118,738      $ 2,263,355   
  

 

 

   

 

 

 

 

  (1) Assets primarily include cash, investments in unconsolidated subsidiaries, deferred income taxes, intangible assets (excluding goodwill) and deferred debt issuance cost.
  (2) The Company deconsolidated Global Linguist Solutions effective July 7, 2010.

Note 10 — Related Parties, Joint Ventures and Variable Interest Entities

Consulting Fee

The Company has a Master Consulting and Advisory Services (“COAC Agreement”) with Cerberus Operations and Advisory Company, LLC, where pursuant to the terms of the agreement, they make personnel available to us for the purpose of providing reasonably requested business advisory services. The services are priced on a case by case basis depending on the requirements of the project and agreements in pricing. We incurred $0.2 million and $1.4 million in expenses for Cerberus consulting fees during the three and nine months ended September 30, 2011, respectively. We incurred $0.4 million and $0.4 million in expenses for Cerberus consulting fees during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively.

Variable Interest Entities

We own an interest in various active VIEs, all of which are joint ventures. These are listed as follows: (i) 40% owned Partnership for Temporary Housing LLC (“PaTH”); (ii) 45% owned Contingency Response Services LLC (“CRS”); (iii) 44% owned Babcock DynCorp Limited (“Babcock”); (iv) 51% owned Global Response Services LLC (“GRS”), (v) 51% owned Global Linguist Solutions (“GLS”); and (vi) 50% owned DynCorp International FZ-LLC (“DIFZ”). We do not encounter any significant risk through our involvement in our VIEs outside the normal course of our business including our net investment in each entity.

Many of our VIEs only perform on a single contract. The modification or termination of a contract under a VIE could trigger an impairment in the fair value of our investment in unconsolidated subsidiaries. In the aggregate, our maximum exposure to losses as a result of our investment consists of our (i) $19.1 million investment in unconsolidated subsidiaries, net of the GLS impairment disclosed below, (ii) $9.6 million in receivables from our unconsolidated joint ventures, (iii) $6.0 million note receivable from Palm Trading Investment Corp. (“Palm”) and (iv) contingent liabilities that were neither probable nor reasonably estimable as of September 30, 2011.

 

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PaTH is a joint venture formed in May 2006 with two other partners for the purpose of procuring government contracts with the Federal Emergency Management Authority.

CRS is a joint venture formed in March 2006 with two other partners for the purpose of procuring government contracts with the U.S. Navy.

Babcock is a joint venture formed in January 2005 and currently provides services to the British Ministry of Defense.

The GRS joint venture was formed in August of 2010 with one partner, for the purpose of procuring government contracts with the U.S. Navy. During the three months ended September 30, 2011, this joint venture was selected as one of four contractors for an Indefinite Delivery Indefinite Quantity (IDIQ) multiple award contract. The total potential value of the contract is $900.0 million over five years.

GLS is a joint venture formed in August 2006 with one partner for the purpose of procuring government contracts with the U.S. Army. We incur significant costs on behalf of GLS related to the normal operations of the venture. However, these costs typically support revenue billable to the customer.

GLS’ revenue was $89.5 million and $314.7 million during the three and nine months ended September 30, 2011, respectively. GLS’ revenue was $147.7 million and $147.7 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively. Additionally, GLS’ operating income and net income was $7.7 million and $23.2 million during the three and nine months ended September 30, 2011, respectively. GLS’ operating income and net income was $9.8 million and $9.8 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively.

On October 5, 2011, the DCAA issued GLS a Form 1 in the amount of $95.9 million which pertains to potential inconsistencies of certain contractual requirements. As a result of the Form 1, the customer informed GLS it would withhold a portion of outstanding invoices until the Form 1 is resolved.

In view of these developments, combined with the wind-down of GLS’ current task order in Iraq, the announced withdrawal of U.S. forces from that country by year-end and delays of new task orders under the DLITE contract, the Company performed an assessment and concluded that the carrying value of the GLS investment, which totaled $76.6 million as of September 30, 2011, had a loss in value that was other than temporary. We recorded an impairment of our investment as of September 30, 2011, in the amount of $76.6 million.

We own 50% of DIFZ but exercise power over activities that significantly impact DIFZ’s economic performance. We incur significant costs on behalf of DIFZ related to our normal operations. The vast majority of these costs are considered direct contract costs and thus billable on several of our contracts supported by DIFZ services. DIFZ’s assets and liabilities as of September 30, 2011 totaled $12.9 million and $9.4 million, respectively. DIFZ’s assets and liabilities as of December 31, 2010 totaled $35.9 million and $35.9 million, respectively. Additionally, DIFZ’s revenue was $122.1 million and $359.3 million during the three and nine months ended September, 2011, respectively. DIFZ’s revenue was $106.3 million and $106.3 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively. These intercompany revenue and costs are eliminated in consolidation.

As of September 30, 2011, we accounted for GLS, PaTH, CRS, Babcock and GRS as equity method investments based on our share of (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant or the right to receive benefits from the entity that could potentially be significant to the VIE. Alternatively, we consolidated DIFZ based on the abovementioned criteria. We present our share of the GLS, PaTH, CRS and GRS earnings in “Earnings from equity method investees”, within operating income, as these joint ventures are considered operationally integral. Alternatively, we present our share of the Babcock earnings in “Other income, net” as its not considered operationally integral. Current assets and total assets for our equity method investees as of September 30, 2011 totaled $142.3 million and $142.4 million, respectively. Current assets and total assets for our equity method investees as of December 31, 2010 totaled $163.7 million and $175.5 million, respectively.

 

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Table of Contents

Current liabilities and total liabilities for our equity method investees as of September 30, 2011 totaled $97.5 million and $98.3 million, respectively. Current liabilities and total liabilities for our equity method investees as of December 31, 2010, totaled $105.1 million $105.6 million, respectively. Revenue and net income for the equity method investees during the three months ended September 30, 2011 was $122.8 million and $9.8 million, respectively. Revenue and net income for the equity method investees during the nine months ended September 30, 2011 was $451.8 million and $29.3 million, respectively. Revenue and net income for the equity method investees during the three months ended October 1, 2010 was $179.5 million and $11.3 million, respectively. Revenue and net income for the equity method investees for the period from April 1, 2010 (Inception) through October 1, 2010 was $179.5 million and $11.3 million, respectively.

Unconsolidated Joint Ventures

Receivables due from our unconsolidated joint ventures, including GLS, totaled $9.6 million and $5.0 million as of September 30, 2011 and December 31, 2010, respectively. These receivables are a result of items purchased and services rendered by us on behalf of our unconsolidated joint ventures, including GLS. We have assessed these receivables as having minimal collection risk based on our historic experience with these joint ventures and our inherent influence through our ownership interest. The related revenue we earned from our unconsolidated joint ventures, including GLS, totaled $3.0 million and $9.6 million during the three and nine months ended September 30, 2011, respectively. The related revenue we earned from our unconsolidated joint ventures, including GLS, totaled $0.2 million and $0.2 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively. Additionally, we earned $4.5 million and $15.1 million in equity method income (includes operationally integral and non-integral income) during the three and nine months ended September 30, 2011. Additionally, we earned $5.9 million and $5.9 million in equity method income (includes operationally integral and non-integral income) during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010.

We currently hold a promissory note from Palm Trading Investment Corp, which had an aggregate initial value of $9.2 million. The note is included in (i) Prepaid expenses and other current assets and in (ii) Other assets on our unaudited condensed consolidated balance sheet for the short and long-term portions, respectively. The loan balance outstanding was $6.0 million and $6.8 million, as of September 30, 2011 and December 31, 2010, respectively, reflecting the initial value plus accrued interest, less payments against the promissory notes. The fair value of the notes receivable is not materially different from its carrying value.

Note 11 — Collaborative Arrangements

During 2008, we executed a subcontract with CH2M Hill with respect to operations on the LOGCAP IV program, which is considered a collaborative arrangement under GAAP. The purpose of this arrangement is to share some of the risks and rewards associated with this U.S. government contract. Our current share of profits is 70%.

We account for this collaborative arrangement under ASC 808 — Collaborative Arrangements and record revenue gross as the prime contractor. Expenses incurred are recorded in Cost of services in the period realized. Revenue on LOGCAP IV was $382.7 million and $1,163.3 million during the three and nine months ended September 30, 2011, respectively. Revenue on LOGCAP IV was $330.2 million and $330.2 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively. Cost of services on LOGCAP IV was $361.2 million and $1,093.6 million during the three and nine months ended September 30, 2011, respectively. Cost of services on LOGCAP IV was $315.0 million and $315.0 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively. Our share of the total LOGCAP IV profits was $10.0 million and $31.5 million during the three and nine months ended September 30, 2011, respectively. Our share of the total LOGCAP IV profits was $5.4 million and $5.4 million during the three months ended October 1, 2010 and for the period from April 1, 2010 (Inception) through October 1, 2010, respectively.

Note 12 — Consolidating Financial Statements of Subsidiary Guarantors

The Senior Unsecured Notes issued by DynCorp International Inc. (“Subsidiary Issuer”) and the Credit Facility are fully and unconditionally guaranteed, jointly and severally, by the Company (“Parent”) and all of the domestic subsidiaries of Subsidiary Issuer: DynCorp International LLC, DTS Aviation Services LLC, DynCorp Aerospace Operations LLC, DynCorp International Services LLC, Dyn Marine Services of Virginia LLC, Services International LLC, Worldwide Humanitarian Services LLC, Worldwide Recruiting and Staffing Services LLC, Phoenix Consulting Group, LLC, DIV Capital Corporation and Casals & Associates, Inc. (collectively, “Subsidiary Guarantors”). The Subsidiary Issuer and each of the Subsidiary Guarantors are 100% owned by the Company.

 

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The following condensed consolidating financial statements present (i) the unaudited condensed consolidating statement of operations for the three months ended September 30, 2011 and October 1, 2010, (ii) the unaudited condensed consolidating statement of operations for the nine months ended September 30, 2011 and for the period from April 1, 2010 (Inception) through October 1, 2010, (iii) the unaudited condensed consolidating balance sheets as of September 30, 2011 and December 31, 2010, (iv) the unaudited condensed consolidating statement of cash flows during the nine months ended September 30, 2011 and for the period from April 1, 2010 (Inception) through October 1, 2010 and (iv) elimination entries necessary to consolidate Parent and its subsidiaries.

The Parent company, the Subsidiary Issuer, the combined 100% owned Subsidiary Guarantors and the combined subsidiary non-guarantors account for their investments in subsidiaries using the equity method of accounting; therefore, the Parent column reflects the equity income of its subsidiary guarantors and subsidiary non-guarantors. Additionally, the Subsidiary Guarantors column reflects the equity income of their subsidiary non-guarantors.

 

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Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For the Three Months Ended September 30, 2011

 

(Amounts in thousands)    Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Revenue

   $ —        $ —        $ 1,296,170      $ 482,906      $ (843,683   $ 935,393   

Cost of services

     —          —          (1,208,406     (477,137     840,198        (845,345

Selling, general and administrative expenses

     —          —          (47,566     (3,563     3,485        (47,644

Depreciation and amortization expense

     —          —          (12,097     (158     —          (12,255

Earnings from equity method investees

     —          —          3,894        —          —          3,894   

Impairment on equity method investment

     —          —          (76,647     —          —          (76,647
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     —          —          (44,652     2,048        —          (42,604

Interest expense

     —          (22,754     (82     —          —          (22,836

Loss on early extinguishment of debt

     —          —          —          —          —          —     

Interest Income

     —          —          27        2        —          29   

Equity in income of consolidated subsidiaries, net of taxes

     (41,628     (25,946     1,124        —          66,450        —     

Other income, net

     —          —          653        32        —          685   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before taxes

     (41,628     (48,700     (42,930     2,082        66,450        (64,726

Benefit (provision) for income taxes

     —          7,072        16,984        (178     —          23,878   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (41,628     (41,628     (25,946     1,904        66,450        (40,848

Noncontrolling interest

     —          —          —          (780     —          (780
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Delta Tucker Holdings, Inc.

   $ (41,628   $ (41,628   $ (25,946   $ 1,124      $ 66,450      $ (41,628
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For the Three Months Ended October 1, 2010

 

(Amounts in thousands)    Parent      Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Revenue

   $ —         $ —        $ 841,686      $ 114,930      $ (115,570   $ 841,046   

Cost of services

     —           —          (761,321     (110,078     112,373        (759,026

Selling, general and administrative expenses

     —           —          (40,341     (3,285     3,152        (40,474

Depreciation and amortization expense

     —           —          (12,193     (152     —          (12,345

Earnings from equity method investees

     —           —          5,126        —          —          5,126   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —           —          32,957        1,415        (45     34,327   

Interest expense

     —           (22,783     374        —          —          (22,409

Loss on early extinguishment of debt

     —           —          —          —          —          —     

Equity in income of consolidated subsidiaries, net of taxes

     6,851         25,100        897        —          (32,848     —     

Other income, net

     —           —          487        210        45        742   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     6,851         2,317        34,715        1,625        (32,848     12,660   

Benefit (provision) for income taxes

     —           4,534        (9,615     (174     —          (5,255
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     6,851         6,851        25,100        1,451        (32,848     7,405   

Noncontrolling interest

     —           —          —          (554     —          (554
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Delta Tucker Holdings, Inc.

   $ 6,851       $ 6,851      $ 25,100        897      $ (32,848   $ 6,851   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For the Nine Months Ended September 30, 2011

 

(Amounts in thousands)    Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Revenue

   $ —        $ —        $ 3,102,635      $ 742,142      $ (1,106,336   $ 2,738,441   

Cost of services

     —          —          (2,871,502     (725,530     1,096,620        (2,500,412

Selling, general and administrative expenses

     —          —          (116,663     (10,058     9,716        (117,005

Depreciation and amortization expense

     —          —          (37,751     (478     —          (38,229

Earnings from equity method investees

     —          —          11,830        —          —          11,830   

Impairment on equity method investment

     —          —          (76,647     —          —          (76,647
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     —          —          11,902        6,076        —          17,978   

Interest expense

     —          (69,309     (228     —          —          (69,537

Loss on early extinguishment of debt

     —          (2,397     —          —          —          (2,397

Equity in income of consolidated subsidiaries, net of taxes

     (33,394     12,283        3,190        —          17,921        —     

Interest income

     —          —          166        2        —          168   

Other income, net

     —          —          4,792        —          —          4,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (33,394     (59,423     19,822        6,078        17,921        (48,996

Benefit (provision) for income taxes

     —          26,029        (7,539     (703     —          17,787   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (33,394     (33,394     12,283        5,375        17,921        (31,209

Noncontrolling interest

     —          —          —          (2,185     —          (2,185
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Delta Tucker Holdings, Inc.

   $ (33,394   $ (33,394   $ 12,283      $ 3,190      $ 17,921      $ (33,394
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations Information

For The Period From April 1, 2010 (Inception) Through October 1, 2010

 

(Amounts in thousands)    Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Revenue

   $ —        $ —        $ 841,686      $ 114,930      $ (115,570   $ 841,046   

Cost of services

     —          —          (761,321     (110,078     112,373        (759,026

Selling, general and administrative expenses

     —          —          (40,341     (3,285     3,152        (40,474

Merger expenses incurred by Delta Tucker Holdings, Inc.

     (51,722     —          —          —          —          (51,722

Depreciation and amortization expense

     —            (12,193     (152     —          (12,345

Earnings from equity method investees

     —          —          5,126        —          —          5,126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (51,722     —          32,957        1,415        (45     (17,395

Interest expense

     —          (22,783     374        —          —          (22,409

Bridge commitment fee

     (7,963     —          —          —          —          (7,963

Equity in income of consolidated subsidiaries, net of taxes

     6,851        25,100        897        —          (32,848     —     

Other income, net

     —          —          487        210        45        742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (52,834     2,317        34,715        1,625        (32,848     (47,025

(Provision) benefit for income taxes

     14,599        4,534        (9,615     (174     —          9,344   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (38,235     6,851        25,100        1,451        (32,848     (37,681

Noncontrolling interest

     —          —          —          (554     —          (554
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Delta Tucker Holdings, Inc.

   $ (38,235   $ 6,851      $ 25,100      $ 897      $ (32,848   $ (38,235
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Balance Sheet Information

September 30, 2011

 

(Amounts in thousands)    Parent      Subsidiary
Issuer
     Subsidiary
Guarantors
     Subsidiary
Non-
Guarantors
     Eliminations     Consolidated  
     ASSETS   

Current assets:

                

Cash and cash equivalents

   $ —         $ —         $ 78,905       $ 6,553       $ —        $ 85,458   

Restricted cash

     —           —           14,847         —           —          14,847   

Accounts receivable, net

     —           —           790,190         6,050         (10,681     785,559   

Intercompany receivables

     —           —           106,464         21,222         (127,686     —     

Prepaid expenses and other current assets

     6,167         —           90,609         618         309        97,703   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     6,167         —           1,081,015         34,443         (138,058     983,567   

Property and equipment, net

     —           —           23,127         831         —          23,958   

Goodwill

     —           —           646,972         32,399         —          679,371   

Tradenames, net

     —           —           43,705         —           —          43,705   

Other intangibles, net

     —           —           319,740         2,062         —          321,802   

Investment in subsidiaries

     520,663         1,507,134         36,310         —           (2,064,107     —     

Other assets, net

     8,432         39,616         18,220         —           67        66,335   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 535,262       $ 1,546,750       $ 2,169,089       $ 69,735       $ (2,202,098   $ 2,118,738   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     LIABILITIES & EQUITY   

Current liabilities:

                

Current portion of long-term debt

   $ —         $ 5,212       $ —         $ —         $ —        $ 5,212   

Accounts payable

     —           —           279,278         1,832         (4,286     276,824   

Accrued payroll and employee costs

     —           —           99,860         17,437         —          117,297   

Intercompany payables

     55,334         43,068         21,756         7,528         (127,686     —     

Other accrued liabilities

     —           12,050         216,640         6,197         (5,712     229,175   

Income taxes payable

     —           —           —           431         (307     124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     55,334         60,330         617,534         33,425         (137,991     628,632   

Long-term debt, less current portion

     —           965,757         637         —           —          966,394   

Other long-term liabilities

     —           —           39,038         —           —          39,038   

Equity

     479,928         520,663         1,507,134         36,310         (2,064,107     479,928   

Noncontrolling interests

     —           —           4,746         —           —          4,746   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 535,262       $ 1,546,750       $ 2,169,089       $ 69,735       $ (2,202,098   $ 2,118,738   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

33


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Balance Sheet Information

December 31, 2010

 

(Amounts in thousands)    Parent      Subsidiary
Issuer
     Subsidiary
Guarantors
     Subsidiary
Non-
Guarantors
     Eliminations     Consolidated  
  

 

ASSETS

  

Current assets:

                

Cash and cash equivalents

   $ —         $ —         $ 46,106       $ 6,431       $ —        $ 52,537   

Restricted cash

     —           —           9,342         —           —          9,342   

Accounts receivable, net

     —           —           780,524         5,211         (3,640     782,095   

Intercompany receivables

     —           —           74,169         33,268         (107,437     —     

Prepaid expenses and other current assets

     6,167         —           143,337         616         493        150,613   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     6,167         —           1,053,478         45,526         (110,584     994,587   

Property and equipment, net

     —           —           25,553         944         —          26,497   

Goodwill

     —           —           646,972         32,399         —          679,371   

Tradenames, net

     —           —           43,839         —           —          43,839   

Other intangibles, net

     —           —           352,744         2,385         —          355,129   

Investment in subsidiaries

     558,060         1,566,557         35,516         —           (2,160,133     —     

Other assets, net

     8,432         45,246         110,254         —           —          163,932   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 572,659       $ 1,611,803       $ 2,268,356       $ 81,254       $ (2,270,717   $ 2,263,355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
  

 

LIABILITIES & EQUITY

  

Current liabilities:

                

Current portion of long-term debt

   $ —         $ 5,700       $ —         $ —         $ —        $ 5,700   

Accounts payable

     —           —           299,583         1,385         (3,147     297,821   

Accrued payroll and employee costs

     —           —           69,417         29,878         —          99,295   

Intercompany payables

     59,684         7,227         33,393         7,133         (107,437     —     

Other accrued liabilities

     —           22,941         208,427         7,217         —          238,585   

Income taxes payable

     —           —           3,346         125         —          3,471   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     59,684         35,868         614,166         45,738         (110,584     644,872   

Long-term debt, less current portion

     —           1,017,875         637         —           —          1,018,512   

Other long-term liabilities

     —           —           82,645         —           —          82,645   

Equity

     512,975         558,060         1,566,557         35,516         (2,160,133     512,975   

Noncontrolling interests

     —           —           4,351         —           —          4,351   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 572,659       $ 1,611,803       $ 2,268,356       $ 81,254       $ (2,270,717   $ 2,263,355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

34


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Cash Flow Information

For the Nine Months Ended September 30, 2011

 

(Amounts in thousands)    Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Net cash provided by (used in) operating activities

   $ 4,350      $ 16,765      $ 54,423      $ (8,884   $ (2,290   $ 64,364   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

            

Purchase of property and equipment

     —          —          (4,143     —          —          (4,143

Return of capital from equity method investees

     —          —          9,147        —          —          9,147   

Net transfers from/(to) Parent

     —          —          —          12,441        (12,441     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     —          —          5,004        12,441        (12,441     5,004   

Cash flows from financing activities:

            

Borrowings on long-term debt

     —          214,300        —          —          —          214,300   

Payments on long-term debt

     —          (266,906     —          —          —          (266,906

Net transfers (to)/from Parent/subsidiary

     (4,350     35,841        (43,932     —          12,441        —     

Payments of dividends to Parent

     —          —          —          (3,435     2,290        (1,145

Other financing activities

     —          —          17,304        —          —          17,304   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (4,350     (16,765     (26,628     (3,435     14,731        (36,447

Net increase (decrease) in cash and cash equivalents

     —          —          32,799        122        —          32,921   

Cash and cash equivalents, beginning of period

     —          —          46,106        6,431        —          52,537   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ —        $ —        $ 78,905      $ 6,553      $ —        $ 85,458   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

Delta Tucker Holdings, Inc. and Subsidiaries

Unaudited Condensed Consolidating Statement of Cash Flow Information

For The Period From April 1, 2010 (Inception) Through October 1, 2010

 

(Amounts in thousands)    Parent     Subsidiary
Issuer
    Subsidiary
Guarantors
    Subsidiary
Non-
Guarantors
    Eliminations     Consolidated  

Net cash (used in) provided by operating activities

   $ (59,684   $ (19,806   $ 42,242      $ (33,720   $ (1,576   $ (72,544
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

            

Purchase of property and equipment

     —          —          (5,190     —          —          (5,190

Merger consideration for shares

     —          (1,004,892     135,849        —          —          (869,043

Deconsolidation of GLS

     —          —          (938     —          —          (938

Payments received from GLS on note receivable

     —          —          138,001        —          —          138,001   

Disbursements made to GLS on note receivable

     —