UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4,October 3, 2008
or
   
o 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: 001-32869
DYNCORP INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
   
Delaware 01-0824791
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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. Yesþ Noo
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 filero Accelerated filerþ Non-accelerated filero Smaller reporting companyo
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso Noþ
As of August 1,November 3, 2008, the registrant had 57,000,000 shares of its Class A common stock, par value $0.01 per share, outstanding.
 
 

 

 


 

DYNCORP INTERNATIONAL INC.
TABLE OF CONTENTS
     
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 Exhibit 10.13.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNCORP INTERNATIONAL INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
                
 For the Fiscal Quarter Ended  For the Three Months Ended 
 July 4, 2008 June 29, 2007  October 3, 2008 September 28, 2007 
  
Revenue $716,794 $548,673  $779,151 $495,109 
  
Cost of services  (638,389)  (480,089)  (696,519)  (425,633)
Selling, general and administrative expenses  (27,851)  (26,536)  (25,994)  (24,928)
Depreciation and amortization expense  (10,560)  (10,390)  (10,005)  (10,601)
          
Operating income 39,994 31,658  46,633 33,947 
Interest expense  (14,215)  (14,489)  (14,905)  (13,705)
Loss on early extinguishment of debt  (4,443)  
Earnings from affiliates 1,117 891  1,523 1,176 
Interest income 344 1,250  677 430 
Other income, net 705   960  
          
Income before income taxes 27,945 19,310  30,445 21,848 
Provision for income taxes  (9,316)  (7,052)  (9,131)  (7,895)
          
Income before minority interest 18,629 12,258  21,314 13,953 
Minority interest  (649)    (8,443)  
          
Net income $17,980 $12,258  $12,871 $13,953 
          
Basic and diluted earnings per share $0.32 $0.22  $0.23 $0.24 
          
See notes to condensed consolidated financial statements.

 

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DYNCORP INTERNATIONAL INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
         
  For the Six Months Ended 
  October 3, 2008  September 28, 2007 
         
Revenue $1,495,945  $1,043,782 
         
Cost of services  (1,334,908)  (905,721)
Selling, general and administrative expenses  (53,845)  (51,463)
Depreciation and amortization expense  (20,565)  (20,991)
       
Operating income  86,627   65,607 
Interest expense  (29,120)  (28,195)
Loss on early extinguishment of debt  (4,443)   
Earnings from affiliates  2,640   2,067 
Interest income  1,021   1,680 
Other income, net  1,665    
       
Income before income taxes  58,390   41,159 
Provision for income taxes  (18,447)  (14,948)
       
Income before minority interest  39,943   26,211 
Minority interest  (9,092)   
       
Net income $30,851  $26,211 
       
Basic and diluted earnings per share $0.54  $0.46 
       
See notes to condensed consolidated financial statements.

4


DYNCORP INTERNATIONAL INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
                
 As of  As of 
 July 4, 2008 March 28, 2008  October 3, 2008 March 28, 2008 
ASSETS
ASSETS
ASSETS
 
Current assets:  
Cash and cash equivalents $33,500 $85,379  $132,779 $85,379 
Restricted cash 6,072 11,308  20,550 11,308 
Accounts receivable, net of allowances of $1,178 and $268, respectively 652,265 513,312 
Accounts receivable, net of allowances of $592 and $268, respectively 577,589 513,312 
Prepaid expenses and other current assets 133,344 109,027  132,720 109,027 
Deferred income taxes 22,325 17,341  28,254 17,341 
          
Total current assets 847,506 736,367  891,892 736,367 
Property and equipment, net 17,571 15,442  17,866 15,442 
Goodwill 420,180 420,180  420,180 420,180 
Tradename 18,318 18,318  18,318 18,318 
Other intangibles, net 169,158 176,146  160,226 176,146 
Deferred income taxes 12,762 18,168  11,367 18,168 
Other assets, net 16,964 18,088  28,868 18,088 
          
Total assets $1,502,459 $1,402,709  $1,548,717 $1,402,709 
          
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current liabilities:  
Current portion of long-term debt $ $3,096  $ $3,096 
Accounts payable 166,680 148,787  158,436 148,787 
Accrued payroll and employee costs 129,476 85,186  135,305 85,186 
Other accrued liabilities 144,861 129,240  141,084 129,240 
Income taxes payable 11,489 8,245  11,443 8,245 
          
Total current liabilities 452,506 374,554  446,268 374,554 
  
Long-term debt, less current portion 591,614 590,066  615,835 590,066 
Other long-term liabilities 12,993 13,804  14,125 13,804 
 
Commitments and contingencies  
  
Minority interest 5,786  
 
Shareholders’ equity:  
Common stock, $0.01 par value - 232,000,000 shares authorized; 57,000,000 shares issued and outstanding 570 570  570 570 
Additional paid-in capital 356,532 357,026  365,413 357,026 
Retained earnings 91,583 73,603  104,454 73,603 
Accumulated other comprehensive loss  (3,339)  (6,914)  (3,734)  (6,914)
          
Total shareholders’ equity 445,346 424,285  466,703 424,285 
          
Total liabilities and shareholders’ equity $1,502,459 $1,402,709  $1,548,717 $1,402,709 
          
See notes to condensed consolidated financial statements.

 

45


DYNCORP INTERNATIONAL INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DollarsAmounts in thousands)
        
         For the Six Months Ended 
 For the Fiscal Quarter Ended  October 3, 2008 September 28, 2007 
 July 4, 2008 June 29, 2007 
Cash flows from operating activities
  
Net income $17,980 $12,258  $30,851 $26,211 
Adjustments to reconcile net income to net cash provided by (used in) operating activities: 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation and amortization 10,811 10,569  21,087 21,632 
Amortization of deferred loan costs 821 753  1,723 1,507 
(Recovery) for losses on accounts receivable   (955)  (173)  (1,066)
Earnings from affiliates  (1,117)  (891)  (1,255)  (511)
Deferred income taxes  (1,609) 1,012   (4,112)  (1,957)
Equity-based compensation  (803) 1,205  1,225 2,263 
Minority interest 649   9,092  
Loss on early extinguishment of debt 4,443  
Other  (256)    (304) 116 
Changes in assets and liabilities:  
Restricted cash 5,236  (3,591)
Restricted cash (see Note 1) 7,326 2,597 
Accounts receivable  (138,958)  (32,185)  (64,104) 6,062 
Prepaid expenses and other current assets  (25,560)  (3,584)  (26,070)  (9,227)
Accounts payable and accrued liabilities 56,382 24,257  54,096 7,671 
Income taxes payable 5,293  (5,285) 4,128  (5,388)
          
Net cash provided by (used in) operating activities  (71,131) 3,563 
Net cash provided by operating activities 37,953 49,910 
          
Cash flows from investing activities
  
Purchase of property and equipment  (1,208)  (520)  (2,303)  (2,114)
Purchase of computer software  (608)  (753)  (1,212)  (1,264)
Change in cash restricted as collateral on letters of credit (see Note 1)  (16,568)  
Other assets 365 100  365 158 
          
Net cash used in investing activities  (1,451)  (1,173)  (19,718)  (3,220)
          
Cash flows from financing activities
  
Payments on long-term debt  (1,548)  (35,510)
Borrowings (payments) under other financing arrangements 22,319  (543)
Other financing activities  (68)  
Borrowings under debt agreements (see Note 5) 323,751   
Repayments on debt agreements (see Note 5)  (301,129) (36,285)
Net borrowings (payments) under other financing arrangements 16,158  (2,860)
Payments of deferred financing cost  (9,645)  
Other net financing activities 30 62 
          
Net cash provided by (used in) financing activities 20,703  (36,053) 29,165  (39,083)
          
Net decrease in cash and cash equivalents  (51,879)  (33,663)
Net increase in cash and cash equivalents 47,400 7,607 
Cash and cash equivalents, beginning of period 85,379 102,455  85,379 102,455 
          
Cash and cash equivalents, end of period $33,500 $68,792  $132,779 $110,062 
          
Income taxes paid (net of refunds) $7,023 $11,224  $18,965 $21,297 
Interest paid $10,866 $6,603  $30,054 $27,234 
Non-cash investing activities $4,265 $ 
Non-cash purchase of property, equipment and computer software $2,458  
Non-cash sale of DIFZ including related financing (see Note 8) $8,264 $ 
See notes to condensed consolidated financial statements.

 

56


DYNCORP INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Basis of Presentation and Accounting Policies
Basis of Presentation
DynCorp International Inc., through its subsidiaries, (together, the “Company”), providesis a leading provider of specialized mission-critical professional and support services outsourced by 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, construction management, aviation services and operations and linguist services. We also provide logistics support for all our services, including those services provided under the recently-awarded LOGCAP IV contract with the U.S. Army.services. References herein to “DynCorp”“DynCorp International”, the “Company”, “we”, “our”, or “us” refer to DynCorp International Inc. and its subsidiaries unless otherwise stated or indicated by the context. We refer to our subsidiary, DynCorp International LLC and its subsidiaries.
The condensed consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries. These condensed consolidated financial statements have been prepared by the Company, 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, the Company believes that all disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes thereto included in the Company’s 2008 Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on June 10, 2008.
The Company reports its results on a 52/53 week53-week fiscal year with the fiscal year ending on the Friday closest to March 31 of such year (April 3, 2009 for fiscal year 2009 which is a 53 week53-week fiscal year). The six-month fiscal quarterperiod ended July 4,October 3, 2008 was a 14-week27-week period from March 29, 2008 to July 4,October 3, 2008. The six-month fiscal quarterperiod ended June 29,September 28, 2007 was a 13-week26-week period from March 31, 2007 to June 29,September 28, 2007.
In the opinion of management, all adjustments necessary to fairly present the Company’s financial position at July 4,October 3, 2008 and March 28, 2008, the results of operations for the fiscal quarterthree and six months ended July 4,October 3, 2008 and June 29,September 28, 2007, and cash flows for the fiscal quartersix months ended July 4,October 3, 2008 and June 29,September 28, 2007, have been included.included and are of a normal and recurring nature. The results of operations for the fiscal quarterthree and six months ended July 4,October 3, 2008 are not necessarily indicative of the results to be expected for the full fiscal year or for any future periods. The Company uses 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.
For purposes of comparability, certain prior year, specifically our segment report structure as further discussed in Note 14, amounts have been reclassified to conform to the current year presentation. Such reclassifications have no impact on previously reported net income.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Generally, investments in which the Company owns a 20% to 50% ownership interest are accounted for by the equity method. These investments are in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies and is not the primary beneficiary as defined in Financial Accounting Standards Board (the “FASB”) Interpretation No. 46R (Revised 2003),“Consolidation of Variable Interest Entities” (“FIN No. 46R”). The Company has no investments in business entities of less than 20%.

7


The following table sets forth the Company’s ownership in joint ventures and companies that are not consolidated into the Company’s financial statements as of October 3, 2008, and are accounted for by the equity method. Economic rights are indicated by the ownership percentages listed below.
DynEgypt LLC50.0%
Dyn Puerto Rico Corporation49.9%
Contingency Response Services LLC45.0%
Babcock DynCorp Limited44.0%
Partnership for Temporary Housing LLC40.0%
DCP Contingency Services LLC40.0%
On July 31, 2008, the Company sold 50% of its ownership interest in its previously wholly owned subsidiary, DynCorp International Free Zone LLC (“DIFZ”), for approximately $8.2 million. DIFZ was previously a wholly owned subsidiary and therefore consolidated into the Company’s financial statements. No gain has been recognized on the sale as of October 3, 2008 as the Company completely financed the transaction by issuing three notes receivable to the purchaser. As a result, the sale was accounted for as a capital transaction reflected in additional paid in capital (“APIC”). Repayment of the notes to the Company is to be made through a single cash payment of $500,000 with the remainder to be repaid through the purchaser’s portion of DIFZ quarterly dividends. The sale price is contingent upon a revaluation based on actual DIFZ results through January 31, 2009, with any adjustments to the purchase price to be reflected by an increase or decrease in the notes. Additionally, the interest component of the three notes receivable held by the Company will also increase APIC due to the structure of this transaction and will not impact the Company’s consolidated statements of income. After the transaction, it was determined that the Company was the primary beneficiary as defined in FIN No. 46R.
The following table sets forth the Company’s ownership in joint ventures that are consolidated into the Company’s financial statements as of October 3, 2008. For the entities list below, the Company is the primary beneficiary as defined in FIN No. 46R.
Global Linguist Solutions LLC51.0%
DynCorp International Free Zone LLC50.0%
Minority Interest
We hold various ownership interests in a number of joint ventures as disclosed in Note 1 to our 2008 Annual Report as filed with the SEC on June 10, 2008. We are required by GAAP to consolidate certain joint ventures for which we do not hold a 100% interest. We record the impact of our joint venture partners’ interests in these consolidated joint ventures as minority interest. Minority interest is presented on the face of the income statement as an increase or reduction in arriving at net income. The presentation of minority interest on the balance sheet is typically located in a mezzanine account between liabilities and equity. As of July 4, 2008 and March 28, 2008, the minority interest balance related to Global Linguist Solutions LLC (“GLS”) was recorded as an asset due to cumulative losses incurred. We have included minority interest within prepaid expenses and other current assets, due to cumulative losses incurred. As of October 3, 2008, all minority interest, including minority interest related to DIFZ, were recorded as further disclosedmezzanine equity.
Restricted Cash
Restricted cash represents cash restricted by certain contracts in Note 11.which advance payments are not available for use except to pay specified costs and vendors for work performed on the specific contract and cash restricted as collateral as required by our letters of credit. Changes in restricted cash related to our contracts are included as operating activities whereas changes in restricted cash for funds invested as collateral are included as investing activities in the consolidated statements of cash flows.

 

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The following table reconciles our restricted cash to the cash flow statement:
             
  As of  Cash provided 
(Amounts in thousands) March 28, 2008  October 3, 2008  by/(used in) 
             
Type of restricted cash
            
Contract related $11,308  $3,982  $7,326 
Required as collateral     16,568   (16,568)
          
             
Total $11,308  $20,550  $(9,242)
          
Accounting Policies
There have been no material changes to our significant accounting policies as detailed in Note 1 of our 2008 Annual Report on Form 10-K filed with the SEC on June 10, 2008.
Accounting Developments
Pronouncements Implemented
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements; however, it does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the Financial Accounting Standards Board (“FASB”)FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. The adoption of SFAS No. 157 did not have a material impact on our consolidated financial condition and results of operations. See Note 12 for the applicable fair value disclosures.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. It provides entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did not impact our consolidated financial condition and results of operations as we did not elect to apply the fair value option to items that have previously been measured at historical cost.
Pronouncements Not Yet Implemented
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). This statement replaces FASB Statement No. 141, “Business Combinations” (“SFAS No. 141”). This statement retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (which SFAS No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently assessing2008, with the impactexception of the statement.accounting for valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions. SFAS No. 141R amends SFAS No. 109, “Accounting for Income Taxes” such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS No. 141R would also apply the provisions of SFAS No. 141R.

9


In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently assessing the impact of the statement.

7


In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We do not expect the provisions of SFAS No. 161 to have a material impact on our consolidated financial statements.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. We do not expect the provisions of SFAS No. 162 to have a material impact on our consolidated financial statements.
Note 2—Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents during each period. At July 4,As of October 3, 2008, 338,400the only common stock equivalent was restricted stock units were included in the diluted earnings per share calculation.units. These restricted stock units may be dilutive and included or anti-dilutive and excluded in future earnings per share calculations as they are liability awards as defined by SFAS 123R. The following table reconciles the numerators and denominators used in the computations of basic and diluted earnings per share:
                        
 For the Fiscal Quarter Ended  For the Three Months Ended For the Six Months Ended 
(Amounts in thousands, except per share data) July 4, 2008 June 29, 2007  October 3,
2008
 September 28,
2007
 October 3,
2008
 September 28,
2007
 
Numerator
  
Net income $17,980 $12,258  $12,871 $13,953 $30,851 $26,211 
  
Denominator
  
Weighted average common shares — basic 57,000 57,000  57,000 57,000 57,000 57,000 
Weighted average effect of dilutive securities: 
Restricted stock units 61  40  
         
Weighted average common shares — diluted 57,053 57,000  57,061 57,000 57,040 57,000 
         
  
Basic earnings per share $0.32 $0.22  $0.23 $0.24 $0.54 $0.46 
Diluted income per share $0.32 $0.22  $0.23 $0.24 $0.54 $0.46 

10


Note 3—Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the fiscal quartersix months ended July 4,October 3, 2008 are as follows:
                 
  ISS  LCM  MTSS  Total 
  (Dollars in thousands) 
Balance as of March 28, 2008 $340,029  $  $80,151  $420,180 
Transfer between reporting segments(1)
  (39,935)  39,935       
             
Balance as of July 4, 2008 $300,094  $39,935  $80,151  $420,180 
                 
(Amounts in thousands) ISS(1)  LCM  MTSS  Total 
Balance as of March 28, 2008 $340,029  $  $80,151  $420,180 
Transfer between reporting segments(2)
  (39,935)  39,935       
             
Balance as of October 3, 2008 $300,094  $39,935  $80,151  $420,180 
             
   
(1) Balance as of March 28, 2008 represents the goodwill balance of the Government Services (“GS”) segment. International Security Services (“ISS”) and Logistics and Construction Management (“LCM”) did not exist as reportable segments at that date. On April 1, 2008, the Company announced it would change from reporting financial results of two segments, GS and Maintenance and Technical Support Services (“MTSS”), to reporting three segments, beginning with the first fiscal quarter of 2009. This was accomplished by splitting GS into two distinct reporting segments, ISS and LCM.
(2)Transfer between reporting segments as described further in Note 14, is the result of a reorganization of the Company’s reporting structure within its segments and a relatedcontemporaneous independent fair value analysis of the reporting units within the Company’s reporting segments, in the manner required by SFAS 142.

8


The following tables provide information about changes relating to intangible assets:
                                
 July 4, 2008  October 3, 2008 
 Weighted        Weighted       
 Average        Average       
 Useful Life Gross Accumulated    Useful Life Gross Accumulated   
(Amounts in thousands, except years) (Years) Carrying Value Amortization Net  (Years) Carrying Value Amortization Net 
Finite-lived intangible assets:  
Customer-related intangible assets 8.5 $290,716 $(129,191) $161,525  8.5 $290,716 $(137,842) $152,874 
Other 5.3 13,953  (6,320) 7,633  5.2 14,557  (7,205) 7,352 
              
 $304,669 $(135,511) $169,158  $305,273 $(145,047) $160,226 
              
Indefinite-lived intangible assets — Tradename $18,318 $ $18,318  $18,318 $ $18,318 
              
                 
  March 28, 2008 
  Weighted          
  Average          
  Useful Life  Gross  Accumulated    
(Amounts in thousands, except years) (Years)  Carrying Value  Amortization  Net 
Finite-lived intangible assets:
                
Customer-related intangible assets  8.5  $290,716  $(119,997) $170,719 
Other  4.2   10,887   (5,460)  5,427 
              
      $301,603  $(125,457) $176,146 
              
Indefinite-lived intangible assets — Tradename     $18,318  $  $18,318 
              

11


Amortization expense for customer-related and other intangibles was $10.1$9.5 million and $10.0 million for the fiscal quartersthree months ended July 4,October 3, 2008 and June 29,September 28, 2007, respectively, and $19.6 million and $20.0 million for the six months ended October 3, 2008 and September 28, 2007, respectively.
The following schedule outlines an estimate of future amortization based upon the finite-lived intangible assets owned at July 4,October 3, 2008:
        
 Amortization  Amortization 
 Expense 
 (Dollars in 
 thousands) 
Nine month period ended April 3, 2009 $28,313 
(Amounts in thousands) Expense 
Six month period ended April 3, 2009 $18,973 
Estimate for fiscal year 2010 37,327  37,466 
Estimate for fiscal year 2011 33,010  33,173 
Estimate for fiscal year 2012 22,505  22,587 
Estimate for fiscal year 2013 18,988  19,010 
Thereafter 29,015  29,017 
Note 4— Accounts Receivable
Accounts Receivable, net consisted of the following:
                
(Dollars in thousands) July 4, 2008 March 28, 2008 
(Amounts in thousands) October 3, 2008 March 28, 2008 
Billed $252,347 $193,337  $214,816 $193,337 
Unbilled 399,918 319,975  362,773 319,975 
          
Total $652,265 $513,312  $577,589 $513,312 
          
Unbilled receivables at July 4,October 3, 2008 and March 28, 2008 include $37.7$37.0 million and $52.8 million, respectively, related to costs incurred on projects for which the Company has 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 fiscal period. These amounts include $5.3 million related to contract claims at October 3, 2008 and March 28, 2008. The balance of unbilled receivables consists of costs and fees billable on contract completion or other specified events, the majoritysubstantially all of which is expected to be billed and collected within one year.

9


Note 5—Long-Term Debt
Long-term debt consisted of the following:
                
(Dollars in thousands) July 4, 2008 March 28, 2008 
(Amounts in thousands) October 3, 2008 March 28, 2008 
Term loans $299,582 $301,130  $200,000 $301,130 
9.5% Senior subordinated notes(1) 292,032 292,032  415,835 292,032 
          
 591,614 593,162  615,835 593,162 
Less current portion of long-term debt   (3,096)   (3,096)
          
Total long-term debt $591,614 $590,066  $615,835 $590,066 
          
(1)Senior subordinated notes are net of a $1.2 million unamortized discount as of October 3, 2008. There was no unamortized discount as of March 28, 2008.
Future maturities of long-term debt for the six months ending April 3, 2009 and each of the fiscal years subsequent to April 3, 2009 were as follows:
For
     
(Amounts in thousands)    
Six months ending April 3, 2009 $ 
2010  16,875 
2011  50,625 
2012  55,000 
2013  493,335 
Thereafter   
    
Total long-term debt (including current portion) $615,835 
    

12


Senior Secured Credit Facility
On July 28, 2008 the Company entered into a descriptionsenior secured credit facility (the “Credit Facility”) consisting of oura revolving credit facility of $200.0 million (including a letter of credit sub facility of $125.0 million) (the “Revolving Facility”) and a senior secured term loan facility of $200.0 million (the “Term Loan Facility”). The maturity date of the Revolving Facility and the Term Loan Facility is August 15, 2012. Quarterly principal payments will begin on September 22, 2009 and end on the maturity date of August 15, 2012. This first $5.6 million scheduled Term Loan Facility payment on September 22, 2009, is considered long term since the Company has the intent and ability to make a revolver borrowing equal to or greater than this first quarterly payment in order to maintain hedge accounting on the full $200.0 million through May 22, 2010, as disclosed in Note 10. The Credit Facility is subject to various financial covenants, including a total leverage ratio, an interest coverage ratio, maximum capital expenditures and certain limitations based upon eligible accounts receivable. Borrowings under the Credit Facility are secured by substantially all the assets of the Company and the capital stock of its subsidiaries.
On July 28, 2008, the Company borrowed $200.0 million under the Term Loan Facility at the applicable 3-month LIBOR (“London Interbank Offered Rate”) plus the applicable margin then in effect to refinance certain existing indebtedness see Note 7,Long-Term Debt,and pay certain transaction costs related to the Credit Facility and the offering of additional senior subordinated notes, as described below. The applicable margin for LIBOR as of October 3, 2008 was 2.75% per annum, resulting in an effective interest rate under the Term Loan Facility of 5.96% per annum. This rate is fully hedged through the Company’s swap agreements as disclosed in Note 10.
Borrowings under the Revolving Facility bear interest at a rate per annum equal to either the Alternate Base Rate plus an applicable margin determined by reference to the leverage ratio, as set forth in the Credit Facility (“Applicable Margin”) or LIBOR plus the Applicable Margin. As of both October 3, 2008 and March 28, 2008, the Company had no outstanding borrowings under the Revolving Facility.
Our available borrowing capacity under the Revolving Facility totaled $187.6 million at October 3, 2008, which gives effect to $12.4 million of outstanding letters of credit under the letter of credit sub facility. With respect to each letter of credit, a quarterly commission in an amount equal to the face amount of such letter of credit multiplied by the Applicable Margin and a nominal fronting fee are required to be paid. The combined rate as of October 3, 2008 was 2.875%.
As of October 3, 2008, the Company also had $15.7 million of letters of credit outstanding that were not part of the Revolving Facility. These letters of credit are collateralized by $16.6 million of restricted cash, which is recorded as such in the Company’s consolidated financial statements in our 2008 Annual Report on Form 10-K filed with the SEC on June 10,balance sheet as of October 3, 2008.
The Company is required, under certain circumstances as defined in its credit agreement,the Credit Facility, to use a percentage of excess cash generated from operations to reduce the outstanding principal of the term loansTerm Loan Facility in the following year. Such payments are due at the end of the first quarter of the following fiscal year. The Company did not have any such requirements and therefore was not required to make any excess payments on the term loans during the first quarter of fiscal year 2009. The excess cash flow measurement is an annual requirement of the credit agreement and, as a result, the Company cannot estimate with certaintyafter the excess cash flow thatis generated. As of October 3, 2008, the Company cannot reasonably predict if excess cash flows will be generated, if any, for theexist at fiscal year ended April 3, 2009.end.
At July 4, 2008, availability under the revolving credit line for additional borrowings was approximately $96.5 million (which gives effect to approximately $23.5 million of outstanding letters of credit, which reduced the Company’s availability by that amount). The credit agreement requires an unused line fee equal to 0.5% per annum, payable quarterly in arrears, of the unused portion of the revolving credit facility.
We reclassified the current portion of our long-term debt at July 4, 2008 as a result of our debt refinancing which occurred onOn July 28, 2008, upon entering in to the Credit Facility, the Company’s pre-existing Senior Secured Credit Facility was extinguished. Deferred financing fees totaling $4.4 million were expensed in the current reporting period. Deferred financing fees associated with the Credit Facility totaling $5.0 million were recorded in other assets on the Company’s consolidated balance sheet.

13


9.5% Senior Subordinated Notes
In February 2005, the Company completed an offering of $320.0 million in aggregate principal amount of its 9.5% senior subordinated notes due 2013. Interest is payable semi-annually on February 15 and August 15 of each year. Proceeds from the original issuance of the senior subordinated notes, net of fees, were $310.0 million and were used to pay the consideration for, and fees and expenses relating to our 2005 formation as an independent company from Computer Science Corporation. The senior subordinated notes are general unsecured obligations of the Company’s subsidiary, DynCorp International LLC, and certain guarantor subsidiaries of DynCorp International LLC.
In July 2008, the Company completed an offering in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended, of $125.0 million in aggregate principal amount of additional 9.5% senior subordinated notes under the same indenture as the senior subordinated notes issued in February 2005. Net proceeds from the additional offering of senior subordinated notes were used to refinance the then existing Senior Secured Credit Facility, to pay related fees and expenses and for general corporate purposes. The additional senior subordinated notes mature on February 15, 2013. The additional senior subordinated notes were issued at approximately a 1.0% discount totaling $1.2 million. Deferred financing fees associated with this offering totaled $4.6 million.
Prior to February 15, 2009, the Company may redeem the senior subordinated notes, in whole or in part, at a price equal to 100% of the principal amount of the senior subordinated notes plus a defined make-whole premium, plus accrued interest to the redemption date. After February 15, 2009, the Company can redeem the senior subordinated notes, in whole or in part, at defined redemption prices, plus accrued interest to the redemption date. The holders of the senior subordinated notes may require the Company to repurchase the senior subordinated notes at defined prices in the event of certain specified triggering events, including but not limited to certain asset sales, change-of-control events, and debt covenant violations.
The fair value of the senior subordinated notes is further discussed in Note 15.based on their quoted market value. As of October 3, 2008, the quoted market value of the senior subordinated notes was 99% of stated value.
Note 6—Commitments and Contingencies
Commitments
The Company has operating leases for the use of real estate and certain property and equipment, which are either non-cancelable, 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 amounted to $13.7$10.1 million and $15.9$9.6 million for the fiscal quartersthree months ended July 4,October 3, 2008 and June 29,September 28, 2007, respectively, and $23.8 million and $25.5 million for the six months ended October 3, 2008 and September 28, 2007, respectively.
Contingencies
General Legal Matters
The Company and its subsidiaries and affiliates are involved in various lawsuits and claims that have arisen in the normal course of business. In most cases, the Company has denied, or believes it has a basis to deny any liability. Related to these matters, the Company has recorded a reserve of approximately $18.8 million.$20.5 million for pending litigation and claims. While it is not possible to predict with certainty the outcome of litigation and other matters discussed below, it is the opinion of the Company’s management that liabilities in excessrecorded reserves are sufficient to cover known matters based on information available as of those recorded, if any, arising from such matters would not have a material adverse effect on the results of operations, consolidated financial condition or liquidity of the Company over the long term.this Quarterly Report.
Pending Litigation and Claims
On May 14, 2008 a jury in the Eastern District of Virginia found against the Company in a discrimination case brought by a former subcontractor, Worldwide Network Services (“WWNS”), on two State Department contracts.contracts, in which WWNS alleged racial discrimination, tortious interference and certain other claims. The jury awarded WWNS approximately $15.7 million in compensatory and punitive damages and awarded the Company approximately $200,000 on a counterclaim. In addition to the jury award, the court awarded WWNS approximately $3.0 million in connection with certain contract claims. On September 22, 2008, WWNS was awarded approximately $1.8 million in attorneys’ fees. The Company is currently inhas filed a notice of appeal with respect to this matter. As of October 3, 2008, the process of appealingCompany believes it has adequate reserves recorded for this ruling and will continue to work with internal and external counsel in seeking an appropriate resolution.matter.

 

1014


On April 24, 2007, March 14, 2007, December 29, 2006 and December 4, 2006, 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 Providences of Esmeraldas, Sucumbíos, and Carchi in Ecuador, allege violations of Ecuadorian law, international law, and the statutes and common law of Florida, 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 the Company’s 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. The amended complaint does not demand any specific monetary damages, but, as part of their initial disclosures, the three provincial plaintiffs submitted an expert report from an economist that alleges $555,141,266 in damages. Ahowever, a court decision against the Company, although believed by the Company to be remote, could have a material adverse effect on its results of operations and financial condition. The aerial spraying operations were and continue to be managed by the Company under a Department of State (“DoS”) contract in cooperation with the Colombian government. The DoS contract provides indemnification to the Company 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 the 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 United States 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. The terms of the DoS contract provide that the DoS will indemnify DynCorp International LLC against third-party liabilities arising out of the contract, subject to available funding. The Company is 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 the Company. The Company believes 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 adverse effect on the results of operations or financial condition of the Company as a result of the third party indemnification and apportionment of damages described above.
On May 29, 2003, Gloria Longest, a former accounting manager for the Company, filed suit against DynCorp International LLC and a subsidiary of Computer Sciences Corporation under the False Claims Act and the Florida Whistleblower Statute, alleging that the defendants submitted false claims to the U.S. government under the International Narcotics & Law Enforcement Affairs contract with the DoS. The action, titled U.S. ex rel. Longest v. DynCorp and DynCorp International LLC, was filed inDepartment of Justice approved the U.S. District Court forterms of the Middle District of Florida under seal. The case was unsealed in 2005,confidential settlement between the parties and the Company learnedcourt entered an order of its existencedismissal on August 15, 2005 when it was served with the complaint. After conducting an investigationSeptember 26, 2008. The terms of the allegations made by the plaintiff, the U.S. governmentsettlement did not join the action. The complaint does not demand any specific monetary damages; however, a court ruling against the Company in this lawsuit could have a material adverse effect on its operating performance. On May 30, 2008, the parties reached an agreement in principle to resolve the litigation, and subsequently negotiated a settlement agreement and release containing mutually acceptable terms and conditions. The draft settlement agreement also requires and is pending the informal approval of the U.S. Department of Justice (“DOJ”). The Company’s contribution to the settlement is reflected in the Company’s financial statements for the fiscal year ended March 28, 2008 and is not considered by us to be material to our results of operations. On June 6, 2008, the Court entered an order staying the case for sixty days pending finalization and execution of the written settlement agreement. An extension to the stay may be required should DOJ approval not be obtained prior to expiration of the sixty day period.operations or financial condition.
U.S. Government Investigations
We also are occasionally the subject of investigations by various agencies of the U.S. government. 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.

 

1115


On January 30, 2007, the Special Inspector General for Iraq Reconstruction or SIGIR,(“SIGIR”) issued a report on one of our task orders concerning the Iraqi Police Training Program (the “Training Program”).Program. Among other items, the report raises questions about our work to establish a residential camp in Baghdad to house training personnel. Specifically, the SIGIR report recommends that DoS seek reimbursement from us of $4.2 million paid by the DoS for work that the SIGIR maintains was not contractually authorized. In addition, the SIGIR report recommends that the DoS request the DCAADefense Contract Audit Agency (“DCAA”) to review two of our invoices totaling $19.1 million. On June 28, 2007, we received a letter from the DoS contracting officer requesting our repayment of approximately $4.0 million for work performed under this task order, which the letter claims was unauthorized. We responded to the DoS contracting officer in letters dated July 7, 2007 and September 4, 2007, explaining that the work for which we were paid by DoS was appropriately performed and denying DoS’ request for repayment of approximately $4.0 million. By letter dated April 30, 2008, the DoS contracting officer responded to our July 7, 2007 and September 4, 2007 correspondence by taking exception to the explanation set forth in our letters and reasserting the DoS’ request for a refund of approximately $4.0 million. On May 8, 2008, we replied to the DoS letter dated April 30, 2008 and provided additional support for our position.
On September 17, 2008, the U.S. Department of State Office of Inspector General (“OIG”) served us with a records subpoena for the production of documents relating to our Civilian Police Program in Iraq. Among other items, the subpoena seeks documents relating to our business dealings with a former subcontractor, Corporate Bank. We are cooperating with the OIG’s investigation and, based on information currently known to management, do not believe this matter will have a material adverse effect on our operating performance.
U.S. Government Audits
Our contracts are regularly audited by the DCAA and other government agencies. These agencies review our contract performance, cost structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of, and our compliance with, our internal control systems and policies, including our purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed. In addition, government contract payments received by us for allowable direct and indirect costs are subject to adjustment after audit by government auditors and repayment to the government if the payments exceed allowable costs as defined in the government contracts.
The Defense Contract Management Agency (“DCMA”) formally notified the Company of non-compliance with Cost Accounting Standard 403, Allocation of Home Office Expenses to Segments, on April 11, 2007. The Company issued a response to the DCMA on April 26, 2007 with a proposed solution to resolve the non-compliance, which related to the allocation of corporate general and administrative costs between the Company’s divisions. On August 13, 2007, the DCMA notified the Company that additional information would be necessary to justify the proposed solution. The Company issued responses on September 17, 2007 and April 28, 2008 and the matter is pending resolution. In management’s opinion and based on facts currently known, the above describedabove-described matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.
Contract Matters
During the first fiscal quarter 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 it likely the customer will 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.

16


Note 7— Income Taxes
The provision for income taxes consists of the following:
                
 Fiscal Quarter Ended  Three Months Ended 
 July 4, June 29, 
 2008 2007 
 (Dollars in thousands) 
(Amounts in thousands) October 3,
2008
 September 28,
2007
 
Current portion:  
Federal $9,589 $5,889  $11,024 $9,256 
State 807 334  842 568 
Foreign 2,539 607  1,271 1,464 
          
 12,935 6,830  13,137 11,288 
          
Deferred portion:  
Federal  (3,496) 183   (3,874)  (3,236)
State  (117) 7   (130)  (189)
Foreign  (6) 32   (2) 32 
          
  (3,619) 222   (4,006)  (3,393)
          
Provision for income taxes $9,316 $7,052  $9,131 $7,895 
          
         
  Six Months Ended 
(Amounts in thousands) October 3,
2008
  September 28,
2007
 
Current portion:        
Federal $20,610  $15,145 
State  1,650   902 
Foreign  3,811   2,071 
       
   26,071   18,118 
       
Deferred portion:        
Federal  (7,370)  (3,052)
State  (246)  (182)
Foreign  (8)  64 
       
   (7,624)  (3,170)
       
Provision for income taxes $18,447  $14,948 
       
Deferred tax assets and liabilities are reported as:
                
 July 4, March 28, 
 2008 2008 
 (Dollars in thousands) 
(Amounts in thousands) October 3,
2008
 March 28,
2008
 
Current deferred tax assets $22,325 $17,341  $28,254 $17,341 
Non-current deferred tax assets 12,762 18,168  11,367 18,168 
          
Deferred tax assets, net $35,087 $35,509  $39,621 $35,509 
          

12


As of July 4,October 3, 2008 and March 28, 2008, we have $2.8$4.0 million and $2.7 million, respectively, of total unrecognized tax benefits. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.4 million and $1.2 million for both July 4,October 3, 2008 and March 28, 2008.2008, respectively.
It is reasonably possible that in the next 12 months the gross amount of unrecognized tax benefits will decrease by $1$1.0 million due to settlements with taxing authorities. However, the Company does not expect any material changes to its effective tax rate as a result of such settlements.
The Company recognizes interest accrued related to uncertain tax positions in interest expense and penalties in income tax expense in ourits unaudited Condensed Consolidated Statements of Income, which is consistent with the recognition of these items in prior periods. The Company has recorded a liability of approximately $0.7$0.8 million and $0.6 million for the payment of interest and penalties for the periods ending July 4,ended October 3, 2008 and March 28, 2008, respectively.
The Company and its subsidiaries file income tax returns in U.S. federal and state jurisdictions and in various foreign jurisdictions. We areThe Company currently is under audit by the Internal Revenue Service for fiscal years 2005 through 2007. In addition, the statute of limitations is open for federal and state examinations for the Company’s fiscal year 2005 forward and, with few exceptions, foreign income tax examinations for the calendar year 2004 forward.
For the fiscal quarterthree and six months ended July 4,October 3, 2008, ourthe Company’s effective tax rate was 33.3%30.0% and 31.6%, respectively, as compared to 36.5%36.1% and 36.3% for the fiscal quarterrespective three and six months ended June 29,September 28, 2007. The reduction in the effective tax rate was primarily due to the impact of Global Linguist Solutions LLC (“GLS”),GLS and DIFZ, which is aare consolidated joint ventureventures for financial reporting purposes but is anare unconsolidated entityentities for U.S. income tax purposes.

17


Note 8— Shareholders’ Equity
Shareholders’ Equity— The following table presents the changes to shareholders’ equity during the six months ended October 3, 2008:
                         
                  Accumulated    
          Additional      Other  Total 
  Common Stock  Paid-In  Retained  Comprehensive  Shareholders’ 
(Amounts in thousands) Shares  Amount  Capital  Earnings  (Loss) Income  Equity 
Balance at March 28, 2008  57,000  $570  $357,026  $73,603  $(6,914) $424,285 
                   
Comprehensive income:                        
Net income             30,851      30,851 
Interest rate swap, net of tax $2.1 million                  3,619   3,619 
Currency translation adjustment, net of tax                (439)  (439)
                     
Comprehensive income             30,851   3,180   34,031 
                     
Equity-based compensation          93         93 
Tax benefit associated with equity-based compensation          30         30 
Sale of non-controlling interest of DIFZ          8,190         8,190 
DIFZ financing, net of tax          74         74 
                   
Balance at October 3, 2008  57,000  $570  $365,413  $104,454  $(3,734) $466,703 
                   
As described in Note 1, on July 31, 2008, the Company sold 50% of its ownership interest in DIFZ for approximately $8.2 million. No gain has been recognized on the sale as of October 3, 2008, as the Company completely financed the transaction by issuing three notes receivable to the purchaser. As a result, the sale was accounted for as a capital transaction reflected in APIC. Additionally, the interest component of the three notes receivable held by the Company is also reflected in APIC, shown above as “DIFZ financing”, and will not impact the Company’s consolidated statements of income.
Common Stock Repurchase— The Board of Directors of the Company (the “Board”) has authorized the Company to repurchase up to $10.0$25.0 million of its outstanding common stock. The shares may be repurchased from time to time in open market conditions or through privately negotiated transactions at the Company’s discretion, subject to market conditions, and in accordance with applicable federal and state securities laws and regulations. Shares of common stock repurchased under this plan will be held as treasury shares. The share repurchase program does not obligate the Company to acquire any particular amount of common stock and may be modified or suspended at any time at the Company’s discretion. The purchases will be funded from available working capital. No shares have been repurchased under this program through July 4,October 3, 2008.
Shareholders’ Equity— The following table presents the changes to shareholders’ equity during the quarter ended July 4, 2008:
                         
                  Accumulated    
          Additional      Other  Total 
  Common Stock  Paid-In  Retained  Comprehensive  Shareholders’ 
  Shares  Amount  Capital  Earnings  (Loss) Income  Equity 
Balance at March 28, 2008  57,000  $570  $357,026  $73,603  $(6,914) $424,285 
                   
Comprehensive income:                        
Net income             17,980      17,980 
Interest rate cap                    
Interest rate swap                  3,583   3,583 
Currency translation adjustment                (8)  (8)
                     
Comprehensive income             17,980   3,575   21,555 
                     
Tax benefit associated with equity-based compensation          (13)        (13)
Equity-based compensation          (481)        (481)
                   
Balance at July 4, 2008  57,000  $570  $356,532  $91,583  $(3,339) $445,346 
                   
As further described in Note 9, during the first quarter of fiscal year 2009 we incurred a decline in additional paid-in capital due to the reversal of our former Chief Executive Officer’s (“CEO”) stock compensation upon the forfeiture of his Class B equity awards.

13


Note 9—Equity-Based Compensation
As of July 4,October 3, 2008, the Company had provided equity-based compensation through the grant of Class B interests in DIV Holding LLC, the majority holder of the Company’s common stock and the grant of Restricted Stock Units (“RSUs”) under the Company’s 2007 Omnibus Incentive Plan (“2007(the “2007 Plan”). All of the Company’s equity-based compensation is accounted for under SFAS No. 123(R), “Share-Based Payment”. Under this method, the Company recorded equity-based compensation expense of $1.2$1.4 million and $1.1 million for the fiscal quarterthree months ended June 29, 2007. For the fiscal quarter ended July 4,October 3, 2008 due to forfeitures as further described below, the Company recorded a net credit of $0.2and September 28, 2007, respectively, and $1.2 million and $2.3 million for equity-based compensation.the six months ended October 3, 2008 and September 28, 2007, respectively.

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Class B EquityInterests
During the first fiscal quarter ourof 2009, the Company’s former CEO, Herbert J. Lanese, was terminated without cause in accordance with the conditions of his employment agreement, which resulted in the forfeiture of thehis unvested Class B interests in DIV Holding LLC granted to him as an employee.employee of the Company. Mr. Lanese was subsequently issued additional Class B interests for his continued service on the Company’s board of directors.Board. In addition, to the impact of his Class B interests, his separation also resulted in severance liabilities of approximately $4.1 million recorded in the first fiscal quarter of 2009, which will be paid in installments over the twelve months following the date of his termination.
A summary of Class B interest activity during the firstsecond quarter of fiscal year 2009 is as follows:
                
 % Interest in Grant Date  % Interest in Grant Date 
 DIV Holding Fair Value 
(Dollar amounts in thousands) DIV Holding Fair Value 
Balance March 28, 2008
  6.24% 13,248   6.24% $13,248 
First Quarter Fiscal Year 2009 Grants  0.20% 867   0.20% 867 
First Quarter Fiscal Year 2009 Forfeitures  (1.20%)  (2,530)  (1.20%)  (2,530)
          
Balance July 4, 2008
  5.24% $11,585   5.24% $11,585 
          
Second Quarter Fiscal Year 2009 Grants  0.00%  
Second Quarter Fiscal Year 2009 Forfeitures  0.00%  
     
Balance October 3, 2008
  5.24% $11,585 
     
March 28, 2008 Vested
  2.82% $4,641   2.82% $4,641 
First Quarter Fiscal Year 2009 Vesting  0.12% 520   0.12% 520 
          
July 4, 2008 Vested
  2.94% $5,161   2.94% 5,161 
Second Quarter Fiscal Year 2009 Vesting  0.05% 73 
     
October 3, 2008 Vested
  2.99% $5,234 
          
March 28, 2008 Nonvested
  3.42% $8,607   3.42% $8,607 
July 4, 2008 Nonvested
  2.30% $6,424 
October 3, 2008 Nonvested
  2.25% $6,351 
Assuming each grant outstanding, net of estimated forfeitures, as of July 4,October 3, 2008 fully vests, the Company will recognize the related non-cash compensation expense as follows (in(amounts in thousands):
        
Nine month period ended April 3, 2009 $1,484 
Six month period ended April 3, 2009 $910 
Fiscal year ended April 2, 2010 1,102  1,102 
Fiscal year ended April 1, 2011 and thereafter 616  616 
      
Total $3,202  $2,628 
      
Restricted Stock Units
During the first quartersix months of fiscal year 2009, the Company awarded service-based and performance-based RSUs to certain key employees (“Participants”). The grants were made pursuant to the terms and conditions of the 2007 Plan and are subject to award agreements between the Company and each Participant.
The performance-based awards granted duringDuring the first quartersix months of fiscal year 2009, 186,800 performance-based RSUs were granted to certain key employees. These performance-based awards, which we are currently accruing at 100%, are tied to the Company’s financial performance, specifically fiscal year 2011 EBITDA (earnings before interest, taxes, depreciation and amortization), and cliff vest upon achievement of this target. In addition to employee grants, 22,425 service-based RSUs were granted to Board members. These awards vest within one year of grant, but include a post-vesting restriction of six months after the applicable directors’ Board service ends. The RSUs have assigned value equivalent to the Company’s common stock and may be settled in cash or shares of the Company’s common stock at the discretion of the Compensation Committee of the Board.
As of October 3, 2008, 100,000 RSUs have been awarded to our current CEO. Half of these awards are service-based and vest ratably over a three year period on the anniversary of the CEO’s employment commencement date. The remaining 50,000 RSUs are performance-based and are tied to specific performance goals for fiscal year 2009. If the performance measures are achieved for fiscal year 2009, the awards will cliff vest over a three-year service period with one third vesting each year on the anniversary of the CEO’s employment commencement date. We are currently accruing for these performance awards at 100%.

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The RSUs have been determined to be liability awards; therefore, the fair value of the RSUs are re-measured at each financial reporting date as long as they remain liability awards. The estimated fair value of all RSUs was approximately $5.6$7.4 million, net of estimated forfeitures, based on the closing market price of the Company’s stock on the grant date of each respective award, and was approximately $4.7$7.0 million, net of estimated forfeitures, based on the closing market price of the Company’s stock on JulyOctober 3, 2008 as July 4, 2008, our fiscal quarter close, was a market holiday.2008. No RSUsRSU awards have vested as of July 4,October 3, 2008.

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A summary of RSU activity during the first quarter of fiscal year 2009six months ended October 3, 2008 is as follows:
                
 Weighted  Weighted 
 Average  Average 
 Outstanding Grant  Outstanding Grant 
 Restricted Date  Restricted Date 
 Stock Units Fair Value  Stock Units Fair Value 
Outstanding, March 28, 2008 159,600 $21.49  159,600 $21.49 
Units granted 181,800 15.23  309,225 15.42 
Units cancelled  (3,000) 21.19   (7,650) 14.60 
Units vested      
          
Outstanding, July 4, 2008 338,400 $18.13 
Outstanding, October 3, 2008 461,175 $17.54 
     
Assuming each grant outstanding as of July 4,October 3, 2008, net of estimated forfeitures, fully vests (assuming 100% for performance-based awards), the Company will recognize the related equity-based compensation expense as follows based on the value of these liability awards as of July 4,October 3, 2008 (in(amounts in thousands):
        
Nine month period ended April 3, 2009 $1,387 
Six month period ended April 3, 2009 $1,477 
Fiscal year ended April 2, 2010 1,270  2,175 
Fiscal year ended April 1, 2011 and thereafter 1,182  1,739 
      
Total $3,839  $5,391 
      
Note 10—Interest Rate Derivatives
At March 28,October 3, 2008, ourthe Company’s derivative instruments consisted of threetwo interest rate swap agreements, designated as cash flow hedges, that effectively fix the interest rate on the applicable notional amounts of ourthe Company’s variable rate debt as follows (dollars(dollar amounts in thousands):
                            
 Fixed Variable   Fixed Variable   
 Notional Interest Interest Rate   Notional Interest Interest Rate   
Date Entered Amount Rate Paid* Received Expiration Date Amount Rate Paid(1) Received Expiration Date 
April 2007 $168,620   4.975% 3-month LIBOR May 2010 $168,620  4.975% 3-month LIBOR May 2010 
April 2007 $31,380   4.975% 3-month LIBOR May 2010 $31,380  4.975% 3-month LIBOR May 2010 
September 2007 $75,000   4.910% 3-month LIBOR September 2008
 
   
*(1) plusPlus applicable margin (2% at July 4,October 3, 2008).
The fair value of the interest rate swap agreements was a liability of $5.7 million at July 4,October 3, 2008, of which $2.4$3.3 million was considered short term and is expected to be reclassified into earnings within the next 12 months.long term. Unrealized net loss from the changes in fair value of the interest rate swap agreements of $3.6 million, net of tax, for the fiscal quartersix months ended July 4,October 3, 2008 is included in other comprehensive income (loss). As a result of the debt transactions disclosed in Note 15, the interest rate swap with a notional amount of $75.0 million was deemed to be ineffective as of July 4, 2008. There was no material impact on earnings due to hedge ineffectiveness for the fiscal quarterthree and six months ended July 4,October 3, 2008.

20


Note 11—Composition of Certain Financial Statement Captions
The following tables present financial information of certain consolidated balance sheet captions (dollars in thousands).captions.
Prepaid expense and other current assets —Prepaid expense and other current assets were:
                
 July 4, March 28, 
 2008 2008 
(Amounts in thousands) October 3,
2008
 March 28,
2008
 
Prepaid expenses $70,868 $43,205  $63,657 $43,205 
Inventories 8,820 8,463  9,254 8,463 
Work-in-process 42,339 45,245  38,485 45,245 
Minority interest 2,657 3,306   3,306 
Joint venture receivables 12,844 2,076 
Other current assets 8,660 8,808  8,480 6,732 
          
 $133,344 $109,027  $132,720 $109,027 
          

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Prepaid expenses include prepaid insurance, prepaid vendor deposits, and prepaid rent, none of which individually exceed 5% of current assets. As of July 4, 2008 and March 28, 2008, the minority interest resulted in a net debit balance due to the accumulated net loss in GLS.
Accrued payroll and employee costs —Accrued payroll and employee costs were:
                
 July 4, March 28, 
 2008 2008 
(Amounts in thousands) October 3,
2008
 March 28,
2008
 
Wages, compensation and other benefits $100,909 $57,940  $107,340 $57,940 
Accrued vacation 25,444 24,760  24,958 24,760 
Accrued contributions to employee benefit plans 3,123 2,486  3,007 2,486 
          
 $129,476 $85,186  $135,305 $85,186 
          
Other accrued liabilities —Accrued liabilities were:
         
(Amounts in thousands) October 3,
2008
  March 28,
2008
 
Deferred revenue $36,459  $53,083 
Accrued insurance  30,220   36,260 
Accrued interest  5,964   9,885 
Contract losses  18,966   134 
Legal matters  20,491   19,851 
Short-term swap liability  2,382   5,783 
Other notes payable  16,533   374 
Other  10,069   3,870 
       
  $141,084  $129,240 
       
Deferred revenue is primarily due to payments in excess of services provided for certain contracts in addition to payments received for services that must be deferred as a result of multiple element arrangements being recorded as a single unit of accounting.
Note 12—Fair Value of Financial Assets and Liabilities
Effective March 29, 2008, the Company adopted SFAS No. 157. In February 2008, the Financial Accounting Standards Board (“FASB”)FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. Although the adoption of SFAS No. 157 did not materially impact the Company’s financial condition, results of operations, or cash flow, the Company is required to provide additional disclosures as part of its financial statements.

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SFAS No. 157 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.
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 July 4,October 3, 2008, the Company held certain assets and had incurred certain liabilities that are required to be measured at fair value on a recurring basis. These included cash equivalents (including restricted cash) and interest rate derivatives. 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. The Company’s interest rate derivatives, as further described in Note 10, consist of interest rate swap contracts. The fair values of the interest rate swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these interest rate swap contracts as Level 2. The Company has consistently applied these valuation techniques in all periods presented.

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The Company’s assets and liabilities measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at July 4,October 3, 2008, were as follows:
                 
Fair Value Measurements at Reporting Date Using 
  Book value of  Quoted Prices in       
  financial  Active Markets  Significant Other  Significant 
  assets/(liabilities)  for Identical  Observable Inputs  Unobservable 
(amounts in thousands) as of July 4, 2008  Assets (Level 1)  (Level 2)  Inputs (Level 3) 
Assets
                
Cash equivalents $39,572  $39,572  $  $ 
             
Total assets measured at fair value $39,572  $39,572  $  $ 
             
                 
Liabilities
                
Interest rate derivatives $5,673  $  $5,673  $ 
Equity-based compensation(1)
  823,498   823,498       
             
                 
Total liabilities measured at fair value $829,171  $823,498  $5,673  $ 
             
Fair Value Measurements at Reporting Date Using
                 
  Book value of          
  financial  Quoted Prices in       
  assets/(liabilities)  Active Markets  Significant Other�� Significant 
  as of October 3,  for Identical  Observable Inputs  Unobservable 
(amounts in thousands) 2008  Assets (Level 1)  (Level 2)  Inputs (Level 3) 
Assets
                
Cash equivalents(1)
 $153,329  $153,329  $  $ 
             
Total assets measured at fair value $153,329  $153,329  $  $ 
             
                 
Liabilities
                
Interest rate derivatives $5,729  $  $5,729  $ 
             
Total liabilities measured at fair value $5,729  $  $5,729  $ 
             
   
(1) See description of RSUs accounted for as liability awards in Note 9.Includes cash and cash equivalents and restricted cash.
Note 13—Unconsolidated Joint Ventures and Related Parties
Amounts due from ourthe Company’s unconsolidated joint ventures totaled $2.8$12.8 million and $2.1 million as of July 4,October 3, 2008 and March 28, 2008, respectively. RevenueThese receivables are a result of items purchased and services rendered by the Company on behalf of the Company’s unconsolidated joint ventures. The Company has assessed these receivables as having minimal collection risk based on the historic experience with these joint ventures and the Company’s inherent influence through its ownership interest. The change in these receivables from March 28, 2008 to October 3, 2008 resulted in a use of operating cash for the six months ended October 3, 2008 of $10.7 million. The related revenue associated with ourthe Company’s unconsolidated joint ventures totaled $2.6$11.4 million and $0.2$14.1 million for the quarterthree and six months ended July 4,October 3, 2008, respectively, and June 29,$2.1 million and $2.1 million for the three and six months ended September 28, 2007, respectively.
As discussed in Note 1, the Company sold half of its previously wholly owned subsidiary, DIFZ, on July 31, 2008 to Palm Trading Investment Corp. (“Palm”). DIFZ provides leased contract employees, back office staff and outsourced payroll and human resource support services through its approximately 4,100 employees. Currently, all DIFZ revenue and costs are eliminated through the Company’s consolidation process.
As a result of the DIFZ sale, the Company currently holds three notes receivable from Palm for the purchase price which totaled $8.2 million. As of October 3, 2008, the loan balance outstanding with Palm was $8.4 million, including accrued interest of $0.2 million. As indicated in Note 8, accrued interest is recorded in APIC.

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Note 14—Segment Information
On April 1, 2008, the Company announced it would change from reporting financial results on two segments, — Government Services (“GS”)GS and Maintenance and Technical Support ServicesMTSS, to reporting three segments, beginning with the first fiscal quarter of 2009. This was accomplished by splitting GS into two distinct reporting segments.
The three segments are as follows:
International Security Services, or ISS segment, which consists of the Law Enforcement and Security, or LES, business unit, the Specialty Aviation and Counter Drug , or SACD, business unit, and Global Linguist Solutions, or GLS.
Logistics and Construction Management, or LCM segment, and is comprised of the Contingency and Logistics Operations, or CLO, business unit and the Operations, Maintenance, and Construction Management, or OMCM, business unit. This segment is also responsible for winning and performing new work on our LOGCAP IV contract.
Maintenance and Technical Support Services, or MTSS segment addedconsists of its original components in addition to DynMarine Services and DynAustralia, both of which were previously reported under Government Services.the GS segment.

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The following is a summary of the financial information of the reportable segments reconciled to the amounts reported in the condensed consolidated financial statements. All prior periods presented have been recast to reflect the new segment reporting.
                
 Fiscal Quarter Ended  Three Months Ended 
 July 4, 2008 June 29, 2007 
(Amounts in thousands) October 3, 2008 September 28, 2007 
Revenue
  
International Security Services $405,374 $288,720  $472,335 $270,847 
Logistics and Construction Management 93,462 63,128  85,466 47,623 
Maintenance and Technical Support Services 217,958 196,825  222,730 176,794 
Other/elimination  (1,380)  (155)
          
Total revenue $716,794 $548,673  $779,151 $495,109 
     
 
Operating Income
  
International Security Services $25,961 $21,067  $49,949 $32,975 
Logistics and Construction Management 6,676 4,416   (23,057)  (2,728)
Maintenance and Technical Support Services 7,357 6,175  19,741 3,700 
          
Total operating income $39,994 $31,658  $46,633 $33,947 
     
 
Depreciation and amortization
  
International Security Services $6,670 $6,563  $6,448 $7,061 
Logistics and Construction Management 779 648  682 652 
Maintenance and Technical Support Services 3,111 3,179  2,875 2,888 
          
Total depreciation and amortization $10,560 $10,390  $10,005 $10,601 
     

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  Six Months Ended 
(Amounts in thousands) October 3, 2008  September 28, 2007 
Revenue
        
International Security Services $877,709  $559,412 
Logistics and Construction Management  178,928   110,751 
Maintenance and Technical Support Services  441,607   373,619 
Other/elimination  (2,299)   
       
Total revenue $1,495,945  $1,043,782 
       
         
Operating Income
        
International Security Services $75,378  $57,134 
Logistics and Construction Management  (16,987)  (431)
Maintenance and Technical Support Services  28,236   8,904 
       
Total operating income $86,627  $65,607 
       
         
Depreciation and amortization
        
International Security Services $13,118  $13,624 
Logistics and Construction Management  1,461   1,300 
Maintenance and Technical Support Services  5,986   6,067 
       
Total depreciation and amortization $20,565  $20,991 
       
                
 As of  As of 
(Amounts in thousands) October 3, 2008 March 28, 2008 
 July 4, 2008 March 28, 2008 
Assets
  
International Security Services $849,513 $725,775  $786,316 $725,775 
Logistics and Construction Management 210,355 199,088  208,515 199,088 
Maintenance and Technical Support Services 326,643 336,721  312,192 336,721 
Other/Elimination (1) 115,948 141,125 
Corporate/other(1)
 241,694 141,125 
          
Total assets $1,502,459 $1,402,709  $1,548,717 $1,402,709 
     
   
(1) Assets primarily include cash, deferred income taxes, and deferred debt issuance cost.
Note 15—Subsequent Events
On July 14, 2008, the Company announced its intent to sell $125.0 million in aggregate principal amount of additional 9 1/2% senior subordinated notes due 2013 (the “Additional Notes”). On July 28, 2008, the Company issued the Additional Notes in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended. The Additional Notes were issued under the indenture pertaining to the existing 9.5% senior subordinated notes due 2013.
On July 28, 2008 the Company entered into a secured credit facility (the “Credit Facility”) consisting of a revolving credit facility of $200.0 million (including a letter of credit sub facility of $125.0 million) (the “Revolving Facility”) and a senior secured term loan facility of $200.0 million (the “Term Loan Facility”). The maturity date of the Revolving Facility and the Term Loan Facility is August 15, 2012. The Credit Facility is subject to various financial covenants, including a total leverage ratio, an interest coverage ratio, maximum capital expenditures and certain limitations based upon eligible accounts receivable.
On July 28, 2008, the Company borrowed $200.0 million under the Term Loan Facility at the LIBOR rate plus the applicable margin then in effect to refinance certain existing indebtedness and pay certain transaction costs relating to the Credit Facility, the offering of Additional Notes and the refinancing. No amounts were required or drawn under the Revolving Facility as of July 28, 2008.
On July 31, 2008, the Company sold 50% of its ownership interest in its subsidiary, DynCorp International Free Zone LLC, for approximately $8.2 million. No material changes to our operations are anticipated as a result of this sale.

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ITEM 2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements, and the notes thereto, and other data contained elsewhere in this Quarterly Report. The following discussion and analysis should also be read in conjunction with our audited consolidated financial statements, and notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our in our Annual Report on Form 10-K filed with the SEC on June 10, 2008. References herein to “DynCorp”“DynCorp International”, the “Company”, “we”, “our”, or “us” refer to DynCorp International Inc. and its subsidiaries unless otherwise stated or indicated by the context.
COMPANY OVERVIEW
We are a provider of specialized mission-critical professional and support services outsourced by 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, construction management, aviation services and operations, and linguist services. We also provide logistics support for all our services, including those services provided under the recently-awarded LOGCAP IV contract with the U.S. Army. Our current customers include the DoS, the U.S. Army, Air Force, Navythrough approximately 47 active contracts ranging in duration from three to ten years and Marine Corps (collectively, the Department of Defense or “DoD”); commercial customers and foreign governments.over 100 task orders. As of July 4,October 3, 2008, we had approximately 23,70023,000 employees in more thanapproximately 30 countries. DynCorp International and its predecessors have provided essential services to numerous U.S. government departments and agencies since 1951.
We operate our business through three segments: ISS; LCM; and MTTS. Each of these segments is described below.

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International Security Services
ISS provides various outsourced services primarily to government agencies worldwide. ISS consists of the following operatingstrategic business units:
Law Enforcement and Security— This operating unit provides international policing and police training, judicial support, immigration support and base operations. In addition, it provides security and personal protection for diplomats.
Specialty Aviation and Counter-drug Operations— This operating unit providesunit’s services includinginclude drug eradication and host nation pilot and crew training.
Global Linguist Solutions— This consolidated joint venture between DynCorp International and McNeil Technologies provides rapid recruitment, deployment and on-site management of interpreters and translators in-theatre to the U.S. Army for a wide range of foreign languages.
Logistics and Construction Management
LCM provides technical support services to government agencies and commercial customers worldwide. LCM consists of the following operatingstrategic business units:
Contingency and Logistics Operations— This operating unit provides peace-keeping support, humanitarian relief, de-mining, worldwide contingency planning and other rapid response services. In addition, it offers inventory procurement and tracking services, equipment maintenance, property control, data entry and mobile repair services.
Operations Maintenance and Construction Management— This operating unit provides facility and equipment maintenance and control and custodial and administrative services. In addition, it provides civil, electrical, infrastructure, environmental and mechanical engineering and construction management services.

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Maintenance & Technical Support Services
MTSS provides a wide range of technical, engineering, logistics and maintenance support services primarily to government agencies worldwide. MuchMTSS consists of our internal management is performed viewing ourthe following strategic business by Strategic Business Area (“SBA”). From a management perspective, an SBA does not represent a distinct business within MTSS but is rather an accumulation of contracts and services into a management group for accountability and reporting to segment management. For the fiscal quarter ended July 4, 2008, our SBA’s were as follows:areas:
Contract Logistics Support— Provides worldwide support of U.S. Army, Air Force and Navy fixed wing assets. Aircraft are deployed throughout the U.S., Europe, Asia, South America and the Middle East. Contract Logistics Support (“CLS”) provides flight line and depot level maintenance, consisting of scheduled and unscheduled events. Specific functions include repair, overhaul and procurement of components, procurement of consumable materials and transportation of materials to and from the operating sites. In addition, the team is responsible for obsolescence engineering, quality control, inventory management, avionics upgrades and recovery of downed aircraft.
Field Service Operations— Provides worldwide maintenance, modification, repair and logistics support on aircraft, weapons systems, and related support equipment to the DoDDepartment of Defense (“DoD”) and other U.S. government agencies. Contract Field Teams (“CFT”) is the most significant program in our Field Service Operations SBA. Our Companycompany and its predecessors have provided CFT service for over 55 consecutive years. This program deploys highly mobile, quick-response field teams to customer locations to supplement a customer’s workforce.
Aviation & Maintenance Services— Provides aircraft fleet maintenance and modification services, ground vehicle maintenance and modification services, marine services, pilot and maintenance training, logistics support, air traffic control services, base and depot operations, program management and engineering services. These services are offered on a domestic and international basis.

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CURRENT OPERATING CONDITIONS AND OUTLOOK
External Factors
Over most of the last two decades, the U.S. government has been increasing its reliance on the private sector for a wide range of professional and support services. This increased use of outsourcing by the U.S. government has been driven by a variety of factors, including: lean-government initiatives launched in the 1990s; surges in demand during times of national crisis; the increased complexity of missions conducted by the U.S. military and the DoS;Department of State (“DoS”); the increased focus of the U.S. military on war-fighting efforts; and the loss of skills within the government caused by workforce reductions and retirements. These factors lead us to believe that the U.S. government’s growing mission and continued human capital challenges have combined to create a new market dynamic, one that is less directly reflective of overall government budgets and more reflective of the ongoing shift of service delivery from the federal workforce to competent, efficient private sector providers.
The outcome of the U.S. presidential election in November 2008 could have an effect on the future DoD budget and the course of government spending on outsourcing. The DoD expects it will preside over a 2008 budget that could soon reach a record $670.0 billion depending on the outcome of recent war supplemental legislation. The DoD’s fiscal 2009 regular request is $515.4 billion, nearly a 74% increase since 2001, and there is a $70.0 billion placeholder ‘allowance’ for war costs, although the Pentagon admits that the allowance would only provide enough money for war costs until January 2009 or so. When all 2009 supplementals are approved, the 2009 DoD budget could top $700.0 billion.
We believe the following industry trends will further increaseresult in continued strong demand and enable us to more successfully compete for outsourced services in our target markets:markets for the types of outsourced services that we provide:
The continued transformation of military forces, leading to increased outsourcing of non-combat functions, including life-cycle asset management functions ranging from organizational to depot level maintenance;
An increase in the level and frequency of overseas deployments and peace-keeping operations for the DoS, DoD and United Nations;
Increased maintenance, overhaul and upgrade needs to support aging military platforms;
Increased outsourcing by foreign militaries of maintenance, supply support, facilities management and construction management-related services; and
The shift from single award to more multiple award indefinite delivery, indefinite quantity (“IDIQ”) contracts, which may offer us an opportunity to increase revenues under these contracts by competing for task orders with the other contract awardees.
The continued transformation$700 billion financial rescue plan, the possibility of militaryCongress approving a second economic stimulus package and other initiatives undertaken by the Federal government in connection with the current economic crisis will likely have an eventual impact on the defense budget. We believe, however, that within the defense budget, weapon system acquisitions will be the most likely initial target for budget reductions, and operations and maintenance budgets will remain robust, driven by (i) the need to reset equipment coming out of Iraq, (ii) the logistics and support chain associated with repositioning of forces leadingand eventual draw down in Iraq and (iii) deployments into Afghanistan.
Subject to the outcome of negotiations between the U.S. and Iraqi governments, many industry observers believe that President-elect Obama will seek to withdraw troops from Iraq, specifically the withdrawal of U.S. combat forces by December 31, 2011, if not sooner, and that he will support an expanded presence in Afghanistan of approximately 20,000 additional U.S. troops. As a result, we expect our level of business involving Iraq to be relatively stable over the next few years, with demand remaining strong for logistics, equipment reset, training and mentoring of Iraqi forces and government agencies and translation services to support security and peacekeeping activities. In Afghanistan, we believe we are well positioned to capitalize on any increased outsourcingU.S. government focus through many of non-combat functions,our service offerings, including life-cycle asset management functions ranging from organizationalpolice training and mentoring, aircraft logistics and operations, infrastructure development, mine resistant and ambush protected (“MRAP”) services, poppy eradication and logistics services under LOGCAP IV.
Current Economic Conditions
We believe that our industry and customer base are less likely to depot level maintenance;
An increasebe affected by many of the factors affecting business and consumer spending generally. Accordingly, we believe that we continue to be well positioned in the levelcurrent economic environment as a result of historic demand factors affecting our industry, the nature of our contracts and frequencyour sources of overseas deployments and peace-keepingliquidity. However, we cannot be certain that the economic environment or other factors will not adversely impact our business, financial condition or results of operations forin the DoS, DoD and United Nations;
Increased maintenance, overhaul and upgrade needs to support aging military platforms;
Increased outsourcing by foreign militaries of maintenance, supply support, facilities management and construction management-related services; and
The shift from single award to more multiple award indefinite delivery, indefinite quantity (“IDIQ”) contracts, which may offer us an opportunity to increase revenues under these contracts by competing for task orders with the other contract awardees.
future.

 

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Furthermore, we believe that our current sources of liquidity will enable us to continue to perform under our existing contracts and further grow our business. However, a longer term credit crisis could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness on acceptable terms or at all, which could adversely affect our business, financial condition and results of operations.
See “Part II — Other Information — Item 1A. Risk Factors — Current or worsening economic conditions could impact our business.”
Internal Factors
Our internal focus for success centers around five key principles:
Performance — Through a relentless mind set in meeting our commitments to our customers every day and in operating with absolute integrity and in accordance with our Code of Ethics and Business Conduct in all that we do.
Lean Infrastructure — In order to further fuel our growth and invest in our people, we must generate additional investment capacity by ensuring that our infrastructure is as efficient as possible without jeopardizing our ability to perform.
Strategic Investment — We must have clarity in our strategic priorities, and we must properly focus our investments in people, new program pursuits and efforts to penetrate new segments of the market.
New Business — Growing our business profitably starts with winning new business. This involves having a winning attitude across our enterprise, particularly in satisfying our customers and competing for business.
People — We must be the employer of choice, with strong, trusted leadership, an employee-focused environment and a culture of mutual respect in which our employees are empowered and rewarded for serving our customers and ensuring their success.
We apply these key principles continuously as we assess our operational and administrative performance.
Current Events
The results of our operations for the three and six months ended October 3, 2008 exceeded expectations across our core business areas with the exception of our Afghanistan construction contracts, within our LCM segment, which encountered cost overruns due to significant challenges in the operational environment, specifically the deteriorating security situation. Management has determined that several of our Afghanistan construction contracts will operate at a loss or at margins approaching zero over their contract terms and that we are unlikely to bid any similar contracts without revised terms and conditions.
See the Results of Operations section below for further information regarding the financial impact of our construction business on our consolidated financial results.

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CONTRACT TYPES
Our business generally is performed under fixed-price, time-and-materials or cost-reimbursement contracts. Each of these is described below.
  
Fixed-Price Type Contracts:In a fixed-price contract, the price is not subject to adjustment based on costs incurred, which can favorably or adversely impact our profitability depending upon our execution in performing the contracted service. Fixed-price types received by us include firm fixed-price, fixed-price with economic adjustment and fixed-price incentive.
  
Time-and-Materials Type Contracts:A time-and-materials type contract provides for acquiring supplies or services on the basis of direct labor hours at fixed hourly/daily rates plus materials at cost.
  
Cost-Reimbursement Type Contracts:Cost-reimbursement type contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus a fixed-fee, award-fee or incentive-fee. Award-fees or incentive-fees are generally based upon various objective and subjective criteria, such as aircraft mission capability rates and meeting cost targets.
Our historical contract mix by type, for the last two fiscal years, as a percentage of revenue, is indicated in the table below.
        
 Fiscal Quarter Ended                 
 July 4, June 29,  Three Months Ended Six Months Ended 
 2008 2007  October 3, 2008 September 28, 2007 October 3, 2008 September 28, 2007 
Fixed Price  31%  40%  28.3%  39.7%  29.8%  40.0%
Time-and-Materials  26%  35%  24.3%  35.6%  25.1%  35.4%
Cost-Reimbursement  43%  25%  47.4%  24.7%  45.1%  24.6%
              
  100%  100%  100%  100%  100%  100%
         
BACKLOG
We track backlog in order to assess our current business development effectiveness and to assist us in forecasting our future business needs and financial performance. Our backlog consists of funded and unfunded amounts under contracts. Funded backlog is equal to the amounts actually appropriated by a customer for payment of goods and services less actual revenue recognized as of the measurement date under that appropriation. Unfunded backlog is the actual dollar value of unexercised priced contract options.
Most of our U.S. government contracts allow the customer the option to extend the period of performance of a contract for a period of one or more years. These priced options may or may not be exercised at the sole discretion of the customer. Historically, it has been our experience that the customer hascustomers have typically exercised contract options.
Firm funding for our contracts is usually made for one year at a time, with the remainder of the contract period consisting of a series of one-year options. As is the case with the base period of our U.S. government contracts, option periods are subject to the availability of funding for contract performance. The U.S. government is legally prohibited from ordering work under a contract in the absence of funding. Our historical experience has been that the government has typically funded the option periods of our contracts.
The following table sets forth our approximate contracted backlog as of the dates indicated:
                
(in millions) July 4, 2008 March 28, 2008  October 3, 2008 March 28, 2008 
Funded Backlog $936 $1,164  $1,330 $1,164 
Unfunded Backlog 5,619 4,797  5,161 4,797 
          
Total Backlog $6,555 $5,961  $6,491 $5,961 
          
Total backlog as of July 4,October 3, 2008 was $6.6$6.5 billion, as compared to $6.0 billion as of March 28, 2008, primarily due to the award of the War Reserve Materiel re-competerecompete during the quarter.first quarter of the fiscal year. As of July 4,October 3, 2008 and March 28, 2008, total backlog related to GLS was $3.4$3.2 billion and $3.5 billion, respectively, and is incorporated in the table above.

 

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ESTIMATED REMAINING CONTRACT VALUE
Our estimated remaining contract value represents total backlog plus management’s estimate of future revenue under IDIQ contracts for task or delivery orders that have not been awarded. Future revenue represents management’s estimate of revenue that will be recognized from future task or delivery orders through the end of the term and is based on our experience under such IDIQ contracts and management judgments and estimates as to future performance. Although we believe our estimates are reasonable, there can be no assurance that our existing contracts will result in actual revenue in any particular period or at all. Our estimated remaining contract value could vary or even change significantly depending upon various factors, including government policies, government budgets and appropriations, the accuracy of our estimates of work to be performed under time and material contracts and whether we successfully compete with any multiple bidders in IDIQ contracts. As of July 4, 2008 and March 28, 2008, ourThe Company’s estimated remaining contract value was $8.1as of October 3, 2008 increased to $10.1 billion andfrom $7.5 billion respectively.as of March 28, 2008, primarily due to the successful recompete of the Contract Field Teams contract.
RESULTS OF OPERATIONS — Fiscal Quarter Ended July 4, 2008 and June 29, 2007
The Company reports its results on a 52/53-week fiscal quarteryear, with the fiscal year ending on the Friday closest to March 31 of such year (April 3, 2009 for fiscal year 2009, which is a 53-week fiscal year). The six-month fiscal period ended July 4,October 3, 2008 was a 14-week27-week period from March 29, 2008 to July 4,October 3, 2008. The six-month fiscal quarterperiod ended June 29,September 28, 2007 was a 13-week26-week period from March 31, 2007 to June 29,September 28, 2007.
Consolidated
The following tables set forth, for the periods indicated, our consolidated results of operations, both in dollars and as a percentage of revenues:
                                
 Fiscal Quarter Ended  Three Months Ended 
(Dollars in thousands) July 4, 2008 June 29, 2007 
(Amounts in thousands) October 3, 2008 September 28, 2007 
 
Revenue $716,794  100.0% $548,673  100.0% $779,151  100.0% $495,109  100.0%
Cost of services  (638,389)  (89.1%)  (480,089)  (87.5%)  (696,519)  -89.4%  (425,633)  -86.0%
Selling, general and administrative expenses  (27,851)  (3.9%)  (26,536)  (4.8%)  (25,994)  -3.3%  (24,928)  -5.0%
Depreciation and amortization expense  (10,560)  (1.5%)  (10,390)  (1.9%)  (10,005)  -1.3%  (10,601)  -2.1%
                  
Operating income 39,994  5.6% 31,658  5.8% 46,633  6.0% 33,947  6.9%
Interest expense  (14,215)  (2.0%)  (14,489)  (2.6%)  (14,905)  -1.9%  (13,705)  -2.8%
Loss on early extinguishment of debt  (4,443)  -0.6%   0.0%
Earnings from affiliates 1,117  0.2% 891  0.2% 1,523  0.2% 1,176  0.2%
Interest income 344  0.0% 1,250  0.2% 677  0.1% 430  0.1%
Other income, net 705  0.1%   0.0% 960  0.1%   0.0%
                  
Income before taxes 27,945  3.9% 19,310  3.5% 30,445  3.9% 21,848  4.4%
Provision for income taxes  (9,316)  (1.3%)  (7,052)  (1.3%)  (9,131)  -1.2%  (7,895)  -1.6%
                  
Income before minority interest  18,629  2.6% 12,258  2.2% 21,314  2.7% 13,953  2.8%
 
Minority interest  (649)  (0.1%)   0.0%  (8,443)  -1.1%   0.0%
                  
Net income $17,980  2.5% $12,258  2.2% $12,871  1.7% $13,953  2.8%
                  

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  Six Months Ended 
(Amounts in thousands) October 3, 2008  September 28, 2007 
                 
Revenue $1,495,945   100.0% $1,043,782   100.0%
Cost of services  (1,334,908)  -89.2%  (905,721)  -86.8%
Selling, general and administrative expenses  (53,845)  -3.6%  (51,463)  -4.9%
Depreciation and amortization expense  (20,565)  -1.4%  (20,991)  -2.0%
             
Operating income  86,627   5.8%  65,607   6.3%
Interest expense  (29,120)  -1.9%  (28,195)  -2.7%
Loss on early extinguishment of debt  (4,443)  -0.3%     0.0%
Earnings from affiliates  2,640   0.2%  2,067   0.2%
Interest income  1,021   0.1%  1,680   0.2%
Other income, net  1,665   0.1%     0.0%
             
Income before taxes  58,390   3.9%  41,159   3.9%
Provision for income taxes  (18,447)  -1.2%  (14,948)  -1.4%
             
Income before minority interest  39,943   2.7%  26,211   2.5%
                 
Minority interest  (9,092)  -0.6%     0.0%
             
Net income $30,851   2.1% $26,211   2.5%
             
Revenues —Revenues for the fiscal quarterthree and six months ended July 4,October 3, 2008 increased by $168.1$284.0 million, or 30.6%57.4%, and $452.2 million, or 43.3%, respectively, as compared with the fiscal quarterthree and six months ended June 29,September 28, 2007. The increase, as more fully described in the results by segment, is primarily due to growth from new contracts such as the Intelligence and Security Command (“INSCOM”) contract during the first fiscal quarter.contract.
Cost of services —CostsCost of services are comprised of direct labor, direct material, subcontractor costs, other direct costs and overhead. Other direct costs include travel, supplies and other miscellaneous costs. Costs of services for the fiscal quarterthree and six months ended July 4,October 3, 2008 increased by $158.3$270.9 million, or 33.0%63.6% and $429.2 million, or 47.4%, respectively compared with the fiscal quarterthree and six months ended June 29,September 28, 2007 and was primarily a result of revenue growth. As a percentage of revenue, costs of services increased to 89.1%89.4% and 89.2%, respectively, for the fiscal quarterthree and six months ended July 4,October 3, 2008 from 87.5%as compared to 86.0% and 86.8%, respectively, for the fiscal quarterthree and six months ended June 29,September 28, 2007, primarily as a result of unrecognized award fees in ISS and MTSS and a shift from fixed price to cost reimbursable typeoverruns by our Afghanistan construction contracts as compared to the same period in the prior fiscal year.further described below.
Selling, general and administrative expenses (“SG&A”) —SG&A primarily relates to functions such as management, legal, financialfinance, accounting, contracts and administration, human resources, management information systems, purchasing and business development. SG&A was impacted byfor the three and six months ended October 3, 2008 increased $1.1 million, or 4.3%, and $2.4 million, or 4.6%, respectively, compared with the three and six months ended September 28, 2007. SG&A increased as a result of growth in our underlying business, various initiatives to improve organizational capability and compliance, systems improvements and severance costs.costs, offset in part by implementing lean infrastructure initiatives which controlled SG&A forgrowth relative to revenue growth during the fiscal quartersix months ended July 4, 2008 increased $1.3 million, or 5.0%, compared with the fiscal quarter ended June 29, 2007.October 3, 2008. SG&A as a percentage of revenue decreased to 3.9%3.3% and 3.6% for the fiscal quarterthree and six months ended July 4,October 3, 2008, respectively, compared to 4.8%5.0% and 4.9% for the fiscal quarterrespective three and six month periods ended June 29, 2007 and was a result primarily of expense controls implemented during the fiscal quarter offset by severance cost related to our former CEO.September 28, 2007.

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Depreciation and amortization —Depreciation and amortization for the fiscal quarterthree and six months ended July 4,October 3, 2008 increased $0.2decreased $0.6 million, or 1.6%5.6%, and $0.4 million, or 2.0%, respectively, as compared with the fiscal quarterthree and six months ended June 29,September 28, 2007. The increasedecrease was primarily attributed to increased propertya decrease in amortization related to intangibles becoming fully amortized during the first six months of fiscal year 2009. The decline in depreciation and equipment balances driven by the Company’samortization expense as a percentage of revenue was a result of revenue growth as compared to the comparative period in the prior fiscal year.contracts that are non-Company owned asset intensive.
Interest expense —Interest expense for the fiscal quarterthree and six months ended July 4,October 3, 2008 decreasedincreased by $0.3$1.2 million, or 1.9%8.8%, and $0.9 million, or 3.3%, respectively, as compared with the fiscal quarterthree and six months ended June 29,September 28, 2007. The interest expense incurred relates to our credit facility,Credit Facility, senior subordinated notes and amortization of deferred financing fees. The decreaseincrease in interest expense is primarily due to a lowerhigher average outstanding debt balance.balance and higher average interest rates as a result of our new debt financing. In addition to the change in interest expense, deferred financing fees associated with our prior debt were also written-off as further discussed in Note 5. The impact of this write-off is separately disclosed in our consolidated statements of income.

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Income tax expense- Our effective tax rate of 33.3%30.0% and 31.6% for the fiscal quarterthree and six months ended July 4,October 3, 2008, respectively, decreased from 36.5%36.1% and 36.3% for the fiscal quarterrespective three and six months ended June 29,September 28, 2007. Our effective tax rate was impacted by the tax treatment of our GLS and DIFZ joint ventureventures which isare not consolidated for tax purposes but is insteadrather are taxed as a partnershippartnerships under the Internal Revenue Code.
Minority Interest— Minority interest reflects the impact of our joint venture partners’ interest in our consolidated joint ventures, GLS and DIFZ. For the three and six months ended October 3, 2008, minority interest for GLS was $7.8 million and $8.5 million, respectively. Minority interest for DIFZ was $0.6 million for both the three and six months ended October 3, 2008.
Impact of our Afghanistan Construction Contracts
For the three and six months ended October 3, 2008, revenue from our Afghanistan construction contracts was $21.7 million and $44.4 million, respectively. There was no revenue from Afghanistan construction contracts for the three and six months ended September 28, 2007. Our expected remaining revenue through completion of these contracts in our third quarter of fiscal year 2010 is approximately $142.4 million.
As discussed in “Current Operating Conditions and Outlook — Current Events” above, our construction business encountered operational difficulties during the second quarter of fiscal year 2009 which resulted in higher delivery costs and contractual milestone delays. As a result, a contract loss reserve and associated provision, specific to a large construction project in Afghanistan, was estimated and recorded during the quarter which totaled $18.4 million. Additionally, revisions were made to the estimated margins on all other Afghanistan construction contracts within the OMCM strategic business unit resulting in an additional reduction to gross profit of $6.1 million. These contracts are expected to operate with margins at or approaching zero over their remaining contract terms.
The contract loss provision and revisions to estimated margins are based on the best information currently available. However, although we believe that these amounts have been estimated appropriately, there can be no assurance that future events will not require us to revise these estimates.
Results by Segment
The following table sets forth the revenues and operating income for our ISS, LCM and MTSS operating segments, both in dollars and as a percentage of our consolidated revenues for segment revenue and as a percentage of our consolidated operating income for segment specific operating income, for the fiscal quarterthree and six months ended July 4,October 3, 2008 as compared to the fiscal quarterthree and six months ended June 29,September 28, 2007.
                 
  For the Fiscal Quarter Ended 
(Dollars in thousands) July 4, 2008  June 29, 2007 
Revenues
                
International Security Services $405,374   56.6% $288,720   52.6%
Logistics and Construction Management  93,462   13.0%  63,128   11.5%
Maintenance and Technical Support Services  217,958   30.4%  196,825   35.9%
             
 
Consolidated $716,794   100.0% $548,673   100.0%
             
Operating Income
                
International Security Services $25,961   64.9% $21,067   66.6%
Logistics and Construction Management  6,676   16.7%  4,416   13.9%
Maintenance and Technical Support Services  7,357   18.4%  6,175   19.5%
             
 
Consolidated $39,994   100.0% $31,658   100.0%
             
Three Months Ended October 3, 2008 Compared to Three Months Ended September 28, 2007
                 
  Three Months Ended 
(Amounts in thousands) October 3, 2008  September 28, 2007 
                 
Revenues
                
International Security Services $472,335   60.6% $270,847   54.7%
Logistics and Construction Management  85,466   11.0%  47,623   9.6%
Maintenance and Technical Support Services  222,730   28.6%  176,794   35.7%
Other/elimination  (1,380)  -0.2%  (155)  0.0%
             
Consolidated $779,151   100.0% $495,109   100.0%
             
Operating Income & Margin
                
International Security Services $49,949   6.4% $32,975   6.7%
Logistics and Construction Management  (23,057)  -3.0%  (2,728)  -0.6%
Maintenance and Technical Support Services  19,741   2.5%  3,700   0.7%
             
Consolidated $46,633   6.0% $33,947   6.9%
             

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International Security Services
Revenue —Revenue for the three months ended October 3, 2008 increased $201.5 million, or 74.4%, as compared with the three months ended September 28, 2007. The increase primarily resulted from the following:
Law Enforcement and Security: Revenue increased $5.9 million, or 3.4%, primarily due to increases in our security services in Iraq, Palestine, Liberia, and Qatar, offset by a decline in security services in Afghanistan. Revenue from our civilian police services in Iraq increased $5.1 million, which was offset by a decline in civilian police services in Afghanistan of $7.4 million. The increase in Iraq was due to increased personnel levels during the quarter while the decline in Afghanistan was due to revenue recognized in the prior year associated with our construction of a camp facility, which was completed in August 2007. As a result of new contracts started in early fiscal year 2009, we provided civilian police and security services in Palestine and Haiti, which contributed $4.8 million and $0.7 million, respectively, in increased revenue for the period. Our worldwide personal protective services and our security guard services in Qatar also increased which accounted for $2.2 million and $0.7 million in increased revenue, respectively.
Specialty Aviation and Counter-drug Operations: Revenue decreased $6.3 million, or 6.4%, primarily due to a decline in our International Narcotics Law Enforcement programs resulting from scope reductions, offset by new contracts associated with security and drug eradication training in Afghanistan.
Global Linguist Solutions: Revenue was $201.3 million for the INSCOM contract through our GLS joint venture, which began in the fourth quarter of fiscal year 2008. Revenue benefited from the recognition of the GLS award fee of $14.4 million, which represents the award earned or accrued since the contract’s inception. The award fee is based on achieving specific contract performance criteria, such as operational fill rates. The second quarter of fiscal year 2009 is the first period in which we had sufficient basis to recognize the award fee for GLS. Based on our contract performance history to date, we anticipate the ability to accrue award fees through the remaining life of the contract.
Operating Income —Operating income for the three months ended October 3, 2008 increased $17.0 million, or 51.5%, as compared with the three months ended September 28, 2007. The increase primarily resulted from the following:
Law Enforcement and Security: Operating income decreased $12.4 million, or 29.3%, due to declining margins, primarily in our Civilian Police services. This margin decline resulted from a shift in our contracts for these services from fixed price type contracts in the prior fiscal year to cost reimbursable type contracts in the current fiscal year.
Specialty Aviation and Counter-drug Operations: Operating income increased $6.2 million, or 176.2%, primarily due to higher margins on several new security and drug eradication training contracts in Afghanistan, offset by lower revenue for the fiscal quarter.
Global Linguist Solutions: Operating income was $17.2 million for GLS for the three months ended October 3, 2008. Operating income benefited from the accrual of the GLS award fee of $14.4 million, which represents the award earned or accrued since the contract’s inception. The award fee is based on achieving specific contract performance criteria, such as operational fill rates. The second fiscal quarter of fiscal year 2009 is the first period in which we had sufficient basis to recognize the award fee for GLS.
General SG&A Factors: SG&A expense declined for the three months ended October 3, 2008, as compared to the three months ended September 28, 2007. The decline in SG&A expense in the current period as compared to the prior period, is a result of prior period proposal costs associated with the INSCOM contract combined with improved SG&A cost management during the current period. This SG&A decline contributed positively to operating income growth for the fiscal quarter.

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Logistics and Construction Management
Revenue —Revenues for the three months ended October 3, 2008 increased $37.8 million, or 79.5%, as compared with the three months ended September 28, 2007. The increase primarily resulted from the following:
Contingency and Logistics Operations: Revenue increased by $21.8 million, or 94.3%, primarily due to support services performed in response to the severe flooding in Iowa which occurred during the summer of 2008. These services contributed $10.8 million of the increase in revenue. Our operations and peacekeeping services in Africa and the Philippines also contributed by adding $2.9 million and $6.1 million of increased revenue, respectively. Revenue was also positively impacted through an increase in our weapons removal and abatement program which increased $1.1 million.
Operations Maintenance and Construction Management: Revenue increased $15.5 million, or 63.1%, primarily due to our construction projects in Afghanistan, partially offset by the termination of a construction project in Africa. As discussed above in “—Results of Operations—Consolidated—Impact of our Afghanistan Construction Contracts,” due to significant challenges on several Afghanistan construction contracts resulting partly from the deteriorating security situation in that country, we have made a strategic decision to not bid any similar fixed-price contracts without revised terms and condition. This strategic decision is expected to impact future revenue in this segment by limiting the construction opportunities available to us.
Operating Income —Operating income for the three months ended October 3, 2008 decreased $20.3 million as compared with the three months ended September 28, 2007. The decrease primarily resulted from the following:
Contingency and Logistics Operations: Operating income increased by $1.2 million, or 64.0%, for the three months ended October 3, 2008, as compared to the three months ended September 28, 2007. The increase was driven by revenue growth in our logistics support service and operations and peacekeeping services, offset by higher costs in the current quarter related to the ramp-up of our new LOGCAP IV contract, which was awarded in early fiscal year 2009. Currently, LOGCAP IV does not contribute significantly to revenue but incurs costs associated with contract set-up and other overhead costs. Additionally, several programs which contributed positively to revenue growth in the quarter did not contribute to operating income since we have not yet recognized award fees. We anticipate an increase in operating income associated with these projects once we have completed portions of the projects and recognize award fees as revenue in accordance with our policies.
Operations Maintenance and Construction Management: Operating income decreased by $21.6 million to an operating loss of $23.7 million, as compared to an operating loss of $2.1 million for the three months ended September 28, 2007. As discussed above in “—Results of Operations—Consolidated—Impact of our Afghanistan Construction Contracts,” the operating loss in the current period was the result of a contract loss provision associated with a specific construction project in Afghanistan and adjustment to our estimated margins on several other Afghanistan construction projects.
Maintenance & Technical Support Services
Revenue —Revenue for the three months ended October 3, 2008 increased $45.9 million, or 26.0%, as compared with the three months ended September 28, 2007. The increase primarily resulted from the following:
Contract Logistics Support: Revenue increased $12.5 million, or 28.2%, primarily due to higher deliveries of engines and other support equipment associated with our C-21 and Life Cycle Contractor Support (“LCCS”) programs. We expect additional revenue growth for the remainder of the fiscal year due to scope increases from the U.S. government for spending related to the global war on terror.
Field Service Operations: Revenue increased $10.7 million, or 13.6%, primarily due to a new contract for logistics services at Fort Campbell which started in May 2008 and additional revenue from higher personnel levels in our CFT program.
Aviation & Maintenance Services: Revenue increased $21.6 million, or 39.7%, primarily due to increased work associated with MRAP vehicles and increased revenue associated with our General Maintenance Corps contract. These increases were offset by a decline in our marine services and a decrease in threat management systems work.

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Operating Income —Operating income for the three months ended October 3, 2008 increased $16.0 million, to $19.7 million, as compared to $3.7 million for the three months ended September 28, 2007. The increase primarily resulted from the following:
Contract Logistics Support: Operating income for the three months ended October 3, 2008 increased by $3.6 million, to $2.4 million for the three months ended October 3, 2008, as compared to an operating loss of $1.1 million for the three months ended September 28, 2007. The positive results were primarily due to improved project management in several key programs.
Field Service Operations: Operating income increased $2.2 million, or 45.8%, for the three months ended October 3, 2008, as compared to the three months ended September 28, 2007, driven primarily by increased revenue.
Aviation & Maintenance Services: Operating income increased $11.4 million, or 358.2%, for the three months ended October 3, 2008, as compared to the three months ended September 28, 2007, primarily due to increased revenue in key high-margin service areas such as our MRAP program.
Six Months Ended October 3, 2008 Compared to Six Months Ended September 28, 2007
                 
  Six Months Ended 
(Amounts in thousands) October 3, 2008  September 28, 2007 
                 
Revenues
                
International Security Services $877,709   58.7% $559,412   53.6%
Logistics and Construction Management  178,928   12.0%  110,751   10.6%
Maintenance and Technical Support Services  441,607   29.5%  373,619   35.8%
Other/elimination  (2,299)  -0.2%     0.0%
             
Consolidated $1,495,945   100.0% $1,043,782   100.0%
             
Operating Income & Margin
                
International Security Services $75,378   5.0% $57,134   5.5%
Logistics and Construction Management  (16,987)  -1.1%  (431)  -0.1%
Maintenance and Technical Support Services  28,236   1.9%  8,904   0.9%
             
Consolidated $86,627   5.8% $65,607   6.3%
             
International Security Services
RevenuesRevenueRevenue for the fiscal quartersix months ended July 4,October 3, 2008 increased $116.7$318.3 million, or 40.4%56.9%, as compared with the fiscal quartersix months ended June 29,September 28, 2007. The increase primarily resulted from the following:
Law Enforcement and Security: Revenue decreased $10.1$4.3 million, or 5.5%1.2%, primarily due to decreases in our securitiessecurity services in Afghanistan and Iraq offset by increases in Palestine, Liberia and Qatar. Revenue from our civilian police services in Afghanistan and Iraq decreased $8.5$15.9 million and $13.9$8.9 million, respectively. The decline in Afghanistan was due to revenue recognized in the prior year associated with our construction of a camp facility, which was completed in August 2007. In Iraq, revenues wererevenue was lower due to the transition of our operations from leased facilities to customer furnished facilities in May 2007. Both of these projects resulted in significant non-recurring billable costs in the first six months of fiscal year 2008. We also experienced a decline of $1.2$0.8 million in our personal protective services due to changedeclines in personnel levels. ThroughThese declines were offset by new contracts started in early fiscal year 2009, through which we providedprovide civilian police and security services in Palestine, Liberia and Haiti during the first quarter whichHaiti. These contracts contributed $8.7$13.5 million, $2.0$2.2 million and $0.9$1.6 million, respectively, in increased revenue for the period. Our worldwide personal protective services and our security guard services in Qatar also increased, which accounted for $1.9$1.0 million and $2.6 million in increased revenue.revenue, respectively.

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Specialty Aviation and Counter-drug Operations: Revenue increased $9.9$3.5 million, or 9.8%1.8%, primarily due to new contracts associated with security and drug eradication training in Afghanistan.Afghanistan, offset by a decline in our International Narcotics Law Enforcement programs due to program scope reductions.

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Global Linguist Solutions: Revenue was $118.4$319.7 million for the INSCOM contract, which we perform through our GLS joint ventureventure. Revenue benefited from the recognition of the GLS award fee of $14.4 million, which beganrepresents the award earned or accrued since the contract’s inception. The award fee is based on achieving specific contract performance criteria, such as operational fill rates. The second quarter of fiscal year 2009 is the first period in ourwhich we had sufficient basis to recognize the award fee for GLS. Revenue for the first six months of fiscal 2008 fourth quarter. We are anticipatingyear 2009 may not be indicative of revenue for the remaining six months of fiscal year 2009 due to continue to increase throughout the contract ramp-up period which occurred primarily in the first three months of fiscal year as new task orders continue to be issued under this contract.2009.
Operating Income —Operating income for the fiscal quartersix months ended July 4,October 3, 2008 increased $4.9$18.2 million, or 23.2%31.9%, as compared with the fiscal quartersix months ended June 29,September 28, 2007. The increase primarily resulted from the following:
Law Enforcement and Security: Operating income decreased $5.1$17.6 million, or 17.4%24.4%, for the fiscal quarter ended July 4, 2008, as compared to the fiscal quarter ended June 29, 2007, primarily due to decreased revenuedeclining margins in our civilian police services. This margin decline resulted from our services combined with reduced overall margins driven by a shift in our civilian police contracts for these services from primarily fixed price type contracts in the prior period to cost reimbursable type contracts.contracts in the current period.
Specialty Aviation and Counter-drug Operations: Operating income increased $3.9$10.1 million, or 60.1%101.1%, for the fiscal quarter ended July 4, 2008, as compared to the fiscal quarter ended June 29, 2007, primarily due to increased revenue in addition to higher margins on several new security and drug eradication training contracts in Afghanistan.
Global Linguist Solutions: Operating income was $1.8$19.0 million for GLS in our first fiscal 2009 quarter which represented a $2.4 million increasefor the six months ended October 3, 2008. Operating income benefited from the accrual of the GLS award fee of $14.4 million, which represents the award earned or accrued since the contract’s inception. The award fee is based on achieving specific contract performance criteria, such as operational fill rates. The second fiscal quarter ended June 29, 2007. We expect an increaseof fiscal year 2009 is the first period in which we had sufficient basis to recognize the award fee for GLS. Operating income for the first six months of fiscal year 2009 may not be indicative of operating income from award feesfor the remaining six months of fiscal year 2009 due to the contract ramp-up period which we anticipate we will earnoccurred primarily in the future.first three months of fiscal year 2009.
General SG&A Factors: We incurred an increase of $3.7 million in operating incomeSG&A expense declined for the fiscal quartersix months ended July 4,October 3, 2008, as compared to the fiscal quartersix months ended June 29, 2007, due to declinesSeptember 28, 2007. The decline in SG&A expenses. The declines were primarilyexpense in the current period as compared to the prior period, is principally a result of higherprior period proposal costs in the prior year associated with the INSCOM contract.contract combined with improved SG&A cost management during the current period. This SG&A decline contributed positively to operating income growth for the fiscal quarter.
Logistics and Construction Management
RevenuesRevenueRevenues for the fiscal quartersix months ended July 4,October 3, 2008 increased $30.3$68.2 million, or 48.1%61.6%, as compared with the fiscal quartersix months ended June 29,September 28, 2007. The increase primarily resulted from the following:
Contingency and Logistics Operations: Revenue increased by $1.2$22.9 million, or 4.2%45.5%, for the fiscal quartersix months ended July 4,October 3, 2008, as compared to the fiscal quartersix months ended June 29, 2007,September 28, 2007. This increase was primarily due to the expansion of operations and peacekeeping services offered in new regions such asAfrica and the Philippines which increased $2.6 million and Somalia.$14.3 million, respectively. Our growth in Africa was primarily driven by our Africa Peacekeeping program which declined in the first quarter of fiscal year 2009 but had significant growth in the second quarter of the fiscal year 2009 due to a successful contract recompete. Support services performed in response to the severe flooding which occurred in Iowa during the summer of 2008 also contributed to the increase, adding $10.8 million in additional revenue as compared to the prior period. These increases were offset by a decline in our Cecom/CRS Response programs due to a decline in current work levels in these programs.
Operations Maintenance and Construction Management: Revenue increased $29.0$44.5 million, or 80.9%73.7%, for the fiscal quartersix months ended July 4,October 3, 2008, as compared to the fiscal quartersix months ended June 29,September 28, 2007, primarily due to the ramp-up in variousour construction projects in regions including Africa and Afghanistan. We continueAs discussed above in “—Results of Operations—Consolidated—Impact of our Afghanistan Construction Contracts,” due to strategically focussignificant challenges on ourseveral Afghanistan construction services by capitalizingcontracts resulting partly from the deteriorating security situation in that country, we have made a strategic decision to not bid on our construction expertiseany similar fixed-price contracts without revised terms and our global resources in these regions. Continued growthcondition. This strategic decision is expected to impact future revenue in ourthis segment by limiting the construction services through the pursuit of new contracts and the ramp-up of projects in their early stages as of the first fiscal quarter.opportunities available to us.

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Operating IncomesIncomeOperating income decreased $16.6 million, to an operating loss of $17.0 million, for the fiscal quartersix months ended July 4,October 3, 2008, increased $2.3 million, or 51.2%, as compared withto the fiscal quartersix months ended June 29,September 28, 2007. The increasedecrease primarily resulted from the following:
Contingency and Logistics Operations: Operating income decreased by $1.7$0.5 million, or 63.8%11.6%, for the fiscal quartersix months ended July 4,October 3, 2008, as compared to the six months ended September 28, 2007. We experienced higher costs in the current period related to the ramp-up of our new LOGCAP IV contract which was awarded in early fiscal quarter ended June 29, 2007. Althoughyear 2009. Currently, LOGCAP IV does not contribute significantly to revenue increased in this SBU, the increase was in zero margin projects. Contracts that contributebut incurs costs associated with contract set-up and other overhead costs. Additionally, several programs which contributed positively to revenue growth in the quarter did not contribute to operating margin experienced a net decline in revenue during the fiscal quarter thus resulting inincome since we have not yet recognized award fees. We anticipate an overall declineincrease in operating income. It is anticipated that the zero marginincome associated with these projects will contribute positively in the future once we have sufficient basis tocompleted portions of the projects and recognize revenue associated with award fees connected to these contractsas revenue in accordance with our policy.policies.
Operations Maintenance and Construction Management: Operating income increased by $3.4loss was $17.7 million or 131.1%, for the fiscal quartersix months ended July 4,October 3, 2008, as compared to operating income of $0.5 million for the fiscal quartersix months ended June 29, 2007, due to higher revenueSeptember 28, 2007. As discussed above in “—Results of Operations—Consolidated—Impact of our Afghanistan Construction Contracts,” the operating loss in the current period was the result of a contract loss provision associated with a specific construction project in Afghanistan and adjustment to our estimated margins on several fixed priceother Afghanistan construction projects.

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Maintenance & Technical Support Services
RevenuesRevenueRevenuesRevenue for the fiscal quartersix months ended July 4,October 3, 2008 increased $21.1$68.0 million, or 10.7%18.2%, as compared with the fiscal quartersix months ended June 29,September 28, 2007. The increase primarily resulted from the following:
Contract Logistics Support: Revenue increased $4.3$16.8 million, or 7.7%16.7%, for the fiscal quarter ended July 4, 2008, as compared to the fiscal quarter ended June 29, 2007, primarily due to higher deliveries of engines and other support equipment than in the comparable prior year fiscal quarter associated with our Life Cycle Contractor Support (“LCCS”)C-21 and LCCS programs. We expect additional revenue growth for the remainder of the fiscal year due to scope increases from the U.S. government for spending related to the global war on terror.
Field Service Operations: Revenue increased $4.3$15.0 million, or 4.8%8.9%, for the fiscal quartersix months ended July 4,October 3, 2008, as compared to the fiscal quartersix months ended June 29,September 28, 2007, primarily due to a new contract for logistics services at Fort Campbell which started in May 2008.2008 and additional revenue from higher personnel levels in our CFT program.
Aviation & Maintenance Services: Revenue increased $13.2$34.8 million, or 26.3%33.3%, for the fiscal quartersix months ended July 4,October 3, 2008, as compared to the fiscal quartersix months ended June 29,September 28, 2007, primarily due to increased work associated with mine resistant and ambush protected (“MRAP”)MRAP vehicles and increased revenue associated with our General Maintenance Corps contract. TheThese increases were offset by a declinedeclines in our marine services, Columbus Air Force Base support services and a decrease in our threat management systems work.
Operating Income —Operating income for the fiscal quartersix months ended July 4,October 3, 2008 increased $1.2$19.3 million, or 19.1%,to $28.2 million, as compared withto $8.9 million for the fiscal quartersix months ended June 29,September 28, 2007. The increase primarily resulted from the following:
Contract Logistics Support: Operating income for the fiscal quartersix months ended July 4,October 3, 2008 increased $0.2by $3.8 million, fromto $2.5 million as compared to a $0.2 million operating$1.3 loss infor the fiscal quartersix months ended June 29,September 28, 2007. The improved results were primarily due to an increase in revenue and better costimproved project management in several key programs.
Field Service Operations: Operating income decreased $0.1increased $2.1 million, or 1.9%18.4%, for the fiscal quartersix months ended July 4,October 3, 2008, as compared to the fiscal quartersix months ended June 29,September 28, 2007, primarily due to higher cost of services in our contract field teams services offset by slightly higher revenues overall.increased revenue.
Aviation & Maintenance Services: Operating income increased $3.9$15.3 million, or 120.0%238.6%, for the fiscal quartersix months ended July 4,October 3, 2008, as compared to the fiscal quartersix months ended June 29,September 28, 2007, primarily due to increased revenue and improved margins in key high-margin service areas such as our MRAP program.

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General SG&A Factors: We incurred a decrease of $2.8 million for the fiscal quarter ended July 4, 2008, as compared to the fiscal quarter ended June 29, 2007, in operating income due to segment specific SG&A costs associated with business development and compliance costs in addition to SG&A cost increases on several fixed price contracts that outpaced revenue growth. Additionally, a portion of the segment’s revenue growth was from zero margin contract components which did not contribute to the segment’s operating income.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by operations and borrowings available under our credit facilityRevolving Facility are our primary sources of short-term liquidity. Based on our current level of operations, we believe our cash flow from operations and our available borrowings under our credit facilityRevolving Facility will be adequate to meet our liquidity needs for the foreseeable future. While we have taken action to enhance our liquidity through our new Credit Facility and Additional Notes as described in Note 15,However, we cannot be assuredassure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our credit facilityRevolving Facility in an amount sufficient to enable us to repay our indebtedness including the senior subordinated notes, or to fund our other liquidity needs.

25


Cash Flow Analysis
         
  Fiscal Quarter Ended 
(Dollars in thousands) July 4, 2008  June 29, 2007 
Net Cash provided by (used in) operating activities $(71,131) $3,563 
Net Cash used in investing activities  (1,451)  (1,173)
Net Cash provided by (used in) financing activities  20,703   (36,053)
The following table sets forth cash flow data for the periods indicated.
         
  Six Months Ended 
(Amounts in thousands) October 3, 2008  September 28, 2007 
Net Cash provided by operating activities $37,953  $49,910 
Net Cash used in investing activities  (19,718)  (3,220)
Net Cash provided by (used in) financing activities  29,165   (39,083)
Cash used inprovided by operating activities for the fiscal quartersix months ended July 4,October 3, 2008 was $71.1$38.0 million, as compared to $3.6$49.9 million of cash provided infor the fiscal quartersix months ended June 29,September 28, 2007. Our strong operating cash usage was due primarily to increases in working capital primarily due toflow for the ramp-up of the INSCOM contract. Accounts receivable, the largest component of our working capital increase, was $652.3 million as of July 4, 2008, up from $513.3 million as of March 28, 2008, of which approximately half of the increaseperiod was the result of revenue growth with the remaining increase resultinghigher cash generated from operations offset by a reduction in cash from an increase in Days Sales Outstanding (“DSO”). DSO increasedour net working capital. Cash generated from operations benefited from our strong operational performance combined with seasonal payment cycles associated with our largest customers’ fiscal calendar. The change in net working capital was primarily due to 82increases in accounts payable and accrued liabilities and an increase in accounts receivable. Net of revenue growth, our accounts receivable actually declined due to improved collection efforts implemented during the six months ended October 3, 2008. As a result of these efforts, days as of July 4, 2008sales outstanding, a key metric utilized by management to monitor collection efforts on accounts receivable, decreased from 73 days as of March 28, 2008. The increase in DSO was primarily due2008 to the timing63 days as of collections from the Department of State.October 3, 2008.
Cash used in investing activities was $1.5$19.7 million for the fiscal quartersix months ended July 4,October 3, 2008 as compared to $1.2cash used in investing activities of $3.2 million for the fiscal quartersix months ended June 29,September 28, 2007. TheThis use of cash usedfrom investing activities was the result primarily for computer software upgrades and property and equipment additions.of changes in our cash restricted as collateral on letters of credit.
Cash provided by financing activities was $20.7$29.2 million for the fiscal quartersix months ended July 4,October 3, 2008, as compared to cash used of $36.1$39.1 million for the fiscal quartersix months ended June 29,September 28, 2007. The cash provided by financing activities during the fiscal quarter ended July 4, 2008 isperiod was primarily due tofrom our new financing arrangements discussed below and borrowings under our financed insurance contractscontracts. Cash used in financing activities for the six months ended September 28, 2007 was due primarily to repayments of $22.3 million offset by payments on long-term debt of $1.5 million.borrowings under our term loans.
Financing
As of July 4, 2008, no balance was outstanding under our revolving credit facility and $299.6 million was outstanding under the term loan portion of our credit facility. Our available borrowing capacity under the revolving credit facility totaled $96.5 million at July 4, 2008, which gives effect to $23.5 million of outstanding letters of credit. The weighted-average interest rate at July 4, 2008 for our borrowings under the credit facility was 6.9%.
We are required, under certain circumstances as defined in our credit agreement, to use a percentage of excess cash generated from operations to reduce the outstanding principal of the term loans in the following year. Such payments are due at the end of the first quarter of the following fiscal year. We did not have any such requirements and therefore were not required to make any excess payments on the term loans during the first quarter of fiscal 2009. The excess cash flow measurement is an annual requirement of the credit agreement and, as a result, we cannot estimate with certainty the excess cash flow that will be generated, if any, for the fiscal year ended April 3, 2009.
As of July 4, 2008, $292.0 million of principal was outstanding under our senior subordinated notes. Our senior subordinated notes mature February 2013. Interest accrues on our senior subordinated notes and is payable semi-annually.
We have entered into interest rate swap agreements to hedge our exposure to interest rate increases related to our credit facility. These agreements are more fully described in Note 10 to our condensed consolidated financial statements, included in this Quarterly Report.
On July 28, 2008, we entered into a secured credit facility (the “Credit Facility”) consistingthe Credit Facility which consists of a revolving credit facility of $200$200.0 million (including a letter of credit sub facility of $125$125.0 million) (the “Revolving Facility”) and a senior secured term loan facility of $200$200.0 million (the “Term Loan Facility”). The maturityOn that date, of the Revolving Facility and the Term Loan Facility is August 15, 2012. We alsowe borrowed $200$200.0 million under the Term Loan Facility at the LIBOR rate plus the applicable margin then in effect to refinance certain existing indebtedness and pay certain transaction costs relating to the Credit Facility and the offering of Additional Notes,additional senior subordinated notes, discussed below,below. The maturity date of the Revolving Facility and the refinancing. No amounts were required or drawnTerm Loan Facility is August 15, 2012.
As of October 3, 2008, no balance was outstanding under the Revolving Facility, asand $200.0 million was outstanding under the Term Loan Facility. Our available borrowing capacity under the Revolving Facility totaled $187.6 million at October 3, 2008, which gives effect to $12.4 million of July 28, 2008. The Credit Facility is subjectoutstanding letters of credit. We have entered into interest rate swap agreements to various financial covenants, includinghedge our exposure to interest rate increases on a total leverage ratio, an interest coverage ratio, maximum capital expenditures and certain limitations based upon eligible accounts receivable.notional principal amount of $200.0 million.

 

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On July 28, 2008, we issued $125an additional $125.0 million in aggregate principal amount of 9.5% senior subordinated notes due 2013 (the “Additional Notes”) in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended. The Additional NotesThese notes were issued under the indenture pertaining to our existing 9.5% senior subordinated notes due 2013.
While our new Credit Facility and Additional Notes will provide us additional liquidity through incremental debt capacity, we anticipate that as As of October 3, 2008, $415.8 million of principal amount of senior subordinated notes was outstanding, net of a result of our new financing we will incur additional costs associated with$1.2 million unamortized discount. Our senior subordinated notes mature during February 2013. Interest on the write-off of deferred financing costs and additional interest costs associated with more debt availability combined with higher interest rates.senior subordinated notes is payable semi-annually.
Debt Covenants and Other Matters
Our credit facility in place as of July 4, 2008 containedThe Credit Facility contains various financial covenants, including minimum levels of earnings beforea total leverage ratio, an interest taxes, depreciation and amortization (“EBITDA”), minimum interest and fixed charge coverage ratios, and maximumratio, limitations on capital expenditures and total leverage ratio. Non-financialcertain limitations based upon eligible accounts receivable. The Credit Facility and the indenture pertaining to the senior subordinated notes also contain covenants that restrict the ability of the Company and its subsidiaries to, among other things, dispose of assets; incur additional indebtedness; prepay other indebtedness or amend certain debt instruments; pay dividends; create liens on assets; enter into sale and leaseback transactions; make investments, loans or advances; issue certain equity instruments; make acquisitions; engage in mergers or consolidations or engage in certain transactions with affiliates; and otherwise restrict certain corporate activities. We had no areas of noncomplianceaffiliates.
At October 3, 2008, we were in compliance with our variousthe financial and non-financial covenants at July 4, 2008.contained in the Credit Facility and the indenture pertaining to the senior subordinated notes.
OFF BALANCE SHEET ARRANGEMENTS
The Company’sOur off-balance sheet arrangements relate to operating lease obligations and letters of credit, which are excluded from the balance sheet in accordance with GAAP. The Company’sOur letters of credit and lease obligations are described in Notes 5 and 6, respectively, in the notes to our consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements and related footnotes contained within this Quarterly Report. Our more critical accounting policies used in the preparation of the consolidated financial statements were discussed in our 2008 Annual Report on Form 10-K for the fiscal year ended March 28, 2008, filed with the SEC on June 10, 2008. There have been no material changes to our critical accounting policies and estimates from the information provided in our Annual Report on Form 10-K for the fiscal year ended March 28, 2008.
The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions to determine certain of the assets, liabilities, revenues and expenses. These estimates and assumptions are based upon what we believe is the best information available at the time of the estimates or assumptions. The estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from those estimates.
Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed consolidated financial statements provide a meaningful and fair perspective of our consolidated financial condition and results of operations.
ACCOUNTING DEVELOPMENTS
We have presented the information about accounting pronouncements not yet implemented in Note 1 to our condensed consolidated financial statements included in this Quarterly Report.

 

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Disclosure Regarding Forward-Looking InformationDISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements, written, oral or otherwise made, represent the Company’s expectation or belief concerning future events. 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, estimated remaining contract values and estimated total contract values are other examples of forward looking statements. The Company cautionsForward-looking statements involve risks and uncertainties. We caution that these statements are further qualified by important economic, competitive, governmental and technological factors that could cause our business, strategy 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: our substantial level of indebtedness; government policies and the outcome of political elections;next Presidential administration; termination of key U.S. government contracts; changes in the demand for services that the Company provides;we provide; pursuit of new commercial business and foreign government opportunities; activities of competitors; bid protests; changes in significant operating expenses; changes in availability of capital; general economic and business conditions in the U.S.; acts of war or terrorist activities; variations in performance of financial markets; the inherent difficulties of estimating future contract revenues; anticipated revenues from indefinite delivery, indefinite quantity contracts; expected percentages of future revenues represented by fixed-price and time-and-materials contracts; and statements covering our business strategy, those described in “Risk Factors” and other risks detailed from time to time in the Company’sour reports filed with the SEC. 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. The Company assumesWe assume no obligation to update the forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information provided in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2008, filed with the SEC on June 10, 2008.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 of the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are: (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There have been no changes in our internal controls over financial reporting that have occurred during the fiscal quarter ended July 4,October 3, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL MATTERS
Information related to various commitments and contingencies is described in Note 6 to the condensed consolidated financial statements.

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ITEM 1A. RISK FACTORS
There have been no material changes in risk factors from those described in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended March 28, 2008, filed with the SEC on June 10, 2008.2008, except as follows:

28

Current or worsening economic conditions could impact our business.


Over the last several months, there has been a significant deterioration in the U.S. and global economy, which many economic observers expect to worsen and be prolonged. In addition, liquidity has contracted significantly and borrowing rates have increased. We believe that our industry and customer base are less likely to be affected by many of the factors affecting business and consumer spending generally. Accordingly, we believe that we continue to be well positioned in the current economic environment as a result of historic demand factors affecting our industry, the nature of our contracts and our sources of liquidity. However, we cannot assure you that the economic environment or other factors will not adversely impact our business, financial condition or results of operations in the future. In particular, if the Federal government, due to budgetary considerations, accelerates the expected reduction in combat troops from Iraq, fails to implement expected troop increases in Afghanistan, otherwise reduces the DoD Operations and Maintenance budget or reduces funding for DoS initiatives in which we participate, our business, financial condition and results of operations could be adversely affected.
Furthermore, although we believe that our current sources of liquidity will enable us to continue to perform under our existing contracts and further grow our business, we cannot assure you that will be the case. A longer term credit crisis could adversely affect our ability to obtain additional liquidity or refinance existing indebtedness on acceptable terms or at all, which could adversely affect our business, financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.At our annual meeting of shareholders held on July 15, 2008 (the “Annual Meeting”), the shareholders elected William L. Ballhaus, Michael J. Bayer, Charles S. Ream, and Peter J. Schoomaker to our Board, each to serve a three-year term. The following table shows the vote tabulation for the shares represented at the meeting:
             
Nominee Votes For  Votes Withheld  Broker Non-Votes 
William L. Ballhaus  55,304,699   536,997    
Michael J. Bayer  55,345,200   496,496    
Charles S. Ream  55,392,374   449,322    
Peter J. Schoomaker  55,363,521   478,175    
The terms of office of the following directors continued through and after the meeting:
General Richard E. Hawley (USAF Ret.)
Herbert J. Lanese
General Barry R. McCaffrey (USA Ret.)
Ramzi M. Musallam
Robert B. McKeon
Admiral Joseph W. Prueher (USN Ret.)
Mark H. Ronald
Admiral Leighton W. Smith, Jr. (USN Ret.)
William G. Tobin
Our shareholders also ratified the Audit Committee’s decision at the Annual Meeting to retain Deloitte and Touche LLP as the Company’s independent auditors for the 2009 fiscal year. The vote was 55,828,104 in favor, 9,871 against, and 3,721 abstaining.

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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed as part of, or incorporated by reference into, the Quarterly Report on Form 10-Q.
     
Exhibit  
Number Description
 10.13.1* Supplemental Indenture, dated as
Amendment No. 8 to the Amended and Restated Limited Liability Company Operating Agreement of July 14, 2008, among DynCorp InternationalDIV Holding LLC DIV Capital Corporation, the Guarantors named therein and The Bank of New York Mellon.
 31.1* 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 31.2* 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 32.1* 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 32.2* 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
 DYNCORP INTERNATIONAL INC.
Date: AugustNovember 12, 2008
 
 
 /s/ MICHAEL J. THORNE   
 Name:  Michael J. Thorne  
 Title:  Senior Vice President and Chief Financial Officer  

 

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