Toggle SGML Header (+)


Section 1: S-1/A (FIRST AMENDMENT TO FORM S-1)

Document


Registration No. 333-228388

As filed with the Securities and Exchange Commission on December 21, 2018

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Perspecta Inc.
(Exact name of registrant as specified in its charter)
Nevada
 
7374
 
82-3141520
(State or other jurisdiction of incorporation or organization)
 
(Primary Standard Industrial Classification Code Number)
 
(I.R.S. Employer
Identification Number)
15052 Conference Center Drive
Chantilly, VA 20151
(571) 313-6000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
William G. Luebke
Perspecta Inc.
15052 Conference Center Drive
Chantilly, VA 20151
(571) 313-6000
 
Copies to:
 
A. Peter Harwich
Latham & Watkins LLP
885 Third Avenue
New York, NY 10022-4834
(212) 906-1899
(Name, address, including zip code, and telephone number, including area code, of agent for service)
From time to time after the effective date of this registration statement.
(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o




If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    o                Accelerated filer            o
Non-accelerated filer    x                Smaller reporting company    o
                            Emerging growth company    o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o




The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED DECEMBER 21, 2018

PROSPECTUS

23,273,341 Shares
396192076_logoprspa03.jpg
Perspecta Inc.
Common Stock

This prospectus relates solely to the offer and sale from time to time of up to 23,273,341 shares of Perspecta Inc. common stock, $0.01 par value per share, by the selling stockholders identified in this prospectus. See “Principal and Selling Stockholders.” The registration of the shares of common stock to which this prospectus relates does not require the selling stockholders to sell any of their shares of our common stock nor does it require us to issue any shares of common stock.

We will not receive any proceeds from the sale of the shares by the selling stockholders, but we have agreed to pay certain registration expenses, other than commissions or discounts of underwriters, broker-dealers, or agents. The selling stockholders from time to time may offer and sell the shares held by them directly or through underwriters, agents or broker-dealers on terms to be determined at the time of sale, as described in more detail in this prospectus. For more information, see “Plan of Distribution.”

Our common stock is listed on the New York Stock Exchange (“NYSE”), under the symbol “PRSP.” On December 20, 2018, the closing sales price of our common stock as reported on the NYSE was $17.98 per share.

Because all of the shares of our common stock offered under this prospectus are being offered by the selling stockholders, we cannot currently determine the price or prices at which our shares may be sold under this prospectus.

Investing in our common stock involves risks. Before making a decision to invest in our common stock, you should carefully consider the matters described under “Risk Factors” beginning on page 3 of this prospectus.

Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                 , 2018.

This prospectus is part of a registration statement that we have filed with the SEC using a “shelf” registration process. Under this shelf registration process, the selling stockholders may, from time to time, offer and sell the shares described in this prospectus in one or more offerings.





This prospectus provides you with a general description of the shares the selling stockholders may offer. Each time the selling stockholders sell our shares using this prospectus, to the extent necessary, we will provide a prospectus supplement that will contain specific information about the terms of that offering, including the number of shares being offered, the manner of distribution, the identity of any underwriters or other counterparties and other specific terms related to the offering. The prospectus supplement may also add, update or change information contained in this prospectus. To the extent that any statement made in an accompanying prospectus supplement is inconsistent with statements made in this prospectus, the statements made in this prospectus will be deemed modified or superseded by those made in the accompanying prospectus supplement. You should read both this prospectus and any prospectus supplement together.

Neither we nor the selling stockholders have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. Neither we nor the selling stockholders take any responsibility for, nor can provide assurance as to the reliability of, any other information that others may give you. Neither we nor the selling stockholders have authorized any other person to provide you with different or additional information, and neither of us are making an offer to sell the shares in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of the prospectus or any sale of the ordinary shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

For investors outside of the United States, neither we nor the selling stockholders have done anything that would permit the offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to the offering and the distribution of this prospectus outside of the United States.





TABLE OF CONTENTS
 
Page No.
Prospectus Summary
The Offering
Risk Factors
Cautionary Note Regarding Forward-looking Statements
Use of Proceeds
Price and Holders of our Common Stock
Unaudited Pro Forma Condensed Combined Financial Information
Principal and Selling Stockholders
Description of our Capital Stock
Material U.S. Federal Income Tax Consequences to Non-U.S. Holders
Certain Relationships and Related Party Transactions
Plan of Distribution
Legal Matters
Experts
Incorporation of Certain Information by Reference
Where You Can Find More Information
Index to Vencore Holding Corp. and KGS Holding Corp. Combined Financial Statements







PROSPECTUS SUMMARY

This summary highlights information contained elsewhere, or incorporated by reference, in this prospectus. It does not contain all of the information that you should consider before deciding to purchase shares of our common stock. You should carefully read this entire prospectus, including the “Risk Factors” section, the “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018 (the “2018 10-K”), “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2018 10-K, in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 (the “First Quarter 10-Q”), in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 (the “Second Quarter 10-Q,” and, together with the First Quarter 10-Q, the “2018 10-Qs”) and in our Current Report on Form 8-K filed on November 14, 2018, each incorporated by reference herein, as well as our historical financial statements, the notes to those financial statements and certain unaudited pro forma condensed combined financial information appearing elsewhere in this prospectus or incorporated by reference into this prospectus, before making an investment decision to purchase shares of our common stock.

Unless otherwise indicated or the context otherwise requires, “Perspecta,” “we,” “our” and “us” refer to Perspecta Inc. and its combined subsidiaries, including Ultra Second VMS LLC (“Ultra Second”), KGS Holding Corp. (“KGS HC”) and their respective subsidiaries, after giving effect to the Spin-Off and the Mergers (as defined below) for periods following the consummation of the Spin-Off and the Mergers.

Introduction

On May 31, 2018, Perspecta became an independent company through the consummation of the spin-off (the “Spin-Off”) of the United States (“U.S.”) Public Sector business (“USPS”) of DXC Technology Company (together with its consolidated subsidiaries other than, for all periods following the Spin-Off, Perspecta, “DXC”). Following the Spin-Off and pursuant to an Agreement and Plan of Merger dated October 11, 2017 (the “Merger Agreement”), on May 31, 2018, Perspecta completed the combination of USPS with Vencore Holding Corp. (“Vencore HC”) and KGS HC through the following transactions:

Ultra KMS Inc., a wholly owned subsidiary of Perspecta, merged with and into KGS HC (the “KeyPoint Merger”), with KGS HC surviving the KeyPoint Merger;
concurrently with the KeyPoint Merger, Ultra First VMS Inc., another wholly owned subsidiary of Perspecta prior to the Mergers, merged with and into Vencore HC (the “First Vencore Merger”), with Vencore HC surviving the first Vencore Merger; and
immediately after the KeyPoint Merger and First Vencore Merger, Vencore HC merged with and into Ultra Second, another wholly owned subsidiary of Perspecta prior to the Mergers (the “Second Vencore Merger” and, together with the KeyPoint Merger and the First Vencore Merger, the “Mergers”), with Ultra Second surviving the Second Vencore Merger.

As a result of these transactions, the businesses owned by Vencore HC and KGS HC became wholly owned by Perspecta.
In this prospectus, unless otherwise noted or the context otherwise requires:

“KeyPoint Merger Sub” refers to Ultra KMS Inc., a wholly owned subsidiary of Perspecta prior to the Mergers;
“KeyPoint Stockholder” refers to KGS Holding LLC, the sole stockholder of KGS HC prior to the Mergers;
“USPS” refers to the U.S. Public Sector business of DXC and its combined subsidiaries after giving retroactive effect to Internal Reorganization;
“Perspecta”, “we”, “our” and “us” refers to Perspecta Inc. and its combined subsidiaries, including Ultra Second, KGS HC and their respective subsidiaries, after giving effect to the Spin-Off and the Mergers for periods following the consummation of the Spin-Off and the Mergers;
“Vencore Merger Corp.” refers to Ultra First VMS Inc., a wholly owned subsidiary of Perspecta prior to the Mergers;
“Ultra Second” refers to Ultra Second VMS LLC, a wholly owned subsidiary of Perspecta;

1



“Vencore Stockholder” refers to The SI Organization Holdings LLC, the sole stockholder of Vencore HC prior to the Mergers;
“Veritas Capital Management” refers to Veritas Capital Fund Management, L.L.C.; and
“Veritas Capital” refers to The Veritas Capital Fund III, L.P., The Veritas Capital Fund IV, L.P. and their affiliates, including Veritas Capital Management.

Our Business

Perspecta delivers information technology (“IT”), mission, and operations-related services across the U.S. federal government to the Department of Defense (“DoD”), the intelligence community, and homeland security, civilian and health care agencies, as well as to certain state and local government agencies through two reportable segments: (1) Defense and Intelligence and (2) Civilian and Health Care.

We are a leading provider of end-to-end enterprise IT services to government customers across U.S. federal, state and local markets. Using our market-leading enterprise offerings and solutions, we help our government customers implement modern collaborative workplaces, hybrid cloud platforms and integrated digital systems of engagement with their enterprise management systems. By delivering these modern enterprise solutions, often while ensuring interoperability with mission critical legacy systems, we believe we have helped our government customers better realize the benefits of technology, which will ultimately enable them to fulfill their mission objectives and achieve desired business outcomes.

Our Corporate Information
    
Perspecta was incorporated as a Nevada corporation on October 10, 2017. Our principal executive offices are located at 15052 Conference Center Drive, Chantilly, VA 20151, our telephone number is (571) 313-6000 and our principal website address is www.perspecta.com. As of November 1, 2018, we have approximately 14,482 employees with approximately 70% of our employees having a public trust and/or Secret security clearance, and approximately 21% of our employees having Top Secret and/or Sensitive Compartmented Information level clearance, the latter of which typically requires the completion of a polygraph. No information available on or through our website shall be deemed to be incorporated in this prospectus or the registration statement of which it forms a part.


2



THE OFFERING

Issuer
Perspecta Inc.
Selling stockholders
Veritas Capital Management. See “Principal and Selling Stockholders.”
Common stock offered for resale by the selling stockholders
Up to 23,273,341 shares
Common stock outstanding immediately following this offering
163,984,227 sharesa
Use of proceeds
We will not receive any proceeds from the sale of our common stock by the selling stockholders pursuant to this prospectus. See “Use of Proceeds” and “Principal and Selling Stockholders.”
Dividend policy
On June 1, 2018, our Board of Directors authorized and declared a regular quarterly cash dividend of $0.05 per share on Perspecta’s common stock. The first quarterly dividend was paid on July 17, 2018 to Perspecta stockholders of record at the close of business on June 11, 2018. On August 14 , 2018, our Board of Directors authorized and declared a regular quarterly cash dividend of $0.05 per share on Perspecta’s common stock. The second quarterly dividend was paid on October 16, 2018 to Perspecta stockholders of record at the close of business on September 5, 2018. On November 14, 2018, our Board of Directors authorized and declared a quarterly cash dividend of $0.05 per share on Perspecta’s common stock. The third quarterly dividend will be paid on January 15, 2019 to the Perspecta stockholders of record at the close of business on December 5, 2018. We currently anticipate continuing to pay quarterly cash dividends on our common stock. See also “Risk Factors-Risks Relating to Our Common Stock and Capital Structure–We may not pay dividends on our common stock and our indebtedness may limit our ability to pay dividends on our common stock” in the 2018 10-K.
Listing
Our common stock is listed on the New York Stock Exchange under the symbol “PRSP.”
Risk factors
See “Risk Factors” and other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our common stock.
 
 
(a) Based on shares outstanding as of December 19, 2018
 

RISK FACTORS

You should carefully consider the matters discussed under “Risk Factors” in our 2018 10-K, incorporated by reference herein, as well as other risk factors described under “Risk Factors” in any prospectus supplement, together with all of the other information included or incorporated by reference in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. The risks and uncertainties described or incorporated by reference in this prospectus are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occur, our business, financial condition and results of operations may be adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. The risks discussed or incorporated by reference in this prospectus also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” in this prospectus.


3



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements and assumptions contained in this prospectus and in the documents incorporated by reference that do not directly and exclusively relate to historical facts could be deemed “forward-looking statements.” Forward-looking statements are often identified by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “may,” “could,” “should,” “forecast,” “goal,” “intends,” “objective,” “plans,” “projects,” “strategy,” “target” and “will” and similar words and terms or variations of such. These statements represent current expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved.

Forward-looking statements include, among other things, statements with respect to our financial condition, results of operations, cash flows, business strategies, prospects, operating efficiencies or synergies, competitive position, growth opportunities, plans and objectives of management and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control. Important factors that could cause actual results to differ materially from those described in forward-looking statements include, but are not limited to:
any issue that compromises our relationships with the U.S. federal government, or any state or local governments, or damages our professional reputation;
changes in the U.S. federal, state and local governments’ spending and mission priorities that shift expenditures away from agencies or programs that we support;
any delay in completion of the U.S. federal government’s budget process;
failure to comply with numerous laws, regulations and rules, including regarding procurement, anti-bribery and organizational conflicts of interest;
failure by us or our employees to obtain and maintain necessary security clearances or certifications;
our ability to compete effectively in the competitive bidding process and delays, contract terminations or cancellations caused by competitors’ protests of major contract awards received by us;
our ability to accurately estimate or otherwise recover expenses, time and resources for our contracts;
problems or delays in the development, delivery and transition of new products and services or the enhancement of existing products and services to meet customer needs and respond to emerging technological trends;
failure of third parties to deliver on commitments under contracts with us;
misconduct or other improper activities from our employees or subcontractors;
delays, terminations or cancellations of our major contract awards, including as a result of our competitors protesting such awards;
failure of our internal control over financial reporting to detect fraud or other issues;
failure to be awarded task orders under our indefinite delivery, indefinite quantity contracts;
changes in government procurement, contract or other practices or the adoption by the government of new laws, rules and regulations in a manner adverse to us; and
the other factors described in “Risk Factors” in this prospectus and in the 2018 10-K.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 10-K, the 2018 10-Qs and in our Current Report on Form 8-K filed with the SEC on November 14, 2018. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

No assurance can be given that any goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events, except as required by law.

USE OF PROCEEDS

We are registering these shares of common stock for resale by the selling stockholders. We will not receive any proceeds from the sale of the shares offered by this prospectus. The net proceeds from the sale of the shares offered by this prospectus will be received by the selling stockholders.

4




PRICE AND HOLDERS OF OUR COMMON STOCK

Our common stock has been “regular-way” trading on the NYSE under the symbol “PRSP” since June 1, 2018, following the completion of the Spin-Off and Mergers. Prior to June 1, 2018, there was no public market for our common stock. Our common stock was traded on a “when-issued” basis starting on May 24, 2018.

On December 20, 2018, the closing price as reported on the NYSE of our shares was $17.98 per share. As of December 18, 2018, we had 43,423 holders of record of our shares.

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information of Perspecta include the unaudited pro forma condensed combined statement of operations for the six months ended September 30, 2018 after giving effect to the Spin-Off and Mergers as described below. The unaudited pro forma condensed combined statement of operations for the six months ended September 30, 2018 give effect to the Spin-Off and the Mergers as if they occurred on April 1, 2017. We derived these unaudited pro forma condensed combined financial statements from, and you should read them in conjunction with, the audited and unaudited consolidated financial statements, and the related notes to those statements included in, and incorporated by reference into, this prospectus.

USPS historically reported its results based on a fiscal year basis that ended on March 31. All references to the unaudited pro forma condensed combined statement of operations for the six months ended September 30, 2018 include (i) the combined results of Historical Vencore HC and KGS HC for the period from April 1, 2018 to May 31, 2018, (ii) the legacy USPS activity for the period from April 1, 2018 to May 31, 2018 (presented with historical Perspecta) and (iii) Perspecta, including entities acquired in the Mergers, from June 1, 2018 to September 30, 2018.

The historical financial data for Vencore includes the combined results of Vencore HC and KGS HC. The historical results of operations of Vencore for the period from April 1, 2018 to May 31, 2018 was derived from the combined ledgers of these companies for the months of April and May 2018. The historical combined financial statements of USPS have been “carved-out” from the combined and consolidated financial statements of DXC, and reflect assumptions and allocations made by DXC related to purchase price allocation adjustments associated with the strategic combination of Computer Sciences Corporation and the Enterprise Services business of Hewlett Packard Enterprise Company to form DXC on April 1, 2017. These adjustments for the period from April 1, 2018 to May 31, 2018 are reflected in the results of operations of Perspecta for the six months ended September 30, 2018.

USPS’s historical combined financial statements include DXC assets and liabilities that were specifically identifiable or otherwise attributable to USPS, including subsidiaries and affiliates in which DXC had a controlling financial interest or was the primary beneficiary. USPS’s historical combined financial statements include all revenues and costs directly attributable to USPS and an allocation of expenses related to certain DXC corporate functions. The results of operations in the USPS historical combined financial statements do not necessarily include all expenses that would have been incurred by USPS had it been a separate, stand-alone entity. Actual costs that may have been incurred if USPS had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as IT and infrastructure. Consequently, USPS’s historical combined financial statements do not necessarily reflect what USPS’s financial condition and results of operations would have been had USPS operated as a stand-alone company during the periods or as of the dates presented.

The unaudited pro forma condensed combined financial statements have been prepared in accordance with Article 11 of Regulation S-X. The historical financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (i) directly attributable to the Spin-Off and the Mergers, (ii) factually supportable, and (iii) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the consolidated results of operations of Perspecta.

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting with USPS considered the accounting acquirer of Vencore. Under the acquisition method of accounting, the

5



purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values, with any excess purchase price allocated to goodwill.

The adjustments included in the unaudited pro forma condensed combined financial statements are based upon currently available information and assumptions that management of Perspecta believes to be reasonable. These adjustments and related assumptions are described in the accompanying notes presented on the following pages.

The unaudited pro forma condensed combined financial statements are for informational purposes only and are not intended to represent or to be indicative of the actual results of operations or financial position that the combined company would have reported had the Spin-Off and the Mergers been completed as of the dates set forth in the unaudited pro forma condensed combined financial statements, and should not be taken as being indicative of the combined company’s future consolidated results of operations or financial position. The actual results may differ significantly from those reflected in the unaudited pro forma financial statements for a number of reasons, including differences between the assumptions used to prepare the unaudited pro forma financial statements and actual amounts.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2018
 
 
Six Months Ended September 30, 2018
 
Period from April 1 to May 31, 2018
 
Six Months Ended September 30, 2018
(in millions)
 
Historical Perspecta(a)
 
Historical Vencore HC and KGS HC
 
Effect of Spin-Off
 
Effect of Mergers
 
Pro Forma Combined
Revenues
 
$
1,861

 
$
245

 
$

 
$

 
$
2,106

 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Costs of services
 
1,410

 
195

 

 
(10
)
A
1,595

Selling, general and administrative
 
150

 
20

 

 
(2
)
B
168

Depreciation and amortization
 
138

 
5

 

 
14

C
157

Restructuring costs
 
2

 
1

 

 

 
3

Separation, transaction and integration-related costs
 
65

 
40

 
(26
)
D
(79
)
D

Interest expense
 
47

 
39

 
9

E
(24
)
E
71

Other income, net
 
(28
)
 

 

 

 
(28
)
Total costs and expenses
 
1,784

 
300

 
(17
)
 
(101
)
 
1,966

 
 
 
 
 
 
 
 
 
 
 
Income (loss) before taxes
 
77

 
(55
)
 
17

 
101

 
140

Income tax expense
 
24

 
2

 
4

F
29

F
59

Net income (loss)
 
$
53

 
$
(57
)
 
$
13

 
$
72

 
$
81

 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
 
$
0.49

Diluted
 
 
 
 
 
 
 
 
 
$
0.49

 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares:
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
G
165.71

Diluted
 
 
 
 
 
 
 
 
G
165.71

 
 
 
 
 
 
 
 
 
 
 
(a) This includes legacy USPS activity for the period from April 1, 2018 to May 31, 2018.

 
 
 
 

Results of Operations
The following adjustments are intended to reflect the operations of Perspecta as if the Spin-Off and Mergers occurred on April 1, 2017.

6



(A)
Costs of services were adjusted to eliminate the effect of the amortization of inventory step up for Vencore from actuals. On a pro forma basis, the step up of inventory is fully amortized as of September 30, 2017.
(B)
Selling, general and administrative expenses were adjusted to remove the annual historical Veritas Capital Fund Management L.L.C. management fees paid by Vencore that are eliminated as they are not expected to have a continuing impact on the results of operations following the consummation of the Spin-Off and the Mergers.
(C)
Depreciation and amortization were adjusted to reflect the change in amortization expense associated with acquired intangible assets.
(D)
Represents costs paid to advisers, attorneys and other third parties directly related to the Spin-Off and Mergers. Accordingly, transaction costs have been eliminated as these costs are directly attributable to the Spin-Off and Mergers, but are not expected to have a continuing impact on results of operations following the consummation of the Spin-Off and the Mergers.
(E)
Interest expense was adjusted as a result of the New Term Facility, New Revolving Credit Facility, new interest rate swaps, amended receivables credit facility (the “MARPA Facility”), and EDS Notes assumed and Vencore outstanding debt repayment.
(F)
Represents the income tax impact of the pro forma adjustments, using an estimated statutory tax rate of approximately 27% for the six month period ended September 30, 2018.
(G)
The weighted average common shares outstanding for basic earnings per share reflects 142,425,184 shares of the combined company to be issued to DXC shareholders, in connection with the Spin-off, and 23,273,341 shares of the combined company issued to the sellers of Vencore, in accordance with the Merger Agreement.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table provides information regarding the beneficial ownership of our common stock as of December 1, 2018 by:
each of our stockholders who beneficially owns more than 5% of our outstanding common stock, as well as the selling stockholders;
each of our directors;
each of our executive officers; and
all of our directors and executive officers as a group.

The selling stockholders listed in the table below may from time to time offer and sell any or all shares of our common stock set forth below pursuant to this prospectus. When we refer to selling stockholders in this prospectus, we mean the persons listed in the table below, and the pledgees, donees, permitted transferees, assignees, successors and others who later come to hold any of the selling stockholders’ interests in shares of our common stock other than through a public sale.

Certain selling stockholders may be deemed underwriters as defined in the Securities Act of 1933, as amended (the “Securities Act”). Any profits realized by the selling stockholders may be deemed underwriting commissions.

The following table sets forth, as of the date of this prospectus, the name of the selling stockholders for whom we are registering shares for resale to the public, and the number of such shares that each such selling stockholder may offer pursuant to this prospectus. Applicable percentages are based on 163,971,901 shares outstanding on December 1, 2018, adjusted as required by rules promulgated by the SEC. We are filing this registration statement to comply with our obligation to register 23,273,341 unregistered shares of common stock for resale by the selling stockholders pursuant to the Side Letter Agreement dated as of October 11, 2017(as amended the “Side Letter Agreement”), by and among Perspecta (then named Ultra SC Inc.), Veritas Capital Management, the Vencore Stockholder and the KeyPoint Stockholder, (as amended by that certain letter agreement, dated May 31, 2018, by and among Perspecta, Veritas Capital Management, the Vencore Stockholder, the KeyPoint Stockholder and DXC). Except as otherwise noted in the footnotes below, each person or entity identified in the table has sole voting and investment power with respect to the securities he, she or it holds, and the address of each person or group is c/o Perspecta, 15052 Conference Center Drive, Chantilly, VA 20151.


7



Based on information provided to us by the selling stockholders and as of the date the same was provided to us, assuming that the selling stockholders sell all the shares of our common stock beneficially owned by them that have been registered by us and do not acquire any additional shares during the offering, the selling stockholders will not own any shares other than those appearing in the column entitled “Number of Shares of our Common Stock Beneficially Owned After This Offering.” We cannot advise as to whether the selling stockholders will in fact sell any or all of such shares. In addition, the selling stockholders may have sold, transferred or otherwise disposed of, or may sell, transfer or otherwise dispose of, at any time and from time to time, the shares in transactions exempt from the registration requirements of the Securities Act after the date on which they provided the information set forth on the table below.

 
 
Number of Shares of our Common Stock Beneficially Owned Prior to This Offering
 
Number of Shares of our Common Stock that May Be Sold in This Offering
 
Number of Shares of our Common Stock Beneficially Owned After This Offering
Name and Address of Beneficial Owner
 
Number
 
%
 
Number
 
%
 
Number
 
%
Veritas Capital Fund Management, L.L.C.(1)
 
23,273,341

 
14.14%

 
23,273,341

 
14.14%

 

 
*

9 West 57th Street, 29th Floor
 
 
 
 
 
 
 
 
 
 
 
 
New York, New York, 10019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Vanguard Group, Inc.
 
10,425,8512

 
6.3%

 

 

 
10,425,8512

 
6.3%

100 Vanguard Blvd.
 
 
 
 
 
 
 
 
 
 
 
 
Malvern, Pennsylvania 19355
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BlackRock, Inc.
 
9,167,0933

 
5.6%

 

 

 
9,167,0933

 
5.6%

40 East 52nd Street
 
 
 
 
 
 
 
 
 
 
 
 
New York, New York 10022
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
John M. Curtis
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
John P. Kavanaugh
 
7,468

 
*

 

 

 
7,468

 
*

 
 
 
 
 
 
 
 
 
 
 
 
 
James L. Gallagher
 
13,1444

 
*

 

 

 
13,1444

 
*

 
 
 
 
 
 
 
 
 
 
 
 
 
Tammy N. Heller
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
William G. Luebke
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
J. Michael Lawrie
 
285,557

 
*

 

 

 
285,557

 
*

 
 
 
 
 
 
 
 
 
 
 
 
 
Ramzi M. Musallam
 
23,273,3415

 
14.14%

 

 

 
23,273,3415

 
14.14%

 
 
 
 
 
 
 
 
 
 
 
 
 
Sondra L. Barbour
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Sanju K. Bansal
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Lisa S. Disbrow
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Pamela O. Kimmet
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Philip O. Nolan
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Michael E. Ventling
 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Paul N. Saleh
 
69,876

 
*

 

 

 
69,876

 
*

 
 
 
 
 
 
 
 
 
 
 
 
 
All executive officers and directors of the Company, as a group (14 individuals)
 
23,649,3864,6

 
14.37%

 
23,273,3414,6

 
14.14%

 
23,649,3864,6

 
14.37%


8



* Less than 1%.
(1)
Based solely on the most recently available Schedule 13D filed by The SI Organization Holdings LLC (“SI”), The Veritas Capital Fund IV, L.P. (“Fund IV”), Veritas Capital Partners IV, L.L.C. (“Fund IV LLC”), and Ramzi M. Musallam with the SEC on June 6, 2018. The Schedule 13D provides that Fund IV LLC is the general partner of Fund IV, which has certain rights in respect of SI. Mr. Musallam is the Chief Executive Officer and Managing Partner of Fund IV LLC and Veritas Capital Partners III, L.L.C. (“Fund III LLC”), which is the general partner of The Veritas Capital Fund III, L.P., which is the managing member of KGS HC. SI holds 18,877,244 shares of Perspecta common stock. Each of SI, Fund IV (including on the basis of its power to appoint all of the members of the board of managers of SI), and Fund IV LLC (including on the basis of Fund IV LLC serving as the general partner of Fund IV) may be deemed to beneficially own and share the power to dispose of such shares. Mr. Musallam may be deemed to beneficially own and share the power to vote and dispose of the 18,877,244 shares of Perspecta common stock held directly by SI and an additional 4,396,097 shares of common stock held directly by KGS LLC, including on the basis of Mr. Musallam serving as the Chief Executive Officer and Managing Partner of Fund IV LLC and Fund III LLC.
(2)
Based solely on the most recently available Schedule 13G filed by The Vanguard Group (“Vanguard”) with the SEC on February 7, 2018 regarding DXC. The Schedule 13G regarding DXC provides that Vanguard has sole voting power over 405,617 shares of DXC, shared voting power over 68,038, sole dispositive power over 20,386,782 shares of DXC and share dispositive power over 464,921 shares of DXC.
(3)
Based solely on the most recently available Schedule 13G filed with the SEC on October 10, 2018 by BlackRock, Inc. (“BlackRock”) regarding Perspecta. The Schedule 13G regarding Perspecta provides that (i) BlackRock is a parent holding company or control person and (ii) BlackRock, through its subsidiaries identified therein, had sole voting power over 16,056,747 shares of Perspecta and sole dispositive power over 16,613,779 shares of Perspecta.
(4)
With respect to Mr. Gallagher, includes 12,742 shares of common stock that may be acquired pursuant to the exercise of employee stock options within 60 days of December 1, 2018. These shares have been deemed to be outstanding in computing the Percentage of Class.
(5)
Mr. Musallam is a member of our Board of Directors and is also the Chief Executive Officer and Managing Partner of Veritas Capital Management. Mr. Musallam may be deemed a beneficial owner of the shares of common stock beneficially owned by Veritas Capital Management and its affiliated investment funds and certain co-investors. See footnote 1 above.
(6)
The executive officers and directors, as a group, have sole voting and investment power with respect to 23,649,386 shares. Includes 0 shares of common stock subject to vest within 60 days of December 1, 2018. Holders of unvested restricted stock units have sole voting power, but no investment power, with respect thereto. Includes 12,742 shares of common stock that may be acquired pursuant to the exercise of employee stock options within 60 days of December 1, 2018. These shares have been deemed to be outstanding in computing the Percentage of Class.

DESCRIPTION OF OUR CAPITAL STOCK

General

The following summarizes information concerning our capital stock, including material provisions of our Amended and Restated Articles of Incorporation, our Bylaws and certain provisions of Nevada law. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description, you are encouraged to read our Amended and Restated Articles of Incorporation and our Bylaws, which are incorporated by reference as exhibits to the registration statement of which this prospectus is a part.

Authorized Capital Stock

Our authorized capital stock consists of 750,000,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per share.

Shares Outstanding

As of December 19, 2018, there were 163,984,227 shares of our common stock issued and outstanding.

Common Stock

The following description of our capital stock sets forth general terms and provisions of our common stock and preferred stock based on the provisions of our Amended and Restated Articles of Incorporation, our Bylaws and provisions of applicable Nevada law.

Holders of our common stock are entitled to one vote per share on all matters to be voted upon by our stockholders. The vote of the holders of a majority of the stock represented at a meeting at which a quorum is present is generally required to take stockholder action, unless a different vote is required by law or specifically required by our Amended and Restated Articles of Incorporation or Bylaws.

Subject to the rights of any holders of our preferred stock, the holders of our common stock are entitled to receive dividends ratably, if any, as may be declared from time to time by our Board of Directors out of funds legally available for

9



the payment of dividends. However, if our Board of Directors grants rights of cumulative dividends to any series of our preferred stock, our Amended and Restated Articles of Incorporation limit our ability to take certain actions, including with respect to the payment of dividends on our common stock, if such accrued dividends are owed to the holders of any series of preferred stock. For example, no cash payments for distributions or dividends may be made to the holders of our common stock unless all accrued dividends for past and current dividend periods on all series of preferred stock entitled to cumulative dividends have been declared and set apart for payment. In addition, so long as accrued dividends with respect to any series of our preferred stock that is entitled to cumulative dividends remains unpaid for any period up to and including the preceding dividend date, we may not purchase or redeem any shares of our capital stock.

In the event of our liquidation, dissolution or winding up, after all liabilities and the holders of each series of preferred stock have been paid in full, the holders of our common stock are entitled to share ratably in all remaining assets. Our common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate and issue in the future.

Preferred Stock

Our Board of Directors may issue up to 1,000,000 shares of only one class of preferred stock in one or more series and, subject to Chapter 78 of the Nevada Revised Statutes (the “Nevada Corporation Law”), our Board of Directors may set the designations, preferences and relative, participating, optional or other special rights or qualifications, limitations or restrictions of such preferred stock. Each share of preferred stock is of equal rank with each other share of preferred stock, regardless of series, with respect to the payment of dividends and the distribution of capital assets.

Our Board of Directors has the power to issue our preferred stock with voting, conversion and exchange rights that could negatively affect the voting power or other rights of our common stockholders, and the Board of Directors could take that action without stockholder approval. The issuance of our preferred stock could delay or prevent a change in control of our company.

If our Board of Directors grants voting power to the holders of shares of any series of preferred stock, holders of shares of such series will be entitled to no more than one vote per share voting with the holders of shares of our common stock at each annual or special meeting of stockholders upon all matters upon which a vote is taken except that if the holders of shares of such series are entitled to elect two or more directors, as a class, the holders of shares of such series will not be entitled to a vote for the election of any other directors of Perspecta.

In addition, so long as accrued dividends with respect to any series of our preferred stock that is entitled to cumulative dividends remains unpaid for any period up to and including the preceding dividend date, we may not purchase or redeem any shares of our capital stock.

Anti-Takeover Effects of Various Provisions of Nevada Law and Our Amended and Restated Articles of Incorporation and Bylaws.

Provisions of the Nevada Corporation Law and our Amended and Restated Articles of Incorporation and Bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, would be expected to discourage certain types of coercive takeover practices and takeover bids our Board of Directors may consider inadequate and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us will outweigh the disadvantages of discouraging takeover or acquisition proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.

Blank Check Preferred Stock. Our Amended and Restated Articles of Incorporation permit our Board of Directors to issue our preferred stock with voting, conversion and exchange rights that could negatively affect the voting power or other rights of our common stockholders, and the Board of Directors could take that action without stockholder approval. The issuance of our preferred stock could delay or prevent a change of control of Perspecta.

10




Board Vacancies to be Filled by Remaining Directors and Not Stockholders. Our Bylaws provide that any vacancies on the Board of Directors, including any newly created directorships, will be filled by the affirmative vote of the majority of the remaining directors then in office, even if such directors constitute less than a quorum, or by a sole remaining director.

Removal of Directors by Stockholders. Our Bylaws and the Nevada Corporation Law provide that directors may be removed by stockholders only by the affirmative vote of the holders of at least two-thirds of the voting power of the outstanding capital stock entitled to vote.

Stockholder Action. Our Bylaws preclude stockholders from calling special meetings except where such special meetings are requested by stockholders representing 75% of the capital stock entitled to vote. Our Bylaws prevent stockholder action by written consent for the election of directors and require the written consent of 90% of the capital stock entitled to vote for any other stockholder actions by written consent.

Advance Notice of Director Nominations and Stockholder Proposals. Our Bylaws contain advance notice procedures for stockholders to make nominations of candidates for election as directors or to bring other business before the annual meeting of stockholders. As specified in our Bylaws, director nominations and the proposal of business to be considered by stockholders may be made only pursuant to a notice of meeting, at the direction of the Board of Directors or by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures that are provided in our Bylaws.

To be timely, a nomination of a director by a stockholder or notice for business to be brought before an annual meeting by a stockholder must be delivered to our secretary at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of an annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, for notice by the stockholder to be timely, it must be delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of (1) the 90th day prior to such annual meeting and (2) the 10th day following the day on which public announcement of the date of such meeting is first made, whichever first occurs.

In the event a special meeting of stockholders is called for the purpose of electing one or more directors, any stockholder entitled to vote may nominate a person or persons as specified in our Bylaws, but only if the stockholder notice is delivered to our secretary at our principal executive offices not earlier than the 120th day prior to such special meeting and not later than the close of business on the later of (1) the 90th day prior to such special meeting or (2) the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by our Board of Directors to be elected at such meeting.

Amendments to our Amended and Restated Articles of Incorporation and Bylaws. Under the Nevada Corporation Law, our Amended and Restated Articles of Incorporation may not be amended by stockholder action alone. Amendments to the Amended and Restated Articles of Incorporation require a board resolution approved by the majority of the outstanding capital stock entitled to vote. Our Bylaws may only be amended by stockholders upon the affirmative vote of not less than a majority of the outstanding capital stock entitled to vote. Subject to the right of stockholders as described in the immediately preceding sentence, our Bylaws may be adopted, amended or repealed by our Board of Directors.

Nevada Anti-Takeover Statute. We are subject to Nevada’s Combination with Interested Stockholders Statute (Nevada Corporation Law Sections 78.411-78.444) which prohibits an “interested stockholder” from entering into a “combination” with the corporation, unless certain conditions are met. An “interested stockholder” is a person who, together with affiliates and associates, beneficially owns (or within the prior two years, did beneficially own) 10% or more of the corporation’s capital stock entitled to vote.

No Cumulative Voting. Our Amended and Restated Articles of Incorporation prohibits cumulative voting in the election of directors.


11



Limitations on Liability and Indemnification of Officers and Directors

Nevada Corporation Law limits or eliminates the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties as directors. Our Amended and Restated Articles of Incorporation and Bylaws include provisions that require us to indemnify, to the fullest extent allowable under the Nevada Corporation Law, our directors or officers against monetary damages for actions taken as a director or officer of our company, or for serving at our request as a director or officer or another position at another corporation or enterprise, as the case may be. Our Amended and Restated Articles of Incorporation and Bylaws also provide that we must indemnify and advance reasonable expenses to our directors and officers, subject to our receipt of an undertaking from the indemnified party as may be required under the Nevada Corporation Law. We are also expressly authorized to carry directors’ and officers’ insurance to protect our company, our directors, officers and certain employees for some liabilities.

The limitation of liability and indemnification provisions under the Nevada Corporation Law and in our Amended and Restated Articles of Incorporation and Bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. However, these provisions do not limit or eliminate our rights, or those of any stockholder, to seek non-monetary relief such as injunction or rescission in the event of a breach of a director’s fiduciary duties. Moreover, the provisions do not alter the liability of directors under the federal securities laws. In addition, your investment may be adversely affected to the extent that, in a class action or direct suit, we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

Authorized but Unissued Shares

Our authorized but unissued shares of common stock and preferred stock are available for future issuance without your approval. We may use additional shares for a variety of purposes, including future public offerings to raise additional capital, to fund acquisitions and as employee compensation. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

Stock Exchange Listing

Our common stock is listed on the New York Stock Exchange under the symbol “PRSP.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is EQ Shareowner Services.

Direct Registration System

Our common stock is registered in book-entry form through the direct registration system. Under this system, ownership of our common stock is reflected in account statements periodically distributed to stockholders by EQ Shareowner Services, our transfer agent, who holds the book-entry shares on behalf of our common stockholders.

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following discussion is a summary of the material U.S. federal income tax consequences to Non-U.S. Holders (as defined below) of the purchase, ownership and disposition of our common stock issued pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”), in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a Non-U.S. Holder of our common stock. We have not sought and will not seek any rulings from the IRS regarding the matters

12



discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the purchase, ownership and disposition of our common stock.

This discussion is limited to Non-U.S. Holders that hold our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a Non-U.S. Holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income. In addition, it does not address consequences relevant to Non-U.S. Holders subject to special rules, including, without limitation:

U.S. expatriates and former citizens or long-term residents of the United States;
persons subject to the alternative minimum tax;
persons holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;
banks, insurance companies, and other financial institutions;
brokers, dealers or traders in securities;
“controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax;
partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);
tax-exempt organizations or governmental organizations;
persons deemed to sell our common stock under the constructive sale provisions of the Code;
persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation;
tax-qualified retirement plans;
“qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds; and
persons subject to special tax accounting rules as a result of any item of gross income with respect to the stock being taken into account in an applicable financial statement.

If an entity treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.

THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.

Definition of a Non-U.S. Holder

For purposes of this discussion, a “Non-U.S. Holder” is any beneficial owner of our common stock that is neither a “U.S. person” nor an entity treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:

an individual who is a citizen or resident of the United States;
a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia;
an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.


13



Distributions

If we make distributions of cash or property on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below under “-Sale or Other Taxable Disposition.”

Subject to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder of our common stock will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). If a Non-U.S. Holder holds the stock through a financial institution or other intermediary, the Non-U.S. Holder will be required to provide appropriate documentation to the intermediary, which then will be required to provide certification to the applicable withholding agent, either directly or through other intermediaries. A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.

Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.

Sale or Other Taxable Disposition

A Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our common stock unless:

the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable);
the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or
our common stock constitutes a U.S. real property interest (“USRPI”) by reason of our status as a U.S. real property holding corporation (“USRPHC”) for U.S. federal income tax purposes.

Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.

Gain described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty), which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.

14




With respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination of whether we are a USRPHC depends, however, on the fair market value of our USRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance we currently are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition by a Non-U.S. Holder of our common stock will not be subject to U.S. federal income tax if our common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and such Non-U.S. Holder owned, actually and constructively, 5% or less of our common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.

Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.

Information Reporting and Backup Withholding

Payments of dividends on our common stock will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a United States person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any dividends on our common stock paid to the Non-U.S. Holder, regardless of whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our common stock within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting, if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a United States person, or the holder otherwise establishes an exemption. Proceeds of a disposition of our common stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.

Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

Additional Withholding Tax on Payments Made to Foreign Accounts

Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or “FATCA”) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or gross proceeds from the sale or other disposition of, our common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in clause (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.


15



Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our common stock, and will apply to payments of gross proceeds from the sale or other disposition of such stock on or after January 1, 2019.

Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our common stock.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

James J. Kavanaugh, the brother of our Chief Financial Officer, is the Chief Financial Officer of International Business Machines Corporation (“IBM”).  From time to time, we engage in transactions with IBM relating to the supply of hardware, labor and support services by IBM to Perspecta.  Payments to IBM under these contracts were approximately $14 million since June 1, 2018, and the majority of such transactions were entered into prior to the appointment of John P. Kavanaugh as the Perspecta CFO on May 31, 2018. We believe that all such arrangements have been entered into in the ordinary course of business, have been conducted on an arm’s-length basis and do not represent a material interest to James J. Kavanaugh.
     
For additional information regarding related party transactions, see Item 13 - “Certain Relationships and Related Transactions, and Director Independence” of our 2018 10-K. 

PLAN OF DISTRIBUTION

General

We are registering the shares of common stock covered by this prospectus for the selling stockholders. The selling stockholders may sell or distribute the shares of our common stock covered by this prospectus from time to time in one or more transactions, using one or more of the following methods:
underwriters in a public offering;
“at the market” to or through market makers or into an existing market for the securities;
ordinary brokerage transactions and transactions in which a broker-dealer solicits purchasers;
block trades in which a broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
privately negotiated transactions;
through entering into or settling of standardized or over-the-counter options, swaps or other hedging or derivatives transactions, whether through an options exchange or otherwise;
by pledge to secure debts and other obligations (including obligations associated with derivatives transactions);
in other ways not involving market makers or established trading markets, including direct sales to purchasers or sales effected through agents;
through the distribution by any selling stockholder to its partners, members or shareholders;
a combination of any such methods of sale; and
any other method permitted pursuant to applicable law.

Many of the transactions described above will not require an amendment or supplement to this prospectus prior to the selling stockholders consummating the sale or transfer of our common stock. However, to the extent required by law, this prospectus or the registration statement of which this prospectus forms a part may be amended or supplemented from time to time to describe a specific plan of distribution. Any amendment or supplement relating to a particular offering of our common stock by the selling stockholders may include the following information to the extent required by law:
the terms of the offering;
the names of any underwriters or agents and the amount of securities underwritten or purchased by each of them;
the purchase price of the securities;
any delayed delivery arrangements;
any over-allotment options under which underwriters may purchase additional common stock from the selling stockholders;
any underwriting discounts and other items constituting underwriters’ compensation;

16



any public offering price and the proceeds to the selling stockholders; and
any discounts or concessions allowed or reallowed or paid to dealers.

The selling stockholders may distribute the common stock from time to time in one or more transactions:
at a fixed price or prices, which may be changed from time to time;
at market prices prevailing at the time of sale;
at prices related to the prevailing market prices; or
at negotiated prices.

The selling stockholders may offer our common stock to the public through underwriting syndicates represented by managing underwriters or through underwriters without an underwriting syndicate. If underwriters are used for the sale of our common stock, the securities will be acquired by the underwriters for their own account. The underwriters may resell the common stock in one or more transactions on the NYSE, including in negotiated transactions at a fixed public offering price or at varying prices determined at the time of sale. In connection with any such underwritten sale of common stock, underwriters may receive compensation from the selling stockholders, for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell common stock to or through dealers, and the dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Such compensation may be in excess of customary discounts, concessions or commissions.

If the selling stockholders use an underwriter or underwriters to effectuate the sale of common stock, to the extent required by law, the names of the underwriters will be set forth in the prospectus or prospectus supplement used by the underwriters to sell those securities. Selection of underwriters will be from a list supplied by Perspecta or as otherwise determined in accordance with the terms of the Side Letter Agreement. The selling stockholders may use underwriters with whom we or the selling stockholders have a material relationship. We will describe the nature of such relationship in the prospectus supplement, naming the underwriter. Unless otherwise indicated in the prospectus or prospectus supplement relating to a particular offering of common stock, the obligations of the underwriters to purchase the securities will be subject to customary conditions precedent and the underwriters will be obligated to purchase all of the securities offered if any of the securities are purchased. We have agreed to pay certain expenses incident to the registration of the shares of common stock to the public, other than commissions or discounts of underwriters, broker-dealers, or agents. Under the Registration Rights Agreement we are also obligated to provide customary indemnification to the selling stockholders.

In effecting sales, brokers or dealers engaged by the selling stockholders may arrange for other brokers or dealers to participate. Broker-dealers may receive discounts, concessions or commissions from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. Such compensation may be in excess of customary discounts, concessions or commissions. If dealers are utilized in the sale of securities, the names of the dealers and the terms of the transaction will be set forth in the prospectus or prospectus supplement, if required.

The selling stockholders may also sell shares of our common stock from time to time through agents. We will name any agent involved in the offer or sale of such shares and will list commissions payable to these agents in a prospectus supplement, if required. These agents will be acting on a best efforts basis to solicit purchases for the period of their appointment, unless we state otherwise in any required prospectus supplement.

Until the distribution of our common stock is completed, the rules of the SEC may limit the ability of underwriters and other participants in any offering to bid for and purchase our common stock. As an exception to these rules, the underwriters in certain circumstances are permitted to engage in certain transactions that stabilize the price of our common stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock. If the underwriters create a short position in our common stock in connection with an offering, i.e., if they sell more common stock than are set forth on the cover page of the applicable prospectus or prospectus supplement, the underwriters may reduce that short position by purchasing our common stock in the open market. The underwriters also may impose a penalty bid on certain underwriters. This means that if the underwriters purchase our common stock in the open market to reduce the underwriters’ short position or to stabilize the price of our common stock, they may reclaim the amount of the selling concession from the underwriters who sold those shares of common stock as part of the offering. In

17



general, purchases of our common stock for the purpose of stabilization or to reduce a short position could cause the price of our common stock to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of our common stock to the extent that it were to discourage resales of our common stock.

The selling stockholders may sell shares of our common stock directly to purchasers. In this case, they may not engage underwriters or agents in the offer and sale of such shares.

The selling stockholders and any underwriters, broker-dealers or agents that participate in the sale of the selling stockholders’ shares of common stock or interests therein may be “underwriters” within the meaning of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling stockholders who are “underwriters” within the meaning of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act. We will make copies of this prospectus and any prospectus supplement available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act, if applicable.

We are not aware of any plans, arrangements or understandings between any of the selling stockholders and any underwriter, broker-dealer or agent regarding the sale of any shares of our common stock by the selling stockholders. We cannot assure you that the selling stockholders will sell any or all of the shares of our common stock offered by them pursuant to this prospectus. In addition, we cannot assure you that the selling stockholders will not transfer, devise or gift the shares of our common stock by other means not described in this prospectus. Moreover, shares of common stock covered by this prospectus that qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than pursuant to this prospectus.

From time to time, one or more of the selling stockholders may pledge, hypothecate or grant a security interest in some or all of the shares owned by them. The pledgees, secured parties or persons to whom the shares have been hypothecated will, upon foreclosure, be deemed to be selling stockholders. The number of a selling stockholder’s shares offered under this prospectus will decrease as and when it takes such actions. The plan of distribution for that selling stockholder’s shares will otherwise remain unchanged.

A selling stockholder may enter into hedging transactions with broker-dealers or other financial institutions, and the broker-dealers or financial institutions may engage in short sales of the shares in the course of hedging the positions they assume with that selling stockholder, including, without limitation, in connection with distributions of the shares by those broker-dealers or financial institutions. A selling stockholder may enter into options, swaps, forwards or other derivatives transactions with broker-dealers or other financial institutions that involve the pledge or delivery of the shares offered hereby to the broker-dealers or financial institutions that may then resell or otherwise transfer those securities.

A selling stockholder that is an entity may elect to make a distribution of the shares of common stock covered by this prospectus to its members, partners or shareholders. In such events we may file a prospectus supplement to the extent required by law in order to permit the distributees to use the prospectus to resell the common stock acquired in the distribution. The members, partners or shareholders of a selling stockholder who receive shares of our common stock pursuant to a registered distribution may sell those shares of common stock directly to purchasers or through underwriters, broker-dealers or agents under Section 4 (a) (1) of the Securities Act, except to the extent any such member, partner or shareholder is deemed to be our “affiliate” under Rule 144 of the Securities Act. After receiving shares of our common stock, the members, partners and shareholders of the distributing stockholders, to the extent not deemed to be our “affiliate” under Rule 144 of the Securities Act, will act independently of us, and the selling stockholders, in making decisions regarding the timing, manner and size of each sale of our common stock.

The members, partners or shareholders and any underwriters, broker-dealers or agents that participate in the sale of the members’, partners’ or shareholders’ shares of common stock or interests therein may be “underwriters” within the meaning of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Members, partners or shareholders who are “underwriters” within the meaning of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act. We will make copies of this prospectus available to the members, partners or shareholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act, if applicable. If any entity is deemed an

18



underwriter or any amounts deemed underwriting discounts and commissions, the prospectus or prospectus supplement will identify the underwriter or agent and describe the compensation received from the members, partners or shareholders. The members, partners or shareholders will acknowledge prior to their receipt of shares of our common stock that they understand their obligations to comply with the provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules thereunder relating to stock manipulation, particularly Regulation M.

In order to comply with the securities laws of certain states, if applicable, the shares may be sold only through registered or licensed brokers or dealers. In addition, in certain states, the shares may not be sold unless they have been registered or qualified for sale in the state or an exemption from the registration or qualification requirement is available and complied with.

If more than 10% of the net proceeds of any offering of securities made under this prospectus will be received by members of the Financial Industry Regulatory Authority (“FINRA”) participating in the offering or affiliates or associated persons of such FINRA members, the offering will be conducted in accordance with FINRA Rule 5110(h).

The specific terms of the lock-up provisions, if any, in respect of any given offering will be described in the applicable prospectus supplement.

This offering will terminate on the date that all shares offered by this prospectus have been sold or distributed by the selling stockholders.

LEGAL MATTERS

The validity of the shares of Perspecta common stock offered pursuant to this prospectus will be passed upon for us by Woodburn & Wedge, Reno, Nevada.

EXPERTS

The financial statements incorporated in this prospectus by reference from the Company’s 2018 10-K and the Current Report on Form 8-K, filed with the SEC on November 14, 2018, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is incorporated herein by reference (which report expresses an unqualified opinion on the financial statements and includes an emphasis-of-matter paragraph referring to the Company’s combined financial statements being derived from the consolidated and combined financial statements and accounting records of DXC and HPE as if the Company were operated on a standalone basis). Such financial statements have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
 
The combined financial statements of Vencore Holding Corp. and KGS Holding Corp. as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent accountant, given on the authority of said firm as experts in auditing and accounting.

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
 
We “incorporate by reference” into this prospectus certain documents we have filed with the SEC, which means that we are disclosing important information to you by referring you to such documents. The documents listed below and all amendments or supplements to these documents are incorporated by reference into this prospectus:

Our Annual Report on Form 10-K for the fiscal year ended March 31, 2018, filed with the SEC on June 29, 2018, except for Part I - Item 1, PART II - Item 7 and PART II - Item 8, which are amended by information in our Current Report on Form 8-K filed with the SEC on November 14, 2018 (regarding a recast of our segment information);
Our Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2018 and September 30, 2018, filed with the SEC on August 14, 2018 and November 14, 2018, respectively;

19



Our Current Reports on Form 8-K, filed with the SEC on May 25, 2018, June 6, 2018 (as amended by Amendment No. 1 on Form 8-K/A filed July 19, 2018), July 19, 2018, October 9, 2018, October 15, 2018, November 14, 2018 (regarding a recast of our segment information) and December 18, 2018.

Any statement contained in this prospectus or a document incorporated by reference into this prospectus shall be deemed to be modified or superseded to the extent that a statement contained herein or in any other subsequently filed document that also is incorporated by reference herein, including any prospectus supplement or free writing prospectus provided to you by us, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute part of this registration statement.

We hereby undertake to provide without charge to each person, including any beneficial owner, to whom a copy of this prospectus is delivered, upon written or oral request of any such person, a copy of any and all of the information that has been incorporated by reference in this prospectus, other than exhibits to such documents, unless such exhibits have been specifically incorporated by reference thereto. Requests for such copies should be directed to our Investor Relations department, at the following address.

Perspecta Inc.
Attn: Stuart Davis - Investor Relations
15052 Conference Center Drive
Chantilly, VA 20151
(571) 313-6000

The incorporated documents may also be accessed on Perspecta’s website at www.perspecta.com. Except for the specific documents listed above, no information available on or through our website shall be deemed to be incorporated in this prospectus or the registration statement of which it forms a part.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a Registration Statement on Form S-1 under the Securities Act with respect to our common stock being distributed as contemplated by this prospectus. This prospectus is a part of, and does not contain all the information set forth in, the registration statement and the exhibits and schedules to the registration statement. Some items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to us and our common stock, please refer to the registration statement including its exhibits and schedules. Statements we make in this prospectus relating to any contract or other document are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may review a copy of the Registration Statement including its exhibits and schedules on the Internet website maintained by the SEC at www.sec.gov. Information contained on any website we refer to in this prospectus is not part of this prospectus or any report filed with or furnished to the SEC.
 
We are subject to the information and periodic reporting requirements of the Exchange Act and, accordingly, will file annual reports containing financial statements audited by an independent public accounting company, quarterly reports containing unaudited financial statements, current reports, proxy statements and other information with the SEC. You may inspect and copy these reports, proxy statements and other information without charge at the SEC’s website. You also may access, free of charge, our reports filed with the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those forms) through our website at www.perspecta.com. Reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. Our website is included in this prospectus as an inactive textual reference only. The information found on our website is not part of this prospectus or any report filed with or furnished to the SEC.


20



INDEX TO VENCORE HOLDING CORP. AND KGS HOLDING CORP. COMBINED FINANCIAL STATEMENTS
 
Page No.
Vencore Holding Corp. and KGS Holding Corp. Combined Financial Statements
 
Report of Independent Auditors
Combined Balance Sheets as of March 30, 2018 and December 31, 2017 and 2016
Combined Statements of Operations for the Three Months Ended March 30, 2018 and March 31, 2017 and for the Years Ended December 31, 2017, 2016 and 2015
Combined Statements of Comprehensive Income (Loss) for the Three Months Ended March 30, 2018 and March 31, 2017 and for the Years Ended December 31, 2017, 2016 and 2015
Combined Statements of Changes in Stockholders’ (Deficit) Equity for the Three Months Ended March 30, 2018 and for the Years Ended December 31, 2017, 2016 and 2015
Combined Statements of Cash Flows for the Three Months Ended March 30, 2018 and March 31, 2017 and for the Years Ended December 31, 2017, 2016 and 2015
Notes to Combined Financial Statements


F-1



Report of Independent Auditors
To the Management and Board of Directors of Vencore Holding Corp. and KGS Holding Corp.
We have audited the accompanying combined financial statements of Vencore Holding Corp. and KGS Holding Corp., which comprise the combined balance sheets as of December 31, 2017 and 2016, and the related combined statements of operations, comprehensive income (loss), cash flows and stockholder’s (deficit) equity for each of the three years in the period ended December 31, 2017.
Management’s Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Vencore Holding Corp. and KGS Holding Corp. as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 1 to the combined financial statements, the Company changed the manner in which it accounts for net periodic pension cost and net periodic postretirement benefit cost and the manner in which it accounts for restricted cash in the statements of cash flows as of January 1, 2018. Our opinion is not modified with respect to these matters.

/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 16, 2018



F-2



Vencore Holding Corp. and KGS Holding Corp.
Combined Balance Sheets
(in thousands, except share data)
 
As of December 31,
 
As of
March 30,
 
2016
2017
 
2018
Assets
 
 
 
(Unaudited)
Current assets:
 
 
 
 
Cash
$
66,050

$
95,132

 
$
86,220

Accounts receivable, net
166,537

180,337

 
181,868

Restricted cash

80

 

Prepaid and other current assets
19,072

12,986

 
15,470

Deferred costs
21,727

24,264

 
25,608

Total current assets
273,386

312,799

 
309,166

Property, equipment, and capitalized software, net
35,166

35,851

 
34,143

Purchased intangible assets, net
259,713

240,534

 
236,593

Goodwill
396,924

396,924

 
396,924

Other long‑term assets
57,890

44,635

 
44,384

Total assets
$
1,023,079

$
1,030,743


$
1,021,210

Liabilities and stockholder’s equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued expenses
$
63,552

$
80,333

 
$
82,125

Accrued compensation and benefits
79,581

82,360

 
62,923

Current portion of long‑term debt
18,244

23,338

 
23,338

Other current liabilities
32,518

37,437

 
40,530

Total current liabilities
193,895

223,468


208,916

Long‑term debt, net of current portion
859,980

947,678

 
945,660

Accrued pension and other post‑retirement liabilities, net of current portion
81,964

103,584

 
101,522

Other long‑term liabilities
84,260

53,577

 
53,324

Total liabilities
1,220,099

1,328,307


1,309,422

Commitments and Contingencies (Note 20)


 

Stockholder’s equity:
 
 
 
 
Common stock, $0.01 par value, 2,000 shares authorized, 2 shares issued and outstanding at December 31, 2016, 2017 and March 30, 2018


 

Additional paid‑in capital
188,945

188,945

 
188,945

Accumulated deficit
(327,220
)
(403,426
)
 
(393,639
)
Accumulated other comprehensive loss
(58,745
)
(83,083
)
 
(83,518
)
Total stockholder’s (deficit) equity
(197,020
)
(297,564
)

(288,212
)
Total liabilities and stockholder’s equity
$
1,023,079

$
1,030,743


$
1,021,210




The accompanying notes are an integral part of these combined financial statements.

F-3



Vencore Holding Corp. and KGS Holding Corp.
Combined Statements of Operations
(in thousands)
 
Year Ended December 31,
 
Three Months Ended
 
2015
2016
2017
 
March 31, 2017
March 30, 2018
 
 
 
 
 
(Unaudited)
Revenue
$
1,399,153

$
1,405,089

$
1,376,036

 
$
335,886

$
342,942

Operating costs and expenses
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization)
(1,150,291
)
(1,152,354
)
(1,139,574
)
 
(281,716
)
(274,660
)
General and administrative expenses
(88,155
)
(83,211
)
(101,042
)
 
(21,871
)
(27,422
)
Depreciation and amortization
(36,352
)
(35,457
)
(30,708
)
 
(7,855
)
(6,711
)
Gain on contingent consideration
7,897



 


Deferred contract costs
(2,854
)
(6,493
)
(5,143
)
 
(1,286
)
(1,194
)
Gain on pension plan
1,239

6,451

9,018

 
2,266

2,288

Total operating costs and expenses
(1,268,516
)
(1,271,064
)
(1,267,449
)
 
(310,462
)
(307,699
)
Income from operations
130,637

134,025

108,587

 
25,424

35,243

Interest expense
(75,240
)
(76,930
)
(81,151
)
 
(18,944
)
(19,712
)
Debt extinguishment costs

(7,159
)
(4,259
)
 


Other, net
(11,037
)
(4,931
)
(8,677
)
 
(2,210
)
(2,272
)
Investment gain


2,951

 
2,951


Income before income taxes and equity in net losses of affiliate
44,360

45,005

17,451

 
7,221

13,259

Income tax (expense) benefit
(21,346
)
(25,290
)
10,260

 
(2,959
)
(3,152
)
Income before equity in net losses of affiliate
23,014

19,715

27,711

 
4,262

10,107

Equity in net losses of affiliate


(1,263
)
 
(106
)
(320
)
Net income
$
23,014

$
19,715

$
26,448

 
$
4,156

$
9,787











The accompanying notes are an integral part of these combined financial statements.

F-4



Vencore Holding Corp. and KGS Holding Corp.
Combined Statements of Comprehensive Income (Loss)
(in thousands)
 
Year Ended December 31,
 
Three Months Ended
 
2015
2016
2017
 
March 31, 2017
March 30, 2018
 
 
 
 
 
(Unaudited)
Net income
$
23,014

$
19,715

$
26,448

 
$
4,156

$
9,787

Other comprehensive loss, net of tax:
 
 
 
 
 
 
Post‑retirement benefits:
 
 
 
 
 
 
Actuarial loss on defined benefit pension plans, net of tax
(9,724
)
(412
)
(22,328
)
 


Amounts reclassified from accumulated other comprehensive loss, net of tax
(3,078
)
(2,836
)
(2,600
)
 
(656
)
(145
)
Available‑for‑sale securities:
 
 
 
 
 
 
Net changes related to available‑for‑sale securities, net of tax
(472
)
369

590

 
78

(290
)
Other comprehensive loss
(13,274
)
(2,879
)
(24,338
)

(578
)
(435
)
Total comprehensive income
$
9,740

$
16,836

$
2,110


$
3,578

$
9,352
































The accompanying notes are an integral part of these combined financial statements.

F-5



Vencore Holding Corp. and KGS Holding Corp.
Combined Statements of Stockholder’s (Deficit) Equity
(In thousands except share and per share amounts)
 
Common Stock
Additional
Paid‑In Capital
Accumulated
Other
Comprehensive Loss
Accumulated Deficit
Total
Stockholder’s (Deficit) Equity
 
Shares
Amount
Balances at December 31, 2014
2

$

$
371,945

$
(42,592
)
$
(369,949
)
$
(40,596
)
Other comprehensive loss



(13,274
)

(13,274
)
Net income




23,014

23,014

Balances at December 31, 2015
2


371,945

(55,866
)
(346,935
)
(30,856
)
Liquidating dividend


(183,000
)


(183,000
)
Other comprehensive loss



(2,879
)

(2,879
)
Net income




19,715

19,715

Balances at December 31, 2016
2


188,945

(58,745
)
(327,220
)
(197,020
)
Liquidating dividend




(102,654
)
(102,654
)
Other comprehensive loss



(24,338
)

(24,338
)
Net income




26,448

26,448

Balances at December 31, 2017
2


188,945

(83,083
)
(403,426
)
(297,564
)
Other comprehensive loss



(435
)

(435
)
Net income




9,787

9,787

Balances at March 30, 2018 (unaudited)
2

$

$
188,945

$
(83,518
)
$
(393,639
)
$
(288,212
)


























The accompanying notes are an integral part of these combined financial statements.

F-6



Vencore Holding Corp. and KGS Holding Corp.
Combined Statements of Cash Flows
(in thousands)
 
Year Ended December 31,
 
Three Months Ended
 
2015
2016
2017
 
March 31, 2017
March 30, 2018
Operating activities
 
 
 
 
(Unaudited)
Net income
$
23,014

$
19,715

$
26,448

 
$
4,156

$
9,787

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
 
 
 
Depreciation and amortization
36,352

35,457

30,708

 
7,855

6,711

Amortization of debt discount and debt issuance costs
7,131

9,007

9,361

 
2,632

2,212

Amortization of deferred contract costs
2,854

6,493

5,143

 
1,286

1,194

Gain on contingent consideration
(7,897
)


 


Loss on debt extinguishment

7,159

4,259

 


Share‑based compensation expense (income)
4,018

(219
)
3,617

 
169

277

Deferred income taxes
10,393

20,903

(15,683
)
 
2,456

491

Remeasurement of lease abandonment

(1,598
)
(834
)
 

(69
)
(Gain) losses on dispositions of property and equipment
(796
)
431

109

 


Gain on investment


(2,951
)
 
(2,951
)

Loss from equity‑method investment


1,263

 
106

320

Changes in operating assets and liabilities, net of the effect of acquisitions
 
 
 
 
 
 
Accounts receivable, net
32,502

5,027

(13,800
)
 
1,837

(1,531
)
Prepaid expenses and other current assets
2,688

(5,036
)
5,999

 
(1,591
)
(2,484
)
Deferred costs
(9,870
)
922

(2,537
)
 
(3,233
)
(1,343
)
Other long‑term assets
(1,541
)
1,370

12,706

 
(605
)
(1,694
)
Accounts payable and accrued expenses
(12,862
)
8,985

16,124

 
2,818

3,771

Accrued compensation and benefits
(4,219
)
13,577

(838
)
 
(21,981
)
(19,713
)
Other current liabilities
(5,979
)
(2,179
)
4,526

 
2,208

3,143

Post‑retirement pension plans
(2,285
)
(9,314
)
(9,365
)
 
(2,265
)
(2,207
)
Other long term liabilities
(4,097
)
(13,156
)
(12,534
)
 
480

86

Payment of contingent consideration, in excess of acquisition date fair value
(4,968
)


 


Other, net
840

68

72

 
32

3

Net cash provided by (used for) operating activities
65,278

97,612

61,793

 
(6,591
)
(1,046
)
Investing activities
 
 
 
 
 
 
Expenditures for property, equipment and capitalized software
(15,915
)
(11,210
)
(9,410
)
 
(1,926
)
(2,998
)
Proceeds from property and equipment disposal
6,155

37


 


Investment in deferred compensation plans
(735
)
(861
)
(61
)
 

(58
)
Investment in company owned life insurance
(2,521
)
(2,924
)
(1,906
)
 
(464
)
(500
)
Proceeds from sale of investment in company owned life insurance plan
3,842


3,800

 
3,800


Investments in affiliate/JV


(500
)
 


Net cash provided by (used for) investing activities
(9,174
)
(14,958
)
(8,077
)
 
1,410

(3,556
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

F-7



Financing activities
 
 
 
 
 
 
Liquidating dividend

(183,000
)
(102,654
)
 


Proceeds from issuance of long‑term debt
9,616

311,100

215,000

 


Repayments of delayed draw
(25,000
)


 


Payments of long‑term debt
(27,572
)
(202,250
)
(127,413
)
 
(5,838
)
(4,136
)
Payment of debt issuance costs

(16,615
)
(4,750
)
 


Debt extinguishment cost

(1,750
)
(3,937
)
 


Payments on capital lease
(56
)
(465
)
(880
)
 
(207
)
(254
)
Cash paid to revolving credit facility
(462
)


 


Payment of contingent consideration
(4,648
)


 


Net cash used for financing activities
(48,122
)
(92,980
)
(24,634
)
 
(6,045
)
(4,390
)
Net increase (decrease) in cash, included restricted
7,982

(10,326
)
29,082

 
(11,226
)
(8,992
)
Cash, including restricted, at beginning of period
68,604

76,586

66,260

 
66,260

95,342

Cash, including restricted, at end of period
76,586

66,260

95,342

 
55,034

86,350

Less restricted cash included in prepaid and other current assets at end of period
370

210

210

 
210

130

Cash at end of period
$
76,216

$
66,050

$
95,132

 
$
54,824

$
86,220

 
 
 
 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
 
 
 
Equipment acquired under capital leases
$
151

$
1,481

$
2,061

 
$
132

$

Purchases of property & equipment in accounts payable & accrued expenses
$
779

$
117

$
657

 
$

$

Cash paid for interest
$
(67,518
)
$
(67,020
)
$
(70,252
)
 
$
(16,475
)
$
(19,141
)
Cash (paid for) received for taxes
$
(3,662
)
$
(11,398
)
$
3,025

 
$
(20
)
$
(49
)



























The accompanying notes are an integral part of these combined financial statements.

F-8



Vencore Holding Corp. and KGS Holding Corp.
Notes to Combined Financial Statements

1. Organization and Business Overview

Description of the Organization

Vencore Holding Corp., was incorporated in Delaware in October 2010 and is a holding company whose primary purpose is its ownership of the equity in Vencore Inc. (“Vencore OpCo”), the principal operating company of the Vencore business. Vencore Holding Corp. is wholly owned by The SI Organization Holdings LLC, a Delaware limited liability company. The SI Organization Holdings LLC, on a fully diluted basis, is approximately 51% owned by The Veritas Capital Fund IV, L.P. (through Class A membership interests), 19% owned by PGSI Holdings LLC (through Class A membership interests), 14% owned by TSIO Holdings LLC (through Class A membership interests), 6% owned by The Veritas Capital Fund III, L.P. (through Class A membership interests), 6% owned by certain members of Vencore OpCo’s senior management and employees of and advisors to Vencore (through Class A membership interests and Class B/B‑1 membership interests), 3% owned by entities affiliated with TCW/Crescent Mezzanine, LLC (through Class A membership interests), and 1% owned by IP III Mezzanine Partners, L.P. and UT Mezz Partners, L.P. (through Class A membership interests). Class A membership interests are issued at the The SI Organization Holdings LLC level. Vencore Holding Corp. was formerly named The SI Organization Holding Corp. (from 2010 to 2014), and was created as part of the divestiture of Vencore OpCo (then named The SI Organization, Inc.) from Lockheed Martin Corporation in 2010.

On May 23, 2014, Vencore OpCo acquired QinetiQ North America Services and Solutions Group through the purchase of all of the issued and outstanding stock of QinetiQ North America, Inc., a Delaware corporation (“QNA SSG”). As of July 22, 2014, QNA SSG’s name was changed to Vencore Services and Solutions, Inc. (“VSS”). On May 14, 2013, Vencore acquired TT Government Solutions, Inc., doing business as Applied Communication Sciences (“ACS”); ACS was renamed Vencore Labs, Inc. on January 1, 2015. As used herein, “Vencore” refers to Vencore Holding Corp., Vencore Holding Corp. is a holding company of Vencore OpCo and its direct and indirect subsidiaries, including VSS and ACS.

Keypoint Government Solutions, Inc. (“Keypoint OpCo”) was initially established as a subsidiary of Kroll, Inc., a corporate investigations and risk consulting firm, as Kroll Government Services, Inc. to exclusively service government clients during the development of the Department of Homeland Security. In May 29, 2009, The Veritas Capital Fund III, L.P., formed KGS Holding Corporation (“Keypoint”) as a wholly owned subsidiary of KGS Holding LLC, for the purposes of acquiring the business and operations of KGS from Kroll, Inc. KGS Holding LLC is 78.8624% owned by The Veritas Capital Fund III, L.P. (through Class A shares), 7.8662% owned by John Hancock Entities (through Class A shares), and 13.2514% owned by Keypoint’s management and Chertoff Group Investments, LLC (through Class A, Class B and B-1 shares).

Nature of Business

Vencore OpCo provides mission‑critical, innovation‑driven services and solutions to U.S. Government customers. The foundation of its business is the application of systems engineering and integration, cybersecurity, applied research and big data analytics on an enterprise‑wide scale to assist U.S. Government customers in solving their most complex information‑related challenges. Vencore OpCo provides the architecture and integration of highly‑engineered, mission‑critical information solutions across the U.S. Government and provides enterprise‑level support to multiple governmental programs that manage, collect, analyze and disseminate critical mission data to national security agencies and their customers. We maintain expertise in providing comprehensive solutions throughout the life of multi‑billion dollar systems that support the core missions of the U.S. Intelligence Community and other U.S. Government agency customers. Our services and solutions span the entire lifecycle of programs, encompassing system(s) definition, architecture, agile solutions development, test and integration, deployment and operations. Keypoint OpCo performs and delivers background investigations, compliance monitoring, and risk and security consulting services to its clients, primarily the U.S. Government. Other customers include state and local governments and commercial customers. Vencore OpCo is headquartered in Chantilly, Virginia with approximately 3,400 employees as of March 30, 2018. Keypoint OpCo is headquartered in Loveland, Colorado with approximately 2,700 employees as of March 30, 2018.


F-9



Unaudited Interim Financial Information

The accompanying balance sheet as of March 30, 2018, the statements of operations and statements of cash flows for the three months ended March 31, 2017 and March 30, 2018, and the statements of stockholder’s (deficit) equity for the three months ended March 30, 2018 are unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual audited financial statements; and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the financial position of Vencore and Keypoint as of March 30, 2018, and the results of its operations and its cash flows for the three months ended March 31, 2017 and March 30, 2018. The financial data and other information disclosed in these notes related to the three months ended March 30, 2018 are unaudited. The results for the three months ended March 30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018, any other interim periods, or any future year or period.

2. Significant Accounting Policies

Principles of Combination and Basis of Presentation

The accompanying combined financial statements include the accounts of Vencore and its wholly owned subsidiaries and Keypoint and its wholly owned subsidiaries (collectively, the “Company”, “we”, “us”, or “our”), and are being presented as entities under common control. The combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation and combination. All financial information presented in the financial statements and notes herein is presented in thousands.

The combined financial statements do not necessarily represent the results of the Company had it been operating as one entity during the periods presented in these financials statements. In most instances throughout the accompanying notes to these financial statements, financial results are combined, unless it is more meaningful to disclose Vencore and Keypoint separately.

The fiscal year of the Company ends on December 31 of each calendar year. Vencore’s fiscal quarters end on the last Friday of March, June and September. Keypoint’s fiscal quarters end on the last day of March, June and September.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. These estimates are based on management’s best knowledge of historical experience, current events and various other assumptions that management considers reasonable under the circumstances. Actual results could differ from those estimates. Areas of the financial statements where estimates may have the most significant effect include, but are not limited to, unbilled receivables, inputs used for computing pension and post‑retirement related liabilities, estimates to complete for customer contracts, estimated returns, accrued liabilities and expenses, estimated useful lives of identified intangible assets, depreciation and amortization, allowance for doubtful accounts, evaluation of goodwill and other assets for impairment, valuation of Class B/B‑1 membership interests, valuation of contingent consideration and incurred but not reported expenses for self‑insurance.

Revenue Recognition

Substantially all of the Company’s revenue is derived from contracts with the U.S. Government. The Company generates its revenue from the following types of contractual arrangements: cost‑reimbursable contracts, fixed‑price contracts or time‑and‑materials contracts.

Revenue on cost‑reimbursable contracts is recognized as services are performed generally based on the allowable costs incurred during the period plus any recognizable earned fee. The Company considers fixed fees under cost‑reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the contract. For cost‑reimbursable contracts that include performance‑based fee incentives, which are principally award fee arrangements, the Company

F-10



recognizes income when such fees are probable and estimable, and the fees are recognized throughout the term of the contract in proportion to the allowable costs incurred. Estimates of the total fee to be earned are made based on contract provisions, prior experience with similar contracts or customers and management’s evaluation of the Company’s performance on such contracts. Contract costs, including indirect expenses, are subject to audit by the Defense Contract Audit Agency and, accordingly, are subject to possible cost disallowances. The Company records contract reserves against open indirect cost audits and re‑measures the liability on a quarterly basis.

Revenue on fixed‑price contracts is primarily recognized using the percentage‑of‑completion method based on actual costs incurred relative to total estimated costs for the contracts, which are recorded using the cost‑to‑cost method. These estimated costs are updated during the term of the contract and may result in revision by the Company of recognized revenue and estimated costs in the period in which the changes in the estimated costs are identified. Profits on fixed‑price contracts result from the difference between incurred costs used to calculate the percentage of completion and revenue earned.

Revenue earned under time‑and‑materials contracts is recognized as hours are worked based on contractually billable rates to the client. Costs on time‑and‑materials contracts are expensed as incurred.

Contract accounting requires significant judgment relative to assessing risks, estimating contract revenue and costs and assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, developing total revenue and costs at completion estimates requires the use of significant judgment. Contract costs include direct labor and billable expenses, other direct costs, as well as allocations of allowable indirect costs. Billable expenses are comprised of subcontracting cost and other “out‑of‑pocket” costs that often include, but are not limited to, travel‑related costs and other charges. The Company recognizes revenue and billable expenses from these transactions on a gross basis because it is the primary obligor on its contracts with customers. Provisions for estimated losses at completion, if any, are recognized in the period in which the loss becomes evident. The provisions include estimated costs in excess of estimated revenue and any profit margin previously recognized.

Significant estimate‑at‑completion (“EAC”) adjustments on a single contract could have a material effect on the Company’s combined financial position or annual results of operations. We review and update our contract‑related estimates regularly. When adjustments in estimated contract revenues or estimated costs at completion are required on contracts, any changes from prior estimates are recognized as an inception‑to‑date adjustment in the period in which the facts necessitating the revision become known with the exception of contracts acquired through acquisition, where the adjustment is made for the period commencing from the date of acquisition. Changes in these estimates can occur over the contract performance period for a variety of reasons, including changes in contract scope, contract cost estimates and estimated incentive or award fees. The net impact of adjustments in contract estimates on our income from operations and net income totaled $1.5 million, $2.0 million, $1.4 million, $0.0 million and $0.3 million for the years ended December 31, 2015, 2016 and 2017 and three months ended March 31, 2017 and March 30, 2018, respectively.

Revenue on fixed unit price contracts, where specified units of output under service arrangements are delivered, is recognized when realized or realizable and earned, as units are delivered based on the specified price per unit. Delivery is represented by the final submission of the completed case (a “case” being defined as the total amount of work required to complete the background investigation as requested by the customer) in accordance with the contract. The Company considers the case to be the unit of account.

The Company has entered into fixed-unit price contracts with a large customer, for which the revenues from the services provided under these contracts are recognized upon case completion. In order to recognize revenue only for completed cases, management first records revenue for all cases when the case reaches the “fieldwork finished” (“FF”) status. FF is the point where the Company believes it has performed all the necessary work, the report is delivered to the customer and the case is complete. This is also the point when revenue is fully recognized if no further re-work is required. There are situations whereby the customer requests rework on some of the cases subsequent to FF, in which case management records an adjustment at month end, based on an estimate of the percentage of cases that may be re-opened for rework or may perform additional steps upon requests by the customer (“re-work provision”). Historically, that estimate has averaged at approximately 18% and was reported as case rework provision and presented as contra revenue and a corresponding contra receivable in the accompanying combined financial statements. The revenue related to the re-worked cases is recognized when the rework is completed.

F-11




Management records revenue at 100% for the case at FF status and as required by the contract terms, bills only 90% of the revenue at that time, while the remaining 10% is billed when the case is marked completed by the customer. This 10% holdback is recognized as an unbilled receivable until it is transferred to billed receivable when the case is deemed completed by the customer.

For the year ended December 31, 2015, the Company had a contract with National Aeronautics and Space Administration (“NASA”) and a contract with Office of Personnel Management (“OPM”), representing approximately 11% and 16%, respectively of total revenue. For the year ended December 31, 2016, the Company had a contract with NASA and a contract with OPM, representing approximately 12% and 16%, respectively of total revenue. For the year ended December 31, 2017, the Company had a contract with NASA and a contract with OPM, representing approximately 10% and 16%, respectively of total revenue. For the three months ended March 31, 2017, the Company had a contract with NASA and a contract with OPM representing approximately 11% and 14%, respectively of total revenue. For the three months ended March 30, 2018, the Company had a contract with OPM representing approximately 21% of total revenue.

Cash

Cash includes cash on hand which is maintained in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. As of December 31, 2017, the Company maintained $10 million in money market funds. The investment in money market funds has an immediate liquidity feature.

Restricted Cash

The Company had a letter of credit outstanding as of December 31, 2016 and 2017 from its revolving credit facility to provide credit support for certain insurance policies in the event of default. As of March 30, 2018, the restricted cash balance was not deemed necessary.

Concentration of Credit Risk

Financial instruments that are concentrations of credit risk consist principally of trade receivables. The risk related to trade receivables is mitigated by having contracts with departments and agencies of the U.S. Government and state and local governments. We do not generally require collateral or other security to support trade receivables. We do not have any off‑balance sheet credit exposure related to our trade receivables. As of December 31, 2016, 2017, and March 30, 2018, over 97% of our accounts receivable were with agents, agencies and departments of the U.S. Government.

Receivables

Receivables include amounts billed and currently due from customers, as well as amounts currently due but unbilled. The Company maintains allowances for doubtful accounts against certain receivables based upon the latest information regarding whether invoices are ultimately collectible. Assessing the collectability of customer receivables requires management judgment. The Company serves the U.S. Government and state and local governments. The Company determines its allowance for doubtful accounts by specifically analyzing individual accounts receivable, historical bad debts, current economic conditions and accounts receivable aging trends. Upon determination that a receivable is uncollectible, the receivable balance and any associated reserve are written off. Pursuant to contract provisions, U.S. Government agencies and certain other customers have title to, or a security interest in, assets related to such contracts as a result of advances, performance‑based payments and progress payments. We reflect those advances and payments as billings in excess of costs incurred for contracts that we account for on a percentage‑of‑completion basis using the cost‑to‑cost method to measure progress towards completion.

Long‑term unbilled receivables related to retainage, holdbacks and long‑term rate settlements to be billed at contract closeout are included within accounts receivable, net in the accompanying combined balance sheets.

F-12




Property and Equipment

Property and equipment are recorded at cost, and the balances are presented net of accumulated depreciation. The cost of software purchased or internally developed is capitalized, as appropriate.

Depreciation is calculated using the straight‑line method over the estimated useful lives of the assets. Furniture and fixtures are depreciated over 7 to 10 years, computer equipment is depreciated over 3 to 5 years, machinery and equipment is depreciated over 3 to 5 years, and software purchased or developed for internal use is depreciated over 3 to 5 years. Leasehold improvements are amortized over the shorter of the remaining lease term or the useful life of the improvements. Repairs and maintenance costs are expensed as incurred.

Leases

Rent expense is recorded on a straight‑line basis over the life of the applicable lease. The difference between the cash payment and rent expense is recorded as deferred rent in either other current liabilities or other long‑term liabilities in the combined balance sheets, depending on when the amounts will be recognized.

Intangible Assets

Intangible assets represent assets acquired as part of the Company’s business acquisitions and include customer contractual relationships, backlog, technology, favorable leasehold interests, non‑compete agreements, internal software, trademarks and trade names. Finite‑lived intangible assets are amortized on a straight‑line basis over the expected useful life. Customer relationships are amortized over 8 to 24 years and technology is amortized over 7 to 10 years. Backlog is amortized over 16 years, non‑compete agreements are amortized over 5 years, and leasehold interests are amortized over the shorter of the useful life of the asset or the lease term. Trademarks are amortized over the remaining legal life of the trademark if the Company does not intend to renew the trademark. Trademarks are defined as indefinite‑lived assets if the Company intends to continuously renew the trademark. Indefinite‑lived trademarks and trade names are not amortized, but are tested for impairment on at least an annual basis and more frequently if interim indicators of impairment exist. The trade name is considered to be impaired if the carrying value exceeds its estimated fair value. The Company uses the relief from royalty method to estimate the fair value. The fair value of the asset is the present value of the license fees avoided by owning the asset, or the royalty savings.

The Company no longer has any indefinite‑lived intangible assets with remaining book value other than goodwill as of December 31, 2016 and 2017, and March 30, 2018.

Goodwill
    
The Company records goodwill when the purchase price of a business acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired and liabilities assumed. Keypoint and Vencore evaluate goodwill at least annually on September 30 and October 31, respectively, for impairment or whenever events or circumstances indicate that the carrying value of goodwill may not be fully recoverable. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. During the years ended December 31, 2015, 2016 and 2017, the Company did not record any impairment of goodwill.
    
Impairment of Long‑lived Assets

The Company reviews its long‑lived assets, including property and equipment and amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for any excess of the carrying amount over the fair value of the asset.


F-13



Self‑Insurance Liability

The Company maintains self‑funded medical insurance. Self‑funded plans include health benefits and also prescription drug and dental benefits. The Company records an incurred but unreported claim liability for self‑funded plans based on an actuarial valuation within other current liabilities. The estimate of the incurred but unreported claim liability is provided by a third party valuation firm, primarily based on claims and participant data for the medical, dental, and pharmacy related costs.

Defined Benefit Plan and Other Postretirement Benefits

The Company recognizes the underfunded status of defined benefit plans on the combined balance sheets within accrued pension and other post retirement liabilities, net of current portion and other current liabilities. The Company recognizes the overfunded status of defined benefit plans on the consolidated balance sheets within other long term assets. Gains and losses and prior service costs and credits that have not yet been recognized through net periodic benefit cost are recognized in accumulated other comprehensive income (loss), net of tax effects, and will be amortized as a component of net periodic cost in future periods. The measurement date, the date at which the benefit obligations are measured, is the Company’s fiscal year‑end.

Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we consider the principal or most advantageous market in which the asset or liability would transact, and if necessary, consider assumptions that market participants would use when pricing the asset or liability.

The accounting standard established a fair value hierarchy that prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3). Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. See “Note 17 - Fair Value Measurements” for additional information on the Company’s fair value measurements.

Share‑based Compensation

Vencore measures and recognizes share‑based compensation expense for all share‑based awards made to employees and directors using fair value methods over the requisite service period. The fair value of total equity is determined using the income approach, specifically the discounted cash flow method, and the market approach, specifically the guideline public company method. Equity allocation among Vencore’s various classes of equity is determined based on the option‑pricing method. The fair value indications are adjusted to reflect the rights of the holder.
    
Vencore records the expense associated with these awards on a straight‑line basis over the five‑year vesting period with a corresponding liability. The awards are re‑measured each reporting period with the resulting increase or decrease to compensation expense and liability based on the pro rata portion of the fair value on the balance sheet date. In the case of modifications of awards, additional share‑based compensation expense is based on the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified. Share‑based compensation expense is classified as general and administrative expenses consistent with other compensation expense associated with the award recipient. See “Note 21 - Share‑based Compensation” and “Note 17 - Fair Value Measurements” for further details.

Keypoint has not recognized any compensation costs related to its incentive bonus awards issued to management of Keypoint as they are subject to performance conditions based on events that results in change in control, in which case compensation cost will be recognized over the requisite service period only if the events are probable of occurring. Keypoint has consistently followed the definition of “probable” as defined in ASC 718, relating to the change in control provisions and deemed that it is not probable of the event to occur.

F-14




Costs of Revenue

Costs of revenue consist of direct labor and associated fringe benefits, indirect overhead, subcontractor costs, travel expenses and other expenses incurred to perform on contracts.

General and Administrative Expenses

General and administrative expenses include the salaries and wages and fringe benefits of our employees not performing work directly for customers. Among the functions covered by these costs are business development, IT services, finance and accounting, legal, executive management, human resources and recruiting.

Deferred Costs
        
Deferred Direct Costs

Directly attributable costs for certain contracts where revenue is determined on a completed performance model are deferred until the final submission is done and revenue is recognized. Periodic reviews are performed to ensure such deferred costs are fully realizable.

Deferred Indirect Costs

Included in the combined balance sheets are certain costs related to the performance of our U.S. Government contracts which are required to be recorded under U.S. GAAP but are not currently allocable to contracts. Such restructuring costs represent activities across Vencore including elimination of redundant employees, capabilities and certain leased and owned facilities. Restructuring costs include severance and abandoned leases costs. As of December 31, 2016 and 2017, and March 30, 2018, deferred contract costs were approximately $14.4 million, $9.4 million, and $8.2 million, respectively. These costs are allocated to contracts when they are billable as agreed upon by the Defense Contract Management Agency and amortized by the Company over a 3 to 5 year period. We regularly assess the probability of recovery of these costs. This assessment requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future contract activity. If the level of backlog in the future does not support the continued deferral of these costs, the profitability of our remaining contracts could be adversely affected.

Income Taxes

We account for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740, Income Taxes, under which an asset and liability approach is used for the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, including net operating loss carryforwards.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences. Temporary differences are primarily the result of the differences between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured using enacted statutory tax rates applicable to the future years in which the deferred amounts are expected to be settled or realized. The effect of a change in tax rates is recognized in the provision for income tax in the period the change in rates is enacted.

A valuation allowance is recorded against deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment for a valuation allowance requires judgment on the part of the Company with respect to the benefits that may be realized.

Any interest or penalties incurred in connection with income taxes are recorded as part of income tax expense for financial reporting purposes.

F-15




Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. The Company is currently involved in various claims and legal proceedings, but does not believe the loss contingencies are probable or estimable and therefore has not accrued for them.

Comprehensive Income (Loss)

Comprehensive income (loss) is the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances from non‑owner sources. Comprehensive income (loss) consists of net income (loss); actuarial gain (loss) on post‑retirement plans, net of tax; reclassifications from accumulated other comprehensive income (loss), net of tax from post‑retirement plans; net changes in available‑for‑sale securities; and reclassifications from accumulated other comprehensive income (loss), net of tax from available‑for‑sale securities.

Variable Interest Entities

ASC Topic 810, Consolidation (“ASC Topic 810”) requires the consolidation of entities that are controlled by a company through interests other than voting interests. Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as variable interest entities (“VIE”). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE’s capital structure, contractual terms, nature of the VIE’s operations and purpose, and the Company’s relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respect to an entity on an ongoing basis.

On February 17, 2017, Vencore entered into a joint venture agreement with Havas Health, Inc. (“Havas”), a global communications company operating in over 50 countries focused on health and wellness communication and cross stakeholder strategy. The companies have joined together to form HVH Precision Analytics LLC (“HVH”). The joint venture will leverage sophisticated analytics and predictive modeling with deep therapeutic area expertise to provide unique data and insights into the niche rare disease market.

Upon formation, Vencore contributed $0.5 million in cash and $3.0 million in non‑financial assets that were measured for fair value on the contribution date, including: (i) intellectual property, (ii) inventions, (iii) trademarks and trade secrets, (iv) information technology assets and (v) customer relationships and agreements. In exchange for these contributions, Vencore received 1,000,000 of HVH’s Class A Units, or 50% of HVH’s equity interest. The cash portion of the Company’s contribution into the formation of HVH is reported as part of investing activities in the combined statements of cash flows.

The fair value of the assets contributed to HVH are categorized as Level 3 within the fair value hierarchy as certain unobservable inputs were used in determining the fair value of the assets. Vencore used a market approach in determining the fair value of the assets. Upon formation, Havas contributed $3.5 million in exchange for 50% of HVH’s equity interest. We believe this represents the exit price at measurement date for 50% of the joint venture from the perspective of a market participant in an arms‑length transaction. The assets contributed by Vencore are largely comprised of a technology asset which is utilized by HVH. This technology asset represents an unobservable input as there is no open market readily available in which the value of the assets can be observed. Based on the contribution made by Havas for 50% of HVH’s equity interest, Vencore believes the fair value of the assets to be $3.0 million. The measurement of the fair value of the contributed assets is considered to be nonrecurring so additional measurements are not conducted in following periods. There is also no difference between the highest and best use of the technology assets and the manner in which the assets are currently used by HVH as HVH was created by Vencore and Havas for the purposes of conducting analytics and modeling to provide data and insights into a niche market by utilizing the assets and cash contributed by both Vencore and Havas.

F-16




In accordance with ASC Topic 810, we identified HVH as a VIE because HVH, upon formation, has insufficient equity investment at risk and its equity investment holders at risk lack the ability, through voting or similar rights, to direct the activities that most significantly impact HVH’s economic performance. Additionally, we evaluated our variable interests in HVH and concluded that the Company is not the primary beneficiary and therefore should not consolidate HVH as we do not hold the power to direct the activities that most significantly impact HVH’s economic performance nor do we have the obligation to absorb the majority of the losses or the right to receive the majority of the benefits of the VIE. Vencore has not identified any subsequent changes to HVH’s governing documents or contractual arrangements that would change the characteristics or adequacy of the entity’s equity investment at risk in accordance with ASC Topic 810.

Vencore accounted for its investment in HVH in accordance with ASC Topic 810 and recorded a gain of $3.0 million in the first quarter of 2017, representing the fair value of contributed assets. Vencore subsequently accounts for its share of earnings or losses using the equity method of accounting in accordance with ASC 323, Investments - Equity method and joint ventures. The investment balance for HVH is included in “Other long‑term assets” on the Company’s combined balance sheet. The Company’s investment related to this VIE totaled $2.2 million as of December 31, 2017 and $1.9 million as of March 30, 2018, representing the Company’s maximum exposure to loss. Under the equity method, Vencore recognizes its share of earnings or losses of HVH in the periods for which they are reported by HVH in its financial statements.

Vencore applies the cumulative earnings approach and classifies cash inflows and outflows as operating activities unless Vencore’s cumulative distributions exceed cumulative equity in earnings recognized by Vencore (as adjusted for amortization of basis differences). When such an excess occurs, the current‑period distribution up to this excess is considered a return of investment and is classified as cash inflows from investing activities.

The Company considers whether the value of any of its equity method investments has been impaired whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considered any such decline to be other than temporary (based on various factors, including historical financial results, product development activities and the overall health of the affiliate’s industry), an impairment loss would be recorded.

Recently Issued Accounting Pronouncements

On May 1, 2015, the FASB issued ASU 2015‑07, Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the FASB Emerging Issues Task Force) (“ASU 2015‑07”). Under the amendments in this ASU, investments for which fair value is measured at net asset value (“NAV”) per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. The amendments in ASU 2015‑07 are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the NAV per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. The Company has adopted ASU 2015‑07 for the year ended December 31, 2016 and has applied this guidance with respect to the Company’s deferred compensation plan assets discussed in “Note 19 - Postretirement Plans.” As a result of adopting this ASU, investments totaling $273 million were reclassified from fair value hierarchy to NAV at December 31, 2016. At December 31, 2017, investments totaling $303 million were presented at NAV.

The Company has elected to early adopt ASU 2016‑15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), issued by the FASB on August 26, 2016 (“ASU 2016‑15”). This ASU addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero‑coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate‑owned life insurance policies (including bank‑owned life insurance policies); distributions received from equity

F-17



method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this ASU apply to all entities, including both business entities and not‑for‑profit entities that are required to present a statement of cash flows under Topic 230. Effective January 1, 2016, the Company has adopted the provisions of ASU 2016‑15 retrospectively by classifying debt extinguishment costs of $1.8 million as financing activities for the year ended December 31, 2016; reclassifying a contingent consideration payment of $9.6 million made in June 2015 from investing to a cash outflow for operating activities of $5.0 million and a cash outflow for financing activities of $4.6 million for the year ended December 31, 2015; and reclassifying activity related to corporate‑owned life insurance between operating activities and investing activities for the year ended December 31, 2015.

In March 2017, the FASB issued ASU 2017‑07, Compensation - Retirement Benefit (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017‑07”), which changes the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Service cost is included within the same income statement line item as other compensation costs arising from services rendered during the period, while other components of net periodic benefit cost will be presented separately outside of operating income. Additionally, only service costs may be capitalized in assets. ASU 2017‑07 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted the requirements of ASU No. 2017-07 on January 1, 2018 using retrospective income statement presentation. Service cost is now reported as cost of revenue and the other components of net periodic benefit cost are reported as Other, net in the Combined Statements of Operations. The adoption of ASU 2017-07 resulted in the reclassification of net credits from Cost of revenue to Other, net of $11,634 thousand, $6,726 thousand and $9,259 thousand for the years ended December 31, 2015, 2016 and 2017, respectively, and $2,324 thousand and $2,329 thousand for the three-month periods ended March 31, 2017 and March 30, 2018, respectively. See Note 19 “Postretirement Plans” for the components of net periodic benefit cost.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, clarifying the treatment of restricted cash on the statements of cash flows. Under the new standard, amounts considered restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts on the statements of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. The Company adopted the standard on January 1, 2018, on a retrospective basis. The adoption of the amendment changed the presentation of certain information in the Combined Statements of Cash Flows, resulting in the presentation of a reconciliation of total cash, cash equivalents and restricted cash and restricted cash equivalents and their related captions on the balance sheet amounting to $25.5 million, $160 thousand, $0, $0 and $80 thousand for the years ended December 31, 2015, 2016 and 2017 and the three months ended March 31, 2017 and March 30, 2018, respectively.

Standards Issued But Not Yet Effective

The following ASUs were recently issued but have not yet been adopted:

In May 2014, the FASB issued ASU 2014‑09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014‑09”). ASU 2014‑09 will eliminate transaction‑ and industry‑specific revenue recognition guidance under current U.S. GAAP and replace it with a principle‑based approach for determining revenue recognition. ASU 2014‑09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014‑09 is effective for annual reporting periods beginning after December 15, 2017 and interim periods therein, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. ASU 2014‑09 may be adopted either retrospectively or on a modified retrospective basis whereby ASU 2014‑09 would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch‑up adjustment recorded to beginning retained earnings at the effective date for existing contracts with remaining performance obligations.

In 2016, the FASB issued ASU 2016‑08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016‑10, Revenue from Contracts with Customers

F-18



(Topic 606): Identifying Performance Obligations and Licensing, and ASU 2016‑12, Revenue from Contracts with Customers (Topic 606): Narrow‑Scope Improvements and Practical Expedient to provide supplemental adoption guidance and clarification to ASU 2014‑09. The effective date for these new standards and transition requirements are the same as the effective date and transition requirements for ASU 2014‑09.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and require entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosure. The effective date for these new standards and transition requirements are the same as the effective date and transition requirements for ASU 2014‑09.

Management is in the process of reviewing the Company’s revenue contracts and is performing an assessment of the potential effects of the standard on the Company’s combined financial statements and disclosures, accounting policies and internal control over financial reporting. We developed a detailed implementation plan, which included, among other things, an update to our policies, development of disclosures, updates to our controls and application of the guidance across our contract population. We are still assessing the qualitative and quantitative impacts to our combined financial statements as well as a transition method. Management plans to adopt the new standard effective January 1, 2019.

In January 2016, the FASB issued ASU 2016‑01, Financial Instruments - Overall (Subtopic 825‑10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016‑01”). The pronouncement requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These changes become effective for the Company’s fiscal year beginning January 1, 2019. The adoption of ASU 2016‑01 is being evaluated by the Company and the adoption is not expected to have a significant impact on the Company’s combined financial position or results of operations.

In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842) (“ASU 2016‑02”) that provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016‑02 requires a lessee to recognize assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. ASU 2016‑02 includes a short‑term lease exception for leases with a term of 12 months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. ASU 2016‑02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. The Company is currently evaluating the effect of the standard on its combined financial statements and related disclosures. Vencore will adopt this standard using a modified retrospective method.

On January 26, 2017, the FASB issued ASU 2017‑04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017‑04”), which simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017‑04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017‑04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. Finally, this ASU amends the Overview and Background sections of the Accounting Standards Codification as part of the

F-19



FASB’s initiative to unify and improve such sections across Topics and Subtopics. Public entities are required to prospectively adopt the standard for their annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this standard in the fourth quarter of 2017 in conjunction with our annual goodwill impairment evaluation process.

3. Business Combination

On May 23, 2014, Vencore acquired QNA SSG through the purchase of 100% of the outstanding capital stock of QinetiQ North America, Inc. The acquisition was accounted for under ASC Topic 805. Under ASC Topic 805 the assets and liabilities acquired were recorded at fair value. A valuation of the identifiable assets and liabilities acquired was performed and a purchase price allocation resulted in new identifiable intangible assets. The excess of the purchase price over assets acquired and liabilities assumed was allocated to goodwill. Total purchase price consideration recorded in 2014 was $159.0 million.

As part of the total consideration, Vencore agreed to pay contingent consideration of up to $50.0 million in cash depending on QNA SSG’s financial performance between April 1, 2014 and March 31, 2015. Upon the effective date of the acquisition, management determined the fair value of contingent consideration to be $4.6 million. On a quarterly basis thereafter, Vencore re‑measured the liability and recorded an additional amount, representing a change in estimate, which totaled $12.9 million for the year ended December 31, 2014. In the second quarter of 2015, Vencore settled and paid contingent consideration to the seller in the amount of $9.6 million and recorded a gain of $7.9 million, which is reflected in the combined statements of operations for the year ended December 31, 2015.

4. Lease Abandonment Liability

The Company accounted for the lease abandonment liability in accordance with ASC Topic 420 Exit or Disposal Costs and reflected the change in the statement of operations. The terms of the operating leases extend through 2023.

On a monthly basis as payments toward the leases are made, the liability is released, which resulted in a $7.0 million, $4.3 million, and $0.5 million reduction of the liability balance for the year ended December 31, 2016 and 2017, and three months ended March 30, 2018, respectively. Vencore also recorded a change in estimate of the lease abandonment liability during 2016 and 2017 and three months ended March 30, 2018 in the amount of $1.6 million, $0.8 million, and $0.1 million, respectively, due to changes in sublease expectations and lower costs than forecasted.

Changes in the lease abandonment liability are as follows (in thousands):
Accrual balance at December 31, 2015
$
18,928

Non‑cash activities
(1,598
)
Lease payments in liability
(7,002
)
Accrual balance at December 31, 2016
10,328

Non‑cash activities
(834
)
Lease payments in liability
(4,344
)
Accrual balance as of December 31, 2017
5,150

Non‑cash activities
(69
)
Lease payments in liability
(548
)
Accrual balance as of March 30, 2018 (unaudited)
$
4,533


Of the total $10.3 million, $5.2 million, and $4.5 million as of December 31, 2016, 2017, and March 30, 2018, respectively, $4.4 million, $1.9 million, and $1.8 million, respectively, are included within other current liabilities (“Note 11 - Other Current Liabilities”), and $5.9 million, $3.3 million, and $2.7 million, respectively, are included within other long‑term liabilities (“Note 12 - Other Long‑term Liabilities”).


F-20



5. Deferred Costs
    
Deferred Indirect Costs

In prior years Vencore faced program consolidations, delayed contract awards, potential sequestration effects and significant reduction in customers’ budgets. Additionally, as a result of the QNA SSG acquisition, Vencore continued its restructuring initiatives. Restructuring activities across Vencore included elimination of redundant employees, capabilities and certain leased and owned facilities. Specifically, these initiatives included internal facility restructurings, continuation and expansion of the employee termination and realignments, and IT and other internal systems consolidations. As part of a facility consolidation project, Vencore sold a building at Vencore Valley Forge, Pennsylvania. Vencore had also previously exited leases due to the consolidation of heritage acquisition facilities in 2013. The consolidation of leases from prior acquisitions was completed by December 31, 2014. These restructuring costs are deferred and allocated to contracts when they are billable as agreed upon by the Defense Contract Management Agency and amortized by Vencore on a 3 to 5 year period.

Changes in the asset are as follows (in thousands):
Balance at December 31, 2014
$
11,159

Add: Severance and related costs
4,614

Add: Write‑off of a building(a)
4,208

Add: Professional and other fees
2,399

Less: Costs released to contracts
(2,854
)
Balance at December 31, 2015
$
19,526

Add: Severance and related costs
1,187

Add: Professional and other fees
175

Less: Costs released to contracts
(6,493
)
Balance at December 31, 2016
$
14,395

Add: Severance and related costs
167

Less: Costs released to contracts
(5,143
)
Balance at December 31, 2017
$
9,419

Add: Severance and related costs
16

Less: Costs released to contracts
(1,194
)
Balance at March 30, 2018 (unaudited)
$
8,241

(a)    Represents the write‑off of a building that was captured in deferred contract costs.

Of the total $14.4 million, $9.4 million, and $8.2 million as of December 31, 2016 and 2017, and March 30, 2018, respectively, $5.1 million, $4.8 million, and $4.8 million, respectively, are included within deferred costs in our combined balance sheets, and $9.3 million, $4.6 million, and $3.4 million, respectively, are included within other long‑term assets on the combined balance sheets (“Note 8 - Other Long‑term Assets”).

Changes in the related liability are as follows (in thousands):

F-21



 
Severance and
Related Costs
Professional
and Other Fees
Total
Balance as of December 31, 2014
$
3,250

$
47

$
3,297

Additions
4,614

2,399

7,013

Cash payments
(7,298
)
(2,432
)
(9,730
)
Balance as of December 31, 2015
566

14

580

Additions
1,187

175

1,362

Cash payments
(1,753
)
(189
)
(1,942
)
Balance as of December 31, 2016



Additions
167


167

Cash payments
(167
)

(167
)
Balance as of December 31, 2017



Additions
16


16

Cash payments
(16
)

(16
)
Balance as of March 30, 2018 (unaudited)
$

$

$


Deferred Direct Costs
        
Keypoint defers costs directly related to the production of cases that have been partially completed. Keypoint allocates a portion of total production costs in the month to cases that have been submitted as fieldwork finished and recognized as revenue and a portion to partially completed cases. The portion allocated to partially completed cases is deferred to be recognized in the period when the case is completed as fieldwork finished and related revenue is recognized.

Keypoint’s model for calculating deferred direct costs is as follows:
Total cost of production (for any period)
= Cost per SU X
Number of SU’s on partially completed cases (in any period)
= Deferred Direct Cost
Total # of SU’s produced (in that period)
where SU represents the Source Unit, Keypoint’s measurement of the amount of work.

Changes in the asset are as follows (in thousands):
Balance at December 31, 2014
$
9,939

Add: Production costs
6,853

Less: Costs released to contracts
(646
)
Balance at December 31, 2015
16,146

Add: Production costs
6,619

Less: Costs released to contracts
(6,181
)
Balance at December 31, 2016
16,584

Add: Production costs
23,214

Less: Costs released to contracts
(20,309
)
Balance at December 31, 2017
19,489

Add: Production costs
7,716

Less: Costs released to contracts
(6,372
)
Balance at March 30, 2018 (unaudited)
$
20,833



Total deferred direct costs of $16.6 million, $19.5 million, and $20.8 million, as of December 31, 2016, 2017, and March 30, 2018, respectively are included within deferred costs in our combined balance sheets.


F-22



6. Accounts Receivable

Accounts receivable, net consisted of the following components (in thousands):
 
As of December 31,
 
As of
March 30,
 
2016
2017
 
2018
 
 
 
 
(Unaudited)
Accounts receivable - billed
$
61,055

$
55,186

 
$
57,721

Accounts receivable - unbilled
110,443

129,488

 
128,489

Allowance for doubtful accounts
(4,961
)
(4,337
)
 
(4,342
)
Accounts receivable - net
$
166,537

$
180,337

 
$
181,868


The changes in the Company’s allowance for doubtful accounts as of December 31, 2015, 2016 and 2017 and as of March 30, 2018, were as follows (in thousands):
Balance at December 31, 2015
$
4,810

Charged to costs and expenses
424

Deductions
(273
)
Balance at December 31, 2016
4,961

Charged to costs and expenses
174

Deductions
(798
)
Balance at December 31, 2017
4,337

Charged to costs and expenses
31

Deductions
(26
)
Balance at March 30, 2018 (unaudited)
$
4,342


Unbilled amounts represent revenues for which billings have not been presented to customers at period end. The Company includes in current accounts receivable certain unbilled amounts which may extend beyond one year. Long‑term unbilled includes receivables related to retainage, holdbacks and long‑term rate settlements to be billed at contract closeout of $4.4 million, $3.6 million, and $3.7 million, as of December 31, 2016 and 2017, and March 30, 2018, respectively.

As of December 31, 2016 and 2017, and March 30, 2018, the Company had $15.6 million, $25.6 million, and $27.7 million, respectively, within accounts receivable related to projects with OPM.

7. Prepaid and Other Current Assets

Prepaid and other current assets consisted of the following components (in thousands):

F-23



 
As of December 31,
 
As of
March 30,
 
2016
2017
 
2018
 
 
 
 
(Unaudited)
Taxes receivable
$
6,382

$

 
$

Prepaid insurance
1,294

231

 
1,063