UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number 333-145355

VANGENT, INC.

Delaware		20-1961427
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

4250 North Fairfax Drive
Suite 1200
Arlington, Virginia 22203
(703) 284-5600

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

There were 100 shares of common stock of Vangent, Inc. issued and outstanding at September 26, 2009.

 

 

VANGENT, INC.
Table of Contents

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 26, 2009 and December 31, 2008 (unaudited)		3
Condensed Consolidated Statements of Operations for the three and nine months ended September 26, 2009 and September 27, 2008 (unaudited)		4
Condensed Consolidated Statements of Stockholder’s Equity and Comprehensive Income (Loss) for the nine months ended September 26, 2009 and September 27, 2008 (unaudited)		5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 26, 2009 and September 27, 2008 (unaudited)		6
Notes to Condensed Consolidated Financial Statements (unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures about Market Risk		31
Item 4T. Controls and Procedures		32
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		32
Item 1A. Risk Factors		32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3. Defaults Upon Senior Securities		32
Item 4. Submission of Matters to a Vote of Security Holders		32
Item 5. Other Information		32
Item 6. Exhibits		33
Signature		33
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Forward-Looking Statements

          This quarterly report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as expectation or belief concerning future events. Forward-looking statements involve risks and uncertainties. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “plans,” “expects,” “could,” “estimates,” “intends,” “may,” and similar expressions, or the negative thereof, are intended to identify forward-looking statements. Statements regarding our contract backlog are examples of forward-looking statements. The Company cautions that these statements are further qualified by important economic, competitive, governmental and technological factors that could cause our business, strategy or actual results of operations or events to differ materially from those in the forward-looking statements, including, without limitation, changes in the demand for services that the Company provides; our ability to generate new business in the United States and abroad; activities of competitors; bid protests; changes in operating expenses; our substantial debt; changes in the availability of and cost of capital; general economic and business conditions and the other factors set forth under “Risk Factors” in this quarterly report on Form 10-Q and in our annual report on Form 10-K for the year ended December 31, 2008. Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances, and there can be no assurance that any forward-looking statement contained herein will prove to be accurate. The Company assumes no obligation to update the forward-looking statements.

PART I. FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

Vangent, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per-share amounts)
(unaudited)

		September 26,				December 31,
		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	32,078			$	21,134
Trade receivables, net			122,267				129,859
Prepaid expenses			7,370				6,134
Deferred contract costs			5,872				—
Other current assets			6,606				6,279
Total current assets			174,193				163,406
Property and equipment, net			29,959				27,152
Intangible assets, net			162,004				177,999
Goodwill			286,866				286,866
Deferred debt financing costs, net			8,568				10,197
Other assets			429				654
Total assets		$	662,019			$	666,274
Liabilities and Stockholder’s Equity
Current liabilities:
Current portion of long-term debt		$	594			$	—
Accounts payable and accrued liabilities			71,156				67,109
Fair value of liability derivatives, current portion			4,837				6,063
Accrued interest payable			2,510				8,304
Deferred tax liability			5,009				3,962
Advance payments on contracts			2,702				2,695
Total current liabilities			86,808				88,133
Long-term debt, net of current portion			419,772				420,366
Other long-term liabilities			8,003				7,879
Deferred tax liability			9,226				5,259
Total liabilities			523,809				521,637
Commitments and contingencies (Note 8)
Stockholder’s equity:
Common stock, $0.01 par value, 1,000 shares authorized, and 100 shares issued and outstanding			—				—
Additional paid-in capital			207,104				206,328
Accumulated other comprehensive loss			(9,923	)			(13,135	)
Accumulated deficit			(58,971	)			(48,556	)
Total stockholder’s equity			138,210				144,637
Total liabilities and stockholder’s equity		$	662,019			$	666,274

See notes to condensed consolidated financial statements.

Vangent, Inc.
Condensed Consolidated Statements of Operations
(in thousands)
(unaudited)

		Three Months Ended								Nine Months Ended
		September 26,				September 27,				September 26,				September 27,
		2009				2008				2009				2008
Revenue		$	149,393			$	133,391			$	427,875			$	400,800
Cost of revenue			128,567				106,470				362,742				329,570
Gross profit			20,826				26,921				65,133				71,230
General and administrative expenses			10,803				12,445				31,638				38,702
Selling and marketing expenses			4,967				3,757				13,849				11,963
Operating income			5,056				10,719				19,646				20,565
Interest expense			8,669				8,719				25,628				26,895
Interest and other (income) expense, net			7				(185	)			(86	)			(634	)
Income (loss) before income taxes			(3,620	)			2,185				(5,896	)			(5,696	)
Provision for income taxes			1,647				2,632				4,519				5,728
Net loss		$	(5,267	)		$	(447	)		$	(10,415	)		$	(11,424	)

See notes to condensed consolidated financial statements.

Vangent, Inc.
Condensed Consolidated Statements of Stockholder’s Equity and Comprehensive Income (Loss)
(in thousands, except share amounts)
(unaudited)

														Accumulated
										Additional				Other								Total
		Common Stock								Paid-in				Comprehensive				Accumulated				Stockholder's
		Shares				Amount				Capital				Income (Loss)				Deficit				Equity
Balance, December 31, 2008			100			$	—			$	206,328			$	(13,135	)		$	(48,556	)		$	144,637
Effect of hedging activities, net of tax			—				—				—				2,162				—				2,162
Foreign currency translation adjustment			—				—				—				1,050				—				1,050
Net loss			—				—				—				—				(10,415	)			(10,415	)
Total comprehensive loss																							(7,203	)
Equity-based compensation			—				—				776				—				—				776
Balance, September 26, 2009			100			$	—			$	207,104			$	(9,923	)		$	(58,971	)		$	138,210
Balance, December 31, 2007			100			$	—			$	205,275			$	(2,937	)		$	(22,049	)		$	180,289
Effect of hedging activities, net of tax			—				—				—				821				—				821
Foreign currency translation adjustment			—				—				—				(710	)			—				(710	)
Net loss			—				—				—				—				(11,424	)			(11,424	)
Total comprehensive loss																							(11,313	)
Equity-based compensation			—				—				839				—				—				839
Balance, September 27, 2008			100			$	—			$	206,114			$	(2,826	)		$	(33,473	)		$	169,815

See notes to condensed consolidated financial statements.

Vangent, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

		Nine Months Ended
		September 26,				September 27,
		2009				2008
Cash flows from operating activities
Net loss		$	(10,415	)		$	(11,424	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of intangible assets			15,995				15,851
Depreciation and amortization			8,960				10,475
Equity-based compensation expense			776				839
Deferred income taxes			5,054				4,889
Changes in operating assets and liabilities, net of effect of acquisition:
Trade receivables			8,238				574
Prepaid expenses and other assets			(4,053	)			2,886
Accounts payable and accrued liabilities			4,161				(6,214	)
Accrued interest payable			(5,794	)			(5,152	)
Advance payments on contracts			7				(1,907	)
Other			107				125
Net cash provided by operating activities			23,036				10,942
Cash flows from investing activities
Acquisition, net of cash acquired			—				(3,892	)
Capital expenditures			(12,193	)			(6,796	)
Net cash used in investing activities			(12,193	)			(10,688	)
Cash flows from financing activities
Repayment of senior secured term loan			—				(7,834	)
Capital lease payments			(264	)			(205	)
Net cash used in financing activities			(264	)			(8,039	)
Effect of exchange rate changes on cash and cash equivalents			365				(217	)
Net increase (decrease) in cash and cash equivalents			10,944				(8,002	)
Cash and cash equivalents, beginning of period			21,134				26,093
Cash and cash equivalents, end of period		$	32,078			$	18,091
Supplemental noncash investing and financing activities
Leasehold improvements provided by lessor under operating leases		$	813			$	2,503
Supplemental cash flow information
Interest paid		$	29,116			$	30,361
Income taxes paid		$	781			$	405

See notes to condensed consolidated financial statements.

Vangent, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands)
(unaudited)

1. Organization and Basis of Presentation

Basis of Presentation

          Vangent, Inc. (“Vangent” or “Company”) is a 100%-owned subsidiary of Vangent Holding Corp. Vangent Holding LLC is the majority shareholder of Vangent Holding Corp. Vangent Holding LLC is 90% owned by The Veritas Capital Fund III, L.P. and 10% owned by Pearson plc (“Pearson”).

          The unaudited condensed consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries and have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and note disclosures normally included in complete financial statements have been condensed or omitted pursuant to the applicable rules and regulations. The Company believes that all disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes thereto included in our annual report on Form 10-K for the year ended December 31, 2008.

          In the opinion of management, all normal and recurring adjustments necessary to fairly present the financial position and results of operations as of and for the periods presented have been included. The results of operations presented are not necessarily indicative of the results to be expected for the full fiscal year or for any future periods. The Company uses estimates and assumptions in the preparation of its financial statements. The estimates are primarily based on historical experience and business knowledge and are revised as circumstances change. Actual results could differ materially from those estimates.

Nature of Operations

          Vangent serves customers in the U.S. government, international governments, higher education, and the private sector. The Company’s primary customer focus is U.S. and international governmental agencies which utilize third-party providers to design, build and operate technologically advanced systems. The Department of Health and Human Services represented 41%, the Department of Education represented 16%, and the Department of Defense represented 10% of total revenue for the nine months ended September 26, 2009.

Fiscal Year and Quarterly Periods

          The Company’s fiscal year begins on January 1 and ends on December 31. Quarterly periods are based on a four-week, four-week, five-week methodology ending on the Saturday nearest to the end of the quarter to align with the Company’s domestic business processes. Foreign subsidiaries are consolidated based on the calendar quarter.

Variable Interest Entities

          The Company has interests in two foreign joint ventures that began providing government services in the fourth quarter of 2008 in the United Kingdom and in the United Arab Emirates. The joint ventures provide subcontracting services under foreign government agency programs. In the United Kingdom arrangement, the Company has guaranteed joint venture performance under a fixed-priced subcontract. Under both joint venture agreements the Company holds less than a majority ownership interest in the joint ventures, is entitled to a majority of the income and losses of the joint ventures, and has determined that it is the primary beneficiary of each of the joint ventures. The joint ventures are fully consolidated in the Company’s consolidated financial statements as follows: total revenue of $1,464 and total net loss of $116 for the nine months ended September 26, 2009, and total assets of $1,482 dedicated to the activities of the joint ventures at September 26, 2009.

          The Company has an interest in a joint venture in Argentina that began providing government services in the second quarter of 2009. Under the arrangement, the Company has guaranteed joint venture performance under a fixed-priced subcontract and has committed

to fund 50% of the joint venture’s future working capital requirements amounting to $215. The Company holds less than a majority ownership interest in the joint venture and is entitled to 50% of the income and losses of the joint venture. The Company has determined that it is not the primary beneficiary of the joint venture. The joint venture is accounted for under the equity method of accounting in the Company’s condensed consolidated financial statements as follows: equity in net income of $131 for the nine months ended September 26, 2009, and investment in joint venture of $363 included in other current assets at September 26, 2009.

Subsequent Events

          Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. The Company has evaluated subsequent events through November 9, 2009, the date of issuance of the condensed consolidated financial statements. Financial statements reflect the effects of subsequent events that provide additional evidence about conditions at the balance sheet date (recognized subsequent events). The effects of subsequent events that provide evidence about conditions that arose after the balance sheet date (nonrecognized subsequent events) are not reflected in the financial statements but are disclosed if the financial statements would otherwise be misleading.

2. Recent Accounting Pronouncements

          In June 2009, the Financial Accounting Standards Board (“FASB”) approved the FASB Accounting Standards Codification^TM (“ASC”) as the single source of authoritative nongovernmental U.S. generally accepted accounting principles. The Codification reorganizes thousands of pronouncements into roughly 90 accounting topics and displays the topics using a consistent structure. All existing FASB accounting standard documents are superseded, and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification became effective for interim and annual periods ending after September 15, 2009. The Codification did not have a material impact on the Company’s results of operations or financial position.

          In June 2009, the FASB issued an update to the ASC topic, Consolidations, dealing with the consolidation of variable interest entities. The new requirements change how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated and requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. The new requirements become effective on January 1, 2010. The Company is evaluating the new requirements but does not expect that adoption will have a material effect on its results of operations or financial position.

          In August 2009, the FASB issued an ASC update, Accounting for Redeemable Equity Instruments, to reflect the views of the staff of the Securities and Exchange Commission regarding the application of Accounting Series Release No. 268, Presentation in Financial Statements of Redeemable Preferred Stocks. The Company does not expect that adoption of the update will have a material effect on its results of operations or financial position.

          In August 2009, the FASB issued an ASC update, Fair Value Measurements and Disclosures — Measuring Liabilities at Fair Value, to provide clarification for circumstances in which a quoted price in an active market for the identical liability is not available. Fair value would be measured using one or more of the following techniques: (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset; or quoted prices for similar liabilities when traded as assets; or (ii) another valuation technique that is consistent with the principles of fair value measurement such as an income approach or a market approach. The update becomes effective for reporting periods beginning after August 27, 2009. The Company does not expect that adoption of the update will have a material effect on its results of operations or financial position.

          In October 2009, the FASB issued an ASC update, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, to (i) provide guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated; (ii) require an entity to allocate revenue using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of the selling price; and (iii) eliminate the use of the residual method. The update becomes effective on a prospective basis in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The Company does not expect that adoption of the update will have a material effect on its results of operations or financial position.

3. Trade Accounts Receivable

          A summary of trade accounts receivable and customers that represented 10% or more of trade accounts receivable follows:

		September 26,				December 31,
		2009				2008
Trade accounts receivable		$	62,424			$	64,183
Billable trade receivables			41,161				48,657
Unbilled trade receivables pending completion of milestones, contract authorizations, and retainage			18,348				15,797
Other			561				1,427
			122,494				130,064
Allowance for doubtful accounts			(227	)			(205	)
Trade accounts receivable, net		$	122,267			$	129,859
Trade accounts receivable from major customers
Department of Health and Human Services			36	%			41	%
Department of Education			10	%			10	%
Department of Defense			11	%				*

4. Intangible Assets

          A summary of intangible assets follows:

		Weighted
		Average Life		September 26,				December 31,
		(in years)		2009				2008
Customer relationships		10.7		$	205,724			$	205,724
Intellectual property		Indefinite			11,178				11,178
Other		4			658				658
					217,560				217,560
Accumulated amortization					(55,556	)			(39,561	)
				$	162,004			$	177,999

          Amortization of intangible assets was $15,995 for the nine months ended September 26, 2009, and $15,851 for the nine months ended September 27, 2008. Amortization of the unamortized balance of intangible assets is scheduled as follows:

Years Ending December 31
2009 (remaining three months)		$	5,331
2010			21,326
2011			20,954
2012			20,791
2013			20,791
Thereafter			61,633
		$	150,826

5. Long-Term Debt

          A summary of long-term debt follows:

		September 26,				December 31,
		2009				2008
Term loan under senior secured credit facility, due February 14, 2013, with interest at variable rates (2.92% at September 27, 2009)		$	230,366			$	230,366
9 5/8% Senior subordinated fixed rate notes, due February 15, 2015			190,000				190,000
			420,366				420,366
Less: current portion of long-term debt			(594	)			—
		$	419,772			$	420,366
Scheduled maturities of long-term debt
2009 (remaining three months)						$	—
2010							1,781
2011							2,375
2012							2,375
2013							223,835
2014							—
2015							190,000
						$	420,366

Senior Secured Credit Facility

          At September 26, 2009, the senior secured credit facility consisted of a term loan of $230,366 due February 14, 2013, and an available revolving credit facility of up to $50,000 that expires February 14, 2012. There were no borrowings outstanding under the revolving credit facility at September 26, 2009. A commitment fee of 0.5% per year is paid on the available unused portion of the revolving credit facility.

          Borrowings under the senior secured credit facility bear interest at a rate equal to, at the Company’s option, either: (i) the base rate, as defined, plus an applicable margin of 1.00-1.50%, or (ii) the adjusted LIBOR, as defined, plus an applicable margin of 2.00-2.50%. The term loan is scheduled to be repaid in 11 quarterly installments of $594 beginning June 2010 with the balance due February 14, 2013. Borrowings are subject to mandatory prepayment with (i) 100% of the net cash proceeds of certain asset sales; (ii) 50% of the net cash proceeds of equity offerings or capital contributions subject to certain exceptions; (iii) 100% of the net cash proceeds of additional debt; and (iv) a percentage of annual excess cash flow, as defined. Payments resulting from the annual excess cash flow requirement are due 90 days following the year end. Based on the excess cash flow calculation for the year ended December 31, 2008, no mandatory payment was required for 2009. Since the excess cash flow requirement is based on annual cash flow, it is not possible at the present time to estimate the amount, if any, that would become payable in March 2010 or subsequent years.

          Borrowings are secured by accounts receivable, cash, intellectual property and other assets and are guaranteed jointly and severally, by all existing and future domestic subsidiaries. Foreign subsidiaries do not guarantee the borrowings. The senior secured credit facility contains various customary affirmative and negative covenants and events of default, including, but not limited to, restrictions on the disposal of assets, incurring additional indebtedness or guaranteeing obligations, paying dividends, creating liens on assets, making investments, loans or advances, and compliance with a maximum consolidated leverage ratio. As of September 26, 2009, the Company was in compliance with all of the affirmative and negative covenants.

          At September 26, 2009, the more restrictive covenants related to (i) compliance with a maximum consolidated leverage ratio and (ii) loans and advances to non-guarantor subsidiaries. The consolidated leverage ratio, as defined in the senior secured credit facility, is based on consolidated indebtedness, as defined, reduced by unrestricted cash and cash equivalents in excess of $5,000, divided by adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, adjusted for unusual and non-recurring items) for a twelve-month period. As of September 26, 2009, the consolidated leverage ratio was 5.80 to 1, compared with the maximum allowable ratio of 6.25 to 1 applicable to the period. At September 26, 2009, outstanding loans and advances by Vangent, Inc. to Vangent Mexico, S.A. de C.V., a non-guarantor subsidiary, amounted to $4,448 compared with the maximum allowable amount of $10,000 under the senior secured credit facility.

9 5/8% Senior Subordinated Notes

          In February 2007, the Company completed an offering of $190,000 principal amount of 9 5/8% senior subordinated notes due February 15, 2015. Interest accrues at the fixed rate of 9 5/8% and is paid semi-annually. The notes are general unsecured obligations of the Company and are subordinated to all existing and future senior loans including borrowings under the senior secured credit facility. The notes are guaranteed, jointly and severally, by all existing and future domestic subsidiaries. Foreign subsidiaries do not guarantee the notes.

          In the event of an equity offering on or prior to February 15, 2010, the Company may redeem the notes with the net cash proceeds of one or more equity offerings at 109.625% of the principal amount, provided that at least 65% of the principal amount of the notes originally issued remains outstanding immediately following such redemption.

          With respect to a redemption not related to an equity offering on or prior to February 15, 2010, the Company may redeem all or part of the notes at any time prior to February 15, 2011, at a redemption price of 100% of the principal amount plus an applicable premium, as defined, and additional interest, as defined. The notes are redeemable at the option of the Company at the redemption price of 104.8125% of the principal amount on or after February 15, 2011, 102.4063% on or after February 15, 2012, and 100% on or after February 15, 2013.

6. Derivative Instruments, Hedging Activities and Financial Instruments

          The Company uses derivative financial instruments to manage interest rate risk and certain foreign currency exchange rate risks. Interest rate swap agreements are used as cash-flow hedges of interest rate risk associated with variable-rate borrowings under the senior secured credit facility. Foreign currency contracts are used by Vangent Mexico, S.A. de C.V. (“Vangent Mexico”), a 100% owned subsidiary, as cash-flow hedges of exchange rate risks associated with purchase commitments and obligations in currencies other than the Mexican peso. Derivatives can involve credit risk from the possible non-performance by the parties. At September 26, 2009, the fair values of the derivative contracts resulted in derivative liabilities and the fair values reflect the Company’s credit adjusted discount rate. The Company does not enter into derivative transactions for trading or speculative purposes.

          As long as the derivative financial instrument qualifies as a cash-flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and is subsequently reclassified to income in the period or periods in which the hedged transaction affects income. At September 26, 2009, the following derivative financial instruments were outstanding:

		Notional
Derivative Financial Instruments		Amount				Description
Interest rate swap agreements		$	185,000			Pay fixed and receive variable
Foreign currency forward contracts		$	7,126			Sell Mexican Pesos

Interest Rate Swap Agreements on Variable-Rate Term Loan

          The Company has entered into interest rate swap agreements with Wachovia Bank, N.A., as counterparty, to hedge fluctuations in LIBOR interest rates on a portion of the term loan borrowing under the senior secured credit facility. The Company exchanged its variable LIBOR interest rate for a fixed interest rate. At September 26, 2009, the notional amounts of the pay-fixed/receive-variable interest rate swap agreements were as follows:

Fixed

Variable

Notional

Interest Rate

Interest Rate

Date Entered

Amount

to be Paid

to be Received

Period Covered

February 2007

$

110,000

5.215

%

3-month LIBOR

February 2009 to February 2010

April 2008

$

75,000

3.280

%

3-month LIBOR

April 2008 to February 2010

April 2008

$

150,000

3.280

%

3-month LIBOR

February 2010 to February 2011

          The Company documented its risk management objective and nature of the risks being hedged and designated the interest rate swaps as cash flow hedges at inception of the agreements. The Company performs a quarterly analysis of the effectiveness of the hedge and has concluded that the hedging relationship is highly

effective due to the consistency of critical terms of the interest rate swap agreements and related term loan under the senior secured credit facility. The fair value of the interest rate swap liability was $6,873 at September 26, 2009, of which $6,101 represents an unrealized loss that is reported in accumulated other comprehensive loss in the consolidated statement of stockholder’s equity. The ineffective portion is charged to interest expense and was not material.

Foreign Currency Contracts

          The Company’s foreign subsidiary, Vangent Mexico, entered into foreign currency forward exchange contracts with Wachovia Bank, N.A., as counterparty, to hedge fluctuations in the Mexican peso exchange rates. At September 26, 2009, the total notional amount of the contracts was $7,126.

          The Company documented its risk management objective and nature of the risks being hedged and has designated the foreign currency contracts as a cash flow hedge at inception of the agreements. The Company performs a quarterly analysis of the effectiveness of the hedge and has concluded that the hedging relationship is highly effective due to the consistency of critical terms of the foreign currency contracts and the related forecasted transactions. The fair value of the derivative liability for the foreign currency contracts was $350 at September 26, 2009, and an unrealized loss of $511 is included in accumulated other comprehensive loss in the consolidated statement of stockholder’s equity.

Fair Value Measurements

          The fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels is summarized as follows:

	•	Level 1	Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
	•	Level 2	Inputs, other than quoted prices that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
	•	Level 3	Unobservable inputs that reflect the reporting entity’s own assumptions.

          A summary of the bases used to measure financial assets and financial liabilities reported at fair value on a recurring basis in the consolidated balance sheets follows:

		September 26,				December 31,
		2009				2008
Liabilities
Level 1 - Quoted prices in active markets for identical items		$	—			$	—
Level 2 - Significant other observable inputs:
Interest rate swap agreements			6,873				9,342
Foreign currency forward contracts			350				—
Total Level 2			7,223				9,342
Level 3 - Significant unobservable inputs			—				—
Total liabilities		$	7,223			$	9,342

Derivative Instruments and Hedging Activities

          A tabular disclosure of the fair values of derivative instruments reported in the balance sheet and the effect of derivative instruments on the statements of operations follows:

Statements of Operations Data

Location of Gain

(Loss)

Location of

Recognized in

Amount of Gain

Gain (Loss)

Income on

(Loss) Recognized

Reclassified

Derivative

in Income on

from

(Ineffective

Derivative

Accumulated

Amount of Gain (Loss)

Portion and

(Ineffective

Amount of Gain (Loss)

OCI into

Reclassified from

Amount

Portion and

Derivatives in Cash

Recognized in OCI on

Income

Accumulated OCI into

Excluded from

Amount Excluded

Flow Hedging

Derivative (Effective

(Effective

Income (Effective

Effectiveness

from Effectiveness

Relationships

Portion)

Portion)

Portion)

Testing)

Testing)

Three Months Ended

Three Months Ended

Three Months Ended

September 26, 2009

September 26, 2009

September 26, 2009

Interest rate swap agreements

$

1,006

Interest expense

$

(1,807

)

Interest expense

$

23

Foreign currency forward contracts

34

Cost of revenue

(192

)

Cost of revenue

—

$

1,040

$

(1,999

)

$

23

Nine Months Ended

Nine Months Ended

Nine Months Ended

September 26, 2009

September 26, 2009

September 26, 2009

Interest rate swap agreements

$

(1,927

)

Interest expense

$

(4,600

)

Interest expense

$

(70

)

Foreign currency forward contracts

(730

)

Cost of revenue

(219

)

Cost of revenue

—

$

(2,657

)

$

(4,819

)

$

(70

)

Balance Sheet Data
		Balance		Fair Value of Liability Derivatives
Derivatives Designated as Hedging		Sheet		September 26,				December 31,
Instruments		Location		2009				2008
Interest rate swap agreements:
Current portion		Fair value of liability derivatives		$	4,487			$	6,063
Non-current portion		Other long-term liabilities			2,386				3,279
					6,873				9,342
Foreign currency forward contracts		Fair value of liability derivatives			350				—
Total liabilitiy derivatives				$	7,223			$	9,342

Financial Instruments

          The fair values of financial instruments at September 26, 2009, follow:

		Carrying
		Amount				Fair Value
Long-term debt
Variable-rate term loan under the senior secured credit facility		$	230,366			$	230,366
9 5/8% senior subordinated notes, due February 15, 2015			190,000				176,700
		$	420,366			$	407,066
Interest rate swap agreements to pay fixed and receive variable
Short-term liabilities		$	4,487			$	4,487
Long-term liabilities			2,386				2,386
		$	6,873			$	6,873
Foreign currency forward contracts
Short-term liabilities		$	350			$	350

          The carrying amount of the variable-rate term loan under the senior secured credit facility approximates fair value. The fair value of the 9 5/8% senior subordinated notes is based on quoted market prices. At September 26, 2009, the quoted market price was $93 per $100 reflecting a yield of 11.5%. The fair value of interest rate swap agreements and foreign currency forward contracts is based on quoted prices for similar assets or liabilities in active markets. The carrying amounts of other financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximate fair value due to their short term nature.

7. Income Taxes

          The provision for income taxes amounted to $4,519 for the nine months ended September 26, 2009, and is composed of U.S. federal, state and local, and foreign income taxes and reflects a tax valuation allowance of $3,508 against U.S. deferred tax assets. The tax valuation allowance results primarily from the effect on the U.S. net operating losses from the tax amortization of goodwill. Goodwill is an indefinite lived asset that is amortized for tax purposes, but is not amortized for financial accounting and reporting purposes. Goodwill is subject to impairment under U.S. generally accepted accounting principles.

          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 management with respect to the benefits that may be realized. The Company has concluded, based upon all available evidence, it is more likely than not that the U.S. federal, state, and local deferred tax assets at September 26, 2009 will not be realizable. A full valuation allowance has been provided against U.S. deferred tax assets. The valuation allowance will be reversed at such time that realization is believed to be more likely than not, and any such reversal would be reflected as a reduction to the provision for income taxes.

          Deferred tax liabilities aggregated $14,235 at September 26, 2009, and were primarily related to an indefinite lived asset (goodwill) that is amortized for tax purposes, but is not amortized for financial accounting and reporting purposes. Goodwill is subject to impairment under U.S. generally accepted accounting principles.

          The ASC topic on Income Taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken, or expected to be taken, in a tax return. Vangent is indemnified and is not liable for any income taxes that relate to the pre-acquisition periods prior to February 15, 2007. There was no liability for unrecognized tax benefits at September 26, 2009. Vangent does not expect changes in unrecognized tax benefits, if any, within the next 12 months to have a material impact on the provision for income taxes or the effective tax rate.

          Vangent and its subsidiaries conduct business and are subject to income taxes in the United States and certain foreign countries. Vangent’s income tax returns for 2007 and 2008 are subject to examination by federal, state, local, or foreign tax authorities. Interest and penalties, if any, relating to income taxes are charged to the provision for income taxes.

8. Commitments and Contingencies

          From time to time, the Company enters into contracts with customers where it has joint and several liability with other participants and/or joint-venture parties providing related contract services. Under these arrangements, the Company may assume some responsibility to the customer for the performance by others of contractual obligations. In some arrangements, the extent of the Company’s obligations for the performance of others is not expressly specified. The Company estimates that as of September 26, 2009, it had assumed an aggregate potential liability of $2,023 for the performance of others under such arrangements. The Company has not been required to make any payments under any of these contracts or arrangements.

          The Company is subject to legal proceedings, investigations and claims arising out of the ordinary course of business and accrues a liability if an unfavorable outcome is probable. In the opinion of management, resolution of such matters is not expected to have a material effect on the Company’s results of operations or financial position.

9. Equity-Based Compensation

          No stock options are authorized and no stock options have been granted by Vangent.

          Certain members of management of Vangent and outside directors of Vangent Holding Corp. have been granted Class B membership interests in Vangent Holding LLC, the majority shareholder of Vangent Holding Corp. which in turn owns all of Vangent’s common stock. At September 26, 2009, the outstanding balance of grants of Class B membership interests represented 5.5% of the profit interests in Vangent Holding LLC. Pursuant to the terms of the operating agreement governing Vangent Holding LLC, the Class B membership interests are subject to a five-year vesting schedule, except in the event of a change of control. The unvested portion of Class B membership interests resulting from forfeitures reverts to the holders of Class A membership interests in Vangent Holding LLC. Class B membership interests are granted with no exercise price or expiration date. Holders of Class B membership interests are entitled to receive their respective proportional interest of all distributions made by Vangent Holding LLC provided the holders of the Class A membership interests have received an 8% per annum internal rate of return on their invested capital. Grants of Class B membership interests are limited to 7.5% of the profits interest in Vangent Holding LLC in the aggregate.

          A summary of activity for grants and the outstanding balance of Class B membership interests in Vangent Holding LLC follows:

		Class B								Fair Value of
		Membership				Class B				Class B
		Interests				Membership				Membership
		Available for				Interests				Interests at Date
		Grant				Outstanding				of Grant
Balance, December 31, 2008			1.9	%			5.6	%		$	5,679
Granted			(0.4	)			0.4				329
Forfeited			0.5				(0.5	)			(406	)
Balance, September 26, 2009			2.0	%			5.5	%		$	5,602
At September 26, 2009:
Vested							2.0	%
Not yet vested							3.5
							5.5	%

          In accordance with the ASC topic on Compensation-Stock Compensation, Vangent charges equity-based compensation expense for awards of Class B membership interests in Vangent Holding LLC granted to its employees and independent directors. Equity-based compensation expense is amortized on a straight-line basis over the total requisite service period for the award. Equity-based compensation expense amounted to $776 for the nine months ended September 26, 2009, and $839 for the corresponding period in 2008. The unamortized amount of equity-based compensation expense was $2,859 at September 26, 2009, and amortization is scheduled as follows:

Years Ending December 31
2009 (remaining three months)		$	266
2010			1,066
2011			1,066
2012			328
2013			116
2014			17
		$	2,859

10. Related Party Transactions

          Vangent pays an annual management fee of $1,000 to Veritas Capital for general business management, financial, strategic and consulting services, of which $750 was paid for the nine months ended September 26, 2009, along with fees of $73 for advisory services and expenses. An affiliate of Veritas Capital provided services of $47 to Vangent for the nine months ended September 26, 2009. A foreign subsidiary of Vangent provides contract services to an unconsolidated joint venture located in Argentina; fees from services provided amounted to $141 for the three and nine months ended September 26, 2009, and accounts receivable from the unconsolidated joint venture included in trade receivables at September 26, 2009, amounted to $141.

          Certain members of management of Vangent and certain outside directors of Vangent Holding Corp. were granted Class B membership interests in Vangent Holding LLC, the majority shareholder of Vangent Holding Corp. which in turn owns all of Vangent’s common stock.

11. Accumulated Other Comprehensive Income (Loss)

          The components of accumulated other comprehensive loss and a summary of changes in accumulated other comprehensive loss for hedging activities follows:

		September 26,				December 31,
		2009				2008
Accumulated other comprehensive loss
Effect of hedging activities, net of tax:
Interest rate swap agreements		$	(6,101	)		$	(8,774	)
Foreign currency forward contracts			(511	)			—
			(6,612	)			(8,774	)
Foreign currency cumulative translation adjustment			(3,311	)			(4,361	)
Total accumulated other comprehensive loss		$	(9,923	)		$	(13,135	)

						Foreign
		Interest				Currency
		Rate				Forward
Summary of hedging activity		Swaps				Contracts				Total
Balance, December 31, 2008		$	(8,774	)		$	—			$	(8,774	)
Change in fair value			(1,927	)			(730	)			(2,657	)
Reclassification to interest expense			4,600				—				4,600
Reclassification to cost of revenue			—				219				219
Balance, September 26, 2009		$	(6,101	)		$	(511	)		$	(6,612	)

12. Business Segments and Major Customers

          Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

          Vangent reports operating results and financial data for three business segments: the Government Group; the International Group; and the Human Capital Group. Government Group customers are primarily U.S. federal agencies. The Government Group assists civilian, defense and intelligence agencies as well as government related entities with the design and execution of information and technology strategy, helps develop and maintain their complex, mission-critical systems and delivers a wide range of business process outsourcing solutions.

The International Group provides consulting, systems integration and business process outsourcing solutions to both commercial and foreign local and central government customers. The Human Capital Group primarily serves the private sector and designs, builds, and operates workforce solutions that automate and improve the recruitment, assessment, selection and development of a customer’s workforce.

          Vangent evaluates the performance of its operating segments based on operating income, but does not measure revenue or operating income by its major service offerings either for internal management or external financial reporting purposes.

          Prior to the second quarter of 2009, equity-based compensation expense was allocated 100% to corporate for segment reporting purposes. In the second quarter of 2009, Vangent changed the allocation of equity-based compensation expense and began allocating a portion of the expense to each segment. Prior periods have been reclassified to conform to the current presentation.

		Three Months Ended								Nine Months Ended
		September 26,				September 27,				September 26,				September 27,
		2009				2008				2009				2008
Revenue by business segment
Government Group		$	125,714			$	107,949			$	359,061			$	320,845
International Group			17,011				18,281				47,763				58,063
Human Capital Group			7,712				7,161				24,569				21,892
Elimination			(1,044	)			—				(3,518	)			—
Total revenue		$	149,393			$	133,391			$	427,875			$	400,800
Operating income (loss) by business segment
Government Group		$	7,989			$	10,081			$	26,349			$	19,608
International Group			(2,181	)			433				(4,639	)			1,142
Human Capital Group			(738	)			219				(2,023	)			(141	)
Corporate			(14	)			(14	)			(41	)			(44	)
Total operating income			5,056				10,719				19,646				20,565
Interest expense and other, net			8,676				8,534				25,542				26,261
Income (loss) before income taxes		$	(3,620	)		$	2,185			$	(5,896	)		$	(5,696	)
Depreciation and amortization
Government Group		$	6,530			$	7,375			$	20,434			$	21,447
International Group			1,274				1,188				3,409				3,598
Human Capital Group			372				397				1,112				1,281
Total depreciation and amortization		$	8,176			$	8,960			$	24,955			$	26,326
Revenue from major customers as a percent of total revenue
Department of Health and Human Services			39	%			46	%			41	%			46	%
Department of Education			15	%			16	%			16	%			17	%
Department of Defense				*				*			10	%				*

13. Condensed Issuer and Non-Guarantor Financial Information

          In connection with the acquisition by Veritas Capital and the related financing, Vangent, Inc. (“Issuer”) issued $190,000 of 9 5/8% senior subordinated notes due 2015. The notes were sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to non-U.S. persons pursuant to Regulation S under the Securities Act. The assets and liabilities of the guarantors have been transferred to Vangent, Inc., and, accordingly, their financial statements are not presented separately. The following subsidiaries of the Issuer do not guarantee the notes (“Non-Guarantors”): Vangent Canada Limited; Vangent Mexico, S.A. de C.V.; Vangent Servicios de Mexico, S.A. de C.V.; Vangent Argentina, S.A.; Vangent Venezuela, C.A.; Vangent Puerto Rico, Inc.; Vangent, Ltd.; and Proyectos Prohumane México, S. A. de C. V. Condensed combining balance sheets, statements of operations, and statements of cash flows for the Issuer and for the Non-Guarantors follow:

Issuer and Non-Guarantor Financial Information
Condensed Combining Balance Sheets
(unaudited)

		September 26, 2009																December 31, 2008
						Non-																Non-
						Guar-				Elimin-												Guar-				Elimin-
		Issuer				antors				ations				Total				Issuer				antors				ations				Total
Assets
Current assets:
Cash and cash equivalents		$	25,176			$	6,902			$	—			$	32,078			$	15,519			$	5,615			$	—			$	21,134
Trade receivables, net			107,822				14,445				—				122,267				117,453				12,406				—				129,859
Loan receivable from Vangent Mexico			4,448								(4,448	)			—
Prepaid expenses			4,699				2,671				—				7,370				4,316				1,818								6,134
Deferred contract costs			5,872				—				—				5,872				—				—								—
Other current assets			675				5,931				—				6,606				4,800				1,479				—				6,279
Total current assets			148,692				29,949				(4,448	)			174,193				142,088				21,318				—				163,406
Property and equipment, net			22,143				7,816				—				29,959				21,238				5,914				—				27,152
Intangible assets, net			150,746				11,258				—				162,004				166,216				11,783				—				177,999
Goodwill			261,327				25,539				—				286,866				261,327				25,539				—				286,866
Deferred debt financing costs, net			8,568				—				—				8,568				10,197				—				—				10,197
Other			343				86				—				429				423				231				—				654
Investment in and advances to Non-Guarantor subsidiaries			54,329				—				(54,329	)			—				56,162				—				(56,162	)			—
Total assets		$	646,148			$	74,648			$	(58,777	)		$	662,019			$	657,651			$	64,785			$	(56,162	)		$	666,274
Liabilities and Stockholder’s Equity
Current liabilities:
Current portion of long-term debt		$	594			$	—			$	—			$	594			$	—			$	—			$	—			$	—
Loan payable to Vangent, Inc. by Vangent Mexico			—				4,448				(4,448	)			—				—				—				—				—
Accounts payable and accrued liabilities			57,401				13,755				—				71,156				59,294				7,815				—				67,109
Fair value of liability derivatives, current portion			4,487				350				—				4,837				6,063				—				—				6,063
Accrued interest payable			2,510				—				—				2,510				8,304				—				—				8,304
Deferred tax liability			4,974				35				—				5,009				3,962				—				—				3,962
Advance payments on contracts			1,775				927				—				2,702				1,952				743				—				2,695
Total current liabilities			71,741				19,515				(4,448	)			86,808				79,575				8,558				0				88,133
Long-term debt, net of current portion			419,772				—				—				419,772				420,366				—				—				420,366
Other long-term liabilities			7,315				1,386				(698	)			8,003				7,814				160				(95	)			7,879
Deferred tax liability			9,110				116				—				9,226				5,259				—				—				5,259
Total liabilities			507,938				21,017				(5,146	)			523,809				513,014				8,718				(95	)			521,637
Stockholder’s equity			138,210				53,631				(53,631	)			138,210				144,637				56,067				(56,067	)			144,637
Total liabilities and stockholder’s equity		$	646,148			$	74,648			$	(58,777	)		$	662,019			$	657,651			$	64,785			$	(56,162	)		$	666,274

Issuer and Non-Guarantor Financial Information
Condensed Combining Statements of Operations
(unaudited)

		Three Months Ended September 26, 2009																Three Months Ended September 27, 2008
						Non-																Non-
						Guar-				Elimin-												Guar-				Elimin-
		Issuer				antors				ations				Total				Issuer				antors				ations				Total
Revenue		$	132,519			$	16,874			$	—			$	149,393			$	115,192			$	18,199			$	—			$	133,391
Cost of revenue			111,225				17,342				—				128,567				91,014				15,456				—				106,470
Gross profit			21,294				(468	)			—				20,826				24,178				2,743				—				26,921
General and administrative expenses			10,122				681				—				10,803				11,377				1,068				—				12,445
Selling and marketing expenses			4,229				738				—				4,967				3,111				646				—				3,757
Operating income (loss)			6,943				(1,887	)			—				5,056				9,690				1,029				—				10,719
Interest expense and other, net			8,535				141				—				8,676				8,463				71				—				8,534
Income (loss) before income taxes			(1,592	)			(2,028	)			—				(3,620	)			1,227				958				—				2,185
Provision for income taxes			1,582				65				—				1,647				1,676				956				—				2,632
Equity in net income (loss) of Non-Guarantor subsidiaries			(2,093	)			—				2,093				—				2				—				(2	)			—
Net income (loss)		$	(5,267	)		$	(2,093	)		$	2,093			$	(5,267	)		$	(447	)		$	2			$	(2	)		$	(447	)